PETITIONER: <ORG>. Vs. RESPONDENT: COMMISSIONER OF INCOME TAX, GUJARAT DATE OF JUDGMENT31/03/1989 BENCH: VENKATACHALLIAH, M.N. (J) BENCH: VENKATACHALLIAH, M.N. (J) PATHAK, <NAME> (CJ) <ORG>ATION: 1989 AIR 1913 1989 SCR (2) 302 1989 SCC (3) 329 JT 1989 (2) 122 1989 SCALE (1)885 ACT: Income Tax Act , 1961: Section 37- -Tests to determine whether Capital or <ORG> Expenditure--'Once for all' and 'enduring benefit' tests--Not conclusive--Object and effect of the expenditure to be looked into--'Once for all payment' made by manufacturer to a foreign company for supply of technical know-how etc. for increasing production improvisation in the process and technology supplemental to existing business--No new venture--Whether the payment made is a revenue expendi- ture qualifying for deduction. HEADNOTE: The appellant-assessee, a company engaged in the manu- facture of penicillin, in order to increase its production, entered into an agreement with a Japanese firm (<ORG>) for supply of sub-cultures of penicillin producing strains, technical know-how, training, written description of the process on a pilot plant, design and specifications of the main equipment in such pilot plant, and to advise the asses- see in the largescale manufacture of penicillin for a limit- ed period of two years. As per the agreement, the assessee paid Rs.2,39,625 to <ORG> and claimed the same as revenue expenditure in its Income tax assessment for the assessment year 1964-65. Disallowing the claim the Income Tax Officer held that the expenditure was for the acquisition of an asset or advantage of an enduring benefit and thus a capital outlay. The Appel- late Assistant Commissioner confirmed the order of the Income Tax Officer. The further appeal of the assessee was dismissed by <ORG> holding that the payment made to <ORG> was 'once for all payment' made for the acquisition of a capital asset. At the instance of the assessee, the <ORG> referred to <ORG>, the question as to whether the sum paid to <ORG> was a revenue expenditure. <ORG> answered the question in the negative. The present appeal is against that order of <ORG>. The assessee also moved an application before <ORG> 303 seeking a direction to the <ORG> to refer another ques- tion of law as to whether a new plant was obtained or in- stalled by the assessee consequent upon the agreement. Declining to interfere, <ORG> observed that the <ORG> has not recorded a finding to the effect that a completely new plant was obtained by the assessee and the <ORG>'s decision that the assessee, had obtained a new process and a new technical know-how from <ORG> was not without evidence. Against the above order of <ORG>, the assessee preferred an appeal to this <ORG>, which was formally dis- posed of with a direction to the <ORG> to draw up a supplementary statement of the case and refer for the opin- ion of this <ORG>, the further question of law as sought for by the assessee; and such a question to be considered in the present appeal. On behalf of the assessee, it was submitted that the <ORG> was influenced by an erroneous assumption that the agreement, envisaged the setting up of a new plant, whereas the objective of the agreement was only to increase the yield of penicillin in the existing plant itself. The <ORG> contended that there was a new venture based on a new technology and know-how of unlimited duration which required a new plant for its commercial exploration. Allowing the appeal, HELD: 1. The financial outlay under the agreement was for the better conduct and improvement of the existing business 'and should, therefore, be held to be a revenue expenditure. There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business reali- ties. The rapid strides in science and technology in the field should make this <ORG> a little slow and circumspect in too readily pigeon-holing an outlay, such as this, as capital. The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition. [319A, B-C; 317D- <<ORG>ATION> .,  2 SCR 696; <ORG>, Bombay v. <ORG>, JT 282 (2) 287, relied on. 2. The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statuto- ry conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability .appropriate to the context. [313C] <NAME> v. Federal Commissioner of Taxation,  72 CLR 543, referred to. 3. In computing the income chargeable under the head "Profits and Gains of Business or Profession", section 37 of the Income-tax Act enables the deduction of any expenditure laid-out or expended wholly and exclusively for the purpose of the business or profession, as the case may be. The fact that an item of expenditure is wholly and exclusively laid- out for purposes of the business, by itself, is not suffi- cient to entitle its allowance in computing the income chargeable to tax. In addition, the expenditure should not be in the nature of a capital-expenditure. In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises it is well nigh impossible to formulate any general rule, even in generality of cases sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. Howev- er, some broad and general tests have been suggested from time to time to ascertain on which side of the line the out-lay in any particular case might reasonably be held to fail. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over-exact- ing. The question in each case would necessarily be whether the tests relevant and significant in one set of circum- stances are relevant and significant in the case on hand also. [310C-F; 312G] City of London Contract Corporation v. <NAME>,  2 TC 239; <ORG> v. <NAME>,  5 TC 529; <ORG> v. <NAME>,  AC 205; <<ORG>ATION> ,  27 ITR 34; <<ORG>ATION> ,  49 ITR (SC) 160; <<ORG>ATION> ,  82 ITR 376 (SC); <<ORG>ATION> ,  106 ITR 900 (SC); <ORG> & <ORG> v. Federal Commissioner of Taxation,  (61) CLR 337; <ORG> v. <NAME>,  AC 295 and <<ORG>ATION> - tion of the Commonwealth of Australia,  AC 224; re- ferred to. 4. The improvisation in the process and technology in some areas of the enterprise was supplemental to the exist- ing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of assessee's established business and not to a new product indicates that what was stipulated was an improve- ment in the operation of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the assessee's established enter- prise. [318G-H] 5. There was no material for the <ORG> to record the finding that the assessee had obtained under the agreement a 'completely new plant' with a completely new process and a completely new technical know-how from <ORG>. Indeed, <ORG> recognised the fallacy in this assumption of the <ORG> that a completely new plant was obtained by the assessee, though, however, <ORG> attributed the inaccuracy to what it considered to be some inadvertence or misapprehension on the part of the <ORG> in that regard. But <ORG> was inclined to the view that a complete- ly new process and technical know-how was obtained from <ORG> under the agreement. Certain assumptions fundamental to, and underlying, the approach of <ORG> are that the agreement envisaged a new process and a new technology so alien to the extent infra-structure, equipment, plant and machinery in the assessee's enterprise as to amount to an entirely new venture unconnected with and different from the line of assessee's extant business. It is in that sense that the expense was held not incurred for the purposes of the day-to-day business of the assessee but for acquiring a new capital asset. But mere improvement in or updating of the fermentation-process would not necessarily be inconsistent with the relevance and continuing utility of the existing infra-structure, machinery and plant of the assessee. [315A-D; 317B] The New Encyclopaedia Britannica, Micropaedia, Vol. II; <ORG>, Kirk Othmen, 3rd Edn. Vol. 2, referred to. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 43(NT) of 1975.

From the Judgment and Order dated 23.1.1974 of <ORG> in Income Tax Reference No. 78 of 1970. <NAME>, Mrs. <NAME> and <NAME> for the Appellant.

<NAME>, <NAME> and Ms. <NAME>, for the Respondent.

The Judgment of the Court was delivered by VENKATACHALIAH, J. This appeal by the assessee, <ORG>, arises out of and are directed against the judgment dated 23.1.1974, of <ORG> in Income Tax Reference 78 of 1970, answer- ing in favour of the <ORG> a question of law referred to it under Section 256(1) of the Income Tax Act, 1961, (Act) by <ORG>.

2. On 8.6.1961, the assessee, a company engaged in the manufacture of antibiotics and pharmaceuticals was granted licence for the manufacture, on its plant, of the well-known antibiotic, penicillin. In the initial years of its venture the assessee was able to achieve only moderate yields from the pencillin-producing strains used by it which yielded only about 5000 units of penicillin per millilitre of the culturemedium.

