JUDGMENT Chitty, J.

1. This is a suit by <NAME> against his brother <NAME> and his nephew <NAME> to have the rights of the plaintiff under the will of his uncle <NAME> ascertained and declared. The second defendant <NAME> has not appeared to defend the suit, and the contest has therefore been between the two brothers, <NAME> and <NAME>. The sole question in the case is as to the validity of Clause 5 of the will of <NAME>, whereby he directed as follows:--"My wife <NAME> shall on my demise take the money which I have been, receiving for the expenses of services, according to my turn...to Sri Sri <NAME> Jee established by my grandmother, the late <NAME>, and perform the said services during her lifetime, and I confer on my wife <NAME> the same right that I now have to the <NAME> Jew's jewellery, plate, etc., and on her demise I confer on my nephew Sriman <NAME> Babaji the right, etc, in respect of the expenses, jewellery, etc., of the said service. He and his son's son, etc, in succession shall enjoy by performing this service." The endowment, the shebaitship of which is now in question, is a private endowment founded by <NAME>, widow of <NAME>, by an ikrar dated 25th May 1820, a postscript dated 27th February 1822, and her will dated 8th December 1842. The following pedigree table shows the family and descendants of <NAME>: [For the pedigree, see the next page.]

2. I do not propose to set out in detail the facts, as to which there is no dispute, for they appear sufficiently from the plaint. and from the various documents which have by the consent of parties been laid before the <ORG>. The will of <NAME> was made as far back as 1891, but his widow, <NAME>, did hot die until May 1906. The question as to the validity of the bequest in plaintiff's favour has therefore only recently arisen. The simple question is whether <NAME> had power to dispose of his own right of worship, and the turn (or pala) which he had enjoyed, in favour of the plaintiff to the exclusion of the defendants, who would in ordinary course have succeeded to such right of worship and pala by inheritance along with the plaintiff. There are no longer any emoluments attached to the offices, and it here fore only the bare right of service which is in dispute.

<NAME> Mr. <NAME> (d. 29 Oct. 1855.) | _____________________________________________________________________________________________________________________________________ | | | | <NAME> <NAME> (Innatic) <NAME> (d. 25 May 1864.) (d. 1 Feb. 1862) (d. 3 Dec. 1876) (d. 9 Dec. 1864) (d. 2 Aug. 1876) X X X X X Rnngonmoni <NAME>. <NAME>. <NAME>.

(d. 16 April 1878). | | (d. 1 June, 1872). | <NAME> | | | (d. 8 Jany. 1871). | ____________________ | | | | | | <NAME> Doyalchand. | _______________________________ | | | | <NAME> (d. 19 Feb. 1892). (d. 11 Nov. 1891) (adopted son). | X | | <NAME>. | ___________________________________________ ___________________________________________ | | | | | | | <NAME> <NAME> <NAME> <NAME> <NAME> <NAME>. (plaintiff). (defendant.) (d. 22 July 1900) | <NAME> (defendant).

3. A large number of oases were cited by counsel relating to religious endowments, but it was frankly conceded that there was no direct authority for or against the proposition which the plaintiff lays before the <ORG>. It would therefore serve no good purpose to discuss those authorities in detail. The law on the subject will be found in Chapter XII of Mr. <NAME>'s work on <ORG>, and in the Introduction to Ganapathi Iyyer's wort on Religious Endowments at pp. clxi--clxiii and ccxi sqq, where all the cases are given. The general conclusions I draw from the authorities may be stated in a few words. Originally both partition and alienation both of the property devoted to a religious purpose like the present, and also of the shebaitship or right of worship were alike forbidden custom, however, and convenience intervened, and the right to partition of a shebaitship came to be recognised. I may point out that it has been accepted by the family with respect to the present endowment, and has been recognised by this <ORG> in the several judgments and decrees which are now before me. The worship has for a long time past (since the days of <NAME> sons) and still is carried on by the various she baits in palas. It is in respect of one only of such palm that the present suit is brought Turning to alienations, it was pointed out by <NAME> in <NAME> v. <NAME> (1898) I.L.R. 23 Bom. 131 that a distinction has always been drawn between alienations to strangers and those to members of the family, and also between compulsory and private alienation. The learned Judge also indicated that as to private alienations no general rule prohibiting them can be lard down. It must depend on each case, first, on the expressed intentions of the founder (if any) and, secondly, and failing that on any custom or usage of the family substantiated by evidence. The two cases most relied upon by plaintiff's counsel were Sitarambhat v. Sitaram <NAME> (1869) 6 Bom. H.C. 250 and Mancharam v. <NAME> (1882) I.L.R. 6 Bom. 298. In the first, an alienation of a temple-office by a grandfather to his grandchildren by way of relinquishment was upheld. In the second, the alienation was by will to a sister's son, the widow of the testator, who was his next heir, expressing her acquiescence in the bequest. It is obvious that cases of relinquishment stand, in a different footing, for there is no exclusion of some third person.

4. In the second case cited it is not stated what were the terms of that particular endowment, and the learned Judges expressed their opinion in somewhat qualified terms. Neither case exactly meets, the present. In the case of <NAME> v. <NAME> (1890) I.L.R. 17 Calc. 557 an alienation of a private idol with its endowed land was upheld by this Court: but in that case the alienation, was made by the consent of the whole family of shebaits to another family, the object being for the benefit of the idol, to secure a continuance of the worship in accordance with the wishes of the founder, which the alienors through poverty were unable to maintain.

5. In the present case the intention of the foundress was that all her lineal descendants should hold the debutter property and jointly perform the sheba. The only alienation which she contemplated was the gift or sale by one of her sons to one or more of the others, the property being in any event retained in the same gotra. So whether by the foundress's express direction or by the ordinary rule of Hindu Law, the property and right of worship may be regarded as being in the first place hereditary. The question then arises whether there has been any modification of that principle by the usage of the family.

6. This is not pleaded and no evidence has been given of any such usage. Many members of the family have purported to deal with their right of worship by will, but the effect of that has certainly not been to establish any uniform usage or practice. Indeed in only one case, that of <NAME>, was an attempt made to divert the right of worship from the persons who would be entitled to it in ordinary succession. In that case the attempt failed, and his. five nephews as his heirs were by the decree of this <ORG>, dated. 26th August 1882, declared to be entitled to the right.

7. In <NAME>'s case his widow, <NAME>, was preferred to his son <NAME>. There was in this case also a suit and the matter was settled by arrangement. This I think is clear from the decree of 7th July 1865. Some question may arise in respect of the disposition under <NAME>'s will, but cannot happen until the death of his step mother <NAME>.

8. <NAME> bequeathed his right of worship to his sons <NAME> and <NAME>, who would in any case have succeeded him. <NAME>'s will was to the same effect as he purported to appoint his widow <NAME>. She was then his next heir, as his son <NAME> was not adopted till after <NAME>'s death.

9. <NAME>, again, directed that his three sons should perform his share of the worship jointly. It is only in <NAME> will that we find a desire to exclude altogether some of those who would be the heirs in the ordinary course, and favour one individual at the expense of the rest.

