JUDGMENT <NAME>, C.J.

1. The judgment of the <ORG> will be delivered by my learned brother. I only desire to make a few general observations on the point of law involved in the appeal and two of the cases.

2. The actual question to be decided in the case is whether, in the liquidation of <ORG>, the respondents can claim to be paid a sum of Rs. 3,01,397-4-3 in priority over all creditors of the company. Of that amount, a sum of Rs. 3,00,000/- is claimed by way of refund of a security deposit made for the due performance of an agreement and the balance is claimed as interest on that sum, both under the terms of the agreement itself.

3. The insolvent in the present case is a company. Upon an order for the winding up of a company being made, the liquidator is to collect and distribute its assets among the creditors and thereafter if there be a surplus, among the contribute ries, subject to the rights of the secured creditors and the claim, if any, of some of the creditors to be paid in priority.

What the general body of creditors can claim to be distributed among them are the assets of the company. The answer to the question in the present case, therefore, depends on whether the amount claimed by the respondents came to belong to the company and is held by it as a part of its assets.

4. What then are the assets of a company? It does not require a statutory provision to establish that no property in which the company has not a beneficial interest can be one of its assets, even though it be a property held in its hands.

Unlike the Insolvency Acts, the Companies Act has not undertaken to say what properties shall not be regarded as the properties of a company in liquidation and seems to have left the matter to principle. Section 62(1)(a) , Presidency Towns Insolvency Act says specifically that the property of the insolvent divisible among his creditors shall not comprise "property held by the insolvent on trust for any other person."

Similarly, Section 28(5) , Provincial Insolvency Act provides that the property of the insolvent, vesting in the Official Receiver and "divisible among his creditors, shall not include "any property .... which is exempted by the Civil Procedure Code or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree"; and Order 21, Rule 61, Civil P. C, provides that the <ORG> shall disallow a claim to property under attachment if it is satisfied that the property was "in the possession of the judgments debtor as his own property and not on account of any other person", implying thereby that where the judgment-debtor is in possession on account of another person, the <ORG> shall allow the claim. Property held by a judgment-debtor in trust for another person is held on account of that person.

The Companies Act does not contain any provisions like Sections 52(1)(a) and 28(5) of the Insolvency Acts, nor does Section 229 which provides that in respect of certain matters, the same rules shall be observed in the winding up of an insolvent company as are in force under the law of insolvency with respect to the estates of persons adjudged insolvents, attract those provisions. But no specific provision was necessary.

The Act has said that it is the assets of the <ORG> company that shall be distributed among the creditors. In a property held by an <ORG>, wholly in trust for another person, he has no beneficial interest and therefore such property cannot be one of his assets liable to distribution upon his own insolvency. It is thus implied in the Companies Act that the assets of a company in liquidation which are liable to be distributed among its creditors cannot include properties held by it wholly in trust for a third party.

5. On the other hand, there can be no doubt that conformably to ordinary notions and the general law, the Companies Act does not regard monies lent to a company as monies paid to it on trust. It does not enable the creditors of a company to say, any more than the creditor of any other debtor, that the monies lent by them remained then property and were only let out for a stipulated period on hire and that, therefore, upon the insolvency of the company, they are entitled to recover their monies from among the assets of the company in the manner of following their property there.

Under the general law, monies borrowed by a person become the property of the borrower, in spite of the stipulation for repayment. Repayment is not refund. In the case of the Companies Act , it is not even necessary to invoke that principle, because the Act deals directly and specifically with debts and lays down what the rights of the creditors shall be in a liquidation of the company.

Leaving aside the secured creditors who may look to their securities wholly or so far as they may be sufficient to satisfy their debts, the ordinary creditors have no absolute right to get back the whole of what they lent on the footing that the money remained their property.

Monies obtained by a company as loans are treated by the Act as having become its own property and as still such property so far as they may be available; and the ordinary creditors can only share in the existing assets of their debtor in proportion to their debts, subject to the rights of the secured, creditors and those of themselves who may be entitled to priority.

The principle applies also to creditors who do not claim on the basis of a loan, but the liability owned to whom is nevertheless a debt. As has been seen, in respect of monies held in trust, the position as between the company and the truster is very different.

6. It is for the foregoing reasons that whenever a claim has been made in a liquidation for the payment of a certain sum in preference to all creditors, the <ORG> have striven to see whether the relation between the company and the claimant is that of debtor and creditor or it is that of trustee and truster. The" propositions I have referred to are elementary, but it is necessary to recapitulate them in order to understand clearly why the enquiry takes that particular form and what the underlying concepts are.

7. A truster of monies can claim a refund from an insolvent company in priority over all creditors, not on the ground that an obligation to return trust property must be discharged before an obligation to repay debts, but on the ground that the monies never became the property of the company and are not therefore divisible among its creditors.

If the monies have been kept separate, they must be handed back. Even if they have been mixed up with other funds of the company, an equal amount, if available, must first be extracted and paid over to the truster, subject to such deductions, if any, as may be provided for by the trust itself. In order, however, that a property may be excluded from the assets of a company, divisible among its creditors, it is not necessary that it should be held formally in trust for a third party.

Where there is such a trust, the company has obviously no beneficial interest in it of the nature divisible among creditors upon insolvency. But there may also be a trust in effect. Property held by an insolvent in a fiduciary capacity is treated as property held in trust for the purposes of the insolvency laws and property held for a specific purpose is treated as clothed with a species of trust, subject to the same principles as trust property.

In all these cases, the property concerned is outside "the divisible assets of the company. The party who put the property in the hands of the company can claim it back in a winding up as his property, while the creditors cannot claim that it should be brought into the distribution.

8. The present case was argued before us as if the decision turned on there being or not being a full and complete trust. It was also argued on the footing that unless an agency could be made out from the agreement, no trust could be established and, conversely, if there was an agency, a trust would necessarily follow. None of those assumptions was correct.

As I have already pointed out, in order that a sum of money can be claimed from an insolvent company without diminution and in priority over all creditors, it is not necessary that there should be, with respect to it, a full and complete trust. All that is required is that it should be impressed with a character which prevents it from becoming the property of the company and keeps it outside the flux of the company's fortune as respects its own funds by virtue of the special purpose for which it is placed in the hands of the company.

Secondly, in order that a deposit made with a company may be said to be held in trust or on terms in the nature of a trust, it is by no means essential that the depositor should be an agent. Nor can, it be said that a deposit made by an agent must always be a deposit made on trust. A deposit made by a customer may well partake of the nature of a trust and a deposit made by a trade agent may well be an advance or advance payment made in the ordinary course of business.

9. A great deal of argument took place before us as to whether there could at all be a trust in respect of a deposit when there was a provision for payment of interest on the sum. Speaking for myself, I do not think that either the decision of <ORG> in -- ' <CITATION> ' or the decision of <ORG> in -- '<NAME> v. <NAME> (No. 1)' (1866) 35 Beav 621 (B) on which reliance is always placed, answers the question.

In the <ORG> case, a nephew had a certain sum of money lying with his uncle's firm and he, by a letter, instructed the uncle to invest the amount in his firm in the name of his (the nephew's) son, who was then a minor, and to hand over the money to him on his attaining the age of 21, paying the interest in the meantime to the father.

In the course of a suit by the minor for the appointment of a new trustee and a direction on the members of the firm to hand over the money to him, the firm went insolvent and a question arose between the minor and the Official Assignee as to whether the former was entitled to preferential payment out of a sum which had been realised by the sale of a portion of the stock-in-trade.

The Courts in India decided in favour of the minor. In <ORG>, their Lordships declined to allow the Official Assignee to raise any question as to whether the transaction constituted a trust, because throughout the course o£ the litigation a trust had been admitted.

Proceeding on the basis that there was admittedly a trust, the only question which their Lordships decided was whether the beneficiary was entitled to follow the trust fund Into the mixed funds of the firm, in view of the fact that the money had been employed in the business of the trustees, not improperly but in pursuance of the terms of the trust itself. The question whether the provision for the payment of interest prevented the transaction from constituting a trust was not allowed to be raised, far less decided. In the other case, '<NAME> v. <NAME> (No. 1) (B)', a" testator appointed his son the executor of his will and bequeathed a sum of £20007- in the form that he directed the executor-to stand possessed of the amount upon trust to pay the interest earned by it to a daughter and upon her death to her children, adding that if, instead of investing, the executor retained the money in his own hands which he would have liberty to do, he would have to pay interest at the rate of £4/- per cent. The executor did not invest the amount.

After the death of the testator, he stated both verbally and in writing that his father had really intended, as he himself had told him, to make a bequest of not £2000/-, but £3000/- and that he would make it that sum in accordance with his father's real wishes.

A question having arisen as to whether the only son of the daughter, who had died in the meantime, was entitled to be paid the additional £1000/- out of the estate of the executor, who was the residuary legatee and who also had died all that the <ORG> really decided was that the executor's liability with regard to the £10007- was exactly the same as that with regard to the £20007-and that with regard to the former sum as well there was a complete voluntary trust.