In the year 1963, with a view to increasing the yield of penicillin, the assessee negotiated with <ORG> ("<ORG>" for short), a reputed enterprise engaged in the manufacture of antibiotics in Japan, which agreed to supply to the assessee the requisite technical- know-how so as to achieve substantially higher levels of performance of production--of more than 10,000 units of penicillin per millilitre of 'cultured--broth'--with the aid of better technology and process of fermentation and with better yielding penicillin-strains developed by <ORG>. The negotiations culminated in an agreement dated 9.10.1963, whereunder <ORG>, in consideration of the 'once for all' payment of 50,000 U.S. dollars (then equivalent to Rs.2,39,625) agreed to supply to the assessee the "sub- cultures of the <ORG>'s most suitable penicillin producing strains", the technical information, know-now and written- description of <ORG>'s process for fermentation of penicil- lin alongwith a flow-sheet of the process on a pilot plant; the design and specifications of the main equipments in such pilot-plant; arrange for the visits to and training at assessee's expense, of technical representatives of the assessee to <ORG>'s plant at Japan and to advise the assessee in the large scale manufacture of penicillin for a period limited to 2 years from the effective date of the agreement. It was also stipu- lated that the technical know-how supplied by <ORG> was to be kept confidential and secret by the assessee which was prohibited from parting with the technical know-how in favour of others or to seek any patent for the process.

3. In the proceedings for assessment to Income-tax for the assessment-year 1964-65 the assessee claimed that Rs.2,39,625 paid under the agreement to '<ORG>' was one laid out wholly and exclusively for the purpose of the business and claimed its deduction as a revenue expenditure. The Income-tax Officer, on the view that the expenditure was for the acquisition of an asset or advantage of an enduring benefit, held it to be a capital outlay and declined the deduction. This view was affirmed by the Appellate Asst. Commissioner in the assessee's first appeal. <ORG>, Ahmedabad Bench, dismissed the further appeal of the assessee holding that the arrangements with <ORG> envisaged the setting-up of a large commercial plant for the production of the antibiotic modelled on the lines of the pilot-plant and that, there- fore, the out-lay could not be treated as an expenditure laid-out on and for purposes of the existing business, but must be regarded as one incurred for a new venture on a new process with a new technology on a new type of plant. The <ORG> held that the payment was 'once for all payment' and was made for the acquisition of a capital asset. The <ORG> inter-alia held:

"The sub-cultures and the information design and flow sheet etc., were to be fur- nished once for all. <ORG> also agreed to advise the assessee in respect of any diffi- culty the assessee may encounter in applying the subcultures and informations obtained by the assessee from <ORG> to the large scale manufacture of penicillin. It is apparent from the agreement and the correspondence which has been made available to us that <ORG> agreed to give the designs etc., not only for a pilot plant but for the manufacture of penicillin according to <ORG>'s process on commercial scale. The assessee has to put in a larger plant modelled on the pilotplant." " ......... It is in consideration for <ORG>'s agreeing to supply the assessee with complete details of the technical know-how, the design, subcul- tures, flow sheet and written descriptions of the process once for all that the assessee paid to <ORG> the stipulated sum of $ 50,000." " ......... It would thus appear that the payment was made for acquiring a capital asset in the shape of technical know- how and other allied information. It was not made in the course of carrying out of an existing business of the assessee but was for the purpose of setting up a new plant and a new process. It would, therefore, appear that the revenue authorities have rightly treated the payment as of capital nature." " ..... The process which the assessee took over from <ORG> was not the same as it was working heretofore. In the present case the outlay was incurred for a complete replacement of the equipment of the business inasmuch us a new process with a new type of plant was to be put up in place of old process and old plant ..................." (Underlining Supplied)

4. At the instance of the assessee the Tribunal stated a case and referred the fol- lowing question of law for the opinion of <ORG>:

"Whether the sum of Rs.2,39,625 was a revenue expenditure admissible to the asses- see for the purpose of computation of its total income?"

<ORG> by the judgment under appeal answered the question in the negative and against the assessee. This part of the judgment is assailed by the assessee in CA 43 of 1975.

5. The reasoning of <ORG> in support of its conclusion was on the following lines:

" .... It is true that the expenditure was manifestly laid out for the purpose of obtain- ing benefits and advantages such as sub-cul- tures of penicillin producing strains, design of a pilot and exchange of technical personnel with a view to acquiring know-how. But the finding of the <ORG>, as we read it, is that all the benefits which asses- see received under the agreement were as a part of the transaction which was undertaken with the ultimate view of a setting-up a new plant and a new process. In view of the find- ings recorded by the <ORG>, no conclusion other than that the expenditure was incurred once and for all with a view to bringing into existence an asset or advantage for the endur- ing benefit of the manufacturing trade of the assessee is possible. The expenditure was incurred for introducing a new process of manufacturing and with a view to installing a new plant, even if not immediately then at a later stage, and on that conclusion the only possible answer to the first question referred to us can be in the negative and against the assessee."

(Emphasis Supplied) Before <ORG>, the assessee also moved an application under Section 256(2) of the Act--ITA No. 24 of 1971--for a direction to the <ORG> to refer another question of law, also stated to arise out of the order of the <ORG>. The question of law respecting which the supplementary reference was sought was this:

"Whether there was any evidence or material before the <ORG> to hold that (1) a completely new plant with a completely new process and new technical know-how was ob- tained by the assessee from Messrs <NAME> under the said agreement, dated 9.10.1963; and (2) to work out that process separate plant or machinery had to be designed, constructed, installed and operated?

<ORG> dismissed this application observing that the <ORG> had no where recorded a finding to the effect that a completely new plant was obtained by the assessee from <ORG> and that the finding of the <ORG> that under the agreement the assessee had obtained a new process and a new technical know-now from <ORG> was not without evidence. Against the dismissal of ITA 24 of 1971 by <ORG>, the assessee has preferred Civil Appeal No. 44 of 1975.

6. On 24.2.1987, this <ORG> while directing the <ORG> to draw up a supplementary statement of the case and refer for the opinion of this <ORG> the further question of law which, according to the assessee, arose out of the Tribu- nal's order and which was the subject-matter of the asses- see's appeal in C.A. 44 of 1975, however, disposed of that appeal formally, leaving the question of law arising out of the supplemental reference to be considered in the present appeal i.e. CA No. 43 of 1975. The <ORG> has since sub- mitted the supplementary statement of the case and has referred that question of law also. This is how both the questions of law, are now before us. While in regard to the first question the correctness of the opinion rendered by the High <ORG> requires to be examined, the second question has to be answered for the first-time as the reference is called by this court directly.

7. We have heard <NAME>, learned Senior Counsel for the assessee and <NAME>, learned senior counsel for the revenue.

In computing the income chargeable under the head "Profits and Gains of Business or Profession", section 37 of the 'Act' enables the deduction of any expenditure laid-out or expended wholly and exclusively for the purpose of the business or profession, as the case may be. The fact that an item of expenditure is wholly and exclusively laid-out for purposes of the business, by itself, is not sufficient to entitle its allowance in computing the income chargeable to tax. In addition, the expenditure should not be in the nature of a capital-expenditure. In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises it is well nigh impossible to formulate any general-rule, even in generality of cases sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. Howev- er, some broad and general tests have been suggested from time to time to ascertain on which side of the line the out-lay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over-exact- ing.

One of the early pronouncements which serves to indicate a broad area of distinction is City of London Contract Corporation v. <NAME>, [1887] 2 T.C. 239 where Bowen, L.J. indicated that the out-lay on the "acquisition of the con- cern" would be capital while an outlay in "carrying-on the concern" is revenue. In <ORG> v. <NAME>, [1910] 5 TC 529 Lord <NAME> suggested as 'not a bad crite- rion' the test that if the expenditure is 'once for all' it is capital and if it is 'going to recur every year it is revenue. In the oft quoted case on the subject, viz, <ORG> v. <NAME>, [1926] AC 205 Viscount Cave L.C. said:

"But when an expenditure is made, not only once and for all, but with a view to bringing into exist- ence an asset or an advantage for the enduring benefit of trade, I think that there is very good reason (in the absence of special circum- stances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." .8. In <ORG> v.