10. Under these circumstances, it appears (i) that this disposition, in Lalit Mohan is not in accordance with the wishes and intentions of the foundress, and (ii) that there is no established usage or practice in the family which could justify it. The initial presumption in the case was against the plaintiff, and the burden of proving such a usage as I have mentioned was upon him. It is evident that he has neither rebutted the one nor discharged the other. The suit therefore fails and is dismissed. The first defendant must have his cost of suit on scale 2,


PETITIONER: <ORG>, <NAME> Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, <NAME> DATE OF JUDGMENT: 08/12/1965 BENCH: <NAME>, S.M. BENCH: <NAME>, S.M. SUBBARAO, K. SHAH, J.C. CITATION: 1966 AIR 1053 1966 SCR (2) 944 CITATOR INFO : F 1967 SC 819 (5) R 1969 SC 840 (11) R 1969 SC 946 (5) E 1969 SC1160 (5) D 1975 SC 97 (20) R 1976 SC 772 (6) R 1986 SC1483 (4) ACT: Indian Income-tax Act , 1922, s. 10(2)(xv) -Loan obtained by company-Stamp duty and other expenditure incurred in obtaining the loan-Whether capital or revenue expenditure- Whether laid out for purpose of business. HEADNOTE: During the accounting period relevant for the assessment year 1950-51 the appellant company obtained a loan of 40 lakhs of rupees from <ORG>. The loan was secured by a charge on the fixed assets of the company. A sum of Rs. 84,633 was shown in the Balance Sheet for the said accounting year as mortgage loan expenses; the sum was not charged as expenditure in the profit and loss account. In the accounts for the accounting year ending March 31, 1953, this sum was written off by appropriation against profits of that year. The Income-tax Officer disallowed the deduction; he held that the expenditure was incurred in obtaining capital and should be distinguished from interest on borrowed capital which alone was admissible as a deduction under s. 10(2)(iii) . In his view the expenditure was of a capital nature and therefore not admissible under s. 10(2)(xv) either. After intermediate proceedings <ORG> in reference gave a finding upholding the view of the Income-tax Officer. The appellant by special leave, came to this Court. It was contended on behalf of the appellant that : (1) the expenditure in question was not incurred to acquire any asset or advantage of an enduring nature; (2) it was applied wholly and exclusively for the purposes of the business; and (3) was admissible as a deduction under S. 10 (2) (xv). HELD : In the circumstances of the case the expenditure in question was revenue expenditure within s. 10(2)(xv) . (i)When there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which it makes a profit, is deductible from the receipts of the business to ascertain taxable income. On the facts of the instant case, the money secured by the loan was the thing for the use of which this expenditure was made. In principle, apart from any statutory provisions, there is no distinction, as drawn by the Income-tax Officer, between interest in respect of a loan and an expenditure incurred for obtaining the loan. [950 G-H] (ii)A loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee. A loan is a liability and has to be repaid and it is erroneous to consider a liability as an asset or an advantage. [955 C] (iii)The nature of the expenditure incurred in raising a loan cannot be made to depend on the nature and purpose of the loan. A loan may be intended to be used for the purchase of raw material when it is negotiated but the company may after raising the lo-an change its mind and spend it on securing capital assets, [955 11-956 B] 945 (iv)The loan was voluntarily entered into in order to facilitate the running of the business of the company and it could not be said that it was not laid out wholly and exclusively for the purpose of the business. [958 B] Case law considered. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1106 of 1964. Appeal by special leave from the judgment and order dated the October 31, 1961 of <ORG> in Tax Case No. 67 of 1958.

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

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

The Judgment of the Court was delivered by <NAME>, <NAME> This appeal by special leave is directed against the judgment of <ORG> at Madras answering the following question of law in favour of the respondent :

"Whether on the facts and in the circumstances of the case, the <ORG> was right in law in holding that the sum of rupees 84,633/- expended by the assessee in obtaining the loan or any part thereof is an allowable expenditure ?"

The facts and circumstances of the case as stated by the <ORG> in the statement of the case are as follows : The appellant, <ORG>, Madras, hereinafter referred to as the assessee, is a public limited company. The question arises in respect of the assessment year 1950- 51, accounting period April 1, 1949 to March 31, 1950. During the accounting year it obtained a loan of 40 lakhs of rupees from <ORG>. This loan was secured by a charge on the fixed assets of the company. Since Mr. <NAME>, the learned counsel for the respondent, has disputed some facts as stated by the Appellant <ORG>, it would be convenient to give these facts in the words of the Appellate <ORG>. It is stated in the statement of the case that "the proceeds of this loan was utilised to pay off a prior debt of 25 lakhs due to Messrs <ORG> and <ORG>. It cannot be stated definitely how the balance of 15 lakhs was used but the directors, while reporting on the accounts for the year ended 31-3-1949 on 4-10-1949 stated that that was utilised towards working funds." The expenditure of Rs. 84,633/- in connection with this loan was made up of thefollowing items :

Stamps 60,02300 Registration Fee 16,,06700 Charges for certified copy of the mortgage deed 2800 Indemnity deed by <ORG> 1500 <NAME>'s fee for drafting deed 7,50000 Legal fees 1,00000 Total Rs. 84,633 0 0 The assessee did not charge this expenditure in the profits and loss account for that year. It was shown in the Balance Sheet as mortgage loan expenses. It continued to be so shown till March 31, 1952. In the accounts for March 31, 1953 this was written off by appropriation against the profits of that year.

The Income Tax Officer refused to allow the deduction of Rs. 84,633/-. He observed "As per the information furnished by the auditors, Rs. 25 lakhs of the loan was to be paid to Messrs <NAME>, Limited, and <ORG> in, discharge of the amount borrowed from them and utilised on the capital assets of the company.

Though in the Company's books the amount of Rs. 84,633 was not charged to revenue but capitalised and carried forward in the Balance Sheet, for purposes of income tax, the Company's auditors claim the same as an admissible item of revenue expenditure." He held that the expenditure was incurred in obtaining capital and should be distinguished from interest on borrowed capital which was alone admissible as a deduction under S. 10 (2) (iii). According to him, s. 10 (2) (xi) specifically excludes from consideration any item of capital expenditure. He further held that the case was not distinguishable from the decision in <ORG> v. <ORG>, Central Provinces(1). The Appellate Assistant Commissioner agreed with the Income Tax Officer. <ORG> distinguished the case of <ORG>

(1) 6 I.T.C. 28.

v. Commissioner of Income Tax(1) on the ground that in the Nagpur Electric Light(1) case money was expended for obtaining capital. It observed as follows "Here we find the position to be different. A study of the balance-sheets of the company as at 31-3-1949 discloses the fact that the paid- up capital was sufficient to cover the entire capital outlay of the company and that the further borrowal of Rs. 25 lakhs was for aug- menting the working. funds of the company. It appears to us that even at that early stage the money was borrowed and used not for capital purposes but for augmenting the working funds of the company. We, therefore, consider that the whole of the mortgage loan was used firstly to discharge the loan of Rs. 25 lakhs and the balance for working funds and, as such, the whole of the amount was purely for the purposes of augmenting the working capital of the company and that it could not be stated that it was used for capital purposes. In this view of the matter, we hold that the money expended in obtaining the loan is an allowable expenditure." <ORG>, after noticing the findings of the Income Tax Officer and the <ORG> preferred the findings of fact made by the Income Tax Officer. It observed "At this stage, we may point out that the conclusion reached by the <ORG> that the money was borrowed only for working expenses and not for capital investment proceeded on an inference based upon the balance-sheet. The <ORG> did not investigate how the sum of Rs. 25 lakhs earlier borrowed from <ORG> was actually utilised. Though in the order of the Income- tax Officer it is found stated that that amount was utilised on the capital assets of the company and that statement was based on the authority of the information furnished by the auditors of the assessee, the <ORG> either overlooked or ignored this circumstance. In the face of the statement so recorded by the Income-tax Officer, the <ORG> does not appear to have been justified in relying upon inferences in ascertaining whether the earlier borrowal was on capital or revenue account."

(1)6 I.T.C. 28.

<ORG> after reviewing various cases, observed :

"If we ask for what purpose the expenditure in the present case was incurred, the only answer must be that it was incurred for the purpose of bringing into existence an asset in the shape of borrowing these Rs. 40 lakhs. The further question would then be whether this asset or advantage was not for the enduring benefit of the business and whether the expenditure incurred was one which was incurred once and for all. The answer to both questions would again be in the affirmative. It is true that the borrowed money has to be repaid and it cannot be an enduring advantage in the sense that the money becomes part of the assets of the company for all time to come. But, it certainly is an advantage which the company derives from the duration of the loan and undoubtedly it could not have been for any purpose other than an advantage to the business that the borrowing was made. That it is not enduring in the sense that the borrowing has to be repaid after a short or long period, as it were, cannot affect the conclusion that it was nevertheless an asset or an advantage that was secured. Viewed in the light of the tests adumbrated in the above decision <CITATION> (1) it seems to us that the expenditure must be regarded as capital expenditure. As the facts of the case which we have set out earlier indicate, there can be no doubt that at least to the extent of Rs. 25 lakhs that amount was expended for purposes of a capital nature, clearly in order to bring into existence capital assets. We have also pointed out that though it was vaguely stated by the <ORG> that the other sum of Rs. 15 lakhs was utilised as working funds, there seems to be no material whatsoever before the <ORG> to justify its coming to that conclusion."

