PETITIONER: NAVNIT R. KAMANI & <NAME>. Vs. RESPONDENT: R.R. KAMANI DATE OF JUDGMENT19/09/1988 BENCH: <NAME>, M.P. (J) BENCH: <NAME>, M.P. (J) SEN, A.P. (J) NATRAJAN, S. (J) CITATION: 1989 AIR 9 1988 SCR Supl. (3) 123 1988 SCC (4) 387 JT 1988 (3) 700 1988 SCALE (2)721 CITATOR INFO : R 1991 SC2176 (51) ACT: Constitution of India, I950: Articles 31C and 142-- Sick Industrial Companies (Special Provisions) Act , 1985-- Constitutional validity of--Workers' Scheme for revival of <ORG>--Directions by courts. % Sick industrial Companies (Special Provisions) Act, I985: Sections 2 and 18- -<ORG>--Workers' Scheme for revival of company. HEADNOTE: A dispute between different branches of an industrialist family culminated in the instant special leave petition. This <ORG>, with a view to speedily resolve the dispute between the parties, and keeping in view the interest of the workers employed in <ORG> (<ORG>). in August 1984 persuaded a retired Judge of <ORG> to mediate between the parties. In August 1985, (<ORG>) stopped production. During the discussions before the <ORG> on July 2, 1986 it was decided that the different groups of the family would try to find a willing buyer for 90% shares held by them. At the same time, the <ORG> permitted the workers to frame a scheme on their own for restarting the factories. In July 1987 <ORG> (<ORG>) instituted a petition seeking <ORG>'s directions for the sale of <ORG> shares to <ORG> and for expeditious consideration of the scheme submitted by the workers for the revival of the factories. In pursuance of the directions of the <ORG>, the scheme was scrutinised by <ORG> (<ORG>) constituted under the Sick Industrial Companies (Special Provisions) Act , 1985. The Board after consultation with various agencies including <ORG>, sanctioned the Workers' Scheme on 6th September 1988, which was placed before the <ORG> for further orders. At this stage one of the parties (<NAME>) submitted an alternate scheme. While stamping the Workers' Scheme with the imprimatur of the <ORG>, it was. PG NO 123 PG NO 124 HELD: (I) When the two Schemes are viewed in juxtaposition, there is no manner of doubt that the scheme presented by <NAME> appears in a rather poor light. The entire scheme is wrapped in imponderables and is built on a non-existant foundation. [134G; 135B, 135C] (2) Section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 inter-alia provides for the reduction of the interest or rights of the shareholders in the sick industrial company to the extent necessary for the reconstruction, revival or rehabilitation of the sick company and further provides for the transfer of its shares at their face value or intrinsic value to the employees of the sick company. [136F G] (3) The provision for transferring the shares to the employees makes manifest the intention of the legislature to encourage the employees to take over the sick units and to clothe the competent authority with power to direct the transfer of the shares to the employees in this behalf. Thus the authority and competence of the <ORG> to issue a direction for the transfer of the shares to the employees has the full backing Of the benevolent legislation enacted especially in order to restructure or revive the sick undertakings. [137A-B] (4) The <ORG> has rightly reached the conclusion that the intrinsic value of the <ORG> share is zero and the Board was perfectly right in directing the members of the Kamani family to transfer the shares at the rate of Re. 1 per share in order to effectuate the Scheme for revival of <ORG>. [137E- G] (5) Since the Scheme is being framed under the statutory authority and directive in order to revive the industry in the larger public interest and inasmuch as there is a necessary declaration contained in Section 2 of the Act which attracts the applicability of Art. 31C Of the Constitution, the decision rendered by the <ORG> is unassailable and unimpeachable. [138D] (6) The Scheme has been framed as per the direction and mandate of this <ORG> in exercise of its inherent constitutional jurisdiction under Art. 142 of the Constitution and there ore the framing of the Scheme and the enforcement of the sanctioned scheme does not detract from or have any impact on the obligation incurred by the guarantors in regard to the debts incurred by <ORG> in past. The concerned Banks were and are bound by the directives and mandates. [138E-F] PG NO 125 (7) Notwithstanding any order that may be secured by party from any other forum the Scheme shall be implemented in obeisance to the judicial command embodied in this order and that in a there is any problem, it may be brought to this <ORG> for seeking appropriate directions instead of resorting to other forums to impede the implementation of this socially and economically wholesome scheme. [139C-D] JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Mice. Petition No. 22428 Of 1988.

IN SPEClAL LEAVE PETITION (CIVIL) NO. 15228 OF 1983. From the Judgment and Order dated 17.8.1983 of <ORG> in Arbitration Petn. No. 6 of 1983. (FOR DIRECTIONS WlTH CMP Nos. 22429/88 & 3805f87). And in the matter of the scheme for revival sanctioned by the <ORG> by its decision dated 6th September, 1988 in pursuance of the directions of this Court. <NAME>, <NAME>, <NAME>, Mrs. <NAME> and <NAME> for the Petitioners. Dr. <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, Mrs. <NAME>, <NAME>, Ms. <NAME>, Ms. <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, <NAME>, Ms. <NAME>, <NAME>, <NAME>, <NAME>, Ms. <NAME> and <NAME>, for the Respondents.

<NAME>, <NAME> and <NAME> for the Intervener.

The Order of the Court was delivered by <NAME>, J. More than a thousand brimming eyes are waiting to, replace the tears of despair by tears of relief. No less than 600 wronged _ workers of a once prosperous industrial unit' induced or reduced to sickness' are on their toes to resort to self-help to restore

1. <ORG> (<ORG>) PG NO 126 the lost source of their butterless bread. Their pens are quivering to write a new chapter in the sage of workers' struggle for finding their true 'indentity' and 'dignity'. Their dream is coming true with the enlightened and refreshing approach of the <ORG> and State Governments, and the concerned <ORG>, coupled with prompt, efficient and swift decision making on the part of the <ORG> and the <ORG>. And with the consensus of all the parties (which is the most heartening feature) who have risen above narrow individual interests by not opposing the workers' scheme in order to promote the larger National interest of reviving the industry, augmenting the National product and providing employment to hundreds of starving workers (three of whom became martyrs to the cause by committing suicide). Internal discord gave rise to disputes and litigations between different branches of a family headed by a pioneering and successful industrialist in the wake of his demise, which culminated in SLP No. 15228 of 1983 wherein all the concerned members of the family were impleaded. When the said matter came up before this Court it was .1) impressed upon the parties that the internecine conflict between the warring factions deserved to be speedily resolved, not only in their own interest, and for saving the name and honour of the founder, but also to ensure that neither the industrial units nor the workers employed in the industries which were controlled by one or the other branch of the industrial family, were ruined. A retired Judge of <ORG>' was accordingly prevailed upon to accept the assignment of resolving the innumerable problems in the larger interest of the warring factions as also in order to protect the interests of the community and the workers in August 1984. The learned <NAME> has invested considerable time, effort and accumen in order to resolve the problems presented in the course of the proceedings and has successfully disentangled the economic mess to a considerable extent. This is evident from the fact that after the learned <NAME> came on the scene <ORG> and Capital Gains Tax dues to the tune of over Rs.48 lakhs and over Rs.35 lakhs respectively have been paid.

2. <ORG>, <ORG> and <ORG>.

3. <ORG> constituted under the Sick Industrial Companies (Special Provisions) Act of 1985, (Act).

4. <ORG>.

5. <NAME>.

6. justice <NAME>.

PG NO 127 In the course of the proceedings it came to light that: (1) <ORG> has stopped production and ceased working in August 1985.

(2) <ORG> has not resorted to closure of the unit or to retrenchment of the workers in accordance with the relevant provisions of law.

(3) While in the eye of law and in theory the workers continue on the rolls of <ORG> and in employment of <ORG>, the workers have not been paid wages for over 8 months since December 1984 till stoppage of work in August 1985 and ever since till now. The arrears till August 1988 work out in the region of Rs.6 1/2 crores.

(4) The wages due to the workers amounting to approximately Rs.2.5 crores have remained unpaid since December 1984.

(5) Employees' contribution to Provident Fund actually deducted from the wages of the workers to the tune of approximately 31/2 lakhs had been wrongfully retained by the management and criminal prosecutions are pending in <ORG>.

(6) The starving workers who have not been paid their wages since December 1984 have been squatting on the factory premises which have been abandoned by the Management. The workers have remained on the premises in order to keep day and night vigil for all these years since August 1985 in order to protect the plant which had provided them work and enabled them to earn their bread with the sweat of their brow.

