"REPORTABLE" IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL No. 6499 OF 2002 Grand Kakatiya Sheraton Hotel & Towers Employees & Workers Union .... Appellant Versus <ORG> .... Respondents JUDGMENT

<NAME>, J.

This appeal is directed against the judgment and order passed by <ORG>, whereby, Sections 47(3) and 47(4) of the Andhra Pradesh Shops & Establishments Act , 1988 (hereinafter referred to as `the Shops Act') are declared unconstitutional, discriminatory and violative of the Articles 14 and 19(1)(g) of the Constitution of India. Following facts would be necessary to understand the controversy.

2. Respondent No. 1 M/s. Srinivasa Resorts Ltd. is a company incorporated under the Companies Act , while the respondent No. 2 is a shareholder of the said company. Respondent No. 1 company is engaged in business of managing and running hotels. They have hotel in the name and style of "<ORG>", which is being run by <ORG>, which is another company incorporated under the Companies Act . The said hotel is registered under the provisions of the Shops Act. The appellant is <ORG> and workers of the said hotel. Assistant Labour Officer, respondent No. 4 herein, visited the hotel at the instance of the appellant <ORG> on 31.5.2001 and as required by him, the respondent Nos. 1 & 2 furnished information regarding the employees, who had left the service of the hotel during last 2-3 years, as also the amounts paid to them towards full and final settlement of the dues. The respondent company, by letter dated 6.8.2001, also furnished the receipts signed by the employees who had left the hotel in token of the amounts received by them. It seems that, thereafter, there was lot of correspondence between the respondent No. 1 company and respondent No. 4 Assistant Labour Officer on the issue, whereby, the Assistant Labour Officer was insisting upon the respondent Company to furnish the final settlement statements of the employees, who had left the service of the hotel, in order to know whether any service compensation had been paid to them or not in accordance with the provisions of the Shops Act. It was pleaded by the respondent company that no further documents except those which were already produced, were available with them. However, the Assistant Labour Officer, by his letter dated 7.8.2001, called upon the respondent company to show cause as to why penal action should not be taken under Section 16(3) of the Act for failure to furnish the required documents. It is at this juncture that a Writ Petition came to be filed before <ORG> by the respondent Nos. 1 & 2 herein, whereby, constitutional validity of the provisions of Sections 47(3) and 47(4) of the Shops Act in question, was challenged on the ground that they are illegal, invalid, inoperative and unsustainable in law and violative of Article 13 , 14 and 19(1)(g) of the Constitution of India. Since the action against the respondent company was initiated by the appellant Grand Kakatiya Sheraton Hotel & Towers Employees & Workers <ORG> (hereinafter referred to as `the <ORG>' for short), the said <ORG> joined as a party, as the respondent No. 3 to the Writ Petition. An injunction was also sought for against the concerned authorities under the Act and more particularly, <ORG> and the Assistant Labour Officer, restraining them from inferring the provisions of Sections 47(3) and 47(4) of the Shops Act against the respondent company. This Writ Petition was allowed by <ORG>, whereby, <ORG> declared the two aforementioned provisions as unconstitutional and amounting to unreasonable discrimination and violative of Article 14 of the Constitution of India.

3. The original respondent <ORG> has filed the present appeal, challenging the impugned judgment.

4. There was one other appeal being Civil Appeal No. 2746 of 2006, which was attached with the present Civil Appeal No. 6499 of 2002, however, when the matter was called for hearing on 5.11.2008, nobody remained present for arguing that appeal, which was dismissed for non-prosecution with no orders as to the costs. We are, therefore, left with Civil Appeal No. 6499 of 2002 only.

5. Before we note and appreciate the rival contentions, it will be better to see the impugned provisions along with the legislative history thereof.

6. The Andhra Pradesh Shops and Establishments Act (Act No. 15 of 1966) (hereinafter referred to as `the 1966 Act') came on the anvil in the year 1966. Section 40 of the 1966 Act provided for conditions for terminating the service of an employee, as also the payment of gratuity to him. This provision came to be amended in the year 1976 by reason of Act No. 53 of 1976, however, the said Act was repealed by the present Act of 1988. The present Act of 1988 provides for conditions of terminating the services of an employee and payment of service compensation for termination, retirement, resignation etc. In short, Section 40 of the 1966 Act and Section 47 of the 1988 Act are pari-materia Sections. It will be better to compare the unamended Section 40 , that existed from 1966 till its amendment in 1976, secondly, the amended Section 40 of the 1966 Act as amended by Act No. 53 of 1976 and Section 47 of the present 1988 Act, more particularly, sub- Sections 3 , 4 and 5 thereof, as they stood on the date of petition. The following tables would succinctly bring out the qualitative changes made in the texture of the said Section. At the same time, they would give us the idea as to how a liability was created via sub- Sections 3 and 4 for the payment of the service compensation and the conditions for such payment.

Section 40 of A.P. Shops and Establishments Act , 1966 prior to 1976:-

Conditions for terminating the service of an employee and payment of gratuity:-

1 No employer shall without a reasonable cause and except for misconduct, terminate the services of an employee and payment of gratuity. 2 No employer shall without a reasonable cause and except for misconduct, terminate the services of an employee, who has been in his employment continuously for a period of not less than six months without giving such employee at least one month's notice in writing or wages in lieu thereof and gratuity amounting to fifteen days' average wages for each year of continuous service.

3 An employee who has completed the age of sixty years or who is physically or mentally unfit having been declared by a medical certificate, or who wants to retire on medical grounds or to resign his services, may give up his employment after giving to his employer, notice of at least one month in the case of an employee of sixty years of age, and fifteen days in any other case; and every such employee and the dependant of an employee who dies while in service, shall be entitled to receive a gratuity amounting to fifteen days' average wages for each year of continuous employment calculated in the manner provided in the explanation to sub-Section (1). He shall be entitled to receive the wages from the date of giving up the employment until the date on which the gratuity so payable is actually paid subject to a maximum of wages for two months. Section 40 of A.P. Shops and Establishments Act , 1966 as amended by Act No. 53 of 1976:-

1 No employer shall without a reasonable cause and except for misconduct, terminate the services of an employee, who has been in his employment continuously for a period of not less than six months without giving such employee at least one month's notice in writing or wages in lieu thereof and in respect of an employee who has been in his employment continuously for a period of not less than five years, a gratuity amounting to fifteen days' average wages for each year of continuous service.

2 An employee who has completed the age of sixty years or who is physically or mentally unfit having been declared by a medical certificate, or who wants to retire on medical grounds or to resign his services, may give up his employment after giving to his employer, notice of at least one month in the case of an employee of sixty years of age, and fifteen days in any other case; and every such employee and the dependant of an employee who dies while in service, shall be entitled to receive a gratuity as provided in sub-Section (1). He shall be entitled to receive the wages from the date of giving up the employment until the date on which the gratuity so payable is actually paid subject to a maximum of wages for two months amounting to fifteen days' average wages for each year of continuous employment calculated in the manner provided in the explanation to sub-Section (1). He shall be entitled to receive the wages from the date of giving up the employment until the date on which the gratuity so payable is actually paid subject to a maximum of wages for two months.

Section 47(3) , (4) and (5) of A.P. Shops and Establishments Act , 1988:-

Conditions for terminating the service of an employee, payment of service compensation for termination, retirement, resignation, disablement etc. and payment of subsistence allowance for the period of suspension:-

1 No employer shall without a reasonable cause and except for misconduct, terminate the services of an employee, who has been in his employment continuously for a period of not less than six months without giving such employee at least one month's notice in writing or wages in lieu thereof and in respect of an employee who has been in his employment continuously for a period of not less than one year, a service compensation amounting to fifteen days average wages for each year of continuous employment: provided that every termination shall be made by the employer in writing and a copy of such termination order shall be furnished to the Inspector having jurisdiction over the area within three days of such termination. 2 The service of an employee shall not be terminated by the employer when such employee made a complaint to the Inspector regarding the denial of any benefit accruing to him under any labour welfare enactment applicable to the establishment and during the pendency of such complaint before the Inspector. The services of an employee shall not also be terminated for misconduct except for such acts or omissions and in such manner as may be prescribed. 3 Every employee who has put in a continuous service of not less than one year, shall be eligible for service compensation amounting to fifteen days' average wages for each year of continuous employment (i) on voluntary cessation of his work after completion of 60 years of age, (ii) on his resignation, or (iii) on physical or mental infirmity duly certified by a registered medical practitioner or (iv) on his death or disablement due to accident or disease: provided that the completion of continuous service of one year shall not be necessary where the termination of the employment of an employee is due to death or disablement:

provided further that in case of death of an employee service compensation payable to him shall be paid to his nominee or if no nomination has been made to his legal heir.