The learned counsel for the assessee company, <CITATION> , urges that the expenditure is admissible as a deduction under s. 10(2) (xv) of the Act. He says that <ORG> erred in holding that the expenditure was made to acquire any asset or advantage of an enduring nature within the test laid down by Viscount <NAME> and approved by this Court in <CITATION> (1). He (1) 27 I.T.R. 34.

further says that what was secured by the expenditure was a loan and in India money expended in raising a loan, whether by means of a debenture or a mortgage and whether you call it a loan capital or not, is not an expenditure in the nature of capital expenditure. He further submits that the expenditure was expended wholly and exclusively for the purpose of the business of the company. The learned counsel for the revenue, Mr. <NAME>, supports the reasoning of <ORG>. He says that <ORG> was right in preferring the findings of the Income Tax Officer on the ground that there was no material for the finding made by <ORG> and the finding was based on surmises and material evidence was ignored. He says that <ORG> in a reference is entitled to ignore any findings of fact made by <ORG> if those findings are vitiated. In the alternative, he says that the question referred is wide enough to include the question whether there was any material for the finding of <ORG>. On the merits he contends that expenditure takes the colour from the thing on which the expenditure is made. If the money is spent to obtain capital then the expenditure assumes the nature of capital expenditure, but if the money is spent to obtain raw-materials then the expenditure takes the colour of revenue expenditure. He further says that the borrowed money is an enduring asset and any expenditure made to obtain this money falls within the test laid down by Viscount <NAME> and approved by this Court. A number of cases have been referred to during the hearing of the case by both the counsel but we do not propose to refer to all of them. We must start first with the cases decided by this Court and see what principles have been laid down for distinguishing revenue expenditure from expenditure in the nature of capital expenditure, and especially those cases which dealt with similar problems. We will first consider <CITATION> (1). This was not a case arising under the Indian Income Tax Act but under the Madras Plantations Agricultural Income Tax Act, 1955, in which a section exactly similar to s. 10 (2) (xv) existed. In brief, the facts in that case were that the assessee had borrowed money for the purpose of purchasing the plantations and he claimed that in computing his agricultural income from these plantations the entire interest paid by him on moneys borrowed for the purpose of purchasing the plantation should be deducted as expenditure, under s. 5(e) of the Act. In (1) 8 S.C.R. 60 1 53 I.T.R. 186.

the Madras Act there was no provision similar to S. 10(2)

(iii) of the Act and thus interest was not expressly deductible as an allowance. This <ORG> applied the test formulated by Viscount ,<NAME>, L. C., in <ORG>) and approved by the <ORG> in <CITATION> (1), and held that the payment of interest was a revenue expenditure. It observed that "no new asset is acquired with it; no enduring benefit is obtained. Expenditure incurred was part of circulating or floating capital of the assessee. In ordinary commercial practice payment of interest would not be termed as capital expenditure." This <ORG> further held that the expenditure was for the purpose of business. Mr. <NAME> tried to distinguish that case on the ground that what was at issue was interest on loan and not expenditure incurred for ,obtaining the loan. In our opinion, there is no justification for drawing this distinction in India. As observed by Lord <NAME> in Scottish North American Trust v. Farmer(1) "the interest is, in truth, money paid for the use or hire of an instrument of their trade as much as is the rent paid for their office or the hire paid for a typewriting machine. It is an outgoing by means of which the Company procured the use of the thing by which it makes a profit, and like any similar outgoing should be deducted from the receipts, to ascertain the taxable profits and gains which the Company earns. Were it otherwise they might be taxed on assumed profits when, in fact, they made a loss."

It will be remembered that there was no section like s. 10(2) (iii) of the Act in the English Income Tax Act. On the other hand, there were certain rules prohibiting the deduction in respect of "any capital withdrawn from, or any sum employed or intended to be employed as capital in such trade. " or "any interest which might have been made if any such sums as aforesaid had been laid out at interest." Lord <NAME> first held in that case that the express prohibitions did not apply to the facts of the case and then proceeded to discuss general principles. These observations show that where there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which it makes a profit, is deductible from the receipts of the business to ascertain taxable income. On the facts of this case, the money secured by the loan was the thing for the use of which this expenditure was made. In principle, apart from any statutory provisions, we see no distinction between interest in respect of a loan and an expenditure incurred for obtaining the loan. (1) 10 T.C. 155. (2) 1 S.C.R. 972 : 27 I.T.R. 34.

(3)5 T.C. 693 at 707.

Mr. <NAME> urges that these observations of Lord <NAME> should be limited to a case where temporary borrowings are made. It is true that <ORG> was dealing with the case of a company and the moneys that were borrowed were of a temporary character. But this fact was only relied on to hold that the moneys secured were not 'capital' within rule 3 of First Case, section 100 (5 and 6 Vic. Ch. 35) of the Income Tax Act , 1842, for Lord <NAME> observed at p. 706;

". . . it appears to me, simply, amounts to this that the word "capital" must, in this rule, be held to bear a wholly artificial meaning differing altogether from the ordinary signification, though there be no context in the clause requiring that there should be given to it a meaning different from that which it bears in ordinary commercial transactions."

He then referred to the decision in <NAME> v. <ORG>) to show that the borrowing by a joint-stock company of money by the issue of debentures does not amount to an increasing of the capital of the company.

<CITATION> (2), this Court again examined the question of distinguishing between capital expenditure and revenue expenditure.

This Court first held that on the facts of the case, cl.

(iii) of s. 10(2) did not apply, because the assessee in that case had agreed to pay the balance of consideration due by the purchaser and this did not, in truth, give rise to a loan. Then <NAME>, J., observed :

"Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must 'be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earing process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure:' (1) 3 D.G. and J. 123. (2) [1965] 1 S.C.R. 770 :

56 I.T.R. 52 L8Sup. Cl/63-14 We will now briefly deal with relevant decisions of the High Courts. The first case referred is In re <ORG>) In that case, <ORG> had incurred an expenditure of Rs. 28 lakhs as underwriting commission paid to underwriters on an issue of 7 lakhs preference shares of Rs. 100/- each and the company claimed to deduct this amount as expenses under S. 9 (2)

(ix) of the Indian Income Tax Act (VII of 1918). <NAME>, C.J., observed:

"If it is admitted that the cost of raising the original capital cannot be deducted from profit after the first year, it is dffficult to see how the cost of raising additional capital can be treated in a different way. Expenses incurred in raising capital are expenses of exactly the same character whether the capital is raised at the flotation of the company or thereafter : <ORG> v. <NAME> (2)".

He further observed that "as long as the law allows preliminary expenses and goodwill to be treated as assets, although of an intangible nature, the money so spent is in the nature of capital expenditure just as much as money spent in the purchase of land and machinery." The Chief Justice accordingly held that Rs. 28 lakhs could not be treated as expenditure (not in the nature of capital expenditure) solely incurred for the purpose of earning the profits of the company's business. <NAME>, J., also came to the same conclusion, and he thought that the ratio decidendi in <ORG> v. <NAME> (2 ) and the principles underlying the decision in <ORG> v. Watson(1) lent support to this conclusion.

