CASE NO.: Writ Petition (civil) 611 of 1992 Appeal (civil) 791 of 1993 PETITIONER: <NAME> and <NAME> and <NAME>. RESPONDENT: State of Orissa and <NAME>. <NAME> & <NAME>. DATE OF JUDGMENT: 07/10/2003 BENCH: <ORG>., <NAME>, <ORG>, <ORG> & DR. <NAME>. JUDGMENT:

J U D G M E N T V.N. KHARE, C.J.I.

Validity of Section 2 of the Orissa Administrative Service, Class - II (Appointment of Officers Validation) Amendment Act, 1992 (hereinafter referred to as 'the Act') is in question in this writ petition and appeal. The appeal arises out of a judgment and order dated 23.4.1991 passed by <ORG> at Bhubaneswar in Transferred Application No.402 of 1986. In the said application, the appellants herein, inter alia, prayed for a direction upon Respondent Nos.1 to 3 to fix their seniority by placing them above the private respondents and grant consequential career benefits to them. In the writ petition also, the petitioners have prayed for quashing of the Orissa Administrative Service Class II (Appointment of Officers Validation) Amendment Ordinance, 1992, which is subsequently replaced by the Act, as also for a declaration that the said Ordinance (Act) is inapplicable in the case of the petitioners and in any event the same cannot be applied retrospectively.

The basic dispute between the parties revolves round the concept of year of allotment as envisaged in the Act. The question came up for consideration before the Full Bench of <ORG> in <CITATION> [AIR 1986 Orissa 151] wherein the principle of year of allotment, as also its application in relation to the parties thereto was upheld. The said decision of <ORG> came up for consideration in <CITATION> [(1990) Supp. 2 SCR 644] and a three-Judge Bench affirmed the views taken by <ORG>.

By virtue of Section 2, <ORG>, Class-II (Appointment of Officers Validation) Act, 1987 (" Validation Act "), is sought to be amended such that certain direct recruits of <ORG> for the year 1973, who were, however, appointed in 1975, are accorded a relative seniority with respect to those merger recruits who were born in the said service by virtue of the prior merger of their parent cadre, <ORG> ("O.S.A.S.") with the O.A.S., Class-II ("O.A.S. II") on December 21, 1973.

The petitioners in the writ petition as well as the appellants in civil appeal were members of <ORG>, which was designated as <ORG> (<ORG>) following its proposed and partial merger, on January 7, 1972, with the <ORG> II, which, in turn, came to be known as <ORG> (<ORG>). The complete and final merger of these branches by virtue of the governmental resolution in this behalf, dated December 21, 1973, resulted in the creation of a single integrated <ORG> Class II. The Deputy Collectors, as the members of the erstwhile <ORG> were known, and the Sub-Deputy Collectors of the <ORG>, were consequently conferred inter se seniority in the integrated service such that the first name of the defunct <ORG> would be placed immediately below the last name of the <ORG>.

It is an admitted fact that the established practice of the State of Orissa as to the appointment, and allocation of seniority, of its officers has been to follow the principle of "year of allotment," whereby the date of appointment of an officer for the purposes of promotion and consequential seniority is regarded not as the date of actual appointment, but as the year in respect of which the vacancy was originally proposed to be filled.

In consonance with the stated practice, the respondent officials, in the present instance, were given 1973 as their year of allotment, although in actual point of time they took up service on varying dates in the year 1975. The petitioners and appellants, being mergerists who were born in the integrated service on the date of merger, that is December 21, 1973, were thereby denied seniority with respect to the direct recruits, by virtue of the principle of year of allotment.

The concept of year of allotment, in the particular context of the 1973 Merger, was first assailed before <ORG> with respect to those direct recruits who were conferred 1970 and 1971 as their respective years of allotment, although they in material point of time were born in the service by virtue of their actual appointment on a subsequent date. <ORG> in <NAME> (supra) , refuted the challenge and upheld the principle of year of allotment as a binding rule, given sanctity through long years of settled practice, and justified in terms of the various rules and regulations incorporating the same. The petition for special leave to appeal from the judgment of <ORG> was then dismissed in limine by <ORG>.

The decision of <ORG> in <NAME> (supra) would subsequently find favour in similar circumstances that came before a three-Judge Bench of this <ORG> in the case of <NAME> (supra) . So as to give practical effect to certain observations and directions made by <ORG> in <NAME> (supra), <ORG> enacted the Orissa Administrative Service, Class  II (Appointment of Officers Validation) Act, 1987. This Act was once more the subject of challenge before <ORG>, but having regard to the <ORG> decision in <NAME> (supra), <ORG> dismissed the case of the petitioners before it. <ORG>, on appeal as well as in the three writ petitions heard together in <NAME> (supra), was of the considered opinion that the decision of <ORG> in <NAME> (supra) was the correct and binding law. This <ORG>, placing further reliance upon its own decision in <CITATION> [], took the view that the sanctity of a well-established rule must not be unsettled, and the principle of year of allotment was as well justified in terms of the decision of <ORG> in <NAME> (supra). The <ORG>, whilst dismissing the appeal, however partly allowed the petition filed by one of the direct recruits, and struck down that portion of the 1987 Validation Act , which effected a differentiation between those direct recruits whose year of allotment was 1970 or 1971, on the one hand, and others whose year of allotment was 1972.

In terms of the decision of this Court in <NAME> (supra), the direct recruits with 1972 as their year of allotment would equally be entitled to be placed in the gradation list at positions of seniority relative to the mergerists, who were previously Sub-Deputy Collectors and then members of the O.A.S. (Junior Branch). <ORG> in <NAME> (supra) clarified that those direct recruits who were given 1973 as their year of allotment would not be covered by its decision, in view of the proceedings concerning them which were then pending before <ORG>.

In disposing of the petitions and appeal before it, <NAME> (supra) this Court made the following observations:

"It is, therefore, clear that <ORG> cadre prior to merger was providing promotional channel to officers of <ORG>I. Rules prescribed the manner in which direct recruitment and promotional appointment were to be made to <ORG>. The Full Bench of <ORG> which we have accepted as laying down the binding and correct legal position clearly found that the mergerists from <ORG>I were neither promotees nor direct recruits and formed a class by themselves. The 1972 resolution of <ORG> had decided a spread-over process for absorption but in December, 1973, immediate and one-time merger was decided and acted upon. We have already held that the recruits to <ORG> with 1972 as the year of allotment were senior to the mergerists. Once the concept and application of 'year of allotment' is upheld, necessarily the <ORG> direct recruits of 1973 would in the facts and circumstances be senior to the mergerists. They are eleven in all as it appears from the Government notification of 16th of February, 1976. There would be no justification to have the mergerists from Class III service brought into the combined cadre in December, 1973, to be senior to these 1973 recruits  their number being substantial  who are only eleven people. On the other hand, there may be justification in the matter of fixing of seniority inter-se between the direct recruits of 1973 to <ORG> and the mergerists to follow the prevailing system of promoting Class III officers to Class II by a particular number and fixing the inter-se seniority in accordance with the then prevailing regulations."

With a view to implementing this direction of <ORG>, <ORG> enacted the impugned Act, the Orissa Administrative Service, Class-II (Appointment of Officers Validation) Amendment Act, 1992, which has come before us for judicial review.

Aggrieved by Section 2 of the 1992 Amendment Act , the petitioners have approached this Court for the necessary relief. The fate of the appeal, although prior in time to the Amendment Act , would also depend upon the validity of the same, and is accordingly being disposed of together with the said writ petition.

It would be appropriate at this stage to cite the material provision under challenge. Section 2 of the Amendment Act of 1992 reads as follows:

"2. Amendment of Section 3 .  In Section 3 of the Orissa Administrative Service, Class-II (Appointment of Officers Validation) Act, 8 of 1987 (hereinafter referred to as the principal Act), for sub-section (2), the following sub-section shall be substituted, namely:-

'(2)(a) Such number of merger recruits as would have been entitled to promotion in the recruitment years 1972 and 1973 computed on the basis of percentage envisaged under Rule 10 of the Orissa Administrative Service, Class-II (Recruitment) Rules, 1959, shall be deemed to be the promotees of the respective years, and the determination of seniority of the merger recruits so deemed to be the promotees, -

(i) of the year 1972 vis-`-vis the officers appointed to <ORG> by direct recruitment in respect of the recruitment year 1972; and

(ii) of the year 1973 vis-`-vis the officers appointed to <ORG> by direct recruitment in respect of the recruitment year 1973;

shall be in accordance with the same principle as followed for the determination of inter se seniority between the direct recruits and the promotees in relation to <ORG> in respect of the recruitment years 1970 and 1971 and they shall be placed accordingly in the gradation list:

(b) The remaining merger recruits shall be placed below the direct recruits of the year 1973 in the gradation list'."

A two-Judge Bench of this Court referred the matter to the Bench of five Judges by an order dated 24.10.1996. The <ORG>, however, by an order dated 4.12.2001 thought it fit to place the same before a Bench of three Judges of this Court. The three-Judge Bench again referred the matter to Bench of five Judges expressing its agreement in <NAME> (supra). That is how the matter is before us.