Commissioner of Income-tax, [1955]27 ITR 34, this Court observed:

"If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bring- ing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure."

"The aim and object of the expendi-

ture would determine the character of the expenditure whether it is a capital expendi- ture or a revenue expenditure."

<CITATION> - tax,  49 ITR (SC) 160; <CITATION> ,  82 ITR 376 (SC) and in <CITATION> - tax,  106 ITR 900 (SC) the enunciation made in <ORG> case  27 ITR 34, which in turn, referred with approval to Lord <NAME>'s dictum was affirmed.

In <ORG> & <ORG> v. Federal Commissioner of Taxation, [1938] 61 CLR 337 <NAME> while indicating that the distinction between revenue and capital corresponds with the distinction between the "busi- ness entity, structure or organisation set up or established for the earning of profit" on the one hand and "the process by which such an organization operates to obtain regular returns" on the other, however, went on to say that:

"The business structure or entity or organiza- tion may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested .... "

The learned judge further observed: " ..... There are, I think, three matters to be considered, (a) the character of the advan- tage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment ..... "

9. In <ORG> v. <NAME>, [1966] AC 295 Lord <NAME> emphasised the futility of a strict application of and exclusive dependence on any single principle in the search for the true-position and pointed out the difficulty arising from taking too literally the general statements made in earlier cases and seeking to apply them to a different case which their authors certainly did not have in mind. The Learned Lord also identified as another source of difficulty the tendency in some cases to treat some one criterion as paramount and to press it to its logical conclusion without proper regard to the other factors in the case. Lord <NAME> further said:

"So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but is a question which must be answered in the fight of all the circumstances which it is reasonable to take into account, and the weight which must be given to a par- ticular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle."

The question in each case would necessarily be whether the tests relevant and significant in one set of circum- stances are relevant and significant in the case on hand also. Judicial metaphors, it is truly said, are narrowly to be watched, for, starting as devices to liberate thought they end often by enslaving it. The non-determinative quali- ty, by itself, of any particular test is highlighted in B.P. Australia v. Commr. of Taxation of the Commonwealth of Australia, [1966] AC 224. Lord <NAME> said:

"The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One considera- tion may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a common sense appreciation of all the guiding features which must provide the ultimate answer .... "

(Emphasis Supplied) The idea of 'once for all' payment and 'enduring bene-

fit' are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judical fetish. What is capital expenditure and what is revenue are not eternal varities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. The words of <NAME> in <NAME> v. <ORG>, 1946.72 CLR 543, dealing with an analogous provision in sec. 51 of Income-tax Assessment Act of Australia may be re- called.

" ....... Lord <NAME>, in using the phrase 'enduring benefit' in <ORG> v. <NAME>, 1926 A.C. 205,213 (HL), was not thinking of advantages that are permanent. There is a difference between the lasting and the everlasting. The time over which the thing 'endures' is a matter of degree and one element only to be considered. Horses in the old days and motor trucks in these days are plant and their acquisition for the purpose of transport in business usually involves a capital expendi- ture. But the horses were not immortal any more than the trucks have proved to be ......... "

10. <NAME> submitted that the approach to the question by the <ORG> was influenced by an erroneous assumption that <NAME>'s agreement envisaged the imperative of a totally new plant, for the exploitation of <NAME>'s improved fermentation technology. Learned counsel invited our attention to the following passage in the order of the <ORG> where this postulate is found:

"On the other hand, a completely new plant with a completely new process and a completely new technical know-how was obtained by the assessee from <ORG> and it was in consideration of obtaining this techni- cal know-how that the assessee made the pay- ment of $ 50,000."

<NAME> submitted that the <ORG> had failed to take into account that even before the agreement, the assessee had set up a plant for the production of penicillin at an out-lay of more Rs.66 lakhs and that the purpose of the agreement with <ORG> was only to increase the yield; of penicillin and that no new venture envisaging the setting up of a new plant was ever intended by the assessee. The pro- duction of penicillin which was the established line of business of the assessee, says learned counsel, was to be improved upon with the use of an improved process of fermen- tation with new penicillin producing strains isolated and developed by <ORG> so as to increase the unit yield of penicillin per milli-litre of the culture-medium. The supply of the technical know-how and the flow sheet of the process and the written description of the specifications of the pilot plant from <ORG> were incidental to and for the effec- tive exploitation of the high penicillin yielding strains of the culture to be supplied by <ORG>. Learned counsel submit- ted that the whole range of the operations envisaged by the agreement, pertained to the area of the "profit earning process" and not the "profit earning machinery or apparatus". The cost relationship between what was involved in the improvisation of the process and the investment on the plant did, says counsel, indicate that the extant "profit earning machinery" was not sought to be supplanted. Learned counsel also urged that there was no material for the <ORG> to hold that the use of new process and tech- nology from <ORG> amounted to a new venture not already in the line of the assessee's existing business or that it required the erection of a new plant discarding and sup- planting the huge investment already existing. Learned counsel submitted that it was no body's case that with the introduction of the <ORG> process of fermentation with improved penicillin strains the existing plant and machinery of over Rs.66 lakhs had become obsolete and irrelevant or that the assessee had had to set up an altogether new plant to work out the improvised <ORG>-process of fermentation. Learned counsel for the <ORG>, however, sought to maintain that all the criteria relevant to the question indicated that the assessee had acquired a new technical know-how for a new process which required the setting-up of a new plant. There was, according to <ORG>, a new venture based on a new technology and know-how of unlimited duration which required a new plant for its commercial exploitation. There were, according to <ORG>, both the acquisition of an enduring asset, and the commencement of a new venture.

11. On a consideration of the matter we are persuaded to hold that there was no material for the <ORG> to record the finding that the assessee had obtained under the agree- ment a 'completely new plant' with a completely new process and a completely new technical know-how from <ORG>. Indeed, <ORG> recognised the fallacy in this assumption of the <ORG> that a completely new plant was obtained by the assessee, though, however, <ORG> attributed the inaccuracy to what it considered to be some inadvertence or misapprehension on the part of the <ORG> in that regard. But <ORG> was inclined to the view that a complete- ly new process and technical know-how was obtained from <ORG> under the agreement. Certain assumptions fundamental to, and underlying, the approach of <ORG> are that the agreement dated 9.10.1963 envisaged a new process and a new-technology so alien to the extant infrastructure, equip- ment, plant and machinery in the assessee's enterprise as to amount to an entirely a new venture unconnected with and different from the line of assessee's extant business. It is in that sense that the expense was held not incurred for the purposes of the day to day business of the assessee but for acquiring a new capital asset.

12. The business of the assessee from the commencement of its plant in 1961, it is undisputed, was the manufacture of penicillin. Even after the agreement the product manufac- tured continued to be penicillin. The agreement with <ORG> stipulated the supply of the "most suitable sub-cultures" evolved by <ORG> for purposes of augmentation of the unit- yield of penicillin milli-litres of the culture-medium. Scientific literature on the bio-synthesis of penicillin indicates that penicillin is derived from a fermentation process. Some penicillins are obtained from direct fermenta- tion and some others by a combination of fermentation and subsequent chemical manipulation of the fermentation product. The manufacturing process, it is stated, consists of four processes: Fermentation, isolation, chemical modifi- cation and finishing. Referring to the common basis of commercial production of penicillin in the New Encyclopaedia Britannica, (Micropaedia, Vol. VII) it is mentioned:

"penicillin, antibiotic, the discovery of which in 1928 by Sir <NAME> marked the beginning of the antibioticera. <NAME> observed that colonies of Staphylococ- cus aureus (the pus-producing bacterium) failed to grow in those areas of a culture that had been accidentally contaminated by the green mold Penicillium notatum. After isolating the mold, he found that it produced a substance capable of killing many of the common bacteria that infect human beings. This antibacterial substance, to which <NAME> gave the name penicillin, was liberated into the fluid in which the mold was grown. This proc- ess is the basis of all commercial production of penicillin ....... "

(p. 850) (Emphasis Supplied) In Encyclopedia of Chemical technology (Kirk Othmer) III Edn. Vol. 2 it is found mentioned:

" .... The specific characteristics of the industrial microbial strains, media, and fermentation conditions cannot be described in detail since these facts are considered trade secrets. The origin of strains, and general principles of culture maintenance, fermenta- tion equipment, innoculum preparation, media, and fermentation conditions for penicillin and cephalosporin production, are public knowledge and are reviewed here.