At this stage it would be convenient to consider the Case of <ORG> v. <NAME> (2) relied on in this decision. We have already mentioned that the statute law in England is different from the law in India and the observations of the learned Judges in the English cases must be appreciated in the light of the background of the English Income Tax Act. In this case a mortgage company had raised money by the issue of debentures and debenture stock and incurred expenses for the issue of mortgage and placing of such debentures and debenture-stock. The Company claimed to deduct these expenses but <ORG> held that the expenses could not be deducted under Schedule D of the English Income Tax Act as trading ex- (1) 1 I.T.C. 125.

(3) [1897] A.C. 1 (2) 3 T.C. 2S5.

penses. <NAME>, J., gave the following reasons for disallowing the claim:

"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, but there cannot be one law for a company having sufficient money to carry on all its operations and another which is content to pay for the accommodation. This appears to me to be entirely concluded by the decision of yesterday. (<ORG> v. Bell(1)".

In the course of arguments, <NAME> had remarked "It is only so much capital. A man wants to raise pound 1 00,000 of capital, and in order to do that he has to pay pound-4,000. That makes the capital pound 96,000. That is all."

In reply to the argument of <ORG>, Q.C., that "the capital of the, company, properly-so-called, is the share capital" <NAME>, <NAME> remarked :

"To the extent that you borrow you increase the capital of the company."

In our opinion, if one keeps in mind the background of the English Income Tax Act, the observations reproduced above have no relevance to cases arising under the Indian Income Tax Act . In face of rule 3, Case 1, S. 100 (5 & 6 Vict. Ch. 35) prohibiting the deduction of any expenditure in respect of any sum employed or intended to be employed as capital, <NAME> and <NAME>, JJ. were only concerned with the question whether the amount secured by debentures and the amount obtained by the issue of debentures and debenture stock could be called capital employed or intended to be employed within the meaning of this rule. Rightly or wrongly, the English Courts have held that the amount obtained by the issue of debentures is capital employed within the meaning of the rule, but this does not give us any guidance in interpreting the words 'capital expenditure' occurring in s. 10 (2) (xv) of the Act. In our opinion, <ORG> was wrong in relying on <ORG> v. <NAME>). But we do not say that the Tata Iron and Steel (1) 3 T.C. 239. (2) 3 T.C. 255.

Co. (1) case was wrongly decided. Obtaining capital by issue of shares is different from obtaining loan by debentures.

In <ORG> v. Commissioner of Income Tax(1), <ORG>, Nagpur, held that expenses for raising debenture loan required for changing the system of supplying current from D.C. to A.C. and for discharging a prior loan was not allowable as deduction of the company's assessable income. The Judicial Commissioner followed the case of <ORG> v. <NAME>) and In re <ORG>). After referring to these two cases, the only additional reason given was that "apart from authority it seems to us to stand to reason that money expended in obtaining capital must be treated as capital expendiure." With great respect we must hold that this case was wrongly decided.

<ORG> in <CITATION> (4)held that the expenditure incurred by the company a capital expenditure and was 10(2)(xv). <ORG> v. Jackson(5) Du#(1) and some other cases Madras(4) held that the expenditure raise a loan by debenture was therefore not deductible under s. relying on European investment and <ORG> v. drew a distinction between the borrowing of capital and securing merely temporary or day-to-day accommodation or banking or trading facilities. According to <ORG>, the expenses for borrowing capital could not be treated as revenue expenditure. This distinction may be valid in English Law but we are unable to appreciate how the distinction is valid under the Indian Income Tax Act . As the decision is mainly based on this distinction and relies inter alia on In re <ORG>(") and <ORG> v. Commissioner of Income Tax (2 we must with respect hold that the case was wrongly decided.

<CITATION> Court relying on Texas Land and Mortgage Company V. William Holtham(3) and the decision in <CITATION> (4) held that on the facts and circumstances of that case, brokerage and commission of four annas on every maund of sugar paid by (2) 6 I.T.C. 28. (3) 3 T.C. 255.

(1) 1 I.T.C. 125. (4) 38 I.T.R. 533.

(5) 18 T.C. 1. (6) 24 T.C. 171.

(7) 47 I.T.R. 139.

the assessee company was not revenue expenditure but capital expenditure. In our opinion, the derision, as far as the brokerage was concerned, was wrong, but we do not say anything in this case with respect to the decision as far as the commission on sale of goods was concerned. <ORG> examined the question in great detail in <CITATION> (1), <NAME>, J., held that the loan of Rs. 10 lakhs obtained by the company was an asset or advantage for the enduring benefit of the business of the assessee. He placed reliance on a number of cases,some of which we have already considered. But we are unable to agree that a loan obtained can be treated as an asset or advantage for the enduring benefit of the business of the assessee. A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount <NAME> and approved and applied by this <ORG> in many cases. <NAME>, J., after referring to a number of cases, felt that the raising of capital by issue of debentures was a recognised mode of raising capital and he felt that the decided cases had laid down the proposition that borrowing money by the issue of debentures was an acquisition of capital asset and that any commission or expenditure incurred in respect thereof was of a capital nature and not to be considered as in the nature of revenue. He was impressed by the fact that not a single case to the contrary was brought to his notice. But we have to decide the case on principle, and with respect it seems to us that he erred in treating the loan as equivalent to capital for the purpose of s. 10(2) (xv) of the Act.

<CITATION> of income Tax (2) <ORG> held that the expenditure incurred for raising loan for the carrying on of a business cannot in all cases be regarded as an expenditure of a capital nature. On the facts of the case they held that as construction and sale of the building was the sole business of the firm and the building was its stock-intrade, and the loan was raised and used wholly for the purpose of acquiring this stock-in- trade and not for obtaining any fixed assets or raising any initial capital or for expansion of the assessee's business, the expenditure incurred for the raising of loan was not an expenditure of capital nature but revenue expenditure. Although the conclusion of <ORG> was correct, we are not able to agree with the principle that the nature of the expenditure incurred in raising a loan would depend upon the nature and purpose of (1) 54 I.T.R. 592. (2) 57 I.T.R. 455.

the loan. A loan may be intended to be used for the purchase of raw-material when it is negotiated, but the company may after raising the loan change its mind and spend it on securing capital assets. Is the purpose at the time the loan is negotiated to be taken into consideration or the purpose for which it is actually used ? Further suppose that in the accounting year the purpose is to borrow and buy raw- material but in the assessment year the company finds it unnecessary to buy raw-material and spends it on capital assets. Will the income tax officer decide the case with reference to what happened in the accounting year or what happened in the assessment year ? In our opinion, it was rightly held by the Nagpur Judicial Commissioner in <ORG> v. Commissioner of Income Tax(1) that the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure.

To summarise this part of the case, we are of the opinion that (a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period-, and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within S. 10(2)(xv) .

The last contention of Mr. <NAME> is that even if it is revenue expenditure, it was not laid out wholly and exclusively for the purpose of business. <NAME>, J., reviewed the case law in <CITATION> (1) and observed as follows :

"The expression "for the purpose of the business" is wider in scope than the expression "for the purpose of earning profits." Its range is wide : it may take in not only the day to day running of a business but also the rationalisation of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile tide; it may also comprehend pay- ment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business."

(1) 6 I.T.C. 28. (2) [1964] 7 S.C.R. 693: 53 I.T.R. 140.

Mr. <NAME> says that the act of borrowing money in this case was not 'incidental to the carrying on of a business. We are unable to accept this contention. <CITATION> (") this Court held that <ORG>, an investment company, when it borrowed money on debentures, the interest paid by it was incurred solely for the purpose of making or earning such income, profits or gains within the purview of S. 12(2) of the Indian Income Tax Act . It held on a review of the facts that the transaction was voluntarily entered into in order indirectly to facilitate the running of the business of the company and was made on the ground of commercial expediency. This case, in our opinion, directly covers the present case, although Mr. <NAME> suggests that the case of an investment company stands on a different footing from the case of a manufacturing company. In some respects, their position may be different but in determining the question whether raising money is incidental to a business or not, we cannot discern any difference between an investment company and a manufacturing company. We may mention that in that case this Court was not considering whether the expenditure was in the nature of a capital expenditure or not, because it was agreed all through that the expenditure was not in the nature of capital expenditure, and the only question which this Court dealt with was whether the expenditure was incurred solely for the purpose of making or earning income, profits or gains. The case of <CITATION> (1) also supports the conclusion we have arrived at on this part of the case. It was held in that case that the payment of interest and a sum equivalent to 11/16th of the profits of the business of the assessee in pursuance of an agreement for obtaining loan from the lender were in a commercial sense expenditure wholly and exclusively laid out for the purpose of the assessees business and they were, therefore, deductible revenue expenditure.

