<ORG> - This is a reference under section 66(1) of the Indian Income-tax Act. The assessee is a public limited company incorporated in 1935 manufacturing sugar and its bye-products. The assessments relate to the years 1950-51, 1951-52 and 1952-53, the accounting years being the three years ending with June 30, 1949, June 30, 1950 and June 30, 1951. In respect of its business, the company resolved to issue mortgage debentures of the value of Rs. 2.5 lakhs. The resolution of the board of directors relating thereto is dated April 15, 1941. This resolution of the board of directors was confirmed by a resolution of the company at its extraordinary meeting held on June 4, 1941. It was further resolved that the company do pay brokerage not exceeding 2.5% and such commission on the sales of sugar for such period as the company may determine to such person or due course, the debentures of the value of Rs. 2.5 lakhs were issued and subsequently allotted. The brokerage of 2.5% mentioned above was also paid. As regards the commission on the sales of sugar mentioned above, an agreement was entered into between the assessee company and <NAME> of Bombay on December 28, 1941, that he was to be paid a commission of 4 annas per Bengal maund of sugar sold during the period commencing from January 1, 1941, and ending with December 31, 1961. In respect of the three years to which the concerned assessments are made, the commission so paid to the underwriters was Rs. 45,503, Rs. 13,362 and Rs. 40,465 respectively. These amounts were claimed by the assessee as admissible deductions in the respective assessment years. The Income-tax Officer and the Appellate Assistant Commissioner as well as <ORG>, Hyderabad Bench, disallowed this claim. The assessee filed three applications before <ORG> to refer to <ORG> the question of law which arose out of the decision of the <ORG>. The three applications were consolidated and the <ORG> referred the following question to <ORG> for decision :

"Whether, on the facts and circumstances of the case, the sums of Rs. 45,503, Rs. 13,362 and Rs. 40,465 are admissible deductions in respect of the assessments for the assessment years 1950-51, 1951-52 and 1952-53 respectively ?"

The relevant portion of the resolution dated April 15, 1941, of the board of directors is as follows :

"Agenda :

I. (1) To issue first mortgage participating debentures of Rs. 2.5 lakhs on the security of the plant and machinery of both the sugar factory & distillery for repaying the loan to <ORG> and the share capital of the society as per agreements dated June 29, 1938. ..

III. (a) That the company hereby approves the agreement to be entered into between the company on the one part and Mr. <NAME>, share and stock-broker, Bombay, on the other part and the terms contained therein for giving a brokerage of 2.5 per cent. on the debenture loan...

(c) That in consideration of the valuable services rendered, the company do hereby enter into an agreement with Mr. <NAME> of Bombay as per terms of the agreement submitted to the meeting giving four annas as commission on every Bengal maund of sugar sold, for a period of twenty years commencing from January 1, 1941."

In the agreement dated December 28, 1941, entered into between the assessee company and <NAME> of Bombay, it is provided that :

"Whereas the said <ORG> negotiated and procured subscription of the said debentures of the face value of Rs. 2,50,000 (Rupees two lakhs and fifty thousand) which have been duly allotted by the company and whereas in consideration aforesaid the company agreed to pay 2 1/2 (two and half) per cent. brokerage on the amount of the sale of every Bengal maund of the companys sugar effected for a period of 20 years and whereas the company has already paid to the said <ORG> the amount of the said brokerage..... It is hereby agreed by and between the parties herein as follows :

1. In pursuance of the said agreement and in consideration of the promises and in consideration of the negotiating for procuring the subscription of the said debentures the company hereby agree to pay to the said <ORG> commission at the rate and on the basis of four annas on the sale of every Bengal maund of the companys sugar during the period commencing from the 1st day of January, 1941, and ending with the 31st day of December, 1961."

It is on these facts that the assessee claimed the three amounts of Rs. 45,503, Rs. 13,362 and Rs. 40,465 as admissible deductions in respect of the assessments for the three assessment years. The claim of the assessee that these three amounts are admissible deductions is based on section 10 , Clause (2), sub-clause (xv), of the Indian Income-tax Act , which is as follows :

"10. (2) Such profits or gains shall be computed after making the following allowances, namely :

(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation."

The stand taken by the department is that these amounts are in the nature of capital expenditure and that, therefore, they are not admissible deductions under the Indian Income-tax Act ; whereas, the contention of the assessee is that this is an expenditure laid out or expended wholly and exclusively for the purpose of the business and is not in the nature of a capital expenditure, but a revenue expenditure.

On the facts stated above, it is clear that the amounts of commission paid every year to <ORG> were for the purpose of obtaining the debenture loan of Rs. 2 1/2 lakhs which went towards the capital of the business. That was an expense incurred for the purpose of raising the capital for the business of the company. The only difference is that this expense is spread over a period of 20 years in the form of commission on the sales of the companys sugar. These amounts are expended for obtaining capital and the asset of Rs. 2 1/2 lakhs that was brought into existence was an asset of an enduring benefit to the trade. Instead of one payment in a lump sum, it was spread over a number of years, the only difference being the mode of payment. The tests by which any particulars expenditure is to be held to be in the nature of a capital expenditure or a revenue expenditure are laid down by <ORG> in <CITATION> . After referring to the several decisions bearing on the question, <NAME>, who delivered the judgment, summarised the position as follows :

"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 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."

In the present case, the resolution dated April 15, 1941, of the board of directors of the assessee company shows that the debenture loan of Rs. 2 1/2 lakhs was raised for the purpose of repaying the loan to <ORG> and the share capital of the society as per agreements dated June 29, 1938. If this loan was not raised, the company would have been forced to repay the loan to <ORG> and the share capital of the society from out of the capital of the assessee company. Thus, it is clear that the debenture loan was raised for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business. Therefore, the expenditure incurred for raising this debenture loan is properly attributable to capital and is of the nature of capital expenditure. The fact that the payment which is part of the expenditure incurred for raising the debenture loan is made periodically does not affect the question and does not convert this expenditure into a revenue expenditure. Applying the above tests laid down by <ORG>, we hold, on an appreciation of the whole situation, that the expenditure in question incurred in this case is of the nature of capital expenditure and not revenue expenditure and is not a deductible allowance under section 10 , clause (2), sub-clause (xv), of the Indian Income-tax Act .

<NAME>, learned counsel for the assessee, argued that, as this debenture loan was raised for the purpose of repaying the loan to <ORG> and the share capital of the society, this expenditure comes under the head of revenue expenditure. His contention is that this expenditure was incurred for preserving the assets of the company and is therefore a deductible expenditure. To meet this argument, the learned counsel for the department relied upon the decision in <ORG> v. Minister of National Revenue. In that case, the assessee company, with a view to reducing their interest charges by redeeming their existing bonds before maturity, reborrowed at lower rates on less onerous conditions as to payment. The carrying through of these financial operations involved necessarily substantial outlays, and the question was whether those outlays were permissible deductions under the Income War Tax Act , 1927, in the assessment of the appellants taxable income. The expenditure incurred amounted to Rs. 1,33,884.81 nP. and the assessee company decided to amortise by spreading it over twelve years, involving a charge annually against income of Rs. 10,535.16 nP. It was contended before <ORG> on behalf of the necessarily for the purposes of earning income and were not payments on account of capital. But <ORG> of <ORG> rejected that contention. Lord <NAME>, who delivered the judgment, pointed out that :

"It is not the business of either of the appellants to engage in financial operations. The nature of their business is sufficiently indicated by their titles. It is to these businesses that they look for their earnings. Of course, like other business people, they must have capital to enable them to conduct their enterprises, but their financial arrangements are quite distinct from the activities by which they earn their income. No doubt the way in which they finance their business will or may reflects itself favourably or unfavourably in their annual accounts, but expenditure incurred in relation to the financing of their businesses is not, in their Lordships opinion, expenditure incurred in the earning of their income within the statutory meaning."

In view of this decision, we cannot accept the contention of the learned counsel for the assessee. In <ORG> v. <NAME>, the assessee company, in order increase its capital, raised money on debentures and claimed that the expenditure incurred for raising the money ought to be deducted from the profits in a particular year. But, it was held that the amount paid in order to raise the money on debentures, comes off the amount advanced upon the debentures and, therefore, is so much paid for the cost of getting it, could not be deducted. In our opinion, the decision of <ORG> in <CITATION> also relied upon by the learned counsel for the department is against the assessees contention in this case. In that case, the assessee, a company carrying on business as manufacturer of plywood and plywood articles, raised a loan of Rs. 3 lakhs by way of first mortgage debentures redeemable in three successive years at Rs. one lakh every year to be utilised towards the working capital of the company. In issuing the debentures the company incurred Rs. 12,924 by way of expenses towards purchase of stamp paper for the trust deed, underwriting commission and registration and lawyers fees. The question was under section 10(2) (xv) of the Income-tax Act as a deduction. The learned judges held that the expenditure of Rs. 12,924 incurred by the company to raise the loan was a capital expenditure and was not therefore deductible under section 10(2) (xv). It was further held that :

"The raising of money by debentures or mortgage cannot be regarded as an ordinary incident in carrying on the business, or be treated as on a par with trading or banking facilities, but must prima facie and in the absence of other indications, be considered to affect the capital of the concern and its profit-making structure."