4 Where a service compensation is payable under this Section to an employee, he shall be entitled to receive his wages from the date of termination or cessation of his services until the date on which the service compensation so payable is actually paid.

5 The payment of service compensation under this Section shall not apply in cases where the employee is entitled to gratuity under the payment of Gratuity Act , 1972 and gratuity has been paid accordingly consequent on the termination or cessation of service.

At this juncture, it will be necessary to see definitions in the amended Act. Section 2 gives definitions in the Act.

2(5): `Commercial establishment' means an establishment which carries on any trade business, profession or any work in connection with or incidental or ancillary to any such trade business or profession or which is a commercial or trading or banking or insurance establishment and includes an establishment under the management and control of a co-operative society, an establishment of a factory or an industrial undertaking which falls outside the scope of the Factories Act , 1948 (Central Act 63 of 1948), and such other establishment as the Government may, by notification, declare to be a commercial establishment for the purposes of this Act but does not include a shop'.

2(8) `employee' means a person wholly or principally employed in and in connection with any establishment and includes an apprentice and any clerical or other staff of a factory or an industrial establishment who fall outside the scope of Factories Act , 1948 (Central Act 63 of 1948); but does not include the husband, wife, son, daughter, father, mother, brother or sister of an employer or his partner, who is living with and depending upon such employer or partner and is not in receipt of any wages;

2(9) `employer' means a person having charge of or owning or having ultimate control over the affairs of an establishment and includes the Manger, Agent or other person acting in the management or control of an establishment; 2(10) `establishment' means a shop, restaurant, eating house, residential hotel, lodging house, theatre or any place of public amusement or entertainment and includes a commercial establishment and such other establishment as the Government may, by notification, declare to be an establishment for the purpose of this Act;

2(21) `shop' means any premises where any trade or business is carried on where services are rendered to customers and includes a shop run by a co- operative society, an office, a store-room, go-down, warehouse or work place whether in the same premises or otherwise, used in connection with such trade or business and such other establishments, as the Government may, by notification, declare to be a shop for the purpose of this Act, but does not include a commercial establishment.

Chapter II deals with registration of establishments. Chapter III relates to shops and Chapter IV relates to establishments other than shops. Chapter V relates to employment of women, children and young persons. Chapter VI relates to health and safety, Chapter VII relates to leave and holidays with wages and insurance scheme for employees. Chapter VIII deals with wages, conditions for termination of services, appeals, and suspension and terminal benefits.

At this juncture, it will be better to see a few provisions of Payment of Gratuity Act , 1972. Sub-Section (3) of Section 1 provides as under:-

(3) It shall apply to:- (a) every factory, mine, oil field, plantation, port and railway company; (b) every shop or establishment within the meaning of any law

for the time being in force in relation to shops and establishments in a State, in which ten or more persons are employed or were employed, on any day of the preceding twelve months;

(c) such other establishments or class of establishments in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as <ORG>, may, by notification, specify in this behalf.

3A. A shop or establishment to which this Act has become applicable shall continue to be governed by this Act, notwithstanding that the number of persons employed therein at any time after it has become so applicable falls below ten.

4. Payment of gratuity:-

(1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years.

(a) on his superannuation, or (b) on his retirement or resignation or (c) on his death or disablement due to accident or disease.

provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.

xxx xxx xxx (2) For every completed year of service or part thereof in excess

of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned provided that in the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months. Immediately preceding the termination of his employment and for this purpose, the wages paid for any over time work shall not be taken into account.

Section 7 of the Payment of Gratuity Act, 1972 provides for the determination of the amount of grautuity. Under sub-Section (1), an eligible employee under the said Act has to make a written application, while sub-Section (2) makes it binding on the employer to determine the amount of gratuity and specify the same to the controlling authority, even if such application is not made. The mandate of sub-Section (3) is to make the payment of gratuity within 30 days of the date, it becomes payable to such eligible employee. Section 3A provides for the interest, where gratuity is not paid within the prescribed period.

7. The challenge before <ORG> was that the impugned provisions of the Shops Act, viz., Sections 47(3) and 47(4) are ex-facie unreasonable, since the service compensation is now payable under the same even to the employee, who has resigned or voluntarily left service after attaining the age of 60 years though he had not put in long and continuous service, as required under the Payment of Gratuity Act . The further challenge was that the employee becomes entitled to receive wages from the date of termination or cessation of his services till the date he is actually paid the service compensation as per sub-Section 4 of the Shops Act. The respondent company (petitioner before <ORG>) urged that this was arbitrary, oppressive, discriminatory and violative of the Article 14 of the Constitution of India. It was urged that the employer was forced to pay the service compensation, even though cessation of service in cases of resignation and voluntary cessation after completion of 60 years, was not on account of any act on the part of the employer.

8. Heavy reliance was placed by the appellant/petitioner on the judgment of this Court in <ORG> Union of India reported in AIR 1958 SC

9. Before <ORG>, the <ORG> sought to defend the said provisions on the ground that the impugned provisions were made for the payment of extra wages. It was urged that the provisions of Sections 47(3) and 47(4) were applicable only to those employees, who were not governed by the Payment of Gratuity Act . It was pointed out that the provisions of Payment of Gratuity Act were applicable only to those employees, who had completed minimum of 5 years of service, while the provisions of the impugned sub-Sections (3) and (4) of the Shops Act would be applicable to the employees, who had served even less than 5 years. According to <ORG>, this was a reasonable classification, having a nexus with the purpose for which the provisions were brought into existence. It was stated further that considering objects and reasons of the Shops Act, it was apparent that there was no conflict between the Payment of Gratuity Act and the Shops Act. It was also urged that since the number of employees in a shop, governed by the Shops Act could be limited to one or two persons and their services also might not continue for a long period, therefore, in order to help such employees, a special provision was made considering such employees as a separate class. Section 47(4) was sought to be saved on the logic that it was nothing, but a concept of Section 25F of the Industrial Disputes Act, 1947 and on that basis, the said sub-Section would be constitutionally valid.