Before we conclude we must deal with the point raised by Mr. <NAME> that <ORG> erred in law in preferring the findings of the Income Tax Officer to that of <ORG>. It is not necessary to decide this question but it seems to us that in a reference <ORG> must accept the findings of fact made by <ORG> and it is for the person who has applied for a reference to challenge those findings first by an application under s. 66(1) . If he has. failed to file an application under (1) 20 I.T.R. 1. (2)  3 S.C.R. 359 : 42 I.T.R. 7.

S.66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before <ORG> that the findings are vitiated for one reason or the other.

To conclude we hold that the expenditure of Rs. 84,633/- was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business. The answer to the question referred, therefore, must be in the affirmative. The appeal is allowed, the judgment of <ORG> set aside and the question referred answered in the affirmative. The appellant will have its costs incurred here and in <ORG>.

Appeal allowed.


CASE NO.: Appeal (civil) 1413 of 2003 PETITIONER: <NAME> RESPONDENT: Registrar, Cooperative Societies and Ors. DATE OF JUDGMENT: 28/07/2004 BENCH: <NAME>,<NAME> & <NAME>. JUDGMENT:

J U D G M E N T With CIVIL APPEAL NOs. 3774, 3775, 3776, 4446, 6415, 6416, 7282, 9854, 9933, 10244-10245 of 2003, C.A. No.4495 of 2004 (@ S.L.P.(C) No. 1096 of 2004), Civil Appeal No. 447 of 2004 S.B. SINHA, J:

Leave granted in S.L.P. (C) No. 1096 of 2004.

These appeals are directed against a judgment and order dated 24.10.2002 passed by a Division Bench of <ORG> at Madras whereby and whereunder several writ appeals filed by the Appellants herein and writ petitions filed by the Private Respondents were disposed of.

The basic fact of the matter is not in dispute.

Cooperative Societies and Land Development Banks constituted and registered in the State of Tamil Nadu used to be governed under Tamil Nadu Cooperative Societies Act, 1961 (for short "the 1961 Act") and the Tamil Nadu Land Development Banks Act, 1934. The State framed rules under the 1961 Act known as Madras Cooperative Societies Rules, 1963.

The 1961 Act and 1934 Act were repealed and replaced by Tamil Nadu Cooperative Societies Act, 1983 (for short "the 1983 Act"). Pursuant to or in furtherance of the powers conferred thereunder, the <ORG> framed rules known as the Tamil Nadu Cooperative Societies Rules, 1988 (for short "the 1988 Rules"). The 1983 Act and the 1988 Rules came into force with effect from 13.4.1988.

It is not in dispute that a large number of employees, i.e., about 39% of the total strength of the employees of the cooperative societies in the State of Tamil Nadu, were appointed without notifying the vacancies to <ORG> and without following the other mandatory provisions of the Act and the Rules framed thereunder relating to recruitment.

It is not in dispute that a large number of appointees furthermore did not have the requisite educational qualification or other qualification like cooperative training etc. The reservation policy of the <ORG> was also not followed by the cooperative societies. The Recruitments were made beyond the permissible cadre strength.

With a view to condone the serious lapses on the part of the Cooperative Societies in making such appointments in illegal and arbitrary manner, <ORG> issued various orders from time to time in terms whereof such appointments were sought to be regularised fixing a cut off date therefor. Firstly, G.O.Ms No. 790 dated 5.7.1971 was issued ratifying the irregular appointments made otherwise than through employment exchange upto 5.7.1971. Further, by G.O.Ms No. 1352 dated 7.11.1978, the cut off date was extended upto 31.12.1977. Yet again, by G.O.Ms. No. 605 dated 3.6.1980, the cut off date was extended upto 31.12.1979. By G.O.Ms. No. 312 dated 30.11.1987 the cut off date was furthermore extended upto 8.7.1980. Ultimately, by G.O.Ms. No. 86 dated 12.3.2001 the cut off date was extended upto 11.3.2001 and thereby the Government of Tamil Nadu sought to regularise appointments made after 8.7.1980 in the Cooperative Societies without notifying <ORG> in respect of those employees who had completed 480 days of service in two years purported to be in terms of Tamil Nadu Industrial Establishments (Conferment of Permanent Status to Workmen) Act , 1981 (for short 'the 1981 Act').

Relying on or on the basis of the said G.O.Ms No. 86 dated 12.3.2001, several writ petitions were filed in <ORG> at Madras praying for issuance of appropriate directions regularising the services of the employees working in <ORG> of the State of Tamil Nadu. Some writ petitions were dismissed whereagainst writ appeals were filed. A large number of writ petitions were also placed before <ORG> for hearing.

The legality and/ or validity of the aforementioned GOMs No. 86 dated 12.3.2001 fell for consideration before <ORG> in the said writ appeals and writ petitions.

Having regard to rival contentions <ORG> of <ORG> framed the following issues for its consideration:

"(i) whether the writ petitions are maintainable?

(ii) whether the cooperative societies are covered by the provisions of <ORG> (Conferment of Permanent Status to Workmen) Act , 1981 as also the Industrial Disputes Act , 1947?

(iii) Whether G.O.Ms. No. 86, dated 12.3.2001 aims at regularizing all the staff appointed to cooperative societies regardless of any defect or any violation of the Rule 149 of the Tamil Nadu Cooperative Societies Rules, 1988, as amended in 1995?

(iv) in the alternative, are the illegal appointees entitled for statutory protection of regularization and permanent status by virtue of Section 3 of the Permanency Act subject to their completion of 480 man days in a continuous period of 2 years? And

(v) whether personnel not covered by clause (iv) are entitled for protection under the Industrial Disputes Act , 1947?"

As regard Issue No. 1, it was held that the writ petitions are maintainable. Issue No. 2 was also decided in favour of the writ petitioners holding that the 1981 Act is applicable to the employees of <ORG>.

Issues No. 3, 4 and 5 were taken up for consideration together.

<ORG> by reason of the impugned judgment opined that the provisions of the 1981 Act would not be applicable as regard appointments made in violation of the statute or statutory rules. It was further held that in any event in terms of the 1981 Act and the G.O.Ms. No. 86 dated 12.3.2001 what had been exempted by the <ORG> was the condition relating to the statutory obligation on the part of the Cooperative Societies to notify <ORG> as regard the existing vacancies and not other statutory conditions. <ORG> held:

"(i) that <ORG>, <ORG>, dated 12.3.2001, has got the effect of only authorizing the regularization of the employees recruited by the cooperative societies for the period from 9.7.1980 to 11.3.2001 exempting the intervention of employment exchange;

(ii) that <ORG>, <ORG>, dated 12.3.2001, shall not operate for regularization of any employee recruited by the cooperative societies in violation of Sub-Rule (1) of Rule 149 of the Tamil Nadu Cooperative Societies Rules, as amended by <ORG>, <ORG>, dated 4.7.1995;

(iii) in societies, where the cadre strength has not been fixed, direct them to adopt the special bye- law in conformity with sub-Rule (1) of Rule 149 of the Tamil Nadu Cooperative Societies Rules, as amended by GOMs No. 212, Cooperation, Food and Consumer Protection Department, dated 4.7.1995;

(iv) direct the Registrar of Cooperative Societies to issue a circular within a week from today calling upon all the cooperative societies in the State of Tamil Nadu to comply with the direction in clause

(iii) supra;

(v) direct that within two months of the approval of the special bye laws under sub-rule (1) of the Rule 149 of the Rules, the respective Deputy Registrars of Cooperative Societies having jurisdiction over the cooperative societies in their Divisions, shall enquire by issuing notice to the entire staff recruited from 9.7.1980 to 11.3.2001, and decide as to whether the said recruitment is in conformity with the special bye laws approved by <NAME> and terminate the services of such staff members, whose appointments are in contravention of the special bye laws so approved by <NAME>;

It is made clear that while considering the validity or otherwise of the appointment of the staff cooperative societies, the requirement of notifying the vacancies to employment exchange shall not be taken cognizance of.