The decision in <ORG> relied upon by the learned counsel for the assessee does not support his contention. In that case, the assessee company purchased certain property for the purposes of its business and subsequently an action was commenced against the company claiming that its title to the property was invalid. The company defended the action and thereby had to incur expenses amounting to pounds 6,249, which sum it claimed to be entitled to deduct as business expenses in computing its profits for the purposes of assessment to income-tax. <NAME> held that the expenditure was properly attributable to revenue. The principle is stated thus :

"..... where a sum on money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company."

<NAME> pointed out that, in that case, there was nothing added to the title or taken away and the title of the company to the property has simply been maintained by that payment. This decision, in our opinion, has no bearing on the question to be decided in this case. The decision in <ORG> also does not help the assessee. In that case, the assessee company, engaged in sugar refining, incurred expenses in a propaganda campaign to oppose the threatened nationalization of the industry and that expenditure was claimed by the assessee as an admissible deduction from its profits for income-tax purposes. <ORG>, by a majority, held that the object of the expenditure being to preserve the assets of the company from seizure and so to enable it to carry on and earn profits, there was no reason in law to prevent the Commissioners from so finding. It was pointed out that :

"On the evidence it was not to be assumed that the trade of the company would have continued, in an income-tax sense, in other hands, after nationalization and accordingly that the expenditure was incurred for the purpose of preventing a change of ownership."

The question that arose for decision in <CITATION> was one under section 12 , clause (2), of the Income-tax Act . The assessee, in that case, was an investment company formed originally for acquiring, holding and otherwise dealing with the shares and Government securities held by one A. On his death, <ORG> was appointed the administrator of As estate in India and in that capacity <ORG> held 50,000 shares belonging to A. Subsequently, as the executors of A required money, <ORG> entered into an agreement with the company whereby company agreed to reduce its capital by 50 lakhs and for that purpose took over the shares from <ORG> issuing to <ORG> debentures of the face value of Rs. 50 lakhs carrying interest at the rate of 5 per cent. per annum redeemable at the option of the registered holder at any time. The question was whether the 5 per cent. interest paid to <ORG> on these debentures by the company could be deducted from its income under section 12(2) of the Income-tax Act. It was pointed out by <ORG> that :

"... the transaction was voluntarily entered into in order indirectly to facility the carrying on of the business of the company and was made on the ground of commercial expediency. It, therefore, fell within the purview of section 12(2) ."

It was further held that the assessee, being an investment company, if it borrowed money and utilised the same for its investments on which it earned income, the interest paid by it on the loans would clearly be a permissible deduction under section 12(2) of the Income-tax Act and that whether the loan is taken on an overdraft or is a fixed deposit or on a debenture makes no difference in law. It is thus seen that this decision also does not support the contention of the learned counsel for the assessee.

We, therefore, hold that, on the facts and circumstances of this case, the sums of Rs. 45,503, Rs. 13,362 and Rs. 40,465 are not admissible deductions in respect of the assessments for the assessment years 1950-51, 1951-52 and 1952-53 respectively. We answer the question referred to <ORG> in the negative. The assessee shall pay the costs of this reference. Advocates fee Rs. 250.

Question answered in the negative.


REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 2092 OF 2006 Commissioner of Income Tax ....Appellant Central, Kanpur Versus J.K. Charitable Trust ....Respondent Kamal Tower, Kanpur With CIVIL APPEAL NO. 1698 OF 2008 With CIVIL APPEAL NO. 1699 OF 2008 With CIVIL APPEAL NO. 2423 OF 2006 With CIVIL APPEAL NO. 682 OF 2007 1 JUDGMENT Dr. ARIJIT PASAYAT, J.

1. Challenge in these appeals in each case is to the order passed by a Division Bench of <ORG> answering the reference made by <ORG>, Allahabad Bench (in short the `<ORG>') under Section 256(1) of the Income Tax Act, 1961 (in short the `Act') in favour of the assessee and against the revenue. For answering the references in favour of the assessee <ORG> relied upon its judgment for two previous assessment years i.e. 1972-73 and 1973-74 in the assessee's case which is reported in <C<ORG>ION> (1992 (196) IIR 31). The present dispute relates to several assessment years, i.e. 1972-73 (in respect of an assessment re done under Section 147(1) of the Act) and assessment years 1975-76 to 1982-83.

2. Learned counsel for the revenue appellant submitted that each assessment year is a separate assessment unit and the factual scenario has to be seen. Dispute relates to the question whether the respondent, assessee's trust was hit by the provisions of Section 13(1)(c) and 13(2)(a)(f) & (h) of the Act and therefore cannot be given the benefit of exemption provided under Section 11 of the Act.

3. Learned counsel for the assessee submitted that for several years no appeal has been filed even though the factual position is the same i.e. for the assessment years 1983-84 upto assessment year 2007-08. Even no appeal was filed against the decision reported in [1992(196) ITR 31] (supra). It is also pointed out that several other <ORG> have taken a similar view and no appeal was preferred by the revenue against any of the judgments of the different <ORG>. Reference is made to the decisions reported in <CITATION> [(1982) 133 ITR 494], <CITATION> [(1983) 139 ITR 913], <CITATION> .2 [1988 (172) ITR 698] and <CITATION> [1996 (226) ITR 394]. The first two judgments have been rendered by the Bombay and Calcutta <ORG> respectively while the other two decisions are of the Gujarat <ORG>.

4. Learned counsel for the revenue submitted that even though appeal has not been preferred in respect of some assessment years, that does not create a bar for the revenue filing an appeal for other assessment years. Reliance is placed on a decision of this Court in <CITATION> [(2008)304 ITR 61 (SC)].

5. The factual scenario is undisputed that for a large number of assessment years no appeal has been filed.

6. The basic question therefore is whether the revenue can be precluded from filing an appeal even though in respect of some other years involving identical dispute no appeal is filed.

7. For deciding the issue a few decisions of this <ORG> need to be noted.

8. <CITATION> (2006 (3) SCC 1) it was noted as follows:

"The decisions cited have uniformly held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct. The courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why the courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a coordinate Bench which, failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction.

A decision can be set aside in the same lis on a prayer for review or an application for recall or under Article 32 in the peculiar circumstances mentioned in <CITATION> (2002 (4) SCC 388). As we have said, overruling of a decision takes place in a subsequent lis where the precedential value of the decision is called in question. No one can dispute that in our judicial system it is open to a court of superior jurisdiction or strength before which a decision of a Bench of lower strength is cited as an authority, to overrule it. This overruling would not operate to upset the binding nature of the decision on the parties to an earlier lis in that lis, for whom the principle of res judicata would continue to operate. But in tax cases relating to a subsequent year involving the same issue as an earlier year, the court can differ from the view expressed if the case is distinguishable or per incuriam. The decision in <CITATION> (2003(3) SCC 239) related to the year 1988. Admittedly, the present dispute relates to a subsequent period. Here a coordinate Bench has referred the matter to a larger Bench. This Bench being of superior strength, we can, if we so find, declare that the earlier decision does not represent the law. None of the decisions cited by <ORG> are authorities for the proposition that we cannot, in the circumstances of this case, do so. This preliminary objection of <ORG> is therefore rejected."

9. <CITATION> (1995(4) SCC 683) the position was highlighted by this court as follows:

"We are unable to appreciate the objection raised against the prosecution of this appeal by the appellant or other SLPs filed in similar matters. Sometimes, as it was stated on behalf of the <ORG>, the <ORG> Government may not choose to file appeals against certain judgments of <ORG> rendered in writ petitions when they are considered as stray cases and not worthwhile invoking the discretionary jurisdiction of this <ORG> under Article 136 of the Constitution, for seeking redressal therefor. At other times, it is also possible for the <ORG>, not to file appeals before this <ORG> in some matters on account of improper advice or negligence or improper conduct of officers concerned. It is further possible, that even where SLPs are filed by the <ORG> against judgments of <ORG>, such SLPs may not be entertained by this <ORG> in exercise of its discretionary jurisdiction under Article 136 of the Constitution either because they are considered as individual cases or because they are considered as cases not involving stakes which may adversely affect the interest of the <ORG>. Therefore, the circumstance of the non-filing of the appeals by the <ORG> in some similar matters or the rejection of some SLPs in limine by this <ORG> in some other similar matters by itself, in our view, cannot be held as a bar against the <ORG> in filing an SLP or SLPs in other similar matters where it is considered on behalf of the <ORG> that non- filing of such SLP or SLPs and pursuing them is likely to seriously jeopardise the interest of the <ORG> or public interest."

