JUDGMENT <NAME>, Acting C.J.

1. This is a Reference under Section 51 of the Indian Income Tax Act, 1918. The section is in the following terms:

1. If, in the course of any assessment under this Act or any proceeding in connection therewith other than a proceeding under Chapter VII, a question has arisen with reference to the interpretation of any of the provisions of this Act or of any rule there under, <ORG> may, either on its own motion or on reference from any Revenue Officer subordinate to it, draw up a statement of the case, and refer it, with its own opinion thereon, to <ORG>, and shall so refer any such question on the application of the assessee unless it is satisfied that the application is frivolous or that a reference is unnecessary.

2. If <ORG> is not satisfied that the statements contained in the case are sufficient to enable it to determine the questions raised thereby, the <ORG> may refer the case back to <ORG> by which it was stated, to make such additions thereto, or alterations therein as the <ORG> may direst in that behalf.

3. <ORG> upon the hearing of any sash case shall decide the questions raised thereby, and shall deliver its judgment thereon containing the grounds on which such decision is founded, and shall send to <ORG> by which the case was stated, a copy of such judgment under the seal of the <ORG> and the signature of the Registrar; and <ORG> shall dispose of the case accordingly, or if the case arose on reference from any Revenue Officer subordinate to it, shall forward a copy of such judgment to such Officer who shall dispose of the case conformably to such judgment.

4. Where a reference is made to <ORG> on the application of an assessee, costs shall be in the discretion of the <ORG>.

2. The assessment which has led up to the present proceeding was made by the Collector of Tipperah, in whose jurisdiction the assessee resides, within the meaning of the definition of the term "Collector" contained in Sub-section (5) of Section 2 of the Indian income Tax Act . The Maharaja of Tipperah, who was the assessee, fork exception to the assessment as contrary to law, but the Collector refused to entertain the petition of objections on the ground that it could be heard by way of appeal from his order only by the Commissioner of <ORG>. The matter was then taken before the Commissioner, who heard the objections, allowed them in part, and modified the order of the Collector on the 19th December 1919. The assesses was not satisfied with his partial success and applied to <ORG>, as <ORG>, to revise the order of the Commissioner. On the 3rd May 1920 <ORG> made this reference under Section 51 , with a view to obtain a ruling of <ORG> on the several questions specified. When the matter was notified to be set down for disposal here, the Advocate-General appeared and mentioned to the <ORG>, that, as it was understood that the assessee had arranged to be represented at the hearing by <NAME>, he thought it fair to state in advance that objection would be taken that <NAME>s were not entitled to be heard on this Reference. When the case was actually taken up for disposal, Mr. <NAME> intimated to the <ORG> that he had been instructed to appear on behalf of the assessee and, consequently, the objection which the Advocate-General had intended to take could not, in the circumstances, arise. It transpired, however, that Mr. <NAME> was instructed by Mr. <NAME>, who was a Solicitor of this <ORG> but had not bean enrolled as a <NAME>. As an Attorney can appear in this <ORG> only on the Original Side and in appeals from the Original Side, the question arose whether this was a matter in which Counsel could be instructed by an Attorney or only by a <NAME>, Consequently, the point which the Advocate-General had previously brought to the notice of the <ORG> did require consideration, though in a somewhat different form. We accordingly heard the Advocate General and Mr. <NAME> and held that, as this reference by <ORG> arose out of a proceeding for assessment of income tax within the jurisdiction of the Collector of Tipperah and the Commissioner of <ORG>, <NAME>s were entitled to be heard and Counsel could be properly instructed only by a <NAME>. When this was intimated to Mr. <NAME> he stated, that Mr. <NAME> and Mr. Birendra Chandra <NAME>, two of the <NAME>s of this <ORG>, were ready to enter appearance on behalf of the assesses. After Mr. <NAME> had thus been properly instructed, the matter was heard on the merits. We shall now state the grounds for our ruling on the question of procedure and then give our decision on the points raised in the Reference.

3. For the solution of the question of procedure, it is necessary to investigate the nature of the proceeding under Section 51 of the Indian Income Tax Act. It is plain that the nature of the proceeding cannot be affected by coincidental circumstances, such as the plane from or the channel through which the Reference has been made; it is immaterial whether, at the time of the Reference, <ORG> was at Calcutta, Darjeeling or Dacca, or, whether <ORG> caused the order of Reference to be transmitted to the Government Solicitor who placed the matter in the hands of the Registrar on the Original Side or to the Legal Remembrance who entrusted the matter to the charge of the Government Pleader on the Appellate Side. The nature of the proceeding is a matter of substance and not of form.