(7) Three of the starving workers have committed suicide on account of their inability to survive the burden of misfortune heaped on them.

The plight of the workers notwithstanding, they exhibited exemplary conduct in their part, and <ORG> (<ORG>) extended its hand of cooperation to the <NAME> family group as has been noticed by the learned <NAME> in his minutes dated July 2, 1986:.

PG NO 128 "The bona fides of the applicant workers would be clear from the fact that in spite of the fact that no wages have been paid to them for the last 14 months, yet, in order to demonstrate their spirit of cooperation, the workers, through their union, had offered in writing to cooperate with the management and accept deferred payment of unpaid wages. The applicants repeat and reiterate that offer. The workmen always were, and still are ready and willing to accept the ar}ears of unpaid wages with increase of production and creation of surplus.

I shall be happy if the authorities who have to take a decision in this matter could find their way to accepting the request of the workers who have not received wages for about 16 months now.

As regards the two proposals given by the workers, neither of them was found acceptable by any of the Kamani family groups present; they thought that the proposals were not feasible."

A proposal was then mooted to sell 90% of the shares of <ORG>. Meanwhile the workers sought leave to frame a scheme of their own for revival the 'sick' unit. What exactly transpired 2- 1/2 years back has E been recorded in the <ORG>'s minutes dated July 2, 1986:

"At the end of the discussions it was decided that the different groups of the family or any of them would try to find a buyer willing to buy the 90% shares held by the family in <ORG> as it is at present. The buyer will have to sit with the workers of the company to come to an agreement with them with regard to the payment of their dues. If the prospective buyer wishes to inspect the factories, no objection would be raised either by the workers or the present management of the company. Parties will report to me within six weeks any progress made in this matter.

On behalf of the workers it was submitted that as the search for a buyer was likely to take time, they may be permitted in the meantime to try and frame a scheme of their own for restarting the factories after discussing the matter with the <ORG> and other authorities. They are free to do so."

PG NO 129 And after an exasperating waiting period of nearly one year thereafter the workers instituted CMP No. 3805 of 1987 on July 2, 1987 inter alia seeking the Following prayers:

"(a) All appropriate orders and directions for the sale of the shares of <ORG> to <ORG> on behalf of and representing the proposed society at such price and on such valuation as <ORG> in its absolute discretion deems proper and subject to such terms and conditions as may be stipulated.

(b) appropriate orders and directions to the said <ORG> respondent No. 59 to take expeditious remedial and other measure for the revival of the factories of the <ORG> including directions to the said <ORG> to consider the scheme of the applicants for the revival and rehabilitation of <ORG> in terms of Exhibits 10 and 12 hereto.

(c) all appropriate orders and directions for the implementation and consideration of the scheme for the revival of the factory of <ORG> as per Ex. 10 and 12 hereto including directions for management of <ORG>, amendment of Articles of <ORG> and all matters connected therewith with such modifications as may be deemed necessary."

By an order of this Court. dated October 13, 1987 in CMP 3805/87, this Court directed the <ORG> to file a feasibility report with respect to the scheme presented by the workers for the revival of <ORG> . This Court also directed the <ORG> to hear the workers as well as the different groups of <NAME> family before making its recommendations. As per this direction the Board held a number of hearings which were attended inter alia, by representatives of <ORG> . Financial Institutions, <ORG>, <ORG> and different groups of the <NAME> family, <ORG>, an apex institution in the field of term lending and one of the operating agencies of <ORG>, was entrusted with the examination of <ORG>'s scheme particularly with regard to technical health of the plant and time required to run it, various, assumptions made in respect of the parameters of costs/prices, estimates of production pattern vis-a-vis projection of future demand, correctness of cost of production, working capital requirement projected operating cash surplus etc. <ORG> submitted its report which was discussed in the subsequent hearings and the views of the concerned agencies, such as, <ORG>, <ORG>, <ORG> the commitments regarding reliefs and PG NO 130 concessions that would be available from these agencies, were obtained. On being so required <ORG> subsequently revised its projections and viability estimates. Based on the above, <ORG> prepared its Feasibility Report and submitted it to this Court. After considering the report of <ORG>, and hearing various parties and with the consent of the parties, this Court vide its order dated 20th April, 1988 directed, inter-alia, that the matter be placed before <ORG> for consideration whether it should proceed to pass an order in terms of the proposed scheme as revised in consultation with <ORG> under Section 18(4) of the Sick Industrial Companies (Special Provisions) Act, 1985. The Board was requested to arrive at a decision after giving notice to all the concerned parties. The relevant part of the order deserves to be quoted:

"In compliance with the Court s order dated 13th October, 1987 <ORG> New Delhi, established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 in consultation with <ORG>, constituted under section 3 of <ORG> Act, 1964 as its operating agency within the meaning of section 3(1) of the Act, considered in depth the scheme submitted by <ORG> and has evaluated the same by its 'feasibility report dated 12 th January, 1988. We have heard learned counsel for the parties and they agree to the order we purpose to make. We direct that the matter shall now be placed before <ORG> for consideration as to whether it should proceed to pass an order in terms of the proposed scheme as revised in consultation with <ORG> under section 18(4) . The <ORG> .shall come to a decision after notice lo all the parties and it shall act in conformity with the provisions of the Act. The <ORG> may, if necessary, frame its own scheme or adopt the proposed scheme framed by <ORG>, with such modifications as it deems fit. The <ORG> shall also be at liberty to consider any alternative scheme at its discretion but the whole exercise shall be completed within eight weeks from today. If the objections to <ORG> s scheme are not sustained the said scheme shall be dealt with according to law. '' PG NO 131 Pursuant to the direction of this Court, the <ORG> afforded a hearing to all the concerned parties on 20th May, 1988 and after having ' examined the submissions made but the various groups of <NAME> family, Banks, <ORG> and <ORG>, prepared a Draft Scheme for revival of <ORG>. The said draft Scheme was circulated to all the parties concerned and short particulars thereof were also published in two news dailies for the information of the shareholders, the creditors and the employees etc. in general. The parties were given due notice for making suggestions/raising objections with respect to the Scheme. On receipt of various suggestions/ objections the <ORG> held its hearing on 28.7.88 for considering the same. After hearing all the parties, and after having examined all the written/oral submissions made, the <ORG> has financed, and sanctioned the scheme as per its decision dated 6th September, 1988 which has now been placed before this Court for further orders in the light of the submissions of the concerned parties Two questions arise in the context of the Workers' Scheme which has been sanctioned by the <ORG> as per its decision dated September 6, 1988:

(1) Whether the Scheme presented by Shri Ashish Puranchand Kamani, applicant in CMP No. 22428 of ]988, at the time of the hearing on 12th September, 1988 (which was not presented before <ORG>) deserves to be considered having regard to his claim that his scheme is preferable to the Workers' Scheme already sanctioned by the <ORG> on September 6, 1988:

(2) Whether the Workers' Scheme as sanctioned by <ORG> deserves to be stamped with the imprimatur of the <ORG>. The scheme presented by <NAME> who claims to hold 24% of the shares of <ORG>, could not be presented before the <ORG>. which was seized with the matter in regard to the framing of a feasible Scheme in pursuance to the directions of this <ORG>, till the <ORG> rendered its decision on September 6, 1988. In the order dated April 20, 1988, this <ORG> had observed that:

The Board may, if necessary, frame its own scheme or adopt the revised scheme framed by <ORG>, with such modifications as it deems fit. The board shall also be at liberty to consider any alternative Scheme PG NO 132 at its discretion but the whole exercise shall be completed within eight weeks from today."