The petitioners and appellants have, not unnaturally, sought to place extensive reliance on certain observations made by <ORG> of this <ORG>, which first considered the present matter. Four principal reasons have been set out in its order, which delineate the conflict with <NAME> (supra). It would be apposite to cite the material portion of the order, which deal with the principal points of divergence:

"We have been taken through the judgment of this Court in <NAME> case by the learned Counsel for the parties. With utmost respect, we do not agree with the reasoning and the conclusions reached therein. Our reasons for reaching the said conclusion are as under:

(1) Prior to the merger, recruitment to the O.A.S. Class II was from four different sources under the Rules. After merger, the appointment to the service was confined only by way of direct recruitment. In the integrated cadre, the concept of 'year of allotment' had become unworkable.

(2) The merger order specifically provided that the members of the <ORG> would rank junior to the members of the <ORG> in the new cadre. That being the position, the appointees by way of direct recruitment to the integrated cadre are to be placed below those who were original members of the <ORG> service.

(3) Mr. <NAME>, learned counsel for the Respondent has taken us through the affidavit filed on behalf of <ORG> wherein it is not disputed that there was no advertisement in respect to any vacancy in the O.A.S. Class II. The advertisement related to the financial service and the police service. The vacancies advertised or identified after the merger of the cadres could not be filled by any of the modes indicated in the service rules except by the direct recruitment.

(4) That in any case, appointment in the new cadre which was constituted on December 21, 1973, could not be made with effect from the date prior to the constitution of the cadre, even if the vacancies existed prior to that date because the said vacancy would be treated to be a vacancy in the integrated cadre.

We, therefore, direct that these matters be placed before a larger bench of five judges of this Court. The <ORG> to place the papers before Hon'ble the Chief Justice for appropriate orders in this case."

It may be noted at the outset that none of the four reasons delineated by the Bench of two learned Judges found fault with the principle of year of allotment itself. Rather, the common thread through each of these reasons given by the <ORG> is that the concept of year of allotment was in effect rendered impracticable and otiose by means of the Merger Resolution of December 1973.

The petitioners contended, first, that the effect of the merger of December 1973 is that appointment to the integrated cadre would be solely by means of direct recruitment, whereas prior to the merger, recruitment to the O.A.S. Class II could be by any of four different sources. That being the case, the principle of year of allotment was now redundant and its application uncalled for. Rule 4 of the Orissa Administrative Service Class- II (Recruitment) Rules deals with method of recruitment:

"4. Method of Recruitment  Recruitment to the Service shall be made by the following methods, namely:-

(a) direct recruitment by competitive examination;

(b) promotion from amongst the members of <ORG>; and

(c) transfer from such other services or posts as are comparable with <ORG> as may be specified by Government from time to time;

(Explanation  Comparable service or post means any service or post specified by Government from time to time, responsibilities and emoluments attached to which are declared by Government to comparable in nature to that of a post of Deputy Collector)

(d) selection; and

(e) transfer or promotion of persons who are considered suitable for appointment to the service in accordance with the provisions of R. 9."

It is apparent that neither the Governmental Resolution of December 1973 nor the impugned Section 2 of the Amendment Act of 1992 have repealed, whether explicitly or implicitly, the Recruitment Rules of 1959. Indeed, the Resolution itself alludes to the relevant rules, thereby eradicating the possibility of the inference of an implied repeal of the 1959 Recruitment Rules. Similarly, the 1973 Resolution did not in any way provide for a termination of recruitment of Deputy Collectors or an alternative method of recruitment, in which case it may not be averred that its effect was to repeal in toto the provisions contained in the 1959 Recruitment Rules. It was not until 1978 that the 1959 Recruitment Rules were repealed by virtue of the coming into force of the Orissa Administrative Service Recruitment Rules and Regulations for Promotion and Competitive Examination, 1978.

We, therefore, find ourselves unable to agree with the submission put forth by the learned counsel on behalf of the petitioners to the effect that the 1973 Resolution an implied repeal of the 1959 Recruitment Rules then in force.

Rather, the material question in terms of the contention of the petitioners is whether the Resolution of 1973 serves to render the very provision contained in Rule 4 of the 1959 Rules, cited above, as redundant and a nullity such that appointment to the O.A.S. II could only be by direct recruitment to the exclusion of all other sources.

This question, too, must be answered in the negative in view of the variety of sources of recruitment available to the <ORG>, including, but not limited to, transfer from other services in terms of sub-clause (c), selection in terms of sub-clause (d) and transfer or promotion in accordance with R. 9 in terms of sub-clause (e) of Rule 4 of the 1959 Recruitment Rules. Even assuming no such parallel service or cadre existed in the period immediately after the merger, it would always be open to the <ORG> to create more such services, in spite of the merger in 1973, from which transfer to the <ORG> II could then be made. The legal effect, then, of the 1973 Resolution resulting in merger was only that sub-clause (b) of Rule 4 of the 1959 Recruitment Rules ceased to have any application, and could then be regarded as impliedly repealed.

It is further fallacious to submit, as the petitioners have done, that by virtue of integration of the cadres, the principle of year of allotment was rendered otiose and immaterial. As shown above, there remained a variety of sources from which recruitment to the O.A.S. II could be made post-merger including transfer from other comparable services. In any event, even if it were to be assumed that direct recruitment would now be the sole source of recruits, as long as there were vacancies which were identified before the entry into force of the Merger Resolution but which remained unfilled, the concept of year of allotment indeed remained applicable, albeit in a more limited form than before.

The concept of year of allotment is provided for by the Explanation contained in Rule 4(2) of the Orissa Administrative Service Class II (Appointment by Promotion, Transfer and Selection) Regulations, 1959 in the following terms :

"For the purpose of this sub-rule, year of allotment in relation to a member of <ORG> means the year in respect of which <ORG> have decided to fill up a vacancy in the cadre of the <ORG> against which the member is shown."

The submission that the principle of year of allotment must be regarded as unworkable is quite apart, of course, from the argument that the principle of year of allotment is in and of itself unreasonable and, therefore, bad in law. Ordinarily, and as a matter of course, we are of the considered opinion, in line with <CITATION> [(1968) 1 SCR 185] and other decisions of this <ORG>, that it is the length of actual service that must be the determining factor in matters of promotion and consequential seniority. However, this <ORG> has subsequently carved out a distinct exception to this general rule by virtue of its decision in Direct Recruit Class II Engineering Officers' Association case (supra) by stating that where the seniority and the vested rights of the many have through years of accustomed practice become dependant upon the existence of a rule, this rule, if injurious to the rights of a few, would not be trifled with, unless it is unworkable or manifestly arbitrary or egregious.

The following observations made by <ORG> in <ORG> (supra) are particularly apposite in the context of the instant case:

"47 (j) The decision dealing with important questions concerning a particular service given after careful consideration should be respected rather than scrutinised for finding out any possible error. It is not in the interest of Service to unsettle a settled position.

(k) That a dispute raised by an application under Article 32 of the Constitution must be held to be barred by principles of res judicata if the same has been earlier decided by a competent court by a judgment which became final."

This Court in <NAME> (supra), in our view, correctly placed reliance on the prior decision of a Constitution Bench in <ORG> (supra), considering the immense lapse of time and long-established sanctity of the practice involving the application of the concept of year of allotment.

The second basis provided by the order of the two-Judge <ORG> expressing conflict with <NAME> (supra) which was approved by the subsequently constituted three-Judge <ORG>, and which is relied upon presently by the petitioners, is that "the merger order specifically provided that the members of the <ORG> would rank junior to the members of the <ORG> in the new cadre. That being the position, the appointees by way of direct recruitment to the integrated cadre are to be placed below those who were original members of the <ORG> service."

We have outlined above our reasons for upholding the validity of the principle of year of allotment, principal among which is our disinclination to tamper with a settled practice, in view of the dicta contained in the decision of this <ORG> in the <ORG> case (supra). The concept of year of allotment has also been shown to be a workable one, inasmuch as it was still open to the <ORG> in the post- 1973 merger scenario to recruit officers from a variety of sources, including, but not limited to, transfer from comparable services. When once the concept of year of allotment is deemed to be upheld, it matters not that the first name of the <ORG> would rank immediately below the last name of the erstwhile <ORG> The material point of fact is that through the adoption of a legal fiction and by having recourse to his Constitutional function under Article 309 of the Constitution, the Governor of the State of Orissa appointed certain officers in the year 1975, who were appointed against vacancies which were identified in the year 1973, prior to the entry into force of the Merger Resolution of December 1973. That being the case, the legal fiction of year of allotment would operate in respect of the 1975 appointees as if they had been appointed in the year when the vacancies were initially identified; in other words, they would be deemed to have been appointed in the year 1973, prior to the merger of the <ORG> II with the <ORG>, although their actual period of service was seen to commence only in 1975.

We are also constrained to point to the fact that by virtue of the Merger Resolution the principle of promotion contained in the 1959 Rules was upheld such that the promotees of a particular year would be accorded seniority above the direct recruits of that year. It is those members of the <ORG>, such as the present petitioners, who were unable to secure promotion when their cases came up before the <ORG> in the years preceding the Merger Resolution (1970-73), who seek seniority over the direct recruits by mere fact of their being members of the integrated service. In our considered opinion, such wholesale integration may not be regarded as the promotion of the whole of the <ORG> This inference is supported by the various provisions contained in the Recruitment Rules of 1959, principally Rule 10 (7) and Rule 11.

