PETITIONER: COMMISSIONER OF INCOME-TAX, <NAME> Vs. RESPONDENT: <ORG>. DATE OF JUDGMENT: 10/04/1964 BENCH: <NAME>, K. BENCH: <NAME>, K. SHAH, J.C. SIKRI, S.M. CITATION: 1964 AIR 1722 1964 SCR (7) 693 CITATOR INFO : R 1965 SC 321 (15) R 1966 SC1053 (17) R 1966 SC1250 (6) F 1967 SC 444 (12) R 1979 SC1291 (8) F 1982 SC 757 (8) ACT: Income Tax-Assessee treated as agent - Estate duty of non- resident paid by assessee-If an allowable deduction-Ex- pression "for the purpose of the business"-Meaning of Indian Income-tax Act, 1922 (11 of 1922), s. 10(2)(xv)- Estate Duty Act , 1953 , s. 34 . HEADNOTE: For the two accounting periods the assessee, a resident company, incorporated outside India paid -estate duty payable on the death of its certain share holders not domiciled in India and debited the said amounts to revenue in its accounts in ascertaining the profits and gains of its business for the said years. The Income-tax Officer included the said amounts so paid towards estate duty in the profits and gains of the company for the said two accounting periods and assessed the company to income-tax for 1955-56 and 1956-57 on that basis. The appeals by the assessee to the Appellate Assistant Commissioner were dismissed but on further appeal, <ORG> set aside the said orders and held that the assessee was entitled to deduct the said amount in computing its profits. On an application by the Commissioner of Income-tax, the <ORG> stated a case under s. 66(1) of the Act to <ORG> and referred the following question of law for its opinion: "Whether on the facts and in the circumstances ,of the case, the estate duty paid by the company under s, 84 ,of the Estate Duty Act , 1953, is a revenue expenditure deductible in computing the assessee's business income for the ,assessment years in question." <ORG> agreed with the view of the <ORG> and answered the question in the affirmative. On appeal by special leave it was urged on behalf of the appellants, (1) that the sum paid by the assessee under s. 84 of the Estate Duty Act were not expenditure of the assessee company and therefore, they could not be deducted from its profits in computing its assessable income under s. 10(2)(xv) of the Act; and (2) that even if it was revenue expenditure, it was not laid out or expended wholly or exclusively for the purpose of the assessee's business within the meaning of the said sub-clause. Held: (i) There was nothing on the record to show whether in England, where the concerned share holders died, the resident company could recover the amount representing the estate duty paid by it in India from the legal representative of the deceased share holders. Therefore, the assessee who, as a statutory agent paid to the <ORG> the estate duty, could not recover the same from the legal representative of the deceased non-resident share holders. In that situation the company would be out of pocket to the extent it paid the estate duty of the said persons. Therefore, it cannot be held that the amounts paid by the assessee towards estate duty were not expenditure incurred by it, but only amounts paid by it on account with a right to recover the same from the persons on whose behalf it paid. (ii)The expression" for the purpose of the business"in s.10(2) (xv) of the Act is wider in scope than the expression "for the purpose of earning profits". Its range is wide: it may 694 take in not only the day to day running of a business but also the rationalization 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 title; it may also comprehend payment of statutory dues and taxes imposed as a pre- condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for carrying on the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. In the present case, the amounts in question were paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. Therefore, it must be held that the estate duty paid by the respondent was not an allowable deduction under s. 10(2)(xv) of the Act. Case law reviewed. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 384 and 385 of 1963. Appeals by special leave from the judgment and Decree dated January 19, 1961, of <ORG> in Income-tax Referred case No. 20 of 1959.

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

<NAME>, <NAME>, <NAME>, <NAME>, <NAME> and <NAME>, for the res- pondents.

April 10, 1964. The judgment of the Court was delivered by <NAME>, J.-These two appeals by special leave raise the question whether the estate duty paid by the resident <ORG>, hereinafter called the assesses, incorporated outside India, on behalf of members not domiciled in India is deductible from its profits in computing its assessable income under s. 10(2)(xv) of the Indian Income-tax Act, 1922, hereinafter called the Act.

The material facts are not in dispute and they may be briefly stated. The assesses is a resident Company incorpo- rated outside India. Most of its shareholders are in the United Kingdom. During the accounting period ending March 31, 1955, it paid pound 1,302-9-4 and pound 1,303 towards estate duty which was payable on the death of certain share- holders who were not domiciled in India. The assessee debited the said amounts to revenue in its accounts in ascertain-

ing the profits and gains of its business for the said year. Similarly, for the accounting year ending March 31, 1956, it paid a sum of pound 3,809-1-5 towards estate duty payable on the death of certain shareholders and debited the said amount to revenue in its accounts in ascertaining the profits and gains of its business for that year. The Income-tax Officer included the said amounts so paid towards estate duty in the profits and gains of the company for the said two accounting periods and assessed the company to income-tax for 1955-56 and 1956-57 on that basis. The appeals preferred by the assessee to the Appellate Assistant Commissioner were dismissed. On further appeal to <ORG> it held that the assessee was entitled to deduct the said amount in computing its profits; and on that finding it set aside the orders of the Appellate Assistant Commissioner. On an application made by the Commissioner of Income-tax, <ORG> stated a case under s. 66(1) of the Act to <ORG>, and referred the following question of law for its opinion:

"Whether on the facts and in the circumstances of the case, the estate duty paid by the <ORG> under Section 84 of the Estate Duty Act, 1953, is a revenue expenditure deductible in computing the assessee's business income for the assessment years in question?"

<ORG> agreed with the view expressed by <ORG> and answered the question referred to it in the affirmative. The present appeals by special leave have been filed against the said order of <ORG>. Mr. <NAME>, learned counsel for the Commissioner of Income-tax, raised before us the following two points; (1) The sums paid by the assessee under s. 84 of the Estate Duty Act, 1953, are not expenditure of the assesseeCompany and, therefore, they cannot be deducted from its profits in computing its assessable income under s. 10(2)(xv) of the Act; and (2) even if it is revenue expenditure, it is not laid out or expended wholly or exclusively for the purpose of the assessee's business within the meaning of the said sub-clause.

Mr. <NAME>, learned counsel for the respondent, supported the judgment of <ORG> and contended that the said estate duty was revenue expenditure incurred by the assessee as it was put out of pocket to that extent and that it had not been proved that the assessee could legally recover the said amounts from the legal representatives of the deceased shareholders. He further argued that he said expenditure was wholly and exclusively for the pur- pose of the assessee's business within the meaning of s.10(2)(xv) of the Act inasmuch as it discharged its statu- tory obligation in order to preserve the assets of the com- pany.

The question raised turns upon the provisions of s. 10(2)

(xv) of the The act. It reads :

Section 10 . Business-The tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profits and gains of any business, profession or vocation carried on by him.

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

(xv) any expenditure (not being an allowance of the nature described in any of the clauses (1) to (xiv) inclusively, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly or exclusively for the purpose of such business, profession or vocation."

The first facet of the argument turns upon the question whether the estate duty paid by the assessee is an expendi- ture incurred by it within the meaning of the said provision. Under s. 5 of the Estate Duty Act the property of every person dying after the commencement of the said Act shall be liable to a duty called "estate duty" at the rates fixed in accordance with s. 35 thereof. Under s. 21 of the said Act there shall not be included in the property passing on the death of the deceased, inter alia, movable property situated outside the territories to which the said Act extends at the time of the death of the person. Under s. 53 of the said Act, where any property passes on the death of the deceased, every legal representative to whom such property so passes for any beneficial interest in possession or in whom any interest in the property so passing is at any time vested and others mentioned in the section shall be accountable for the whole of the estate duty on the property passing on the death. Section 84 thereof is aimed to reach the property of a member of a company dying outside India: the section before amendment read:

Section 84 . Company to furnish particulars of deceased inemberrs to the Controller-

Where a company incorporated outside India carried on business in the territories to which this Act extends and has been, treated for the purposes of the Indian income-tax Act, 1922 (Xi of 1922),as resident for two out of three completed assessments immediately preceding, such company shall, within three months of the receipt of intimation of the death of a member dying after the commencement of this Act, fur- nish to the Controller such particulars as may be prescribed in respect of the shares of the deceased member in the company, and shall be liable to pay estate duty at the rates mentioned in Part III of the Second Schedule, on the principal value of the shares held by the deceased in the company except in cases where the deceased member was a person domiciled in India and the person accountable has obtained a certificate from the Controller showing that either the estate duty in respect thereof has been paid or will be paid or that none is due, as the case may be."