10. <CITATION> [2004(1)SCC 347] reference was made to the judgments in Digambar's case (supra) and <CITATION> (1996(3) SCC 493). It was noted as follows:

"28. In the aforementioned situation, <ORG> of <ORG> manifestly erred in refusing to consider the contentions of the appellants on their own merit, particularly, when the question as regards difference in the grant of scale of pay on the ground of different educational qualification stands concluded by a judgment of this Court in <CITATION> {(1991) Supp(1) SCC 138]. If the judgment of <NAME> case (supra) is to be followed, a finding of fact was required to be arrived at that they are similarly situated to the case of <NAME> (supra) which in turn would mean that they are also holders of diploma in Engineering. They admittedly being not, the contention of the appellants could not be rejected. Non-filing of an appeal, in any event, would not be a ground for refusing to consider a matter on its own merits. ( <CITATION> )

29. <CITATION> (1996) 3 SCC

493) wherein this <ORG> noticed <NAME> case (supra) by holding: (SCC p. 494, para 4) "4. <NAME>, the learned counsel for the appellants, contended that though an appeal against the earlier order of <ORG> has not been filed, since larger public interest is involved in the interpretation given by <ORG> following its earlier judgment, the matter requires consideration by this <ORG>. We find force in this contention. In the similar circumstances, this <ORG> in <NAME>'s case (supra) and in <NAME> case (supra) had held that though an appeal was not filed against an earlier order, when public interest is involved in interpretation of law, the <ORG> is entitled to go into the question."

11. In <NAME>'s case (supra) reference was made to <NAME> case (supra) wherein it was observed at paragraph 5 as follows:

"It is then contended that Section 3(2) and (3) make distinction between the employees covered by those provisions and the employees of the aided schools taken over under Section 3(2) . Until the taking over by operation of Section 3(4) recommendation is complete, they do not become the employees of the <ORG> under Section 4 of the Act. The <ORG> in exercise of the power under Section 8 constituted a committee and directed to enquire and recommend the feasibility to take over the schools. On the recommendation made by them, the <ORG> have taken decision on 13-1-1981 by which date the respondents were not duly appointed as the employees of the taken over institution. Therefore, <ORG> cannot issue a mandamus directing the <ORG> to act in violation of law."

12. <CITATION> (2006(2)SCC

439) at paragraph 24 the position was reiterated.

13. <CITATION> [] it was observed that equity is not a relevant factor for the purpose of interpretation.

14. It will be relevant to note that in <CITATION> [(2000)243 ITR 143 ( <CITATION> [(2001) 249 ITR 219] this Court observed that without a just cause the <ORG> cannot file the appeal in one case while deciding not to file an appeal in another case. This position was also noted in <CITATION> [(2004)9 SCC 420].

15. In <NAME> case (supra) this Court held that where different <ORG> have taken different views and some of the <ORG> have decided in favour of the revenue, same is a just cause for the revenue to prefer an appeal.

16. If the assessee takes the stand that the <ORG> acted mala fide in not preferring appeal in one case and filing the appeal in other case, it has to establish malafides. As a matter of fact, as rightly contended by the learned counsel for the revenue, there may be certain cases where because of the small amount of revenue involved, no appeal is filed. Policy decisions have been taken not to prefer appeal where the revenue involved is below a certain amount. Similarly, where the effect of the decision is revenue neutral there may not be any need for preferring the appeal. All these certainly provide the foundation for making a departure.

17. In <NAME> case (supra) it was held that merely because in some cases revenue has not preferred an appeal that does not operate as a bar for the revenue to prefer an appeal in another case where there is just cause for doing so or it is in public interest to do so or for a pronouncement by the higher court when divergent views are expressed by the different <ORG>. In this case, it is accepted by the learned counsel for the appellant-revenue that the fact situation in all the assessment years is same. According to him, if the fact situation changes then the revenue can certainly prefer an appeal notwithstanding the fact that for some years no appeal was preferred. This question is of academic interest in the present appeals as undisputedly the fact situation is the same.

18. The appeals are without merit and are accordingly dismissed. No costs.

........................................J. (Dr. ARIJIT PASAYAT) ........................................J. (C.K. THAKKER) ..........................................<NAME>) New Delhi;

November 7, 2008


JUDGMENT <NAME>, C.J.

1. This appeal arises out of a suit filed by the plaintiff for a declaration that an order passed by the state of Bombay, which was the defendant, on 24-6-1949, reducing the plaintiff from the rank of an Inspector in <ORG> to a clerk, was illegal and void, that he still continues to hold the office of an Inspector, and also for a decree for a certain amount for arrears of salary.

The suit was heard by Mr. <NAME>, the learned Judge, <ORG>, and he gave the declaration to the plaintiff which he sought and also passed a decree in his favour for arrears of salary. The State of Bombay has now come in appeal, and the first question that we have to consider is whether the order of 24-6-1949, which is challenged was a legal and valid order.

2. On 18-1-1949, the plaintiff, who was then an Inspector in <ORG>, was served with a notice by the Controller of <ORG>, Bombay, and in this notice it was stated that on 20-11-1948, the plaintiff called at the A Ward <ORG> Office and requested the <ORG> Inspector, one <NAME>, to effect suitable alterations in the statement of one <NAME> in connection with the absentee withdrawal of ration on the individual ration cards held by <NAME> with a view to weaken the whole case. A copy of <NAME>'s statement was attached & the plaintiff was given seven days' time to show cause why no action should be taken against him for exercising his official position to influence the case under reference, and also to state whether he desired to be heard in person.

It will be clear from this that the plaintiff was being charged with having seen <NAME> on, 20-11-1943, and to have asked him to make suitable alterations in some statement which <NAME> had made in respect of a case that was pending against him, and what the plaintiff wanted <NAME> to do was to try and weaken the case against <NAME> by making these suitable alterations.

In the statement of <NAME> which was annexed to this notice, <NAME> says that the plaintiff asked him about the case of <NAME>. The plaintiff asked <NAME> where the case stood, what statement was recorded, and if <NAME> could do something in that case. <NAME> says that he flatly refused to do so, but asked him to see some other officials. It is pertinent to note that in this statement <NAME> does not say that the plaintiff asked him to alter the statement of <NAME> with a view to weaken the whole case.

On 15-2-1949, the plaintiff sent a reply to this notice. He says that the allegations made by <NAME> were false, that he was introduced to <NAME> by another Inspector by the name of <NAME>, and that he wanted to know about the case against <NAME> out of curiosity, and he had made it clear to <NAME> that he did not wish to influence him to make any change in the statement made by <NAME>. He says that he was innocent and that he was prepared to appear in person if the foregoing lines failed to convince the Controller of Rationing about the honest intentions of the plaintiff.

On 17-2-1949, the plaintiff was informed that he should appear before the Assistant Controller of Rationing on March 10 when a departmental inquiry would be held.

A departmental inquiry was duly held and at that inquiry all that happened was that the officer who held the inquiry, one Mr. <NAME>, put certain questions to the plaintiff and the plaintiff was asked to cross-examine <NAME> who was present and the plaintiff asked certain questions to <NAME>.

On 30-3-1949, the plaintiff was served with another notice, which is the material notice in this case, and he was asked to show cause within seven days from the receipt thereof why he should not be reverted to his original post of a clerk. It was stated in this notice that the charge levelled against him as per the memorandum dated 18-1-1949, had been established. Therefore, it is clear that by this notice he was merely asked to show cause against the punishment which was proposed to be meted out against him.

With regard to the findings, the Controller informed the plaintiff that the findings had already been accepted and nothing more could be done with regard to that because the notice expressly stated that the charge had been established.

The plaintiff replied on the same day, asked for some time, and also asked the Controller of <ORG> to furnish him with the relevant documents.

On that the Controller on 1-4-1949, furnished to the plaintiff the findings of Mr. <NAME>. In these findings Mr. <NAME> has come to the conclusion that it was clear that the plaintiff had approached <NAME> in order to influence him. <NAME> also refers to the fact that in a particular case the accused was discharged because the plaintiff was absent and could not give evidence, and because of his conduct in remaining absent he had received a warning from the authorities; and Mr. <NAME> says that taking both these points into consideration, viz.., the attempt at influencing <NAME> and his previous conduct in respect of which he had been warned, he recommended that the plaintiff may be reverted to his original Post of clerk.

It may be pointed out that the plaintiff had joined the rationing department as a clerk on 1-1-1944, and was promoted as an Inspector on 22-1-1944.

On 10-4-1949, the plaintiff sent a reply to this notice and it is perfectly true, as contended by the Advocate General, that in this reply the plaintiff has dealt with not only the question of the sentence which the authorities proposed to mete out, but also with regard to the merits of the findings, a copy of which had now been furnished to him.