It is true that in the course of his Judgment, Lord <NAME>, M. R. also held that there was a trust in respect of the £20007- as well, but he did so not by way of holding that the provision for payment of interest did not negative a trust, but by way of holding that although the money had not been separated from the estate, there was nevertheless a completed trust, because the testator had allowed the executor to retain the money in his hands at interest.

That finding was necessary, because there is a distinction between an incomplete trust and a completed trust of which the beneficiary can enforce execution through court and a completed trust was required in the case, because there was a claim for money under the terms of the trust.

But the <ORG> was not asked to decide and did not purport to decide whether a trust in respect of a sum of money could be accompanied by a provision for payment of interest thereon by the trustee. Indeed, there was no argument at the <ORG> at all with respect to the £2000/-. Neither <ORG>, nor any of the text-book writers cites the case as authority for the proposition that a provision for payment of interest by the trustee is not inconsistent with a trust.

10. In some of the more recent Indian decisions to which my learned brother will refer, it has been held that a provision for payment of interest does not necessarily negative a trust, but no reason has been given except that it was so held in the above two cases. I have not been able to trace any decision, English or Indian, where the matter has been Discussed.

11. The position, however, appears to me to plain. Where A pays a sum of money to B merely on the condition that B will repay it after a stipulated period or on demand and will pay interest in the meantime, there is only a loan.

No question of a trust arises in such a case. But A may also pay money to B on trust to hold it for the benefit of C, to be paid to him in a certain contingency, and not only to hold the corpus of the fund for such purpose but also to Increase the fund by investing it and pay the in-

crease, as it accrues, either to C or the truster himself.

In other words, the trust may include a condition that the trustee shall invest the trust fund and pay the interest earned to the same beneficiary as that of the corpus or to the creator of the trust or any other person, In such case, a trust clearly attaches also to the provision for investment and payment of interest. Going one step further, the trust may provide that the trustee may or shall invest the fund with himself and-pay the increase to the beneficiaries named.

Where a rate of interest is mentioned, it only means that what the increase shall be in the case of an investment with the trustee himself is quantified and laid down in the trust and the obligation of the trustee is limited to that amount, as distinguished from the actual profits and irrespective of any loss.

The transactions in the <ORG> case and the case decided by' <ORG> were transactions of this character and constituted trusts. They covered not merely the holding of the trust fund but also the application of the fund with a view to bringing about an increase and payment of the increase to the beneficiaries named. The beneficiary need not be a third party; he may be the truster himself or the truster and, the trustee.

So where A pays money to B to be held for a specific purpose for the benefit of himself or of himself and B and also makes it a condition that during the time the money lies in the hands of B, awaiting application to the specific purpose, it shall not remain idle, but shall be invested with B himself who shall pay interest to A at a certain rate, the transaction is not essentially different and the provision for payment of interest does not take away from its nature of a trust.

It does not take away from the nature of a trust, because it is included among the terms of the trust itself, the obligation' under it being a further obligation of the trustee qua trustee in addition to his obligation with regard to the corpus of the sum.

Where the term is that the trustee shall invest the trust fund with third parties and pay the profits of the investment to the truster or, some other named beneficiary, it can by no means be said that a trust is negatived by such a term. It. does not make any difference if the term be that the trustee may or shall invest the fund with himself and pay the proms, fixed at a certain rate provided there is a clear trust with respect to the corpus.

The test as to whether there is a loan or a trust in such a case appears to be this: where money is paid merely on condition of repayment and payment of interest till then, there is only a loan; but where the main condition on which money is paid shows that the corpus of the fund is being handed over in confidence to be held for the benefit of some person or object, the provision for payment of interest is only a provision for an increase or improvement of the fund and there is no loan but a trust, despite such provision which does not in any way negative a trust.

12. Coming to the facts of the present case, I agree entirely with my learned brother, for the reasons presently to be given by him, that the agreement did not make the respondents agents of the company. They were simply buyers. Nor could there be a question of a trust property so-called, because there was a bilateral agreement between the parties and their rights and obligations lay clearly in contract and not in confidence.

But the money was paid by the respondents to be held by a company for a specific purpose and it was therefore clothed with, what has been called "a species of trust". The specification of a particular purpose for which the money was to be held and kept available, prevented it from becoming the property of the company and invested it with the character of a trust fund, standing outside the vicissitudes of the funds belonging to the company itself.

To what extent allocation for a particular purpose prevents a sum of money from becoming the property of a bankrupt and thus available "to the trustee in bankruptcy is illustrated by cases like In re, Rogers Ex parte Holland and Hannen (1891) 8 Morr 243 (C) 'in re, <NAME> (No. 1)', Ex parte Basden (1902) 2 KB 237 (D) and Rs Watson Ex parte Schipper (1913) 107 LT 783 (E), where it was held that money paid by a third party for the specific purpose of paying a particular creditor of the bankrupt, even if paid with knowledge of the bankruptcy, was impressed with a trust and could not form part of the general assets of the bankrupt, divisible among his creditors.

13. For the foregoing reasons it must be held that the deposit in the present case was impressed with a species of trust, but a further question arises which was not argued at the <ORG>. It was perhapes not argued because of a consent order recorded by <ORG> on 31-3-1954 and appearing at page 23 of the Paper-book.

But I am unable to see how, if the question was to be left to further proceedings as stated then, there could be an unqualified declaration that the entire sum of Rs. 3,01,397-4-3- was held in trust for the respondents alone and an unqualified order for the payment of the whole sum out of the entire assets of the company, as made by <ORG>.

It is true that the deposit was made for a specific purpose, but the specific purpose was not simply return of the deposit upon the termination of agreement but included application of such part of the deposit as might be required for the payment of outstanding dues of the company, arising out of transactions under the agreement. That purpose is implied in the term that the money is to be kept "as security for the due performance of the agreement"'.

It is true that Clause 4 of the agreement says that the return of the security deposit and the interest thereon shall be secured by an unconditional guarantee to be executed by the Directors and Clause 15 says that before the termination of the relationship between the parties, the company must refund "the said deposit of Rupees Three Lacs with interest thereon", but if those provisions are relied on for a contention that the entire amount of the deposit, together with interest, was to be refunded in any event, there would be nothing like a security at all and the transaction would be simply a loan of money at interest.

In that event, the respondents would have no preferential claim. The true construction of the agreement, however, appears to me to be that the money was to be applied, if and when necessary, to the satisfaction of outstanding dues thereunder, which appears not only from the description of the deposit as a security but also from the provision contained in Clause 11 that the prices of the goods purchased by the respondents or ordered to be supplied on their account should be "adjusted" within a certain time.

The 'specific purpose' for which the deposit was made was therefore the dual or rather combined purpose that the money should be held as security for the dues of the company, accruing from time to time and so much Of it should be refunded upon the termination of the agreement as might not have been required and spent for the first purpose.

If that was mixed purpose for which the money was held, the respondents cannot have a declaration that it was held in trust for them alone, nor can they be entitled to a refund of the whole amount, unless it is established that no part of it is required to pay any dues of the company, secured by it. Expressed in terms of a trust, the position here is that the money was held by the company in trust for the respondents and itself, that is to say, held in the language of the Indian definition of a trust, for the benefit of "another and the owner".

The law is well-settled that if in such a case the trustee becomes insolvent, the beneficial interest which he himself has in the trust property passes to the trustee in his bankruptcy and becomes divisible among his creditors: see Halsbury's Laws of England, Vol. 2, p. 226.

It follows that the proper declaration will be that the amount was held by the company in trust for the respondents as well as itself and that the respondents are entitled to a refund of the amount, less such sum, if any, as may be found due to the company on account of transactions had under the agreement. Any amount deducted as due to the company will be divisible among its creditors.

14. There is one other small point which also was not argued at the <ORG>, but to which I may refer for the sake of completeness. It might be argued that so far as the interest on the deposit amount was concerned, it was payable under a collateral or ancillary agreement and was not car-marked as security and therefore it constituted only a debt for "which the respondents would have to take their chance along with the general body of creditors.

Where the terms of a trust include the raising of profits on the trust fund and application of the profits for a particular purpose such as payment to a particular beneficiary, no difficulty arises. A trust clearly attaches to the payment of the profits or the interest as well.

A case of the present type where the interest on a security deposit is payable to the depositor himself is different, but I have come to the conclusion that where the corpus of the amount is impressed with a trust, the interest also is so impressed, although it may not be applicable to the same purpose, because it represents an increase of the trust fund and is paid by the trustee, not because he borrowed the money as a loan but because he is charged by the truster to exploit the fund for his benefit while the corpus lies as security and pay over the benefit of the exploitation to him.

15. I agree with my learned brother in the order proposed by him.

Lahiri, J.

16. This appeal raises the question whether a sum of Rs. 3,01,397/4/3 held by <ORG> (in Liquidation), which will herein after be referred to as the Company, is available for rateable distribution amongst its unsecured creditors or whether it is held by the company in trust or in a fiduciary capacity for the respondent <NAME>. The facts which are relevant for the purposes of the present appeal are as follows :

On 4-6-1951, the respondent entered into an agreement, purporting to be an agreement for sole agency, with the company for a period of two years on a commission of 2 per cent on the value of goods sold with a guarantee of Rs. 24,000/-as minimum commission per annum.