10. <ORG> in its judgment firstly found that the respondent company admittedly had not complied with the provisions of sub-Sections (3) and (4) of the Shops Act on the basis of the Reply Affidavit filed on behalf of the appellant/petitioner. The Court further found on comparison of the provisions of the 1966 Act and 1988 Act that they were almost identical and the payment of gratuity was replaced by the introduction of the concept of service compensation. The only change was to extend the minimum requirement period of six months to one year. <ORG> also found that the establishment of the respondent company was indisputably covered under the Shops Act. <ORG> thereafter noted that the unamended provisions of Sections 40(1) and 40(3) of the 1966 Act had been challenged earlier before <ORG> and the same were declared invalid under Article 14 of the Constitution of India on the ground that while in factories which are large in size, the workers, in order to earn the gratuity, would have to render long and meritorious service under a scheme of Payment of gratuity prior to enactment of the Payment of Gratuity Act , 1972, however, the employees working in the nearby office, which is much smaller in its operations, would be entitled to such gratuity on rendering a mere six months of unbroken service. <ORG> then commented that even when the earlier judgment of <ORG> had attained finality, by way of the present amendment only a cosmetic amendment was made. <ORG> then went on to analyse Section 47 and pointed out that in contrast with sub-Section thereof, under sub-Section (3), the amount of service compensation is required to be paid even if the cessation of service is caused not by the employer, but at the instance of the employee. It was further noted that in case of termination of an employee due to death or disablement, even the condition of completion of continuous service of one year was not necessary. The onerousness of sub- Section 4 was also noted by <ORG> that the employee becomes entitled to be paid the wages from the date of his termination or cessation of his service right until the date of the actual payment of service compensation. <ORG> also saw the contradictions that the Shops Act was applicable to the administrative offices of the factories and the employees working therein. While the employee working in the factory would be eligible for gratuity only after rendering five continuous years of meritorious service, the employees working in the administrative office adjacent to the said factory, would, however, be eligible for service compensation under Section 47(3) by merely rendering one year's service. <ORG> then held that the service compensation was nothing, but a gratuity. Considering the meaning of the word "gratuity", <ORG> found that the service compensation was nothing, but the gratuity, which was payable to the employee as a gift or reward for rendering long and continuous service. It also found that a mere service of one year or so could not be viewed as a long and continuous service, so as to entitle the employee to earn the service compensation or in other words, the "gratuity". <ORG> took into consideration the provisions of the Gratuity Act and found that the minimum period of service therein was five years, as also for the Government servants of the <ORG>, the minimum qualifying period for earning gratuity was 10 years of service. Comparatively, <ORG> came to the conclusion that limiting this period of long, continuous and satisfactory service only to one year was unreasonable and discriminatory. <ORG> also severely commented on the provisions that in case of death or disablement, the condition of completion of one year of service was also not necessary. <ORG> then relying on the judgment of <ORG> Vs. <ORG> reported in AIR 1973 SC 106, held that to treat unequals equal, would amount to discrimination and held that Section 47(3) had that effect. <ORG> then referred to the cases in <ORG> Vs. <ORG> (cited supra) and <ORG> Vs. <ORG> reported in 1992 (2) SCC 343. Thereafter, <ORG> considered the scheme of payment of gratuity as required by the Payment of Gratuity Act and observed that Section 4(1)(b) has been held to be a reasonable classification within the meaning of Article 19(1)(g) of the Constitution of India. Referring to number of other decisions, <ORG> observed:-

"It may be true that having regard to the provisions contained in List III of the VII Schedule of the Constitution, the <ORG> can also lay down certain conditions of service. But, the same would not mean that smaller units will be burdened with a harsher, oppressive and more onerous statutory obligations than their big brothers."

It was found that the same field was being covered by the Central legislation, as well as, the impugned <ORG> legislation. <ORG>, however, pointed out that merely because the <ORG> legislation had received the Presidential assent, that, by itself, could not save the <ORG> legislation if it was otherwise discriminatory. This observation was made on finding that there existed no evidence that the possible conflict in Central Act and the <ORG> Act was brought to the notice of the President before the assent was obtained. On the factual aspect, <ORG> observed that, in fact, there were number of employees, who had left the service and thereafter, had not been heard for a few years and as such, they could not be said to have rendered any work which would entitle them to receive gratuity or service compensation. <ORG> ultimately held that those, who had abandoned their services, were not entitled to get any benefits under the impugned provisions. Thus, <ORG> specifically found the two provisions, viz., 47(3) and 47(4) to be unreasonable. These provisions and more particularly, Section 47(4) was found to be contrary to the basic principles of service jurisprudence. <ORG> ultimately allowed the Writ Petition. It is this judgment, which has fallen for our consideration in the present appeal.

11. The Learned Counsel for the appellant firstly pointed out that impugned Sections 47(3) and 47(4) are constitutionally valid and suffer from no infirmity. He secondly urged that as has been done by <ORG>, the legislation cannot be struck down on the ground of mere hardship. His third contention was that <ORG> had resorted to the comparisons between two legislations by two different legislatures while deciding upon the constitutionality of the aforementioned provisions, which was not permissible. The Learned Counsel fourthly urged that merely because the lesser period for the purpose of grant of service compensation was provided, it did not impinge upon constitutionality and it was perfectly permissible for the legislature to prescribe lesser period. Fifthly, the Learned Counsel urged that in the impugned judgment, it was not shown as to how the fundamental rights of the respondent Nos. 1 & 2 under Article 14 and 19(1)(g) were violated. The Learned Counsel also suggested that <ORG> erred in holding that the Presidential assent under Article 254 (2) was inconsequential. Lastly, the Learned Counsel urged that the decision in <ORG> Vs. <NAME> Magistrate, <ORG> reported in 1972(2) ALT 163 was not correctly decided and could not be relied upon for striking down Section 47(3) of the Shops Act.

12. <NAME>, Learned Senior Counsel appearing on behalf of the respondent company urged that <ORG> had not struck down concerned impugned provisions merely on the ground of hardship. He pointed out that <ORG> had taken the overall effect of the provisions and had come to conclusion that the provisions were unreasonable and hence, unconstitutional. As regards the third contention raised by the Learned Counsel for the appellant, <NAME> pointed out that the Court had not made any comparisons between two legislations by two different legislatures. On the other hand, the Court had found that the basic concept of "service compensation" or as the case may be, "gratuity", was completely abused by Section 47(3) , while Section 47(4) was inherently bad, as it was unreasonable and capable of misused. The Learned Senior Counsel pointed out that the Court had also pointed out that Section 47(3) was capable of giving different treatment to the two sets of employees, who were similarly circumstanced and, therefore, it was hit by Article 14 of the Constitution of India. As regards the fourth contention, the Learned Senior Counsel also relied on <NAME> Vs. <ORG> reported in 1994 (1) SCC 9 and pointed out that the principles on which the gratuity was granted, were completely abused by providing a period of one year's service or even lesser period for the entitlement of gratuity or as the case may be, service compensation. <NAME> further pointed out that the Court had given good reasons relying on the judgment of <ORG> Union of India (cited supra) and <ORG> judgment in <ORG> Vs. <NAME> Magistrate, Suryapet and <ORG>. (cited supra), as also in <NAME> Vs. <ORG> (cited supra) that <ORG> had properly tested the impugned provisions and showed as to how the fundamental rights of the respondent Nos. 1 & 2 under Article 14 and 19(1)(g) were violated. The Learned Senior Counsel pointed out that the finding of <ORG> was that there was no evidence placed before it regarding the material placed before the President for obtaining the consent. Lastly, the Learned Senior Counsel pointed out that after decision in case of <ORG> Vs. <NAME> Magistrate, Suryapet and <ORG>. (cited supra) by the <ORG> of <ORG>, striking down Section 47(3) of the Shops Act, mere cosmetic changes were brought about in the fresh legislation, which was impermissible for the legislature.

13. We shall collectively consider the arguments. <ORG> has quoted from the judgment of this Court in <ORG> Union of India (cited supra), more particularly, from paragraph 205, which is the final verdict of this Court in that case, but before that also, in paragraph 198, it is observed:- "198. When we come, however, to the provision in regard to the payment of gratuity to working journalists who voluntarily resigned from service from newspaper establishments, we find that this was a provision which was not at all reasonable. A gratuity is a scheme of retirement benefit and the conditions for its being awarded have been thus laid down in the <ORG> decisions in this country."

This Court then referred to the case of Workmen employed under <ORG> Vs. Ahmedabad Municipal Corporation reported in 1955 Lab A C 155, as also, the observations made in the case of <ORG> reported in 1956-1 Lab L J 435 and observed in paragraph 202 to the following effect:-

"It will be noticed from the above that even in those cases, where gratuity was awarded on the employee's resignation from service, it was granted only after the completion of 15 years' continuous service and not merely on a minimum of 3 years' service as in the present case. Gratuity being a reward for good, efficient and faithful service rendered for a considerable period (vide <ORG>, Vol. I at page 614 - Chapter XV, Para 1503), there would be no justification for awarding the same when an employee voluntarily resigns and brings about a termination of his service, except in exceptional circumstances."