<ORG>'s original strain of P.

notatum provided only low yields of penicillin .............. Superior penicil- lin producing strain of P. chrysogenum have since been obtained by random screening of variant strains following mutation induction. All of the present day high-yielding industri- al strains are descendants of the NRRL 1951 strain.........."

"Once a high-yielding strain has been isolat- ed, it is essential that the organism be maintained so that it remains viable and capable of producing the antibiotic at its original rate (54) ........... Under suit- able conditions highyielding strains can be preserved for many years without loss of viability or antibiotic-producing ability ..... "

(p. 899-90) We are inclined to agree with <NAME> that there was no material for the <ORG> to hold that the area of improvisation was not a part of the existing business or that the entire gamut of the existing manufacturing operations for the commercial produc- tion of penicillin in the assessee's existing plant had become obsolete or inappropriate in relation to the exploi- tation of the new sub-cultures of the high yielding strains of penicillin supplied by <ORG> and that the mere introduc- tion of the new bio-synthetic source required the erection and commissioning of a totally new and different type of plant and machinery. <NAME> is again fight in the submission that the mere improvement in or updating of the fermentation-process would not necessarily be inconsistent with the relevance and continuing utility of the existing infra-structure, machinery and plant of the assessee.

13. It would, in our opinion, be unrealistic to ignore the rapid advances in Researches in antibiotic medical microbiology and to attribute a degree of endurability and permanance to the technical know-how at any particular stage in this fast changing area of medical science. The state of the Art in some of these areas of high priority. research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and none- phemerality to share the requirements. and qualifications of an enduring capitalasset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay, such as this as capital. The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non- partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisi- tion.

In the present case, the principal reason that influ- enced the option of <ORG> was that the initiation and exploitation of the new-process brought in their wake a new venture requiring an altogether new plant. We are afraid, this view may not be justified. Clauses 2, 4 and 6 of the agreement provide:

"(2) For and in consideration of the subcultures, design, flow sheet and written description to be furnished by <ORG> to ALEM- BIC PURSUANT to paragraph (1) hereof, <ORG> shall pay to <ORG> in advance and in lump sum, such as amount as <ORG> is able to collect Fifty thousand U.S. Dollars ($ 50,000) net in Tokyo after deducting any taxes and charges to be imposed in India upon <ORG> with respect to the said payment to <ORG>."

"4. <ORG> will give advice, to the extent considered necessary be <ORG>, on any diffi- culty <ORG> may encounter in applying the subcultures and informations obtained by <ORG> from <ORG> to the large scale manufacture. The above provision shall be in force after <ORG>'s receipt of the amount set forth in paragraph (2) hereof until the end of two (2) years from the effective date of this agree- ment ..."

"(6) Any of the subcultures and informations obtained by <ORG> from <ORG> shall be re- garded as strictly confidential by <ORG> and its personnel and shall be used by <ORG> only in its Penicillin G plant in India, and shall not be disclosed to any other person, firm or agency, governmental or private. <ORG> shall take all reasonable steps to ensure that such subcultures and information will not be communicated. <ORG> shall take all possible precautions against the escape from its premises of the strain obtained from <ORG> of propagated therefrom.

<ORG> shall not apply for any patent to any country in relation to any of the subcultures and information obtained by <ORG> from <ORG>."

As notified earlier the <ORG> in the course of its order, held:

" ...... <ORG> agreed to give the designs etc., not only for a pilot plant but for the manufacture of penicillin according to <ORG>'s process on commercial scale. The assessee has to put in a larger plant modelled on the pilotplant."

(Emphasis Supplied) Having regard to the terms of Clause 4 of the agreement, this conclusion is non-sequitur.

The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of assessee's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day to day business of the assessee's established enterprise.

14. It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improve- ment of the existing business and should, therefore, be held to be a revenue expenditure. Reference may also be made to the observations of this Court in <CITATION> .,  2 SCR 696 at 705.

There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common- sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break-down. <CITATION> 282 2 287 at 290) this Court said:

" ..... As observed by <ORG> in the decision in <ORG> v. Com-

missioner of Income-Tax, [1980] 124 I.T.R.S.C.p. 1 that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test ...... "

15. In the result, for the foregoing reasons the appeal succeeds and is allowed and the question of law referred to <ORG> for its opinion in Income Tax Reference No. 78 of 1970 is answered in the affirmative and against the revenue. The judgment under appeal is set-aside., Likewise, the supplementary question of law raised in ITA 24 of 1971 before <ORG> and now constituting the subject-matter of the supplementary reference made by the <ORG> to this Court is answered in the negative and against <ORG>.

The appeal is accordingly allowed, but with no order as to costs.

<NAME> al- lowed.


CASE NO.: Appeal (civil) 4702 of 1994 PETITIONER: <ORG> RESPONDENT: <ORG>. DATE OF JUDGMENT: 05/03/2003 BENCH: <NAME> & B.N.SRIKRISHNA JUDGMENT:

JUDGMENT 2003 (2) SCR 631 The Judgment of the Court was delivered by <NAME>, J. These appeals arising under different factual background raise the same question of law and can, therefore, conveniently be disposed of by a common judgment.

Facts Civil Appeal Nos. 4702 and 4703 of 1994 On 23rd May, 1988 a winding up petition was filed under Section 433 of the Companies Act, 1956 seeking to wind up the company known as <ORG> Another petition by another creditor was also filed on 2.11.88. On 10.11.89, during the pendency of the above petitions before <ORG>, the respondent, a <ORG> established under the State Financial <ORG> Act . 1951 (SFC Act ), which was the second charge holder on the assets of the said company, took possession of the mortgaged assets of the said company in purported exercise of its power under Section 29 of the SFC Act. On 30.11.1990 <ORG> in Company Petition No. 131 of 1988 made an order of winding up of <ORG> and appointed the Official Liquidator as the Liquidator to take charge of the assets of the said company. On 30.11.90 the respondent-<ORG> accepted a bid of Rs. 85 lakhs made by Raheja Development <ORG> for sale of the mortgaged assets of the said company, although, to its knowledge, the assets charged were totally valued at an estimated value of Rs.97 lakhs. Neither the Official Liquidator, nor <ORG>, was in any way involved with the negotiations held by the respondent-<ORG> with the prospective purchaser. On 4.3.1991 the respondent filed an application under Section 446 (2) (b) read with Section 537 of the Companies Act, 1956 before <ORG> praying for leave to stand outside the winding up proceedings and realize its securities by selling the assets mortgaged to it. As per the resolution passed in its Board meeting held on 30.11.1990, it was resolved to accept the bid of M/s Raheja Development <ORG>. On 8.10.1991 <ORG> allowed the application of the respondent-<ORG> for standing outside the liquidation proceeding to work out its remedies under Section 29 of the SFC Act subject to an undertaking to discharge the workmen's dues. The Official Liquidator appealed against the order of the Company Judge praying that the sale of the assets of the company under liquidation should only be done by the Official Liquidator under the supervision of <ORG>. The appeal of the Official liquidator (OSA No. 26/91) was dismissed by a Division Bench of <ORG>. An application for review, Review, Application No. 118/93, was also dismissed by <ORG>. The Official Liquidator filed two Special Leave Petitions before this Court challenging the order of <ORG> dated 23rd January, 1992 dismissing the appeal OSA No.26/91, and the order dated 17th June, 1993 dismissing the Review Application No. 118/93. These are respectively Civil Appeal Nos. 4702 & 4703 of 1994.