Under this section in the circumstances mentioned therein a company is liable to pay estate duty in respect of the shares of the deceased member of the company on the princi- pal value of the share held by the deceased in the company: under this section a statutory obligation is imposed on the company to pay the estate duty on the shares of a deceased non-resident member. If such a member of the company had died in India, subject to the conditions mentioned in the section, the company would not be liable to pay the estate duty payable on the shares held by the deceased. In substance the company is made a statutory agent to pay the said duty payable in respect of property belonging to another. Section 77 of the Estate Duty Act enables a person authorised or required to pay estate duty in respect of any property to transfer the said property for the purpose of paying the duty. This section cannot have extra-territorial operation. Prima facie the company cannot transfer the shares or the property of a person domiciled in a country outside India. Nor sub-s. (2) of s. 77 , which says that a person having an interest in any property, who pays the estate duty in respect of that property, shall be entitled to the like charge, as the estate duty in respect of that property had been raised by means of a mortgage to him, has application, for it cannot be said that the company has any legal interest in the shares owned by a third party. That apart, -the said sub-section also cannot have extra- territorial operation. Nothing has been placed before us to enable us to ,.come to the conclusion whether in England, where the concerned shareholders died, the resident company could recover the amount representing the estate duty paid by it in India from the legal representatives of the deceased share- holders. We, therefore, assume that the assessee who, as a statutory agent pays to the <ORG> the estate duty, cannot recover the same from the legal representatives of the deceased non-resident shareholders. In that situation the company would be out of pocket to the extent it paid the estate duty of the said persons. We cannot, therefore, accede to the contention of the learned counsel for the appellant that the amounts paid by the assessee towards estate duty were not expenditure incurred by it, but only amounts paid by it on account with a right to recover the same from the persons on whose behalf it paid. The next question is whether the said expenditure was expended wholly and exclusively for the purpose of the business of the assessee within the meaning of s. 10(2)(xv) of the Act. The crucial words of the section relevant to the present enquiry are "for the purpose of such business." Subsection (2) cl. (xv) is a residuary clause which provides for allowing the items of business expenditure not covered by the other clauses of sub-s. (2) of s. 10 of the Act. Beforethe Amending Act of 1939, the language of the predecessor of this clause read thus:

" not being in the nature of capital gains incurred solely, for the purpose of earning such profits or gains."

The Amending Act of 1939 substituted the present clause and made it more comprehensive by using the expression "for the purpose of such business". Some of the decisions cited at the <ORG>, both English and Indian, throw some light on the construction of the said expression and we would, therefore, briefly notice them.

<ORG> in Strong and Company of Romsey, Limited v. <NAME>) construed a corresponding provision in the Income-tax Act of the United Kingdom, the, relevant part whereof read: "money wholly and exclusively laid out or expended for the purposes of such concern."' There, a brewing company, which also owned licensed houses in which it carried on the business of innkeepers, incurred damages and costs to the amount of pound 1,490 on account of injuries caused to a visitor staying at one of its houses by falling in of a chimney. <ORG> held that the damages and costs were not allowable as a deduction in computing the company's profits for income-tax purposes. The learned Lord Chancellor said:

"They cannot be deducted if they are mainly incidental to some other vocation, or fall on the-, (1) (1906) 5 T.C. 215, 219, 220.

trader in some character other than that of a trader."

Lord <NAME>, whose dictum was the basis for some of the subsequent decisions in that country, referring to the expression "for the purpose of trade" observed as follows:

It is not enough that the disbursement is made in the course of, or arises out of , or is connected with, the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits."

Lord <NAME>'s definition appears to be much narrower than that of the Lord Chancellor, for the former restricts the expression to mean that the expenditure should have been made only for the purpose of earning profits. <NAME>, J., in <NAME> v. <ORG>), noticed that the qualifictaion "for the purpose of earning profits" was a slight expansion of the words of the statute, though he ex- pressed the view that it brought out the real import of the relevant section. <CITATION> )(2), in disallowing the deduction claimed by a company of a sum set aside for the relief of ,the invalid employees, <NAME>, J., applied the test whether the said expenditure incurred by the company was for the purpose of earning profits. In <NAME> v. <ORG>), the court allowed a deduction in respect of sums paid by the respondent-firm in discharging the liabilities of the business outstanding at the date of the said respondent purchased the business from a third party on the ground that the said expenditure, having been incurred for the purpose of preserving the goodwill and for ensuring the continuity of supply of raw-material and labour, was wholly and exclusively laid out for the purpose of its business. After referring to earlier decisions, <ORG>, made the following observation:

Here is a payment made in the circumstances of this case in order to ensure a supply of leather for the business, a payment made in order to ensure a continuance of labour willing to be employed in this business, and payment for rent in order to ensure that the landlord's consent to assignment of the premises, of the premises in which the business was carried on, should not be re- fused. I find it quite impossible to say that there is no evidence to justify those findings."

(1) 17 T.C. 59. 65. (2) (1924) 8 T.C. 678. (3) (1949) 30 T.C. 460. 466.

Here it will be noticed that the learned Judge went beyond the limited scope given by Lord <NAME> to the expression in the statute and did not confine it to the amounts spent only for earning profits, but to expenditure incurred in connec- tion with the business. Where a company incurred an ex- penditure in defending its title to property, it was held in <ORG>) v. <ORG>) that the said amount was spent wholly and exclu-- sively for the purpose of the company's trade and was, therefore, an allowable deduction for the purpose of com- puting the profits of the company for income-tax purposes. This decision gives a more liberal meaning to the expression "for the purpose of the trade" than that given by Lord <NAME>. "Purpose" of the trade includes the purpose to pro- tect the assets of the company carrying on the trade. <ORG> resurveyed the legal position in <ORG>) v. <ORG>) in the context of the questions whether the expenditure incurred by a com- pany engaged in sugar refining in a propaganda campaign to oppose the threatened nationalization of the industry was, an admissible deduction. Lord <NAME>, after referring to the relevant case-law and to Lord <NAME>'s formula, made the following observations:

"..........this seeems to me to be an assumption wholly unwarranted by the evidence. There is no evidence that a transfer of the assets to a national body or authority would not destroy or adversely affect the company's business................. It is clear on the authorities that Lord <NAME>'s formula includes expenditure for the purpose of' preventing a person from being disabled from carrying on and earning profits in the trade."

Lord <NAME> laid down the relevant test thus:

"A general test is whether the money was spent by the person assessed in his capacity of trader or in some other capacity-whether on the one hand the expenditure was really incidental to the trade itself or on the other hand it was mainly incidental to some other vocation or was made by the trader in some other capacity than that of trader."

This decision also restated the two tests namely (i) that the expenditure should be for carrying on the business to earn profits in the trade, and (ii) that the expenditure shall' be incurred by the assessee in his capacity of a person (1) (1942) 10 T.T.R. (Suppl.) 1, S.

(2 ) (1954) 26 I.T.R. 195, 205, 206, 219.

carrying on the business. <NAME>, M.R., in <ORG> v. Keene(1) reaffirmed the second test in the following words:

"I find, however, in <ORG> case(2) what appears to me to be a clear answer to the present appeal. It is, I think, a matter not of dictum but of decision in that case that an expense is not deductible if it falls on a trader in some character other than that of a trader. This was the ground of the opinion of Lord <NAME>, L.C., with which Lords <NAME> and <NAME> agreed. Their Lordships held that the expense there in question fell upon the appellants in their character not of traders but of householders."

In <NAME> v. <ORG>), the question was whether a brewery company, which was owner and lessee of a number of licensed premises where business was carried on on the tide-house basis, was entitled to deduct for the purposes of income tax its liability in respect of compensation fund charges under the, Licensing Act, 1904. It was contended by the <ORG> that the liability to which the <ORG> became subject was in its capacity as landlord of the property and not as trader carrying on the trade of brewer. When the case ultimately came up before <ORG>, the <ORG> was equally divided. The view of two of the members who agreed with the view of <ORG> prevailed. The basis of the judgment was that the liability was wholly and exclusively related to the carrying on of the company's business, because on the facts of that case the company had assumed the position of landlord for the purpose of its trade. If the finding was that the company paid the tax in its capacity as landlord as opined by the learned Lords who dissented, the result would have been the other way. In <ORG> (Buenos Aires) Ltd. v. <NAME> (H.M. Inspector of Taxes)(4), <NAME>, J., covered the entire ground over again in the context of a question whether the appellant-company therein which was incorporated and resident in the United Kingdom and carrying on the business of a large general stores in Buenos Aires, having paid in Argentina a tax known as the "substitute tax" to which it was liable, could claim deduction under the Income-tax Act , 1952 (15 and 16 Geo. VI and 1 Eliz. 1, c. 10, s.137 (a)). The learned judge held on the facts of that case (1) (1947) 30 T.C. 298, 316. (2) (1905) 5 T.C. 215. (3) (1910) 5 T.C. 568.