The Court, thereafter, quoted a passage in relation to Journalists' Working Conditions and their Moral Rights, as also from the collective agreement between <ORG> and <ORG> and ultimately found in paragraph 205 that such provision, providing for a payment of gratuity even to an employee who voluntarily resigns from service after a period of only three years, was certainly unreasonable, imposing unreasonable restrictions on the right of the petitioner to carry on business and was, therefore, liable to be struck down as unconstitutional. The other judgment relied upon by <NAME> was <ORG> and Another Vs. <ORG> reported in 1992 (2) SCC 343. Following observation from paragraph 48 from this judgment is extremely apposite. The observation is as follows:-

"48. .... Article 19(1)(g) provides fundamental rights to all citizens to carry on any occupation, trade or business. Clause (6) thereof empowers the <ORG> to make any law imposing in the interest of the general public, reasonable restrictions on the exercise of the said rights. Wherever a statute is challenged as violative of the fundamental rights, its real effect or operation on the fundamental rights is of primary importance. It is the duty of the <ORG> to be watchful to protect the constitutional rights of a citizen as against any encroachment gradually or stealthily thereon. When a law has imposed restrictions on the fundamental rights, what the <ORG> has to examine is the substance of the legislation without being beguiled by the mere appearance of the legislation. The legislature cannot disobey the constitutional mandate by employing an indirect method. The <ORG> must consider not merely the purpose of the law, but also the means how it is sought to be secured or how it is to be administered. The object of the legislation is not conclusive as to the validity of the legislation............ The <ORG> must lift the veil of the form and appearance to discover the true character and the nature of the legislation and every endeavour should be made to have the efficacy of fundamental right maintained and the legislature is not invested with unbounded power. The <ORG> has, therefore, always to guard against the gradual encroachment and strike down a restriction as soon as it reaches that magnitude of total annihilation of the right."

The observations are extremely relevant in the present context. Now, there could be no dispute that the impugned provision 47(3) is nothing, but an award of gratuity, though it has been given a nomenclature of "service compensation". When we closely examine Section 47(3) , it suggests that an employee, who has to be in a continuous service of not less than one year, becomes eligible for service compensation, amounting to fifteen days average wages for each year of continuous employment (i) on voluntary cessation of his work after completion of 60 years of age or (ii) on his resignation or (iii) on physical or mental infirmity duly certified by a Registered Medical Practitioner or (iv) on his death or disablement due to accident or disease. This is nothing but the provision of a gratuity. It is already held by this Court time and again that the concept of gratuity as conceived in the Payment of Gratuity Act and even earlier to that in labour jurisprudence is that gratuity is a reward for long and continuous service. It is for the first time by that Act, a worker or an employee was made entitled to the gratuity by his rendering continuous service for five years. If this is so, then providing only one year for entitlement to get the gratuity, is certainly unreasonable. What we have to see is the real nature of the so-called service compensation. The service compensation is nothing, but a gratuity and <ORG> has correctly held it to be a gratuity. If we are required to lift the veil as per the mandate of this Court in <ORG> and Another Vs. <ORG> reported in 1992 (2) SCC 343 (cited supra), then it is obvious that the unnatural name of "service compensation" is given to what in fact, is a "gratuity". We need not dilate on this subject as <ORG> has given good reasons to hold it to be a "gratuity". As if this is not sufficient, the proviso to sub-Section (3) provides that in case of termination of the employment due to death or disablement, even this one year's service will not be necessary. In spite of the presumption of constitutionality of a provision, we do not think that such a provision can be held to be reasonable. It is undoubtedly an unreasonable inroad on the fundamental right of the respondent (petitioner before <ORG>) under Article 19(1)(g) of the Constitution of India.

14. As if this is not sufficient, we find from the definitions of "Commercial Establishment" and "Establishment" under the Shops Act that there are always two sets of employees in an establishment, being administrative or clerical and technical employees. While the factory owner would be required to pay the gratuity to the employee working in the factory only on his completing five years of continuous service, in case of the employee working on the administrative or clerical side of the factory or in the office, which may be in the same premises where the factory is situated, merely one year of service or even lesser than that, would be sufficient and the factory owners would have to pay the gratuity or the service compensation, as the case may be, to such person. Thus, the provision is clearly discriminatory and unreasonable. One look at the definition of "Commercial Establishment" would convince that the inclusion of an establishment of a factory or an industrial undertaking which falls outside the scope of Factories Act , 1948 and thereby entitling the employees working therein for the payment of service compensation, clearly brings out the discrimination between such employees and the employees working in the factories as covered by Factories Act , 1948. The definition of "Employee" is also extremely relevant in this behalf, and when the two provisions, viz., Sections 2(5) and 2(8) are read together along with Sections 2(11) and 2(10) , the position becomes crystal clear that the provision of Section 47(3) is clearly discriminatory and, therefore, hit by Article 14 of the Constitution of India. We, therefore, cannot accept the argument of the appellant that the said provision under Section 47(3) is made for a classification and, therefore, there is no discrimination as the classification has a nexus with the object of the Act. Much debate went on the said object, which was stated in the Statement of Objects and Reasons and was also clear from the Preamble. We, however, do not see as to how such discrimination is permissible in the two sets of employees and what is the rationale for providing a short period of one year as compared to five year period in case of employees covered under the Factories Act , 1948.

15. In our opinion, <ORG> was absolutely correct in holding that the provision of Section 47(3) is hit by Article 14 of the Constitution of India.

16. We must, at this juncture, take stock of the argument that it was legally permissible for the legislature to prescribe lesser period for the purpose of grant of service compensation. Our attention was invited to the oft quoted case of <NAME> Vs. <ORG>. (cited supra). In fact, <NAME>, Learned Senior Counsel for the respondents also relied on the case of <NAME> Vs. <ORG>.(cited supra) along with two other cases earlier decided, viz., <ORG> British Paints (India) Ltd. Vs. Its Workmen reported in 1966 (2) SCR 523 and <ORG> Vs. Its Workmen reported in 1977 (2) SCC 329. Our attention was invited by the Learned Counsel for the appellant, more particularly, to paragraph 16 and 17 in case of <NAME> Vs. <ORG>. (cited supra). The observations are, in fact, adverse to the case put up by the appellant. In paragraph 16, this <ORG> observed that the concept of gratuity had undergone metamorphosis over the years. This <ORG> further recognized that though "gratuity" meant payment, gift or a boon made by the employer to employee in industrial adjudication, it was considered as a reward for long and meritorious service and the payment of gratuity depended upon duration and the quality of service rendered by the employee. The <ORG> further observed that at a later stage in the industrial jurisprudence, the gratuity came to be recognized as a retiral benefit in consideration of the service rendered and the employees could raise an industrial dispute for introducing the concept of gratuity as a condition of service. The <ORG> also went on to observe that such payment of gratuity depended on various factors like financial stability and capacity of the employer, the service conditions prevalent in the industry and the region, availability of the other retiral benefits and the standard of other service conditions. The <ORG> very specifically observed that the quantum of gratuity was determined by the said factors. The <ORG> then made observations that the minimum qualifying service for the entitlement to the gratuity or the rate at which it was to be paid and the maximum amount payable was determined on the basis of the aforementioned factors. In paragraph 17, the <ORG> observed that the industrial adjudicators insisted upon certain minimum years of qualifying service before an employee could claim it whether on superannuation or resignation or voluntary retirement, which was inconsistent with the concept of gratuity being an earning for the services rendered. The <ORG> then went on to observe that there was no fixed concept of gratuity or of the method of its payment, and like all other service conditions, the gratuity schemes could differ from establishment to establishment depending upon various factors mentioned earlier. One such prominent factor was the financial capacity of the employer to bear the burden. The <ORG> was also not unmindful of the distinction between the provident fund and gratuity. While in former, there was a contribution from the employer, in case of gratuity such contribution was not a necessary ingredient. The <ORG> then observed in paragraph 17 as under:-

"17. ....... Likewise, the gratuity schemes may also provide differing qualifying service for entitlement to gratuity. It is true that in the case of gratuity, an additional factor weighed with the industrial adjudicators and courts, viz., that being entirely a payment made by the employer without there being a corresponding contribution from the employee, the gratuity scheme should not be so liberal as would induce the employees to change employment after employment after putting in the minimum service qualifying them to earn it." (Emphasis supplied) This would suggest that before introducing any such concept of service compensation which was nothing but the gratuity, the aforementioned factors were bound to be taken into consideration and to be provided for. What we see from the impugned provisions is, firstly, the compulsory nature of the service compensation and secondly, the total absence of guidelines. It is not understood as to how and why in all employments through out, such a short period of one year or even lesser than that has been provided and what is the rationale for the same. When we see the observations in case of <NAME> Vs. <ORG> (cites supra), it is clear that there has to be some minimum qualifying service. To reduce the service to one year or even to the lesser period, a qualifying service would, in our opinion, be absurd and was rightly rejected by <ORG>. Therefore, it cannot be said that in all the circumstances, it is permissible for the legislatures to prescribe a lesser period. We can understand the period being a lesser, but not to the extent of non-existent period of one year or as the case may be, six months, as provided in Section 47(3) , which would not amount to reasonable period for the entitlement to get the gratuity. Such provision is, therefore, obviously, unreasonable. The contention of the Learned Counsel for the appellant is, therefore, rejected.

