<NAME>, J.

1. The following questions have been referred to this court at the instance of the <ORG> under section 256 of the Income-tax Act, 1961:

"For the assessment year 1968-69:

(1) Whether, on the facts and in the circumstances of the case, the <ORG> was justified in allowing the deduction for expenditure of Rs. 8,400 being the rent of the guest house, under section 30 of the Income-tax Act, 1961, for the assessment year 1968-69 ?

(2) Whether, on the facts and in the circumstances of the case, the <ORG> was right in holding that the assessee was entitled to deduct the expenditure of Rs. 6,060 for the maintenance of the guest house under section 37(3) of the Income-tax Act, 1961, for the assessment year 1968-69 ?

For the assessment year 1969-70:

(1) Whether, on the facts and in the circumstances of the case, the <ORG> was justified in allowing the deduction for expenditure of Rs. 4,200 being the rent of the guest house, under section 30 of the Income-tax Act, 1961, for the assessment year 1969-70 ?

(2) Whether, on the facts and in the circumstances of the case, the <ORG> was right in holding that the assessee was entitled to deduct the expenditure of Rs. 2,770 for the maintenance of the guest house under section v of the Income-tax Act , 1961, for the assessment year 1969-70 ?

(3) Whether, on the facts and in the circumstances of the case, the <ORG> erred in law in holding that the sum of Rs. 22,275 was not assessable under section 41(1) for the previous year relevant to the assessment year 1969-70 ?"

2. The first two questions raised for the assessment year 1969-70 are identical to those raised for the assessment year 1968-69 except for the amounts mentioned therein. Counsel are agreed that the two common questions are covered by this court's judgment in the assessee's own case for the assessment year 1967-68 in Income-tax Reference No. 99 of 1976, dated November 18, 1988 (see [1989] 177 ITR 124) and that following the said judgment both the common questions have to be answered in the affirmative and in favour of the assessee.

3. Accordingly, the common questions are so answered.

4. Facts pertaining to the third question relating to the assessment year 1968-70 are: The assessee-company credited a sum of Rs. 79,492 to its profit and loss appropriation account. Out of this amount, the assessee conceded that it was liability to pay tax on Rs. 49,959. As regards the balance amount of Rs. 22,275 the assessee-company admitted that this amount represented commission payable to BE <NAME> in an earlier year, the amount was allowed as deduction. The commission was not claimed by <NAME> for the past many years. During the previous year, the assessee-company debited <NAME>'s account and credited its profit and loss appropriation account. Yet, the assessee-company claimed that the amount was not taxable despite the fact that it was written off in the aforesaid manner. The assessee's contention that the act of writing off on its part did not amount to remission or cessation of its liability which was the requirement of section 41(1) of the Income-tax Act, 1961, was rejected by the Income-tax Officer who brought the aforesaid amount of Rs. 22,275 to tax under section 41(1) . The Appellate Assistant Commissioner confirmed the inclusion of the amount under section 41(1) . On further appeal, however following its earlier order in the assessee's won case for assessment year 1967-68, the <ORG> accepted the assessee's case that the amount of Rs. 22,275 was not taxable as its income under section 41(1) of the Income-tax Act, 1961. According to the <ORG>, its conclusion was fortified by this court's decisions in <CITATION>  49 ITR 578, <CITATION>  54 ITR 167 and <CITATION>  62 ITR 34.

5. <NAME>, learned counsel for the <ORG>, submitted that the <ORG> had not appreciated the decision of this court properly. When certain expenses were allowed as deduction in the past, such amount of expenses is deemed to be the assessee's income under section 41(1) of the Income-tax Act as soon as and to the extent there is remission or cessation of liability in respect thereof. The only question requiring consideration was whether the assessee's liability still continued. In this context, he stated that the assessee's conduct in written off the liability by debiting the account of <NAME> and crediting correspondingly the profit and loss appropriation account clearly indicated that it had no intention of making payment to <NAME> even if it was demanded.

6. According to <NAME>, the legislative intention as regards this provisions was clear. It was to tax such amounts which were allowed as deductions and which were ultimately not paid and were not to be paid by the assessee. Assuming there was some lacuna in the provisions of section 41(1) , he submitted, this court should fill up the lacuna by supplying necessary words in the provisons. In support of his contention, <NAME> relied on number of decisions of this court and other <ORG> to which we propose to refer in the course of our judgment.

7. <NAME>, learned counsel for the assessee, on the other hand, reiterated the reasons given in support of the conclusion. In particular, he urged that the question was squarely covered by the decision of this court referred to by the <ORG> in its order in the assessee's favour. He brought to our notice other decisions of this court and other decisions of this court and other <ORG> which, accordingly to him, supported the <ORG>'s order. We shall make reference to those judgments also to the extent necessary in the course of the judgment.

8. Section 41(1) of the Income-tax Act, 1961, reads thus:

"41(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof the amount obtained by him or the value of benefit accruing to him, shall be deemed to the profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not."

9. Broadly speaking, the sub-section applies only if, (i) an allowance or deduction had been made in the assessment for any year in respect of the loss. Expenditure or trading liability incurred by the assessee and (ii) in subsequent years, the assessee had obtained any benefit in respect of the amount so allowed as deduction by way of remission or cessation. As regards the first condition, admittedly, the amount of Rs. 22,275 represented commission claimed as payable by the assessee to <NAME> in one of the past assessment years and the assessee's claim for deduction was allowed went a credit entry was made in favour of <NAME>. As regards the second condition, there is, of course, a dispute between the parties. According to the <ORG>, the liability being barred by limitation and the assessee having written it off by correspondingly crediting its profit and loss appropriation account, ceased or got remitted within the meaning of section 41(1) of the Act. The assessee contends that it is not so. When a liability is barred by limitation, what happens is that the remedy of the creditor is barred. The liability of the debtor (in this case the assessee) is never barred so long as he had the intention of honoring the liability.