Two points must be underscored. First, that the <ORG> had merely accorded "liberty" to the <ORG> to consider any alternative scheme. and secondly that the matter was left to the "discretion" of the <ORG>. It is therefore clear that no 'right' was conferred on any party to present a new scheme. Option was given to the <ORG> to exercise its discretion to consider any alternative Scheme if it was presented within the time-frame. Learned counsel for the applicant <NAME>, could not contend that any 'right' was conferred on the applicant to present a Scheme. In fact there was no obligation on the part of the <ORG> to consider the Scheme even if it was presented within the time-frame. As a matter of fact the applicant did not present any scheme before <ORG> within the time-bracket specified by this <ORG>. And the <ORG> has, after full and complete deliberation, rendered a well-considered decision sanctioning the Scheme of the workers. On 6th September, 1988, about a week before <NAME>, the applicant, was able to present his Scheme. It is not necessary to examine the issue as to whether or not there was any justification for not presenting the Scheme before the stipulated deadline. Even though it is too late to examine the applicant's scheme it is not considered appropriate to shut out consideration of the scheme only on the ground that it is being presented so late and the workers' scheme has already been sanctioned much earlier. In case the applicant is able to persuade the <ORG> that the Scheme presented by him is preferable to the workers' scheme in the larger interest of all concerned, the decision rendered by the <ORG> could possibly be set aside and the Scheme presented by the applicant could possibly be remitted to the <ORG> for considering the whole matter afresh. Of course it would cause great hardship to all concerned more particularly because the Scheme sanctioned by <ORG> on 6th September, 1988 comes into force with 'immediate effect'. It has also to be realised that the matter would be delayed by several months at the cost of the suffering workers. These are considerations which are more than adequate to discourage and deter the <ORG> from undertaking any such exercise. All the same we have heard the learned counsel for the applicant in regard to the Scheme presented by him even at this late stage. As indicated earlier learned counsel for the applicant stated that while the applicant did not oppose the Scheme presented by the workers, the applicant was confident of persuading the <ORG> to hold that the Scheme presented by the applicant was by far in the larger interest of all concerned as compared to the Scheme presented by the workers and sanctioned by the <ORG>. In PG NO 133 order to effectively deal with this question the cantours of the two Schemes require to be traced:

Scheme presented by the Scheme presented by Shri Workers <NAME>

1. It contemplates starting 1. It envisages the operations with the existing replacement of the existing machinery after effecting machinery by imported second- necessary repairs and hand press and plant reconditioning of the plant equipment, at an estimated to the extent necessary. It cost of Rs.345 lakhs. It is is envisaged that the not known how much time will production can be commenced elapse in replacement and within about six months. when operations can be commenced. There is not even a vague idea about this factor.

2. The scheme is fully backed 2. The Scheme does not show by the same <ORG> that there is even a banks as are secured tentative commitment much creditors of <ORG>. These banks less a firm commitment by any have also made firm Banks or financial commitments for further institutions to finance the financial assistance. project. Nor is it shown that the applicant himself is investing any sizeable amounts to lauch the project.

The Scheme is altogether silent as to how the resources are to be raised in regard to the modernization programme involving Rs.694 lakhs.

3. <ORG>. and the 3. Neither <ORG>. have agreed to Govt. nor <ORG> grant tax concessions having has shown its willingness to regard to the fact that it is give any concession to the the first Scheme of its kind applicant. In fact there for reviving an industrial appears little likelihood of unit framed by the very such concessions having workers rendered jobless on Regard to fact that the account of the sickness. special factors relating to public interest involved in enabling the workers themselves to revive the sick industrial unit does not exist in the case of the applicant.

PG NO 134

4. The workers themselves 4. The workers would not have agreed ( I) to make wage agree to forego any part of sacrifice of 25 % for the their wages or make a wage first year of operations and sacrifice to enable the 15% for the next two years. applicant to take over the in other words the workers unit. Nor the workers would have agreed to forego 15% to accept deferment of dues or 25% of the wages which they to rationalization of staff would be otherwise entitled pattern or retrenchment. to having regard to the fact Learned counsel for <ORG> has that it is the workers own stated that they are not at <ORG> calculated to benefit all prepared to do so.

them atleast in future (2) to deferment of annual increments for two years as also (3) to rationalisation of the staff pattern by persuading the workers to be 3retrenched on payment of compensation in the larger interest of the workers and to restrict the workers to 600 (4) to forego dues subsequent to 31.12.85 (5) to deferment of prestoppage dues till other dues are paid off.

5. The secured oreditors have 5. There is no such agreed to convert 50% of commitment on behalf of the dues into interest free loan secured creditors. Nor is repayable within 10 years and there any liklihood of such a moratorium of one year for concessions for the benefit for 50% of outstandings . of the applicant .

6. The Scheme has been found 6. The fessibility of the to be feasible and viable by applicant's claim has not experts and by the operating been examined by any agency viz. <ORG>, which is competent or authorised fully equipped to form the agency acceptable to the opinion in this behalf. <ORG>.

When the two Schemes are viewed in juxtaposition, there is no manner of doubt that the scheme presented by the applicant appears in a rather poor light. In fact the said scheme suffers from some fundamental infirmities. It is not shown that there is any commitment on behalf of any <ORG> of financial institution to provide the requisite financial PG NO 135 resources to enable the applicant to modernize the plant and to run it. The applicant 'hopes' to purchase a second-hand plant from some foreign country. It is not known whether any such second-hand plant in working condition with reasonable life expectancy is available. It is not known what would be the cost thereof. It is not known whether <ORG>. would release foreign exchange in order to enable the applicant to purchase the said plant. Thus the entire scheme is wrapped in imponderables and there is no concrete basis to entertain a reasonable belief that the 'hope' entertained by the applicant would materialise at all in the foreseeable future. It is proposed to finance the cost of the additional plant and machinery to the tune of Rs.694 lakhs out of which it is stated that Rs.520 lakhs will be by way of term loan assistance from banks and financial institutions. It is conceded that there have been no negotiations with any <ORG> or financial institution and there has not been even a tentative, not to speak of a firm commitment in this behalf. With regard to the remaining Rs.174 lakhs it is stated that it will be by way of promoters contribution or through issue of share capital. whether or not Rs.174 lakhs can be so raised is in the realm of wishful thinking and conjecture. It merely reflects the hope of the applicant which is not rooted in reality. It is built on a non-existant foundation. Nor is it shown whether the applicant himself has any sizeable financial resources of his own. Or whether he is in a position to raise such resources. The Scheme is a manifestation of the hope and 'desire of the applicant and no more. There is little doubt about the fact that no useful purpose will be served by granting the request of the applicant in these circumstances. Even so we would have considered the matter further if the applicant had satisfied this <ORG> about his bona fides and provided an assurance that delay will not be to the detriment or prejudice of the workers or at their cost. An enquiry was accordingly made from the learned counsel for the applicant whether the applicant was prepared to deposit a sum of Rs. 1 crore representing about 15% of the arrears of wages which have by now become payable to the workers to enable the <ORG> to examine the matter notwithstanding the aforesaid short- comings. The learned counsel for the applicant frankly stated that the applicant was not in a position to deposit such a sum s/p In fact he did not even mention that the applicant was prepared to deposit a lesser sum in order to show his good faith and bona fides and in order to protect the legitimate interests of the workers. Counsel wanted the <ORG> to consider the Scheme without any such provision being made merely on the assertion that the Scheme presented by the applicant was the only feasible Scheme which appears to be an altogether ill-founded assertion for the foregoing reasons. Under the circumstances we do not have the slightest hesitation in refusing the applicant's prayer in this behalf.

PG NO 136 In order to deal with the remaining question as regards stamping the Scheme sanctioned by the <ORG> on September 6, 1988 with the imprimatur of the <ORG> is concerned, it will be appropriate to take a glance at the provisions of the Sick Industrial Companies (Special Provisions) Act , 1985 under which the <ORG> has been constituted, before the exercise is undertaken.

The statement of objects and reasons reveals the purpose underlying the benevolent legislation as also the anxiety of the legislature to provide for preventive, ameliorative and remedial measures essential for reviving sick or potentially sick companies and for ensuring expeditious enforcement of the measures devised by the competent authority under the Act. The statement of objects and reasons discloses the anxiety of the legislature at the alarming increase in the incidence of sickness of industrial companies and it also reveals that the legislation has been enacted with the end in view to:

1. afford maximum protection of employment;

2. optimise the use of funds of the companies etc.;

3. salvaging the production assets;

4. realising the amounts due to the Banks etc.; and

5. to replace the existing time-consuming and inadequate machinery by efficient machinery for expeditious determination by a body of experts.