When the Special Leave Petitions came up for admission this Court made the following order.

"Special Leave Petition granted.

Meanwhile, it appears appropriate that the Respondent <ORG> should sell the properties acting jointly with the Official Liquidator under the supervision and in accordance with the direction of the Learned Company Judge of <ORG> and sale proceeds be deposited in the <ORG> and then distributed in accordance with the direction of the Learned Company Judge."

Civil Appeal No. 12928 of 1996 As a seque to the above order, <ORG> moved an application before the Company Judge, <ORG>, for a direction to the Official Liquidator to concur in the sale effected by <ORG> (<ORG>) in its favour. The Company Judge disposed of the application holding that, in view of the order passed by this Court, the application did not survive. <ORG> made an unsuccessful attempt to intervene in Civil Appeal No.4702/94 by seeking relief therein, but its applications I.A. Nos. 4,5,6 & 7 were dismissed. <ORG> appealed against the order of the Company Judge raising similar contentions as urged by the <ORG>. <ORG> dismissed the appeal by taking the same view as the Company Judge. The appellant is before this Court.

Civil Appeal No. 6491 of 1995 A company known as <ORG> borrowed money from the appellant-<ORG> established in Uttar Pradesh. The repayment of the borrowed money was secured by mortgage of the factory premises and hypothecation of plant and machineries of the said <ORG> (the second respondent in the appeal). The second respondent defaulted in repayment of the loan and the appellant called in the money by a notice dated 30th June 1997. On 18.9.1987 the appellant, in purporting to exercise its power under Section 29 of SFC Act, took possession of the mortgaged assets. In the meanwhile, the first respondent, a creditor of the second respondent, had filed a petition under Section 433

(e) of the Companies Act on which <ORG> made an order dated 1.2.1994 for winding up of the second respondent company. The appellant-<ORG> appeared before the Company Judge and contended that it was a secured creditor having first charge over the mortgaged property and, despite commencement of the winding up proceeding, entitled to exercise its powers under Section 29 of the SFC Act to put to sale the mortgaged assets without leave of <ORG>. The learned Company Judge rejected the submission made on behalf of the appellant-<ORG> and directed winding up of the company. An appeal carried to <ORG> was summarily dismissed. Hence, the appeal by the <ORG>.

Civil Appeal No. 2007 of 1997 The respondent company obtained large amounts of loans/advances from the appellant <ORG> (<ORG>). The loans were secured by mortgages and charges on the assets of the respondent company. The company having defaulted in repayment of the loans according to the schedule, the <ORG> issued a notice and took over the mortgaged and charged assets under Section 29 of the SFC Act. In the meanwhile, at the instance of a creditor of the respondent company the company was ordered to be wound up. The <ORG> made an application to the Company Judge under Section 537 of the Companies Act, 1956 for permission to stand outside the winding up proceedings and realize its security. The learned Company Judge dismissed the petition of the respondent. An appeal to <ORG> also failed. The <ORG> is in appeal and raises the same contentions with regard to its rights under Section 29 of the SFC Act.

Civil Appeal No. 6303 of 1995 A company known as <ORG> had borrowed money from <ORG>. The said company was ordered to be wound up on 25.1.1988 by <ORG>. On 9.5.1988, in purported exercise of rights under Section 29 of the SFC Act, <ORG> (<ORG>) took possession of the charged assets of the said company. The Official Liquidator of the said company took out a judge's summons seeking a direction to <ORG> forthwith to hand over' possession of the asset of the company in liquidation. In the meanwhile the <ORG> took steps to transfer of the properties of the company liquidation, again purportedly under Section 29 of the SFC Act. On 20.12.1989 the <ORG> handed over possession of the premises of the company in liquidation to M/s <ORG> for a consideration of Rs. 8,99,726.52. At no point of time was permission of <ORG> taken, nor was the sale approved by <ORG>. <ORG> on being moved did not find the sale to be wanting in bona fides and declined to set aside the sale, but directed <ORG> to deposit the consideration received in court taking the view that the powers under Section 29 could not be unilaterally exercised without concurrence of <ORG>. <ORG> carried the matter in appeal to <ORG> which allowed the appeal holding that <ORG> as a secured creditor could opt to realise the securities by standing outside the winding up proceeding and neither the liquidator, nor <ORG>, could interfere with the rights of <ORG> as a secured creditor once it opted to remain outside the winding up proceedings. The Official Liquidator is in appeal.

The common question agitated in all these appeals is: whether the rights of <ORG> under Section 29 of SFC Act to sell and realise the security could be exercised without reference to <ORG> when a winding up order is made against the company.

Conflicting views have been taken by different <ORG> on this issue. Hence, the need for this Court to settle the law.

Relevant Statutory Provisions Before we address ourselves to the question of law argued, it is necessary to refer to some of the relevant statutory provisions. The State Financial Corporation Act , 1951 was brought on the statute book to grant special privileges to <ORG> established thereunder in the matter of enforcement of their claims against borrowers and to enable speedier recovery of public monies. The relevant povisions of the SFC Act are Sections 29 and 31 which read as under:

" Section 29 - (1) Where any industrial concern, which is under a liability to <ORG> under an agreement, makes any default in repayment of any loan or advance or any instalment thereof [or in meeting its obligations in relation to any guarantee given by the <ORG>] or otherwise fails to comply with the terms of its agreement with <ORG>, <ORG> shall have the [right to take over the management or possession or both of the industrial concerns] as well as the [right to transfer by way of lease or sale] and realize the property pledged, mortgaged, hypothecated or assigned to <ORG>.

(2) Any transfer of property made by <ORG>, in exercise of its powers [ ***] under sub-section (1), shall vest in the transferee all rights in or to the property transferred [as if the transfer] had been made by the owner of the property.

(3) <ORG> shall have the same rights and powers with respect to goods manufactured or produced wholly or partly from goods forming part of the security held by it as it had with respect to the original goods.

(4) [Where any action has been taken against an industrial concern] under the provisions of subsection (1), all costs, [ charges and expenses which in the opinion of <ORG> have been properly incurred] by it [as incidental thereto] shall be recoverable from the industrial concern and the money which is received by it [ ***] shall, in the absence of any contract to the contrary, be held by it in trust to be applied firstly, in payment of such costs, charges and expenses and, secondly, in discharge of the debt due to <ORG> and the residue of the money so received shall be paid to the person entitled thereto.] (5) [Where <ORG> has taken any action against an industrial concern] under the provisions of sub-section (1), <ORG> shall be deemed to be the owner of such concern, for the purpose of suits by or against the concern, and shall sue and be sued in the name of [the concern].

" Section 31 - (1) Where an industrial concern, in breach of any agreement, makes any default in repayment of any loan or advance or any instalment thereof [or in meeting its obligations in relation to any guarantee given by the Corporation] or otherwise fails to comply with the terms of its agreement with <ORG> or where <ORG> requires an industrial concern to make immediate repayment of any loan or advance under Section 30 the industrial concern fails to make such repayment, [then, without prejudice to the provisions of section 29 of this Act and of section 69 of the Transfer of Property Act, 1882 ] any officer of <ORG>, generally or specially authorized by the <ORG> in this behalf, may apply to the district judge within the limits of whose jurisdiction the industrial concern carries on the whole or a substantial part of its business for one or more of the following reliefs namely:-

(a) for an order for the sale of the property pledged, mortgaged, hypothecated or assigned to <ORG> as security for the loan or advance; or (aa) or enforcing the liability of any surety; or]

(b) for transferring the management of the industrial concern to <ORG>; or

(c) for an interim injunction restraining the industrial concern from transferring or removing its machinery or plant or equipment from the premises of the industrial concern without the permission of the Board, where such removal is apprehended.

(2) An application under sub-section (1) shall state the nature and extent of the liability of the industrial concern to <ORG>, the ground on which it is made and such other particulars as may be prescribed.