(4) Appeal No. 2048 (Ch. D.) decided on 25th March, 1963 (unreported).

that incurring liability for that tax was a pre-condition of the Company's earning profits in the Argentina, for without incurring liability for that tax the Company could not carry on business in the Argentina at all. On that finding the learned Judge came to conclusion that it was a liability which the Company had undertaken for the purpose of its trade, and was, therefore, a payment made wholly and ex- clusively for the purpose of the company's trade. It will be seen that in that case the tax was paid by the Company in its capacity as company doing business and unless that tax was paid the company could not carry on its business. The two tests laid down are satisfied.

Pausing here, we shall briefly recapitulate the legal posi- tion in England. The relevant wordings of section with which the English Judges were concerned are, in effect, similar to the terms of s. 10(2)(xv) of the Indian Income-tax Act, 1922. The test laid down by Lord <NAME> in <ORG> v. <NAME>), namely, the disbursement must be made for the purpose of earning profits, has been accepted and followed throughout, though the content of that test has been expanded to meet diverse situations. Broadly, the English courts applied two tests to ascertain whether a deduction was permissible or not, namely. (i) whether the expenditure was incurred for the purpose of carrying on of the business and for removing obstacles and impediments in the conduct of the business, and (ii) whether the assessee paid the amount in his capacity as businessman or in his personal capacity. Now coming to the Indian decisions, a Devision Bench of <ORG> in <CITATION> (2 ) held that the share of bonus voluntarily paid by a company, which held the managing agency of another company, to some of the officers of the managed company was a permissible deduction under s.10(2)(xv) of the Act. The reason for the conclusion is stated thus:

"But having considered the whole case and the question submitted to us I am satisfied that looking purely at it from the point of view of commercial principles what the assessee company has done is something which had as its object increasing the profits of <ORG> nd thereby increasing its own share of the commission."

(1) (1906) 5 T.C. 215.

(2) (1950) 18 I.T.R. 460, 472.

<CITATION> (1), where the agent of the assessee misappropriated his money and the assessee claimed the part of the amount misappropriated and not recovered from the agent as a deduction under s. 10(2)(xv) of the Act for the purpose of income-tax, this Court held that it was not allowable under s. 10(2)(xi) or s.10(2)(xv) of the Act. <NAME>j., observed :

"The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2) , whether it is admissible or not will depend, on whether having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it."

This decision, though not direct in point, lays down the principle that an expenditure can be deducted only if it arises out of the carrying on of the business and is incidental to it. <CITATION> . (2), this Court held that s. 10(2) (xv) of the Act enacted affirmatively what was stated in the negative form in the English statute and was substantially in pari materia with the English enactment and the courts might consider the English authorities as aids to the interpretation thereof. The decision of this Court in <CITATION> (3), though, turns upon the provisions of s. 10(1) of the Act, gives some assistance in deciding the question raised. One of the questions raised was whether the tax paid by the assessee-firm as an agent of the non-resident principle could be claimed as a bad debt or a trading loss. In the words of <NAME>, J., "the loss which the appellant has incurred is not in its own business but the liability arose because of the business of another person and that is not permissible deduction within s. 10(1) of the Act". It is true that this decision did not arise under s. 10(2)(xv) of the Act, but the principle that the expenditure incurred by the assessee in his capacity as agent of another is not a deductible item equally applies to the present case. This Court in The Commissioner of Income tax, <CITATION> (1) had to consider the question whether an expenditure incurred by a race club for the purpose of training jockeys of the club was an allowable deduction within the meaning of s. 10(2)(xv) of the Act. (1)  S.C.R. 690.

(2) (1959) 37 I.T.R. 66.

(3) [1961] 2 S.C.R. 949.

(4) [1961] 2 S.C.R. 729, 735-736.

<NAME>,<NAME>, speaking for the <ORG> , after considering the relevant decisions, concluded thus:

"Applying the law, as laid down in those cases, to the present case the conclusion is that the amountn dispute was laid out wholly and exclusively for the purpose of the respondent's business because if the supply of jockeys of efficiency and skill failed the business of the respondent would no longer be possible. Thus the money was spent for the preservation of the respondent's business."

This decision gives a liberal interpretation to the relevant expression. -In M/s. <NAME> and <NAME> v. The Commissioner of Income-tax, Bombay City II(1), this <ORG> disallowed deduction of the amount paid by a firm as penalty to release the consignment confiscated by the <ORG> authorities. In coming to the conclusion, <NAME>, J., speaking for the <ORG>, observed:

have been construed in <ORG> v. <ORG>) to mean "for the purpose of keeping the trade" going and of making it pay.,, After considering the relevant decisions, the learned Judge proceeded to state thus:

"They cannot be deducted it they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business."

No doubt this judgment is really based upon the fact that an expense which is paid by way of penalty for breach of law cannot be said to be an amount wholly and exclusively laid out for the purpose of the business; but the observations in the decision go further and indicate that the expenditure, if incurred by the trader in some character other than that of a ,trader, is not an allowable deduction. (1) [1961] 2 S.C.R. 651, 657, 663.

(2) [(1925] 12 T.C. 803. 813.

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 rationalization of its administration and modernization of its machinery; it may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile titles; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. In the present case, the company, as a statutory agent of the deceased owners of the shares, paid the sums payable by the legal representatives of the deceased shareholders. The payments have nothing to do with the conduct of the business. The fact that on his default, if any, in the payment of the dues the <ORG> may realise the amounts from the business assets is a conse- quence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure any the more expenditure incurred in the conduct of the business. It is manifest that the amounts in question were paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. We, therefore, hold that the estate duty paid by the respondent was not an allowable deduction under s. 10(2)(xv) of the Act. We answer the question in the negative. The order of <ORG> is wrong and is set aside. In the result, the appeals are allowed with costs. One set of hearing fees.

Appeal allowed


PETITIONER: <ORG> ETC. Vs. RESPONDENT: UNION OF INDIA DATE OF JUDGMENT30/08/1974 BENCH: <NAME>, M. HAMEEDULLAH BENCH: <NAME>, M. HAMEEDULLAH REDDY, P. JAGANMOHAN ALAGIRISWAMI, A. CITATION: 1975 AIR 460 1975 SCR (1) 956 1974 SCC (2) 630 CITATOR INFO : R 1978 SC 215 (23) RF 1978 SC1296 (35,50,60) RF 1981 SC 873 (30,72) RF 1987 SC1802 (9) R 1988 SC1737 (86) APL 1990 SC 334 (103) R 1990 SC1277 (29,40) RF 1990 SC1851 (25) ACT: Sugar (Control) Order, 1966, Clause 7--Central <ORG>. fixing the price "having regard to the estimated cost of production of sugar on the basis of the relevant schedule"--Fixation of price twice within one season--<ORG>. if obliged to make adjustments for losses due to any previous erroneous fixations. Essential Commodities Act , 1955, Section 15- -Fixation of the price of sugar in good faith--Suit for damages if could be initiated. HEADNOTE: Clause 7(1) of the Sugar (Control) Order, 1966, gives the Central <ORG>. power to fix the maximum sugar price by notification in the official <ORG> "from time to time." Clause 7(2) requires the <ORG>. to fix the price "having regard to the estimated cost of production of sugar on the basis of the relevant schedule". The appellants who have preferred these appeals on the certificate granted by <ORG> under Art. 133(1)(c) of the Constitution have challenged the notification dated 28th June 1967 issued by the Central <ORG>. under act. 7 of the Sugar Control order fixing ex-factory prices for sugar factories specified in the notification on the ground that the method adopted in fixing prices of sugar manufactured in various States was not correct. They also alleged failure of the Central <ORG>. to take into account the fact that there was an initial fixation of prices of sugar by a notification dated 1st February 1967 followed by a final fixation on 28th June 1967. It was contended that appropriate adjustments or allowances should have been made in the final fixation by a notification of 28-6-1967. Rejecting the contentions and dismissing the appeals. HELD : (1) Price fixation is more in the nature of a legislative measure even though it may be based upon objective criteria found in a report or other material. It could not, therefore, give rise to a complaint that a rule of natural justice has not been followed in fixing the price. Nevertheless, the criterion adopted must be reasonable. Reasonableness, for purposes of judging whether there was an "excess of power" or an "arbitrary" exercise of it, is really the demonstration of a reasonable nexus between matters which are taken into account in exercising a power and the purpose of exercise of that power. [961 H; 1962 <CITATION>  1 S.C.R. 468 and <CITATION>  2 S.C.R. 860 relied on. <CITATION> , referred to. The appellants have not asserted that they incurred losses or did not make reasonable profits. The practice of fixing the prices, once during the initial months of the crushing season on the data then available and the other at the end of the season, has been invariably followed. From the very nature of things, fixation or refixation of ex-factory price could not take place on any other basis. It could not be delayed until the whole season came to an end leaving the price fixed for the previous season, which was the only other alternative, to govern sales. The passage in page 116 of the report of <ORG> and the expressions "year to year in the same zone" and "determined annually" occurring therein clearly show that the <ORG> meant to lay down only guide-lines in determining relevant criteria for maximum price fixation. What is most important to note, however, is the reference to the margin of profit, which the two sets of schedules, containing different heads filled in for determining cost of manufacture, do not mention. It is evident that the schedules are not all embracing. Again the passage at p. 115 shows that the concept of a 957 "fair-price", implied in a reasonable fixation., and not some mechanical formula. ignoring profits or losses altogether. was contemplated by the <ORG>. It cannot, be said that the <ORG>, in fixing the price of sugar in 1967, took into consideration any extraneous matters or that it acted arbitrarily or unreasonably in doing so. [967 B-C; 965 D-H] (ii)Clause 7(2) requires the <ORG>. to fix the price "having regard to the estimated cost of production of sugar on the basis of the relevant schedules." The expression "have regard to" only obliges the <ORG>. to consider as relevant data the material to which it must have regard. [959 A-B] Ryots of Garabandho and other- Villages v. Zemindar of Parlakimedi & Anr. 70 I.A. 129 referred to. It is evident that the price fixed is an estimated maximum price chargeable because the manufacturer cannot charge more. Furthermore, the only "adjustment" provided for is before a fixation of the estimated Price "having regard" to the basis provided by the relevant schedule, but there is no obligation whatsoever cast upon the <ORG>. to make any "adjustment" to compensate for losses due to any previous erroneous fixations. Indeed, such attempted adjustments may seem to be unfair to subsequent consumers who ought not to be made to pay for past benefits possibly enjoyed by others. Both sets of schedules give considerable freedom to the <ORG>. in choosing what could properly determine the "fair price" to be fixed. Items to be taken into account are broadly stated. They are not tied down to such particulars such as excise duty insisted upon by the appellants. It is not possible to read into clause 7(2) an obligation to fix the price either on an <ORG> basis or five region basis. It is enough if the basis adopted is not shown to be so patently unreasonable is to be in excess of the power to fix price. This power is confined to fixation for the purposes mentioned in Essential Commodities Act , 1955. [1950 B-C; 961 B & F] (iii)The clear implication of Sec. 15 of the Essential Commodities Act , 1955, is that no suits or other legal proceedings, apart from those specified in the Constitution, can be brought against the <ORG>. or its officers for any action taken by the <ORG>. in fixing the price of sugar in good faith. Mere is no allegation made by the appellants that the action of the <ORG>. in fixing the price within a season was lacking in good faith. Hence, no proceedings could have been brought in <ORG> to claim damages against the <ORG>. even if it bona fide action was vitiated by some illegality of the kind set up by the appellants 968 B-C] JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1928/67, 1274-76, 1293, 1356-57/68.