17. At the same time, insofar as Section 47(4) is concerned, the provision is per se unreasonable. We have already quoted Section 40(3) of the 1966 Act in the earlier part of the judgment. We, therefore, do not reproduce the Section here. It is to be remembered that this Section was found to be unconstitutional in the earlier judgment of <ORG> in case of <ORG> Vs. <NAME> Magistrate, <ORG> and <ORG>. (cited supra) and the said judgment had become final. The Section is clearly comparable to Section 47(3) and also Section 47(4) , as the last part of that Section is identical with the wording in Section 47(4) . The only difference, which we find is that instead of word "gratuity", the terminology of "service compensation" is substituted. In our opinion, <ORG> was right in opining that a mere cosmetic amendment could not have been made by way of introduction of Sections 47(3) and 47(4) . It was tried to be argued before us that in the present 1988 Act, the mischief pointed out by <ORG> in earlier Section 40(3) of the 1966 Act has been remedied. We are unable to agree with such argument. We do not see as to how and in what manner, the mischief has been remedied. In its judgment, <ORG> has compared both the provisions and has found that the period of six months, as contemplated in the 1966 Act, was made one year. <ORG> also noted that the provision was declared ultra-vires on the ground that the workmen working in the factory which would be large in size are eligible to be paid gratuity on rendering long and meritorious service under the scheme of Payment of Gratuity by industrial adjudication, i.e., prior to the enactment of Payment of Gratuity Act , 1972, whereas, the employees of a shop or an establishment which is smaller in its operations covered under the 1966 Act, will be entitled to such gratuity on rendering of minimum qualifying period of only six months' unbroken service. <ORG> also noted that the provisions of Sections 47(3) and 47(4) were nothing, but a cosmetic amendment to the earlier Section 40(3) . It is, therefore, clear that no attempt has been made, whatsoever, to point out the mischief found by <ORG> in Section 40(3) of the 1966 Act. It was tried to be urged that the Payment of Gratuity Act was not in existence at the time <ORG> rendered its decision in <ORG> Vs. <NAME> Magistrate, <ORG> and <ORG>. (cited supra). We do not see as to how it is relevant at all. On the other hand, with the advent of Payment of Gratuity Act , the unreasonableness of the provision of Section 47(3) would be all the more prominent. We are also not in a position to agree that Section 47(4) is, in any manner, a valid piece of Legislation and is only in the nature of a procedure and does not amount to penalty. Now, merely because there is a remedy to the employer under Sections 50 and 51 to point out reasons for not being able to have complied with Section 47(3) , the Section does not become a valid Section, particularly, when the identical provision was found to be unconstitutional in case of <ORG> Vs. <NAME> Magistrate, <ORG> and <ORG>. (cited supra), which judgment had become final. We, therefore, cannot accept that Section 47(4) is a valid piece of Legislation. This is apart from the fact that this provision is also capable of being abused or misused by an employee, who may bring out a situation to avoid accepting the payment of gratuity, so as to be able to claim later the wages of the interregnum period.

18. It was argued by the Learned Counsel for the appellant that there could not have been a comparison between the provisions of Payment of Gratuity Act and the present provisions, while deciding the constitutionality. For this purpose, the Learned Counsel relied on the law laid down by this Court in State of M.P. Vs. G.C. <NAME> reported in 1955(1) SCR 599. The following observations in that case were relied upon:-

" Article 14 does not authorize the striking down of a law of one <ORG> on the ground that in contrast with a law of another <ORG> on the same subject, its provisions are discriminatory nor does it contemplate a law of the <ORG> or of the <ORG> dealing with similar subjects being held to be unconstitutional by a process of comparative study of the provisions of the two enactments. The sources of authority for the two statutes being different, Article 14 can have no application."

It may immediately be clarified that though it is true that both the laws, i.e., the Shops Act and the Payment of Gratuity Act have been passed validly under Entry 24 of List III of the VII Schedule, it is incorrect to say that <ORG> has compared the two provisions. It is one thing to refer to a provision and quite another to compare it with impugned provision. <ORG> has actually gone into the concept of gratuity right from its inception and has come to the conclusion that for earning the gratuity, the employee does not have to contribute anything, as in the case of a provident fund. Gratuity is more or less a gratuitous payment by the employer in consideration of long and faithful service by the employee. The concept of gratuity came to be developed firstly in the industrial jurisprudence and was crystallized by the Central Legislation by way of an Act, where a provision of five years of minimum service was made for an employee to be entitled for payment of gratuity. However, as has been held in <NAME> Vs. <ORG> (cited supra), the length of five years of service could not have been reduced in absurd manner to a minuscule period of one year or even less than that. <ORG>, therefore, found fault that the basic concept of gratuity was being abused by the reduction of the required service to an almost non-existent level. It cannot, therefore, be said that <ORG> compared the two provisions. This is apart from the fact that the reduction to a period of six months was already held to be unconstitutional in the judgment of <ORG> Vs. <NAME> Magistrate, Suryapet and Ors. (cited supra), which judgment had attained finality. <ORG> found that instead of remedying the defects pointed out in the judgment of <ORG> Vs. <NAME> Magistrate, Suryapet and Ors. (cited supra), a cosmetic change was made by raising the period of six months to one year. We are, therefore, unable to accept the submission of the Learned Counsel for the appellant that <ORG> proceeded on to decide the constitutionality on the basis of a comparison. We do not, therefore, see how the aforementioned judgment in State of M.P. Vs. G.C. <NAME> reported in 1955(1) SCR 599 (cited supra) can be of any application and help to the present case.

19. A further criticism was leveled by the Learned Counsel for the appellant that <ORG> had struck down the provisions only on the grounds of hardship and that was not permissible. Learned Counsel relied on a decision in <NAME> & Ors. Vs. State of Orissa & Ors. reported in 2003 (11) SCC 614 and our attention was invited to paragraph 45 thereof. Learned Counsel also relied on another decision in <NAME> Vs. <NAME> & Ors. reported in 2004 (11) SCC 753, particularly on the observations made in paragraph 5, as also the decision in <ORG> Vs. <NAME> reported in 2008 (4) SCC 720. Insofar as the last decision is concerned, we do not see as to how it helps the appellant, as in that decision, this Court has recognized the presumption of constitutional validity of a statute. There can be no quarrel with that proposition. Our attention was invited to paragraphs 70, 72, 73 and 78. We could not find anything in those paragraphs, which supports the contention that a mere hardship cannot be a ground for striking down a provision. This Court had only shown the presumption of constitutionality and has cautioned against the light treatment being given to the subject. In our opinion, that is not the case here. <ORG> judgment proceeds on solid bedrock of lucid reasoning and is not restricted to hardship alone.