In this agreement, the company is described as the Principal and the respondent as the Agent. As the principal points raised in this appeal depend upon a true construction of the terms and conditions of this agreement it is desirable to set out the different clauses in some detail. The agreement runs as follows:--

1. The Principal hereby appoints the Agent as its Sole Agent in the Union of India and abroad for the sale of the entire product of the Principal.

2. The Agent will sell the goods of the Principal in its own name as products of the Principal. The Agent will be treated as purchaser of the goods ordered by it.

3. The Agent shall keep with the Principal the sum of Rupees Three lacs ear-marked as security for the due performance of the agreement and carrying interest at the rate of five per centum per annum.

4. The return of the said security deposit and interest thereon shall be secured by an unconditional guarantee to be executed by all the Directors of the Principal jointly and severally in favour of the' Agent. The interest on the deposit shall be payable by the Principal to the Agency every month until refunded.

5. The Agent shall procure orders for the products of the Principal and shall forward the same to the Principal for execution on behalf of the Agent.

6. The Principal shall promptly execute the said orders of the Agent and send the goods and the invoices direct to the buyers on account of the agent and will forward copies of the invoices to the Agent.

7. The Principal shall not be responsible for the realisation of the sale proceeds from the buyers introduced by the Agent.

8. The Principal shall however be responsible for the quality of the goods so consigned by the Principal to the buyers introduced by the Agent.

9. The Agent shall sell the products of the Principal at the controlled rates or such other rates as may be prevailing in the market.

10. The Agent shall use its best endeavours to promote the sale of the products of the Principal and propagate the sale of its products.

11. The prices of the goods purchased by the Agent on its account or ordered to be supplied on its own account shall be adjusted within fifteen days from the delivery or despatch of the goods by the Principal or immediately on realisation of the proceeds of sale of the goods from the actual buyers.

12. Besides the interest aforesaid, the Principal shall pay the Agent a commission at two per centum upon the invoiced value of all goods sold by the Principal either directly or through the Agent or any other Agents or sub-agents less only rebate allowed, that is to say, after allowing rebate et cetera on amounts actually realized in respect thereof. The commission shall be paid every month. If during any year the commission paid or payable by the Principal to the Agent falls short of the sum of Rs. Twenty-four thousand for any reason whatsoever the Principal shall forthwith make good the deficit to the agent at the end of such year.

13. The principal shall be entitled to execute any order or orders received direct from any person and to appoint any agent or sub-agent. But in such cases also the Agent shall be entitled to the commission as aforesaid. The Agent shall not be responsible for the sale proceeds of goods sold direct by the Principal.

14. This Agreement shall remain in force for two years unless determined as hereinafter provided.

15. Either party may by a notice in writing to the other terminate this agency and one month after the receipt of such notice the Agency hereby created shall cease except so far as concerns the rights of either party in connection with acts matters or things done committed or suffered by either party before such determination: Provided always that immediately on such determination the Principal must refund to the Agent the said deposit of Rupees Three lacs with interest thereon and shall continue to pay the Agent the commission aforesaid upto the date of such refund and when the Principal terminates the Agency, by a notice it shall not be deemed terminated unless and until the said deposit with interest is so refunded and, the said commission, so paid to the Agent.

17. It appears that the respondent made a deposit of Rs. 3,00,000/- in pursuance of Clause 3 of the agreement and on the same day viz., 4-6-1951, the directors of the company Jointly and severally guaranteed to the respondent due payment of the sum of Rs. 3,00,000/- and the interest thereon. On 7-1-1952 the company went into liquidation and on 15-3-1952 the respondent applied for leave to sue the company in liquidation.

On 2-6-1952, the respondent instituted Suit No. 2164 of 1952 on the Original Side of this Court for the recovery of a total sum of Rs. 3,47,875/147-which was made up as follows: Rs. 3,01,397/4/3 was claimed for the deposit under the agreement dated 4-6-1951, together with interest and the balance was claimed for a loan of Rs. 25,000/-' on "Khatapeta" account alleged to have been advanced on 27-8-1951 at an interest of RS. 6 3/4 per cent per annum.

In this suit the company was impleaded as defendant 1 and the Directors were impleaded as defendants 2 to 6, No writ of summons was taken out against the company but the directors were served with summons in the usual course. On 20-8-1952 the respondent applied for a summary judgment against defendants 2 to 6 (i.e. the directors) and obtained it on 3-9-1952. The director-defendants filed an appeal against the decree but the appeal was subsequently abandoned.

The result therefore is that the respondent has got a money decree against the directors of the company as guarantors for the entire sum of Rs. 3,47,875/14/- with interest thereon at the rate of 6 per cent per annum from the date of the decree until realisation. The period of two years fixed by the agreement expired on 4-6-1953 and thereafter on 3-8-1953 the respondent filed an application before the joint liquidators of the company claiming to be a preferential creditor in respect of the sum of Rs. 3,01,397-4-3 pies alleging It to be trust money.

This claim was resisted by the appellant on the ground that the money was nothing but a, loan and the respondent had no better rights than those of an unsecured creditor in respect of this amount. On 19-12-1953, the respondent took out a summons for an order that it might be declared that the paid sum of money was Held by the company in trust for the respondent and that the liquidators might be directed to pay the said sum to the respondent forthwith.

At the first hearing of the application a preliminary objection was raised to the effect that the application could not be heard without an amendment of the plaint in Suit No. 2164 of 1953 which contained no prayer for a declaration that the deposit was trust money and in which the deposit was described as an advance. On 2-3-1954 liberty was given to the respondent to amend the plaint and pursuant to that order the plaint was amended and a prayer was added for a declaration that the said sum of money was held by the company in a fiduciary capacity in trust for the respondent.

After the amendment of the plaint the application filed by the respondent was heard by <NAME> as a company Judge and the declaration prayed for by the respondent was granted by a judgment dated 2-4-1934. It is against that judgment that the present appeal has been brought by the appellant firm which is an Unsecured creditor of the company.

18. <ORG> has held that the agreement dated 4-6-1951 created relationship of principal and agent between the company and the respondent with fiduciary obligations on both sides. This conclusion has been strenuously challenged by Mr. <NAME> appearing in support of the appeal. It has been argued that true relationship created by the agreement is that of buyer and seller and strong reliance has been placed upon Clauses 2 and 5 of the agreement which provide that the agent will be treated as purchaser of one goods ordered by it and that the orders procured by the agent shall be executed by the principal on behalf of the agent.

It is further argued that if no agency is created by the agreement and if there is no element of fidelity no trust comes into existence with the result that the deposit made by the respondent Is an ordinary unsecured loan and the respondent is entitled to rank as an unsecured creditor of the company.

Mr. <NAME> appearing for the respondent has contended that Clauses 5 arid 10 of the agreement impose upon the respondent the duty of procuring orders for the products of the company and using its best endeavours to promote the sale of the company's products.

Under Clauses 12 and 13, the respondent is to get a commission of 2 per cent upon the invoiced value of all the goods sold by the company either directly or through the respondent or any other Agent or Sub-agent and under Clause 11 the prices of the goods sold to the respondent or to customers introduced by the respondent are to be adjusted within fifteen days of the delivery or the goods or immediately on realisation of the sale proceeds of 'the goods from the buyers. These conditions, according to Mr. <NAME> constitute the respondent an agent of the company in the true sense.

19. In order to decide this question we have to bear in mind that the agreement in express terms describes the company as the "Principal" and the respondent as the "Agent", but the question that arises is whether In spite of this Description the agreement contemplates the so-called agent acting on his own behalf or on behalf of the so-called principal.

If upon a consideration of all the terms and conditions of the agreement we come to the conclusion that the agreement in substance contemplates the so called agent acting on his own behalf, we shall have no hesitation in holding that no relationship of agency has arisen in spite of the contrary description in the agreement.

Section 182 , Contract Act defines an "Agent" as "a person employed to do any act for another or to represent another in dealings with third persons." With regard to the second alternative of this definition we have no hesitation in holding that the element of representation is totally absent In the present case.

Clauses 2 and 5 of the agreement make It clear that in dealings with third persons the Company's products are to be treated as belonging to the respondent and the orders secured by the respondent are to be executed on behalf of the respondent. These conditions in my opinion, are thoroughly inconsistent with the notion of the respondent representing the company in dealings with third persons.

The next question is whether the respondent can be said to be a person "employed to do any act for another" within the meaning of the first part of Section 182 , Contract Act . The only duty cast upon the respondent under the agreement is the duty of securing orders for the company's products, and propagating their sale.

On ultimate analysis, however, this duty does not appear to be doing an "act for another", because as soon as orders are secured they are to be executed on behalf of the respondent under Clause 5 and as soon as sales are effected the goods will be sold in the name of the respondent.