On 30-4-1949, the Controller of Rationing forwarded to the plaintiff a statement of Mr. <NAME> and a further statement of <NAME>. Mr. <NAME>'s statement was taken down on 20-11-1948, and is not material because all that that statement says is that Mr. <NAME> introduced <NAME> and request-ed <NAME> to see what the plaintiff wanted. But the statement of <NAME>, which bears the date 11-12-1948, is extremely material, and the statement is to the following effect;

"In continuation of my statement dated 20-11-1948, I beg to state that Mr. <NAME>, Inspector ("who is the plaintiff) from <NAME>, asked me whether I can change the statement, of the party or mild the case (which means, we take it, weaken the case). He did not tell me what way I should change. I refused to do either. When I reported this matter to my <ORG>. Chief Inspector Mr. <NAME> had left the office."

On 11-5-1949, the plaintiff replied to this letter of 30-4-1949, with its annextures and he makes a strong protest against the subsequent statement of <NAME> having been forwarded to him as late as 30-4-1949. He points out that it should have been either sent to him along with the letter of 18-1-1949, or it should have been made available to him during the actual conduct of the departmental inquiry held on 10-3-1949, or at least it should have been furnished to him along with the copy of the findings on 1-4-1949.

He therefore, says that he will be justified in surmising that the subsequent statement of <NAME> is definitely an after-thought and has been ingeniously made out with a view to substantiate the charge levelled against him. The Controller of <ORG> ultimately passed an order on 24-6-1949, which is the order challenged in the suit, ordering that the plaintiff should be reverted to his original post of a clerk with effect from 25-6-1949.

3. Rule 55 of the Bombay Civil Services Conduct, Discipline & Appeal Rules provides how an order of dismissal, removal or reduction should be passed, & the question was canvassed in the <ORG> below as to whether this rule had been complied with.

The learned Judge took the view that the rule was merely directory and not mandatory and that the State of Bombay was not bound to comply with this rule, and if the rule had not been complied with, the plaintiff could not make a grievance of that fact.

Mr <NAME> who appears for the plaintiff wanted to argue before us that the learned judge was not right when he took the view that Rule 55 had no binding effect. In our opinion, it is unnecessary to consider that question, and for the purpose of this appeal we will assume that Rule 55 is merely directory in its character and is not binding upon the state of Bombay.

4. But what is undoubtedly binding upon the! State of Bombay, and which position was never challenged by the State of Bombay in the <ORG>: below, is the statutory protection given to a Government servant by Section 240(3) of the Government of India Act, and that Sub-section provides: "No such person (i.e., a member of a civil service under crown or a person who holds any civil post under the Crown) as aforesaid shall be dismissed or reduced in rank until he has been given a reasonable opportunity of showing cause against the action proposed to be taken in regard to him."

Therefore, before the <ORG> can dismiss or even-reduce a civil servant in rank, it is incumbent upon it to give the servant a reasonable opportunity of showing cause against the action the <ORG> proposed to take against him. It is well settled law that it is not sufficient under this Subsection for the Government merely to inform the servant that it proposes to pass a particular punishment and to ask him to show cause against that I punishment.

The opportunity which the state has to furnish has to be a reasonable opportunity, and the Courts have held that a reasonable opportunity is only afforded to the servant when he can show cause not only against the punishment but also against the grounds on which the State proposes to punish him. Therefore, it is not sufficient that the State should call upon the servant to show cause against the quantum of punishment intended to be Inflicted upon him; the State must also call upon the servant to show cause against the decision arrived at by a departmental inquiry if that decision constitutes the ground on which the Government proposes to take action against the servant.

5. <ORG> in -- 'High Commr. for <CITATION> quote with approval a passage from the judgment of the learned Chief Justice to the following effect (p. 126):

"In our judgment each case will have to turn on its own facts, but the real point of the Subsection is in our judgment that the person who is to be dismissed or reduced must know that that punishment is proposed as the punishment for certain acts or omissions on his part and must be told the grounds on which it is proposed to take such action and must be given a reasonable opportunity of showing cause why such punishment should not be imposed."

It is perfectly true, as argued by the "Advocate General, that it would depend upon the facts of each case whether a reasonable opportunity as contemplated by <ORG> was or was not afforded to the dismissed servant. When an inquiry against a dismissed servant is, as it were, in two parts, where there is, first, a departmental inquiry and then a notice to show cause is served upon him by the authority which proposes to dismiss him, the <ORG> has got to look at both parts of the inquiry in order to come to the conclusion whether a reasonable opportunity was afforded to the servant to show cause against the action proposed to be taken against him.

It may not be necessary to duplicate what has already been done in the departmental inquiry. It may be said that if in fact the dismissed servant has been given a full and proper opportunity to show cause against the allegations made against him, then it may not be necessary again to require from him practically the same explanation. It may also be said that it may not be necessary in every case to issue a notice in terms calling upon the servant to show cause not only against the quantum of punishment but also against the grounds on which the proposed action is based. Even though, as in this case, the notice may be defective, if in fact the servant has been given the opportunity and has availed himself of the opportunity of showing cause against the grounds, then the mere fact that there is an irregularity about the notice may not lead to the <ORG> holding that the Government servant did not have the opportunity required under Section 240(3). But we think that there can be no doubt that the <ORG> must be satisfied on a review of all the facts of a particular case that the statutory obligation cast upon the <ORG> has been properly discharged by the <ORG> and the statutory obligation is to afford reasonable opportunity to the dismissed servant.

6. The Advocate General has attempted to argue that it is necessary for the servant to make a grievance that he has been deprived of a certain opportunity and it is only if he makes such a grievance and that grievance has not been removed that it would be open to the dismissed servant to complain in <ORG> that reasonable opportunity was not given to him. That seems to us not to be the true view of the law.

If a Government servant comes to <ORG> and complains that his dismissal was wrongful and that reasonable opportunity was not given to him as required by the statute, it is for the <ORG> then to satisfy the <ORG> that in fact reasonable opportunity was given to him. The requirement of the Government of India Act that reasonable opportunity should be given to the Government servant does not depend upon the Government servant asking for it. It is a statutory protection that is. afforded to the servant and a statutory obligation cast upon the <ORG> and the <ORG> has got to discharge that obligation irrespective of whether the protection is claimed or not claimed by the servant.

If the <ORG> holds that reasonable opportunity was not given, the order of dismissal must be set aside and the <ORG> cannot be influenced by the consideration that the dismissed servant did not ask for a reasonable opportunity, It is also important to bear in mind, as pointed, out by <ORG>, that the findings given by the officer holding the departmental inquiry are at that stage merely tentative. It is only when the authority who has a right to dismiss the servant comes to a definite condition on the charges which have been preferred against the servant and the actual punishment to follow is provisionally deter-mined that the stage arises when a reasonable opportunity should be given to the servant to show cause against the action proposed to be taken. It is only at that stage, as against <ORG> points out, that the action is proposed within the meaning of Section 240(3) of the Government of India Act.

7. Now, it is in the light of this legal position that we have to consider the facts of this case, and the first rather startling fact which confronts us at the very threshold is that in the depart-mental inquiry held by Mr. <NAME>, <NAME>, the only material witness in the case, was never examined. All that Mr. <NAME> did was that he asked the plaintiff to cross-examine him. It is difficult to understand the efficacy of a cross-examination without there being an examination-in-chief. It is difficult to understand how the plaintiff can cross-examine <NAME> if he did not know what his evidence was and what he was deposing to.

The Advocate General says that domestic tribunals are not governed by the rules of procedure and the rules of evidence which govern a Court of law. He may be right, but we sincerely hope that the State of Bombay which has always been very punctilious in these matters will not countenance a departmental inquiry in which action is proposed to be taken against a servant where only a witness is produced for being cross-examined by the servant without the servant being given 'an opportunity of hearing what evidence the witness is going to give.

Even assuming that a statement of such a witness is furnished to the Government servant, it is a sound rule that <ORG>s of law follow and which even domestic tribunals should follow that all evidence must be given in the presence of an accused person and in the presence of a person against whom action is proposed to be taken. It is one thing to make a statement behind the back of a person; it is entirely a different thing to make a statement in front of the <ORG> or a domestic tribunal and in the presence of a person against whom you are going to make serious charges.

But the matter in this case is much more serious than mere failure to ask <NAME> to give his oral evidence before the plaintiff. Even the so-called right to cross-examine that was conferred upon the plaintiff was a very illusory right, because on the day when the departmental inquiry was held he did not have before him the second statement which <NAME> had made. Therefore, he proceeded to cross-examine <NAME> on the basis of the first statement in complete ignorance that <NAME> had made a subsequent statement. That statement was before Mr. <NAME>, but Mr. <NAME> did not think fit to apprise the plaintiff of the existence of that statement.