20. In R.N. Goyal Vs. Ashwani Kumar Gupta & <ORG>. reported in 2004 (11) SCC 753 (cited supra), while repealing the constitutional challenge to the rules, which was observed by this <ORG> that if the Rules framed under Article 309 of the Constitution of India were for general good, but caused hardship to the individual, the same could not be a ground for striking down the Rules. These observations are not apposite to the present controversy. Here the impugned provisions have not been struck down merely because they would cause hardship to any individual or any class. In fact, the provisions have been shown to be totally unreasonable and in total contradiction with the established norms for the concept of gratuity. Not only that, the provisions have been shown to be discriminatory in respect of the two sets of workers, who are similarly, if not identically circumstanced. In case of <NAME> & <ORG>. Vs. State of Orissa & <ORG>. (cited supra) also, it was specifically observed in paragraph 45 that the <ORG> had the requisite jurisdiction to pass appropriate Legislation, which would do justice to its employees. The <ORG> went on to hold that if a balance is sought to be struck down by reason of the impugned Legislation, it would not be permissible for the <ORG> to declare the legislation ultra vires only because it may cause some hardships to the petitioners. These observations were made in relation to the service jurisprudence, where, the constitutional validity of Orissa Administrative <ORG>, Class II (Appointment of Officers Validation) Amendment Act, 1992, was in challenge. By that amendment, relative seniority was awarded to the direct recruits for the year 1973, who were appointed in the year 1975, over and above, the mergerists born in the said <ORG> by virtue of merger of their parent cadre with the Orissa Administrative <ORG>, Class II. The argument was raised that such grant of seniority would amount to a hardship to the petitioners in the matter of seniority. <ORG> of this <ORG> thoroughly examined the provisions of Section 2 of the Amendment Act with reference to the earlier cases decided on the question and came to the conclusion that it was disinclined to temper with the settled practice, particularly, in view of the law laid down in Direct Recruit Class II Engg. Officers' Assn. Vs. State of Maharashtra reported in 1990 (2) SCC 715. It was found that the concept of the "year of allotment" was workable and it was within the powers of the <ORG> to recruit the officers from variety of sources. It was also found that the seniority awarded was on the basis of a legal fiction, which had to be given its full effect. It was in that context that the observations regarding hardship were made. We are afraid, the fact- situation in the present case is entirely different and the observations made are not applicable to the present matter. We, therefore, reject the argument raised by the appellant. This is apart from the fact that the High <ORG> has correctly observed that even if the law cannot be declared ultra vires on the ground of hardship, it can be so declared on the ground of total unreasonableness applying Wednesbury's "unreasonableness" principles. The <ORG>, specifically, has also found that this reasonableness is apparent from the fact that the employees falling within Sub-Sections (1) and (3), although from different classes, had been treated equally, giving them the same benefit. For this purpose, the <ORG> also relied on the observations made in <ORG> Vs. <ORG> reported in AIR 1973 SC 106.

21. <ORG> also referred to in this behalf, the observations made in <ORG> and Another Vs. <ORG> (cited supra) and rightly concluded that the impugned provision was totally unreasonable.

22. This takes us to the last contention raised by the Learned Counsel for the appellant, regarding the question of "Doctrine of occupied field". <ORG> has observed:-

"It may be true that having regard to the provisions contained in List III of VII Schedule of the Constitution, the <ORG> can also lay down certain conditions of service. But, the same would not mean that smaller units will be burdened with a harsher, oppressive and more onerous statutory obligations than their big brothers. The Payment of Gratuity Act covers the field. Both the <ORG> Act and the Central Act , in view of sub-Section (5) of Section 47 deal with the matter relating to gratuity."

<ORG> then referred to a decision in <NAME> Vs. State of U.P. reported in AIR 1987 SC 1837. It also referred to the decision in <NAME> of Village Jamalpur Vs. <NAME> reported in 1985 (3) SCC 661 and relying on the observations made in that judgment, came to the conclusion that the State could not take aid from the provisions of Article 254(2) of the Constitution. The Court further observed that mere assent of the President may not be adequate and the provision in question, being directly in conflict with the Central Act , the same cannot be valid. Further, the Court observed:-

"Mechanical assent given by the President may be held to be an idle formality, as there does not exist any evidence that the possible conflict had been brought to the notice of the President before his assent was obtained."

<ORG> then went on to hold that the instant case would stand on the worse footing, as factually, it would not be disputed that the employees had left the services and those who abandoned the service voluntarily, had not been heard of for a few years. It was noted by <ORG> that if the provisions of Sections 47(3) & 47(4) are held valid, then such persons who had voluntarily abandoned the service, would be taking the advantage of their own wrong, particularly, in relation to Section 47(4) . <ORG> also further observed that the union could not have taken the cause of the persons, who had abandoned their services.

23. The impugned judgment is a complete answer to the question raised regarding Article 254(2). There can be no doubt that both the Central Act and the impugned <ORG> Act operate in the same field in as much as, the "service compensation" is nothing, but the "gratuity", though called by different name. Under such circumstances, unless it was shown that while obtaining the Presidential assent for the <ORG> Act , the conflict between the two Acts was specifically brought to the notice of the President, before obtaining the same, the <ORG> could not have used the escape route provided by Article 254(2) of the Constitution. We fully agree with <ORG> when <ORG> held that the two Acts occupy the common field and were in conflict with each other. The contention of the appellant that Article 254(2) would save the impugned provisions is, therefore, rejected.

24. In the result, we concur with the judgment of <ORG> and confirm the same. The appeal has no merits and it is dismissed, but without any order as to the costs.

......................................J.

(<NAME>) ......................................J.

(<NAME>) New Delhi;

February 27, 2009.


PETITIONER: COMMISSIONER OF SALES TAX, LUCKNOW Vs. RESPONDENT: D. S. BIST & ORS. DATE OF JUDGMENT11/09/1979 BENCH: UNTWALIA, N.L. BENCH: UNTWALIA, N.L. PATHAK, R.S. CITATION: 1980 AIR 169 1980 SCR (1) 593 1979 SCC (4) 741 CITATOR INFO : D 1988 SC1435 (38) ACT: U. P. Sales Tax Act, 1948-S. 2(i) proviso-Tea leaves after drying and processing-Whether remained agricultural produce not exigible to sales tax under the proviso. HEADNOTE: The proviso to s. 2(i) of the U.P. Sales Tax Act, 1948 excludes from the term "turnover" proceeds of sale of agricultural or horticultural produce grown by a person on any land in which he has interest. The assessee, who was an agriculturist, owned tea gardens in the State. After being plucked from tea shrubs tea leaves are withered in shade in rooms, crushed by hand or foot, roasted for 15 minutes, then covered by wet sheets for the purpose of generating fermentation, graded and finally roasted again with charcoal for obtaining flavour and colour. The final product is sold in the market. Before <ORG> the assessee contended that tea leaves sold by him were agricultural produce grown by him on his own land and that, therefore, the sale of tea effected by him was exempt from sales tax under the proviso to s. 2(i) of the Act. <ORG> rejected the assessee's contention. <ORG> answered the reference in favour of the assessee and against the revenue. Dismissing the appeal, ^ HELD: (per <NAME>): <ORG> was right in holding that sales of tea leaves were not exigible to sales tax. The commodity which was sold was not different from the commodity which was produced in agriculture and, therefore, the proviso to s. 2(i) is attracted. [600 F, 602 E] 1. Almost every kind of agricultural produce has to undergo some kind of processing or treatment by the agriculturist himself either on the farm or elsewhere in order to make it non-perishable, transportable and marketable. Some minimal process is necessary to be applied to many varieties of agricultural produce. The test in these cases is to see whether in relation to that agricultural produce the process applied was minimal or was so cumbersome and long drawn out that either in common parlance or in the market or even otherwise no one would treat the produce as an agricultural produce. The mere fact that in the case of a particular product the process is a bit longer or even a bit complicated would not rob the produce of its character of being an agricultural produce. [597 B-C; F-G] 2. All the processes enumerated by <ORG> were necessary for the purpose of saving the tea leaves from perishing, making them fit for transporting and marketing. The processes applied were all within the region of minimal processes and at no point of time they crossed that limit and robbed the leaves of their character of being and continuing to be agricultural produce. [598 C-E] 594 Vol. 21 Encyclopaedia Britannica (1968 edition), referred to. <CITATION> 17 S.T.C., 316, The State of Madras v. <ORG> 19 S.T.C., 129 referred to. <CITATION> 7 S.T.C., 541, <CITATION> . 12 S.T.C. 519, <CITATION> . 58 I.T.R., 612 <CITATION> 20 S.T.C., 417, Commissioner of Sales Tax, U.P., <NAME> v. <NAME> and Sons, 21 S.T.C., 17 approved. <CITATION> A.I.R. 1921 Calcutta, 40 distinguished. (<NAME>, J. concurring). <CITATION> A.I.R. 1921 Calcutta, 40 <ORG> was of opinion that while process of selecting and plucking tea leaves from the tea shrubs could be deemed to be agriculture, the subsequent process which included drying and rolling of the leaf was a manufacturing process. If <ORG> could be said to have laid down that as a result of those processes the tea leaf ceased to be agricultural produce, it is not correct. The tea leaf remained what it always was. It was tea leaf when selected and plucked and it continued to be tea leaf when after the process of withering, crushing and roasting, it was sold in the market. The process applied was intended to bring out its potential qualities of flavour and colour. The potential inhered in the tea leaf from the outset when still a leaf on the tea bush. The potential surfaced in the tea leaf when the mechanical processes of withering, crushing and roasting, fermenting by covering with wet sheets and roasting again were applied. At no stag, did it change its essential substance. It remained tea leaf throughout. In its basic nature it continued to be agricultural produce. [603 B-C] JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 2361- 2364 of 1972.