The scheme envisaged by Section 187 of the Act inter- alia provides for the reduction of the interest or rights of the shareholders in the sick industrial companies to the extent necessary for the reconstruction, rovival or rehabilitation of the sick company. There is also a very salutory provision which contemplates transfer of the shares in the sick industrial company at face value or intrinsic value (which may be discounted value or such other value as may be specified) inter-alia

7. Section 18(2)(f) : "the reduction of the interest or rights which the shareholders have in the sick Industrial company to such an extent as the Board considers necessary in the interests of the reconstruction, rovival or rehabilitation of the sick industrial company or for the maintenance of the business of the sick industrial company;"

PG NO 137 to the employees of the sick industrial companies. The provision for transferring the shares to the employees which makes manifest the intention of the legislature to encourage the employees to take over the sick units and to clothe the competent authority with power to direct the transfer of the shares to the employees in this behalf. Thus the authority and competence of the Board to issue a direction for the transfer of the shares to the employees has the full backing of the benevolent legislation' enacted especially in order to restructure or revive the sick undertakings. In the course of the discussion in the earlier part of this order we have referred to the abortive efforts made by the learned <NAME> and the members of the different family groups of <NAME>s for selling 90% of the shares of <ORG>. It however appears that no purchaser was coming forth. The aforesaid exercise however shows the willingness and preparedness of the concerned members of the <NAME> group to transfer their shares on their own even without a directive. Their willingness is however irrelevant since the <ORG> is clothed with the authority and competence to reduce the value of the shares from Rs.10 per share to Re.1 per share and direct the transfer of the shares to the employees. A point was made before the <ORG> for the transfer of the shares as regards the order reducing the value of the share and the direction to transfer the shares at the reduced value of Re.1 per share. <ORG> has closely, carefully and dispassionately considered this dimension of the matter and has rightly reached the conclusion that the intrinsic value of the share is zero. The liabilities far exceed the assets and even by applying the break-up or back-up method suggested by the members of the <NAME> family the value of the shares could be determined only at the intrinsic value of the shares and the Board reached the firm conclusion that each share had zero value. And even so the Board directed that the value of the share be reduced to Re. 1 per share and directed them to transfer the shares at Re. l per share. Having given our anxious consideration to this factor even on our own, we are fully convinced and fully satisfied that the Board was perfectly right in directing the members of the <NAME> family to transfer the shares at the rate of Re. l per share in order to effectuate the Scheme for revival of <ORG>. We may also mention that the <ORG> was wholly right that the provisions of the Act were immune from challenge by virtue of the declaration contained in Section 2 of the Act attracting the application of Art. 31C of the Constitution. Turning to the merits of the Scheme sanctioned by

8. Section 18(2)(1) : "transfer or issue of the shares in <ORG> at the face value or at the intrinsic value which may be a discounted value or such other value as may be specified to any industrial company or any person including the executives and employees of <ORG>;"

PG NO 138 <ORG>, it does not suffer from any infirmity. It has been considered to A be feasible and economically viable by experts. It envisages the management by a Board of Directors consisting of fully qualified experts and representatives of <ORG>, <ORG> and of the employees. The Scheme has the full backing of the nationalized <ORG> and the encouragement from the Central <ORG> and the State <ORG> which have made commitments for granting tax concessions. The backing and the concessions are forthcoming essentially because it is a Scheme framed by the employees who themselves are making tremendous wage-sacrifice and are trying to stand erect on their feet in order to salvage the ship which has been almost wrecked by others. It is appropriate to refer to one more important aspect. The Scheme envisages that the liability of the guarantors under the con tract of guarantee executed in favour of the concerned <ORG> should remain unaffected by the framing of the Scheme. <ORG> has rightly made a provision in this behalf and sanctioned the Scheme subject to the direction that the sanctioning of the Scheme will not result in the detraction from the obligations incurred by the guarantors towards the <ORG>. Since the Scheme is being framed under the statutory authority and directive in order to revive the same in the larger public interest and inasmuch as there is a necessary declaration contained in Section 2 of the Act which attracts the applicability of Art. 31C of the Constitution, the decision rendered by the <ORG> is unassailable and unimpeachable. Besides, the Scheme has been framed as per the direction and mandate of this Court in exercise of its inherent jurisdiction and its constitutional jurisdiction under Art. 142 of the Constitution and therefore the framing of the Scheme and the enforcement of the sanctioned Scheme does not detract from or have any impact on the obligation incurred by the guarantors in regard to the debts incurred by <ORG> in the past.

The concerned Banks were and are bound by the directives and mandates. Having given our anxious consideration to the decision rendered by <ORG> sanctioning the Scheme taking into account all the factors we fully agree with the reasoning and conclusion of <ORG> and hereby stamp the Scheme with the imprimatur of this Court.

An apprehension has been expressed that same attempts might be made by those who are not happy with the sanctioning of the Workers' Scheme to throw a spanner in the wheel and to impede the implementation of the Scheme. We do not think any such effort would be made having regard to the fact that the Scheme has been devised as per the directions of this Court and that it has now been stamped with the PG NO 139 imprimatur of this Court pursuant to this order. It is of course true that if the legal forum is utilised with an eye on impeding the implementation of the Scheme, it could throw everything out of gear. This cannot be countenanced as implementation of the Scheme with expedition is of the essence of the present exercise. The Act itself has been enacted in order to evolve a speedy and efficient machinery so that a sick industry could be revived with utmost expedition, production could be started, locked up funds could be utilised for furthering socioeconomic development. And so that the unemployment of starving workers could be ended before they are starved to death and they are provided with employment to enable them to 'live' with dignity instead of 'existing' in humiliating conditions. We, therefore, make it clear that notwithstanding any order that may be secured by any party from any other forum the Scheme shall be implemented in obeisance to the judicial command embodied in this order and that in case there is any problem, it may be brought to this Court for seeking appropriate directions instead of resorting to other forums to impede the implementation of this socially and economically wholesome Scheme.

A note of caution is required to be sounded before we conclude this order. While the Act enacted in 1985 does envisage the revival of sick units by the workers who had been rendered unemployed, it is (as far as is known) for the first time that the legislative intent reflected in the relevant provisions of the Act to encourage workers' schemes is being given a concrete shape in this manner. It is perhaps for the first time that such a Scheme sponsored by the suffering employees themselves has come to be sanctioned. Under the circumstances a very heavy burden rests on the shoulders of <ORG> and the concerned employees. Tens of thousands of similarly situated workers would be watching with anxious eves the outcome of this bold experiment undertaken by the workers of <ORG>. On their success or failure will depend the future hope and destiny of tens of thousands of similarly situated workers. Success of this venture will instil new confidence and enable the workers to try to build their own future with their own hands albeit at Some initial sacrifice. Failure will be visited with disastrous consequences. We, therefore, not only hope and trust that <ORG> and the concerned workers will make themselves fully aware of this crucial factor, but also beseech them to rise to the occasion and individually and collectively do their best to make it a success. They will have an opportunity to show to the world that the workers in New lndia are capable of managing their own affairs, shaping their own destiny, and building their own future. They will also have an opportunity to establish that when the workers are inspired by an ideal they can produce optimum quantity PG NO 140 as also the best quality. Because, they would be working for a great cause, and working for themselves instead of working for others who often deny to them their legitimate dues and even deprive them of such legitimate dues by appropriating to themselves the fruits of the worker's labour. Be it also realized that <ORG>, in the event of the success of this exercise, will be stepping into a new creative phase in the struggle of the working class to assert its identity. One can almost hear the footsteps of the new era in the corridors of future. The workers must therefore ensure the roaring success of this Scheme in this noble cause at any cost.

We also hope and trust that the concerned nationalized Banks, <ORG>, and the concerned Governments will continue to cooperate with the same enthusiasm and zeal and with the same motivation in order to make the Scheme a success so as to usher in a new era in the industrial history of New India. On this note of cautious optimism we conclude. <NAME>


JUDGMENT <NAME>, J.

1. This is an appeal from a decree of <ORG> at Allahabad dated April 13, 1937, which affirmed a decree of <ORG> at Muttra in favour of the plaintiff dated September 13, 1933.

2. The only question for decision is one of law, viz. whether the words "sister's son" in Section 2 of the Hindu Law of Inheritance (Amendment) Act, 1929-which will hereinafter be referred to as "the Act"-include the son of a half-sister. Section 2 of the Act is as follows :-

A son's daughter, daughter's daughter, sister and sister's son shall, in the order so specified, be entitled to rank in the order of succession next after a father's father and before a father's brother :

Provided that a sister's son shall not include a son adopted after the sister's death.