10. For appreciation of the rival contentions in this regard, it is desirable to first refer to the judgments of this court railed upon before us. The first judgment cited is in the case of <CITATION>  49 ITR 578. In that case, the income-tax authorities had concluded the amount of Rs. 30,190 in the income of the assessee on the ground that the liability pay had ceased by reasons of the expiry of the period of three years. The assessee had not written off the liability in its accounts. It was on these facts that this court held that merely because the remedy of the creditors to recover the amount is barred, the assessee's liability did not cease and that, therefore, the amount was not taxable under the provision of section 10(2A) of the Income-tax Act, 1922, corresponding to section 41(1) of the Income-tax Act, 1961. The second decision is <CITATION>  62 ITR 34. In this case, certain amounts were add owed as deduction in the past in respect wages, salary an bonus payable to the employees. The liabilities in respect thereof were written off during the previous year, the remedy was apparently barred by limitation. The <ORG>'s contention that the liabilities had ceased and section 10(2A) of the 1922 Act (corresponding to section 41(1) of the new Act) was applicable was rejected by this court observing at page 41 as under:

"....... The question to be considered is whether the transfer of these entries about a remission cessation of its liability. The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees, we fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honor his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt - the debtor making payment thereof his creditor. Transfer of an entry is neither an agreement between the parties not payment of the liability."

11. Thus, this court, in its above judgment, held that the cessation of the liability may occur either (i) by reason of operation of law, i.e., on the liability being unenforceably at law by the are creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or (ii) by contract between the parties, or (iii) by discharge of the debt - the debtor making payment thereof his creditor. There are, thus, three alternative situations contemplated in this decision which would result in the cessation of the liability. However, in that case, the liability pertained to wages, salaries and bonus due by an employer to his employees in an industry so much so that the provisions of the Industrial Disputes Act were attracted and consequently the bar of limitation did not come in the way of the employees. In these circumstances, this court held that there was no cessation of the liabilities and, therefore the amounts could not be treated as income of the assessee under section 10(2A) of the Indian Income-tax Act, 1922.

12. <CITATION>  102 ITR 428, this court held that neither remission not cessation of liability could take place by unilateral act on the part of the debtor and, therefore, merely because the amount was transferred from "unclaimed balances account" to "reserve for taxation account" it will not become taxable under section 10(2A) of the Act of 1922. That the decision was given on the facts of that case is evident from the emphasis laid on the fact that some payments were made out of these accounts as and when demanded by the parties and for this reasons the transfer of amounts from "unclaimed balances account" to "reserve for taxation account" did not mean cessation of liability. The question involved in the case of <CITATION> .  149 ITR 604, was not regarding the remission or cessation of liability at all. It was whether the surplus deposits made by the customers were trading receipts in the hands of the assessee. It was held that the excess deposit were to held by the assessee for the benefit of the depositors. The deposits were in respect of specific transactions of sales and were adjusted towards the purchase price of the machinery sold. It had close connection with the transactions of sales. Since the assessee transferred the excess deposits remaining in its hands to the profit and loss account during the previous year, such excess amounts were assessable to tax as trading receipts in the hands of the assessee. The provisions of section 10(2A) of the old Act of 1922 and section 41(1) of the new Act of 1961 were not even referred to and/or examined in this decision.

13. To sum up, so far as these court is concerned, the settled legal position appears to be what was stated by this court in its judgment in <ORG>'s case [1966] 62 ITR 34. The liability of an assessee does not cease merely because the liability has become barred by limitation and the assessee has unequivocally expressed it intention not to honour the liability even when demanded. Essentially, therefore, it will always be a question of fact whether or not the assessee has expressed unequivocally his intention not to honour the liability after it has become barred by limitation. In a given set of facts, a finding either way may be possible. In the instant case, the departmental authorities have assumed that the assessee has not intention of honoring the liability on demand from the mere fact of the assessee's writing off the liability and crediting the amount to the profit and loss appropriation account. The <ORG> has held that the liability did not cease. We have to answer the question on the basis of the facts found. In the circumstances, so far as this case is concerned, it will not be possible for this court of interfere.

14. The decisions of other <ORG> cited before us do not carry the matter further, because they followed the earlier decisions of this court.

15. Accordingly, the third question relating to the assessment year 1969-70 also is, on the facts, found answered in the affirmative and in favour of the assessee.