Appeals by special leave from the Judgment and Order dated 17-5-72 of <ORG> in Sales Tax Ref. Nos. 693 to 696/70.

<NAME>, <NAME> and <NAME> for the Appellant. (In all the appeals) <NAME> and <NAME> for the Respondent. The following Judgments were delivered:

UNTWALIA, J. The Commissioner of Sales Tax, Lucknow has filed these four appeals by special leave against the judgment of <ORG> given in four sales-tax references under the U.P. Sales Tax Act, 1948, hereinafter referred to as the Act.

The assessee-respondent owns some tea gardens in the State of U.P. The tea-leaves grown by the respondent in his gardens are sold in the market after being processed and packed. The stand taken on his behalf before the taxing authorities was that the tea-leaves sold by the respondent are agricultural produce grown by himself and, therefore, the sales were not exigible to sales-tax. The contention of the assessee was not accepted and <ORG> made four references in respect of the four periods to <ORG> on the following question of law:-

"Whether on the facts and circumstances of this case the article ceased to be an agricultural produce and whether the tea produced by the assessee would be exigible to sales tax?"

<ORG> has answered the reference in favour of the assessee and against the revenue. Hence these appeals by the department.

Under section 3, the charging section, of the Act it was the turn-over for each assessment year determined in accordance with the various provisions of the Act and the Rules framed thereunder, which was chargeable to sales-tax. The definition of 'turnover' given in section 2(i) of the Act at the relevant time stood as follows:-

" "Turnover" means the aggregate amount for which goods are supplied or distributed by way of sale(or are sold), or the aggregate amount for which goods are bought, whichever is greater by a dealer, either directly or through another, on his account or on account of others, whether for cash or deferred payment or other valuable consideration:

Provided that the proceeds of the sale by a person of agricultural or horticultural produce, grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, or poultry or dairy products from fowls or animals kept by him shall be excluded from his turnover."

The above proviso was meant to exempt an agriculturist or a horticulturist from the charge of sales-tax in respect of his agricultural or horticultural produce grown by himself in his land in which he has an interest of the kind mentioned in the proviso. The short question which falls for our determination, therefore, is whether the assessee's transactions of sale came within the ambit of the proviso. Indisputably and undoubtedly the assessee was an agriculturist, the tea-leaves grown by him in his land were agricultural produce, and he had sold them after processing and packing. In other words the assessee made them marketable and fit for consumption by the consumers and then sold them. If the tea- leaves so sold substantially retained the character of being an agricultural produce, it is plain that the assessee's sales will not be exigible to sales-tax. If, on the other hand, the leaves had undergone such vital changes by processing that they lost their character of being an agricultural produce and became a different commodity then the sales made by assessee were exigible to sales-tax.

<ORG> has extracted the primary findings of fact recorded by <ORG> in its revisional order. As is well-known tea-leaves are plucked from tea- plants as green tea-leaves. The tea-leaves so plucked are not fit for consumption and are not sold in the open market. They are often purchased by big tea concerns from the owners of the gardens and after processing and packing them they (the concerns) sell them in the market. Since in their cases the proviso will not apply the sales will be exigible to sales tax. But when the producer himself does the same or similar kind of job, then the question arises whether it can be justifiably said that he also cannot take advantage of the proviso?

The primary facts as extracted by <ORG> from the order of <ORG> are the following:-

(1) "The tea-leaves were first of all subjected to withering in shadow in rooms on a wooden floor for about 14 hours."

(2) "then they were crushed-by hand or foot and were then roasted for about 15 minutes." (3) "Later they were roasted on mats for about 15 minutes."

(4) And then they were "covered by wet sheets for generating fermentation. During this process the colour of leaves was changed from green to yellowish."

(5) "the leaves were then subjected to grading with sieves of various sizes. Fanning machines are also used in completing the grading process."

(6) "The produce was then finally roasted with charcoal for obtaining suitable flavour and colour."

(7) "It is this final product which was eventually sold by the assessees."

The question for consideration is whether on the findings aforesaid it can be justifiably held in law that the leaves lost their character of being an agricultural produce and became something different. It should be remembered that almost every kind of agricultural produce has to undergo some kind of processing or treatment by the agriculturist himself in his farm or elsewhere in order to bring them to a condition of non-perishability and to make them transportable and marketable. Some minimal process is necessary to be applied to many varieties of agricultural produce. As for example, when wheat stalks are cut from the farm, threshing and winnowing have to be done. The product so obtained has to be dried for a few days. The husk and dust have to be separated. Thereafter packing the wheat in bags or other containers it is taken to the markets for sale. One can never suggest that such a wheat product becomes a commodity different from the one which was produced in the process of agriculture. To pursue that example further, if the agriculturist who produces the wheat has a flour mill and crushes the wheat produced by him in that mill and then if the flour so produced is sold by him one can never reasonably suggest that the flour sold by him is an agricultural produce, because in that event, the manufacturing process goes beyond the limit of making the agricultural produce fit for marketing as such and turns it into a different commodity altogether i.e. flour. But there may be some other kinds of agricultural produce which required some more processing to make it marketable. In the case of such a commodity what one has to judge is to find out whether in relation to that agricultural produce the process applied was minimal or was it so cumbersome and long drawn that either in common parlance, or in the market, or even otherwise, any body would not treat the produce as an agricultural produce. The mere fact that in the case of a particular product the process is a bit longer or even a bit complicated will not rob the produce of its character of being an agricultural produce. Largely the inference to be drawn from the primary facts of processing, one may say, will be an inference of fact. But it is not wholly so. In a given case it will be a mixed question of fact and law. If wrong tests are applied in drawing the inference that the agricultural produce has lost its character of being so, then it will be a question of law and <ORG> will have jurisdiction in an appropriate reference, as in the present case it had, to decide whether the case came under the proviso to section 2(i) of the Act.

Unlike many agricultural products tea-leaves are not marketable in the market fresh from the tea gardens. No body eats tea-leaves. It is meant to be boiled for extracting juice out of it to make tea liquor. Tea-leaves are, therefore, only fit for marketing when by a minimal process they are made fit for human consumption. Of course, the processing may stop at a particular point in order to produce inferior quality of tea and a bit more may be necessary to be done in order to make it a bit superior. But that by itself will not substantially change the character of the tea-leaves, still they will be known as tea-leaves and sold as such in the market. In my opinion all the six processes enumerated above from the primary findings of fact recorded in the order of <ORG> were necessary for the purpose of saving the tea-leaves from perishing, making them fit for transporting and marketing them. The process applied was minimal. Withering, crushing and roasting the tea-leaves will be surely necessary for preserving them. The process of fermentation or final roasting with charcoal for obtaining suitable flavour or colour and also the process of grading them with seives were all within the region of minimal process and at no point of time it crossed that limit and robbed the tea-leaves, the agricultural produce, of their character of being and continuing as such substantially. In my opinion, therefore, the view expressed by <ORG> is quite justified and sustainable in law.

In Volume 21 of Encyclopaedia Britannica (1968 edition) under the head 'Tea' are dealt with at page 739 the processes of cultivation and manufacture of tea. Under the sub-head 'Cultivation' it is found stated:-

"Tea leaves are plucked either by hand or with special shears. In the tropical areas of southern India, Ceylon, and Indonesia, harvest continues throughout the year, but in the subtropical regions of northern India and China and in Japan and Formosa, the harvests are seasonal. The flavour and quality of the tea-leaves vary with the climate, soil, age of the leaf, time of harvest (even from season to season), and method of preparation."