In order to constitute the relation of agency, it is, in my opinion, essential that goods should be sold to customers introduced by the agent' not on behalf of the agent but on behalf of the Principal. If the goods are sold on behalf of the alleged agent and if the alleged agent is to be treated as the purchaser, he ceases to be an agent and becomes a Principal.

On a consideration of the agreement as a whole-therefore my conclusion is that it does not create a relationship of principal and agent between the company and the respondent but a relationship 01 seller and wholesale buyer of the products of the company.

20. We have now to consider the question whether the provision about the payment of commission makes any difference in the relationship between 'the company and the respondent. Under Clauses 12 and 13 of the agreement the respondent is to get a commission of 2 per cent upon the value of all goods sold by the company either directly or through the respondent or through and other Agent or Sub-agent subject to a minimum of Rs. 24,000/- per year.

Clause 5 of the agreement which imposes upon the respondent the duty of securing orders for the company's products does not, however, require that if the orders secured by the respondent fall below a specified minimum limit, it will not be entitled to any commission. On the other hand Clauses 12 and 13 make it plain that the respondent, will earn its minimum commission even if it does; not secure any order whatsoever for the company.

In these circumstances the only conclusion that can be drawn is that the word "commission" as used in the agreement, does not connote remuneration for the work done by an agent. Mr. <NAME> has cited before us the decision of <ORG> in the case of '<NAME> v. <NAME>, (A Firm)' AIR 1919 PC 166 (P). The facts of this case are, however, somewhat different from the facts of the present case.

Under the terms of the agreement in the reported case the seller was to get half per cent. commission for 30 days' credit and one per cent. commission for 60 days' credit whereas in the instant case the buyer is to get a commission of 2 per cent, subject to a minimum of Rs. 24,000/- per year under all circumstances.

In spite of this difference in facts, however, the actual words used by Lord <NAME> support the conclusion that if the terms of the agreement establish the relation of vendor and purchaser the use of the word 'commission' does not convert it into an agency. Lord <NAME> in delivering the judgment of the Board observes as follows:

"It comes to this that the documents show on the face of them a contract between principals The mere mention of commission in the contract as signed is not in any way ....... Inconsistent with the relation being between principal arid principal'. As I have held that the agreement in the present case does not constitute an agency but creates a relation of vendor and purchaser, the use of the word 'commission' does not affect the position.

21. The point that arises for consideration now is whether in spite of the fact that no agency arises Under the agreement, the agreement read as a whole, creates a trust or a fiduciary relationship. <ORG> has proceeded upon the view that since the deposit was by an agent, to be appropriated towards a specific purpose connected With the agency, it must be impressed with a trust.

His view has been influenced to a large extent by a decision of <ORG> of this Court in the case of ' <CITATION> ' , the facts of which, in his opinion are indistinguishable from the facts of the present case. As all the terms of the agreement in that case are not set out in the judgment as reported, we sent for the paper book of that case and read all the terms. On a comparison of the agreement in that case with the agreement in the present case, however, we find that the terms are essentially different.

In '<NAME> case (G)', the agreement is truely an agreement between a principal and agent as the agent agreed to sell the goods of the principal on behalf of the principal at a price to be fixed by the principal, whereas in the instant case, the alleged agent is to be treated as, the purchaser of goods and the alleged principal is to execute the orders secured by the alleged agent on behalf of the latter.

The agreement in the present case being an agreement between two principals the fiduciary obligation of an agent to account for his dealings to the principal cannot be said to exist. The only obligation of the respondent in the instant case is an obligation to pay for the price of commodities sold to it or to customers introduced by it. Such en obligation in my opinion does not constitute a fiduciary relationship.

22. The next question is whether the deposit in the present case, can be said to be impressed with a trust. On a careful consideration of the agreement's a whole it seems to me that it contains no element of fidelity or confidence which is an essential ingredient of trust as defined by Section 3 , Trusts Act . The agreement is bilateral and whatever rights are secured to the parties under it are contractual rights.

Under the third clause of the agreement the company is binding itself in express terms to hold the deposit for the specific purpose of due performance by the respondent of its obligations. An obligation like this does not, in our opinion, create an obligation in trust but an obligation in contract. I accordingly hold that the agreement creates neither a trust, properly so-called, nor a fiduciary relationship.

23. Mr. <NAME>, appearing for the appellant has put forward another reason why the agreement in the present case cannot be said to create a trust. He has argued that the stipulation for payment of interest is inconsistent with the notion of a trust, because such a stipulation carries with it the necessary implication that the deposit really belongs to the depositee. On this point there is a conflict of Judicial decisions amongst the different <ORG> of India.

The Allahabad, Bombay and Lahore High Courts have taken the view that the existence of a stipulation for payment of interest is destructive of a trust because it indicates that the depositee would be entitled to use the deposit as his own property and for his own purposes. See 'In re <ORG>' , 'Maiieswari Brothers v. <ORG>' AIR 1942 All 119 (FB)(I), 'In Re. Manekji Petit Manufacturing Co., Ltd.' AIR 1932 Bom 311 (J)', '<ORG> v. <NAME>-ji' AIR 1936 Bom 344 (K) and '<NAME> v. <NAME>' AIR 1937 Lah 444 '(L).

The Calcutta and Madras High courts on the other 'hand have adopted the view that the provision as to payment of interest is not wholly inconsistent with the existence of a fiduciary relationship. See 'In re. <ORG>' , 'In re. <ORG>' , and 'In the matter of <ORG>' AIR 1939 Mad 337 (O).

The view taken by this Court is based on the judgment of Lord <NAME> in '(1866) 35 Beav. 621 at p. 628 (B)', where a testator made over a certain sum of money to his executor upon trust for his daughter for her life and to pay her interest at the rate of 4 per cent, per annum. Under the terms of the will the executor was authorised to make such use of the capital as he thought fit. Upon these facts Lord <NAME> held that a trustee, if so authorised, could use the trust fund and could be required to pay interest.

To the same effect is the decision of <ORG> in the case of ''. That was a case where a sum of money was handed over to the depositse for the purpose of investment in the depositee's business in the name of the depositor's son who was then a minor and the depositee undertook to refund the deposit on the minor's attaining the age of 21 and in the meantime to pay interest at the rate of 9 per cent, per annum.

Upon the depositee being adjudicated insolvent the question arose whether the depositor's son would rank as an unsecured creditor or had a preferential claim in respect of the deposit. Before <ORG> it was sought to be argued that the circumstances under which the deposit had been made did not constitute a trust but a mere advance in respect of which the depositor's son could claim no better right than that of an unsecured creditor.

Their Lordships, however, did not allow this point to be raised because the trust was admitted both before <ORG> and <ORG> and also in the printed case before <ORG>. This case is at least an authority for the proposition that an agreement for payment of interest does not militate against the existence of a trust.

It may be noted in this connection that in 'In re. Fazl Bhai Mills Ltd.' AIR 1936 Bom 296 (P) one of the reasons given by Kania J. for not following the decision in '<NAME> case (J)', was that the attention of the learned Judges who decided that case was not drawn to the decision In '(1866) 35 Beav. 621 (B)', and made the following observations at p. 299:

"Having regard to the definition of trust in the Indian Trusts Act I do not see any reason why there cannot be a trust merely because the company expressly reserved the right to utilise the trust fund for its own purpose and agreed to pay interest in the meanwhile."

Upon this state of authorities if it had been necessary for us to decide this point in this appeal we would have held that the view taken by the Calcutta and Madras <ORG> is right; but having regard to the fact that I have already held that the agreement in the present case constitutes neither a trust nor a fiduciary relationship, this point is not of any practical importance in this appeal and I need not pursue it further.

24. Though the agreement dated 4-6-1951 does not create a trust properly so-called or a fiduciary relationship, we have no doubt in our mind that It imposes a contractual obligation on the company to hold the deposit for a specific purpose. By Clause 3 the deposit is specifically "earmarked as security for the due performance of the agreement". Under the agreement the respondent is liable to pay the company the prices of goods sold to it or to customers introduced by it.

Under Clause 11 such prices are to be "adjusted within' fifteen days of the delivery or despatch of goods" and by Clause 15 the company accepts the liability to refund the deposit with interest on the expiry of two years or on prior determination of the agreement by one month's notice. The combined effect of these three clauses, in my view, is that there is to be an accounting between the company and the respondent in terms of Clause 11 and the respondent is to pay the prices within the period specified in that clause.

In the event of the respondent's failure to pay the prices, however, the company would be entitled to deduct the, same from the deposit made in pursuance of Clause 3. Upon this reading of the agreement it is clear that it imposes a contractual liability on the company to hold the deposit for the specific purpose of appropriating it towards the unpaid prices of goods sold or supplied to the respondent in the event of the latter's failure to pay.

It is this contractual obligation of the company that protects the right of the respondent to the extent of the balance of the deposit that may remain after deducting the unpaid prices of goods sold to or at the instance of the respondent. Prom the affidavit of the joint liquidators it would appear that, according to them, there are outstanding dues against the respondent for prices of goods; but the exact amount due, if any has not been ascertained.