Appeals from the Judgment and orders dated the 10th October 1967 and 5th February 1968 of <ORG> in Civil Writ Nos. 1218, 1295-97, 1320, 1344 and 1318 of 1967 respectively.

B.Sen. <NAME>, <NAME>, <NAME> and <NAME> for the appellant in C. A. 1928/67. <NAME> for the appellants in C. As. 1274-76 and 1293/68.

<NAME> and <NAME> for the appellant in C. A. No. 1356/68.

<NAME>; for the appellant in C. A. 1357/68. <NAME> and <NAME> for the respondents, except C. A. 1928 and 1275/68.

<NAME>, <NAME> and <NAME> for the respondents in C. A. 1928 and 1275 of 1968.

The Judgment of the <ORG> was delivered by <ORG> The appellants are manufacturers of sugar, who have come before us after certification of their cases as fit for appeal to this <ORG> tinder Article 133(1)(c) of the Constitution. They challenged the notification dated 28-6- 1967 issued by <ORG> under clause 7 of the Sugar (Control) Order, 1966, fixing ex-factory prices for sugar factories specified in the notification. It appears that, in the Writ Petitions filed in the High <ORG> for quashing the impugned notification and appropriate orders in the nature of mandamus, the validity of section 3 of the Essential Supplies Act 10 of 1955, as well :as of the Sugar (Control) Order, 1966, issued under it were questioned. But, before us, the appellants have confined their arguments to contentions based on the correctness of the method adopted in fixing prices of sugar manufactured in various States, and the alleged failure of <ORG> to take into account the fact that there was an initial fixation of prices of sugar by a notification dated 1-2-1967 followed by a final fixation on 28-6-1967. According to the appellants, appropriate adjustments or allowances should have been made in the final fixation by a notification of 28-6-1967. We are, therefore, ]lot concerned now with any question relating to the validity of clause 7 of the Sugar (Control Order) under which the notifications were issued.

The relevant clause 7 reads as follows:

"7. Power to fix sugar prices:-

(1) <ORG>. may from time to time by notification in the Official Gazette, fix the price or the maximum price at which any sugar may be sold or delivered and different prices may be fixed for different areas or different factories or different types or grades of sugar.

(2) Such price or maximum price shall be fixed having regard to the estimated cost of production of sugar determined on the basis of the relevant schedule of cost given in the Report of the Sugar Enquiry Commission (October 1965), subject to the adjustment of such rise in cost subsequent to the Report aforesaid as, in the opinion of <ORG>, cannot be absorbed by the provision for contingencies in the relevant schedule to that Report.

(3) Where the price or the maximum price has been so fixed, no person shall sell or purchase or agree to sell or purchase any sugar at a price in excess of that fixed under sub-clause (1) :

Provided that the price at which sugar may be sold for delivery otherwise than ex-factory shall not exceed the price or the maximum price, as the case may be, fixed under sub- clause (1) for sale ex-factory plus such charges in respect of transport to any town or any specified area and other incidental charges as may be fixed by the concerned State Government or by any officer authorised in this behalf by <ORG> or <ORG> in accordance with the instructions issued by <ORG> in this behalf from time to time."

Clause 7(2), set out above, requires the <ORG>. to fix the price "having regard to the estimated cost of production of sugar on the "basis of the relevant schedule". The expression "having regard to" only obliges the <ORG>. to consider as relevant date material to which it must have regard (See Ryots of Garabandho and other Villages v. Zemin- dar of <ORG>. (1). The appellants concede that this is the effect of language of cl. 7(2). It is evident that the price fixed is an estimated maximum price chargeable because the manufacturer cannot charge more. Furthermore, it should be noted that the only "adjustment" provided for is before a fixation of the estimated price "having regard" to the basis provided by the relevant schedule, but there is no obligation whatsoever cast upon the <ORG> to make any "adjustment" to compensate for losses due to any previous erroneous fixations. Indeed, such attempted adjustments may seem to be unfair to subsequent consumers who ought not, it could be argued, be made to pay for the past benefits possibly enjoyed by others.

<ORG> had recommended that the country should be divided into five zones for the purposes of fixation of price of sugar in each zone. Its opinion was, that dividing the country into a large number of zones would make the price fixation of sugar "degenerate" into "cost plus basis". The reason given by the <ORG> against division of the country into larger number of zones was that this would encourage inefficient factories to remain inefficient instead of inducing them to effect economies by rationalization and modernisation so as to become efficient. The grievance of the appellant <ORG> was that the Government had really divided the country into 22 zones and that it had, while doing so, taken into consideration the conversion charges on the basis of five zones putting Haryana in the same zone as Madhya Pradesh. It claimed that its efficiency as a manufacturer using modern methods was greater than that of factories in Madhya Pradesh although the wages it had to pay were higher than those paid by <ORG>. It was difficult for <ORG>, as it is for us, to determine these questions of fact on the meager material or bare assertions, not subjected to cross-examination, which are available in writ proceedings decided primarily on affidavits. Nevertheless, assuming that these assertions rest on a factually correct basis, we think that a modern manufacturer of sugar, with more efficient methods of production, would gain by a fixation of price which was profitable even for less efficient manufacturers. Even if we assume that the wages of laborers were somewhat higher in Haryana than those in Madhya Pradesh, without sufficient material to be able to arrive at a definite conclusion on this matter, we think that the disadvantage to the <ORG> would be offset by the advantage it enjoys as a producer with a more modern and (1)70 I. A. 129.

efficient manufacturing technique. It is a well known fact that rationalisation of industry, by the use of modern methods, reduces the amount of labour needed in more mechanised modes of manufacture. Therefore we do not think that these assertions could prove any inequitable treatment meted' out to the Haryana manufacturers of sugar in any case no breach of a mandatory duty, which could justify the issue of a writ of mandamus, was established. We have also examined the grievance of the appellants that the price of sugar for the season 1966-67 was not determined in accordance with the relevant data. As already indicated above, the cost schedules given by the <ORG> were only guide-lines to indicate the relevant data in fixing the price. They were not like clear mandatory Statutory provisions which could be enforced without much difficulty. The <ORG>'s report gives two sets of schedules which contain different heads filled in for determining cost of manufacture. One of these sets gives heads of cost of manufacture for future calculations based "on 10% recovery excluding basic cost of cane" (page 110) and with the "number of working days on the basis of 22 crushing hours". Here, the heads of costs are '(1) cost excluding basic cost of cane but including extra cost on cane (2) packing (3) grade differential (4) selling expenses (5) "dearness allowance escalation for 10 points". Another set of schedules of fair price fixation for the year 1963-64, for which the basic cost of cane was presumably known, after giving "average capacity", "average crushing days", and "average recovery per cent", contains the following heads (p. 117) "(1) raw materials-basic cost of cane (2) conversion charges including- extra cost of cane (3) packing charges (4) adjustment for extras due to grade differential (5) selling expenses (6) excise duty (7) return (8) fair ex-factory price"

Here, manufacturing "costs" are, presumably, covered by "conversion charges".