4. The scheme of the Indian Income Tax Act , 1918, for the determination of controverter questions of liability to assessment is fairly simple. The assessment is made, in the first instance, under Sub-section (1) of Section 18 , by the Collector, who, under Clause (5) of Section 2 , it in relation to an assesses carrying on business, the Collector of the place where the principal place of business of such assesses is situate, and in relation to any other assessee, the Collector of the place where such assessee resides. When the assessment has been so made, the assessee may, under Sub-section (1) of Section 21 , apply by petition to the Commissioner for relief against the order of the Collector. Under Section 22 , the Commissioner may pass such order as he thinks fit, by way of confirmation, reduction, enhancement or cancellation of the assessment. Section 23 next authorises <ORG> to call for the record of any assessment proceeding which has been taken by any Officer subordinate to it and to make such enquiry and to pass such orders thereon as it thinks fit. Section 51 empowers <ORG> to make a reference to <ORG> either on it own motion (that is, when it has seizin of the proceeding under Section 23 ) or on reference from any Revenue Officer subordinate to it (that is, while the proceeding is still before the Collector or the Commissioner). Section 51 further provides that <ORG> shall make such reference on the application of the assessee, unless it is satisfied that the application is frivolous or that a reference is unnecessary. Section 52 finally lays down that no suit Shall be brought in <ORG> to set aside or modify any assessment made under the Act. It is clear from the provisions analysed that the jurisdiction of <ORG> is taken away, as the assessee would have been entitled, but for Section 52 , to institute a suit in <ORG> to contest the validity of the assessment made by the Collector. In lieu of such remedy, the assessee is permitted to take up the matter successively to the Commissioner and <ORG>. <ORG> is thus constituted the <ORG> which finally re-places <ORG>, subject to the reservation that there may be a reference to <ORG> on questions of interpretation of the provisions of the Act or of the rules made there under. When such a reference has been made, the opinion pronounced by <ORG> cannot be ignored, because it is made obligatory on <ORG> concerned to decide the case conformably to the judgment of <ORG>. What then is the nature of the jurisdiction which <ORG> exercises on such reference? Under the Letters Patent, the civil jurisdiction of <ORG> is classified as original (ordinary and extraordinary), and appellate (from the Original Side or from the <ORG> in the Provinces.) The Letters Patent makes no mention of revision (as distinguished from superintendence) of the proceedings of subordinate <ORG> or of references from them. This does not justify the inference that the <ORG> has no power to revise proceedings or to hear references. It was pointed out by Sir <NAME>, C.J., in <NAME> v. <NAME> 21 W.R. 263 : 13 B.L.R. 103, that the power of revision is in essence an aspect of appellate jurisdiction. The substance of the matter is, as explained in Secretary of <ORG> for <CITATION> . 9 Ind. Cas. 183 : 18 C.L.J. 90 : 15 C.W.N. 848, that the error of the inferior <ORG> ia rectified by a superior <ORG>; this characteristically common to both the proceedings technically sailed appeal and revision. On the other hand, a reference is made by a subordinate to a superior <ORG> with a view to obtain its opinion upon a controverter question of law and thereby avoid possible error. An Appellate <ORG> thus exists for the correction of an error of a subordinate <ORG> by way of appeal or revision, as also for the evidence of error by a subordinate <ORG> by pronouncing an opinion upon the question of law referred in advance. The essence of the matter thus is that when a <ORG> hears a reference, it really performs the functions of a <ORG> of Appeal quite as much as it undoubtedly does when it hears an application for revision. The index of the relation of superior and inferior <ORG> is furnished by the fast that the judgment pronounced on the reference by <ORG> is binding upon the referring authority. There is thus no escape from the conclusion that <ORG> exercises, not an original but an appellate jurisdiction when it entertains a reference under Section 51 of the Indian Income Tax Act, 1918. In this connection, we must not overlook Section 106(2) of the Government of India Act, 1915, which provides that <ORG> has not and may not exercise any original jurisdiction in any matter concerning the revenue or concerning any Act ordered or done in the collection thereof, according to the usage and practice of the country, or the law for the time being in force; this substantially reproduces the provision in Section 8 of 21 Geo. III, C. 70, which debarred the Supreme <ORG> from exercising jurisdiction in any matter concerning the revenue. Now, <ORG>, under the Indian Income Tax Act , 1918, exercises jurisdiction over the entire <ORG>, as well in the Town of Calcutta, as beyond the limits of the <ORG> town. A distinction may thus legitimately be drawn between a reference made in connection with an assessment on a person who resides in the town of Calcutta (that is, within the limits of the ordinary original civil jurisdiction of this <ORG>) and a reference made in connection with an assessment on a person who resides beyond the limits of the ordinary original civil jurisdiction of his <ORG>. In the former class of cases, the procedure should be assimilated with that applicable to appeals front the Original Side; in the latter class of cases, the procedure should be that applicable to appeals from the <ORG> in the Provinces under Clause 16 of the Letters Patent. This distinction, as is well-known, has a historical origin and cannot be ignored. It was faintly contended, however, by Mr, <NAME>, as a last resort, that the jurisdiction which <ORG> exercises under Section 51 of the Indian Income Tax Act is neither original nor appellate, but a new kind of jurisdiction not contemplated by the Letters Patent. It is sufficient to say that this argument, though not lacking the merit of novelty, could not be of any practical assistance to Mr. <NAME>s for, while an Attorney can appear only on the Original Side, a <NAME> is excluded only from the Original Side. Consequently, if the jurisdiction were neither original nor appellate, an Attorney would not be, but a <NAME> would be, competent to appear. In the present case, the assessment under Section 18 was made by the Collector of Tipperah and the order under Section 22 (which ultimately came under examination by <ORG>) was made by the Commissioner of <ORG>. Consequently, the procedure which governs appeals from the <ORG> in the Provinces, within the meaning of Clause 16 of the Letters Patent, is applicable to the reference made by <ORG> under Section 51 , and on such reference <NAME>s, but not Attorneys, are entitled to appear. This view is not opposed to the procedure followed in the case of <CITATION> for India in Council 64 Ind. Cas. 107 : 32 C.L.J. 421; there no such question was raised, possibly for the reason that as the Company, though owning property situated at Naogaon in Assam, had its registered office at 1, Clive Street, Calcutta, and might, consequently, be deemed, under Section 2(5) , to have its principal place of business within the town of Calcutta ; the assessment was, in fact, made by the Collector of Income Tax, Calcutta. Our conclusion is also not affected by the decision in Barristers and <NAME>, In re 4 Ind. Cas. 297 : 13 C.W.N. 605 : 10 Cr. L.J. 553, that <NAME>s had no right of audience in <ORG> in cases sent up for trial under Act XIV of 1908. No reasons were recorded in that case; but it was plain that the jurisdiction to be exercised by the <ORG> was original criminal jurisdiction. Nor is any assistance to be derived from the decision in <CITATION> 41 Ind. Cas. 313 : 25 C.L.J. 401 : 21 C.W.N. 654 : 18 Cr. L.J. 793, where the <ORG> was equally divided in opinion upon the question, whether <NAME>s were entitled to be heard in a proceeding under Section 195 of the Criminal Procedure Code instituted in a <ORG> Small Cause <ORG> and brought up before <ORG> in the exercise of its revisional jurisdiction or of its power of superintendence. Nor is any light thrown on the point before us by the practice in connection with references under Section 57 of the Indian Stamp Act, 1899; such references, so far as we have been able to discover, have hitherto been made mostly in connection with matters arising within the limits of the ordinary original civil jurisdiction of this <ORG>, and, in such cases claim to a right of audience would not ordinarily be put forward by <NAME>s; but in one instance at least, Reference under Stamp Act , 1899 (6), where the question arose in relation to <ORG> from the <ORG>, Counsel appeared with a <NAME> at the hearing.

5. On the other hand, <NAME> have always appeared in references from subordinate <ORG> for disciplinary action against Pleaders and <NAME> under the Legal Practitioners Act , 1879, as also in proceedings instituted in this <ORG> for disciplinary action against <NAME>.

6. We have next to consider the questions referred by <ORG> to this Court for decision:

(1) Is selami or premium agricultural income within the meaning of Section 2(1) of the Indian Income Tax Act, 1918, when charged.

(a) for the settlement of waste lands or abandoned holdings?

(b)for recognition of a transfer of a holding from one tenant to another?

(2) Are illegal abwabs, such as uttarayan agricultural income within the meaning of that section?

7. Section 4 provides that agricultural income shall not be chargeable to income tax. Section 2(1)(a) lays down that agricultural income" means any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue or subject to a local rate assessed and collected by officers of Government as such, The assessee contends that the incomes mentioned in the two questions are exempt from assessment as they constitute agricultural income within the meaning of the definition just given. We are of opinion that this contention is well founded in respect of selami paid for the settlement of waste lands or abandoned holdings, but cannot be supported in respect of selami paid for recognition of a transfer of a holding from one tenant to another. When a new tenancy is created in respect of unoccupied waste lands or lands which had been abandoned by previous tenants, the premium represents essentially the capitalised value of a portion of the rent. We are not unmindful that in the case of <NAME> v. <NAME> 13 W.R. 307 : 5 B.L.R. App.1 it was ruled that money payable by a lessee in consideration of a leaee granted, whether called nuzzur or selami, cannot be looked upon as rent, but is simply a debt due upon a contract and is recoverable by a suit in a final <ORG> on the money-bond executed in that behalf by the tenant in favour of his landlord. It is not necessary to hold that such Salami is rent within the meaning of the definition given in the Bengal Tenancy Act or the Transfer of Property Act . The expression used in the Indian Income Tax Act is "rent or revenue," and this is obviously wider than rent, as defined in the Bengal Tenancy Act or the Transfer of Property Act . The term "revenue" is defined in <ORG> as follows: "The return, yield, or profit of any lands, property, or other important source of income; that which comes in to one as a return from property or possessions, specially of an extensive kind; income from any source, specially of an extensive kind; income from any source, but specially when large and not directly earned." There can be little doubt that when a lease is granted, the amount fixed for periodical payment is not independent of the amount paid in a lump sum as premium. The capitalized value of the sum periodically payable, taken along with the premium, constitute in the aggregate the consideration for the grant; so that the larger the one element, the smaller the other. From this point of view, we must hold that the premium paid for the settlement of waste lands or abandoned holdings may reasonably be regarded as "rent or revenue" derived from land, within the meaning of that expression as used in the definition of "agricultural income" in Section 2(1)(a) .