There must therefore be an accounting between the company and the respondent with regard to the prices of goods sold to the respondent or to customers introduced by it. If upon such accounting any sum is found due to the company it will be deducted from the deposit and will be available for distribution amongst the unsecured creditors of the company. The balance, if any, will however, be treated as the property of the respondent.

25. In aid of his argument that the deposit in the present case amounted only to a loan Mr. <NAME> cited the decision of <ORG> in the case of '<ORG>' (1951) 32 Tax Cas. 133 (Q). The facts of that case are these: a British company used to employ agents in China for the purpose of selling and distributing petroleum products in that country. The practice of the company was to require its agents in China to deposit with the company a sum of money in Chinese dollars which was repayable on the termination of the agency. The company used to deposit with banks in Shanghai sums of money equal to the agency deposits. When Sino Japanese hostilities broke out in 1937 the company transferred the deposits to the United Kingdom and deposited the sterling equivalents with the parent company. On account of depreciation of Chinese dollar in relation to sterling the transfer resulted in profits to the Company.

The question arose whether this exchange profit was fixed capital or circulating capital made in the course of the company's business and must be included in the computation of its income for Income-tax purposes. <ORG> held that the exchange profit was capital profit and not subject to income-tax.

Prima facie this decision does not appear to have any bearing on the question which has been raised before us, but Mr. <NAME> has placed reliance on certain. observations made by <ORG> at p. 155 of the report where his Lordship summarises his conclusion in the following words:

"After paying the 'best attention to the arguments for the <ORG> and those for the Respondent company I find nothing in the facts of this case to divest those deposits of the character which it seems to me they originally bore, that is to say, the character of loans by the agents to the company, given no doubt to provide the company with a security but nevertheless loans. As loans it seems to me that they must prima facie be loans on capital not revenue account, which perhaps is only another way of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital."

'At p. 158' <NAME> said as follows:

"I agree with my brother <NAME> that the dollars deposited for the purposes indicated in the agency agreement were in the nature of loans and were not part of a transaction on revenue account."

It is true that in the passage quoted above the deposits made by agents were described as loans, but their Lordships were only considering the question whether the deposits were capital or trading receipts. Their mind was not addressed" to the question whether the deposits were secured or unsecured loans or whether the deposits were impressed with a trust.

The word 'loan' is a genus which Includes unsecured as well as secured loans and loans impressed with a trust. The description of deposits by agents as loans is no solution of the problem with which we are confronted, i.e. whether they are loans impressed with a trust.

Their Lordships certainly did not intend to lay down the general proposition that agency deposits must be treated as unsecured loans in all cases. For these reasons I am of the opinion that the decision in the case of '<ORG>', (Q) is of no assistance to the appellant,

26. Mr. <NAME> relied upon the description of the deposit as "advance" in the plaint of Suit No. 2164 of 1952 before its amendment and also in two affidavits of one <NAME> affirmed on behalf of the respondent. He has also relied upon the fact that the deposit was credited by the company in the "Deposit Sales Account". These circumstances according to Mr. <NAME> point to the conclusion that the company treated the deposit as an ordinary unsecured loan. I am not, however, impressed by this argument.

In the plaint of Suit No. 2164 of 1952 as well as in the affidavits relted upon by Mr. <NAME> the description of the deposit as an 'advance' is qualified by the statement "upon the terms and conditions contained in an agreement in writing made ......

on 4-6-1951." There is therefore no unqualified admission to the effect that the deposit was purely an unsecured advance and even if there had been any we would have found it impossible to decide the present question upon admissions when the original agreement is before us.

The credit of the amount in the "Deposit Sales Account" also does not carry the appellant further. <NAME> has observed: "Ordinary loans were credited in the books of the company in the ordinary loan account whereas the deposit was credited in the Deposit Sales Account". This finding has not been challenged before us.

We may, therefore, legitimately conclude that the deposit was treated by the company differently from ordinary unsecured loans. If that be so, it is Impossible to accept the argument advanced on behalf of the appellant that the credit of the amount in the deposit sales account is wholly inconsistent with the idea of trust.

27. Lastly Mr. <NAME> argued that the relation between the company and the respondent under the agreement was that of a banker and customer and the only obligation of the company was to return the deposit on the expiry of two years or on earlier determination by notice. Such an , obligation, according to Mr. <NAME>, does not entitle the respondent to any priority over unsecured creditors.

After giving the matter my best consideration T find myself unable to accept the proposition that under the agreement the only obligation of the company was to refund the deposit on termination of the alleged agency by efflux of time or by act of parties.

In my opinion the contingency that is safeguarded by the deposit is the possible failure of the respondent firm to pay the prices of goods sold to it or to customers introduced by it and the company was under an additional obligation to hold the money as security against such a contingency.

It is this last obligation Which takes the deposit out of the category of unsecured loans and protects the respondent's right in respect of the balance of the deposit that may remain after deducting its dues to the company.

28. For the reasons given above, the appeal is allowed in part and the order made by <NAME> modified. In lieu of the declaration made by him, it is declared that the sum of Rs. 3,01,397-4-3 is held by the company for a specific purpose in the nature of a trust for the benefit of the applicant firm and itself and in lieu of the order for payment made by the learned Judge it is ordered that the applicant firm will be entitled to repayment of the aforesaid sum out of the entire assets of the company, less such sum, if any, as" may be found due from it to the company on account of transactions had under the agreement.

Upon the amount due to the applicant firm be ing determined, it will be entitled to apply to the <ORG> for payment of such amount within six weeks from the date of such determination. The rest of the order of the learned Judge will stand.

There will be no order for costs in this appeal, but the Official Liquidators shall be entitled to retain and pay their own costs of this appeal as well as other costs, if any, ordered to be made costs in the appeal as between Attorney and Client out of the assets of the company in their hands.