Section 32 empowers the <ORG> to move the District Judge for appropriate ad interim and interim orders in aid of action under Section

31. Section 46B gives an overriding effect to the provisions of the Act and reads as under:

" Section 46B - The provision of this Act and of any rule or orders made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in the memorandum or articles of associations of an industrial concern or in any other instrument having effect by virtue of any law other than this Act, but save as aforesaid, the provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being applicable to an industrial concern.] Section 46B was inserted by Act 56 of 1956 with effect from 1.10.1956.

The relevant provisions of the Companies Act , 1956 which need to be noticed are: Section 529 and 529A which read as under:

" Section 529 - (1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to-

(a) debts provable;

(b) the valuation of annuities and future and contingent liabilities; and

(c) the respective rights of secured and unsecured creditors;

as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent;

[Provided that the security if every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen's portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realize his security:-

(a) the liquidator shall be entitled to represent the workmen and enforce such charge;

(b) any amount realized by the liquidator by way of enforcement of such charges shall be applied ratably for the discharge of workmen' dues; and

(c) so much of the debt due to such secured creditor as could not be realized by him by virtue of the foregoing provisions of this proviso or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purpose of section

" Section 529A - (1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company-

(a) workmen's dues; and (b) debts due to secured creditors to the extent such debts rank under

clause (c) of the proviso to sub-section (1) of Section 529 pari passu with such dues shall be paid in priority to all other debts."

The Contentions It is contended on behalf of the SFCs that they are secured creditors and as such entitled to exercise their rights under the mortgage as also the statutory rights conferred on them by Section 29 of SFC Act without interference of courts. Hence, it is urged that the SFCs can sell the mortgaged and charged properties without reference to any court, much less <ORG>. Reliance is placed on the judgment of this <ORG> in <CITATION> ., AIR (1955) SC 604. That was a case arising under Section 232 of the Companies Act, 1913. This <ORG> was required to consider the meaning of the provision "any sale held without leave of the <ORG> of any of the properties" used in Section 232 (1) of the Companies Act , 1913 which rendered such sales void. It was held that these words refer only to sales held through the intervention of the <ORG> and not to sales 'effected by the secured creditor outside the winding up without intervention of the <ORG>. This <ORG> pointed out that the law in England, and under the provisions of the Companies Act in India, was the same, namely, that the secured creditor had the right of realizing his security by standing outside the winding up, in which case he was not required to seek intervention of the <ORG>.

The decision in <NAME> (supra) held the field for considerable period, both under the Companies Act , 1913 and the Companies Act , 1956. However, by amending Act 35 of 1985, amendments were carried out in section 529 and a new Section 529A was enacted. These developments in our view, brought about a qualitative change in the legal situation. It is important to notice that M.K.. <NAME> (supra) was decided under the Companies Act , 1913 which did not have any provision corresponding to the proviso to Section 529 or Section 529A of the Companies Act 1956. Obviously therefore, <NAME> could not have considered the impact of these amendments on the provisions of section 232 of the Companies Act, 1913 (corresponding to Section 537 of the Companies Act. 1956).

<ORG> of <ORG> has considered in detail the change in the legal situation brought about by these new legal provision in <CITATION> , AIR (1993) Bombay 392.

As a result of the proviso added in Section 529 , the security of every secured creditor is deemed to be subject to a 'pari passu' charge in favour of the workmen to the extent of the workmen's dues (called 'workmen's portion, as defined in sub-section (3)(c) therein. It is further provided that, where the secured creditor, instead of relinquishing its mortgage and proving his debt, opts to stand outside the winding up proceedings and realise his security, the Official. <ORG> shall be entitled to represent the workman and enforce such charge and that any amount realised by enforcement of such charge shall be applied ratably by the Official <ORG> for the discharge of workmen's dues. It is true that even the amended proviso does not give the <ORG> an independent right of enforcing the charge by selling the security against which such charge is created. Nonetheless, it creates a 'pari passu' charge in favour of the workmen to the extent of their dues and makes the <ORG> the representative of the workmen to enforce such a charge. By reason of Clause

(c) of the newly added proviso , so much of the debt due to the secured creditor opting to realise security as could not be realize because of the specially created rights in favour of the workmen or the amount of the workmen's portion in the security, whichever is less , shall rank 'pari passu' with the workmen's dues under Section 529A . Section 529A provides for overriding preferential payments of workmen's dues and unrealised portion of the secured creditors dues, as provided in clause (c) of the proviso to Section 529 .

Counsel for the SFCs contended that there is a conflict between the provisions of Section 529 read with Section 529A of the Companies Act on the one hand and Section 29 of the SFC Act on the other. It is urged that the provisions of the Companies Act being general law must yield to the provisions of the SFC Act which is special law. In the first place, we see no such conflict between the provisions of the Companies Act as amended in 1985 and the provisions of the SFC Act , 1951. In our view, the provisions of the SFC Act were merely intended to give an expeditious remedy to the SFCs without having to go through the procedure of enforcing the mortgage under the Transfer of Properties Act, 1882. In fact, even under Section 69 of the Transfer of Property Act, under certain circumstances a mortgagee has the power to sell the mortgaged property in default of payment of mortgaged money without intervention of the court. Under the general law, the <ORG> would have to file a suit for realising their security unless they qualified under section 69 of the Transfer of Property Act. This meant considerable delay and holding up of the public monies due to the SFCs. In public interest, therefore, special provisions were made by Section 29 , 30 , 31 and 32 enabling the SFCs to take possession of the mortgaged assets and sell them without having to move a court of law. The provisions of Section 29 to 32 and the rights flowing thereon are exercisable under ordinary circumstances. However, when the debtor is a Company in winding up, the rights of the SFCs are affected by the provisions of the Companies Act , 1956. Looked at from this point of view, therefore, there is no conflict between the provisions of the SFC Act and the Companies Act . Assuming that there is conflict, then the judgment of this Court in <CITATION> ,  7 SCC 291 clearly holds that the amendments made in Section 529 and 529A would override and control the rights under Section 29 of the SFC Act. Though the Companies Act may be general law, the provisions introduced therein in 1985, were intended to confer special rights on the workers and pro tanto must be treated as special law made by <ORG>. Since the amendments to the Companies Act were made by a later Act of 1985, they would override the provisions of section 29 of SFC Act, 1951. We are unable to accept the contention that the view taken in <ORG> (supra) needs reconsideration. Far from it, we are in agreement with the view expressed therein.

The decision of <ORG> in <ORG> case (supra) gives weighty reasons as to why when the company is under winding up the SFC to which the assets of the company are charged cannot proceed to realise the security without intervention of <ORG>. We have already noticed that as a result of the amendment to Section 529 a pari passu charge to the extent of the workmen's portion is created on the security of every secured creditor when he opts to realize a security by standing outside winding up. 'Pari Passu' means "with equal steps, equally, without preference" (Jowitt's Dictionary, Vol. II, 1959 Edition 1294). <NAME>'s Law Dictionary, 6th Edition, 115 defines it as 'By an equal progress... used especially of creditors who, in marshalling assets, are entitled to receive out of the same fund without any precedence over each other." It is also defined as "With equal steps, that is to say, proceeding side by side at the same place" (Prem's Judicial Dictionary, Volume III, 1964 Edition, page 1217) The rights of the pari passu charge holders would run equally, temporally and potently, with the rights of the secured creditors. The Official Liquidator, as the representative of the workmen, to enforce such pari passu charge would have the right of representing the workmen equally with the rights of the secured creditors. Charge is defined under Section 100 of the Transfer of Properties Act thus:

" Section 100-Where immoveable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions hereinbefore contained [which apply to a simple mortgage shall, so far as may be, apply to such charge.] Though the charge by itself may not amount to mortgage, all the provisions which apply to a simple mortgage, so far as may be, apply to a charge. Thus, the Official Liquidator, as the representative of the workmen's pari passu charge, would be in the position of a co-mortgagee. Though Section 29 hitherto enabled the <ORG> as a mortgagee to exercise its right thereunder by taking possession of the property and selling it in satisfaction of its debt, the situation has now changed. Because of the aforesaid statutory intervention, the <ORG> must necessarily contend with a pari passu charge holder who has equal rights. It is well established law that where there are co-mortgagees, one co-mortgagee cannot sell without consent of the comortgagee or institute any proceedings for sale of mortgaged property without joining the other co-mortgagees either as plaintiffs or as defendants. The <ORG>'s right under Section 29 of freely realising its security gets trammeled if it has to take on a pari passu charge holder. The realisation of the security can thereafter only be done either by satisfaction of the pari passu charge or by a suit in which the pari passu charge holder would be a party defendant. Though when the <ORG> Act was enacted in 1951 it was intended that <ORG> could act unilaterally, the amendments made to the Companies Act in 1985 have introduced a pari passu charge holder as a co-helmsman of the ship of the <ORG>, who can neither be ignored nor overridden. In other words, the existence of the pari passu charge holder being represented by the Official Liquidator would necessarily bring in supervision of <ORG> as the Official Liquidator cannot act without directions from and supervision of <ORG>. This is precisely the reason why the judgment of this Court in <ORG> (supra) holds that the statutory right of the <ORG>s to sell the property under Section 29 of the <ORG> Act is now subject to the provisions of Section 529 and Section 529 A of the Companies Act. The statutory right to sell the property under Section 29 of the Act has now to be exercised in tandem with the rights of pari passu charge in favour of the workmen created by the proviso to Section 529 of the Companies Act. This Court observed in <ORG> (<ORG>):

" The Act of 1951 is a special Act for grant of financial assistance to industrial concerns with a view to boost up industrialization and also recovery of such financial assistance if it becomes bad and similarly the Companies Act deals with companies including winding up of such companies. The proviso to sub-section (1) of Section 529 and Section 529-A being a subsequent enactment, the non obstante clause in Section 529-A prevails over Section 29 of the Act of 1951 in view of the settled position of law. We are, therefore, of the opinion that the above proviso to sub-section (1) of Section 529 and Section 529-A will control Section 29 of the Act of 1951. In other words the statutory right to sell the property under Section 29 of the Act of 1951 has to be exercised with the rights of pari passu charge to the workmen created by the proviso to Section 529 of the Companies Act. Under the proviso to sub-section (1) of Section 529 , the liquidator shall be entitled to represent the workmen and force (sic enforce) the above pari passu charge. Therefore, <ORG> was fully justified in imposing the above conditions to enable the Official Liquidator to discharge his function properly under the supervision of <ORG> as the new Section 529-A of the Companies Act confers upon <ORG> the duty to ensure that the workmen's dues are paid in priority to all other debts in accordance with the provisions of the above section. The legislature has amended the Companies Act in 1985 with a social purpose viz. to protect dues of the workmen. If conditions are not imposed to protect the right of the workmen there is every possibility that the secured creditor may frustrate the above pari passu right of the workmen."

Since the Official Liquidator is in the position of a comortgagee, the SFCs cannot act independently or by ignoring him for enforcing their security. It is established law that, in case of co-mortgagees, all of them should join in the suit for enforcing the security, but if some of them refuse to join, they have to be included as defendants, not merely as performa parties, but as necessary parties inasmuch as the mortgage right vests in them along with the plaintiffs mortgages. (See in this connection the judgment of <ORG> in <CITATION> , AIR (1919) PC 24). The same principle would be substantially true and applicable in the case of a mortgagee and a pari passu charge-holder over the same security for realising the security. The realization of the security can only be done by both the charge-holders joining and realising the security simultaneously. If a sale takes place, it can only be simultaneously for recovery of the claim of all pari passu charge holders and sale proceeds are required to be divided proportionately in the same proportion as their dues.

In support of their respective contentions, parties have referred to and relied upon judgments of different <ORG>. The view taken by <ORG> commands itself to us. <ORG> of the said <ORG> pointed out that, like a secured creditor, the official liquidator as a pari passu charge holder cannot independently bring the security to sale ignoring the secured creditor. He must, therefore, either obtain concurrence of the secured creditor for sale and take the <ORG>'s sanction, or he can apply for sanction of the <ORG> after notice to the secured creditor. In either event, the <ORG> while granting sanction may impose appropriate conditions and give directions regarding the conduct of the sale, the fixing of the reserve bid, acceptance of the bid, confirmation of sale and distribution of sale proceeds.

We cannot be unmindful of the fact that every creditor is interested in realizing the security only for his benefit and to the extent necessary for recovery of his outstandings. Prior to 1985 it might have been possible for a secured creditor under section 529 of the Companies Act, 1956, or its predecessor, section 232 of the Companies Act, 1913 as interpreted by this Court in <NAME> case (supra), to opt to stand outside the winding up and realise the security by bringing it to sale. This was possible because the secured creditor had unrestricted right of standing outside the winding up and proceeding against the property mortgaged to him. Or, to put it in the words Lord <NAME> in Food Controller v. <NAME>, (1923) AC 647 A, [as quoted in para 15 of <NAME> case (supra)]:

"The phrase 'outside the winding up' is an intelligible phrase if used, as it often is, with reference to a secured creditor, say a mortgagee. The mortgagee of a company in liquidation is in a position to say "the mortgaged property is to the extent of the mortgage my property. It is immaterial to me whether my mortgage is in winding up or not. I remain outside the 'winding up' and shall enforce my rights as mortgagee". This is to be contrasted with the case in which such a creditor prefers to assert his right, not as a mortgage, but as a creditor. He may say 'I will prove in respect of my debt'. If so, he comes into the winding up."

Of course, even in such a situation, if the same property was mortgaged to more than one secured creditor, they had to either come to an agreement, or in the event of disagreement, there had to be a suit in which dissenting mortgagee had to be sued as a necessary party defendant. No doubt section 29 of the SFC Act was intended to place the SFCs on a better footing . But, in our view, this better footing is available only so long as the debtor is not a company or is a going company. The moment a winding up order is made in respect of a debtor company, the provisions of section 529 and 529A come into play and whatever superior rights had been ensured to SFCs under the provisions of the SFC Act are now subjected to and operate only in conjunction with the special rights given to the workmen, who as pari passu charge-holders are represented by the official liquidator. We are, therefore, of the view that the unhindered right hitherto available to the SFCs to realise their security, without recourse to the <ORG>, no longer holds true as the right vested in the official liquidator is a statutory impediment to such exercise and has to be reckoned with. And since the official liquidator can do nothing without the leave or concurrence of the <ORG>, all necessary applications must, therefore, come to the Company <ORG>.

We do not really see a conflict between Section 29 of the ' SFC Act and the Companies Act at all, since the rights under Section 29 were not intended to operate in the situation of winding up of a company. Even assuming to the contrary, if a conflict arises, then we respectfully reiterate the view taken by the <ORG> bench of this court in <ORG> case (supra). This Court pointed out therein that section 29 of the SFC ACT cannot override the provisions of section 29(1) and 529A of the Companies Act, 1956, inasmuch as the SFCs cannot exercise the right under section 29 ignoring a pari passu charge of the workmen. It was observed in the judgment:

"The proviso to sub-section (1) of Section 529 and Section 529-A being a subsequent enactment, the non obstante clause in section 529-A prevails over Section 29 of the Act of 1951 in view of the settled position of law. We are therefore, of the opinion that the above proviso to sub-section (1) of the Section 529 and Section 529-A will control Section 29 of the Act of 1951. In other words the statutory rights to sell the property under Section 29 of the Act of 1951 has to be exercised with the rights of pari passu charge to the workmen created by. the proviso to Section 529 of the Companies Act. Under the proviso to sub-section (1) of Section 529 , the liquidator shall be entitled to represent the workmen and force (sic enforce) the above pari passu charge."