Even a casual look at the two statements is sufficient to satisfy any Court that the charge against the plaintiff could only be substantiated on the basis of the second statement and not the first. All that the first statement says is that the plaintiff inquired from <NAME> where the case against <NAME> stood and. what statement was recorded and whether <NAME> could do something in the case. <NAME> was not asked according to this statement that he should do anything positive; that he should alter the statement or weaken the case against <NAME>. It is only when we come to the second statement which is made about 20 days after the first statement that <NAME> alleges that the plaintiff told him to change the statement and to weaken the case.

8. Now, it is important to note that the charge against the plaintiff in respect of which the departmental inquiry was hold and which was communicated to him on 18-1-1949, was on the basis of the second statement, because the plaintiff was charged with having requested <NAME> to effect suitable alterations in the statement of <NAME> with a view to weaken the case against him.

The Advocate General has contended that the substance of the second statement of <NAME> is embodied in the charge itself and therefore the plaintiff was not prejudiced by not having been furnished with the second statement. In our opinion that is not the correct or proper way of looking at the matter. In the charge it was not intimated to the plaintiff that <NAME> had made a second statement. As far as his knowledge went, <NAME> had made only one statement, and although the charge was much wider and more serious than the first statement made by <NAME>, he had a right to assume that he was being charged with a serious offence although <NAME> had not deposed to that particular offence.

It is admitted both by Mr. <NAME> and Mr. <NAME>, the Controller of <ORG>, at the material date, that they had the second statement of <NAME> before them, and Mr. <NAME>'s finding was based upon that statement, and the ultimate decision arrived at by Mr. <NAME> was also based upon that statement. The Advocate General says that the second statement was ultimately sent to the plaintiff and therefore the plaintiff could have shown cause against that statement. Now, it is one thing to point out to the investigating authorities that a statement made by a particular witness is false or incorrect or malicious; it is entirely a different thing to cross-examine that witness in the presence of the investigating officer and to establish by cross-examination that the witness is not a witness of truth.

It is clear on the record, therefore, that the plaintiff never had the opportunity of cross-examining <NAME> on the second statement to point out the discrepancies between the first statement and the second statement and to obtain from <NAME> an explanation as to why when he made the first statement he did not state what he ultimately stated when he made the second statement.

9. To put the matter briefly, the decision against the plaintiff was arrived at on the evidence of the most material witness without an opportunity being given to the plaintiff to cross-examine that witness; or, in other words, the investigating authorities based their conclusion and their finding upon an 'ex parte' statement of the most material kind without that statement having! been tested by cross-examination.

It has also been pointed out by the learned Judge, and rightly, that although the finding of Mr. <NAME> was based on two grounds, one being a statement made by the plaintiff to <NAME> and the other being the fact that he had been warned by the authorities in connection with the case in which he failed to appear as a witness, the second ground was not mentioned in the charge at all, and therefore when the plaintiff went to the departmental inquiry he was only prepared to meet the charge that he had made a particular statement to <NAME>. He was not prepared to meet the other charge that he had been warned by the authorities earlier in his service.

The Advocate General says that this second charge was mentioned in the finding and therefore the plaintiff had an opportunity of showing cause and in fact he has shown cause. That is perfectly correct, but even so there is an element of prejudice caused to the plaintiff, because if he had been told when the departmental inquiry was held that the authorities were going to consider against him the fact that he had been warned, he might have given evidence himself or he might have called some evidence to explain as to why he could not appear in Court and how the accused in that case came to be discharged which led to his being warned.

A rather curious fact was also pointed out by the learned Judge below that Mr. <NAME> when he made his report to Mr. <NAME> mentioned a third ground why the plaintiff should be reduced in rank, and the third ground was that the plaintiff was short in stature and that stature was not befitting the high position of an Inspector of <ORG>.

It is true that Mr. <NAME> in his evidence states that he did not think that particular observation of Mr. <NAME> constituted a part of the finding. He, therefore, deleted it and forwarded to the plaintiff the finding minus that particular re-mark. But as far as Mr. <NAME> was concerned, that fact undoubtedly weighed with him in the recommendation he made with regard to the punishment that should be meted out to the plaintiff.

10. Taking all these circumstances into consideration we have come to the conclusion that on the facts of this case the plaintiff was not afforded that reasonable opportunity which he is entitled to, to show cause against the action proposed to be taken by the State of Bombay. In view of that it is clear that the decision of the learned I Judge below was right that the order of dismissal was not valid and must be held to be bad.

11. The learned Judge has also awarded to the plaintiff arrears of pay, and the question that arises is whether the learned Judge was right in granting that relief. The Advocate General has relied on '<NAME>'s case, (A)', for the contention that the position under the Government of India Act was that a servant of the <ORG> had no right to sue the <ORG> in tort; unless there was an obligation undertaken by the <ORG> by statute or by contract, a servant of the <ORG> could not sue it for arrears of pay.

<ORG> took the view that payment of a salary was entirely a matter of the bounty of the <ORG> and there was no legal obligation upon the <ORG> to pay its servant, and in '<NAME>'s case, (A)', <ORG> expressly decided that the only right that a dismissed servant had was to a declaration that the order of dismissal was void and inoperative and that he continued to remain a servant of the <ORG>.

12. Mr. <NAME> who appears for the plaintiff argues that we should prefer an earlier decision of <ORG> which has taken a contrary view, and that earlier decision of <ORG> is in -- ' <CITATION> ', AIR 1947 FC 23 (B). it should be noted that the <ORG> decision in '<NAME>'s case, (A)', is subsequent to the decision of <ORG> in '<NAME> case (B)'. It is unfortunate that the attention of the <ORG> was not directed to '<NAME> case, (B)' and we do not find any discussion of '<NAME> case, (B)', in the judgment of the <ORG>. '<NAME> case, (B)', followed <ORG>'s decision in '<NAME>'s case, (A)', which was subsequently reversed by the <ORG> in -- 'AIR 1948 PC 121 (A)'.

What is urged by Mr. <NAME> is that it is open to us to prefer the judgment of <ORG> to that of <ORG> and he is prepared to satisfy us that on a review of the authorities and of the decisions in India <ORG> was right in the view it took and not <ORG>. The view of <ORG> was that a dismissed servant is entitled to arrears of pay. In our opinion it is not open to us to consider the relative merits of the judgment of <ORG> and of <ORG>. As we shall presently point out, we are bound by the decision of <ORG>, we must give effect to it, and whatever our view may be about the correctness of the decision arrived at by <ORG>, so long as that decision stands and so long as <ORG> has not laid down the law to the contrary, we cannot express any opinion contrary to that expressed by <ORG>.

13. Mr. <NAME> relies on Section 212 of the Government of India Act which provides: "The law declared by <ORG> and by any judgment of <ORG> shall, so far as applicable, be recognised as binding on, and shall be followed by, all courts in British India, and, so far as respects the application and interpretation of this Act or any Order in Council thereunder or any matter with respect to which <ORG> has power to make laws in. relation to the State, in any Federated State."

The submission of Mr. <NAME> on the interpretation of this section is that the Government of India Act gives the same efficacy to a decision of <ORG> as to a decision of <ORG>, and therefore it leaves it to the option of a Court in British India whether to accept the decision of <ORG> or of <ORG>. In our opinion that contention is entirely untenable. What Section 212 really means is that the law declared by the Federal court to the extent that <ORG> is the ultimate authority, and the law declared by <ORG> to the extent that <ORG> is the ultimate authority, shall prevail. But we have got to look to the other sections of the Government of India Act in order to decide which is the ultimate authority with regard to any particular case decided. For that purpose we must look at Section 205 and 208. Section 205 conferred appellate jurisdiction upon <ORG> in appeals from High Courts in matters which involved the interpretation of the Government of India Act or any Order in Council made thereunder, and Section 208 provided for an appeal from a decision of <ORG> under S, 205 to His Majesty in Council, and an appeal was provided by leave of <ORG>, Under clause (a), with which we are not concerned, an appeal was provided from a judgment of <ORG> given in its exercise of its original jurisdiction. In '<NAME>'s case, (A)', <ORG> did not give any leave, but the appeal was entertained by special leave granted by <ORG>.

Therefore, the final authority as far as the Government of India Act was concerned in constitutional matters was not <ORG>, but if an appeal was entertained by <ORG>, it was <ORG> that was the ultimate authority. It was only when no leave was granted by <ORG> & 110 special leave was granted by <ORG> that the decision of <ORG> became final and effect was given to it under Section 212.

In this case, inasmuch as <ORG> has laid down the law in '<NAME>'s case, (A)', that law must prevail over the law laid down by <ORG> in '<NAME> case, (B)', on an identical question. It is no use arguing that '<NAME> case (B)', was not appealed from and <ORG> has not reversed '<NAME> case, (B)'. <ORG> took a particular view in '<NAME> case, (B)', that very point came up before <ORG>, and <ORG> took a contrary view, and therefore it is that contrary view which must prevail under Section 212 and not the view of <ORG>.