PETITIONER: RASHBIHARI PANDA ETC. Vs. RESPONDENT: STATE OF ORISSA DATE OF JUDGMENT: 16/01/1969 BENCH: <NAME>, J.C. BENCH: <NAME>, J.C. HIDAYATULLAH, M. (CJ) RAMASWAMI, V. MITTER, G.K. GROVER, A.N. CITATION: 1969 AIR 1081 1969 SCR (3) 374 1969 SCC (1) 414 CITATOR INFO : RF 1970 SC 564 (70) E 1971 SC 733 (5,6) RF 1971 SC1461 (435) D 1974 SC 366 (92) D 1974 SC 651 (16) R 1979 SC1628 (22,23) RF 1980 SC1789 (36) R 1981 SC 679 (16,37,38,42,43,49) R 1984 SC 657 (16) R 1984 SC1527 (23) RF 1987 SC1086 (28) RF 1987 SC1109 (30,34) ACT: Orissa Kendu Leaves (Control of Trade) Act (28 of 1961) s. 10-Scheme of <ORG> for sale and disposal of leaves purchased by it Contracts with, and invitation to offer, restricted to licencees of previous year-If violative. of Arts. 14 and 19(1) (g) of Constitution- Art. 19(6) (ii)- Monopoly of <ORG>-Tests for validity-Bona fides of <ORG> and error of judgment by <ORG>-If a defence to discrimination. HEADNOTE: Kendu tree is a wild growth and its leaf is used mainly in the manufacture of bidis. To regulate trade in Kendu leaves and prevent exploitation of growers and pluckers the respondent-<ORG> adopted diverse measures. In 1961, the Orissa Kendu Leavs (Control of Trade) Act, 1961, was enacted. By s. 3 of the Act no person other than the <ORG>, an authorised officer of the <ORG>, or an agent appointed by the <ORG> shall purchase or transport Kendu leaves; and under- s. 4 the <ORG> is, authorised to fix the price at which the leaves shall be purchased from the growers by the officer or agent of the <ORG>. Section 10 provides that the Kendu leaves purchased shall be sold or disposed of in such manner as the <ORG> may direct, and under s. II, at least one half of the net profits derived by the <ORG> is to be paid to Samitis and Gram Panchayats. A grower of Kendu leaves chal- lenged ss. 3 and 4 and r. 7(5) made under the Act as infringing his fundamental rights under Arts. 14 and 19(1)(f) and (g). This Court, in <CITATION> ,  Supp. 2 S.C.R. 691, held that ss. 3 and 4 did not infringe Art. 19(6) (ii ), but that the <ORG> was in- competent to implement the provisions of the Act and give effect to its monopoly, because, the agents appointed were not really agents of the <ORG> but were authorised to carry on trade in the leaves purchased not on behalf of the <ORG> but on their own account, and that it thus gave rise to a monopoly in favour of the agents which was not protected by Art. 19(6) (ii) since the law cannot be used by the <ORG> for the private benefit of agents. Thereafter, the <ORG> made some changes in the implementation of its monopoly. In 1966, it invited tenders from persons desirous of purchasing Kendu leaves purchased by the officers and agents of the <ORG>. During the years 1966 and 1967, the prices of Kendu leaves ruled very high and when sales were effected by public auction, prices considerably in excess of those at which tenders were accepted were realised. Early in 1968, the <ORG> evolved another scheme under which, the <ORG> offered to renew the licences of those traders who in the <ORG>'s view had worked satisfactorily in the previous year and had paid the amounts due from them regularly' The scheme was objected to, and realising that, the scheme arbitrarily excluded many persons interested in the trade, and hence was objectionable, the <ORG> decided to invite offers for advance purchases of Kendu leaves but restricted the invitation to those individuals who had carried out the contracts in the previous year without default and to the satisfaction of the <ORG>, that is, the existing contractors were given the exclusive right to make offers to 375 purchase Kendu leaves. This new method of offering to enter into agreements for advance purchases of Kendu leaves by private offers in preference to open competition, was challenged by writ petitions in <ORG> as violative of the petitioner's fundamental rights under Arts. 14 and 19(1)(g). <ORG> held that under s. 10 of the Act the <ORG> could dispose of the leaves in such manner as it thought fit, that the only question for the Court was whether in adopting the new scheme of offering to enter into advance purchase contracts by private negotiation the <ORG> had acted bona fide, and that the petitioners failed to show that in exercising its discretion the <ORG> acted arbitrarily or without bona fides. In appeal to this Court, HELD : The validity of a law by which the <ORG> assumed the monopoly to trade in a given commodity `as to be judged by the test whether the entire benefit arising therefrom is to enure to the <ORG>, and the monopoly is not used as a cloak for conferring private benefit upon a limited class of persons. The monopoly of purchasing Kendu leaves under S. 3 may be held to be valid if, it be administered only for the benefit of the <ORG>. Similarly,, the right to sell or dispose of Kendu leaves by the <ORG> under s. 10 , in such manner as the <ORG> may direct, would be valid if it be exercised in public interest and not to serve the private interests of any person or class of persons. The profit resulting from the sale must be for the public benefit and not for private gain. Section 11 also emphasises the concept that the machinery of sale or disposal of the leaves must also be geared to serve the public interest. if the scheme of disposal creates a class of middle men who could purchase from the <ORG> at concessional rates and earn large profits disproportionate to the nature of the,service rendered or duty performed by them, it cannot claim the protection of Art. 19(6) (ii) as it is not open to the <ORG> to create a monopoly in favour of third parties from its own monopoly. [383 385A-D] In the present case, the right to make offers being open to a limited class of persons it effectively shut out all other persons carrying on trade in Kendu leaves as well as new entrants into the trade. Both the schemes, evolved by the <ORG>, namely the one of offering to enter into contracts with certain named licencees, and the other of inviting tenders from licencees who had in the previous year carried out their contracts satisfactorily gave rise to a monopoly in the trade in the leaves to certain traders and singled out other traders for discriminating treatment. Therefore, they were violative of the fundamental right of the petitioners under Arts. 14 and 19(1)(g) and as the 'schemes were not 'integrally and essentially' connected with the creation of the monopoly they were not protected by Art. 19(6) (ii). [384 E-H; 385 B-D] (a) If the only anxiety of the <ORG> was to ensure due performance by those who submitted tenders, <ORG> could devise adequate safe guards. But the classification based on the circumstance that certain existing contractors had carried out their obligation in the previous year ,regularly and to the satisfaction of the <ORG> is not based on any real and substantial distinction bearing a just and reasonable relation to the objects sought to be achieved namely, the effective execution of the monopoly in public interest, the prevention of exploitation of pluckers and growers of Kendu leaves, or the securing of the full benefit from the trade, to the <ORG>. [384G-H; 386B-D] 376 (b) The scheme could not be supported on the ground that it imposed reasonable-restrictions, within the meaning of Art. 19(6 ), on the fundamental rights of traders to carry on business in Kendu leaves. [38SC-D] (c) The plea that the action of the <ORG> was bona fide cannot be an effective answer, because, the <ORG> had not considered, the prevailing prices of Kendu leaves about the time when offers were made, the estimated crop, the conditions in the market, offers of higher prices and the likelihood of offerors of higher prices carrying out their obligations and whether it was in the, interests of the <ORG> to invite tenders in the open market from all persons irrespective of their having taken contracts in the previous year. [385H; 386A-B] (d) It could not also be said that the <ORG> merely committed an error of judgment in adopting the impugned scheme. It is not a case of the <ORG> erring in the exercise of its discretion, but the action of the <ORG> was itself not valid. [386 B-D] JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1472 to 1474 of 1968.

Appeals by special leave from the judgment and order dated May 8, 1968 of <ORG> in O.J.C. Nos. 49, 52 and 132 of 1968.

<NAME>, for the appellant (in CAs. Nos. 1472 and 1473 of 1968).

<NAME>, <NAME> and <NAME>, for the appellant (in C.A. No. 1474 of 1968).

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

The Judgment of the Court was delivered by <NAME>, J. These appeals arise out of orders passed in peti- tions moved before <ORG> challenging the scheme adopted by <ORG> for sale of Kendu leaves in which the <ORG> has assumed a monopoly of trading, by the Orissa Kendu Leaves (Control of Trade) Act 28 of 1961.

Kendu tree is a wild growth. Its leaf is used mainly in the manufacture of bidis. To regulate the trade in Kendu leaves the State of Orissa has adopted diverse executive, and legislative measures. In exercise of the powers conferred by S. 3(1) of the Orissa Essential Articles Control and Requisitioning (Temporary Powers) Act, 1947 <ORG> issued the Orissa kendi. Leaves (Control and Distribution) Order, 1949, providing for the is-sue of licences to person trading in Kendu leaves. The District Magistrates were authorised to fix the minimum rates for purchase of Kendu leaves and the Order provided that the licensees shall purchase Kendu leaves from the pluckers or 37 7 owners of private trees and forests at rates not below the minimum prescribed. A trader in Kendu leaves challenged the validity of the Act and the Order before <ORG> on the plea that <ORG> was incompetent to enact the Act and that in any event the Act and the Order infringed the guarantee of fundamental freedom to carry on business under Art. 19(1)(g) of the Constitution. A Division Bench of <ORG> upheld the validity of the Act : <CITATION> (1). The Court observed that the main purpose of the Order was to prevent indiscriminate and unrestricted competition in the trade in Kendu leaves and to protect the growers and pluckers from exploitation. The Order of 1949 was replaced by another Order issued in 1960, but without any substantial changes in its principal provisions. Thereafter <ORG> enacted the Orissa Kendu Leaves (Control of Trade) Act 28 of 1961. By s. 3 of the Act no person other than (a) the <ORG>; (b) an officer of <ORG> authorised in that behalf; (c) an agent in respect of the unit in which the leaves have grown shall purchase or transport Kendu leaves. By s. 4 it was enacted that the <ORG> shall, after consultation with <ORG>, fix the price at which Kendu leaves shall be purchase( any officer or agent from growers, of Kendu leaves during any year. By s. 8 the <ORG> was authorised to 'appoint agents for different units to purchase Kendu leaves. Section 10 , provided that : .

"<ORG> leaves purchased by <ORG> or by their officers or agents under this Act shall be sold or otherwise disposed of in such manner as <ORG> may direct."

Out of the net profits derived by the <ORG>, from the trade in Kendu leaves under the Act, by s. 1  1 , an amount not less than one half was to be paid to Samitis and Grama Panchayats. Sections 14 , 15 and 16 dealt with penalties, attempts and abetment of offences and procedure of courts. Section 18 ' conferred upon the <ORG> power to make rules for carrying out the purposes of the Act. Agents were appointed by the <ORG> of Orissa to pur- chase Kendu leaves. The agents were, authorised under the agreements to purchase the Kendu leaves and also to trade in the Kendu leaves purchased.

A grower of <ORG> leaves moved a petition in this Court contending that the principal provisions of the Act infringed his (1) A.I . 1952 Ori 260.

fundamental rights under Arts. 19(1)(f) & (g) and Art. 14. He challenged ss. 3 and 4 and rule 7(5) as infringing the fundamental right under Art. 19(1)(f) and (g) of the Consti- tution, and ss. 5 , 6 and 9 as contravening the equality clause of the Constitution. This <ORG> held in <CITATION> (1) that the Orissa Kendu (Control of Trade) Act, 1961, was a valid piece of legislation, and creation of a <ORG> monopoly in Kendu leaves was protected by Art. 19(6) as amended by the Constitution (First Amendment) Act, 1951. In the opinion of the <ORG>, fixation of prices prescribed by S. 4 was reasonable and in the 'interest of the general public both under Art. 19(5) and Art. 19(6) and S. 4 of the Act was on that account valid. The <ORG> further held that section 3 which allowed the <ORG> or an officer of the <ORG> authorised in that behalf or an agent in. respect of the unit in which the leaves were grown, to purchase or transport Kendu leaves for and on behalf of the <ORG> was not open to attack. But in the view of the <ORG> the categories of persons mentioned in cls. (b) & (c) of S. 3 i.e. officers of the <ORG> and agents were intended to work for the <ORG> and all their actions and dealings in pursuance of the provisions of the Act had to be actions and dealings on behalf of and for the benefit of the <ORG>, and since under the agreement obtained from the agent under r. 7 (5) to work the monopoly of the <ORG>, the appointees were not made agents in the strict sense of- the term, and were appointed to carry on trade on their own account, the agreements were invalid. The <ORG> accordingly held that the <ORG> <ORG> was incompetent to implement the provisions of the Act through the Agents appointed under those agreements.