16. No order as to costs.


PETITIONER: S. G. JAISINGHANI Vs. RESPONDENT: UNION OF INDIA AND ORS.(With Connected Writ Petition) DATE OF JUDGMENT: 22/02/1967 BENCH: <NAME>, V. BENCH: <NAME>, V. RAO, K. SUBBA (CJ) SHELAT, J.M. SIKRI, S.M. VAIDYIALINGAM, C.A. CITATION: 1967 AIR 1427 1967 SCR (2) 703 CITATOR INFO : F 1968 SC 507 (8) RF 1968 SC 938 (23) E&D 1970 SC 470 (1,6,12,15,35,36) RF 1972 SC2516 (15) E 1972 SC2627 (1,5,12,13,18,21,23) D 1973 SC1146 (9,10) RF 1973 SC1168 (6) RF 1973 SC1425 (14) RF 1974 SC1618 (1,10) D 1974 SC1806 (6) RF 1975 SC2299 (340) F 1976 SC 490 (57,58,106,208,212) RF 1976 SC1207 (185) D 1977 SC 251 (33,36) RF 1977 SC 757 (33,38,40) RF 1979 SC1073 (4,13) R 1980 SC 452 (50) RF 1980 SC1246 (8) RF 1980 SC1561 (36) RF 1980 SC2056 (73) F 1982 SC 101 (31) D 1983 SC 769 (21,22,31,38) D 1984 SC1595 (24,63) R 1985 SC 617 (4) D 1985 SC1019 (24) D 1985 SC1495 (133) RF 1985 SC1558 (26) RF 1987 SC2359 (9) D 1988 SC 268 (26) RF 1988 SC 654 (7) RF 1990 SC1106 (5,28) RF 1990 SC1607 (19) R 1991 SC 101 (66,276) RF 1991 SC 212 (2) RF 1991 SC 537 (37,28,43) ACT: Income-tax Service-Seniority Rules, 1952, r. 1(f)(iii) and (iv)Seniority between direct recruits and promotees-If violative of Arts. 14 and 16 of Constitution-Promotion Rules, r. 4-Promotion from Class 1, Grade II to Grade I- Different periods of service for direct recruits and Promotees-lf discriminatory-Income-tax Officers (Class 1, Grade II) Service Recruitment Rules, r. 4-Fixation of quota- Duty to follow, it mandatory. HEADNOTE: In 1944, <ORG> created two classes of Income-tax Service, namely, Class I service with Grades 1 and 11, and Class 11 service with Grade II. Recruitment to Class I, Grade II was to be made : (a) by direct recruitment through a competitive examination, and (b) by pro. motion from Class 11, Grade III. A Class 11 officer is considered by <ORG> for promotion to Class 1, Grade II, after 5 years' service in Class 11 (2 years of probation and 3 years as Income tax Officer). In 1951, the ratio between direct recruits and promotees was fixed at 2 : 1, presumably under r. 4 of the Income-tax Officers (Class I,, Grade 11) Service Recruitment Rules. Under r. 1 (f) (iii) of the Seniority Rules, 1952, dealing with seniority between direct recruits, and promotees, a promotee becomes senior to a direct recruit who has com- pleted the probationary period of two years in the very year in which <ORG> recommends the officers in Class II far promotion to Class 1. Rule 1 (f) (iv) deals with a special situation in which an officer initially appointed to Class 11 service is given seniority in the same manner as a departmental promotee, if subsequent to his passing the departmental examination he is appointed in Class I on the results of the competitive examination. Rule 4 of the Rules of Promotion of the Central Board of Revenue Office Procedure Manual, states, that the prescribed minimum service for an office of Class 1, Grade 11 for promotion to Grade 1 is 5 years gazetted service including 1 year in class I, Grade II for promotion to Grade 1 is 5 years gazetted 11, the minimum period of service for promotion to class I, Grade I, would be actually 4 years service in class II and 1 year service in Class I Grade II. Respondents 4, 5 and 6 were appointed in Class II, Grade III Service in 1947. They and the appellant (who was a direct recruit) were appointed in Class 1, Grade 11 service in 1951 after having successfully completed in the 1950 competitive examination. The three respondents were however shown as seniors to the appellant as "deemed promotees" under r. 1 (f) (iV) The appellant filed a writ petition in <ORG> and contended that (1) r.- 1 (f) (iii) and (iv) of the Seniority Rules and r. 4 of the Promotion Rules were discriminatory and violative of Arts. 14 and 16 of the, 704 Constitution, and (2) that during 1951-56 there was excessive recruitment of promotees, in violation of the quota rule prescribing the ratio of 2 : 1. <ORG> rejected the petition. In appeal to this Court, HELD : (1) (a). Rule 1 (f) (iii) of the Seniority Rules, 1952, does not violate the guarantee under Arts. 14 and 16. It is not corrected to say that all officers appointed to Class 1, Grade 11 service formed one class and that after the officers have been one once recruited there could be no distinction between direct recruits and promotees. It is really a case of recruitment to the service from two different sources and the adjustment of seniority between them. The concept of equality in- the matter of promotion can be predicated only when the promotees are drawn from the same source. If the preferential treatment of one source in relation to the other is based on the differences between the two sources, and the said differences have a reasonable relation to the nature of the office it can legitimately 1 be sustained on the basis of a valid classification. The reason for the classification in the present case was that the higher echelons of the service should. be filled by experienced officers possessing not only a high degree of ability but also first-rate experience. A rule which gives seniority to outstanding officers with considerable experience, and selected on merit and limiting the promotion to a percentage not exceeding the prescribed limit cannot per se be regarded as unreasonable. The net effect of the rule is that 3 years of outstanding work in Class II is equated to 2 years of probation in Class I, 'Grade II service, and on a consideration of this aspect of the matter, the promotee Is given seniority over a direct recruit completing the period of probation in the same year. [711 E-H; 712 <CITATION> ,,  2 S.C.R. 586, 596 followed. (b) Rule 1(f)(iv) is also based on a reasonable classification and do-not offend the guarantee under Art. 14 or Art. 16(1) of the Constitution. [715 D] The "deemed promotees" we're appointed in Class II, Grade, IIl service in 1947 and completed 5 years service in that clam by the year 1952 and if <ORG> had then recommended their,promotion to Class 1, Grade II, each one of them would have become senior to the appellant by the operation of r. 1(f) (iii).Further, if cl. (iv) did not exist there would be no incentive to a promotee of this type to sit for the competitive examination. Also, if the service of the promotees in Class II. Grade III was entirely ignored and if they join Class I, Grade II service as direct recruits, they might become junior to others by the operation of r. 1 (f) (iii).[715 B-D] (c) Once it is held that r. 1 (f) (iii) of the Seniority Rules is legally valid, the rule of promotion cannot be held to lead to any discrimination as between direct recruits and promotees. The object of the rule of promotion is really to carry out the policy of r. 1-(f) (iii) and not allow it to be defeated by the requirement of 5 years service in Class I, Grade 11 itself, before consideration for promotion to Class 1, Grade 1. Otherwise, a promotee certified fit by <ORG> in 1952-will be senior to the direct recruits who completed their probation in that year, but the seniority Would be an empty formality For, if the 705 promotee-officer is not allowed to count his period of service in Class 11 for the purpose of promotion to Grade I. Class 1, he will have to wait till 1957 or 1958 to go to Grade 1, Class I, while direct 'recruits who completed their probation in 1952 or 1953 could go to Grade I, Class I in 1955 or 1956 counting the 5 years, period from the date on which they were placed on probation, [714 A-D, E-G] (2) The appellant was entitled to a Writ in the nature of mandamus commanding respondents 1 to 3 to adjust the seniority of the appellant and other officers similarly situated and to prepare a fresh seniority list in accordance with law after adjusting the recruitment for, the period 1951 to 1956 and onwards in accordance with the quota rule. [718-D-E] Rule 4 of the Income4ax Officers (Class I, Grade II) Service Recruitment Rules is a statutory rule and there is a statutory duty cast on the <ORG> under this rule to determine the method to be employed for the purpose of filling the vacancies and the number of candidates to be recruited. Having fixed the quota under the rule, there is no discretion left with the <ORG> to alter it according to the exigencies of the situation or to deviate from it, in any particular year, at its own will and pleasure. The absence of arbitrary power is the first essential of the rule of law and discretion, when conferred upon executive authorities, must be confined within clearly defined limits, and their decisions should be made by the application of known principles and rules. The quota rule is linked up with the seniority rule and unless the quota 'rule is strictly observed in practice, it will be difficult to hold that the seniority rule, that is, rule 1(f)(iii) and (iv) of the Seniority Rules, is not unreasonable and does not offend Art. 16. Therefore, the promotees from Class 11, Grade III to Class 1, Grade 11 service, in excess of the prescribed quotas for each of the years 1951 to 1956 and onwards should be held to have been illegally promoted. [717 H; 718 A-D, G- H] The order will not affect such Class 11 officers who have been appointed permanently as Assistant Commissioners of Income-tax. [718 F] For the future years <ORG> should adopt the roster system, by framing an appropriate rule for working out the quota between the direct recruits and the promotees and the roster should be maintained indicating the order in which appointment are made by direct recruitment and by promotion, in accordance with the percentage :fixed under the statutory rules [719 F] JUDGMENT:

CIVIL APPELLATE/ORIGINAL JURISDICTION : Civil Appeal No. 1038 of 1965.

Appeal from the judgment and order dated the March 11,' 1964 of <ORG>, Circuit Bench at Delhi in Civil Writ Petition No. 189-D of 1962.

AND WRIT PETITION No. 5 OF 1966.

Petition under Art. 32 of the Constitution of India- for the enforcement of fundamental rights.

The appellant appeared in person (in C.A. No. 1038 of 1965).

<NAME>, Solicitor-General, <NAME>, <NAME>, <NAME> and <NAME>, for respondents Nos. 1-3.

<NAME>, <NAME> and <NAME>, for respondent No. 4.

<NAME>, <NAME> and <NAME>, for respondents Nos. 5 and 6.

<NAME> for <ORG>, for respondents Nos. 12, 22, 25, 28, 29, 38, 40, 43, 54, 79, 86, 107 and 117. <NAME>, Addl. Solicitor-General, <NAME> and <NAME>, for respondents Nos. 20, 116 and 123. The respondent No. 34 appeared in person. <NAME>, <NAME> and <NAME>, for intervener.

<NAME>, <NAME>, <NAME>, <NAME>, <NAME> and <NAME>, for the petitioner (in W. P. No. 5 of 1966).

<NAME>, Solicitor-General, <NAME>, <NAME>, <NAME> and <NAME>, for respondents Nos. 1-4.

<NAME>, <ORG>, <NAME>, and <NAME>, for respondents Nos. 6, 7, 9, 12-17, 19, 22, 24, 26, 30, 31, 35, 37, 41, 42-50, 52-61, 63, 64, 66, 68-70, 7274, 80, 82-85 87, 91, 95 and 96.

<NAME>, <NAME>, <NAME> and <NAME>, for intervener.

The Judgment of the Court was delivered by <NAME>, J. Civil Appeal No. 1038 of 1965 This appeal is brought, by certificate, from the judgment of <ORG> dated March 11, 1964 dismissing the Writ petition of the appellant Civil Writ No. 189-D of 1962. In his petition under Art. 226 of the Constitution, the appellant, <NAME>, challenged the constitutional validity of what has been described as the "seniority rule" in regard to Income-tax Service, Class 1, Grade 11 along with the improper implementation of the "quota" recruitment to that Service as infringing the guarantee of Arts. 14 and 16(i) of the Constitution. The original respondents to the petition were <ORG>

tary to <ORG> in <ORG> and <ORG>-respondents 1 to 3. Subsequently, respondents 4 to 126 were added and those are promotees in <ORG> who will be affected by the result of the petition.

In order to improve the Income Tax administration <ORG>, on September 29, 1944, reconstituted and classified the existing Income-Tax Services as Class I and 11. The re-organisational scheme provided for recruitment of Income-Tax Officers, Class I Grade 11 Service partly by promotion and partly by direct recruitment. The re-organisational scheme was set out in <ORG>, Finance Department (Central Revenues) letter dated September 29, 1944 (Ex. B). It created two classes of Income-Tax Service, Class I with Grade I and Grade 11 and Class 11 Service with Grade 111. Recruitment to Class I Grade 11 Service was to be made : (a) by direct recruitment through a competitive examination, and (b) by promotion from Class It Grade III, the ratio prescribed in paragraph 2(d) of the letter being 80% by direct recruitment and 20% by promotion from Class 11 Grade III Service, and in case sufficient number of suitable candidates was not available for promotion, surplus vacancies would be filled by direct recruitment. In <ORG>, <ORG> (<ORG>) letter dated January 24, 1950 (Ex. G to the writ petition), the rules of seniority were laid down. These rules laid down-the principle for determination of seniority (a) as between direct recruits recruited on the result of the combined competitive examination; (b) as between promotees selected from Class 11 and (c) as between the direct recruits who complete their probation in a given year and the promotees in the same year for appointment to Class 1. These rules were revised on September 5, 1952 by <ORG>, <ORG>, <ORG>, letter No. F. No. 58(3)-Ad. IT150, dated September 5, 1952. The relevant rule, viz., rule I (f) as framed in 1950 was as follows "The seniority of direct recuits recruited on the results of the examinations held by <ORG> in 1944, and subsequent years shall be reckoned as follows :-

(i) Direct recruits of an earlier examination shall rank above those recruited from subsequent examination.