This very contention based on the non-obstante clause in Section 46B of the SFC Act was rejected by pointing out that if the non-obstante clause in section 529A and section 46B of the SFC Act which was inserted in the year 1956. Far from taking a different view of the matter, we too are of the same view as has been taken in the judgment of this Court in <ORG> case (supra).

Similar view was taken by a Division Bench of the A.P. High Court in <CITATION> ., (1986) Co. Cases 402 and a learned single Judge of <ORG> in <CITATION> cases Vol. 98 p. 683).

<ORG> of <ORG> in C.A. No. 6303 of 1995 has, however, struck a discordant note. <ORG> was impressed by the fact that in M.K. Ranganathan this Court had emphasised the right of a secured creditor to realize his security by standing outside the winding up of a company. It also emphasised that the proviso to section 529 of the Companies Act operates only where a secured creditor, instead of relinquishing his security and proving his debt, proceeds to realise his security. In the words of <ORG> "But the fact remains, it has yet been left at the option of the secured creditor to realise the security without proving his debt in the winding up proceedings." This seems to be the linchpin of the reasoning. In our view, the reasoning of <ORG> that in case secured creditor does not opt to realise the security, the liquidator, by dint of the proviso to section 529 , does not become a charge holder in the estate of the company so as to exercise the right of a simple mortgagee as envisaged under section 100 of the Transfer of Property Act, appears to be non-sequitur, secured creditor does not opt to stand outside the winding up but relinquishes his security and proves his debt in the winding up, then there is no doubt that the official liquidator will come into custody of all the assets of the company in liquidation and the distribution of the assets would have to proceed in accordance with the provisions of section 529A of the Companies Act, in which case the secured creditor stands in line as an unsecured creditor. It is only when the <ORG> as a secured creditor opts stand outside the winding up and seeks to realise its security that the conflict, if any, can arise. We have already indicated as to who must yield in such a clash of the titans. The fact that the liquidator or the workmen do not have a right independently to enforce the charge, unless the creditor decides to stand outside the winding up, does not make any difference to the situation, in our view. It is not the contention of the <ORG>s that they do not desire to exercise the option available to them of standing outside the winding up. In fact, it is their contention that as mortgages they have a right to stand outside the winding up and are not subject to the supervisory jurisdiction of <ORG>. They also contend that, unlike other mortgagees, they have a special right by reason of sections 29 of the <ORG> Act of taking possession of the assets and realising them by sale, transfer and so on. We are, therefore, unable to accept the reasoning of <ORG> as correct.

Finally, counsel for the <ORG> urge that the view we are to take would obliterate the difference between a creditor opting to stay outside up and one who opts to prove his debts in winding up. We are unable to accept it. As a result of the amendments made by the Act of 1985 in the Companies Act , 1956, the <ORG> as secured creditors, must seek leave of <ORG> for the limited purpose of ensuring that the pari passu charge in favour of the workmen is safeguarded by imposition of suitable conditions under the supervision of <ORG>. If this amount to impeding their hitherto unimpeded rights, so be it. Such is the Parliamentary intendment, according to us. This impediment is of a limited nature for the specific purpose of protecting the pari passu charge of the workmen's dues and subject thereto, <ORG> can continue to exercise their statutory rights as secured creditors without being reduced to the status of unsecured creditors required to prove their debts in insolvency and stand in line with other unsecured creditors. Neither is the apprehension expressed justified, nor the contention sound. We, therefore, hold as under :

1. The right unilaterally exercisable under section 29 of the SFC Act is available against a debtor, if a company, only so long as there is no order of winding up ;

2. The SFCs cannot unilaterally act to realise the mortgaged properties without the consent of the official liquidator representing workmen for the pari passu charge in their favour under the proviso to section 529 of the Companies Act, 1956.

3. If the official liquidator does not consent, the SFCs have to move <ORG> for appropriate directions to the official liquidator who is the pari passu charge holder on behalf of the workmen. In any event, the official liquidator cannot act without seeking directions from <ORG> and under its supervision.

In the result, Civil Appeal No. 4702/1994 and Civil appeal No. 4703/ 1994 are allowed and <ORG> is directed to move <ORG> to seek appropriate directions in the matter. The judgment of the Division Bench as well as the single Judge permitting the <ORG> to sell the assets of <ORG> without the leave of <ORG> are set aside, with liberty to the K<ORG> to move <ORG> and seek appropriate directions in the matter of realization of its securities.

Civil Appeal No. 12928/1996 is dismissed.

Civil Appeal Nos. 6491/95 and 2007/97 are dismissed with the same liberty to the <ORG> to move <ORG> for further directions.

Civil Appeal No. 6303/1995 is allowed. The judgment of the Division Bench of <ORG> is set aside and the judgment of the Company Judge is upheld. <ORG> has the same liberty for moving the learned Company Judge for appropriate directions for realisation of the sale proceeds of the assets.

All the aforesaid appeals are accordingly disposed of with no order as to costs.


JUDGMENT <NAME>, J.

1. The facts in this case are somewhat unusual. There was an ordinary mortgage decree of the year 1903. The mortgagee applied for execution in due course on the 8th of August 1905. In January 1906 the mortgagor applied under the old Code of Civil Procedure to be declared an insolvent. In his application of August 1905 the mortgagee asked that the property might be sold, but did not seek any further relief against the mortgagor. Accordingly in June 1906 the property was sold under this <NAME>. In September of the same year the <ORG> declared the mortgagor an insolvent, although under Section 351 it did not discharge him. In December of the same year the <ORG> struck off the <NAME> of August the 8th, 1905, for two reasons: (1) that it had been satisfied, (2) that the judgment-debtor was now an adjudicated SHANKAK insolvent. The mortgagee appeared from the first in the insolvency proceedings as the sole opposing creditor.

2. We might find some difficulty, more, speaking for my self, I think a verbal than a real difficulty in bringing such appearance within the meaning of the words " application to take some step-in-aid of execution" under Article 179 (old ), now Article 182. But as the result of those proceedings was against him, the creditor, appellant here, appsaled to <ORG> and succeeded. We think that it is not putting too great a strain upon ordinary language to say that an appeal in such circumstances fairly falls within the meaning of the words " an application to take a step-in-aid of execution." It is clear that as long as the insolvency proceedings went in favour of the debtor, the creditor could not have presented any application in ordinary course for the further execution of his decree with the least hope of success. Two at least of the <ORG> in India had already put so liberal a construction upon the insolvency provisions of the old Civil Procedure Code that an executing creditor must have foreseen that no application for the execution of the decree either by sale of property or arrest of the person of the judgment-debtor could have the least chance of success so long as the judgment-debtor had been declared an insolvent under Section 351, even although he had not been actually discharged within the meaning of Section 357. So that we think that in view of the <ORG>'s finding that this judgment-debtor was an insolvent early in 1906, the present appellant had no other course open to him than in the first instance to get this bar to the further execution of his decree removed, and the only way in which he could hope to obtain that result would be by first opposing the insolvency petition in the first <ORG>, and, if he failed there, by appealing to higher authority. This he did, and although it is unnecessary to trace the subsequent tedious proceedings, it is sufficient to say that his last appeal could not have been made earlier than January 1909, that is to say, well within three years of his present <ORG>.

3. Adopting that view, it is unnecessary to enter into any of the other nice and difficult questions which have been raised and adequately argued in the course of this appeal. We do not seek to lay down any general principle upon any of those questions, but we desire to confine our judgment to the rather unusual facts before us, and we think that we do no violence to the meaning of Article 179 (old ), now Article 182 , by holding that the present <NAME> is within three years of the last application made by the judgment-creditor to a <ORG> to take some step-in-aid of the execution of his decree. For these reasons we think that the appeal ought to be allowed and the judgment of the <ORG> below reversed. We direct, therefore, that the <NAME> be restored and that execution do proceed upon it according to law. We think that this appeal must be allowed with all costs.