3. The facts of the case are not in dispute and need not be referred to in detail. The parties are Hindus governed by the law of the Mitakshara. The property in the suit belonged to one <NAME> who was the last male owner. It was claimed by <NAME>, the plaintiff, who is <NAME>'s father's uncle's son. His claim was resisted by <NAME>, the defendant, for herself and on behalf of her son <NAME>. <NAME> is the halfsister of <NAME>, being his father's daughter, by his first wife. When succession opened, these were the two claimants to the estate, viz. <NAME> and <NAME>. <NAME> died during the pendency of the appeal.

4. Apart from the Act, <NAME> as <NAME> father's uncle's son would, as a sapinda, be entitled to succeed to the estate of <NAME> as the nearest reversioner, in preference to <NAME>, his half-sister's son who is only a bandhu. Under the Act, however, the persons named in Section 2 inherit with gotraja sapindas, and a "sister's son" coming next after a "sister" enjoys priority in succession over the father's paternal uncle's son. If <NAME>, as the son of the half-sister of <NAME>, was entitled under the Act to inherit the suit property, then <NAME> as his mother would be entitled to succeed him under the ordinary law.

5. It was urged in the Courts in India that the words "sister's son" in Section 2 of the Act would include a half-sister's son, and <ORG> would therefore have a preferential claim to succeed to the estate of <NAME>, but this contention was negatived by the Courts, following the decision in <CITATION> . (1933) I.L.R. 55 All. 725, F.B

6. In this appeal by the defendant, the same contention has been urged, the argument being that by the Act "sister" has been admitted as an heir under the Mitakshara law, that the term "sister" in Section 2 includes a half-sister and by parity of reasoning the words "sister's son" would include a half-sister's son. It is to be regretted that the respondent has not been represented, but Mr. <NAME> who has argued the case for the appellant with skill and ability has placed before the <ORG> fairly and fully all the relevant facts and arguments.

7. There is divergence of judicial opinion among Courts in India regarding the construction of Section 2 of the Act. <CITATION> the full bench of <ORG> held that "the word 'sister' in Section 2 of the Hindu Law of Inheritance (Amendment) Act, 1929, does not include a half-sister, either consanguine or uterine." The main grounds for the decision are, that the word "sister" in the English language ordinarily means a sister of the whole blood and that "if we hold that 'sister' in Section 2 of Act II of 1929 includes a half-sister, we shall be putting a sister and a half-sister in the same category "-which would be against the spirit of the Mitakshara law under which a relation of the full blood excludes a relation of the half-blood, and " shall be introducing a 'half-sister' between the words 'sister' and 'sister's son'...." The learned Judges observed (p. 727) that the Act-

is an enabling Act which introduces certain persons as heirs who had no such place according to the ordinary interpretation of the Mitakshara law. Unless we have a clear reason to believe that the legislature was introducing, by implication, a person not specifically mentioned as an heir, we have no right to give the word 'sister' a wider meaning than it would ordinarily bear,"

8. They also observed (p. 727) :-

If we hold that a sister includes a half-sister, then there will be no reason to make a distinction between a uterine sister and a consanguine sister.... Ordinarily it would be repugnant to the notions of Hindus to recognise a woman as a sister who has not the same father as the person himiself.

This decision was followed by a single Judge of <ORG> in <CITATION> (1935) I.L.R. 11 Luck. 148 and also by the Madras and Patna High Courts. [ <CITATION> and <NAME> v. <NAME>  A.I.R. Pat. 310], The judgment of <NAME> in the last-mentioned case is noticeable as it contains the fullest statement of the various reasons that could be urged in support of the rival contentions. All these decisions held that "sister" in Section 2 of the Act does not include a half-sister.

9. Besides the reason given in <CITATION> the other grounds mentioned in these decisions, shortly stated, are, that the Act, inasmuch as it alters the law of succession to a certain extent should be strictly construed, that it proceeds on the principle of affinity, that the legislature might have advisedly left out of consideration the "half-sister", and the position of the half-sister is distinct from that of the full sister even in those provinces where she is an heir; all of which it is said would show that there is no justification for interpreting the word "sister" as including a half-sister.

10. Differing from the above view, <ORG> in its full bench decision in <NAME> v. Mst. <NAME> [1938] Nag. 115, F.B. held that "a half-sister who is a child of the same father is an heir under the Hindu Law of Inheritance (Amendment) Act of 1929. The word 'sister' includes a sister by the same father even though the mother be different," The Court proceeded on the view that under the Act a sister is an heir in all the provinces to which the Mitakshara law applied, that it should be interpreted according to the notions of Hindu law of which it forms a part, and that as a general rule the law of the Mitakshara recognises no distinction between the full blood and the half-blood except in a competition inter se. The learned Judges pointed out that as a sister succeeds as a father's daughter, a half-sister having the same father is an heir if the sister would be an heir. The same Court has also held that a half-sister's son is in the line of heirs and that a "sister's son" in Section 2 of the Act would include a half-sister's son. [See <NAME> v. <NAME> [1938] A.I.R. Nag. 97]

11. <CITATION> . Ganpati Devi (1936) I.L.R. 18 Lah. 525 Tek Chand J. (with whom <NAME> agreed) doubted the correctness of the decision in <CITATION> , stating, (p. 534) :-

With great respect, I think that the conclusion of the learned Judges is expressed too broadly and I confess I have grave doubts as to the soundness of the decision and the reasons on which it is based.

12. The Act is described as, An Act to alter the order in which certain heirs of a Hindu male dying intestate are entitled to succeed to his estate.

13. And the preamble is :-

Whereas it is expedient to alter the order in which certain heirs of a Hindu male dying intestate are entitled to succeed to his estate.

14. As the object of the Act is thus to alter the order of succession of certain persons therein mentioned, it is desirable to examine how the law stood with reference to their rights of succession before the Act, and how those rights have been altered by it.

15. Before the Act, the only females recognised as heirs under the Hindu law except in Bombay and Madras, were "(1) the widow, (2); the daughter, (3) the mother, (4) the father's mother, (5) the father's father's mother. Accordingly "a son's daughter, daughter's daughter and sister "-the first three persons mentioned in the Act were not heirs at all, except in the presidencies of Bombay and Madras, where the first two of them ranked as bandhus. In Bombay, the third, a "sister" is expressly mentioned as an heir in the Mayukha; though not expressly mentioned as such in the Mitakshara, her right as an heir has long since been recognised. A sister is recognised as a gotraja sapinda both in the Mayukha and in the Mitakshara. In Madras, she was recognised as entitled to succeed as bandhu, but only after the male bandhus. A "sister's son" ranked everywhere as a bandhu before the Act.

16. Under the Act, all the above-mentioned four persons, "a son's daughter, daughter's daughter, sister and sister's son "are ranked as heirs in a specified order of succession and placed next after a father's father and before a father's brother, thus enabling them to inherit with gotraja sapindas.

17. The Act came into force on February 21, 1929. When it began to be enforced, the question arose in certain Courts in India [ see Bhagwan Dei, <NAME> v. <NAME>, <NAME> (1933) I.L.R. 8 Luck. 646 <CITATION> (1935) I.L.R. 17 Lah. 356 <CITATION> (1936) I.L.R. 58 All. 1041, F.B. and <NAME> v. Mt. Jainath Kuar whether, having regard to the language of the preamble, the provisions of the Act would apply not only to persons who were already heirs under the Mitakshara law, but also to those of the persons who were not heirs before the Act; because the Act, it was said, was merely intended to alter the ordet in which persons already recognised as heirs would, succeed and not to create new heirs. The heading and preamble of the Act do not accurately summarise its provisions, but having regard to the language of Section 1 (2) of the Act which says that "it applies only to persons who but for the passing of the Act would have been subject to the law of the Mitakshara in respect of the provisions herein enacted...." The Courts concluded, and in their Lordships' view rightly, that it would apply to the persons specified so as to constitute them heirs even in those provinces where they were not heirs according to the prevailing view of the law of the Mitakshara.

18. It will thus be seen that the Act has amended and altered the old order of succession in Hindu law. It affects all Hindus governed by the Mitakshara. Hence it appears to their Lordships that in the absence of an interpretation clause, the <ORG> should interpret the terms of the enactment in the sense in which they are used in the Mitakshara law. <CITATION> (1928) L.R. 55 I.A. 139 : s.c. 30 Bom. L.R. 829 in considering whether the natural "brother" of the deceased Hindu taluqdar who was an adopted son, was a "brother" within the meaning of Section 22, Clause (5), of the Oudh Estates Act, I of 1869, as amended by Section 14 of the U.P. Act III of 1910, and was consequently entitled to the estate in preference to the widow, their Lordships answered the question in the negative, on the ground that the personal law was applicable to the interpretation of the word "brother." They rejected the argument that the Act being expressed in English is its own dictionary.