(ii) Direct recruits of any one examination shall rank inter se-, in accordance with the ranks obtained by them at that examination.

(iii) The promotees who have been certified by the <ORG> in any calendar year shall be senior to all M2Sup. CI/67-16 direct recruits who complete their probation during that year or after and are confirmed with effect from a date in that year or after. Provided that a person initially recruited as Class 11 Income-tax Officer, but subsequently appointed to Class I on the results of a competitive examination conducted by the Federal Public Service <ORG> shall if he has passed the departmental examination held before his appointment to Class I Service, be deemed to be promotee for the purpose of seniority."

The rule, as revised in, 1952 was to the following effect. "The seniority of direct recruits recruited on the results of the examinations held by <ORG> in 1944, and subsequent years shall be reckoned as follows

(i) Direct recruits of an earlier examination shall rank above those recruited from a subsequent examination.

(ii) Direct recruits of any one examination shall rank inter se in accordance with the ranks obtained by them at that examination;

(iii) Officers promoted in accordance with the recommendation of the,' <ORG> before the next meeting of the <ORG> shall be senior to all direct recruits appointed on the results of the examinations held by <ORG> during the calendar year in which the <ORG> met and the three previous years.

(iii) Notwithstanding anything contained in clause (iii).a Class 11 Income-tax Officer subsequently appointed to Class I on the results of a Competitive Examination conducted by <ORG> shall, if he has passed the Departmental Examination held before his appointment to Class I Service be deemed to be a promotee for the purpose of seniority."

Clause (iv) of the 1952 Rule is almost a reproduction of the proviso to clause (iii) of the rule framed in 1950 and clause (iii) has been recast in somewhat different language, though in substance it contains what the main body of clause

(iii) of the Rule of 1950 stated. The effect of clause

(iii) of 1952 Rule is that the promotee becomes senior to the direct recruit who has completed a probationary period of two years in the very year in which <ORG> meets recommending the officers in Class 11 for promotion to Class 1. The following illustrations clarify the application of the rule Illustration 'A'

-------------------------------------------------------- Year of Year Year Depart- Position Promo-

Competitive of of mental of tees Exam. appoint- comple-promo- direct seniority ment tion tion recruit by of Com- direct 2 mittee recruit years' met ment proba- tion

1 2 3 4 5 6

------------------------------------------------------------ 1947 the three 1948 1950 Has completed Senior previous probation.

years.

1948 1949 1951 Has not completed Do. probation. 1949 1950 1952 Has not completed probation. 1950 1951 1953 1950 Do. Do.

Ilustration 'B'

1950 the three 1951 1953 Has com- Senior previous pleted pro- years.bation. 1951 1952 1954 Has not Do. completed probation. 1952 1953 1955 Do.Do. 1953 1954 1956 in 1953 Do. Do.

A Class 11 Officer when directly recruited had to be on pro- bation for two years during which period he had to undergo a course of theoretical and practical training and should pass a departmental examination for being confirmed. After a minimum period of thee years of work as Income-tax Officer (after his probation of two yea rs) he is considered by <ORG> for promotion to Class 1. That is to say that he has to have a minimum service of 5 years in all in Class II before he is qualified for being considered for promotion to Class I, Grade 11 Service. Clause (iv) of rule 1(f) deals with a special situation in which an officer initially appointed to Class 11 Service is given seniority in the same manner as a departmental promotee if subsequent to his passing the departmental examination in Class 11 he is appointed to Class I on the results of the combined competitive examination held by <ORG>.

On October 18, 1951 the recruitment quotas of 80'/ and 20% under the re-organisation scheme dated September 29, 1944 were revised. Under the revised recruitment quota rule 66- 2/3% of the vacancies in Grade 11 Class I would be filled by direct recruitment and the remaining 33-1/3% by promotion from Grade III Class 11 Service. Any surplus vacancies which could not be filled by promotion for want of suitable candidates were to be added to the quota of vacancies to be filled by direct recruitment.

Rule 4 of the Rules of Promotions at page 251 of the Central Board of Revenue Office Procedure Manual has also been the subject-matter of controversy in this appeal and is set out below.

"Income-tax Officer, Class I (Grade 1)- Promotions to this grade are made from the grade of Income-tax Officers Class 1, Grade II. The promotions are made on the basis of seniority subject to fitness, and not by selection. Normally promotions from Class II are made to Grade 11 of Class I only in the first instance. However, in the initial stages of the re-organisation of <ORG>, several senior officers were promoted direct from Class 11 to Class 1, Grade 1, but such promotions will not ordinarily take place in future. NOTE.-The <ORG> has ruled that the promotion to Class 1, Grade I of officiating I.T.O s., class 1, Grade 11- whose retention in that grade has been approved by <ORG> would also be in the nature of promotion from I.T.O., Class 11, Grade III to I.T.O., Class 1, Grade I and require consultation with the <ORG>, even though the promotion from I.T.O., Class 1, Grade 11 to Class 1, Grade I is made on the basis of seniority cum-fitness without reference to <ORG>. Appointments to Class I, Grade I should, therefore, be referred to the <ORG> for approval so long as the officers have not been confirmed in the Class 1, Grade II post.

<NAME>

Basis of promotion is seniority-cum-fitness and prescribed minimum service is five years gazetted service including one year in Class 1, Grade II."

<ORG> of <ORG> rejected the writ petition of the appellant holding that the principles for determining seniority between direct recruits and promotees laid down in rule 1(f)(iii) and (iv), 1952 were not discriminatory and there was no infringement of Arts. 14 and 16(1) of the Constitution. It was also decided by <ORG> that the quota rule announced by <ORG> was merely a policy statement and had no statutory force and departure from the quota did not give rise to any, justiciable issue. It was further observed that the ,promotion rule from Class I, Grade II to Class 1, Grade I was not discriminatory and ultra vires of Arts. 14 and 16 of the Constitution.