(vi) that no cooperative staff member appointed subsequent to G.O.Ms. No. 86, Cooperation, Food and Consumer Protection Department, dated 12.3.2001 otherwise than through employment exchange shall be continued in service and their services shall be terminated forthwith.

(vii) that either the provisions of Tamil Nadu Industrial Establishments (Conferment of Permanent Status to Workmen) Act , 1981 or the Industrial Disputes Act , 1947, or the settlements entered under Sections 12 or 18 thereof, shall have no application to the staff of the cooperative societies appointed without adequate qualifications or beyond the cadre strength for the period from 9.7.1980 to 11.3.2001. This is equally applicable to the staff appointed to the cooperative societies, otherwise than through employment exchange, for the period from 12.3.2001 onwards."

Mr. <NAME>, learned senior counsel appearing on behalf of the appellant relying on or on the basis of the decision of this Court in <NAME> and Others Vs. <ORG> [(1991) 1 SCC 28] would submit that having regard to the fact that the appellants had been working in the cooperative societies for a long time, <ORG> committed a serious error in not holding that they had acquired a right for regularization.

In any event, Mr. <NAME> would contend that each employee was individually entitled to be given an opportunity of being heard so as to enable the competent authority to come to the conclusion as to whether they had fulfilled the requirements contained in the aforementioned GOMs No. 86 dated 12.3.2001 or not. Reliance in this behalf has been placed on <NAME> and Others Vs. <ORG> and Others [(1985) 3 SCC 545].

The learned counsel appearing on behalf of the respondents, on the other hand, supported the judgment of <ORG>.

The primal question which arises for consideration in these appeals is as to whether the <ORG> had the requisite authority to direct regularisation of services of the employees of the cooperative societies by reason of the impugned GOMs No. 86 dated 12.3.2001.

The 1983 Act was enacted inter alia to make better provision for, the organization, management and supervision of cooperative societies in the State of Tamil Nadu as also for providing for an orderly development of the cooperative movement in accordance with cooperative principles. Indisputably, in terms of the provisions of the 1983 Act, the cooperative societies are required to be registered thereunder and are also liable to comply with the provisions thereof as also the rules framed thereunder. Before the <ORG> source of the power of the State to issue the said G.O.Ms. No. 86 dated 12.3.2001 was traced to Sections 182 and 170 of the 1983 Act as also Article 162 of the Constitution of India.

Section 170 of the Act provides for power of the <ORG> to exempt registered societies from any of the provisions of the Act other than clause (b) of sub-section (1) of section 88 and sub-section (1) of section 89 of this Act, or of the rules, subject to such conditions as may be specified and direct that such provisions of the rules shall apply to such society with such modifications as may be specified in the order. It is not the case of any of the parties that any such order of exemption had been passed in favour of any of the cooperative societies. Section 170 of the 1983 Act, therefore, does not confer any power upon the <ORG> to issue the impugned order.

In any view of the matter such an order could not have been passed with retrospective effect condoning the actions on the part of the cooperative societies which were in flagrant violations of the provisions of the Act and the Rules made thereunder.

Section 182 of the 1983 Act reads as under:

"182. Power of Government to give directions.-(1) The Government may, in the public interest, by order, direct the Registrar to make an inquiry or to take appropriate proceedings under this Act, in any case specified in the order, and the Registrar shall report to the Government the result of the inquiry made or the proceedings taken by him within a period of six months from the date of such order or such further period as the Government may permit.

(2) In any case, in which a direction has been given under sub-section (1), the Government may, notwithstanding anything contained in this Act, call for and examine the record of the proceedings of the Registrar and pass such orders in the case as they may think fit:

Provided that before passing any order under this sub-section the person likely to be affected by such order shall be given an opportunity of making his representation."

A bare perusal of the aforementioned provision would clearly go to show that the impugned Government Order could not have been issued by the State in terms thereof as the same can be taken recourse to only for the purposes mentioned therein and not for any other. It is not a case where the Government directed the Registrar to make an enquiry against a person in the public interest. Article 162 of the Constitution of India provides for extension of executive power to the matters with respect of which <ORG> has power to make laws. Article 162 of the Constitution by no stretch of imagination is attracted as the source of the power of the State to pass an appropriate order must be traced to the provisions of the Act itself. If the State had no power to issue the said GOMs No. 86 dated 12.3.2001 the same must be held to be a nullity.

Let us now consider the extent to which the provisions of the 1981 Act would apply to the fact of the present case.

The 1981 Act applies only to industrial establishments. Industrial Establishment has inter alia been defined to mean "an establishment as defined in clause (6) of Section 2 of the Tamil Nadu Shops and Establishments Act , 1947 (Tamil Nadu Act XXXVI of 1947)".

Establishment has been defined in Section 2(6) of the Tamil Nadu Shops and Establishments Act , 1947 as under:

"'Establishment' means a shop, commercial establishment, restaurant, eating house, residential hotel, theater or any place of public amusement or entertainment and includes such establishment as the State Government may by notification declare to be an establishment for the purpose of this Act."

Mr. <NAME> urged that the cooperative societies are Commercial Establishments.

Whether <ORG> would be a commercial establishment or not would essentially be a question of fact. It cannot be said keeping in view the legislative intent that all cooperative societies would be 'commercial establishments' within the meaning of the Tamil Nadu Shops and Establishments Act , 1947. It, therefore, appears that the impugned Government Order has been issued by the State without proper application of mind. It has furthermore not been stated in the impugned Government Order that all the cooperative societies are commercial establishments within the meaning of Section 2(6) of the Tamil Nadu Shops and Establishments Act , 1947.

<ORG> and <ORG> are governed by the statutes under which they have been created as also the Rules and bye laws framed thereunder. The cooperative societies are obligated to follow the cooperative principles as laid down in the Act and the Rules framed thereunder.

The <ORG> had framed rules in exercise of its power conferred upon it under Section 180 of the 1983 Act in the year 1988. Rule 149 of the 1988 Rules provides for a complete code as regard the mode and manner in which appointments were required to be made and the process of appointments is required to be carried out. In terms of the said Rule, requirements to possess educational qualification and other qualifications had been laid down. One of the essential qualifications laid down for holding certain posts is 'undergoing cooperative training and previous experience'.

At this juncture, we may notice some of the provisions contained in Rule 149 of the 1988 Rules.

Sub-rule (3) of Rule 149 read as under:

"(a) No appointment by direct recruitment to any post shall be made except by calling for from the societies applications from their employees who possess the qualifications for the post and unless the Government have accorded special sanction for recruitment by advertisement in dailies, by also calling for a list of eligible candidates from <ORG>.

(b) Where <ORG> issues a non-availability certificate or the <ORG> have accorded special sanction for recruitment by advertisement in dailies, the society shall invite applications from candidates including those working in other societies by advertisements in one English daily and two Tamil dailies having circulation within the area of operations of the society approved by the <ORG> for the purposes of issue of <ORG> advertisements.

(c) Every appointment by direct recruitment shall be made by holding written examination and interview or by holding only interview as decided by the board and on the basis of the rank given with reference to the marks obtained in the written examination, if any, and the marks awarded in the interview:

Provided that nothing contained in this sub-rule shall apply to any of the posts for the recruitment of which <ORG> has been constituted under section 74 or in respect of which common cadre of service has been constituted under section 75 ;

Provided further that nothing contained in this sub- rule shall apply to appointments of dependents of the employees of any society who died or medically invalidated while in service."