19. In the law of the Mitakshara, the principle is fundamental that the primary test on all questions of inheritance is propinquity in blood. "To the nearest sapinda the inheritance next belongs." (Manu, 9.189). Applying this basic principle of succession, the Hindu law gives preference to the whole blood over the half blood. As applied to brothers, the rule is thus stated in the Mitakshara;, Chapter II, Section 4, Placita 5 and 6 :-These run as follows :-

(5) "Among brothers such as are of the whole blood, take the inheritance in the first instance, under the text.... 'To the nearest sapinda the inheritance next belongs.' Since those of the half blood are remote through the difference of the mothers."

(6) "If there be no uterine (or whole) brothers, those by different mothers inherit the estate." (See <NAME>'s translation of the Mitakshara.)

20. In <NAME> v. <NAME> (1933) L.R. 60 I.A. 189 : S.C. 35 Bom. L.R. 595 the Board held that-

The Mitakshara, ch. II, Section 4, vv. 5 and 6, states a principle with regard to the preference of the whole blood to the half blood applicable to all sapindas in the same degree of consanguinity.

<CITATION> (1931) L.R. 58 I.A. 372. s.c. 33 Bom. L.R. 1411 which was a case between bandhus it was held that in a Hindu family governed by the Benares school of the Mitakshara law the father's half-sister's sons have preference as heirs over the mother's sister's sons. In the course of the judgment their Lordships observed (p. 375) :-

<CITATION> (1915) L.R. 42 I.A. 177 : s.c. 17 Bom. L.R. 998 it is laid down that 'having regard to the general scheme of the Mitakshara the preference of the whole blood to the half blood is confined to members of the same class, or to use the language of the Judges of the High Court in <CITATION> (1895) I.L.R. 19 All. 215 to "sapindas of the same degree of descent from the common ancestor."

In their Lordships' opinion the principle of the decision applies equally in the case of bandhus, not descended from a common ancestor but claiming merely on the basis of propinquity. Again the Mitakshara (Ch. 2, Section 4, pl. 5 to 7) definitely prefers a half-brother to the son of a full brother : see <CITATION> (1873) 12 B.H.C. 65

21. It follows that the law of the Mitakshara recognises no difference between relations of whole blood and those of half blood which would include sisters and half-sisters as well, except when there is a competition amongst them inter se. This has been understood and acted upon as a general principle of Hindu law by <ORG> in <NAME> v. Mt. Jiweni [1937] A.I.R. Lah. 11 in which it was held that & half-sister's son is an heir, according to its general principles. There is nothing in the Act itself to show that the interpretation of the word "sister" as including a "half-sister" sanctioned by the Mitakshara, is contrary to its intention, either express or implied. In <ORG> v. <NAME> (1883) 53 L.J.Q.B. 185 <NAME> observed (p. 189) :-

...it is, I consider, a well settled rule that in construing a statute or a document it is not right to follow merely the words of the statute or document, taking them in their ordinary grammatical meaning : but it is necessary also to apply those words to tile subject-matter dealt with in the statute or document and then to construe them with reference to that subject-matter, unless there is something which compels one not so to construe them. The rule is, I think, that the ordinary meaning of the words used in the English language must be applied to the subject-matter under consideration.

22. In their Lordships' opinion, the Act should be read as a part of the general Hindu law of inheritance, and when so read, it should be held as already explained, that the word "sister" used in it would include a half-sister. It is obvious that the object of the Act is to give effect to the principle of propinquity by bringing into the order of succession some of those persons more nearly connected with the propositus by ties of blood than others whose connection with him though as sapindas is but remote. On the whole, in giving full effect to the principle of propinquity their Lordships cannot find any sufficient reasons to exclude the half blood as such. However, in thus interpreting the term "sister" as including half-sister one qualification should be made.

23. It is said that if we hold that a "sister" includes a half-sister, there will be no reason to make a distinction between a uterine and consanguine sister and that it will be repugnant to the ordinary notions of Hindus to recognise a woman as a sister who has not the same father as the person himself. This objection does not seem to be insurmountable. In his annotation under placitum 5 in Section V of Ch. II of the Mitakshara, the learned commentator <NAME> refers to the following text of <NAME> wherein he says :

Kinsmen (bandhus) are sapindas and these may belong to the same family or not.... The daughters of the father and other ancestors must be admitted like the daughters of the man himself and for the same reason.

Following this text the sister was recognised as heir as <NAME> in Bombay; though elsewhere she was not recognised as an heir except in Madras where she was treated as a bandhu. Their Lordships think that the description given by <NAME> "the daughter of the father" is helpful in interpreting the term "sister" where, as in this Act, it is used to signify an heir with reference to persons governed by the Mitakshara. In their Lordships' opinion, the term "sister" in the Act would include a half-sister, i.e. a sister by the same father even though the mother be different; but cannot be extended beyond that to include one who has not the same father.

24. It is stated as an objection that the full sister and the half-sister must take together, if the word "sister" in the Act includes a half-sister; but this is too rigid a view. On ordinary principles, the difficulty will not arise; for, although, as recognised under the Mitakshara, a sister will include a halfsister, the latter will take the inheritance only when there is no full sister to claim it.

25. If the term "sister" in the Act includes a half-sister, then it must be held by parity of reasoning, that the term "sister's son" would include a halfsister's son. In this connection their Lordships would draw attention to the decision in <CITATION> (1891) I.L.R. 15 Mad. 300 where in holding that a half-sister's son is entitled to inherit under the Hindu law in force in the Madras Presidency, the learned Judges pointed out that the position of a half-sister's son in the line of heirs is the same as that of a sister's son. In the course of the judgment they stated as follows (p. 301) :-

The relationship between the maternal uncle and his sister's son or step-sister's son is alike that of sapindas, for, in both cases, there is a common grandfather and the relation of sapindas arises from connection as parts of the body [1938] A.I.R. Nag. 97

26. In <NAME> v. <NAME> the learned Judges of <ORG> observed (p. 99) :

Once it is accepted that the son of a half-sister occupies the same position as the son of a full-sister and consequently falls within that class, and once it is seen that the Hindu law does not speak of them separately in the texts, it must be taken that the <ORG> was using language familiar to Hindu lawyers and meant to elevate all the persons who formed that particular class and who are ordinarily designated by the term 'sister's sons.

Their Lordships find themselves in agreement with the above observations of the learned Judges of <ORG>.

27. For the above reasons, their Lordships are unable to accept the conclusion arrived at by the learned Judges in <CITATION> (1933) I.L.R. 55 All. 725, F.B. on which the decision under appeal is based. The Courts in India have not viewed the question from the correct standpoint. In their Lordships' opinion, <NAME>, the son of the half-sister of <NAME> who succeeded to the estate under the Act having died, his mother has under the ordinary law inherited from him.

28. In the result, their Lordships will humbly advise His Majesty that this appeal should be allowed and the decrees of the Courts in India should be set aside and the suit should be dismissed. The plaintiff will pay the defendant's costs in <ORG> and in this appeal; but in the trial Court, each party will bear its own costs in consonance with its order.