A perusal of the figures under the first set of tables shows that, as the number of working days is increased, the cost is, quite, naturally, reduced. The 10 % recovery basis merely indicates the amount of sugar obtained from the total quantity of sugarcane. But, from both sets of schedules, we find that there is considerable freedom given to the <ORG> in choosing what could properly determine the "fair price" to be fixed. Items to be taken into account are broadly stated. They are not tied down to the particulars which, according to the learned counsel for the appellant, ought to have been taken into account. The criteria are elastic enough to either include or exclude some of the items put forward on behalf of the applicants as necessary to be taken into account. Some of the items which, according to the appellants, should be treated as items of cost may not even properly find a place there. For example it was suggested that excise duty was wrongly left out as an item of cost. There is nothing in the first set of schedules to indicate that excise duty must be taken into account in determining, the cost of production. In the second set of schedules excise duty is mentioned apart from manufacturing and other items of cost. Excise duty is really, imposed on goods when they have come into existence in the manufactured form. It could more properly be taken into consideration in determining nit profits than in calculating cost of manufacture.

One of the contentions on behalf of the petitioners was that prices should not have been determined on the basis of 22 zones but should have been determined either on an <ORG> scale or for five zones as recommended by <ORG>. costs of production, for purposes of price fixation, can only be determined on the basis of averages from data collected from each particular region- and con- ditions which affect factories in general in that region. It may. be that, on particular items, the <ORG> may have reasons to regard data collected in one region to be unreliable. Other data collected in another region may be considered good enough for a more general use of it. The results of price fixation are actually given separately in an annexed table for each factory in each State and are not uniform. We cannot read into clause 7 (2) an obligation to fix the price either on an <ORG> basis or five region basis. It is enough if the basis adopted is not shown to be so patently unreasonable as to be in excess of the power to fix price. This power is confined to fixation for the purposes mentioned in Essential Commodities Act , 1955. In any case, the appellants' objections could form the subject matter of representations which could have been made to the <ORG> by each of the parties affected. If their case had substance, they ought to have made a demand for a more just fixation on what they considered to be more appropriate and reasonable basis before going to court. They had not done so.

The petitioners did not challenge the price fixation on the ground that a quasi-judicial procedure had to be adopted before prices are fixed even if such price fixation affects, as it must each factory. Price fixation is more in the nature of a legislative measure even trough it may be based upon objective criteria found in a report or other material. 15-L192SupCI/75 it could; not, therefore, give rise to a complaint that a rule of natural justice has not been followed in fixing the price. Nevertheless, the criterion-adopted must be reasonable. Reasonableness, for purposes of judging whether there was an "excess of power" or an "arbitrary" exercise of it, is really the demonstration of a reasonable nexus between the matters which are taken into account in exercising a power and the purposes of exercise of that power. This was made clear by this Court in the two cases cited on behalf of the appellants (1) <CITATION> (1); (2) <CITATION> (2).

<ORG> case (supra) related to price fixation under the provisions of Cotton Textile (Control) Order, 1948. There, this Court observed. inter alia, that the case of <CITATION> (3) "does not consider that concept of fair prices varies with circumstances in which and the purposes for which the price control is sought to be imposed," and, it indicated that the decision in that case was based on a "special agreement" involved there. The purposes of the Essential Commodities Act were thus explained (at p. 490) "The question of fair price to the consumer with reference to the dominant object and purpose of the legislation claiming equitable distribution and availability at fair price is completely lost sight of if profit and the producer's return are kept in the forefront. The maintenance or increase of supplies of the commodity or the equitable distribution and availability at fair prices are the fundamental purposes of the Act. If the prices of yarn or cloth are fixed in such a way to enable the manufacturer or producer to recover his cost of production and secure a reasonable margin of profit, no aspect of infringement of a fundamental right can be said to arise."

It was then said (at p. 490) :

"In determining the reasonableness of a restriction imposed by law in the field of industry, trade or commerce, it has to be remembered that the mere fact that some of those who are engaged in these are alleging loss after the imposition of law will not render the law unreasonable. By its very nature, industry or trade or commerce goes through periods of prosperity and adversity on account of economic and sometimes social and political factors. In a largely free economy when controls have to be introduced to ensure availability of consumer goods like food- stuff, cloth and the like at a fair price it is an impracticable proposition to require the Government to go through the exercise like that of a Commission to fix the prices."

(1) [1974] 1 S.C.R. p. 468.

(2) [1973] 2 S.C.R. 860.

(3) [1972] 2 S.C.R. 526.

'Even these <ORG> cannot always make a correct estimate of a price which is fair to all because there are intricacies of the trade of all profit making enterprises, which a <ORG> may not be able to probe."

<ORG> case (supra) the price of fixation of sugar under the Sugar (Price Determination) Order, 1971, on principles laid down by <ORG> and other expert bodies were considered by this <ORG>. In that context it said (at page

875) "A unit-wise fixation of price as suggested by counsel, and payment on the basis of a price so worked out would mean perpetuating inefficiency and mismanagement, and depriving the partial control policy of the incentives for economy and efficiency inherent in it. We are, therefore, satisfied both on the language of the sub-section, the background in which it was enacted and the mischief the legislature sought to remedy through its working that the true construction is that a fair price has to be determined In respect of the entire produce, ensuring to the industry a reasonable return on the capital employed in the business of manufacturing sugar. But this does not mean that Government can fix any arbitrary price, or a price fixed on extraneous considerations or such that it does not secure a reasonable return on the capital employed in the industry."

In both the cases mentioned above the question was assumed to be one involving a determination of "fair price". In arriving at such an assessment, a reasonable margin of profits, judged by average standards of efficiency, could be provided for. In the cases before us, the appellants have not asserted that they incurred losses or did not make reasonable profits. In other words, they themselves ignore what appears to be an important aspect in all such price fixation so that one is left wondering whether their real complaint is not that they could not "profiteer". We are not satisfied that the <ORG>, in fixing the price of sugar in 1967, to which the Writ Petitions in the appeals before us are confined, took into consideration any extraneous matters or that it acted arbitrarily or unreasonably in doing so. in <ORG> case, which is accepted by both sides as the basic or the most comprehensive case from the point of view of relevant material on record, the counter-affidavit filed by <NAME>, Joint Secretary, <ORG>, gives the matters taken into account for the impugned price fixation as follows :

"With reference to paragraphs 14 and 15 of the Writ Petition, I say that the correct facts are as follows :-

(a) The fixation of ex-factory price of sugar is necessarily to be done initially about the time when the crushing season starts or when the deliveries from new season's production commence. This fixation has necessarily to be made on the basis' of estimates of the relevant data available at that time.Circumstances may require the revision to the exfactory price during the: seasons and, the final re- fixation, of. price generally takes place after the crushing season is over. Ever since the present control started in April 1963, the practice to above has been followed. From the very nature of things of fixation or re- fixation of ex-factory price cannot be done on any other basis.

(b) For the reasons stated above, the Sugar (Control) Orders of 1963 and 1966 empower <ORG> to fix ex-factory price from time to time.

(c) It is incorrect to state, as has been done in paragraphs 14 and 15 of the Writ Petition, that clause 7(2) of the Sugar (Control) Order, 1966 makes provision for any adjustment in respect of deliveries of sugar made prior to the date of any notification issued thereunder. All that the said sub- clause provides is fixation of a price having regard to the estimated cost of production.

(d) From the very nature of things it is obvious that even the cost schedules, recommended by <ORG> are not based on the actual cost of production in any individual factory, but are based on the average of only a few sample factories taken into account by <ORG>, which necessarily results in the price not being based on actual cost of production in any individual factory.