14. Mr. <NAME> has relied on Article. 374(2) of the Constitution. The article deals, as the marginal note correctly indicates, with proceedings pending in <ORG>, and what it provides is: "All suits, appeals and proceedings, civil or criminal, pending in <ORG> at the commencement of this Constitution shall stand removed to <ORG>, & <ORG> shall have jurisdiction to hear and determine the same,....."

The reason for providing this was that on the Constitution coming into force <ORG> ceased to exist and the new <ORG>, the Supreme <ORG>, was set up, and some provisions had to be made with regard to matters pending before <ORG>. But what Mr. <NAME> relies on is the next provision in that article and that is: "....... .and the judgments and orders of <ORG> delivered or made before the commencement of this Constitution shall have the same force and effect as if they had been delivered or made by the Supreme <ORG>." Mr. <NAME> says that by this provision all Judgments of <ORG> delivered before the Constitution have been given the same efficacy and the same binding authority as the judgments of the Supreme <ORG> delivered after the Constitution came into force. In our opinion it is impossible to give that interpretation to this provision in Article 374(2). Obviously, the judgments and orders of <ORG> referred to in that part of the article are judgments and orders which were delivered by <ORG> in those suits, appeals and proceedings which were transferred to the Supreme <ORG>. The Federal <ORG> may have passed interlocutory orders, it may have delivered judgments, in those matters, and in order to obviate any argument that these orders or these judgments ceased to have any validity by reason of the fact that <ORG> ceased to exist and a new <ORG> came into existence, the Constitution has expressly provided that the judgments and orders already delivered by <ORG> in matters transferred to the Supreme <ORG> shall have the same binding force as if they had been delivered or passed by the Supreme <ORG> itself.

In this connection attention may be drawn to Article 141 of the Constitution. That article provides :

"The Law declared by <ORG> shall be binding on all courts within the territory of India."

After the Constitution has come into force, the only Court whose decisions are made binding on all Courts is <ORG>. But prior to the Constitution it would depend upon the Government of India Act as to the decisions of which Court shall have a binding effect upon the Courts, and there can be no doubt that before the Constitution was enacted <ORG> in India was the final judicial authority whose decisions were binding on all Courts. After the Constitution has been enacted, it is open to <ORG> to lay down the law contrary to the view expressed by <ORG> prior to the enactment of the Constitution. In this very case, with respect, it is open to <ORG> to say that it prefers the decision of <ORG> ha '<NAME> case, (B)', to the decision of <ORG> in '<NAME>'s case, (A)'. But till <ORG> has expressed that opinion, the decision of <ORG> must continue to have binding authority upon all the <ORG> in India. The same view of the law has been taken by <ORG> in -- ' <CITATION> ', .

15. Mr. <NAME> has relied on a decision of <ORG> in -- ' <CITATION> ', . In that case the learned Judges preferred to follow the decision in '<NAME> case, (B)', to that in '<NAME> case, (A)'. With respect to the learned Judges, they have not considered the provisions of the Government of India Act, nor have they expressed any opinion as to how it is open to <ORG> not to follow <ORG> in a matter which was decided before the Constitution came into force and in respect of which <ORG> has expressed no opinion after the Constitution was brought into operation. With respect, we do not think that <ORG> is right in the view that it has taken. We prefer the decision of <ORG>.

16. As far as our own <ORG> is concerned, in -- ' <CITATION> ', AIR 1932 Bom 37 (E), a division bench of this <ORG> consisting of Mr. Justice <NAME> and Mr. Justice <NAME> took the view that the only relief to which the plaintiff, who was a dismissed servant in that case, was entitled was a declaration as given by <ORG>. Mr. <NAME> who appeared in that case wanted to rely on the Judgment of <ORG> in '<NAME>'s case, (A)'. The learned Judges refused to accede to that argument holding that that Judgment had ceased to be operative by virtue of the superior <ORG>'s (<ORG>'s) appellate decision in the same case reported in '<NAME>'s case, (A)'.

17. The result, therefore, will be that the appeal will be allowed in part and the decree passed by the learned Judge will be modified by substituting the following decree: "There shall be a declaration that the order reducing the plaintiff from the rank of an Inspector to that of a clerk dated June 24, 1949, is illegal, void & of no legal effect. There will be a further declaration that the plaintiff continues to hold the office of Inspector from which he was reduced."

18. In view of our decision the cross-objections preferred by the appellant which were concerned with the salary due to him do not survive. Cross-objections dismissed with costs.

19. The plaintiff must get the costs both of the suit and of this appeal.

20. Appeal allowed in part.


<NAME>, <NAME>

1. This is an appeal by the department against the order of the Commissioner (Appeals) relating to assessment year 1998-99.

2. The department in this appeal objecting to deletion of addition of Rs. 37,49,715 being the fees receivable by the assessee under the GIC Big Value Scheme. During the assessment proceedings the assessing officer noticed that the assessee has waived fees receivable under GIC Big Value Scheme. The assessee was required to explain why the fees receivable should not be added to the income of the assessee. It was explained that only real income, i.e., income accrued and received can be brought to tax and notional income cannot be charged to tax. It was further stated that the assessee has taken conscious view that the management fee receivable by the assessee from the mutual fund will be a beneficiery as the overall result of fee charge and expenses to be borne by the assessee-company were almost equal. It was also explained that NAV (Net Asset Value) of the scheme had fallen below the assured repurchase price and also charging of fees would have resulted in correspondingly larger shortfall which eventually would have to be made good by <ORG>, i.e., the assessee. However, the assessing officer was not satisfied with the reply. As per the agreement fees was chargeable and the waiver of the fees was not benefited. Accordingly, be disallowed the claim of the assessee and added to the income of the assessee. The Commissioner (Appeals) deleted the addition by placing reliance on the jurisdictional <ORG> order in the case of <CITATION> (1960) 39 ITR 706 (Bom), wherein it was held that it is only real income of the assessee that is liable to tax and the real income cannot be arrived at without taking into account the amount foregone by the assessee. It was further held by <ORG> that in ascertaining the real income the fact that the assessee follows the mercantile system of accounting does not have any bearing. It cannot be said that by not charging the fees the appellant has connived with <ORG> or its sponsors to render undue benefit to them or to help them evade income-tax. In the circumstances the addition of Rs. 37,49,717 was deleted, Now the department is in appeal before the <ORG>.

3. The learned Departmental Representative firstly placed reliance on the order of the assessing officer. It was further submitted that similar disallowance was made for the assessment year 1997-98. The Commissioner (Appeals) has also deleted the same and the appeal of the department is pending before the <ORG>. However, it was submitted that the issue can be decided independently also. It was further submitted by the Departmental Representative that the Commissioner (Appeals) has not given a correct finding as, as per the agreement, the fee was payable by <ORG>. Therefore, the waiver of fees at the hands of the assessee should not be taken into consideration and the income should be assessed on the accrual basis and the same has been accrued during the year under consideration. Therefore, the order of the assessing officer should be restored on this issue. On the other hand, the learned Authorised Representative of the assessee placed reliance on the order of the Commissioner (Appeals). It was further submitted that the fee was chargeable under one of the schemes and the scheme was as per the objects of the assessee-company. It was further submitted that on similar issue the Commissioner (Appeals) has confirmed one addition. The appeal of the assessee has already been decided wherein the other scheme was held as under various objects of the assessee-company. Therefore, the scheme under which fee was chargeable from mutual fund is for the purpose of business only. Hence for the commercial expediency fee was waived by <ORG> in the month of January, 1997 which falls during the year under consideration. Attention of the Bench was drawn on the relevant papers placed in the Paper Book. It was further stated that as per the CBDTs Circular reported in 218 ITR 219, (sic) also the fees waived by the assessee-company cannot be assessed to the income of the assessee. It was further submitted that the decision of jurisdictional <ORG> relied on by the learned Commissioner (Appeals) is squarely applicable on the facts of the present case.