Sub-rule (4) of Rule 149 mandates that no person shall be appointed to the service of a society if he has on the date on which he joins the post, attained the age of thirty years and in the case of persons belonging to Scheduled Castes and Scheduled Tribes thirty-five years.

Sub-rule (25) of Rule 149 provides that the principle of reservation of appointment for Scheduled Castes/ Scheduled Tribes and Backward Classes followed by <ORG> for recruitment to the State shall apply.

No appointment, therefore, can be made in deviation of or departure from the procedures laid down in the said statutory rules.

The terms and conditions of services are also laid down in the said rules.

The 1983 Act was furthermore amended in the year 1995 providing for cadre strength which is directly relatable to the income of the cooperative societies.

Provisions of the Act and the Rules framed thereunder reflect the legislative recruitment policy. The said provisions are, thus, mandatory in nature.

Regularisation, in our considered opinion, is not and cannot be the mode of recruitment by any "State" within the meaning of Article 12 of the Constitution of India or any body or authority governed by a Statutory Act or the Rules framed thereunder. It is also now well-settled that an appointment made in violation of the mandatory provisions of the Statute and in particular ignoring the minimum educational qualification and other essential qualification would be wholly illegal. Such illegality cannot be cured by taking recourse to regularisation. (See State of H.P. Vs. <NAME> and Another, ).

It is equally well-settled that those who come by backdoor should go through that door. (See <ORG> and Others Vs. <ORG>, (1994) 2 SCC 204) Regularisation furthermore cannot give permanence to an employee whose services are ad-hoc in nature.

The question came up for consideration before this Court as far back in 1967 in State of Mysore & Anr. Vs. S.V. Narayanappa [(1967) 1 SCR 128] wherein this Court observed "Before we proceed to consider the construction placed by <ORG> on the provisions of the said order we may mention that in <ORG> both the parties appear to have proceeded on an assumption that regularisation meant permanence. Consequently it was never contended before <ORG> that the effect of the application of the said order would mean only regularising the appointment and no more and that regularisation would not mean that the appointment would have to be considered to be permanent as an appointment to be permanent would still require confirmation. It seems that on account of this assumption on the part of both the parties <ORG> equated regularisation with permanence."

This Court yet again in <NAME> Vs. T. Thimmaiah & Anr. [(1972) 2 SCR 799], it was held:

"If the appointment itself is in infraction of the rules or if it is in violation of the provisions of the Constitution illegality cannot be regularised. Ratification or regularisation is possible of an act which is within the power and province of the authority but there has been some non-compliance with procedure or manner which does not go to the root of the appointment. Regularisation cannot be said to be a mode of recruitment. To accede to such a proposition would be to introduce a new head of appointment in defiance of rules or it may have the effect of setting at naught the rules."

The said decisions of this Court have received approval of a 3-Judge Bench of this Court in B.N. Nagarajan and Others Vs. State of Karnataka and Others [(1979) 4 SCC 507] it was held that the procedures for appointment as contained in the Rules framed under Article 309 of the Constitution of India must be complied with. No regularisation is, thus, permissible in exercise of the statutory power conferred under Article 162 of the Constitution if the appointments have been made in contravention of the statutory Rules.

<NAME> (supra) has also been followed by this Court in several decisions in <NAME> and Others, etc. Vs. <NAME> and Others [AIR 1984 SC 885], <NAME> and others Vs. State of Karnataka and others [AIR 1994 SC 55] and <NAME> and others Vs. Govt. of Andhra Pradesh and others [AIR 1995 SC 586].

The said decisions have been recently noticed by a Division Bench of this Court in <NAME> Vs. <NAME> and Others [(2004) 2 SCC 377].

In State of M.P. and Another Vs. Dharam Bir [(1998) 6 SCC 165], it was observed that the government services are essentially a matter of status rather a contract and in that context it was observed:

"26. Whether a person holds a particular post in a substantive capacity or is only temporary or ad hoc is a question which directly relates to his status. It all depends upon the terms of appointment. It is not open to any government employee to claim automatic alteration of status unless that result is specifically envisaged by some provision in the statutory rules. Unless, therefore, there is a provision in the statutory rules for alteration of status in a particular situation, it is not open to any government employee to claim a status different than that which was conferred upon him at the initial or any subsequent stage of service.

27. Applying these principles to the instant case, since the respondent, admittedly, was appointed in an ad hoc capacity, he would continue to hold the post in question in that capacity"

It is trite that appointments cannot be made on political considerations and in violation of the government directions for reduction of establishment expenditure or a prohibition on the filling up of vacant posts or creating new posts including regularization of daily-waged employees. (See <ORG> Vs. <NAME> and Others [(1998) 9 SCC 258]) Yet again, in <NAME> and Others Vs. State of Assam and Others [(2001) 1 SCC 143], it was noticed:

"14The decisions cited by Mr. <NAME>, in support of his contention, not only do not support his contention but on the other hand, appears to us to be against his contention. In <NAME> case ((1997) 2 SCC 1 : 1997 SCC (L&S) 267) this Court in no uncertain terms held that as the appointments had been made illegally and contrary to all recognised recruitment procedures and were highly arbitrary, the same were not binding on the State of Bihar. This Court further went on to hold in the aforesaid case that the initial appointments having been made contrary to the statutory rules, the continuance of such appointees must be held to be totally unauthorised and no right would accrue to the incumbent on that score. The Court had also held that it cannot be said that the principles of natural justice were violated or full opportunity was not given to the employees concerned to have their say in the matter before their appointments were recalled and terminated"

This Court has considered this aspect of the matter in various other decisions, viz., <ORG> Jabalpur, M.P. Vs. <NAME> and Others [(1997) 5 SCC 86], <NAME> and Others Vs. State of Bihar and Others [(1997) 2 SCC 1], Dr. <NAME> Vs. State of Maharashtra and Others [(1994) Suppl. 3 SCC 380], <ORG> and Others Vs. Dr. <NAME> and Others [(1994) 2 SCC 630], and Dr. <NAME> and Another Vs. State of J & K and Others [(1996) 9 SCC 619].

Even recently in <NAME> and others Vs. State of J & K and others [(2000) 7 SCC 371], this Court opined:

"28.The decisions of this Court have recently been requiring strict conformity with the Recruitment Rules for both direct recruits and promotees. The view is that there can be no relaxation of the basic or fundamental rules of recruitment."

It was further observed:

"29. Similarly, in <CITATION> ( : 1993 SCC (L&S) 607 : (1993) 24 ATC 259) it was held that though the power of relaxation stated in the rule was in regard to "any of the provisions of the rules", this did not permit relaxation of the rule of direct recruitment without consulting the Commission and the entire ad hoc service of a direct recruit could not be treated as regular service. Similarly, in <CITATION> ( : 1993 SCC (L&S) 412 : (1993) 24 ATC

117) it was held that for direct recruitment, the rules relating to recruitment through <ORG> could not be relaxed. <CITATION> ( : 1994 SCC (L&S) 723 :

(1994) 27 ATC 56) it was held that the provisions of the J&K Medical Recruitment Rules could not be relaxed for direct recruitment. The backdoor direct recruitments, could not be permitted. (See also <CITATION> (1994 Supp (3) SCC 380 : 1995 SCC (L&S) 31 : (1994) 28 ATC 415).) <CITATION> ( : 1996 SCC (L&S) 1296) this Court directed the direct recruits to go before <ORG>."

In Dr. <NAME> (Mrs.) Vs. State of Rajasthan [(2003) 3 SCC 485] this Court categorically held that there was no scope of regularization unless the appointment was made on a regular basis.