Thereafter <ORG> made some changes in the machinery for implementation of the monopoly and entered into agreements, of sale of Kendu leaves after inviting tenders from traders. Even against this scheme objections were raised. It was claimed by persons interested in the Production and trade in Kendu leaves that <ORG> merely resorted to a device of introducing purchasers who were mere associates or nominees of the "so called agents," and that the position remained practically the same as in the days before the judgment of this Court. On February 2, 1966, <ORG> invited tenders from persons desirous of purchasing Kendu leaves purchased or collected by <ORG> or by their officers or Agents under the provisions of the Orissa Kendu Leaves (Control of (1) [1963] Supp. 2 S.C.R. 691.

37 9 Trade) Act , 1961, in the units as constituted under s. 5 of the Act. In the last paragraph of the tender notice it was stated "If the person appointed as Purchaser during the currency of his agreement in respect of any Unit duly observes and performs all the terms and conditions to the satisfaction of the Government and if the Government are satisfied that the Purchaser has been prompt in taking delivery of leaves and making payments, the Government may grant to the Purchaser a renewal of 'his appointment for one year on such terms and conditions as may be mutually agreed upon."

During the years 1966 and 1967 the prices of Kendu leaves ruled very high and when sales were effected on behalf of <ORG> in certain cases by public auctions, prices considerably in excess of those at which tenders were accepted were realized. Early in 1968 letters were addressed to certain traders intimating that it had been decided by <ORG> to renew "leases of Kendu leaf Units" held by them, for the year 1968 if they accepted the terms set out therein. Under this scheme the Government 'Offered to those licensees who in their view had worked satisfactorily in the previous year and had paid the amounts due from them regularly to continue their licences with the added provision that the agents with whom they had been working in 1967, will also work during 1968. The link between the agent and the purchaser which had been the subject matter of agitation in previous years. it was claimed, was extended by the scheme.

On January 24, 1968, a petition was moved by <NAME> in <ORG> under Art. 226 of the Con- stitution challenging the action, of the <ORG>. The <ORG>, it appears, had second thoughts and the offers to renew the previous licenses were withdrawn and the licensees were informed that the <ORG> had decided to invite offers for advance-purchases from persons who had purchased Kendu leaves from individual units during the year 1967 and had not committed default in payment of the dues. Other writ petitions were filed challenging the legality of the new method adopted by the <ORG> <ORG> of offering to enter into agreements for advance purchases of Kendu leaves by private offers in preference to open competition. It was urged on behalf of the petitioners that in seeking to enter into agreements for advance purchase contracts, for Kendu leaves by private negotiation the <ORG> <ORG> sought I to support their party interests in preference to public 'benefit envisaged by the <ORG> monopoly, and that the so-called <ORG> monopoly trade in Kendu leaves "was a colourable device to make, 'it appear constitutional and permissible under Art. 19(6) (ii) of the Constitution", whereas in truth it was intended to benefit only the supporters of the party in power, and the scheme on that account "was a fraud on the Constitution". The new scheme, it was said, was devised for the purpose of increasing the party funds to the detriment of public revenue, and on that account the act of the <ORG> <ORG> was "mala fide and unconstitutional". The petitioners claimed that the <ORG> of Orissa had classified the units into five sections raising the royalty or share of profit from the purchaser from Rs. 44 to a maximum amount of Rs. 64 whereas the offer of one of the petitioners who offered Rs. 1 00 per bag in addition to the rates offered by the <ORG> by a telegram early in January 1968 and followed by a confirmatory letter, was not accepted. It was further said that an offer made by a manufacturer of bidis to purchase the entire crop for a total amount of rupees three crores was also not accepted. On behalf of the <ORG> it was submitted that till 1967 no rate was fixed for dried and processed leaves in the hands of the growers but when the new Ministry assumed office in 1967 the minimum price was fixed at Rs. 35 per bag of processed leaves in the hands of the growers, which was later raised to Rs. 45 per bag, and the remuneration payable to pluckers was also raised under orders issued by the <ORG>, and as a result thereof it was anticipated that the pluckers and growers would earn Rs. 47 lakhs in addition to the amount they had earned in 1967; that the scheme of making an offer to established licensees was evolved with a view to "close the channels of corruption and the policy had eliminated all sorts of negotiations or personal approach in the matter of sale of Kendu leaves by the <ORG>", and after careful consideration, the <ORG> determined the fair price that may be realized by selling Kendu leaves, that the dealers who were given contracts for two years by the previous Ministries had been offered options to purchase the leaves at rates higher than 'those obtaining during the last few years and that under the new policy the profits earned rose from Rs. 1, 00,75,000 in 1962-63 to Rs. 1,91,00,000 in 1968-69. It was also submitted that under s. 10 of the Kendu Leaves (Control of Trade) Act, the <ORG> was authorised to dispose of the Kendu leaves in such manner as the <ORG> may direct and thereby the authority vested in the <ORG> to use their discretion "was not amenable to the writ jurisdiction of <ORG>", and that from the data furnished it was clear that the <ORG> had acted in the best interests of the <ORG> and the "figures showed their bona fides in the matter".

<ORG> Was of the view that the <ORG> having assumed monopoly of trading 'in Kendu leaves was alone entitled to purchase the Kendu leaves from the primary producers, and was by s. 10 authorise to dispose of the leaves "in such manner as the <ORG> 'may direct'. Section 10 , in the view of <ORG> Placed no restriction on the manner in which the <ORG> may sell Kendu leaves, and the only question which the Court had to consider was whether in adopting the new scheme of offering to enter into advance purchase contracts by private negotiations for selling Kendu leaves in 1968 the, <ORG> had acted bona fide. <ORG> observed:

". . . . . we hold that the <ORG>'s exercise of the power or discretion under s. 1  0 cannot be said to be arbitrary as it is open to the <ORG> to direct the sale or disposal of <ORG> leaves in any manner they may direct-either by advance purchase contracts by private negotiations or by public auction or by tender; it is not a case where <ORG> has exercised this power or discretion without jurisdiction. The <ORG> is not concerned with the propriety of the <ORG>'s action in adopting the particular manner of sale or disposal as it purported to direct. Evidently, the <ORG> acted, as any prudent businessman would do, for the purpose of getting the maximum revenue-net profits-from the trade in <ORG> leaves. <ORG>'s direction, in exercise of the power of discretion conferred on them under s. 10 , as to whether a particular-manner of sale or disposal will be suitable in a particular year, will depend entirely on their subjective satisfaction, upon consideration of a number of factors which may vary from year to year.

Such direction by <ORG> as to the particular manner of sale or disposal in a particular year, as dependent on the subjective satisfaction of the <ORG> as aforesaid, is not justiciable. There is also nothing on record to show lack of bona fides on the part of <ORG> in adopting the manner it did private negotiations-in the matter of sale of <ORG> leaves in 1968; nor have we been shown any material to hold that its action was capricious or arbitrary or in excess of its jurisdiction."

Article 19 (1) (f ) guarantees the citizens the right to acquire, hold and dispose of property, and Art. 19(1) (g) guarantees the right to practise any profession, or to carry on any occupation, trade or business. The right under cl.

(f) is subject to reasonable restrictions which the State may impose on the exercise of the right in the interests of the general public or for the pro P C.1.169-6 tection of the interests of any scheduled tribe. Clause (6) of Art. 19 which was amended, by the, Constitution (First Amendment) Act, 1951, sets out the restrictions which may be ,up 1 on the right to practise a profession or to carry on any occupation, trade or business. It states "Nothing in sub-clause (g) of the said clause shall affect the operation of any existing law in- so far as it ,imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right con- ferred by the said sub-clause, and, in particular, nothing in the said sub-clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to,

(ii) the carrying on by the <ORG>, or by a corporation owned or controlled by the <ORG>, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise."