(e) It is also incorrect to state as has been done by the petitioner that the price which is so fixed under the Sugar (Control) Orders if fixed on the basis of the previous year's results. As a matter of fact, the price, which is so fixed,isanestimate on the basis of data not only of the previous year's results, but also on the basis of the working of more than one year in the past and also crop forecasts and various other factors relating to the commencing year in respect of which the price has to be fixed. The statement by the petitioner that the price is fixed by <ORG> on the basis of the previous year's working is on the face of it incorrect as in such an event there would be no necessity of making any estimate for the purpose of price fixation.and all that would be needed would be to continue the prevailing price.

The ex-factory price for the sugar factories in Punjab in- cluding Haryana was fixed at Rs. 137-35 per quintal by a Notification dated the 24th March, 1966. By Notification dated the 20th October, the ex-factory price of such factories was revised to Rs. 134-55 per quintal. Thus, in point of fact the petitioner was benefited to the extent of Rs. 2-80 per quintal on all deliveries made from the production of the year 1965-66 up to the 19th October, 1966, because no adjustment was made or could be made under the provisions of the relevant Sugar (Control) Order regarding such benefit which accured to the petetioner as aforesaid We turn now to the questions whether there was a "provisional" fixation of :price by the notification of 1-2- 1967 or whether the socalled "final' fixation for the season- 1966-67 by the notification of 28 6-1967 was illegal for that reason. We find that clause 7 of the Control Order set out above does not contemplate only a "Provisional" or preliminary, fixation of maximum price to be followed by a "final" fixation for the whole season, such as,, according to the appellants, is supposed to have happened here. Clause 7(1) gives <ORG> power to fix the maximum sugar prices by notification in the official Gazette "from time to time" it was, therefore, contended on behalf of <ORG> that both the notifications complied with the requirements of the Control Order, because there is neither a provision for a provisional fixation, to be followed by a final fixation for a season, nor is any period of time between one fixation and another specified. In reply to this contention, Mr. <NAME>, learned counsel for the appellants in Civil Appeal No. 1356 of 1958, referred us to the statement in the counter-affidavit, set out above, and the <ORG> report (at page 116) :

"In actual practice, however, the duration and recovery may vary from year to year in he same zone. The ex-factory selling price in each zone will have to be determined annually with reference to the actual duration and recovery. The basic cost of cane and the margin of profit will have to be added to arrive at the ex-factory price. It may be reiterated that in applying the schedules, packing charges, grade, differentials and selling expenses should be kept constant per quints of sugar irrespective of recovery percentage while other items of cost should be adjusted in inverse proportion to the recovery percentage.

Although the passage set out above primarily refers to other matters which are to be taken into account in determining the ex-factory selling price of white sugar, yet, it is relied upon by Mr. <NAME> inasmuch as the terms "year to year in the same zone" and "determined annually" occur here. These passages- only indicate a practice. Furthermore, they show that the <ORG> meant to lay down only guide-lines in determining relevant criteria for maximum price fixation. What is most important to note, however, is the reference to the margin of profit which the schedules do not mention. It is evident that the schedules are not all embracing. We also find (at p. 116) in this Report :

"Table X.5 gives the fair ex-factory price per quintal of white sugar (Grade D-29) for each Zone on the basis of actual recovery and duration pertaining to 1963-64 crushing season."

This shows that the concept of a "fair-price", implied in a reasonable fixation, and not some mechanical formula, ignoring profits or losses altogether, was contemplated by the- Commission.

The point which is common to all the appeals relates to the difference in price-fixed on 1-2-1967 and the price fixed on 28-6-1967. In the case of the appellant in Civil Appeal No. 1928 of 1967, prices fixed were 137-75 and 142.25 respectively. In the case of the appellant in Civil Appeal No. 1356 of 1968 the price fixed.on 28-6-1967 was 187.10. The argument was that, as the price fixed on 28-6-67 is the one which was revised at the end of the crushing season after taking into account the actual length of the season and recovery achieved, that represents the correct price for the whole season.', It was argued that in respect of the deliveries made between 1-2-1967 and 28-6-1967 at the rate of fixed on' 1-2-1967, the appellants have suffered considerable losses. It Wag submitted that the Government had to make some provision for compensating them for these losses.

The appellants relied on the following statement issued on behalf of the Government which has not been controverted :

"1. According to the current practice, the ex- factory prices of sugar are fixed at the beginning of each year on the basis of expected recovery of sugar from cane and the length of crushing season. These prices' are revised at the end of the crushing season.- taking into account the actual length of the season and the recovery achieved in the different regions.

2.:Accordingly, <ORG> have reviewed the ex-factory prices of sugar for the current year in the light of actual recovery and duration obtained by sugar factories in Uttar Pradesh, Bihar, Punjab, Haryana, West Bengal, Rajasthan and Madhya Pradesh. The revised prices are as follows :

Price Region Ex-factory price per quintal in rupees Eastern Uttar Pradesh 139 -07 Part A of West U.P. 160 -32 Part 13 of West U.P. 147 - 37 Part C of West U.P. 140 - 83 Part D of West U.P. 136.61 North Bihar 139.88 South Bihar 187.88 Punjab 152.58 Haryana 142 -25 West Bengal 138.61 Rajasthan 159 -52 Madhya Pradesh 171.91

3. The revised prices have been notified today and come into effect immediately.

4. The prices for factories in other areas will be announced in due course".

We find that, in the previous year, the price actually fixed subsequently was lower than the price fixed originally so that various sugar producers, including, we presume, all the appellants, got the benefit of such higher prices fixed earlier. We mention this only to indicate that the price-fixation for the whole season 1966-67 did not appear to be either arbitrary, capricious, or unfair.: As <ORG> pointed out, it cannot, be contended that the estimate of manufacturing costs land the resulting fixation of price made in the beginning of February, 1967, Was wholly unrelated to the actual conditions which came to light after the working results of the crushing season as a whole were known at the end of the season. The practice of fixing the pieces once during the initial months of available and the other at the end of the season has been invariably followed. From the very nature ex factory price could not take Place, on any other basis. It could not e kept waiting until the whole season came to an end leaving the price fixed for the previous season, which was the only other alternative, to govern sales. The practice adopted was certainly fairer.

All the cases before us relate to the season 1966 to 1967 which was over long ago. No provision has been brought to our notice to indicate how the <ORG> would be responsible to manufacturers for an erroneous fixation of price at which sugar may be sold during a particular season by manufacturers to dealers who can sell it to the consumers. Learned counsel suggested that, the. appellants could sue those to whom sugar was supplied at lower rates than should have been fixed. We find it very difficult to understand how the manufacturers could claim any thing, even by means of suits, from dealers with whom there were no agreements providing that any variation in price to be fixed by the <ORG> will enable the manufacturers to recover the balance in case the fixation was too low. indeed, if the fixation of price is found to be too high for any reason, such as the failure to consider the amount of profits made by the manufacturers in a particular season, the manufacturers may have become liable to pay something back to the dealers had there been any provision in contacts between manufacturers and dealers for recovery of balances due to either side on subsequent fixations. It is enough to mention here that no such provision in any agreement has been brought to our notice. No dealers whose rights may be affected are before us to enable us to pronounce on their alleged liabilities. In <ORG> case, there was an understanding given in <ORG> by <ORG> that the <ORG> will pay the syndicate the balance, on a redetermination of price, if the price fixed by the <ORG> was found to be too low. We have no doubt that undertaking exhausted itself with proceedings in <ORG> when the writ petition in appeal before us now failed.

We also find, in accordance with the well established practice of providing protection for action taken by the <ORG>. and its officers for actions of the nature sought to be quashed by the appellants, Section 15 of the Essential Commodities Act, 1955, lays down :

"15(1) No suit, prosecution or other legal proceeding shall lie against any person for anything which is in good faith done or intended to be done. in: pursuance of any other made under' <CITATION> .

(2) No suit or other legal proceeding shall lie against the Govt. for any damage caused or likely to be caused by anything which is in good faith done or intended to be done in pursuance of any order made under <CITATION> ".

This means that no suits or other legal proceedings, apart from those specified in the Constitution can be brought against the <ORG>. or its. officers for any action taken by the <ORG>. in fixing the price of sugar in good faith. There is no allegation made by the appellants that the action of the <ORG>. in fixing the price twice within a season was lacking in good faith. Hence, no proceeding could have been brought in <ORG> to claim damages against the <ORG>. even if its bona-fide action was vitiated,by some illegality, of the kind set up by the appellants. The result is that, even if we could have given a mere decla- ration that the price fixation for the season 1966-67 in good faith was vitiated by some illegality, such a delcaration would have been useless to the appellants. It is well established practice that Courts do not issue writs or make declarations which are futile.