Rule 10 (7) provides as follows:

"For recruitment to the Service by promotion or transfer or selection, under these rules, <ORG> shall consult the <ORG> before appointment."

Rule 11 deals with the question of allocation of seniority:

"11. Seniority:- (1) The seniority of officers appointed to the service under Cls. (a), (b), (c) and (d) of R. 4 in any year shall be in the following order, namely:-

(a) officers appointed to the Service by promotion under Cl.

(b) of R. 4, ranked inter se in the order in which their names are arranged by the <ORG>;

(b) officers appointed to the Service by transfer from other service or services of posts under Cl. (c) of R. 4, ranked inter se in the order in which their names are arranged by the <ORG>;

(c) officers appointed to the Service by selection under Cl.

(d) of R. 4 ranked inter se in the order in which their names are arranged by the <ORG>;

(d) officers appointed to the Service on the results of a competitive examination in accordance with Cl. (a) of R. 4, ranked inter se in the order in which their names are arranged by the <ORG>."

Since the Merger of December 1973, does not fit within the various criteria for promotion, it may not be regarded as a wholesale promotion of all <ORG> employees. The said employees who were integrated in the O.A.S. II are, rather, to be regarded as a class unto themselves, beneficiaries, as they are, of a one-off measure resulting in integration of the two cadres.

Under Article 309 of the Constitution of India, it is open to the Governor of the <ORG> to make rules regulating the recruitment, and the conditions of service of persons appointed, to such services and posts until provision in that behalf is made by or under an Act of the <ORG>. As has been rightly pointed out by the <ORG> in the <NAME> case (supra), the <ORG>, or the Governor of the <ORG>, as the case may be, may, in its discretion, bestow or divest a right of seniority. This is essentially a matter of policy, and the question of a vested right would not arise, as the <ORG> may alter or deny any such ostensible right, even by way of retrospective effect, if it so chooses or in public interest.

Learned counsel for the petitioners further contended that there was no advertisement in respect of any vacancy in the O.A.S. Class II, and that the direct recruits with 1973 as their year of allotment were appointed to <ORG> in spite of the fact that the advertisements for that year were solely in respect of <ORG> and <ORG>. This ground was not entertained by <ORG> in <NAME> (supra) as it had not been pressed in the first instance before <ORG> and was barred, as such, by the principle of constructive res judicata. The parties being somewhat different in the present proceedings, this issue may now validly be raised before this Court.

We find ourselves unconvinced by the assertion that the omission of the <ORG> II in the advertisement for recruitment in the year 1975, which referred solely to vacancies in <ORG>, would serve to nullify the appointments of the respondents direct recruits. As has rightly been observed in <NAME> case (supra), although this ground was repelled by the <ORG> at the threshold, through the application of the rule of constructive res judicata, that normally this competitive examination was a common examination held for the <ORG> as well. Even when an advertisement is issued, no candidate may be said to have acquired a vested right of selection. Conversely, when once the vacancies for the year 1973 were identified by the <ORG>, it was free to conduct a competitive examination at a time and in a manner of its choosing. The common examination was in previous years held for <ORG>, as well as the Orissa Financial Service and <ORG>. The mere fact of omission, then, of the <ORG>II in the advertisement issued for the purpose would not of itself amount to rendering the appointments of the respondent direct recruits as nugatory. Learned counsel for the State of Orissa has submitted that the usual practice is to identify a notional number of vacancies, which may then be compromised by either excess or insufficient intake at the time of actual recruitment, depending upon such factors as the calibre of the candidates and the particular needs of the <ORG> at that time. It was for similar reasons that the High <ORG> of Orissa in <NAME> (supra) upheld the appointment of the opposite parties, although several more recruits were appointed than were originally envisaged in terms of vacancies.

The fourth and final basis of conflict between <NAME> (supra) and <NAME> finds expression in the fourth reason given by the Bench of two learned Judges of this Court for disagreeing with the conclusions reached in the former instance.

The <ORG> observed as follows:

"That in any case, appointment in the new cadre which was constituted on December 21, 1973, could not be made with effect from the date prior to, the constitution of the cadre, even if the vacancies existed prior to that date because the said vacancy would be treated to be a vacancy in the integrated cadre."

With utmost respect, we find ourselves unable to agree with the aforesaid observation. Indeed, this observation is one and the same as the observation that "the concept of 'year of allotment' had become unworkable," which we have already refuted above. To reiterate, by virtue of the fact that the vacancies were identified in the O.A.S. II at a point prior in time to the Merger effected on December 21, 1973, these vacancies would, as a matter of course, be treated as vacancies in the integrated cadre. Once the concept of year of allotment is deemed to be valid, we can arrive at no other conclusion than that such vacancies as were identified before the Merger Resolution would be filled by the <ORG> in its discretion, notwithstanding the Merger effected on December 21, 1973.

A legal fiction was created for the purpose of providing year of allotment. Such legal fiction must be given its full effect. <CITATION> [] , the law is laid down in the following terms :

"The purpose and object of creating a legal fiction in the statute is well-known. When a legal fiction is created, it must be given its full effect. In <ORG> v. <ORG>, [(1951) 2 All.E.R 587], Lord <NAME>, J. stated the law in the following terms:-

"If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs."

The said principle has been reiterated by this Court in <NAME> v. Divisional Manager, <ORG>, Machilipatnam, A.P. & Anr. [(1994) 2 SCC 323]. See also <ORG> v.

Chief Inspector of Factories & Ors.etc., [(1998) 5 SCC 738], <CITATION> .,[(1995) Supp. 2 SCC 498], <CITATION> . District Magistrate, Allahabad, U.P. & Ors. [] and G.

<NAME> etc. v. Hon'ble Speaker, <ORG>, Madras & Anr. [(1996) 2 SCC 353]."

The effect of the Merger Resolution for the purposes of allocation of the benefits of seniority was merely that the erstwhile members of the <ORG> would now rank as senior to those direct recruits whose year of joining service and year of allotment was later than 1973. In other words, at the time of the Merger in December 1973, the Sub-Deputy Collectors of the <ORG> were placed in the gradation list below not alone the Deputy Collectors of the erstwhile <ORG>, but also below those officers who had been envisaged by the vacancies of the preceding years, but who were yet to be actually recruited. As stated by us above, the Merger itself did not purport to discontinue direct recruitment to the <ORG>, nor did it address itself to the question of the identified vacancies.

We are compelled to infer, then, that the vacancies identified for the year 1973, and other years preceding the Merger Resolution of December 1973, continued to exist and were appropriately filled by the <ORG> in consonance with the principle of year of allotment.

It has rightly been stated by the <ORG> in <NAME> case (supra) that in the interests of justice regard must be had to the fact that the respondent direct recruits are few in number as compared to the hundreds of mergerists who belonged to the defunct <ORG> Much harm would come to the respondents were they to be placed below the merger recruits in the gradation list, whereas the mergerists are scarcely affected by the miniscule number of direct recruits placed above them. In any event, the Recruitment Rules of 1959 are manifest in their mandate that only the promotees of a particular year are to be placed above the direct recruits of that year. The present petitioners being mere mergerists, but not promotees in accordance with the relevant rules and regulations, may not claim the status of promotees, and have, therefore, been rightly placed in positions below the direct recruits whose year of allotment was 1973. In relation to the direct recruits no legislation existed. Earlier order was issued by reason of executive instruction which was recognized by 1987 Act but as noticed hereinbefore, a portion thereof was struck down. By reason of the impugned Act, the legislature has sought to strike a delicate balance. Having regard to the entirety of the fact situation obtaining in the case, we do not find that the said Act is discriminatory in nature. The reason for enactment of the impugned legislation has expressly been stated in the Statements of Objects and Reasons.

Seniority is not the fundamental right but is merely a civil right. The right of the seniority in this case was also not a vested or accrued right. In this case, the petitioners seek benefit to which they are not otherwise entitled. The legislature, in our opinion, has the requisite jurisdiction to pass an appropriate legislation which would do justice to its employees. Even otherwise a presumption to that effect has to be drawn. If a balance is sought to be struck by reason of the impugned legislation, it would not be permissible for this Court to declare it ultra vires only because it may cause some hardship to the petitioners. A mere hardship cannot be a ground for striking down a valid legislation unless it is held to be suffering from the vice of discrimination or unreasonableness. A valid piece of legislation, thus, can be struck down only if it is found to be ultra vires Article 14 of the Constitution of India and not otherwise. We do not think that in this case, Article 14 of the Constitution is attracted. <ORG> learned counsel placed strong reliance on the decision of this Court in the case of <NAME> (supra). According to him, this matter stands concluded by the said decision in petitioners' favour. <ORG> passionately read and re-read the said decision. We are of the view that reliance by the learned counsel on <NAME>'s case (supra) is totally mis-placed. In the said decision, promotees and direct recruits brought in one cadre were governed by one set of rules, which is not a case here.

In the result, we uphold the validity of the Orissa Administrative Service, Class-II (Appointment of Officers Validation) Amendment Act, 1992, and particularly Section 2 thereof, which rightly sought to give effect to the judgment of this Court in the case of <NAME> (supra) . The writ petition and appeal are accordingly dismissed. There shall, however, be no order as to costs.