8. But these considerations do not apply to the selami or premium paid for recognition of a transfer of a holding from one tenant to another. When the transfer is recognized, the original tenancy continues and there is no new demise. The sum paid as selami or premium in such circumstances is obviously not rent in any sense of the term; nor can it be deemed the return, yield, or profit of any land. The money is paid by the transferee to the landlord to purchase peace, so that he may not contest the validity of the transfer. We cannot hold that money so levied by the landlord can be comprised within the scope of the definition of agricultural income.

9. Finally, the contention that illegal abuabs, such as uttarayan, constitute agricultural income, is manifestly untenable. The item uttarayan is a voluntary payment, made by tenants, at one piece per rupee of their rent, for expenses of the Bastu Puja on the Uttarayan Sanskranti day (the list day of the Bengali month Pous) and for distribution of sweets and oranges to all servants of the estate, <ORG> officers and local residents. The item consequently is an illegal exaction and cannot, on the widest interpretation which may be placed on the phrase "rent or revenue," be possibly included therein; nor can it be said to be derived, that is, drawn, or obtained from the land. We do net feel pressed by the contention that, if the income from Uttarayan be treated as assessable, there would be an indirect recognition of it by <ORG>; For, all that was have to consider is, whether it is exempted from assessment, because, if not exempted, it must be taxed as included in the all comprehensive expression in Section 3(1) , namely, "income from whatever source it is derived." Reference may in this connection be made to the decision in <NAME> v <NAME> (1886) 56 L.J.Q.B. 251 : 18 Q.B.D. 276 : 56 L.T. 208 : 35 W.R. 276. In that case, it was ruled that persons receiving profits from betting systematically carried on by them throughout the year as book makers on case courses, were chargeable with income tax on such profits, even though bets were considered null and void and not recoverable in law. <NAME>, J., said that even an illegal vocation would be taxable on its income, as "if a man were to make a systematic business of receiving stolen goods, and to do nothing else and were thereby to make a profit of, say £2000 a year, <ORG> would be quite right in assessing him if it were in fact his vocation." We hold, accordingly, that income derived from illegal abwabi, such as uttarayan, is not exempt from assessment.

10. The result is that Q. (1)(a) is answered in the affirmative, Q. (1)(b) and Q. 2 in the negative.

11. There will be no order for costs under Section 51(1) , as the Reference has been decided in part in favour of the assessee.

12. Let a copy of this judgment be forwarded to <ORG> under Section 51(3) .

Fletcher, J.

13. I agree.

Walmsley, J.

14. I agree.


JUDGMENT <NAME>, J.

1. The question referred to this Court under Section 66(2) of the Income-tax Act arises out of the assessment for the year 1944-45, the previous year in relation to which ended on 16th August, 1943. The assessee firm carried on business in coffee, among other things. In the relevant accounting year, 1942-43 the assessee, entered into contracts with <ORG>, constituted under the Coffee Market Expansion Act VII of 1942, under which the assessee purchased 12,390 cwt. of coffee with a contractual obligation to export the whole of that quantity to the Middle East and Australia. In addition, the assessee purchased from others out of their export quotas 2,3O3cwt. which also he was under an obligation to export. The prices at which <ORG> sold the coffee for export were far less than those at which coffee was sold from the pool by the <ORG> for sales within India. The assessee exported only 8,784 cwt. the balance of 5,959 cwt. it sold within India without the knowledge of <ORG>. The assessee made considerable profits out of these sales. The India Coffee <ORG> came to know of these sales in contravention of the assessee's obligations only in 1946, when it called upon the assessee to explain. The assessee admitted in his letter, dated 20th May, 1946, that it had failed to export 5,959 cwt. of coffee that it had obtained for export in 1942-43 and the assessee agreed to pay the damages in accordance with one of the alternative terms of the contract it had entered into with <ORG>.

2. Clause 9 of that contract ran:

If the buyer fails to ship the coffee purchased for export to a destination outside India, the Board reserves to itself the right to levy liquidated damages or to restore the status quo in any one of the following ways, at the absolute discretion of the Controller of Coffee:

(a) To recover a fixed measure of damages at Rs. 20 per owt. to be paid to <ORG>.

(b) To export an equivalent quantity by weight of coffee purchasing the same from the pool and to recover the loss incurred in the transactions from the buyer. The decision of the Controller in the matter of price at which such coffee is purchased and sold and in the matter of fixing the loss, shall be final.

(c) To call upon the buyer to restore the stock delivered to him at a price less than the purchase by 2J per cent, of the price for every month after the expiry of the period for export fixed above and the date when the buyer is called upon to restore the stock provided that a period of fifteen days and over shall be treated as a month and a period less neglected.

The fixed damages referred to above shall be deemed as liquidated damages and the buyer shall not be entitled to any reduction thereof in any circumstances."

3. It was apparently the first of these alternatives that was availed of by the Controller of Coffee, and the damages, the assessee was liable to pay for the admitted breach of the contractual obligation was assesseed at Rs. 1,19,177, on 1stjune, 1946. The assessee paid this amount in instalments in the latter part of its year of account 1945-46.

4. The assessment proceedings for 1944-45 were completed by the Income-tax Officer only on 5th August, 1947. The assessee firm claimed that the sum of Rs. 1,19,177, it had paid as liquidated damages should be deducted to arrive at its assessable profits for the accounting year 1942-43 under Section 10(2)(xv) of the Income-tax Act. That claim was disallowed by the departmental authorities. The assessccs' appeal to <ORG> failed.

5. The question referred to this Court under Section 66(2) of the Act ran:

Whether on the facts and in the circumstances of the case the sum of Rs. 1,19,177 paid by the assessee as damages to <ORG> for not exporting the coffee seeds outside India is under the terms of agreement allowable as an expenditure under Section 10(2)(xv) of the Act in the assessment year 1944-45.

6. Two points had to be determined by <ORG> (1) whether independently of the year of account in which the expenditure of Rs. 1,19,177 was incurred by the assessee, the expenditure could be claimed at all as deduction under Section 10(2)(xv) of the Act; and (2) if it could be claimed as a lawful deduction, did the fact that the amount was expended, not in the relevant year of account 1942-43, but only in the year of account 1945-46, bar the grant of relief in the assessment year 1944-1945. Both the points were decided against the assessee by <ORG>. The claim of the assessee firm has to be rejected if either of the points is decided against it.

7. The <ORG>, in our opinion, was right when it decided in the circumstances of this case that the amount expended by the assessee in 1945-46 could not be excluded in computing the assessable income of the assessee during its account year 1942 43.

8. No doubt the assessee paid the sum of Rs. 1,19,177 to <ORG> as liquidated damages for breach of contract. That breach was in the year of account 1942-43. The liability to pay damages under the contract between the assessee and <ORG> was, however, only a contingent liability, and it remained so till that year of account ended. The assessee maintained its accounts on the mercantile basis. The assessee did not debit itself in the year of account with the amount it eventually had to pay in 1945-46. It could not claim to be in a better position than it would have been had it debited itself with that amount in its accounts during 1942-43. Even so, that debit would have represented only a reserve provided by the assessee against the enforcement in future of what was still a contingent liability in 1942-43. However prudent such a provision might have been from the point of view of accountancy, that would not have sustained a claim for deduction under Section 10(2)(xv) of the Act with reference to the account year 1942-43. It would still have been an unascertained claim for damages for breach of contract. The claim itself was not made in the year of account. That there could be no defence to the claim when it was made did not alter the fact, that the claim had yet to be made and the damages yet to the ascertained.