PETITIONER: COMMISSIONER OF INCOME-TAX, <NAME>, NOWST BENGAL III Vs. RESPONDENT: <ORG>. DATE OF JUDGMENT: 20/02/1969 BENCH: <NAME>, V. BENCH: <NAME>, V. SHAH, J.C. GROVER, A.N. CITATION: 1969 AIR 1160 1969 SCR (3) 804 1969 SCC (1) 629 CITATOR INFO : RF 1986 SC 98 (18) R 1986 SC1483 (4) R 1986 SC1483 (4) ACT: Indian Income-tax Act , 1922, ss. 3 , 10(2) (xv) and 66(1)- Assessee appointed sole selling agent of principal- Compensation paid to former selling agents through accounts of assessee--compensation paid through assessee's accounts whether deductible expenditure-Payment whether expenditure laid out for purposes of business-Payment whether under overriding title-<ORG>'s finding of fact that compensation was not paid by assessee under any agreement with principal cannot be interfered with by <ORG> when question not referred to it. HEADNOTE: <ORG> was a subsidiary of <ORG>. With effect from 1st April 1948 the former terminated the services of four selling agents in India and in their place appointed the respondent company (another subsidiary of <ORG>, London) as their sole selling agents. The four former selling agents were to be paid compensation for the termination of their services and this was done through the accounts of the respondent. In its income returns for the years 1949-50, 1950-51, 1951-52 and 1952-53 the respondent showed as its income the net amount of commission arrived at after deducting from the gross commission the compensation paid to the former selling agents. The Income-tax Officer in his order for the year 1951-52 held that the said deductions were not permissible. His order was confirmed by <ORG> and <ORG>. The <ORG> held that there was no agreement between <ORG> (Export) Glasgow and the respondent company casting on the latter the liability to pay the compensation to the former selling agents out of the commission earned by it; the <ORG> further said that even if there was an agreement it was not acted upon. In reference under s. 66(1) of the Indian Income-tax Act, 1922 the <ORG> took the opposite view and held that the claim made by the respondent company was allowable. The revenue appealed to this Court. The questions that fell for consideration were : (i) whether the <ORG> was justified in interfering with the <ORG>'s finding of fact on a question not referred to it; (ii) whether the compensation amounts paid by the respondent to the former selling agents were expenditure laid out wholly and exclusively for 'the purpose of business; (ii) whether the income in question was diverted before it reached the respondent by virtue of an overriding title. HELD : (i) It is well-established that the <ORG> is not <ORG> in a reference under s. 66(1) of the Act and it is not open to the <ORG> in such a reference to embark upon a reappraisal the evidence and to arrive at findings of fact contrary to those of the Appellate: <ORG>. It is the duty of the <ORG> while hearing the reference to confine itself to the facts as found by the Appellate <ORG> and to answer the question of law in the context of those facts. It true that the finding of fact will be defective in law if there is no evidence 805 to support it or if the finding is perverse. But in the hearing of a reference under s. 66(1) of the Act it is not open to the assessee to challenge such a finding of fact unless he has applied for the reference of the specific question under s. 66(1) . [809 B-D] In the present ease the assessee had in its applications under s. 66(1) expressly raised the question about the validity of the finding of the Appellate <ORG> as regards the agreement but the question was not referred by the Appellate <ORG> to the <ORG> and the contention of the assessee with regard to the question must be deemed to have been rejected. The assessee did not thereafter move the <ORG> under s. 66(2) of the Act requiring it to call for a statement of the case on that specific question. The <ORG> was therefore in error in embarking upon a reappraisal of the evidence before the Appellate <ORG> and setting aside the finding of the Appellate <ORG> that there was no agreement as claimed by the assessee for the payment of compensation to the former selling agents out of its own commission and. that if there was such an agreement it was not acted upon. [809 <CITATION> , 60 I.T.R. 52, <CITATION> ., 63 I.T.R. 609 and <CITATION> ., 68 I.T.R. 200, applied. (ii) In the absence of proof of the exact terms and conditions of the agreement it was not possible to accept the argument that the amount paid as compensation to the ex- agents was an 'expenditure laid out wholly and exclusively for the purpose of the business' under s. 10(2)(xv) of the Act. [810 D] (iii) The assessee's documents suggested that the payment of compensation was the exclusive liability of <ORG> and the assessee was not under a legal obligation to pay the amount of compensation to the outgoing agents. It was not established that the payment of compensation was by an overriding title created either by the Act of the parties or by the operation of law. An obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in the diversion of income. An obligation to apply income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible. The true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted in truth never reached the assessee as his income. [810 <CITATION> ,  1 I.T.R. 135, <CITATION> ,  6 I.T.R. 206 and <CITATION> , 41 I.T.R. 367, applied. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1549 to 1552 of 1968.

Appeals from the judgment and order dated September 28, 1964 of <ORG> in Income-tax Reference No. 18 1961.

<NAME>, <NAME>, <NAME>, <NAME> and <NAME>, for the appellant (in all the appeals).

<NAME>, <NAME> and <NAME>, for the respondent (in all the appeals).

The Judgment of the Court was delivered by <NAME>, J. These appeals are brought by certificate from the judgment of <ORG> dated 28th September, 1964 in Income Tax Reference No. 18 of 1961. The respondent (hereinafter called the assessee) is a private limited company incorporated in India and is a subsidiary of <ORG>, London, which holds the entire share capital of the assessee. The business of the assessee consists mainly of acting as selling agents in India for a large variety of goods such as chemicals, dyes, explosives etc., manufactured or purchased by its London principals and sold in India. <ORG> [hereinafter referred to as <ORG>] is another subsidiary of <ORG> which holds the entire share capital of <ORG> The <ORG> had appointed as their selling agents in India four companies, viz., (1) <ORG>, Calcutta, (2) <ORG>, Madras, (3) <ORG> Bombay and (4) <ORG> With effect from 1st April, 1948, <ORG> terminated the services of the aforesaid selling agents and appointed the assessee as its sole selling agent. The <ORG> had agreed to pay to the former selling agents compensation at the rate of two fifth, two fifth and one and two fifths of the commission earned by the assessee for the three years from 1st April, 1948. The compensation was paid to the four companies through the accounts of the assessee. For this purpose the modus operandi adopted was as follows :-The compensation payable to the former agents was spread over a period of three years and on the assumption that the turnover was constant, the compensation payable to the selling agents was on an average, an amount equal to the 11/15th of the commission earned by the assessee at the normal rates. In order to arrive at the amount of commission to be credited to the assessee's profit and loss account each year the assessee in the first place credited the commission account and debited <ORG> account with the full amount of compensation earned by it at normal rates on sales effected during the year. Next, the assessee transferred from the commission account to a special reserve account called the 'Explosives Ex-Agents Compensation Reserve Account', the proportion payable to the ex-agents as compensation, namely, 11/15th (2/5+2/5+7/5= 11/5 X 1/3 = 11/15) (leaving 4/15th towards commission account) so that funds might be accumulated for payment to the four companies from time to time.

<NAME>

The year of account of the assessee is from 1st October to 30th September every year. As a result of the above method of accounting, the following figures appeared in the assessee's books of accounts

Gross Transfer toNet Commission Reserve forCommission compensa- tion

Rs. Rs. Rs. 1st April 1948 to 30th September 1948 2,91,396 2,03,503 87,893 Year ending 30th September 1949 7,67,294 5,41,526 2,25,768 Year ending 30th september 1950 7,52,204 5,29,284 2,22,920 year ending 30 th september 1951 10,20,922 4,00,052 6,20,870

TOTAL 28,31,816 16,74,365 11,57,451

For the assessment years 1949-50, 1950-51, 1951-52 and 1952-53 the assessee showed the net amounts of commission earned on the selling agencies by <ORG> adding a foot note that the amounts were arrived at after deducting the amount of compensation payable to the out- going agents. By his order dated 28th January, 1957 for the assessment year 1951-52 the Income Tax Officer held that the deductions were not permissible. In an appeal preferred by the. assessee the Appellate Assistant Commissioner confirmed the assessment by his order dated 25th November, 1957. The assessee took the matter in further appeal to <ORG> which dismissed the appeal. <ORG> held that there was no justification for the absence of a written agreement between <ORG> and the assessee when the former selling agencies were terminated and the assessee was appointed as the sole selling agent. It was observed that the assessee was not collecting any commission on behalf of the outgoing agents and it was not their legal obligation to pay compensation to the out-going agents. If the assessee was not entitled to more than 3/5th of commission during the first two years, it should have credited that amount whereas the assessee had actually credited four-fifteenth on a notional basis which was not in consonance with the arrangement. The conclusion reached by <ORG> was that "there was no agreement between the assessee and <ORG> and if there was one it was not acted upon". It was held by <ORG> that the payment of compensation was not because of an overriding title created either by the act of the parties or by operation of law.

At the instance of the assessee the following question of law was referred to <ORG> under section 66(1) of the Income-Tax Act, 1922 (hereinafter called the Act):--

<NAME>

"Whether the inclusion by the Income Tax officer. of Rs. 2,03,503, Rs. 5,411,526, Rs. 5,29,284 and 4,00,052 in the assessment for the years 1949-50, 1950-51, 1951-52 and 1952- 53, for relevant accounting years ending the 30th Sept. 1948, 1949, 1950 and 1951 respectively in the computation of the total income of the assessee is justified and correct ?"