In <ORG> Vs. <ORG> Delhi and others [(1992) 4 SCC 99] the Court emphasized how judicial sympathy to the workmen could boomerang upon the purpose wherefor Schemes like Jawahar Rozgar Yojna have been framed, and thereby in the larger context, deny the limited benefit extended by the <ORG> to the unemployed which would not be available but for such schemes. (See also Executive Engineer (<ORG> of Karnataka) Vs. <NAME> and Others, (1997) 5 SCC 434) In M.D., <ORG> and Another Vs. <NAME> and Others [(2003) 5 SCC 388], this Court noticed a large number of earlier decisions of this Court wherein it had been held that once employees are appointed for the purpose of Scheme, they do not acquire any vested right to continue after the project is over.

In State of Haryana and Another Vs. <NAME> and Others [(2003) 6 SCC 123] a Division Bench of this Court held that a person appointed as daily wager holds no post and thus, not entitled to claim the benefit of equal pay for equal work. (See also <ORG> and Another Vs. <NAME>, (2003) 5 SCC 188).

In State of Himachal Pradesh through the Secretary, Agriculture to the Govt. of Himachal Pradesh Vs. <NAME> and Others [AIR 1997 SC 1445], this Court stated the law in the following terms:

"4. It is seen that when the project is completed and closed due to non-availability of funds, the employees have to go along with its closure. <ORG> was not right in giving the direction to regularise them or to continue them in other places. No vested right is created in temporary employment. Directions cannot be given to regularise their services in the absence of any existing vacancies nor can directions be given to the <ORG> to create posts in a non-existent establishment. The Court would adopt pragmatic approach in giving directions. The directions would amount to creating of posts and continuing them despite non availability of the work. We are of the considered view that the directions issued by <ORG> are absolutely illegal warranting our interference. The order of <ORG> is therefore, set side."

A Division Bench of this Court in <NAME> Vs. <NAME> and Another [(2003) 5 SCC 12] upon noticing the decision of this Court in <ORG> (supra) observed:

"A good deal of illegal employment market has developed, resulting in a new source of corruption and frustration of those who are waiting at <ORG> for years. Not all those who gain such back-door entry in the employment are in need of the particular jobs. Though already employed elsewhere, they join the jobs for better and secured prospects. That is why most of the cases which come to the courts are of employment in government departments, public undertakings or agencies. Ultimately it is the people who bear the heavy burden of the surplus labour. The other equally injurious effect of indiscriminate regularization has been that many of the agencies have stopped undertaking casual or temporary works though they are urgent and essential for fear that if those who are employed on such works are required to be continued for 240 or more days have to be absorbed as regular employees although the works are time-bound and there is no need of the workmen beyond the completion of the works undertaken. The public interests are thus jeopardized on both counts."

Yet again in <ORG> Vs. <NAME> and Others [(2003) 8 SCC 248], noticing that the respondents were not recruited through the employment exchange or through any other accepted mode of selection and further noticing that it was also not known whether there was any advertisement calling for applications for these appointments, the prayer for reinstatement of service was rejected.

Although we do not intend to express any opinion as to whether the cooperative society is a "<ORG>" within the meaning of Article 12 of the Constitution of India but it is beyond any cavil of doubt that the writ petition will be maintainable when the action of the cooperative society is violative of mandatory statutory provisions. In this case except the <ORG> functions and supervision of the cooperative society, the <ORG> has no administrative control over its day to day affairs. The <ORG> has not created any post nor they could do so on their own. The <ORG> has not borne any part of the financial burden. It was, therefore, impermissible for the <ORG> to direct regularization of the services of the employees of the cooperative societies. Such an order cannot be upheld also on the ground that the employees allegedly served the cooperative societies for a long time.

In <ORG> Vs. <NAME> (Smt.) and Others [(2003) 10 SCC 405], <ORG> of this Court rejected a similar contention stating:

"8 The learned counsel therefore contends that there is every justification for absorbing the respondents concerned on regular basis in recognition of their long satisfactory service. The learned counsel further contends that the ad hoc arrangement to employ them on consolidated pay should not go on forever. The contention of the learned counsel cannot be sustained for more than one reason and we find no valid grounds to grant the relief of regularization. There is nothing on record to show that the employees concerned were appointed after following due procedure for selection. Apparently, they were picked and chosen by the university authorities to cater to the exigencies of work in <ORG>."

In Jacob M. Puthuparambil (supra) whereupon Mr. <NAME> placed strong reliance, a 3-Judge Bench of this Court noticed that by reason of the statutory rules, regularization was sought to be made of such employees who were appointed under posts required to be filled if (i) it is necessary in public interest and (ii) where an emergency has arisen to fill any particular post which has fallen vacant, immediately. Therein it was further noticed that Clause (e) of Rule 9 provided for regularization of service of any person appointed under clause (i) of sub-rule (a) if he had completed continuous service of two years on December 22, 1973, notwithstanding anything contained in the rules.

<NAME> (supra) has been distinguished by this Court in several decisions including 3-Judge Bench of this Court in Director, <ORG>, <NAME> Vs. <NAME> (<ORG>.) [(1992) 4 SCC 33] and <NAME> (supra).

We do not intend to say any more on the subject as even constitutionality of such a provision is pending for consideration before the Constitution Bench of this Court. (See Secretary, State of Karnataka & Ors. Vs. <NAME> and Ors. 2003 (10) SCALE 388).

We are also of the opinion that in a case of this nature, where the validity or otherwise of a government order is in question, the principles of natural justice will have no role to play and in any event recourse thereto would result in futility.

In Civil Appeal No. 1413 of 2003 an additional ground has been raised to the effect that as the appellant was appointed on a compassionate ground, this Court on sympathetic consideration should issue appropriate directions directing the respondents to regularize her services. It appears that the appellant was appointed as supervisor in 3rd respondent <ORG> by the President of the <ORG> on a consolidated pay of Rs. 2500/- by an order dated 5.03.2001. Her appointment is said to have been made on compassionate ground on the plea that her husband had deserted her. It has not been shown before us that there exists a scheme in terms whereof deserted woman can be appointed on compassionate grounds. Even such appointment, in our opinion, would be illegal.

In State of Manipur Vs. Md. <NAME> [(2003) 7 SCC 511], this Court observed that the purpose of providing appointment on compassionate ground is to mitigate the hardship due to death of the breadwinner in the family.

In a case of this nature this court should not even exercise its jurisdiction under Article 142 of the Constitution of India on misplaced sympathy.

In <ORG> Vs. <ORG>, Chandigarh and Others [(2004) 2 SCC 130], it is stated:

"We have no doubt in our mind that sympathy or sentiment by itself cannot be a ground for passing an order in relation whereto the appellants miserably fail to establish a legal right. It is further trite that despite an extra-ordinary constitutional jurisdiction contained in Article 142 of the Constitution of India, this Court ordinarily would not pass an order, which would be in contravention of a statutory provision.

As early as in 1911, Farewell L.J. in Latham vs. Richard Johnson & Nephew Ltd. [1911-13 AER reprint p.117] observed :

"We must be careful not to allow our sympathy with the infant plaintiff to affect our judgment. Sentiment is a dangerous <ORG> to take as a guide in the search for legal principles."

Yet again recently in Ramakrishna Kamat & Ors. Vs. State of Karnataka & Ors. [JT 2003 (2) SC 88], this Court rejected a similar plea for regularization of services stating :

"We repeatedly asked the learned counsel for the appellants on what basis or foundation in law the appellants made their claim for regularization and under what rules their recruitment was made so as to govern their service conditions. They were not in a position to answer except saying that the appellants have been working for quite some time in various schools started pursuant to resolutions passed by zilla parishads in view of the government orders and that their cases need to be considered sympathetically. It is clear from the order of the learned single judge and looking to the very directions given a very sympathetic view was taken. We do not find it either just or proper to show any further sympathy in the given facts and circumstances of the case. While being sympathetic to the persons who come before the court the courts cannot at the same time be unsympathetic to the large number of eligible persons waiting for a long time in a long queue seeking employment."

For the reasons aforementioned, we do not find any merit in these appeals which are dismissed accordingly. No costs.