9. It could not be predicated in 1942-43 what Would be the claim of <ORG>, the other contracting party entitled to damages under the contract. We have already set out the terms of Clause 9 of the contract. It provided for three alternatives any one of which <ORG> could claim at the discretion of the Controller of Coffee. The quantum of damages could not possibly have been identical under each of these three alternatives open to <ORG>. Which of these three alternatives gave the greatest monetary advantage to <ORG> at any given point of time, with the corresponding monetary liability on the assessee, it was not possible to guess because no claim even was made by <ORG> in 1942-43. Till <ORG> made clear by its claim which of the three alternatives it chose, there could be no means of knowing what the liability of the assessee was. Up to that stage it could only be a contingent liability. For all that the assessee knew in 1942-43 no claim might have been made at all by <ORG>. That was probably what the assessee hoped for that the breach of the terms of the contract would go undetected and the liability would go unenforced. Under such circumstances the assessee could not treat any sum as an ascertained liability even if it could not be viewed as an ascertained debt due to <ORG>, to justify the claim to deduct any specified sum from the assessable profits of that year. Whether the liability was discharged or not by payment, only an ascertained liability would have justified an entry in the accounts of the assessee maintained on a merchantile basis. Even had the assesee firm entered any amount in its accounts in 1942-43 before such ascertainment, the claim under Section 10(2) {xv) would have been unsustainable.

10. To sum up, it was contingent liability and not an ascertained liability in 1942-43.

11. It should betaken as well-settled now that without statutory warrant--and there is none in Section 10(2)(xv) --deductions are not premissible for anticipated losses even if they are inevitable, nor for contingent liabilities.

12. In <ORG> v. Stedeford(1948) 30 T.C. 496, the facts were as follows. The assessee company carried on the business of managing factory canteens. Under the usual form of contract made between the company and the factory owner, the crockery, cutlery and utensils used in the canteen were provided by the factory owner, but they were to be maintained in their original quantity and quality by the company. It was found impossible in the relevant year of account, owing to scarcity and high price of the equipment concerned, to effect all the replacements for which the company was liable. The company, however, charged as expenses not only the amounts- of the disbursements actually made in effecting replacements, but also amounts representing at current prices the company's liability to effect replacements as soon as the required equipment became available. The company claimed the latter set of amounts as admissible deductions in computing its assessable profits. That claim was disallowed. In the assessment proceedings an accountant who was called in as an expert gave evidence. He stated that the accounts had been prepared in accordance with the principles of sound commercial accounting. He added that, if he had been the auditor of the assessee company, he would not have been prepared to certify the accounts as correct, if the provisions to meet the company's liabilities in respect of equipment shortages had not been made year by year in the manner in which the accounts showed them to have been made.

13. In dealing with the evidence of the Accountant, <NAME>, L.J., observed:

. . . . they (accounts) might well have been prepared in accordance with the principles of sound commercial accounting without being permissible deductions before arriving at the profits in a particular year.

After analysing the terms of the contract in that case, <NAME>, L.J., observed:

The real liability under the contract so far as replacement of utinsils goes was a contingent liability. It is a liability which would not arise until termination of the contract and it was contingent upon the inability of the caterers in the meanwhile to replace the utensils. In that sense it is, I think, correct to say that the real liability under the contract was a contingent one.

14. It was the same principle that was laid down in <ORG> v. <ORG>) 12 T.G. 773, at page 781:

...A prudent commercial man may put part of the profits made ,in one year to reserve, and carry forward that reserve to the next year, in order to provide against an unexpected, or (it may be) an inevitable, loss which he foresees will fall upon his business during the next year. The process is a familiar one. But its adoption has no effect on the true amount of the profits actually made, and does not prevent the whole of the profits, whereof a part is put to reserve, from being taken into computation in the year in question for purposes of assessment. On the contrary, the balance of profits and gains is determined independently altogether of the way in which the trader uses that balance when he has got it; and, if he puts part of it to reserve and carries it forward into the next year, that has no effect whatever upon his taxable income for the year in which he makes the profit.

Earlier the Lord President observed:

It is a general principle, in the computation of the annual profits of a trade or business under the Income-tax Act s, that those elements of profit or gain, and those only, enter into the computation which are earned or ascertained in the year to which the enquiry refers; and in like manner, only those elements of loss or expense enter into the computation which are suffered or incurred during that year At page 782 the Lord President stated:

I confess to thinking that it would be a dangerous innovation to allow apprehended losses in fuluro to constitute proper matter for deduction from the present profits of commercial undertakings.

He restated this later when he observed:

...this only serves to make it plain that what they are seeking to do is to put against the actual ascertained receipts from their business in one period a loss which is neither suffered nor incurred in that period. I know of no justification for this, either under the rules or principles of the Income-tax Act s or in ordinary commercial accounting.

In <ORG> v. <ORG> T.C. 1017, the assessee company which carried on business in mining, held their mines on leases which contained the usual covenants for the repair and maintenance of the mines, pits, roads, etc. Owing to national stoppage in the coal mining industry, the company was forced to close down their mines from 1st April, 1921 to 2nd July, 1921. The stoppage of work resulted in severe damage to the mines involving considerable amount of expenditure to recondition the mines. The reconditioning work was commenced after 2nd July, 1921. For the period of account, from 1st April, 1921 to 30th June, 1921, the assessee debited itself in its accounts with the cost of reconditioning the mines, though no expenditure was made until after the end of the accounting period. It was ultimately held by <ORG> that the costs of reconditioning was not a proper deduction in computing the results of the assessee company's trade for the accounting-period ending 30th June, 1921. Lord <NAME> observed at page 1048:

According to the appellants' contention, however, it is not the actual expenditure that is deducted but the need for making the expenditure which is to be measured in their favour and brought into the account. This contention would involve the conclusion that the subject could choose which period he liked as the one in which the allowance is to be brought into account, either that when the expenditure became necessary or that when it was made.

The contention was repelled. If we apply the principle of that contention to the claim of the assessee before us, logically he should be in a position to claim a deduction in any of the years 1942-43, 1943-44, 1944 45 or 1945-46 at his choice. That certainly would not disclose a true picture of the assessable profits made in the year 1942-43. At page 1049 Lord <NAME> observed:

The appellants say that in an Income-tax sense this sum is a proper debit against the profit of the three months in question, because, although it was neither spent in fact nor incurred as a debt in that time, it was a prospective liability which would have to be satisfied at another time and as soon as possible. The money was spent to enable profits to be made after 30th June, 1921, not to enhance those made before that date. ...It seems to me like saying that a man is entitled to charge supper in his expenses for Sunday night because, though he went supperless to bed, he orders something extra for his breakfast on Monday morning.

In <NAME> and <NAME>'s Principles of Income-tax Taxation at page 534 the learned authors quoted the dictum of the Lord President in <ORG> v. <ORG>) T.R. 149:

It seems to follow that, if in the earlier period there is only a provisional or contingent liability it is not until it has been subsequently determined to be an actual liability by admission or decision that it can properly be brought into computation....