We have already indicated above that it has not been shown to us how the fixation of maximum price by the <ORG> for the season 1966 to 1967 was erroneous or unreasonable even though it was done twice witnin one season. There is no prohibition against such fixation of price twice within a season. ]Each operated only from the date of fixation until it was fixed again. It had no retrospective effect. There could, therefore, be no claim for any readjustment against anyone simply because the price fixed in a subsequent period was higher or lower than the price fixed in the beginning of the same season. The essential requirements for invoking the writ issuing jurisdiction. of <ORG> here that the fixation had to be shown to be ultra vires. This was not done by the petitioners-appellants. Hence, their writ petitions were rightly rejected by <ORG>s. As the appeals fail on merits we need not discuss the technical difficulty which an application for a writ of certiorari would encounter when no quasi-judicial proceedings was before <ORG>. The powers of the high Court under Article 226 are not strictly confined to the limits to which proceedings for prerogative writs are subject in English practice. Nevertheless the well recognised rule that no writ or order in the nature of a Mandamus would issue when there is no failure to perform a mandatory duty applies in this country as well. Evert in cases of alleged breaches of mandatory duties the salutary general rule which is subject to certain exceptions applied by us as it is in England when writ of Mandamus is asked for could be stated as we find it set out in Halsbury's Taws of England (3rd edition vol. 13 p. 106):

"As a general rule the order will not be granted unless the party complained of has known what it was he was required to do so that he had the means of considering whether or not he should comply and it must be shown by evidence that there was a distinct demand of that which the party seeking the mandamus desires to enforce and that that demand was met by a refusal."

in the cases before us there was no such, demand refusal. Thus no ground whatsoever is shown here for the issue of any writ order or direction under Article 226 of the Constitution. These appeals must be and are hereby dismissed but in the circumstances of the case we make no order as to costs.

Appeals dismissed.

V. M. K.

<NAME>


PETITIONER: <NAME> Vs. RESPONDENT: <ORG>. DATE OF JUDGMENT17/11/1987 BENCH: SHETTY, <NAME>: SHETTY, <NAME>, B.C. (J) CITATION: 1987 SCALE (2)1067 ACT: Indian Contract Act , 1872: Auction-Disposal of property by <ORG> or instrumentality of the <ORG>-Resort to private negotiation instead of public auction justified in compulsive situations. Constitution of India, Article 14: Property owned by <ORG> or instrumentality of <ORG>-sale of-Through public auction or by inviting tenders-Action to be fair and above board-Nothing to be done to give impression of bias, favouritism or nepotism. HEADNOTE: % The respondent, a <ORG> Government <ORG> obtained decree for certain amount against the appellant and in execution proceedings a tea estate was brought for sale by court auction in 1969, but in the absence of a bidder the respondent itself had to purchase it at a higher price. The respondent, however, could take possession of the estate only in 1982. It then invited tenders for the sale of the estate. The appellant offered Rs.6,00,000. The next best offer was for Rs.4,15,550 and the third for Rs.2,07,451. The highest offer was accepted, but the appellant could not pay the amount except the earnest money, even after repeated extension of time and offer to receive the balance in instalments. The respondent then negotiated with the next highest bidder, who enhanced the offer to Rs.4,50,000 which was accepted by the respondent. The property, however, was sold to a partnership firm in which the said bidder was a partner. The appellant thereupon moved <ORG> complaining that the respondent in selling the property to the firm had deviated from the normal practice of inviting the tenders from the public and that the <ORG> being a public authority was bound to act reasonably and fairly and it ought not be have arbitrarily selected the purchaser. <ORG> declined to interfere. Dismissing the appeal, ^ HELD: The action of the respondent in offering the property to the person next in order by private negotiations and selling the same at 1080 his request to the partnership firm was perfectly justified. [1087G] The public property owned by the <ORG> or by any instrumentality of the <ORG> should be generally sold by public auction or by inviting tenders, not only to get the highest price for the property but also to ensure fairness in the activities of the <ORG> and public authorities. They should act fairly. Their actions should be legitimate. Their dealings should be above board. Their transactions should be without aversion or affection and should not be suggestive of discrimination, bias, favouritism or nepotism. Ordinarily these facts would be absent if the matter is brought to public auction or sale by tenders. Though that is the ordinary rule, it is not an invariable rule. There may be situations necessitating departure from the rule, but then such instances must be justified by compelling reasons and not by just convenience. [1086H; 1087A-C] In the instant case, the respondent dealt with the property in all fairness. It invited tenders for the sale of the property under the notification. The appellant submitted the highest tender in response to the said notification. He was granted all concessions and facilities for payment by instalments but he failed. If the appellant could not act according to his tender, there was no reason why the property should not be offered to the person who was next in order. The respondent, therefore, did not do anything unfair with the second bidder after it had got the tender amount raised substantially. [1087D- <CITATION> .,  1 SCR 305 at 312; <CITATION> .,  2 SCR 272; R.D. Shetty v. <ORG> JUDGMENT:

State of Jammu and Kashmir & Anr., [1980] 3 SCR 1338; <CITATION> , AIR 1981 SC 344; <CITATION> .,  Suppl. SCR 541 and Shri Sachidanand Pandey v. State of W. B. AIR 1987 SC 1109, applied.

& CIVIL APPELLATE JURISDICTION: Civil Appeal No. 914 of 1987.

From the Judgment and Order dated 22.8.1984 of <ORG> in O.P. No. 6806 of 1984.

<NAME> and <NAME> for the Appellant.

<NAME>, N. Sudhakaran for the Respondent. The Judgment of the Court was delivered by <ORG>, J. A tea estate of 100 acres with some buildings, machinery and equipments was given as security to <ORG> ("<ORG>") against the loan taken by the appellant. A part of the loan remained outstanding and the appellant could not clear it. <ORG> thereupon filed O.A. No. 8/64 before <ORG> for recovery of the arrears and obtained decree for an amount of Rs.1,20,000. In execution of the decree, the said tea estate was brought for sale by court auction. On November 5, 1969, the auction sale was held. There was no bidder. So the <ORG> itself had to purchase the property for about Rs.1,65,000. There was long standing dispute between the workmen of the estate and the previous management relating to payment of their wages. <ORG> therefore could not take possession of the estate. An extent of 85 acres out of 100 acres of the estate was in possession of the workmen as per settlement arrived at between the <ORG> Commissioner and the District Collector. The workmen used to collect the income therefrom towards their wages. This arrangement continued for about thirteen years. On January 7, 1982, the <ORG> got possession of the entire estate. <ORG> wanted to recover its amount. It was not interested in the property. It therefore, invited tenders for the sale of the estate. On March 19, 1982, a tender notification was published in dailies like <ORG>, <ORG> and <ORG> newspapers. In response to the notification, the daughter-in-law of the appellant was the only tenderer. She offered Rs.5,10,505. <ORG> accepted the tender. It was subsequently found that the daughter-in-law was no better than the appellant. She also could not pay any amount.

On January 18, 1983, the <ORG> again invited tenders for the sale of the property. The notification was published in the said newspapers as it was done earlier. This time, the <ORG> received these tenders: (i) <NAME> (Appellant before us) for Rs. six lakhs; (ii) <NAME> for Rs.4,15,550 and (iii) <NAME> for Rs.2,07,451. Since the appellant submitted the highest offer, the <ORG> naturally had to accept it. On March 2, 1983, the acceptance was communicated to the appellant. He must have thanked his stars for getting back his family property which was so dear to him or which was according to him so valuable. But there was no such anxiety shown. He did not pay anthing except the earnest money of Rs.40,000.

The <ORG>, however, extended the time for payment again and again. The <ORG> also gave him instalments for payment of the balance price. All the efforts of the <ORG> failed to induce the appellant.

The <ORG> wanted to get back its money. It was not interested in retaining the property. So it negotiated with <NAME> who had submitted his tender alongwith the appellant in response to the notification dated January 18, 1983. He had then offered Rs.4,16,550. His tender was the next best. After negotiation, he enhanced the offer to Rs. four and a half lakhs. The <ORG> accepted it and decided to sell the property to <NAME>. The property however, was sold to <ORG> at the request of <NAME>. <ORG> is a partnership firm in which <NAME> is one of the partners.

The appellant who could not purchase the said property by any means filed suit O.S. No. 229/84 before <ORG> Thidupuzha to restrain the <ORG> from selling the property. He could not get relief in the suit since by then the sale deed was executed in favour of <ORG>. Subsequently, he moved <ORG> complaining that the <ORG> while selling the property for Rs. four and a half lakhs to <ORG>, had deviated from the normal practice of inviting tenders from the public. He contended that the <ORG> being a public authority was bound to act reasonably and fairly and it ought not to have arbitrarily selected the purchaser. <ORG> found no substance in those submissions. <ORG> observed:

"The submission made by the petitioner's counsel is that the decision to sell the property by private negotiations is arbitrary and is therefore liable to be interfered with by this court. This is clearly a case where in execution proceedings the decreeholder has purchased the property and thereafter the property was sold in public auction to the petitioner, who purchased it for Rs. six lakhs but failed to pay the sale amount in spite of the fact that this court and afterwards the corporation had shown great indulgence towards the petitioner. This is not at all a fit case for interference under Art. 226 of the Constitution."