<ORG> answered the question in the negative in favour of the assessee holding that the inclusion of the amount of compensation in the total income of the assessee for the relevant assessment years was not justified. On behalf of the appellant it was contended that <ORG> had no legal Justification for interfering with the finding of <ORG> that there was no proof of the agreement between the assessee and <ORG> with regard to the quantum of commission to be paid to the assessee for the period between 1st April, 1948 and 31st March, 1951. On this point reference was made by Mr. <NAME> to (a) the letter dated 11th March, 1947 from <ORG> to <ORG>,

(b) the affidavits of Mr. <NAME> and Mr. <NAME> and (c) the letter dated 3rd January, 1958 of <ORG> and <ORG>, Calcutta. It was argued that these documents established that there was an agreement between <ORG> and the assessee, that for the period 1st April 1948 to 31st March, 1951 the assessee was entitled to receive as its commission only the amounts representing the, difference between the normal rates of commission and the compensation payable to the former agents during that period. <ORG> had considered all these documents and reached the conclusion that there was no agreement between <ORG> and the assessee and 'if there was one it was not acted upon'. <ORG> remarked that the letter dated 11th March, 1947 from <ORG> set forth only the terms and conditions subject to which the selling agencies of the out-going agents were terminated. It was silent on the crucial question of commission to be paid to the assessee during the three years from the date of its appointment as sole selling agent. The affidavits of Mr. <NAME> and Mr. <NAME> were produced for the first time before the Appellate Assistant Commissioner. The affidavits were made- many years 'after the crucial date of the appointment of the assesee as the sole selling agent of <ORG> The affidavits did not mention the amount of commission to be paid to the out-going agents and the affidavits were also not consistent with the entries in the books of accounts of the assessee. The letter of M/s <NAME> and <NAME> was produced at a very late stage during the hearing- of the appeal before the <ORG> and even, otherwise the letter merely explains the method of accounting adopted by the assessee and did not carry the matter any further in the circumstances, the Appellate <ORG> held that there was no agreement between the assessee and <ORG> and if there was any such agreement it was not acted upon. It is manifest that the finding of the Appellate <ORG> on this question is a finding on question of fact and <ORG> was not entitled to interfere with this finding. It is well established that <ORG> is not <ORG> in a reference under s. 66(1) of the Act and it is not open to <ORG> in such a reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate <ORG>. It is the, duty of <ORG> while hearing the reference to confine itself to the facts as found by the Appellate <ORG> and to answer the question of law in the context of those facts. It is true that the finding of fact will be defective in law if there is no evidence, to support it or if the finding is perverse. But in the hearing of a reference under s. 66(1) of the Act it is not open to the assessee to challenge such a finding of fact unless he has, applied for the reference of the specific question under s.66(1). <CITATION> (') it was held by this Court that in a reference <ORG> must accept the findings of fact reached by the Appellate <ORG> and it is for the party who applied for a reference to challenge those findings of fact, first, by an application under s. 66(1) . If the party concerned has failed to file an application under s. 66(1) expressly raising the question about the validity of the finding of fact, he is not entitled to urge before <ORG> that the finding is vitiated for any reason. The same view has been expressed by this Court in <CITATION> .(2) and <CITATION> .(3).In the present case the assessee has in his application under s.66(1) expressly raised the question about the validity of the finding of the Appellate <ORG> as regards the agreement but the question was not referred by the Appellate <ORG> to <ORG> and the contention of the assessee with regard to the question must be deemed to have been rejected. The assessee did not thereafter move <ORG> under s. 66(2) of the Act requiring it to call for a statement of the case on that specific question. We are therefore of opinion that <ORG> was in error in embarking upon a reappraisal of the evidence before the Appellate <ORG> and setting aside the finding of the Appellate <ORG> that "there was no agreement as alleged in the affidavits of Mr. W. A. <NAME> and Mr. <NAME> and "if there was such an agreement it was not acted upon". (1) 60 I.T.R. 52.

(2) 63 I.T.R. 609.

(3) 68 I.T.R. 200.

It was argued by Mr. <NAME> that even if the agreement was not established,, the amount, Paid by the assessee as compensation to the ex-agents was an expenditure laid out wholly and exclusively for the purpose of the business such is allowable under s.10(2) (xv) of the Act. The contrary view point was urged on behalf of the appellant,. It was pointed out that the assessee was acting as the agent of <ORG> for the payment of compensation of the ex-agents and the payment was made not in the character of a trader but in the character of the agent of its Principal. The contention of the appellant was that the assessee got the right to sell goods after 1st April 1948 and for getting that right the assessee parted with a portion of its commission for the first two years after 1st April 1948 and paid very much more than the commission earned in the third year. This position was borne out by the accounts of the respondent which show that the assessee received the commission at full rates and out of it created a reserve account of which these compensations were made to the ex-agents. We have already referred to the finding of <ORG> that no agreement between the assessee and <ORG> has been proved. In the absence of proof of the exact terms and conditions of the 'agreement it is not possible to accept the argument of the assessee that the amount paid as compensation to the ex- agents was an "expenditure laid out wholly and exclusively for the purpose of the business" under s. 10(2) (xv) of the Act.

It was finaly contended on behalf of the respondent that by virtue of an overriding title the income was diverted before it reached the assessee, and so, the amount of compensation paid to the ex-agents did not form part of the income of the assessee. In other words, the contention was that the compensation payable to the ex-agents was diverted from the income of the assessee by ,an overriding title arising under the agreement between the assessee and <ORG> The argument was stressed that the commission payable as compensation to the ex-agents did not form part of the income of the assessee. We are unable to accept this argument as correct. We have already pointed out that the finding of <ORG> is that the precise terms of the agreement between the assessee and <ORG> have not been established. In any event, even on basis of the affidavits of Mr. <NAME> and Mr. <NAME> the payment of compensation to the "-agents was apparently made by the assessee for and on behalf of <ORG> The assessee's documents suggest that the payment of compensation was the exclusive liability of <ORG> and the assessee was not under a legal obligation to pay the amount of compensation to the out-.going agents. It is not established that the payment of compensation ,was by an overriding title ,created either by the act of the parties or by the operation of law. An obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assesses results in the diversion of income. An obligation to apply income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible. The true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted 'in truth never reached the assessee as his income. The leading case on the subject is <CITATION> (1) where the step mother of the <NAME> had brought a suit for maintenance and a compromise decree was passed in which the step mother was to be paid Rs. 1,100 per month, which amount was declared a charge upon the properties in the hands of the <NAME> by the Court. The <NAME> sought to,deduct this amount from his assessable income, which was disallowed by <ORG> at Calcutta. On appeal to <ORG> Lord <NAME> observed as follows "But their Lordships do not agree with the learned Chief Justice in his rejection of the view that the sums paid by the appellant to his step mother were not 'income' of the appellant at all. This in their Lordships' opinion is the true view of the matter.

When the Act by section 3 subjects to charge 'all income' of the individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the court by charging the appellant's whole resources with a specific payment to his step-mother has to that extent diverted his income from him and has directed it to his step-mother; to that extent what he receives for her is not his income. It is not a case of the application by the appellant of part of his income in a particular way, it is rather the allocation of a sum out of his revenue before it becomes income in his hands".

Another case of <ORG> is reported in <CITATION> (2), where, a testator appointed the appellants as executors and directed them to pay Rs. 1,00,000 out of the income on the occasion of his addya sradh. The executors paid Rs. 5,537 for such expenses, and sought to deduct the amount from the assessable income. <ORG> confirmed the decision of <ORG> disallowing the deduction and observed that the payments were made out of the income of the estate coming to the hands of the executors and in pursuance of an obligation imposed upon them by the testator. <ORG> observed that it was not a case in which (1)  1 I.T.R. 135.

(2) [1938] 6 I.T.R. 206.

a portion of the income had been diverted by an overriding title from the person who would have received it otherwise and distinguished <NAME> case(1). <CITATION> (2), <NAME>, J., speaking for the Court observed as follows "There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, if is deductible; but where the income is required to 'be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable".

In view of the principle laid down in these authorities we are of ,opinion that the payment of compensation by the assessee to the ex-agents was not by an overriding title created either by act of the parties or by operation of law. We accordingly reject the argument of Mr. <NAME> on this aspect of the case.

For the reasons expressed we hold that the judgment of <ORG> dated 28th September, 1964 should be set aside and the question referred by <ORG> should be answered in the affirmative and against the assessee. The appeals are accordingly allowed with costs. One hearing fee.

<ORG> allowed.

(1) [1933] I.T.R. 135. (2) 41 I.T.R. 367.

<NAME>