15. The position is thus summed up in Simon's Income-tax, second edition, Vol. II, paragraph 230, at page 203:

In computing the profits of a trade it is the normal accountancy practice to allow as an expense any sum in respect of liabilities which have accrued over the accounting period, and to make a deduction of such sums from the profits. Following the decision in <ORG> v. <NAME> (Inspector of Taxes)(1948) 30 T.C. 496, however, it appears that the nature of liabilities which may be deducted on business and accountancy principles does not accord with the nature of liabilities deductible for income-tax purposes. For income-tax purposes it was held that a distinction must be drawn between an actual, i.e., legal liability, which is deductible, and a liability which is future or contingent and for which no deduction can be made.

16. The position under Section 10(2)(xv) of the Indian Income-tax Act is the same as the learned authors pointed out in <NAME> and <NAME>'s Income-tax, third edition, at page 500:

This clause allows deduction only in respect of expenditure. A contingent liability is not expenditure and therefore cannot be subject of deduction under this clause.

17. Thus the position is that, even had the assessee firm in this case debited itself with the entire amount of Rs. 1,19,177 in the year of account 1942-43, it would have represented only an estimate of its contingent liability and would not have furnished a real basis for a claim to deduct that amount under Section 10(2)(xv) of the Act. What the assessee really asked for in this case was that the expenditure actually incurred in its year of account 1945-46 should be related back to the year of account 1942-43 in computing the assessable profits for 1942-43. There should be no difficulty in repelling that claim. The position is thus summed up in <ORG>, second edition, Vol. II, paragraph 181, at page 161:

When a sum has been charged as a trade expense for a certain accounting period, no adjustment of the amount can, as a rule, be made. If, however, a liability had accrued in the accounting period in question, but the amount to be charged is subsequently altered, there may be a case for re-opening the account for the previous period so as to substitute the ascertained amount for the amount charged for that period. The question is to some extent a question of fact, but the principle is that if the liability accrued in the earlier period, the subsequently ascertained amount must be related back to that period; while if no liability had accrued in the earlier period, the item has to be brought into account for the period in which the liability arose.

In the case of the assessee it was only a contingent liability in 1942-43. The liability arose in the year of account 1945-46 when the claim was made, and after it had been admitted the liability of the assessee was ascertained. It could not be related back as a proper item of expenditure in 1942-43.

18. The learned Counsel for the assessee invited our attention to <NAME> v. <NAME> T.C. 649, where it was held that, if on the discontinuance of trade a payment for work already done has not been finally settled, the accounts could be re-opened so as to bring in a payment for such work, even though it is gratuitous, which is made thereafter. That related to a receipt after the period of account. In view of the true principle applicable to relating back of expenses, we see no scope for extending the principle laid down in <NAME>'s case35 T.C. 649, to the claim of the assessee.

19. Our conclusion on this part of the case is that, even if the sum the assessee had eventually to pay in 1945-46 as liquidated damages for breach of its contractual obligations had constituted a permissible deduction under Section 10(2)(xv) of the Act, such a claim could not have been allowed in the assessment year 1944-45, in computing the assessable profits for the accounting year 1942-43.

20. We shall next deal with the question whether the requirements of Section 10(2)(xv) could be satisfied, i.e., whether the expenditure had been laid out or expended wholly and exclusively for the assessee's business.

21. What the Income-tax-Act in England does not permit among other things is (1) any disbursements or expenses not being money wholly and exclusively laid out or expended for the purpose of trade (Rule 3-a) and (2) any loss not connected with or arising out of trade (Rule 3-c). The interdependence of the two provisions as well as the distinction between them was pointed out by <ORG>, in <CITATION> (1932) 17 T.C. 59 at 64.

...no doubt they do run rather close to each other, but I cannot help thinking that there is a distinction between (a) and {e). Now a case might be put in which it was not easy to say whether a thing was a disbursement or expense or was a loss. It is conceivable--such things sometimes happen--that there may be cases in which a thing might fall alternatively--it might be either within (a) or within (e), but, none the less, I do think that there is a distinction to be drawn between the two: (a) relates to disbursements; that means something or other which the trader pay out; I think some sort of volition is indicated. He chooses to pay out some disbursement; it is an expense; it is something which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which, so to speak, comes upon him ab extra. It is not very easy to formulate the thing but it is easy enough to put illustrations falling on one side or the other of the line which may show what is, I think, the distinction, and the real distinction, between these things.

In this case we are concerned with a disbursement or expense; but unless it was connected with or arose out of the assessee's business, there could be no further question of the expenditure having been incurred wholly and exclusively for its business.

22. In the oft-quoted passage from the speech of Lord <NAME>, L.C., in Strong v. WoodifieldL.R. (1906) A.C. 448 at 452 : 5 T.C. 215at 219, he laid down:

In my opinion, however, it does not follow that if a loss is in any sense connected with the trade it must always be allowed as a deduction; for it may be only remotely connected with the trade, or it may be connected with something else quite as much as or even more than with the trade. I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation or fall on the trade in some other character other than that of trader. The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers for accidents in travelling might be deducted. On the other hand, if a man kept a grocer's shop, for keeping which a house is necessary, and one of the window shutters fell upon and injured a man walking in the street, the loss arising thereby to the grocer ought not to be deducted. Many cases might be put near the line, and no degree of ingenuity can frame a formulla so precise and comprehensive as to solve at sight all the cases that may arise.

What Lord <NAME> observed in the same case has been applied as consistently by Courts in India as in England. Lord <NAME> said:

...for the purposes of the 'trade'. These words are used in other rules and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, etc. I think disbursements permitted are such as are made for that purpose.

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 purposes of earning the profits .

23. The application of these principles has led to the position which may be taken as well settled now, that payments of penalties for infraction of the law fall outside the scope of permissible deductions. The penalty in any such case is imposed as a punishment on the offender as a responsible person owing obedience to the law. Its nature severs it from the expense of trade. It is not incurred by him in his character of trader.

24. The principle laid down by <NAME>, J., in the Commissioners of Inland Revenue v. <NAME> & Co., Ltd.(1919) 12 T.C. 277, and followed by him in The Commissioners of Inland Revenue V. Alexander Von Glehn & Co., Ltd.(1920) 12 T.C. 232, was approved of by <ORG> in <NAME> case(1920) 12 T.C. 232.

25. In <NAME>'s case(1919) 12 T.C. 277, Rowlatt, J., observed:

I may shelter myself behind the authority of Lord <NAME>, who, in his judgment in <ORG> in Strong ,& Co. v. Woodifield L.R. (1906) A.C. 448 at 452 : 5 T.C.215 at 219 said that it is impossible to frame any formula which shall describe what is a loss connected with or arising out of a trade...but it seems to me that a penal liability of this kind cannot be regarded as a loss connected with or arising out of a trade. I think that a loss connected with or arising out of a trade must, at any rate, amount to something in the nature of a loss which is contemplable, and in the nature of a commercial loss. I do not intend that to be an exhaustive definition, but I do not think it is possible to say that when a fine, which is what it comes to has been inflicted upon a trading body, it can be said that, that is 'a loss connected with or arising out of' the trade....

26. In <NAME> case(1920) 12 T.C. 232, Lord <NAME>, M.R., pointed out at page 235 of the report:

Now...such proceedings as those are not technically criminal proceedings. I do not think that matters. They certainly are proceedings in which a penalty is being sued for by the Attorney General as representing the <ORG>, for an infraction of the law, whether technically criminal for the purpose of appeal, seems to me to be immaterial. The money which is paid is money paid as a penalty, and it does not matter in the least that the Attorney-General has elected to take treble the value of the goods, nor does it matter that it may be called in the information a forfeiture. It is in fact, under the section, a penalty.