The first question to be considered in this appeal is whether rule 1(f)(iii) of the seniority rules as framed in 1952 violates the guarantee under Arts. 14 and 16 of the Constitution. It was contended on behalf of the appellant that the impugned rule was upon an unjustifiable classification between direct recruits and promotees after they had entered into. Class 1, Grade 11 Service and on the basis of that classification promotees are given seniority with weightage over direct recruits of the same year and three previous years. It was contended that there was a discrimination between officers of Class 1, Grade 11 Service after their recruitment and the actual working of the rule kept on pushing down the direct recruits and postponing their chances of promotion to higher posts in <ORG>. It was submitted that all officers appointed to Class 1, Grade II Service formed one class and after the officers have been once recruited there could be no distinction between direct recruits and promotees. In other words, it was contended that the promotees and direct recruits became one class immediately on entry and thereafter there cannot be any class within that class. ,We are unable to accept the contention of the appellant as correct. In our opinion, it is not right to approach this problem as if it is a case of classification of one service into two classes for the purpose of promotion, and as the promotion rule operation to the disadvantage of one of the two classes. It is really a case of recruitment to the Service from two different sources and then adjustment of seniority between the recruits coming from the two sources. So far as Art. 16(1) is concerned, it cannot be said that the rule of seniority proceeds on an unreasonable basis. The reason for the classification is the objective of filling the higher echelons of <ORG> by experienced officers possessing not only a high degree of ability but also first-rate experience. Having regard to the particular circumstances of this case, we are of opinion that the seniority rule is not unreasonable when read with the quota rule which provides for a special reservation of a small percentage of posts for the promotees who are selected by a special Committee, which determines the fitness of the candidates for promotion after they have put in at least three years of service as Income-tax Officers. A rule which gives seniority to outstanding officers with considerable experience, and selected on merit and limiting the promotion to a percentage not exceeding the prescribed limit cannot per se be regarded as unreasonable. As we have already pointed out, the direct recruits joining Class 1, Grade II Service have to undergo a period of two years training and thereafter they become qualified for confirmation. A promotee having already undergone the very same training during the period of probation of Class II, Grade III, joins Class 1, Grade II with three years period of assessment and working experience of <ORG>. It is necessary to add that the selection of a promotee to Class I is based on merit and great weightage is given by <ORG> to outstanding qualifications, record of work and the ability of the can- didate, so that those who come to Class 1, Grade 11 are officers who have shown outstanding capability as Income-tax Officers in Class 11 Service. The statement in Annexure 2 of the affidavit on behalf of respondents 1 to 4 in Writ Petition No. 5 of 1966 shows that the standards of selection are very stiff inasmuch as a very small proportion of officers considered for selection is actually promoted. The net effect of rule 1(f)(iii) therefore is that three years of outstanding work in Class 11 is equated to two of 'probation in <ORG> and on consideration of this aspect of the matter the promotee is given seniority over a direct recruit completing the period of probation in the same year.

The relevant law on the subject is well-settled. Under Art. 16 of the Constitution, there shall be equality of opportunity for all citizens in matters relating to employment or appointment to any office under the <ORG> or to promotion from one office to a higher office thereunder. Article 16 of the Constitution is only an incident of the application of the concept of equality enshrined in Art. 14 thereof. It gives effect to the doctrine of equality in the matter of appointment and promotion. It follows that there can be a reasonable classification of the employees for the purpose of appointment or promotion. The concept of equality in the matter of promotion can be predicated only when the promotees are drawn from the same source. If the preferential treatment of one source in relation to the other is based on the differences between-the said two sources, and the said differences have a reasonable relation to the nature of the office or offices to which recruitment is made, the said recruitment can legitimately be sustained on the basis of a valid classification. Dealing with the extent of protection of Art. 16(1) of the Constitution, this Court observed in <CITATION> (1) "It would be clear that matters relating to employment cannot be confined only to the initial matters prior to the act of employment. The narrow construction would confine the application of Art. 16 (1) to the initial employment and nothing else; but that clearly is only one of the matters relating to employment. The other matters relating to employment would inevitably be the provision as to the salary and periodical increments therein, terms as to leave, as to gratuity, as to pension and as to the age of superannuation.- These are all matters relating to employment and they are, and must deemed to- 'be included in the- expression matters relating to employment' in Art. 16(1). What Art. 16(1) guaranttees is equality of opportunity to all citizens in respect of all the matters relating to employment illustrated by us as well as to an appointment to any office as explained by us. The three provisions Art. 16(1 ), Art. 14 and Art. 15(1) form part of the same constitutional code of guarantees and supplement each other. If that be so, there would be no difficulty in holding that the matters relating to employment must include all matters in- relation to employment both prior, and. subsequent, to the employment which are incidental to the employment and form part of the terms and conditions of such employment."

This <ORG> further observed in that case " Art. 16(2). prohibits, discrimination and thus assures the effective enforcement of the fundamental right, of equality of opportunity guaranteed by Art. 16(1). The words, in respect of only employment used in Art. 16(2) must, therefore, include all matters relating to employment as specified in. Art. 16(1). Therefore, we are satisfied that promotion to selection posts is. included both under Art. 16(1) and (2)."

We next proceed to consider the argument of the appellant that the rule of promotion from I Income-tax Officers Class 1, Grade II to Class 1, Grade I is discriminatory in character. It was contended, that while a direct recruit has to put in 5 years as Income Tax Officer Class 1, Grade II, a promotee officer gets into Grade 1 with a minimum of one year's service in Class I, Grade 11, the other four years being counted in Class II, Grade III. It was I [1962] 2 S.C.R. 586, 596-598.

therefore submitted that the rule operated against the direct recruit in a discriminatory manner. In our opinion, there is no substance in the contention of the appellant. Once it is held that the rule of seniority enacted in rule 1(f)(iii) is legally valid, the rule of promotion i.e., rule 4 of Ch. IX of the Central Board of Revenue Office Procedure Manual cannot be held to lead to any discrimination as between direct recruits and promotees. Rule 4 states that the prescribed minimum service for Class 1, Grade 11 Officer in the matter of promotion to Grade I of that Service is five years gazetted service including one year in Class 1, Grade 11. For a promotee therefore the minimum period of service for promotion to Class I, Grade I is actually 4 years service in Class 11, Grade III and one year service in Class 1, Grade 11. The object of the rule is really to carry out the policy of rule 1(f) (iii) of the Rules of Seniority and not allow it to be defeated by the requirement of five years service in Class 1, Grade 11 itself before-consideration for promotion to Class I, Grade