WRIT PETITION (C) No. 611 OF 1992 <NAME> and <NAME>. .. Petitioners Versus State of Orissa and <NAME>. .. Respondents CIVIL APPEAL No. 791 OF 1993 <NAME> and <NAME>. .. Appellants Versus <NAME> & <NAME>. .. Respondents Dear Brother,

Draft judgment in the aforesaid matters is being sent herewith for your kind consideration.

.CJI.

(<NAME>) .08.2003 Hon'ble Mr. Justice <NAME>.

.CJI.

.CJI.

.CJI.

(<NAME>) .08.2003 Hon'ble Dr. Justice <NAME>.


PETITIONER: UNION OF INDIA Vs. RESPONDENT: DELHI CLOTH & GENERAL MILLS DATE OF JUDGMENT: 12/10/1962 BENCH: <NAME>, K.C. DAS BENCH: <NAME>, K.C. DAS SINHA, <NAME> P.(CJ) GAJENDRAGADKAR, P.B. <NAME>, K.N. <NAME>, J.C. CITATION: 1963 AIR 791 1963 SCR Supl. (1) 586 CITATOR INFO : E 1967 SC1895 (30) RF 1968 SC 922 (14) D 1971 SC2333 (5) R 1973 SC 225 (21) R 1973 SC 425 (8) R 1982 SC 127 (8) RF 1984 SC 420 (13) RF 1985 SC 746 (14) D 1986 SC 281 (8) RF 1986 SC 662 (23,24) RF 1986 SC1097 (6) RF 1986 SC1730 (11) RF 1988 SC 871 (4) R 1988 SC1164 (4) R 1988 SC2176 (4) R 1988 SC2223 (11) R 1988 SC2237 (6) APL 1989 SC 79 (2) R 1989 SC 516 (17,18) F 1989 SC 622 (4) F 1989 SC1153 (6,7) RF 1990 SC 59 (3) R 1990 SC1579 (37) R 1990 SC1676 (11) R 1990 SC1893 (4) RF 1991 SC2222 (17,23) RF 1992 SC 224 (15) RF 1992 SC2055 (6) ACT: Excise Duty-Manufacture of Vanaspati-'Refined oil' if an intermediate product-Liability-'Manufacturing' and 'processing'-Distinction-Central Excises and Salt Act , 1944 , s. 2 (f )-First Schedule, Item 23. HEADNOTE: The respondents, who were manufacturers of Vegetable products known as Vanaspati, were assessed to excise duty under item 23 of the First Schedule to the Central Excises and Salt Act ,' 1944. on what the taxing authorities called the manufacture of refind oil from raw oil 'Which according to them fell within the description of 'vegetable non- essential oils, all sorts, in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power". The common case made by the respondents in their petition under Art. 226 of the Constitution challenging the imposition was that for the purpose of manufacturing Vanaspati they purchased groundnut and til oil from the market and subjected them to different processed before applying hydrogenation to produce Vanaspati and that nothing that they produced at any stage was covered by that item. Affidavits by experts were filed by both the parties and <ORG> found in favour of the respondents and allowed the petitions. <ORG> appealed. It was urged on its behalf that before finally producing Vanaspati the respondents produced at an intermediate stage what was known as refined oil' in the market and although they might not sell it and although Vanaspati, when produced, was liable to excise duty under another item, that could not affect their liability. Held, that excise duty being leviable on the manufacture of goods and not on their sale, the petitioners would no doubt be liable if they produced refined oil', as known in the market, at an intermediate stage. But it was clear that there could be no ,refined oil' as known in the market without deodorisatio,n according to the specification of <ORG> and the affidavits of the experts. Since, however, the process 587 of, deodorisation was admittedly applied in the respondents'. factories only after hydrogenation was' complete,' they could not said to produce 'refined oil' at any stage. Nor could the respondents be held to manufacture kind of non -essential vegetable oil'. Processing- cannot be equated to manufacture' which means bringing into existence a new substance. The <ORG> by defining the word 'manufacture' in s.2(f) of the Act did not intend to make the 'mere processing of goods liable to duty. The words "all sorts" in item 23 are intended only-,Po make it clear that vegetable non-essential oils. whether raw or refined, from whatever raw material produced, will be liable to excise duty. JUDGMENT:

CIVIL APPELLATE, JURISDICTION :Civil. Appeals Nos. 168-170 of 1960.

Appeals from the judgment and order dated 10, 1958, of the Circuit Bench of the Punjab, <ORG> at Delhi in Civil Writs Nos. 301, 302. a d. 347 of 1956.

<NAME>, <NAME> and <NAME>, for the appellants. <NAME>, <NAME> and, <NAME>, for the respondent (in C.A. No. 168/60).

<NAME>, <NAME>, <NAME> and <NAME>,' for the respondent in (C.A. No. 169/60). <NAME>, <NAME>, and <NAME>, for the respondents (in C.A. No. 170 60).

N. A.: :Palkhivala, <NAME> and <NAME>, for the Interveners (in all the appeals.) 1962. October 12. The judgment of the <ORG> was delivered by <NAME>, J.-These , three appeals are against the orders of the Punjab, High <ORG> all three petitions under Art' 226 of the. Constitution. The three petitions are by three different companies manufacturing vegetable products known as Vanaspati and they challenge the legality of the imposition of Excise duty on, what was called by the taxing authorities as the manufacture of "refined" from raw oil. These petitions raise a common question of law. as regards the- liability to <ORG> duty under item 23 of the first schedule to the Central Excises and Salt Act 1 of 1944, on similar facts. The petitions were heard together and disposed' of by a common judgment allowing the appeals and directing the. <ORG>' authorities to withdraw the impugned.demand of <ORG> duty on the petitioners. The present appeals have also been heard together.

The facts alleged in the three separate petitions filed by the three petitioners the manufacturers of Vanaspati, are practically the same. It is said that for the purpose of manufacturing Vanaspati the petitioners purchased groundnut and (the respondents herein) til oil from the open market or directly from the manufacturers of such oil. The oils thus purchased are subjected to different processes in order to turn them into Vanaspati. It is their case that the only finished product they manufacture from the raw materials thus purchased is Vanaspati which is liable to exciseduty as a vegetable product. They, contend that at no stage do they produce any new product which can come within the item described in the Schedule as " vegetable non-essential, oils.. all sorts in or in relation to the manufacture of which any process is ordinarily carried on with the aid of Power." Accordingly, it is, said, the demand for excise duty on the ground that they produce from the raw oils purchased a product which is liable., to duty under item 23 of the Schedule (now item 12) is illegal.

In resisting these petition <ORG> contended, in substance, that in the course of the manufacture of Vanaspati, the vegetable product form raw groundnut and til oil, the petitioners bring into to existence at one stage, after carrying out some 'process" with the aid of power, what is known to market as "'refined oil". This "refined oil" falls within the description of "vegetable non-essential oils, all sorts, in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power," and so is liable to excise duty. The affidavit filed. by Mr. <NAME>, Chief Chemist, <ORG>, <ORG>,<ORG>, in support of this contention of the appellant, describes the process by which raw oil is manufactured into Vanaspati thus :-

"The manufacture of vegetable product consists in hydrogenating oils using a catalyst. The catalyst is a sensitive material and is liable to be poisoned and made ineffective if certain impurities, like mucilaginous, matter, free oxidised fatty acid and moisture are present.

In order therefore, to successfully manufacture vegetable product the

hydrogenation has to be done on a refined vegetable non-essential oil. 'The refined vegetable non-essential oil (an oil free from major impurities mentioned in paragraph 2 above) is the penultimate raw material for the manufacture of vegetable product. The vegetable non-essential oils as obtained by crushing containing the impurities mentioned ,earlier are raw vegetable nonessential oils. The process of refining them consists in adding. an aqueous solution of an alkali which will combine with the free fatty acids to form a soap and settle down with it a large amount of suspended and mucilaginous matter; after *settling the clear supernatant layer is drawn off and treated with an Appropriate quantity of bleaching earth and carbon is then filtered. In this process the colouring matter is removed and the moisture that was originally present in the neutralised oil will also be removed. At this stage the oil is a refined oil and is suitable for hydrogenation into vegetable product. This process of refining generally involves the use of power and machinery." He then goes on to say "'Depending upon the quality of the seed used for crushing and that of the original raw oil this refined oil will now generally be suitable for edible purposes of discriminating users and for the manufacture of toilet goods like hair oils and high class soaps. For certain users who are even more discriminating this oil may be subjected 'to a further process of deodorisation.

The difference between raw vegetable non- essential oils and refined vegetable oils will clearly be seen on examination of the two 'products. The refined oil will generally be colourless or only slightly coloured. ' It will be perfectly clear and in many cases it may have no odour. The raw oil, on the other hand, will have a certain amount of turbidity or sediment at the bottom and will also be somewhat deep in colour. I further say that sometimes refined oil obtained above is subjected to a process of further deodorization. Such oil can be correctly described as refined and deodorised oil. As far as known to me, the two grades of oils are separately marketed in the country; as for' example, groundnut' oil' and 'refined groundnut oil' the latter generally with a distinctive label when marketed in containers of approximately 4 gallons or less."