At page 237 the learned Master of the Rolls pointed out that no moral obliquity attached itself to the conduct of the assessee who had to pay a penalty, but he observed that that made no difference. At page 238 the learned Master of the Rolls-observed:

Now what is the position here ? This business could perfectly well be carried on without any infraction of the law at all. This penalty was imposed because of an infraction of the law and that does not seem to me to be, any more than the expense which had to be paid in the case of Strong v. Woodifield L.R. (1906) A.C. 448 at 452 : 5 T.C.215 at 219, appeared to Lord <NAME> to be, a disbursement or expense which was laid out or expended for the purpose of such trade,...nor does it seem to me, though this is rather more questionable,to be a sum paid, on account of a loss connected with or arising out of such trade....

Warrington, L.J., observed at page 241:

Now it cannot be said that the disbursement in the present case is made in any way for the purpose of the trade or for the purpose of earning the profits of the trade. The disbursement is made, as I have already said--and the same remark applies to this rule as to the other because the individual who is conducting the trade has, not from any moral obliquity, but has unfortunately, been guilty of an infraction of the law.

Scrutton, L.J., was of the view, that the payment of the penalty in that case was an unfortunate incident that followed after the assessee, <NAME>, had earned his profits.

27. The principles laid down in <NAME>' case(1919) 12 T.C. 277, and <NAME> case(1920) 12 T.C. 232, were applied in <NAME> v. <NAME> and Chemicals Ltd.31 T.C. 202: The law infraction of which was alleged in that case, was the law of the United States. The assessee was assessed to tax under the English law. After referring to the dictum of Lord <NAME> in <NAME> case(1920) 12 T.C. 232, that whether the proceedings in which the penalty was incurred were criminal proceedings or not did not matter, <NAME>, J., observed:

I can see no distinction in law as to whether the proceedings were proceedings to recover sums of money of this sort pursued in an American <ORG> or in an English <ORG>.

Dealing with the contention, that <ORG> and <ORG>, paid the money in question to ensure continuity of supplies from America, <ORG>, observed at page 211:

But when one is asked to say that the 16,000 dollars were wholly and exclusively expended in order to get the supplies, so to do would be to shut one's eyes, as I think, to the plain facts. There is no evidence that it was paid, "wholly and exclusively" for that purpose. It was one of the reasons--it was paid but it manifestly was not the only reason. One of the reasons was to get as cheaply as possible a settlement with the American authorities, paying something by way of compromise--agreeing with one's adversary while one is in a way with him. That is really what happene'd here.

The learned Judge held that the payment was not an admissible deduction.

28. Though the claim for deduction was upheld in <CITATION> , it was on the application of the principle laid down by Lord <NAME>, L.G., in Strong v. <NAME>. At page 563 <NAME>, G.J., observed:

Now, applying these two tests to the facts of the case, in my opinion, both the tests are satisfied because the loss is incidental to the trade because it was in the course of its business of selling stationery that the directors were charged with having contravened the law and also in its capacity as a trader that the company was called upon to defend its directors and the salesman Earlier the learned Chief Justice pointed out that the expenses for the litigation were not incurred by the persons charged with the offences themselves, but they were incurred by the company in order to save those persons from the consequences of the prosecution. We have referred to this case only to show that the principles laid down in <NAME> v. <NAME>, were not departed from in deciding whether the deduction claimed by the assessee, <ORG>, under Section 10(2)(xv) was permissible.

29. The learned Counsel for the assessee referred to <CITATION> (1939) 7 I.T.R. 269, and <CITATION> (1948) 16 I.T.R. 412; in support of his contention, that the illegality of a transaction was not really relevant. In both these cases the question at issue was whether the income derived from a partnership, the constitution of which was illegal, was assessable to tax. These decisions leave untouched the principle which we referred to earlier, that a payment by way of penalty for an infraction of law will not come within the scope of Section 10(2)(xv) , which requires that the expenditure should have been incurred wholly and exclusively for the assessee's business.

30. The next class of cases to which we shall refer, decided again on an application of the principles laid down in Strong v. WoodifieldL.R. (1906) A.C. 448, dealt with payments by way of damages or compensation. In Income-tax Appellate Tribunal, Bombay v. <NAME>) 14 I.T.R. 206, after considering the scope of the principles laid down in <NAME>' case (1919) 12 T.C. 227, and <NAME> case(1920) 12 T.C. 232, and in Strong v. WoodifieldL.R. (1906) A.C. 448, the learned Judges applied the principle laid down by <ORG> is <CITATION> (1940) 8 I.T.R. (Supp.) 41, and observed at page 215:

The assessee <NAME> was not convicted for infringement of the trade mark. The suit against him was not decided on merits. An appeal was filed against an interlocutory order in a pending suit. The compromise of the claim did not amount to an admission that he had committed an infringement of the trade mark. Instead of carrying on an expensive and uncertain litigation he considered it more prudent to compromise the claim in order to minimise his losses or to save him from the the payment of damages in case the suit was ultimately decided against him. The amount of Rs. 2,000 which he paid was not on account of a penalty for infringement of the trade mark but was solely on account of costs incurred by the plaintiff in the suit....In the carrying on of his business he was involved in a litigation and he was bound to defend the case and conduct it in a prudent manner which would be for his benefit and would minimise his losses. The expenditure was laid out or expended wholly and exclusively for the purpose of such business.

We fail to see how this decision, where the facts as found were totally different from those we have to consider in this case, helps the assessee.

31. <CITATION> (1940) 8 I.T.R. (Supp.) 41, the company paid £7,500 in settlement of a claim for damages for defamation. That payment was under a compromise entered into between the assessee company and Mr. <NAME>. The claim of the asses-see company, that the payment constituted a permissible deduction,was upheld by <ORG>, affirming the decision of <ORG> At page 53, <ORG> pointed out:

...there is no evidence upon which the Commissioners could find that the object of <ORG> in entering into the compromise was anything except to obtain payment of as much of the balance of the account as they could persuade Mr. <NAME> to agree to, and that account being, as I have said, a trading account,it seems to me that the compromise was a compromise effected for the purpose of the company's trade and for the purpose of enabling them to recover the payment of a trading debt owing to them from a customer, which would come into computation in their trading account. On that basis, payments made as a condition of obtaining that compromise which secured that payment to them would have been payments wholly and exclusively laid out or expended for the purposes of the Appellant company's trade The other basis on which the claim for the deduction was upheld was, that it was a payment to get rid of a trading relation that was disadvantageous (see the observations of <ORG>, at page 55). The test to apply was the same. Only in the case of <CITATION> (1940) 8 I.T.R. (Supp.) 41, the finding was that that test was satisfied.