1. The promotee is placed senior to a direct recruit who completes probation in the year in which the promotee is selected by <ORG>. If it should be laid down that the past service as Income-tax Officer in Class 11 is not to be counted, then rule 1(f)(iii) would be nullified, because directly recruited officers junior to the promotees would go to Grade I earlier than the promotee officers. For example, a promotee certified fit by <ORG> in 1952 will be senior to the direct recruits who complete their probation in that year. And if it is to be laid down that the promotee officer shall not count his period of service in Class 11 for the purpose of promotion to Grade 1, Class I he will have to wait till 1957 or 1958 to go to Grade 1, Class 1, while direct recruits who completed their probation in 1952 or 1953 would have gone to Grade 1, Class I in 1955 or 1956, counting the five years period from the date on which they were placed on probation. To remove this anomaly the promotion rule has been framed and we are unable to accept the argument of the appellant that there is any discrimination in the working of this rule. The rule of promotion is inextricably linked with the rule of weightage and seniority in Grade 11. If in the rule of promotion the service in Grade III is not to be taken into account, seniority in Grade 11 would be an empty formality. In regard to rule 1(f)(iv) of the Seniority Rules, there are only three respondents i.e., respondents 4, 5 and 6 who have been promoted as "deemed promotees" under this clause of the rule. Each one of them was appointed in Class 11, Grade III Service in 1947 and was appointed in Class 1, Grade II Service in 1951 after having successfully competed in the competitive examination of the year 1950, the same year in which the appellant was successful. The appellant also joined Class 1, Grade 11 Service in 1951. The three respondents have been shown as senior to the appellant in the seniority list. The objection of the appellant is that while they qualified in the same competitive examination, they had become senior to him because of the operation- of the artificial rule by which they are treated as "deemed promotees"; otherwise they would have remained junior to him. On behalf of these respondents it was argued by Mr. <NAME> that they had been appointed to Class 11, Grade III Service in 1947 and completed 5 years service in that class by the year 1952 and if <ORG> met in 1953, as it actually did meet, and if it recommended their promotion to Class I, Grade 11, each one of them would have become senior to the appellant by the operation of cl. (iii) to rule 1(f). There was also the further consideration that if rule 1(f)(iv) did not exist there was no incentive to a promotee of this type to sit for the competitive examination. It should also be taken into account that if the service of the promotees in Class 11, Grade III is entirely ignored and if they join the Class 1, Grade 11 Service as direct recruits they might well find themselves becoming junior to those who were left behind in Class II, Grade Ill Service by the operation of rule 1(f)(iii). We are accordingly of the opinion that rule 1(f)(iv) is based on a reasonable classification and does not offend the guarantee under Art. 14 or Art. 16(1) of the Constitution.

We proceed to consider the next question arising for consi- deration in this appeal, viz.,. the allegation of the appellant that there was excessive recruitment of promotees in violation of the quota rule. Rule 3 of the Income-tax Officers (Class 1, Grade 11) Service Recruitment Rules is to the following effect "The Service shall be recruited by the following methods

(i) By competitive examination held in India in accordance with Part 11 of these Rules.

(ii) By promotion on the basis of selection from Grade HI (Class 11 Service) in accordance with Part III of these Rules."

Rule 4 reads "Subject to the provisions of Rule 3, Government shall determine the method or methods to be employed for the purpose of filling any particular vacancies, or such vacancies as may require to be filled during any particular period, and the number of candidates to be recruited by each method."

Rule 5 states "Vacancies in the Service which are filled otherwise than by promotion shall be apportioned between. the various communities in India in accordance with the provisions of the Government of India (Home Department) Resolution No. F. 14/17-B/33-Ests. dated the 4th July, 1934 (regarding communal representation in the services) and No. 23/5/42-Ests. (S) dated. the 11th August, 1943 (reg arding representation of Scheduled Castes in the Services ) and the supplementary instructions connected the rewith."

In the letter of <ORG> dated September 29, 1944 (Ex. B to the writpetition of the appellant) it is stated that the recruitment to Grade 11 of Class I will be made partly by promotion and partly by direct recruitment and that "80% of the vacancies arising in the Grade will be filled by direct recruitment through the Indian Audit and Allied Services Examination and the remaining 20% vacancies will be filled on the basis of promotion by selection provided suitable number of men 'are available for promotion". It was also stated in the letter that if there are any vacancies which could not be filled by promotion for want of suitable candidates, these will be added to the quota of vacancies to be filled by direct recruitment. The quota was altered by <ORG> subsequently in their letter dated October 18, 1951 (Ex. E to the writ petition). In this letter <ORG> , said that. they had decided in consultation. with <ORG> that for a period of five years, in the first instance, 66-2/3 % vacancies in Class 1, Grade 11 will be filled by direct recruitment and the remaining 33-1/3 % vacancies on the basis of promotion and any surplus vacancies which cannot be filled for want of suitable candidates will- be added to the quota of vacancies to be filled by direct recruitment. ,.There has been no argument, in this case, with regard- to the operation of the rule between the years 1945 and 1950, though in the petition the appellant has alleged that in those years also there were excessive recruitments of promotees. It appears from the affidavit of respondent No. 1 that these were formative years of <ORG> and re-organisation of the <ORG> was being completed and the initial period of re- organisation lasted up till 1950. The argument was confined to the years 1951 to 1956. According to the appellant, there was excessive recruitment of 71 promotees more than the figure permitted by the quota rule. In the judgment under appeal <ORG> has examined the matter and found that the excess number of promotees was 31 for the four years 1951 to 1954. During the hearing of the appeal we had ordered the Secretary of <ORG> to furnish the number of vacancies which had arisen from year to year from 1945 onwards, the nature of the vacancies- permanent or temporary and the chain of vacancies and such other details which are relevant to the matters pending before this Court. In his affidavit dated January 31, 1967 Mr. <NAME> said that he was not able to work out, in spite of his best endeavours the number of vacancies arising in a particular year. However, a statement, Ex. E, was furnished showing the number of officers recruited by the two methods of recruitment to Class I Service during the relevant years