The experts who have filed affidavits in support of the petitioners' case agree with Mr. <NAME> that common oils, like groundnut, sesame, mustard cottonseed, etc. in their raw stage always contain varying amounts of impurities and these impurities have to be removed by different processes before hydrogenation for the purpose of producing Vanaspati can be applied. There is however this important difference between the view of Dr. <NAME> who has filed an affidavit in support of the petitions, and that of Mr. <NAME> that while according to Mi. <NAME> the raw oil which has been freed from impurities but not deodorised is sold in the market as refined oil, Dr. <NAME> is definite in his statement that refined oil for edible purposes, as understood by the manufacturers as well as by the trade, is oil to which all the three processes, viz., neutralization, bleaching and deodorisation have been applied. He goes on to say: "In fact I would not regard any oil as refined oil unless it was also deodorised, since the failure to deodorise oil leaves behind in the oil certain impurities in the shape of compounds which give off bad odours." (Vide para. 5 of his affidavit in the petition filed by <ORG>).

As already stated <ORG> accepted the petitioners' contention that the oil in their hands after some amount of refinement in the course of being converted into Vanaspati was not liable to excise duty under item 23 (Now item 12) and so allowed the petitions.

In support of the appeals, Mr. <NAME> has advanced a two- fold argument. He first argues that the respondent concerns after they buy the raw oil with all its impurities, manufacture by the application of certain processes of refinement, a refined oil which is the same as the refined oil available in the market, and the aid of power is taken in some of these processes; and that it is "refined oil" thus produced that becomes after further processes "vegetable product". When the vegetable product comes into existence it becomes liable to excise duty as vegetable product under the present cl. 13, which appears to be the same as old cl. 11. That however cannot alter the position that at an earlier stage. these same respondents have manufactured refined oil" as is known to the market. That substance comes squarely within cl. 23 (now cl. 12) and is therefore liable to duty under this clause; and the fact that they do not put this "refined Oil" on the market but use it to produce a finished product known as vanaspati product cannot affect this liability. Excise duty is on the manufacture of goods and not on the sale. Mr. <NAME> is therefore right in his contention that the fact that the substance produced by them at an intermediate stage is not put in the market would not make any differences If from the raw material has been brought into existence a new substance by the application of processes one or more of which are with the aid of power and that substance is the same as "refined oil" as known to the market an excise duty may be leviable under Item 23 (the present item 12). But has it been shown that the substance produced by the petitioners is at any intermediate stage before <ORG> comes into existence, "refined oil" as known to the market? We are not satisfied that this has been shown. As already stated, a summary of the numerous processes necessary to turn the raw groundnut or til oil 'into vegetable product has been given in the affidavits sworn to by the experts on both sides., It does not appear to be disputed that the process of deodorisation is applied in the petitioners' factory after hydrogenation is complete. The appellant's case is that before hydrogenation has started the substance in the hands of these petitioners is "refined oil" as known to the market. That raises the important question whether any oil is known as "refined oil' in the market before deodorization has taken place. As already indicated, the appellant's case is that deodorization is not necessary for "refined oil" to come into existence; the respondents' case on the other hand is that without deodorisation the substance is not "refined oil".

We have already referred to the affidavits on this question as sworn to by Mr. <NAME> on behalf of the appellant and Dr. <NAME> on behalf of the respondents petitioners. In his affidavit Dr. <NAME> has also referred to the specification of "refined oil" by <ORG> and has given these in an annexure to his affidavit. From this annexure we find the following specification by <ORG>

"Refined groundnut oil:-Groundnut oil which has been refined by neutralisation with alkali bleached with fuller earth and/or Activated Carbon', and deodorised with steam, no other chemical agent being used.

refined by neutralisation with alkali, bleached with alkali, bleached with fullers' earth and/or Activated Carbon and Deodorised."

This specification by <ORG> furnishes very strong and indeed almost incontrovertible support for Dr. <NAME>'s view and the respondents' contention that without deodorisation the Oil is not "'refined oil" as is known to the consumers and the commercial community. Further support, if any was needed, is found in the several affidavits of several concerns who market refined groundnut oil under the brand names-Falika, Tripti, Kitchen, Kiran, Temple, Sovereign, Lotus, Nirmal, Dilkhus, Kamdhenu, Radio, Deer, Dog, Sepoy, Cocogem Tushar and Ginutol. They agree in, asserting that the oil is always deodorised before it is marketed as refined oil under these brand names. As against this if has to be noticed that the appellant could not produce evidence of one single case of marketing of refined oil without deodorisation. Instead of that Mr. <NAME> produced before us copies of extracts of a book by. <NAME> of the name "Cottonseed and Cottonseed Products" and another book by the same author of the name "Industrial Oil and Fat Products" and a third book of the name "Vegetable Fats and Oil" by <NAME>. Mr. <NAME>'s statement does not at all make it clear that refined oil is put on the market without deodorisation. Mr. <NAME> appears to have stated in his book on "Industrial Oil and Fat Products" that the term "refining" refers to any purifying treatment designed to remove free fatty acids, phosphatides or mucilaginous material, or other gross impurities in the oil; it excludes "bleaching" and also "deodorisation". The extracts from this book also do not clearly show that before deodorisation the oil which has been refined by the purifying treatment, is put on the market. The extract from <NAME>'s book on "Cottonseed and Cottonseed Products" contains a passage in these words :-

"In a discussion of the composition and characteristics of cottonseed oil, three kinds of oil are to be distinguished. They are :

(a) crude oil, which is the oil as it is expressed from the seed, and the commodity shipped from the oil mills; (b) refined oil, or oil Which has been freed of most of its nonglyceride constituents by treatment with alkali, with or without subsequent bleaching or deodorisation, and (c) hydrogenated oil."

Mr. <NAME> has relied on <NAME> 's statement that the oil which has been freed of most of its nonglyceride constituents by treatment with alkali, with or Without subsequent bleaching or deodorization is refined oil", for his contention that even without deodorisation the oil is known as "refined oil". It will be unsafe however to base any conclusion on this extract without knowing the entire context in which the statement has been made or what has been made or what has been said in other parts of the same 'book. The book itself was not produced before us. It is worth noticing that while the above statement is made by Mr. <NAME> in respect of cottonseed oil, the oil with which we are concerned is produced from groundnut oil and tit-neither of which is cottonseed. Apart from all this we are of opinion that the view :,of <ORG> as regards what is refined oil as known to the trade in India must be preferred to the opinion of this author. In this con- nection' it has also to be mentioned that the affidavits filed on behalf of the respondents are clear and cate- gorical, while <NAME>'s affidavit on which reliance was placed on behalf of the appellant is somewhat vague, halting and not categorical.

On a consideration of all these materials we have no doubt about the correctness of the respondents' case that the raw oil purchased by the respondents for the purpose of manufacture of Vanaspati does not become at any stage "refined oil" as is known to the consumers and the commercial community. The first branch of Mr. <NAME>'s argument must therefore be rejected.

The other branch of Mr. <NAME>'s argument is that even if it be held that the respondents do not manufacture "refined oil" as is known to the market they must be held to manufacture some kind of "non,essential vegetable oil" by applying to the raw material purchased by them, the processes of neutralisation by alkali and bleaching by activated earth and/ or carbon. According to the learned Counsel "manufacture" is complete as soon. as* by the application of one or more processes, the raw material undergoes some change. To say this is to equate "'processing" to "manufacture" and for this we can find no warrant in law. The word "manufacture" used as a verb is generally understood to mean as "bringing into existence a new substance" and does not mean merely "to produce some change in a substance", however minor in consequence the change may be. This distinction is well brought about in a passage thus quoted in Permanent Edition of Words and Phrases, Vol. 26, from an American judgment. The passage runs thus :-

'Manufacture' implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use."

It is helpful to consider also in this connection the ordinary meaning of the word "'goods". For, by the very words of the: Central Excises and Salt Act , 1944, excise duty is leviable on "'goods". The Act itself does not define "goods" but defines "excitable goods" as meaning "goods specified in 'the First Schedule as being, subject to a duty of excise and includes salt." On the meaning of the word "goods" an interesting passage is quoted in the Words and Phrases, Permanent Edition, Vol. 18, from a judgment of <ORG> thus:

"The first exposition I have found of the word 'goods' is in Bailey's Large Dictionary of 1732, which defines it simply 'Merchandise'-, and by <NAME>, who followed as the next lexicographer, it is defined to be movables in a house; personal or immovable estates; warn,; freight; merchandise,,"

<ORG> defines the word "'goods" thus :- "Goods, noun' plural, (1) movables; household, furniture; (2) Personal or movable estate, as horses, cattle, utensils, etc., (3) Wares; merchandise; commodities bought and sold by merchants and traders."

These definitions make it clear that to become "goods" an. article must be something which can ordinarily come to the market to be bought and Sold.