32. The decision in <ORG> v. Federal Commissioner of Taxation48 C.L.R. 113 was the one on which the learned Counsel for the assessee relied to a considerable extent. In that case the appellant assessee, which was the proprietor and publisher of an evening newspaper, claimed to deduct from its assessable income moneys paid by way of compensation, either before or after judgment, for damages in respect of defamatory matter published in that paper, and amounts incurred by way of costs in contesting the claims of persons defamed and in obtaining advice in regard thereto. The <ORG> by a majority held that the monies so disbursed were wholly and exclusively laid out or expended for the production of assessable income. That decision of the majority was based on the application of the tests laid down in Strong v. Woodifield L.R. (1906) A.C. 448. <NAME>, C.J., and <NAME>, J., pointed out that the distinction between the case before them and Strong v. Woodified L.R. (1906) A.C. 448, lay in the degree of connection between the trade or business carried on and the cause of the liability for damages. At page 119 the learned Judges pointed out:

When it appears that the inclusion in the newspaper of matter alleged by claimants to be defamatory is a regular and almost unavoidable incident of publishing it, so that the claims directly flow from acts done for no other purpose than earning revenue, acts forming the essence of the business no valid reason remains for denying that the money was wholly and exclusively expended for the production of assessable income Earlier at page 118 the learned Judges observed:

None of the libels or supposed libels was published with any other object in view than the sale of the newspaper. The liability to damages was incurred or the claim was encountered, because of the very act of publishing the newspaper. The thing which produced the assessable income was the thing which exposed the tax-payer to the liability or claim discharged by the expenditure.

<NAME>, J., put it thus:

As publication is the common source of income and liability, the necessary connection between the carrying on of the business of newspaper and the liability which causes the expenditure is complete.

The claim of the assessee before us is on a totally different footing, as we shall presently show.

33. Equally storng reliance was placed by the learned Counsel for the respondent on <CITATION> (1943) 11 I.T.R. 454 : (1943) 2 M.L.J. 274. In that case the assessee firm, which was carrying on business in crackers, entered into a contract with other proprietors in the same line of business, under which the assessee's goods were to be sold at certain specified rates, but in breach of this contract the assessee sold crackers at lower rates. In a suit for damages for breach of contract instituted by the other parties a decree was passed against the assessee for Rs. 5,000 and costs. The assessee claimed the amount paid by the assessee under the decree as lawful deduction. That claim was negatives. After referring to the principles laid down in <NAME>' case(1912) 12 T.C. 277 and <NAME> case(1910) 12 T.C. 232, the learned Chief Justice observed at page 462:

In the present case, the assessee was not fined for a breach of law, but was made to pay damages for a breach of the contract entered into. The assessee's action in disregarding the undertaking given was palpably dishonest and we are of the opinion that the award of damages which followed did not constitute an expenditure falling within Section 10(2)(xv) . It was not incidental to the trade.

The learned Chief Justice further observed:

This is not a case of conducting a business in a negligent manner; it is a case of conducting a business in a dishonest manner.

34. In <NAME> v. Commissioner of Income-tax, Madras(1955) 28 I.T.R. 235 : (1955) 2 M.L.J.579, we had occasion to refer to the decision in <CITATION> (1943) 2 M.L.J. 274 : 11 I.T.R. 454, when the correctness of that decision was not challenged. The learned Counsel for the assessee invited us to differ from the principles laid down in <NAME>'s case(1943) 2 M.L.J. 274 : 11 I.T.R. 454. It may not be necessary to examine in this case the full implications of the decision in <NAME>'s case(1943) 2 M.L.J. 274 : 11 I.T.R. 454, or the correctness of the extension of the principles of the English decisions which it might involve. In any event we do not understand the learned Chief Justice to have laid down that, where a wilful breach of con tract has been established, that is sufficient proof of dishonesty which would disentitle the assessee from preferring any claim under Section 10(2)(xv) of the Act for damages paid for breach of contract. As we shall presently show, it is not necessary to rest our decision in this case merely on the basis, that the conduct of the assessee before us, when he committed the breach of the contract, was palpably dishonest."

35. In Commissioners of Inland Revenue v. <ORG>) 33 T.C. 91 <NAME>, <NAME>, in dealing with the contention, that the £25,000 paid as damages by the company was for fraud and deceit on its part or was akin to such damages, observed, at page 93:

If it is fraudulent and deceitful then the penalty it pays by way of damages cannot be deducted as a trading expense any more than could the penalty in Commissioners of Inland Revenue v. <NAME>) 12 T.C. 232.

Possibly it was only the argument that was set out, because the learned Judge observed next:

For the respondent company it was argued that even were the £25,000 damages, or akin to damages, for fraud and deceit, it would still be entitled to deduct that sum in computing its taxable profits, but as this question, in my view, does not arise I say nothing about it.

The last of the cases we have to refer Tto on the question of damages is <NAME> v. Hall(1947) 28 T.C. 200. In that case, the assessee <NAME> had to pay £3,575, damages and costs, in an action for malicious libel. After referring to the principle laid down in <NAME> v. <NAME> (1906) A.C. 448, Macnaghten, J., observed at page 205:

In the present case the loss which the Appellant has sustained, £550, damages, and £3,025, costs is in one sense a loss connected with his trade. Apart from his desire to injure Mr. <NAME>, the Appellant also desired to increase his own profits. He had that motive. He could only have increased his profits if he succeeded in giving an advantage to his own clients in Cuba or a disadvantage to the rivals of his clients. It is a case that falls, it seems to me, exactly within the words of Lord <NAME>, who said that the losses " cannot be deducted if they are mainly incidental to some other vocation, or fall on the trader in some character other than that of a trader." The loss fell upon the Appellant in this case in the character of calumniator of a rival sugar broker. It was only remotely connected with his trade as a sugar broker As we said, these cases were all virtually decided on the application of the test laid down in Strong v. WoodifieldL.R (1906) A.C. 448. It is not enough if the loss sustained or expenditure incurred is in some sense connected with the trade, for it may be only remotely ccnneeded with the trade or it may be connected with something else quite as much or even more than with the trade. Only such losses can be deducted as are connected in the sense that they are really incidental, to the trade itself. 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 purposes of earning the profits.

36. Before we discuss whether these tests have been satisfied by the assessee, we have to verify, what the nature of the payment was. No doubt the assessee firm paid the amount of Rs. 1,19,177 in discharge of the contractual obligation it had entered into with <ORG> to pay an ascertained sum as liquidated damages for breach of contract. The contractual obligation, the performance of which the asessee defaulted, was to export the coffee which had been sold to it at a concessional price only because it was earmarked for export abroad. The other contracting party, <ORG>, was a statutory body created by the Coffee Market Expansion Act (VII of 1942). The control <ORG> exercised over the sales of coffee, whether for ultimate export out of India or for sales within India, had a statutory basis. It is true the Act itself did not in express terms prohibit sale within India of coffee sold by the <ORG> for export. That what was broken by the assessee was a term of the contract and not an express provision of law does not, in the circum-stances of this case, make any real difference to the principle to be applied. It was in exercise of the statutory duties imposed on the <ORG> to regulate and control sales of coffee produced in India, in the interests of the national economy of the country, that the <ORG>, through the instrumentality of a contract, virtually laid an embargo on sale within India of coffee that had been sold at a concessional rate for the specified purpose of export. It was that that the assessee transgressed, when it deliberately and without any apparent excuse, sold the coffee within India. What it had to pay was no doubt called liquidated damages. But the payment was really akin to a penalty for committing an act opposed to public policy, a policy that underlay the Act, which the Act left to <ORG> to enforce. The assessee could and should have carried on its business in coffee in conformity with the obligations imposed upon it, no doubt, by a contract, but under the authority of the Coffee Market Expansion Act and in furtherance of the policy of control that underlay that Act. It could have carried on the bsusiness without infraction of its obligations. That should have been its normal course of conducting its business.