Then comes the sub-head 'Manufacture' which enumerates the categories of three classes of teas and then it is mentioned:-

"Most stages of processing are generally common to the three types, of tea. First, the fresh leaves, are withered by exposure to the sun or by heating in trays until pliable (usually 18-24 hours). Next the leaves are rolled by hand or machine in order to break the leaf cells and liberate the juices and enzymes. This rolling process may last up to three hours. Finally, the leaves are completely dried either by further exposure to the sun, over fires, or in a current of hot air, usually for 30- 40 minutes."

In making black tea, the leaves, after being rolled, are fermented in baskets or on glass shelves or cement floors under damp cloths. "The process of fermentation, or oxidation, reduces the astringency of the leaf and changes its colour and flavour." About green-leaves it is mentioned- "Green tea is made by steaming without fermentation in a perforated cylinder or boiler, thus retaining some of the green colour. The leaves are lightly rolled before drying." It would thus be seen that the tea-leaves as plucked have got to pass through stages of processing of one kind or the other in order to make them fit for human consumption, as in the case of paddy and many other commodities dehusking in the case of former and some other kind of process in regard to the latter has got to be done in order to make them marketable and fit for consumption.

There are two decisions of <ORG> in <CITATION> (1) and <CITATION> (2) where a similar question arose with respect to arecanuts. At page 544 of the first case which was followed in the second occurs a passage which may be usefully quoted here:-

"As we have pointed out, it was common ground that there is no market in Coimbatore or elsewhere for arecanuts as they are when plucked from the trees, and it should be remembered they are gathered when they are still unripe. The proviso to section 2(i) of the Act is obviously conceived in the interests of agriculturists. It excludes from any tax liability under the Act sale of agricultural and horticultural produce, the primary condition to be satisfied being that it must be produce of the land which either belongs to the seller or of the land in which he has an interest as specified by section 2(i). To restrict that concession to sale of arecanuts, for instance, only if those arecanuts are sold in the state in which they are immediately on being gathered from the trees, would render the statutory exclusion meaningless."

I approve of this decision.

There are two decisions of <ORG> given in relation to the question of sugarcane being converted into jaggery. They are:- <CITATION> (1) and <CITATION> .(2) In the former case it was observed at page 11:-

"It is true that gur cannot be regarded as an agricultural produce grown on land. But if gur is prepared out of the agricultural produce which is grown on land, in the absence of any indication to the contrary suggesting that the agricultural produce must be sold in the form in which it is grown, we will be justified in holding that an agriculturist who is exclusively selling agricultural produce grown on the land either in the form in which it is grown or in the form in which it is converted for the purpose of transportation or preventing deterioration is within the exception provided by section 2(6). In the present case, with a view to prevent deterioration and for the purpose of facilitating transportation the assessee converted the sugar-cane grown by him into gur and sold it."

It appears to me that this case has gone a bit too far and on an appropriate occasion it may require further consideration. Nonetheless, in the instant case one can safely conclude, as I have done, that with a view to prevent deterioration and for the purpose of facilitating transport and making it marketable the assessee himself did some processing to the plucked tea-leaves and hence <ORG> was right in holding that such sales were not exigible to sales-tax. Similar or identical principles have been applied by other High Courts also in respect of different commodities such as rubber, sole crepe, casuarina, pig bristles etc. The cases are- <CITATION> (3). <CITATION> .;(4) <CITATION> .;(5) Rayavarapu Mrityanjaya Rao v.

The State of Andhra Pradesh(1) and Commissioner of Sales Tax, U.P., Lucknow v. <NAME> and Sons. (2) Broadly speaking these cases have been decided on application of the correct principles of law.

Reliance on behalf of the <ORG> was placed upon a few cases. None of them supports the department's contention. I may notice only two or three of them. <CITATION> (3) the question for consideration related to the tax liability of <ORG> under the Income Tax Act , 1918. If the whole of its income was derived from agriculture, the assessee was not liable to pay income-tax. If, however, the activities of the <ORG>, which produced income were attributable partly to agriculture and partly to its manufacturing activities, then the whole of the amount could not have been taxed under the Income-Tax Act . The stand of the <ORG> was-"the actual leaf of the tea plant, without the addition thereto of the processes above described, is of no value as a market commodity." On behalf of the <ORG> it was contended "that the manufacturing processes carried out in a modern tea factory, with scientific appliances and up- to-date machinery, are different from those ordinarily employed by a cultivator to render the produce raised by him fit to be taken to market." <ORG> held-"that the process in its entirety cannot be appropriately described as agriculture. The earlier part of the operation when the tea bush is planted and the young green leaf is selected and plucked may well be deemed to be agriculture. But the latter part of the process is really manufacture of tea, and cannot, without violence to language, be described as agriculture.

The green leaf is not marketable commodity for immediate use as an article of food, but it is a marketable commodity to be manufactured by people who possess the requisite machinery into tea fit for human consumption." After referring to some authoritative books on Tea, the view expressed by <ORG> was "that the entire process is a combination of agriculture and manufacture." Hence only a part of the income was held to be taxable. In the instant case the problem is quite distinct and different. Here we are concerned with the question whether the commodity which the assessee sold as tea was his agricultural produce or not. He had not sold his tea-leaves from his gardens to any manufacturing tea company. He had himself applied some indigenous and crude manufacturing process in order to enable him to sell his tea in the market. In such a situation I have no difficulty in holding that the sale was of his agricultural produce.

<CITATION> (1) the question before this Court was whether the respondent- firm which purchased raw tobacco and converted it by a manufacturing process into chewing tobacco and sold it in small paper packets was entitled to deduction of excise duty paid by it on the raw tobacco from the gross turnover of sales of chewing tobacco under rule 5(1)(i) of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939. It would be found mentioned at page 318:-"Both the advocates argued, on the basis of the factual position, that the packets of chewing tobacco were goods different from tobacco from which the said goods were manufactured." On that footing, by interpretation of the rule it was held that only excise duty paid on the goods sold by the assessee is deductible from the gross turnover, and not the excise duty paid on raw tobacco. This case was followed by <ORG> in The State of Madras v. <ORG>) In the instant case I have held that the commodity which was sold was not different from the commodity which was produced in agriculture.

The view expressed by <ORG> in the judgment under appeal which is reported in <CITATION> .(3) is on the lines of the preponderance of views expressed by different <ORG> in relation to different commodities. I approve of the case and dismiss these appeals with costs- hearing fee-one set only.

PATHAK, J. I agree that the appeals should be dismissed.

But I should like to say a few words in regard to <CITATION> .(4) That was a case where <ORG> had a tea plantation and after selecting and plucking the young green leaf from the tea bush by hand it was put through a process of drying and rolling. <ORG> alleged that the process actually applied to the dry leaf was a manufacturing process carried out in a modern tea factory with scientific appliances and the latest machinery. <ORG>, on a consideration of the respective cases of the parties, observed that the entire process could not be described as agriculture, and that the process applied to the tea leaf after it had been plucked was a manufacturing process. It observed that the green tea leaf was a marketable commodity to be manufactured by people who possessed the requisite machinery into tea fit for human consumption. It was of the opinion that while the process of selecting and plucking the tea leaf from the tea shrubs could be deemed to be agriculture, the subsequent process which included drying and rolling of the leaf was a manufacturing process. <ORG> drew a distinction between the two processes for the purpose of apportioning the income between agricultural income and non agricultural income. The question before us is whether after the tea leaf had been put through the process of withering, crushing, roasting and fermentation it continued to be agricultural produce. If <ORG> can be said to have laid down that as a result of those processes the tea leaf ceased to be agricultural produce, I am unable to agree with it. To my mind, the tea leaf remained what it always was. It was tea leaf when selected and plucked. and it continued to be tea leaf when after the process of withering, crushing and roasting it was sold in the market. The process applied was intended to bring out its potential qualities of flavour and colour. The potential inhered in the tea leaf from the outset when still a leaf on the tea bush. The potential surfaced in the tea leaf when the mechanical processes of withering, crushing and roasting, fermenting by covering with wet sheets and roasting again were applied. The tea leaf was made fit for human consumption by subjecting it to those processes. At no stage. did it change its essential substance. It remained a tea leaf throughout. In its basic nature, it continued to be agricultural produce.

The appeals fail and are dismissed with costs. Costs are awarded as one set only.

P.B.R. Appeals dismissed.