This consideration of the meaning of the word "goods" an provides strong support for the view that "manufacture" which is liable to excise duty under the Central, Excises and Salt Act , 1944, must be the "bringing into existence of a new substance known, to the market." "But," says the learned Counsel, "look at the definition of 'manufacture' in the definition clause of the Act and you will find that 'manufacture' is defined thus: 'Manufacture' includes any process incidental or ancillary to the completion of a manufactured product (s.2(f)". We are unable. to agree with the learned Counsel that by inserting this definition of the word ',manufacture,, in s. 2 (f) the legislature intended to equate "processing" to "manufacture" and intended 'to make mere "Processing" as distinct from "manufacture" in the: same, sense of bringing into existence of a new substance known to the market, liable to duty. The sole purpose of inserting this definition is to make it clear that at certain places in the Act the word 'manufacture' has been used to mean a process incidental to the manufacture of the article. Thus in the very item under which the excise duty is claimed in these cases, we find the words : "in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power". The definition of "manufacture' as in s. 2(f) puts it beyond any possibility of controversy that if power is used for any of the numerous processes that are required to turn the raw material into a finished article known to the market the clause will be applicable; and an argument that power is not used in the whole process of manufacture using the word in its ordinary sense, will not be available. It is only with this limited purpose that the legislature, in our opinion, inserted this definition of the word 'manufacture' in the definition section and not with a view to make the 'mere "processing" of goods as liable to excise duty. Mr. <NAME> wanted to derive some assistance, for his argument from the words "all sorts" as used in the clause. According to him, the words "all sorts" will be superfluous unless interpreted to mean "whether bringing into existence a new substances or not." The reasoning is clearly fallacious. The words "all sorts" have been used to make it clear: that "vegetable non-essential oils" whether raw or refined and from whatever raw material produced will be liable to excise duty. Refined oil is one sort; raw oil is another sort. But as the duty is on the manufacture of goods, that is, on the bringing into existence a new substance known to the market, the raw oil or the refined oil must be some substance known to the, market before it can be subjected to duty.

We are therefore of opinion that <ORG> was right in, its conclusion that there was no legal basis for the demands of excise duty which were made. on the petitioners and in directing the authorities to withdraw these demands. The appeals are accordingly dismissed with costs. Appeals dismissed.


PETITIONER: <ORG>. Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX,WEST BENGAL DATE OF JUDGMENT: 11/11/1954 BENCH: BHAGWATI, <NAME>: BHAGWATI, <NAME>, <NAME>, <NAME>, T.L. VENKATARAMA CITATION: 1955 AIR 89 1955 SCR (1) 876 ACT: Indian Income-tax Act (XI of 1922), s. 10(2)(xv) -Capital expenditure-Revenue expenditure-Meaning of and distinction between the two. HEADNOTE: Section 10(2)(xv) of the Indian Income-tax Act, 1922, uses the term 'capital expenditure' for which no allowance is given to the assessee. The term 'capital expenditure' is used as contrasted with the term 'revenue expenditure in respect of which the assessee is entitled to allowance under section 10(2) (xv) of the Act. As pointed out by the Full Bench of the Lahore High Court in <NAME>, In re [(1946) 15 I.T.R. 185] it is not easy to define the term 'capital expenditure' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Though it is not easy to reconcile all the decided cases on the subject, as each case had been decided on its peculiar facts, some broad principles could be 973 deduced from what the learned judges have laid down from time to time: (1)Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment: vide Lord Sands in Commissioners of Inland Revenue v. <ORG> (  13 T. C. 1) and <ORG> v. <NAME> (  2 T. C. 239). (2)Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade: vide <NAME> L.C., in <NAME> v. <ORG> ( 10 T.C. 155). If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a now asset, that is, machinery. The expressions 'enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. (3)Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it. One has got to apply these criteria, one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2)(xv) of the Indian Income-tax Act, 1922. The question has all along been considered to be a question of fact to be determined by <ORG> on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of 124 974 fact if they have been arrived at on a proper application of those principles. The assessee acquired from <ORG> a lease for 20 years (with a clause for renewal) in respect of certain limestone quarries situated in Khasi and Jaintia Hills. In addition to the rents and royalties for lease the assessee as the lessee had to pay two further sums as protection fees' under the covenants contained in clauses 4 and 5 of the lease. Under clause 4 the portection was in respect of another group of quarries called the Durgasil area, and the lessor undertook not to grant for this area any lease, permit or prospecting licence regarding limestone to any other party except with a condition that no limestone should be used for the manufacture of cement. This protection was given in consideration of a sum of Rs. 5,000 annually payable by the assessee during the whole period of the lease. Under clause 5 a further protection was given by the lessor to the lessee in respect of the whole of the Khasi and Jaintia Hills District for which lessee was to pay annually Rs. 35,000 to the lessor for 5 years. According to these covenants the assessee in his capacity as the lessee paid the lessor a sum of Rs. 40,000 for the accounting years 1944-45 and 1945-46. Held, that the sum of Rs. 40,000 was a capital expenditure inasmuch as it was incurred for the acquisition of an asset or advantage of an enduring nature for the whole of the business and Was no part of the working or operational expenses for carrying on the business of the assesses. Accordingly the payment of Rs. 40,000 was not an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. Countess Warwick Steamship Co. Ltd. v. <NAME>  2 K.B. 292), <ORG> v. <NAME> [18871 2 T.C. 239), <ORG> v. <NAME> (  5 T.C. 529), <NAME> (Surveyor of Taxes) v. <ORG> ( [19151 6 T.C. 671), <NAME> v. <ORG> ( 10 T.C. 1.55), <ORG>'s case (  6 T.C. 399), <ORG> v. <NAME> (H. M. Inspector of Taxes), ( [19211 12 T.C. 256), <ORG> v. <NAME> (  1 K.B. 124), <ORG> v. <NAME> (H. M. Inspector of Taxes), ( 18 T.C. 280). <ORG> v. <NAME> (H. M. Inspector of Taxes) (I 19341 19 T.C. 390), <ORG>, Bombay v. Commissioner of Income-tax, Bombay Presidency and Aden ([19371 L.R. 64 I.A. 215), <ORG> and <ORG> v. <NAME> ( 61 C.L.R. 337), <NAME> and Sons. v. Commissioner of Income-tax ( 1-4 I.T.R. 66), <CITATION> . ( 15 I.T.R. 105), <ORG> v. Commissioner Of Income-tax, U.P. & Ajmer Merwara ( 17 I.T.R. 13), <CITATION> ., ( S.C.R. 11), <CITATION> . & Co. 975 (  17 I.T.R. 317) and <CITATION> . (  2 K.B. 184), referred to. <NAME>, In re, (  15 I.T.R. 185), approved. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 162 of 1952. Appeal from the Judgment and Order dated the 7th day of June, 1951, of <ORG> at Calcutta in Income-tax Reference No. 60 of 1950 arising out of the Order dated the 22nd day of November, 1949, of <ORG> in I.T.A. Nos. 1026 and 1027 of 1948-49 <NAME> for the appellant.

<NAME> for the respondent.

1954. November, 11. The Judgment of the Court was delivered by, BHAGWATI J.-This appeal from the judgment And order of <ORG> with leave under section 66-A (2) of the Indian Income-tax Act raises an interesting question as to the line of demarcation between capital expenditure and revenue expenditure. On the 14th November, 1938, the appellant company acquired from <ORG> a lease of certain limestone quarries, known as the Komorrah quarries situated in the Khasi and Jaintia Hills District for the purpose of carrying on the manufacture of cement. The lease was for 20 years commencing on the 1st November, 1938, and ending on the 31st October, 1958, with a clause for renewal for a further term of 20 years. The rent reserved was a half-yearly rent certain of Rs. 3,000 for the first two years and thereafter a half-yearly rent certain of Rs. 6,000 with the provision for payment of further royalties in certain events. In addition to these rents and royalties two further sums were payable under the special covenants contained in clause& 4 and 5 of the lease as " protection fees ". Under clause 4 the protection was in respect of another group of quarries called the Durgasil area, the lessor undertaking not to grant any lease, permit or prospecting licence regarding the limestone to any other party therein without a condition that no limestone should be used for the manufacture of cement in consideration of a sum of Rs. 5,000 payable annually during the whole period of the lease. Under clause 5 a further protection was given in respect of the whole of the Khasi and Jaintia Hills District, a similar undertaking being given by the lessor in consideration of a sum of Rs. 35,000 payable annually but only for 5 years from the 15th November, 1940. In the accounting years 1944-45 and 1945-46 the company paid its lessor sums of Rs. 40,000 in accordance with these two covenants and claimed to deduct the sums in the computation of its business profits under the provisions of section 10(2) (xv) of the Income-tax Act in the assessments for the assessment years 1945-46 and 1946-47. The Income-tax Officer, the Appellate Assistant Commissioner and <ORG> rejected the contention of the company and the following question, as ultimately reframed, was at the instance of the company referred by the <ORG> to <ORG> for its decision :-

" Whether, in the circumstances of the case, the two sums of Rs. 5,000 and Rs. 35,000 paid under clauses 4 and 5 of the deed of the 14th November, 1938, were rightly disallowed as being expenditure of a capital nature and so not allowable under section 10(2) (xv) of the Indian Income-tax Act ". <ORG> answered the question in the affirmative and hence this appeal.