UPSC War Officers Exam. Service selected Year recruits candi- from datesClass

1951 50 1952 49 1953 52 38 1954 44 30 1955 45 24 1956 25-

---------------------------------------------------------------- It "is not clear from the affidavit of Mr. R., <NAME> whether the quota rule was strictly followed for the years in question. In the counter-affidavits of respondents 1 to 4 in Writ Petition No. 5 of 1966 there is however an assertion that the quota rule "has 'been substantially complied with."

The Solicitor-General on behalf of respondents 1, 2 and 3 submitted that the quota rule was merely an administrative direction to determine recruitment from two different sources in the proportion stated in the rule and a breach of that quota rule was not, a justiciable issue. The Solicitor-General said that there was, however, substantial compliance with the quota rule. But in the.absence of figures of permanent vacancies in Class 1, Grade; II for the relevant years the Solicitor-General was unable to say to What extent there had been deviation from the rule. We are unable to accept the argument of the Solicitor-General that the quota rule was- not legally binding on the <ORG>. It is not-disputed that rule 4 of the- Income-tax Officers (Class 1, Grade II) Service Recruitment Rules is a statutory rule and there is a statutory duty cast on the <ORG> under this rule to, determine the method or methods to be employed for the purpose of filling the vacancies and. the number of candidates to be recruited by each method. In the letter of the <ORG> of India dated October 18, 1951 there is no specific reference to rule 4, but the quota fixed in their letter must be deemed to have been fixed by the <ORG> of India in exercise of the statutory power given under rule 4. Having fixed the quota in that letter under rule 4, it is not now open to the <ORG> of India to say that it is not incumbent upon it to follow the quota for each year and it is open to it to alter the quota on account of the particular situation (See para 24 of the counter affidavit of respondents 1 to 3 in Writ Petition No. 5 of 1966). We are of opinion that having fixed the quota in exercise of their power under rule 4 between the two sources of recruitment, there is no discretion left with the <ORG> of India to Alter that quota according to the exigencies of the situation or to deviate from the quota, in any particular year, at its own will and pleasure. As we have already indicated, the quota rule is linked up with the seniority rule and unless the quota rule is strictly observed in practice, it will be difficult to hold that the seniority rule i.e., rule 1(f)(iii) & (iv), is not unreasonable and does not offend Art. 16 of the Constitution. We are accordingly of the opinion that promotees from Class II, Grade III to Class 1, Grade II Service in excess of the prescribed quotas for each of the years 1951 to 1956 and onwards have been illegally promoted and the appellant is entitled to a writ in the nature of mandamus commanding respondents I to 3 to adjust the seniority of the appellant and other officers similarly placed like him and to prepare a fresh seniority list in accordance with law after adjusting the recruitment for the period' 1951 to 1956 and onwards in accordance with the quota rule prescribed in the letter of the <ORG> of India No. F. 24(2)-Admn. I.T./51 dated October 18, 1951. We, however, wish to make it clear that this order will not affect such Class 11 Officers who have been appointed permanently as Assistant Commissioners of Income Tax. But this order will apply to all other officers including those who have been appointed Assistant Commissioners of Income Tax provisionally pursuant to the orders of <ORG>. In this context it is important to emphasize that the absence of arbitrary power is the first essential of the rule of law upon which our whole constitutional system is based. In a system governed by rule of law, discretion, when conferred upon executive autho, rities, must be confined within clearly defined limits. The rule of law from this point of view means that decisions should be made by the application of known principles and rules and, in general, such decisions should be predictable and the citizen should know where he is. If a decision is taken without any principle or without any rule it is unpredictable and such a decision is the antithesis of a decision taken in accordance with the rule of law. (See Dicey-"Law of the Constitution"-Tenth Edn., Introduction ex). "Law has reached its finest moments", stated <NAME>, J.

<NAME>

United States v. <NAME>), "when it has freed man from he unlimited discretion of some ruler........ Where discretion ; absolute, man has always suffered". It is in this sense that the rule of law may be said to be the sworn enemy of caprice. Discretion, as Lord <NAME> stated it in classic terms in the case of <NAME>), "means sound discretion guided by law. It must be governed by rule, not by humour : it must not be arbitrary, vague and fanciful." We should also like to suggest to the Government that for future years the roster system should be adopted by framing an appropriate rule for working out the quota between the direct recruits and the promotees and that a roster should be maintained indicating the order in which appointments are made by direct recruits and by promotion in accordance with the percentages fixed under the statutory rule for each method of recruitment.

For these reasons we allow this appeal in part and order that a writ in the nature of 'Mandamus should be granted to the appellant to the extent indicated above. There will be no order as to costs in this appeal.

Writ Petition No. 5 of 1966 The questions arising for determination in this case are similar in character to the questions which have been the subject-matter of consideration in Civil Appeal No. 1038 of 1965. For the reasons given in that case, we hold that this petition should be allowed and a writ in the nature of mandamus under Art. 32 of the Constitution should be granted commanding respondents 1 to 3 to adjust the seniority of the petitioner and other officers similarly placed like him and to prepare a fresh seniority list in accordance with law after Adjusting the recruitment for the period 1951 to 1956- and onwards in accordance with the quota rule prescribed in the letter No. F. 24(2) Admn. I.T./51 dated October 18, 1951 of <ORG>. There will be no order as to costs.

V.P.S.

Petition allowed.

Appeal allowed in part.

(1)342 U.S. 98.

(2)(1770) 4 Burr. 2528 at 2539.