Being aggrieved by the judgment of <ORG>, the appellant has preferred the present appeal. On May 18, 1985, this <ORG> while entertaining the appeal issued notice limited to the question whether the sale of the property should be made by general auction. This <ORG> further directed that in any event, the appellant will not be allowed to participate in the auction.

Very interesting turn of events. The appellant who miserably failed to secure the property for himself is now interested in securing the best price for the <ORG>. He says that this is a public interest litigation. His case is that the <ORG> in all fairness must dispose of the property by public auction. It could not have bargained with <ORG> and sold the property to <ORG>.

Before <ORG>, the appellant attacked the sale also on the ground that it was actuated by extraneous considerations. He alleged that the corporation had succumbed to the pressure of some influential persons for the sale of the property in favour of <ORG>. The appellant made these allegations but did not substantiate it. He did not give the names of influential persons who had brought pressure on the <ORG>. He did not even state as to how the <ORG> officials had shown undue interest with <NAME> or with the other partners of <ORG> for sale of the property. It is not proper to make such light hearted and vague allegations against the statutory authorities. These allegations, in our opinion, are uncharitable and unfounded.

The only question that arises for consideration is whether on the facts and in the circumstances, the <ORG> was not justified in selling the property by private negotiations in favour of <ORG> at the instance of <NAME>. It is needless to state that the <ORG> or public authorities should make all attempts to obtain the best available price while disposing of public properties. They should not generally enter into private arrangements for the purpose. These principles may be taken as well established by the following decisions of this Court: (i) <CITATION> ,  1 SCR 305 at 312; (ii) <CITATION> ,  2 SCR 272; (iii) <CITATION> .,  3 SCR 1014; (iv) <CITATION> .,  3 SCR 1338; (v) <CITATION> , AIR 1981 SC 344; (vi) <CITATION> .  Supp. SCR 541 and (vii) <CITATION> . AIR 1987 SC 1109.

<CITATION> .  3 SCR 1014 at 1041 Bhagwati, J. speaking for the Court observed:

"Now, obviously where a corporation is an instrumentality or agency of <ORG>, it would, in the exercise of its power or discretion, be subject to the same constitutional or public law limitations as <ORG>. The rule inhibiting arbitrary action by <ORG> which we have discussed above must apply equally where such corporation is dealing with the public, whether by way of giving jobs or entering into contracts or otherwise, and it cannot act arbitrarily and enter into relationship with any person it likes at its sweetwill, but its action must be in conformity with some principle which meets the test of reason and relevance.

This rule also flows directly from the doctrine of equality embodied in Art 14. It is now well settled as a result of the decisions of this <ORG> in <CITATION> and <CITATION> that Article 14 strikes at arbitrariness in <ORG> action and ensures fairness and equality of treatment. It requires that <ORG> action must not be arbitrary but must be based on some rational and relevant principle which is non-discriminatory: it must not be guided by any extraneous or irrelevant considerations, because that would be denial of equality. The principle of reasonableness and rationality which is legally as well as philosophically an essential element of equality or non-arbitrariness is protected by Art. 14 and it must characterise every <ORG> action, whether it be under authority of law or in exercise of executive power without making of law. The <ORG> cannot, therefore, act arbitrarily in entering into relationship, contractual or otherwise with a third party, but its action must conform to some standard or norm which is rational and non- discriminatory."

<CITATION> ,  3 SCR 1338 at 1355 Bhagwati, J. again speaking for the Court reiterated what he said earlier to <NAME> case. The learned Judge went on to state:

"Every action taken by the Government must be in public interest; the Government cannot act arbitrarily and without reason and if it does, its action would be liable to be invalidated. If the Government awards a contract or leases out or otherwise deals with its property or grants any other largess, it would be liable to be tested for its validity on the touch-stone of reasonableness and public interest and if it fails to satisfy either test, it would be unconstitutional and invalid."

The learned Judge continued (at p. 1357):

"But one basic principle which must guide the <ORG> in arriving at its determination on this question is that there is always a presumption that the <ORG>al action is reasonable and in public interest and it is for the party challenging its validity to show that it is wanting in reasonableness or is not informed with public interest. This burden is a heavy one and it has to be discharged to the satisfaction of the <ORG> by proper and adequate material. The <ORG> cannot lightly assume that the action taken by the <ORG> is unreasonable or without public interest because as we said above, there are a large number of policy considerations which must necessarily weigh with the <ORG> in taking action and therefore, the <ORG> would not strike down governmental action as invalid on this ground, unless it is clearly satisfied that the action is unreasonable or not in public interest. But where it is so satisfied it would be the plainest duty of the <ORG> under the Constitution to invalidate the governmental action. This is one of the most important functions of the <ORG> and also one of the most essential for preservation of the rule of law."

In <ORG> case (AIR 1981 SC 344 at 350 this Court speaking through Chandrachud, C.J., observed:

"We want to make it clear that we do not doubt the bona fides of the authorities, but as far as possible, sales of public property, when the intention is to get the best price, ought to take place publicly. The vendors are not necessarily bound to accept the highest or any other offer, but the public at least gets the satisfaction that the Government has put all its cards on the table. In the instant case, the officers who were concerned with the sale have inevitably, though unjustifiably attracted the criticism that during the course of negotiations the original bid was reduced without a justifying cause. We had willy-nilly to spend quite some valuable time in satisfying ourselves that the reduction in the price was a necessary and fair consequence of the reduction in the quantity of the goods later offered for sale on March 31, 1980. One cannot exclude the possibility that a better price might have been realised in a fresh public auction but such possibilities cannot vitiate the sale or justify the allegations of malafides."

<CITATION> , AIR 1987 SC 1109 at 1133, <NAME>, J. after considering almost all the decisions of this Court on the subject summarised the propositions in the following terms:

"On a consideration of the relevant cases cited at the bar the following propositions may be taken as well established: State owned or public owned property is not to be dealt with at the absolute discretion of the executive. Certain percepts and principes have to be observed. Public interest is the paramount consideration. One of the methods of securing the public interest when it is considered necessary to dispose of a property, is to sell the property by public auction or by inviting tenders. Though that is the ordinary rule, it is not an invariable rule. There may be situations where there are compelling reasons necessitating departure from the rule but then the reasons for the departure must be rational and should not be suggestive of discrimination. Appearance of public justice is as important as doing justice. Nothing should be done which gives an appearance of bias, jobbery or nepotism."

After applying these tests, the learned Judge finally upheld the action of West Bengal Government in not inviting tenders, or in not holding a public auction but negotiating straightway at arms length with <ORG> for giving about four acres of land for establishing a five star hotel.

The public property owned by the <ORG> or by any instrumentality of the <ORG> should be generally sold by public auction or by inviting tenders. This <ORG> has been insisting upon that rule, not only to get the highest price for the property but also to ensure fairness in the activities of the <ORG> and public authorities. They should undoubtedly act fairly. Their actions should be legitimate. Their dealings should be above board. Their transactions should be without aversion or affection. Nothing should be suggestive of discrimination. Nothing should be done by them which gives an impression of bias, favouritism or nepotism. Ordinarily these factors would be absent if the matter is brought to public auction or sale by tenders. That is why the <ORG> repeatedly stated and reiterated that the <ORG> owned properties are required to be disposed of publicly. But that is not the only rule. As <NAME>, J. Observed "that though that is the ordinary rule, it is not an invariable rule." There may be situations necessitating departure from the rule, but then such instances must be justified by compulsions and not by compromise. It must be justified by compelling reasons and not by just convenience.

What is the position in the present case. Here is a case where the <ORG> invited tenders for the sale of the property under notification dated January 18, 1983. The appellant submitted the highest tender in response to the said notification. He was given all concessions for payment of the tender amount. But he did not. He negotiated with the Managing Director of the <ORG> for facilities for payment by instalments. That was also granted to him. There again he failed. If the appellant could not act according to his tender, we fail to see why the property should not be offered to the person who was next in order. The <ORG>, in our opinion, did not do anything unfair with <NAME>. The <ORG> got the tender amount raised from Rs.4,16,550 to Rs.4,50,000. It shows the fairness with which the <ORG> dealt with the property.

On a consideration of all the facts and circumstances of the case, we are satisfied that the action of the <ORG> in offering the property to <ORG> and selling the same at his request to <ORG> was perfectly justified and cannot be found fault with In the result the appeal fails and is dismissed. In the circumstances, however, we make no order as to costs.

<ORG> dismissed.