In <NAME> case(1) this <ORG> held that by the amendments in Art. 19(6) it was intended that the <ORG> monopoly in respect of any trade or business must be presumed to be reasonable and in the interests of the general public; that the expression "law relating to" occurring in cl. (ii) means "essential and basic provisions" enacted to give effect to the monopoly i.e. provisions "integrally and essentially connected with the creation ,of the monopoly "; that the provisions which are incidental or subsidiary to the creation or operation of the monopoly must satis fy. the test of the main clause, and that if the law infringes any other fundamental right in cl. (1) of Art. 19 it must be tested under the appropriate provision governing it. '<ORG> accordingly held that ss. 3 and 4 of the Act were valid but declined in substance to give effect to the monopoly because the agents appointed were not agents of the <ORG> merely for purchasing <ORG> leaves but were 'authorised to carry on trade in leaves purchased on their own account. The operation of the <ORG> monopoly was in the view of the <ORG> to give rise to a monopoly in favour of the agents which had not the protection of Art. 19 (6) (ii). The <ORG> observed that the appointee must be "an agent of the <ORG> strictly so-called" acting-for and on behalf of the <ORG> and not on his own behalf., the '<ORG> while upholding the grant of monopoly by S. 3 of the Act to the <ORG> to carry on the business of purchasing <ORG> leaves was of the view that the law cannot be used by the <ORG> for the- private benefit of agents; it must only be administered (1)  Supp. 2 S.C.R. 691.

for the benefit of the general public, and any, arrangement in which under the guise of a monopoly the <ORG> permitted a Set of persons to make profit for themselves by carrying on business in Kendu leaves on their own behalf was invalid. It is urged by the appellants that the machinery devised by the <ORG> for sale of Kendu leaves in which they had acquired a monopoly to trade was violative of the fundamental, rights guaranteed under Arts. 14 and 19 (1) (g) of the Constitution. It is said that the purchasers are merely nominees of the agents. 'It is also claimed that after this Court struck down a scheme under,which the agents were to carry on business in Kendu leaves on their own account and to make profit for themselves, the <ORG> with a view to help their party-men set up a body of persons who were to be purchasers to whom the monopoly sales were to be made at concessional rates and that the benefit which would have otherwise been earned by the <ORG> accrued to those purchasers.

Section 10 of the Act is a counter-part of s. 3 and authorises the <ORG> to sell or Otherwise dispose of Kendu leaves in such manner as the <ORG> may direct. If the monopoly of purchasing Kendu leaves by s. 3 is valid, insofar as it: is intended to be administered only for the benefit of the <ORG>, the sale or disposal of Kendu leaves by the <ORG> must also be in the public interest and not to serve the private interests of any person or class of persons. It is true that it is for the <ORG>, having regard to all the circumstances, to act as a prudent business-man would, and to sell or otherwise dispose of Kendu leaves purchased under the monopoly acquired under S.

3. but the profit resulting from the sale must be for the public benefit and not for private gain' Section 11 which provides that out of the net profits derived by the <ORG> from the trade in Kendu leaves an amount not less than one half is to be paid to the Samitis and Grama Panchayats emphasises the concept that the machinery of sale or disposal of Kendu leaves must also be geared to serve the public interest. If the scheme of disposal creates a class of middle-men who would purchase from the <ORG> Kendu leaves at concessional rates and would earn large profits disproportionate to the nature of the service rendered or duty performed by them, it cannot claim the protection of Art. 19(6) (ii).

Section 10 leaves the method of sale or disposal of <ORG> leaves to the <ORG> as they think fit. The action of the <ORG> if conceived and executed in the interest of the general public is not open to judicial scrutiny. But it is not given to the <ORG> thereby to create a monopoly in favour of third parties from their own monopoly.

Validity of the schemes adopted by <ORG> for sale of Kendu leaves must be adjudged in the light of Art. 19(1)(g) and Art. 14. Instead of inviting tenders the <ORG> offered to certain old contractors the option to purchase Kendu leaves for the years 1968 on terms mentioned therein. The reason suggested by the, <ORG> that these offers were made because the purchasers had carried out their obligations in the previous year to the satisfaction of the <ORG> is not of any significance. From the affidavit filed by the State <ORG> it appears that the price fetched at public auctions before and after January 1968 were much higher than the prices at which Kendu leaves were offered to the old contractors. The <ORG> realised that the scheme of offering to enter into contracts with the old licensees and to renew their terms was open to grave objection, since it sought, arbitrarily to exclude many persons interested in the trade. The <ORG> then decided to invite offers for advance purchases of Kendu leaves but restricted the invitation to those individuals who had carried out the contracts in the previous year without default and to the satisfaction of the <ORG>. By the new scheme instead of the <ORG> making an offer, the existing contractors were given the exclusive right to make offers to purchase Kendu leaves. But insofar- as the right to make tender-, for the purchase of Kendu leaves was restricted to those persons who had obtained contracts in the previous year. the scheme was open to the game objection. The right to make offers being open to a limited class of persons it effectively shut out all other persons carrying on trade in Kendu leaves and also new entrants into that business. It was ex facie discriminatory, and imposed unreasonable restrictions upon the right of persons other than existing contractors to carry on business. In our view, both the schemes evolved by the <ORG> were violative of the fundamental right of the petitioners under Art. 19(1)(g) and Art. 14 because the schemes gave rise to a monopoly in the trade in Kendu leaves to certain traders, and singled out other traders for discriminatory treatment.

The classification based on the circumstance that existing contractors had carried out their obligations in the pre- vious year regularly and to the satisfaction of the <ORG> is not based on any real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved i.e., effective execution of the monopoly in the public interest. Exclusion of all persons interested in the trade, who were not in the previous year licensees is ex facie arbitrary : it had no direct relation to the object of preventing exploitation of pluckers and growers of Kendu leaves, nor had it any just or reasonable relation to the securing of the full benefit from the trade, to the <ORG>.

385, Validity of the law by which the <ORG> assumed the monopoly to trade in a given commodity has to be judged by the, test whether the entire benefit arising therefrom is to enure to the <ORG>, and the monopoly is not used as a cloak for conferring private benefit upon a limited class of persons. The scheme adopted by the Government first of offering to enter into contracts with certain named licensees, and later inviting tenders from licensees who had in the previous year carried out their contracts satisfactorily is liable to be adjudged void on the ground that it unreasonably excludes traders in Kendu leaves from carrying on their business. The scheme of selling Kendu leaves to selected purchasers or of accepting tenders only from a specified class of purchasers was not "integrally and essentially" connected with the creation of the monopoly and was not on ,,the view taken by this Court in <NAME> case(1) protected by Art. 19(6)(ii): it had therefore to satisfy the requirement of reasonableness under the first part of Art. 19(6). No attempt was made to support the scheme on the ground that it imposed reasonable restrictions on the fundamental rights of the traders to carry on business in Kendu leaves. <ORG> also did not consider whether the restrictions imposed upon per.sons excluded from the benefit of trading satisfied the test of reasonableness under the first part of Art. 19(6). <ORG> examined the problem from the angle whether the action of the <ORG> Government was vitiated on account of any oblique motive, and whether it was such as a prudent person carrying on business may adopt. No explanation has been attempted on behalf of the <ORG> as to why an offer made by a well-known manufacturer of bidis interested in the trade to purchase the entire crop of Kendu leaves for the year 1968 for rupees three crores was turned down. If the interests of the <ORG> alone were to be taken into consideration, the <ORG> stood to gain more than rupees one crore by accepting that offer. We are not suggesting that merely because that offer was made, the Government was bound to accept it. The Government had to consider, as a prudent businessman, whether, having regard to the circumstances, it should accept the offer, especially in the light of the financial position of the offeror, the security which he was willing to give and the effect which the acceptance of the offer may have on the other traders and the general public interest.

The learned Judges of <ORG> have observed that in their view the exercise of the discretion was not shown to be arbitrary, nor was the action shown to be lacking in bona fides. But that conclusion is open to criticism at the government is not shown to have considered the prevailing prices of <ORG> (1)[1963] Sup 2 S.C.R. 691 leaves about the time when offers were made, the estimated crop of <ORG> leaves, the conditions in the market and the likelihood of offerors at higher prices carrying out their obligations, and whether it was in the interests of the <ORG> to invite tenders in the open market from all persons whether they had or hid not taken contracts in the previous year. If the <ORG> was anxious to ensure due performance by those who submitted tenders for purchase of <ORG> leaves, it was open to the <ORG> to devise adequate safeguards in that behalf. In our judgment, the plea that the action of the <ORG> was bona fide cannot be an effective answer to a claim made by a citizen that his fundamental rights were infringed by the action of the Gov- ernment, nor can the claim of the petitioners be defeated on the plea that the <ORG> in adopting the impugned scheme committed an error of judgment. The plea would have assisted the <ORG> if the action was in law valid and the objection was that the <ORG> erred in the exercise of its discretion. It is unnecessary in the circumstances to consider whether the <ORG> acted in the interest of their party-men and to increase party funds in devising the schemes for-sale of <ORG> leaves in 1968.

During the pendency of these proceedings the entire year for which (the contracts were given has expired. The persons to whom the contracts were given are not before us, and we cannot declared the contracts which had been entered into by the <ORG> for the sale of Kendu leaves for the year 1968 unlawful in these proceedings. Counsel for the appellants agree that it would be sufficient if it be directed that the tenders for, purchase of Kendu leaves be invited by the <ORG> in the next season from all persons interested in the trade. We trust that in accepting tenders, the <ORG> <ORG> will act in the interest of, the general public and not of any class of traders so that in the next season the <ORG> may get the entire benefit of the monopoly in the trade in Kendu leaves and no disproportionate share thereof may be diverted to any private agency. Subject to these observations we make no further order in the petitions out of which these appeals arise.

There will be no order as to costs in all these appeals throughout.

V.P.S. Scheme declared invalid.