4. We have heard the rival submissions and considered them carefully. After considering and perusal of the material on record we find that the Commissioner (Appeals) was justified in deleting the notional income assessed by the assessing officer in the hands of the assessee-company. It was explained by the assessing officer that to make good the shortfall it was decided by <ORG> that no fees be charged to the scheme for the quarter ending 30-6-1997. The Boards Resolution was passed in the month of January, 1997. It was further explained that no fee was charged by <ORG> as during the period it was incharge of management scheme performance which lagged behind the promise. It was also explained that net asset value of scheme had fallen below the repurchase price. It was also submitted that charging any fees would have resulted in correspondingly larger shortfall which eventually would have been to be made good for <ORG> In the light of the above facts <ORG> thought it prudent not to charge fee. The resolution as discussed above was passed by <ORG> on 20-1-1997. A certificate was filed before the assessing officer. This is not a case that the assessee has waived fees after close of the year. This decision was on commercial expediency and was not an after thought to avoid any tax effect. There was no relationship with the Mutual Fund company, as the assessee-company is an independent entity. In case of <CITATION> (1960) 39 ITR 706, <ORG> has held that it was the real income of the assessee-company for the accounting year that was liable to tax and that the real income could not be arrived at without taking into account the amount foregone by the assessee. In ascertaining the real income the fact that the assessee was followed mercantile system of accounting did not have any bearing. The accrual of commission the making of the accounts, the legal obligation to give up part of the commission, and the foregoing of the commission at the time of making of the accounts were not disjointed facts; there was a dovetailing about them which cannot be ignored. Accordingly, the addition made by the assessing officer, which was confirmed by the <ORG> was deleted by <ORG>. The facts in the present case are similar to the above-mentioned case. <ORG> have taken a conscious decision that fee chargeable from the <ORG> should be waived. Otherwise the expenses could have been incurred more. Therefore, the fee which never charged by the assessee, cannot be held as income of the assessee for the year under consideration and the Commissioner (Appeals) was justified in deleting the same. We further note that similar addition has been deleted by the Commissioner (Appeals) for the assessment year 1997-98. <ORG> Commissioner (Appeals) also relied on the Boards Circular No. 26(XL-VII-5) dated 26-10-1953, which permits such surrender in specified circumstances and the facts were quite similar to the present case. Therefore, in view of the Circular considered by the Commissioner (Appeals) for the assessment year 1997-98 and in view of reasoning given by the Commissioner (Appeals) and above reasoning of ours, we confirm the order of the Commissioner (Appeals).

5. In the result, the appeal filed by the department is dismissed.


<NAME>, C.J.

1. This is a reference under Section 66(1) of the Indian <ORG> Act, 1922 (hereafter referred; to as," the Act"). The assessee is a company manufacturing and selling rosin and turpentine. For a long time the company was using electricity on D.C. system. In order to reduce electricity charges the company decided to change over from D.C. system to A.C. system. The change involved a total expenditure of .Rs. 1,11,407. The company claimed a deduction of Rs. 27,852 as development rebate. This claim was disallowed by the <ORG> Officer. The decision was upheld in appeal by the Appellate Assistant Commissioner. But the assessee succeeded before <ORG>, Allahabad. The <ORG> held that the assessee was entitled to development rebate under Section 10(2)(vib) of the Act, The <ORG> was not sure whether all the equipments used in the change over was new. The case was, therefore, remanded to the <ORG> Officer to dispose of the claim of the assessee for development rebate on that footing. The appeal was partly allowed. At the request of the Commissioner of <ORG>, U. P., the <ORG> has referred the following question of law to this court :

" Whether, on the facts and in the circumstances of the case, the electrical installations installed by the assessee-compony, as a result of a change over from D.C, to A.C. system, constitute plant and machinery and whether development rebate was admissible in respect of expenditure incurred in connection therewith? "

2. The assessee claimed development rebate under Clause (vib) of Sub-section (2) of Section 10 of the Act. Clause (vib) is ;

"In respect of machinery or plant being new, which has been installed after the 31st day of March, 1954, and which is wholly used for the purposes, of the business carried on by the assessee, a sum by way of development rebate in respect of the year of installation equivalent to 25 per cent. of the actual cost of such machinery or plant to the assessee..."

3. It was not disputed for the department that the expenditure in question was wholly used for purposes of the business of the assessee. But it was urged for the department that the expenditure was not in respect of any machinery or plant. So, the main question for consideration in this reference is whether the expenditure of Rs. 1,11,407 was in respect of any "machinery or plant" within the meaning of Clause (vib) of Section 10(2) of the Act.

4. In order to understand the meaning of the words "machinery" and 'plant', used in Clause (vib), it will be convenient to consider certain other clauses of Section 10(2) of the Act. Clause (vi) provides for depreciation of buildings, machinery and plant. Clause (via) deals with depreciation of buildings newly erected or of machinery or plant installed after March 31,. 1948. It will be noticed that all these Clauses (vi), (via), and (vib) use the-words "machinery" and "plant". The <ORG> rightly observed that. there is a presumption that the legislature must have used the words. "machinery" and "plant" in various clauses of Section 10(2) of the Act in the same sense.

5. <CITATION> ,  53 I.T.R. 165 (S.C.), the assessee was a transport operator. The assessee replaced petrol engines in two buses by diesel engines incurring an expenditure of Rs. 18,544. The question arose whether in addition to normal depreciation the assessee was entitled to extra depreciation allowances under the second paragraph of Clause (vi) and Clause* (via) of Section 10(2) of the Act. It was held that the assessee was pntitled to deduction of extra depreciation allowances under the second, paragraph of Clauses (vi) and (via) of Section 20(2) . It was further held that the same meaning ought to be given to the word "machinery" in the various Clauses (iv), (v), (vi)and (via) of Section 10(2) of the Act. On the same reasoning, the word "machinery" should have the same meaning in Clause (vib) of Section 10(2) of the Act.

6. <CITATION> ,  50 I.T.R. 202 it was held by <ORG> that a diesel engine is mahcinery and fitting the engine in a motor vehicle is installation within the meaning of Section 10(2)(vib) of the Act. So, a person who owns lorries is entitled to claim development rebate and extra depreciation in respect of diesel engines which he has fitted up in his lorries replacing old petrol engines. The decision of <ORG> was upheld by <ORG> in <CITATION> ,  60 I.T.R, 246 (S.C.).

7. The <ORG> described the change over from D.C. system to A.C. system thus : " This involved new installations of poles, cables, conductors, switchboards for distribution to various feeders."

8. <CITATION> , <ORG> explained that the expression "installed" in the second paragraph of Clause (vi) and Clause (via), did not necsssarily mean "fixed in position" but was also used in the sense of induct or introduce or placing an apparatus in position for service or use. Where an engine was fixed in a vehicle it was installed within the meaning of the expression in Clauses (vi) and (via) of Section 10(2) of the Act. The word "installed" must carry the same sense in Clause (vib) of Section 10(2) of the Act.

9. The word "plant" as used in Sub-section (2) of Section 10 of the Act has been defined in Sub-section (5) of Section 10 :

"Plant includes vehicles, books, scientific apparatus and surgical equipment purchased for the purposes of the business, profession or vocation."

10. The definition of plant contained in Sub-section (5) of Section 10 is very wide. The term "plant" includes such articles as books and scientific apparatus. There should, therefore, be no difficulty in treating poles, cables, conductors and switch-boards for distribution of electricity as plant within the meaning of Clause (vib) of Section 10(2) of the Act.

11. It is significant that the Income-tax Officer allowed normal depreciation on these very articles under Clause (vi) of Section 10(2) of the Act. He must have allowed depreciation on the footing that these articles constitute machinery or plant within the meaning of Clause (vi) of Section 10(2) of the Act. If the poles, cables, conductors and switch-boards coustituted "machivery or ptant" within the meaning of Clause (vi), there is no reason why they should not constitute "machinery or plant" within the meaning of Clause (vib) of Section 10(2) of the Act. Even if there is some difficulty in looking upon poles, cables, conductors and switch-boards as machinery, there is no difficulty in accepting the assessee's case that these articles constitute a plant within the meaning of Clause (vib) of Section 10(2) of the Act. The <ORG> was, therefore, right in holding that the assessee is entitled to development rebate under Clause (vib) of Section 10(2) of the Act. We answered the question referred to this court as follows :

" On the facts and in the circumstances of the case, the electrical instal-ations installed by the assessee-company as a result of a change over from D.C. to A.C. system constitute plant. Consequently, development rebate was admissible in respect of expenditure incurred in connection therewith."

12. The assessee shall receive from the Commissioner of Income-tax, U.P. Rs. 200 as costs of this reference.


ORDER <NAME>, <NAME> and <NAME>, JJ.

1. <ORG> answered the following three questions in the affirmative and in favour of the assessee. The <ORG> is in appeal there against by special leave.

2. The three questions read thus:

1. Whether on the facts and in the circumstances of the case, the <ORG> is right in law in upholding the order of the Commissioner (Appeals) who deleted the addition of Rs. 1,30,44,518/- being interest receipts and hire charges from contractors by holding that the same are in the nature of capital receipts which would go to reduce capital cost?

2. Whether on the facts and in the circumstances of the case, <ORG> is right in law in upholding the order of the Commissioner (Appeals) holding that the work-in-progress is to be treated as opening capital for the purposes of determining the relief admissible Under Section 80J and the assessee is entitled to relief admissible Under Section 80J in respect of the said work-in-progress?

3. Whether on the facts and in the circumstances of the case, <ORG> is right in upholding the order of the Commissioner (Appeals) holding that the assessee is entitled to investment allowance on the generating station building considering it as `plant'?