Clauses 4 and 5 of the deed of lease may be here set out :-

4. The lessee shall pay to the lessor Rs. 5,000 (Rupees five thousand) only annually during the period of the lease on November 15th starting from November 15th, 1938, as a protection fee. In consideration of that protection fee the lessor undertakes not to allow any person or company any lease permit or prospecting licence for limestone in the group of quarries as described in Schedule 2- and delineated in the plan thereto annexed and therein coloured blue called the Durgasil area without a condition in such lease permit or prospecting licence that no limestone ,shall be used for the manufacture of cement.

5.Besides the above protection fee the lessee shall pay to the lessor annually the sum of Rs. 35,000 (Rupees thirty five thousand) only for five years starting from the 15th day of November, 1940, as a further protection fee so long as the total amount of limestone quarried by the lessee in a year does not exceed 22,00,000 maunds per year whether quarried in the area of this lease or elsewhere or obtained by purchase from other quarries in the Khasi and Jaintia Hills by the lessees. If, however, in any year the total amount of limestone converted into cement at the lessee's Sylhet,Factory exceed 22,00,000 maunds the lessee will be entitled to an abatement at the rate of Rs. 20 for every 1,000 maunds quarried in excess of 22,00,000 maunds and the lessee shall pay the sum of Rs. 35,000 less the abatement calculated on the basis hereinbefore mentioned. Limestone which is not converted into cement at the lessee's factory in Sylhet district will not entitle the lessee to any abatement in the protection fee. The lessor in consideration of the said payment undertakes not to allow any person or company any lease permit or prospecting licence for limestone in the whole of Khasi and Jaintia Hills district without a condition in such lease permit or prospecting licence that no limestone extracted shall be used directly or indirectly for the manufacture of cement. The lessor will be empowered to terminate this agreement for the payment of a protection fee at any time after it has run for 5 years by giving six month,%' notice in writing by registered letter addressed to 11, Clive Street, Calcutta but the lessee will not be entitled to terminate this agreement during the currency of the lease except with the consent of the lessor.

It is not clear as to what was meant by the last provision contained in clause 5, the lessee in the event of his having paid the sum of Rs. 35,000 for the 5 years having nothing else to do but enjoy the benefit of the covenant on the part of the lessor during the subsequent period of the lease. This provision is however immaterial for our purposes.

The line of demarcation between capital expenditure and revenue expenditure is very thin and learned Judges in England have from time to time pointed out the difficulties besetting that task. Lord <NAME> a Dovey v. Cory(1), administered the following warning:-

I do not think it desirable for any tribunal to do that which <ORG> has abstained from doing-that is, to formulate precise rules for the guidance or embarrassment of business men in the conduct of business affairs. There never has been, and I think there never will be, much difficulty in dealing with any particular case on its own facts and circumstances; and, speaking for myself, I rather doubt the wisdom of attempting to do more." <NAME> also expressed himself much to the same effect in Countess Warwick Steamship Co. Ltd. v. Ogg(1): "

It is very difficult, as I have observed in previous cases of this kind, following the highest possible authority, to lay down any general rule which is both sufficiently accurate and sufficiently exhaustive to cover all or even a great number of possible cases, and I shall not attempt to lay down any such rule."

Certain broad tests have however been attempted to be laid down and the earliest was the one indicated in the following observations of <ORG> in the course of the argument in <ORG> v. <NAME> (3) :- " You do not use it 'for the purpose of' your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern."

The expenditure in the acquisition of the concern would be capital expenditure; the expenditure in carrying on the concern would be revenue expenditure.

Lord <NAME> in <ORG> v. <NAME> ( 4), suggested another criterion at page 536 :

Now, I don't say that this consideration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital (1) [1901] A.C. 477, 488.

(2) [1924] 2 K.B. 292, 298.

(3)(1887) 2 T.C. 239, 243.

(4)(1910) 5 T.C. 529, 536.

expenditure as against what is income expenditure to say that capital expenditure is a thing that is a going to be spent once and for all, and income expenditure is a thing that is going to recur every year."

This test was adopted by <NAME> in <NAME> (Surveyor of Taxes) v. Vickers Ltd. (1), and after quoting the above passage from the speech of Lord <NAME> he observed that the real test was between expenditure which was made to meet a continuous demand for ex. penditure as opposed to an expenditure which was made once for all. He however suggested in the course of his judgment another view-point and that was whether the particular expenditure could be put against any particular work or whether it was to be regarded as an enduring expenditure to serve the business as a whole, thus laying the foundation for the test prescribed by Viscount <NAME> in <NAME>'s case (2). <NAME> v. <ORG> (2), laid down what has almost universally been accepted as the test for determining what is capital expenditure as distinguished from revenue expenditure. Viscount <NAME> there observed at page 192:-

"But there remains the question, which I have found more difficult, whether apart from the express prohibitions, the sum in question is (in the words used by Lord <NAME> in <NAME>'s case(3) ), a proper debit item to be charged against incomings of the trade when computing the profits of it; or, in other words, whether it is in substance a revenue or a capital expenditure. This appears to me to be a question of fact which is proper to be decided by the Commissioners upon the evidence brought before them in each case ; but where, as in the present case, there is no express finding by the Commissioners upon the point, it must be determined by the Courts upon the materials which are available and with due regard to the principles which have been laid down in the authorities. Now, in <ORG> v. <NAME> (4). Lord <NAME>, as Lord President of <ORG>, expressed the opinion that "in a rough way" it was (1)(1915) 6 T.C. 671.

(2)(1925) 10 T.C. 155.

(3)(19I4) 6 T.C. 399.

(4)(19IO) 5 T.C. 529. 536, "not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which is going to recur every year" ; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not, intended by Lord <NAME> to be a decisive one in every case; for it is easy to imagine many cases in which a payment, though made "once and for all", would be properly chargeable against the receipts for the year........ But when an expenditure is made, not only once and for all. but with a view to bringing into existence an asset or an advan- tage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."

Viscount <NAME> however in <NAME> v. -Moore (H. M. Inspector of Taxes) (1), suggested another test and that was the test of fixed or circulating capital, though even there he observed that it was not necessary to draw an exact line of demarcation between the fixed and circulating capital. The line of demarcation between fixed and circulating capital could not be defined more precisely than in the description of <NAME> of fixed capital as what the owner turns to profit by keeping it in his own possession, and circulating capital as what he makes profit of by parting with it and letting it change masters. This test was adopted by Lord <NAME> in <ORG> v. <NAME> (2), where he observed:-

" I am inclined to think that the question whether the money paid is provided from the fixed or the circulating capital comes as near to accuracy as can be suggested. Lord <NAME>'s test, that where money is spent for an enduring benefit it is capital, seems to leave open doubts as to what is meant by "enduring" ................. (1) (1921) 12 T.C. 266, 282.

(2) [1932] 1 K.B. 124,138.

It seems rather that the cases of <NAME> (1) and of <NAME> v. B. W. Noble, Ltd. (2) and of <NAME> v. Staveley Coal & Iron Co. (3), give illustrations that the test of fixed or circulating capital is the true one; and where, as in this case, the expenditure -is to bring back into the hands of the company a necessary ingredient of their existing business-important, but still ancillary and necessary to the business which they carry-onthe expenditure ought to be debited to the circulating capital rather than to the fixed capital, which is em. ployed in and sunk in the permanent-even if wasting -assets of the business." This preference of his was reiterated by Lord Hanworth M.R. in <ORG> v. <NAME> (H. M. Inspector of Taxes) "The above cases serve to establish the difficulty of the question rather than to affirm any principle to be applied in all cases. Indeed, in the last case cited, Atherton v. <ORG> <ORG> (5) Lord <NAME> says that a payment 'once and for all'-a test which had been suggested by Lord <NAME> in <ORG>' v. Farmer(1), was not true in all cases, and he found authority for that statement in <NAME> v. Incorporated Council of Law Reporting for England and Wales (7) and the Anglo-Persian case(8 ) already referred to is another. The test of circulating, as contrasted with fixed capital, is as good a test in most cases, to my mind, as can be found ; but that involves the question of fact, was the outlay in the particular case from fixed or circulating capital ?" <NAME> at page 300 pointed out the difficulties in applying this test also.

"Unfortunately, however, it is not always easy to determine whether a particular asset belongs to the one category or the other. It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating (2) [1919] 1 K.B. 25.

(2) (1927] 1 K.B. 719.

(3) (1928] 2 K.B. 405.

(4) (1933) 18 T.C. 280, 298.

(5) (1925) 10 T.C. 155, 192.

(6) (1910) 5 T.C. 529.

(7) [1914] 3 K.B. 674.

(8) [1932] 1 K.B. 124.

capital. A chattel or a chose in action may be fixed capital. The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas. "

In <ORG> v. <NAME> (H. M. Inspector of Taxes)(1), Lord <NAME> however veered round to Viscount Cave's test and expressed his disapproval of the test of fixed and circulating capital. He reviewed the various authorities and stated :

" My Lords, if the numerous decisions are examined and classified, they will be found to exhibit a satisfactory measure of consistency with Lord <NAME>'s principle of discrimination. "

As regards the test of fixed and circulating capital he observed, at page 432 :-

" I have not overlooked the criterion afforded by the economists' differentiation between fixed and circulating capital which Lord <NAME> invoked in <NAME> v. Moore(1), and on which <ORG> relied in the present case, but I confess that I have not found it very helpful. "

<ORG> Tata Hydro-Electric Agencies, Limited, Bombay v. Commissioner of Income-tax, Bombay Presidency and Aden(1), pronounced at page 226:-

"What is money wholly and exclusively laid out for the purposes of the trade' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly, to attend (1) (1935) 19 T.C. 390.