3. It is not in dispute that the first two questions must be answered in the affirmative and in favour of the assessee having regard to the judgments of this Court in <CITATION> , <CITATION> . 224 I.T.R. 353 respectively.

4. The issue to be decided relates to the third question.

5. It was the case of the assessee that it was entitled to investment allowance as applicable to a plant in respect of its power generating station building. In a note filed before the Commissioner (Appeals) it stated that it had included for the purpose the value of its <ORG>. Cable Duct System, Outdoor Yard Structures and Tail Race Channel. It explained that the process of generation started from letting in water from the reservoir into the penstocks and ducts which were the water conductor system into the turbines. Once electricity had been produced by generation, it had to be conducted, as it was not possible to store the same, and the process of generation continued untill the electricity was led to the transmission tower. The water that was used for rotation of the turbines had to be removed and this was done through the Tail Race Channel. For stepping up the electricity, transformers were used in the outdoor yard. The conduction of the electricity was through conductors held in ducts, called the Cable Duct System, which were specifically designed for the purpose. The case of the assessee, therefore, was that all these were part of the special engineering works that were an essential part of a generating plant and, therefore, it was entitled to have the same treated as a plant for the purposes of investment allowance. The Commissioner accepted the correctness of the assessee's case. He held that it was clear that the generating station buildings had to be treated as a plant for the purposes of investment allowance. These buildings could not be separated from the machinery and the machinery could not be worked without such special construction. He, therefore, allowed investment, allowance on the generating station, building, as claimed. The <ORG> affirmed this finding, as, indeed did <ORG>.

6. We, therefore, have before us a finding of fact recorded by the fact finding authority that the generating station building is an integral part of the assessee's generating system.

7. Our attention has been drawn by learned Counsel for the <ORG> to the judgment of this <ORG> in <CITATION> 224 I.T.R. 192. He submits that, in that judgment, this <ORG> has held that, except in exceptional cases, the building in which the plant is situated must be distinguished from the plant and that, therefore, the assessee's generating station building was not to be treated as a plant for the purposes of investment allowance.

8. It is difficult to read the judgment in the case of <ORG> so broadly. The question before the court was whether a building that was used as a hotel or a cinema theatre could be given depreciation on the basis that it was a "plant" and it was in relation to that question that the court considered a host of authorities of this country and England and came to the conclusion that a building which was used as a hotel or cinema theatre could not be given depreciation on the basis that it was a plant. We must add that the <ORG> said, "To differentiate a building for grant of additional depreciation by holding it to be a plant in one case where a building is specially designed and constructed with some special features to attract the customers and the building not so constructed but used for the same purpose, namely, as a hotel or theatre would be unreasonable." This observation is, in our view, limited to buildings that are used for the purposes of hotels or cinema theatres and will not always apply otherwise. The question, basically, is a question of fact, and where it is found as a fact that a building has been so planned and constructed as to serve an assessee's special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance.

9. In the instant case, there is a finding by the fact finding authority that the assessee's generating station building is so constructed as to be an integral part of its generating system. It must, therefore, be held that it is a "plant" and entitled to investment allowance accordingly. The third question is answered in the affirmative and in favour of the assessee.

10. The civil appeal is dismissed.

11. No order as to costs.


JUDGMENT <NAME>, J.

1. The appellants carry on business of buying paddy and after getting it husked either in their own mills or in other mills sell the rice to the <ORG> and other registered dealers. On the purchase of paddy they paid purchase tax as provided in the Punjab General Sales Tax Act, 1948. The question for decision is whether when they sold the rice produced out of the paddy purchased, they were entitled to exclude the turnover relating to the paddy purchased. When the Sales Tax Officer sought to levy sales tax without excluding the turnover in question from the total turnover of the appellants, the appellants moved <ORG> and Haryana under Article 226 of the Constitution challenging the validity of the levy. The petitions filed by the appellants first went up before a learned single Judge, who rejected the same. He came to the conclusion that rice and paddy are not identical goods and consequently the turnover relating to paddy over which purchase tax had been paid could not be excluded in computing the assessable turnover of the appellants. Aggrieved by that order the appellants went up in appeal to the Appellate Bench of that <ORG>. The Appellate Bench confirmed the decision of the learned single Judge. Thereafter, after getting certificates from the <ORG>, these appeals have been brought.

2. The only question that arises for decision in these appeals is whether paddy and rice can be considered as identical goods for the purpose of imposition of sales tax. Under the concerned Sales Tax Act exemption from payment of sales tax is provided if the very paddy in respect of which purchase tax was levied was sold and not if that paddy is converted into rice and sold. It is contended on behalf of the appellants that paddy and rice are identical goods and, therefore, when the law grants an exemption in respect of paddy, that exemption is also available to transactions relating to rice. The argument proceeded on the basis that rice was nothing but dehusked paddy. Both rice and paddy are identical goods. When paddy was dehusked, there is no change in the identity of the goods.

3. In support of their contention, the appellants cited to us certain dictionary meanings of the word "paddy" to show that rice is nothing but dehusked paddy. This Court has firmly ruled that in finding out the true meaning of the entries mentioned in a Sales Tax Act , what is relevant is not the dictionary meaning, but how those entries are under stood in common parlance, specially in commercial circles. Sales tax primarily deals with dealers who are engaged in commercial activity. Therefore, what is of the essence is to find out whether in commercial circles, paddy is considered as identical with rice. In this connection reference may be usefully made to the decision of this Court in <CITATION> ., wherein this Court was called upon to consider whether betel leaves could be considered as vegetables. Dictionary meaning showed that betel leaves are a class of vegetables, but yet this Court ruled that the word "vegetable" should be construed in its popular sense, meaning that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it. On that basis this Court came to the conclusion that betel leaves could not be considered as vegetables. <CITATION> ., this Court held that the word "coal" included "charcoal" on the ground that in ordinary parlance "coal" includes "charcoal". <CITATION>  25 S.T.C. 52 (S.C.); ., the question was whether "cotton" included "cotton seeds". This Court held that they were two distinct commercial goods though before the seeds were separated both the cotton and the seeds were part of one commodity.

4. In support of their contention that the meaning given in the commercial circles is not of the essence and what is of essence is the identity of the goods, the learned Counsel for the appellants relied on the decision of this Court in <NAME> of Madhya Bharat (now <CITATION>  17 S.T.C. 313 (S.C.). There the relevant entry read "iron and steel". The question was whether when a dealer purchased scrap iron locally and imported iron plates from outside and after converting them into bars, flats and plates in his mills, sold them in the market, they continued to be "iron and steel". This Court ruled that in spite of the change effected because of the process the goods had undergone, the goods sold in the market did not cease to be "iron and steel". We do not think that this decision is of any assistance to the appellants because both the goods purchased as well as sold were "iron and steel".

5. It was contended on behalf of the appellants that the essential question that we have to decide is whether the goods sold differed in identity from the goods purchased. It was urged that merely because paddy was dehusked and rice produced, there was no change in the identity of the goods. Identity of goods is one of the essential elements to be borne in mind in deciding the nature of the transaction. It was so decided in <CITATION>  11 S.T.C. 827 (S.C.) : . In that case the question arising for decision was whether hydrogenated oil continued to be groundnut oil. This Court held that the hydrogenated groundnut oil continued to be groundnut oil. In arriving at that conclusion this Court took into consideration that the essential nature of the goods had not changed after the groundnut oil had been subjected to chemical process. Similar view was taken by this Court in <CITATION>  19 S.T.C. 24 (S.C). Therein the question whether patasa, harda and alchidana could be considered as "sugar". This Court held that when sugar was processed into patasa, harda and alchidana, it did not change its essential characteristic. Its identity continued to be the same. Now, the question for our decision is whether it could be said that when paddy was dehusked and rice produced, its identity remained. It was true that rice was produced out of paddy but it is not true to say that paddy continued to be paddy even after dehusking. It had changed its identity. Rice is not known as paddy. It is a misnomer to call rice as paddy. They are two different things in ordinary parlance. Hence quite clearly when paddy is dehusked and rice produced, there has been a change in the identity of the goods. In this view it is not necessary for us to refer to the decisions of some of <ORG> read to us at the time of hearing.

6. There is yet another difficulty in the way of the appellants. Both the Punjab Sales Tax Act as well as that Act as amended by Haryana make a distinction between rice and paddy in their respective Sales Tax Act s. Rice and paddy are treated differently. It is true that the entries in question were brought on the statutes by notifications issued by the respective Governments, as authorised under the respective Acts. But the Act s authorised the Governments in question to either include or delete items in Schedules C and D of those Acts and it further provided that once an inclusion or deletion was made, it became a part of the law. The fact that these Acts make distinction between rice and paddy is a circumstance of great significance. Those Act s proceed on the basis that paddy is something different from rice for the purpose of sales tax.

7. For the reasons mentioned above, we see no merit in these appeals. They are dismissed with costs, one hearing fee.