(2) (1921) 12 T.C, 266, (3) (1937) L.R, 64 I.A. 215.

to the true nature of the expenditure, and to ask oneself the question, is it a part of the company's working expenses; is it expenditure laid out as part of the process of profit earning ?"

In the case before them they came to the conclusion that the obligation to make the payments was undertaken By the appellants in consideration of their acquisition of the right and opportunity to earn profits, i.e., of the right to conduct the business and not for the purpose of producing profits in the conduct of the business. The distinction was thus made between the acquisition of an income-earning asset and the process of the earning of the income. Expenditure in the acquisition of that asset was capital expenditure and expenditure in the process of the earning of the profits was revenue expenditure. This test really is akin to the one laid down by <NAME> in The City of London Contract Corporation Ltd. v. Style8(1).

<NAME> expressed a similar opinion in <ORG> and <ORG> v. <NAME>), at page 360:- " But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist in what has been called a 'profit- yielding subject," the phrase of Lord <NAME> in <ORG> v. <ORG>). As general conceptions it may not be difficult to distinguish between the profit yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns of revenue. The latter can be considered, estimated and determined only in relation to a period ,or interval of time, the former as at a point of time. For the one concerns the instrument for earning profits (1) (1887) 2 T.C. 239.

(2) (1038) 61 C.L.R. 337.

(3) (1930) S.C. 215, 220.

and the other the continuous process of its use or employment for that purpose.

These are the three criteria adopted for distinguishing capital expenditure from revenue expenditure though it must be said that preponderance of opinion is to be found in support of <NAME> test as laid down in <NAME>'s case(1).

Viscount Cave's test has also been adopted almost universally in India: vide <NAME> & Sons V. Commissioner of Income-tax(2), <CITATION> .(1), <ORG>, Saharanpur v. Commissioner of Income-tax, <ORG>), and <CITATION> .(5). <CITATION> .(3), <NAME> observed, at page 116:-

" The legal touchstone which is almost invariably applied is the familiar dictum of Viscount Cave in <NAME>'s case(1)............ <NAME> felt that this definition had placed the matter beyond all controversy -see remarks in <ORG>'s case(6). But Lord <NAME> in <NAME> case(1), felt that <NAME> had been unduly optimistic and the learned Law Lord was of the opinion that the question whether a particular expenditure fell on one side of the line or other was a task of much refinement. But on the whole I think that the definition of Viscount Cave is a good working definition ; and if one were to supplement it with the definition suggested by Mr. Justice <NAME> in <NAME> v. <ORG>), whether an expenditure had in any way altered the original character of the capital asset, we have a legal principle which can be applied to any set of given facts.

(1) (1925) to T.C. 155.(5) (1952] S.C.R. 11. (2) [1945]14 I.T.R. 66.(6) [1932] 1 K.B. 124. (3) [1946] 15 I.T.R. 105.(7) (1935) 19 T.C. 390. (4) [1949] 18 I.T.R. 13(8) [1942] 10 I.T.R. Suppl. 1, 6.

In <NAME>, In re(1), <ORG> of <ORG> attempted to reconcile all these decisions and deduced the following broad test for distinguishing capital expenditure from revenue expenditure. The opinion of <ORG> was delivered by Mr. Justice <NAME> as he then was, in the terms following:

" It is not easy to define the term 'capital expenditure' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned Judges have laid down from time to time. They are as follows :-

1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment: vide Lord <NAME> in Commissioners of Inland Revenue v. <ORG>). In <ORG> v. Styles(1), at page 243, <NAME> observed as to the capital expenditure as follows :

" You do not use it 'for the purpose of' your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern. "

2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade: vide Viscount Cave L.C. in <NAME> v. <ORG> and <ORG>). If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be (1) [1946] 15 I.T.R. 185. (3) (1887) 2 T.C. 239. (2) (1927) 13 T.C. 1, 14. (4) (1925) 10 T.C. 155.

deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired anew asset, that is, machinery.

3.Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it". This synthesis attempted by <ORG> of <ORG> truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an. asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria, one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2) (xv) of the Income- tax Act. The question has all along been considered to be a question of fact to be determined by the Income-tax authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles. The expression "once and for all" used by Lord <NAME> has created some difficulty and it has been contended that where the payment is not in a lump sum but in instalments it cannot satisfy the test. Whether a payment be in a lump sum or by instalments, what has got to be looked to is the character of the payment. A lump sum payment can as well be made for liquidating certain recurring claims which are clearly of a revenue nature, and on the other hand payment for purchasing a concern which is prima facie an expenditure of a capital nature may as well be spread over a number of years and yet retain its character as a capital expenditure. (Per <NAME> in <CITATION> .(1). The character of the payment can be deter- mined by looking at what is the true nature of the asset which has been acquired and not by the fact whether it is a payment in a lump sum or by instalments. As was otherwise put by Lord Greene M.R. in <CITATION> .(2):

"The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of the term, is shortlived. A payment of this character appears to me to fall into the same class as the payment of a premium on the grant of a lease, which is admittedly not deductible".

The case of <ORG>, Bombay v. Commissioner of Income-tax, <ORG> and Aden(3) affords another illustration of this principle. It was observed there:-

"If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business". (1) [1949] 171.T.R. 3I7. 329.

(3) (193 7) L. R. 64 1, A 215.

(2) [1942] 2 K.B. 184.

The expression "once and for all" is used to denote an expenditure which is made once and for all for procuring an enduring benefit to the business as distinguished from a recurring expenditure in the nature of operational expenses. The expression "enduring benefit" also has been judicially interpreted. <NAME> in <ORG> v. Dale(1) agreed with <ORG> that by enduring benefit is meant enduring in the way that fixed capital endures:

"An expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively early date". <NAME> observed in <ORG> & <ORG> v. Federal Commissioner of Taxation(2): "When the words 'permanent' or 'enduring' are used in this connection it is not meant that the advantage which -will be obtained will last for ever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole e.g -"enlargement of the goodwill of a company permanent improvement in the material or immaterial assets of the concern".

To the same effect are the observations of Lord Greene M. R. in <CITATION> . (3 ) above referred to.

These are the principles which have to be applied in order to determine whether in the present case the expenditure incurred by the company was capital expenditure or revenue expenditure. Under clause 4 of the deed the lessors undertook not to grant any lease, permit or prospecting license regarding limestone to any other party in respect of the group of quarries called the Durgasil area without a condition therein that no limestone shall be used for the manufacture of (1) (1932] 1 K.B. 124, 146.

(2) (1938) 61 C.L.R. 337, 355.

(3) (1942) 24 T.C. 453.

cement. The consideration of Rs. 5,000 per annum was to be paid by the company to the lessor during the whole period of the lease and this advantage or benefit was to enure for the whole period of the lease. It was an enduring benefit for the benefit of the whole of the business of the company and came well within the test laid down by Viscount <NAME>. It was not a lump sum payment but was spread over the whole period of the lease and it could be urged that it was a recurring payment. The fact however that it was a recurring payment was immaterial, because one bad got to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. The asset which the company had acquired in consideration of this recurring payment was in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by the company for its business as a whole. It was not a part of the working expenses of the business but went to appreciate the whole of the capital asset and make it more profit yielding. The expenditure made by the company in acquiring this advantage which was certainly an enduring advantage was thus of the nature of capital expenditure and was not an allowable deduction under section 10(2)(xv) of the Income-tax Act.

The further protection fee which was paid by the company to the lessor under clause 5 of the deed was also of a similar nature. It was no doubt spread over a period of 5 years, but the advantage which the company got as a result of the payment was to enure for its benefit for the whole of the period of the lease unless determined in the manner provided in the last part of the clause. It provided protection to the company against all competitors in the whole of the Khasi and Jaintia Hills District and the capital asset which the company acquired under the lease was thereby appreciated to a considerable extent. The sum of Rs. 35,000 agreed to be paid by the company to the lessor for the period of 5 years was not a revenue expenditure which was made by the company for working the capital asset which it had acquired. It was no part of the working or operational expenses of the company. It was an expenditure made for the purpose of acquiring an appreciated capital asset which would no doubt by reason of the undertaking given by the lessor make the capital asset more profit yielding. The period of 5 years over which the payments were spread did not make any difference to the nature of the acquisition. It was none the less an acquisition of an advantage of an enduring nature which enured for the benefit of the whole of the business for the full period of the lease unless terminated by the lessor by notice as prescribed in the last part of the clause. This again was the acquisition of an asset or advantage of an enduring nature for the whole of the business and was of the nature of capital expenditure and thus was not an allowable deduction under section 10(2)(xv) of the Act. We are therefore of the opinion that the conclusion reached by the Income-tax authorities as well as <ORG> in regard to the nature of the payments was correct and the sums of Rs. 40,000 paid by the company to the lessors during the accounting years 1944-45 and 1945-46 were not allowable deductions under section 10(2)(xv) of the Act. The appeal therefore fails and must be dismissed with costs. Appeal dismissed.