37. Could it be claimed by the assessee, in the circumstances of this case, that what it did by selling the coffee with in India was incidental to the trade itself that if carried on ? Its business was among other things to buy and sell coffee. Puchases and sales of coffee were regulated by the Act and by <ORG> under the provisions of that Act. It was subject to that statutory control that the assessee had to carry on its business. Transgression of that control was not a normal incident of that business, though it was in one sense connected with its business. If it had not been a dealer in coffee, it could not have been in a position to buy coffee for export; and if it had bought coffee for export, it would not have been in a position to sell that coffee within India. But that connection is not enough to sustain the claim, that what the assessee had to pay <ORG> was inextricably mixed up with its normal line of business. The breach of its contractual,obligation to the <ORG> was not in the normal course of business, and the liability the assessee had to discharge for such a breach was not incidental to the trade itself that it carried on.

38. From what we have said above it should be clear that it was not a case of a payment of damages for a mere breach of contract with nothing more. It was not of course a case of penalty paid under the terms of a statute for contravention of any specific statutory provision. In the circumstances of this case the liquidated damages, claimed and paid was, however, more akin to a penalty than the damages suffered for breach of contract in the course of normal trading activities, whether or not that breach of contract was also dishonest. That is why we said that it may not be necessary to rest our decision in this case on the rule laid down in <NAME>'s case(1943) a M.L.J. 274 : 11 I.T.R. 454. In out opinion it is the principle laid down in <NAME> case(1920) 12 T.C. 232, that should be extended and applied to negative the claim of the assessee in this case. To adapt the words of <NAME>, M.R., in <NAME> case(1920) 12 T.C. 232, the assessee's business could perfectly well be carried, on without any infraction of the obligations laid on the assessee by <ORG>, entrusted with the statutory duty of controlling and regulating sales of coffee. A penalty was imposed because of an infraction of these obligations, and the money was not expended or laid out for purposes of the trade which the assessee carried on. Or in the words of <NAME>, L.J.

Were these fines made or paid for the purpose of earning the profits ? The answer seems to me to be obvious that they were not, they were unfortunate and in this case we would add, justly deserved incidents which followed after the profits had been earned.

39. The learned Counsel for the assessee relied on <CITATION> (1950) 2 M.L.J. 33 : 18 I.T.R. 357, in support of his contention, that the sum of Rs. 1,19,177 paid in 1945-46 as damages should really be viewed as addition to the price that the assessee had to pay for the coffee it had purchased and sold in 1942-43. We are unable to see any real basis on the facts proved in this case to apply the principle laid down in <CITATION> (1950) 2 M.L.J. 33 : 18 I.T.R. 357. It could not be the case of the asses-see that it purchased the coffee for sale in India, with a pre-existing contractual obligation to pay a higher price, to be quantified on ascertainment at a later stage. It should be remembered that it was in breach of its contractual obligations that the assessee sold the coffee in India.

40. The <ORG>, in our opinion, was right in rejecting the claim of the assessee. The requirements of Section 10(2)(xv) were not satisfied. The payment was not even really incidental to the trade itself, as that principle was explained by <ORG>, in Strong v. WoodifieldL.R. (1906) A.C. 448.

41. We answer the question referred to us in the negative and against the assessee. Since the assessee has failed, the assessee will pay the costs of this reference. Counsel's fee Rs. 250.


JUDGMENT <NAME> and <NAME>, JJ.

1. The petitioner, were initially appointed as Junior Engineers in the Mandi Parishad. One <NAME> was also appointed as Junior Engineer in the Mandi Parishad. He was promoted on 15.6.1991 on the post of Assistant Engineer in stop-gap arrangement and thereafter on 11.9.1997 he was promoted on the post of Deputy Director (Electrical Mechanical). The remaining petitioners who were Junior Engineers were promoted on stop-gap arrangement as Assistant Engineers on different dates in the year 1995 and 1996. Being aggrieved against their 'reversion' to the post of Junior Engineer, all the petitioners have preferred writ petitions before this Court.

2. The factual matrix as set out in these writ petitions is that In the meetings dated 2.8.1995 and 19.9.1995, <ORG> increased the strength of Assistant Engineers from 72 posts to 100 posts and increased the posts of Assistant Engineers (Electrical Mechanical) from 11 to 30 posts. In pursuance of the said increased strength, the Director of <ORG> passed orders of promoting the petitioners except <NAME> on the post of Assistant Engineer in the stop-gap arrangement. Mr. <NAME> was promoted on the post of Deputy Director (Electrical Mechanical). Thereafter, the Director of <ORG> reverted all the petitioners on the post of Junior Engineer mainly on two grounds, firstly ; that the posts upon which the promotions were made, vacancies were not available and secondly ; that the promotions were made ignoring the seniority list.

3. The thrust of the learned counsel for the petitioners in these writ petitions are two fold, firstly, that the strength was increased by <ORG> itself, and hence the strength cannot be reduced by the Director by reverting the petitioners, and secondly, that the principle of audi alteram partem was not followed, inasmuch as, in pursuance of ad hoc promotions on the stopgap basis the petitioners joined the posts and were working on the promoted posts. The order of reversion has adversely affected their rights and hence without giving them an opportunity to show cause such an order could not have been passed.

4. From the side of the respondents it has been averred in the counter-affidavit that the resolutions passed by <ORG> on 2.8.1995 and 19.9.1995 were not approved by <ORG>. By means of its order dated 3.11.1995, <ORG> was directed to stop the follow up action with regard to the resolutions passed in the aforesaid meetings, till further orders, and <ORG> was directed to forward those resolutions to <ORG> for approval.

5. Mr. <NAME>, learned counsel for the petitioners, has drawn the attention of this Court to the contents of the said direction issued by <ORG>, wherein, it was indicated that <ORG> had taken such a decision pertaining to the service conditions of its employees which was beyond the jurisdiction of <ORG> and the provisions contained in the Regulations. Such a resolution could not be implemented without relaxing the provisions contained in the service regulations. The said direction also indicated that in accordance with the provisions contained in 0 26F (2) of the U. P. Krishi Utpadan Mandi Adhiniyam, 1964 (hereinafter referred to as the Act) the approval of <ORG> was not taken and the <ORG> in its resolutions has relaxed the eligibility clause of the regulation unauthorisedly. The contention of Mr. <NAME> appears to be that, that direction was confined to the provisions contained in Section 26F (2) only. Section 26F of the Act reads as under:

"26F. Appointment of officers and servants.--(1) The <ORG> may appoint such officers and servants as it considers necessary for efficient performance of its functions on such terms and conditions as may be provided for in regulations made by the <ORG>.

(2) The <ORG> may, with the previous approval of <ORG>, appoint a servant of <ORG> or <ORG> as an officer or servant of the <ORG> or of <ORG> on such terms and conditions as it thinks fit."

6. In the light of the provisions contained in Section 26F of the Act and the direction of <ORG>, dated 23.11.1995, this Court has to examine as to whether the direction of <ORG> was confined only to sub-section (2) of Section 26F of the Act or not. From a perusal of the entire direction issued by <ORG>, it appears that <ORG> had raised objections about the resolutions passed by <ORG> in its meetings dated 2.8.1995 and 19.9.1995 which were beyond the powers of <ORG> and the same could not be done without relaxing the provisions of the Act. and the Regulations and the same could not be implemented. After issuing this direction, reference to Section 26F (2) was mentioned, and thereafter an illustration was given that In the meeting dated 2.11.1995 at item No. 6 which pertains to eligibility conditions of the employees, the same was relaxed without the approval of <ORG>, as that power was vested to <ORG> only. At the end of that direction, <ORG> directed that till further orders of <ORG> implementation of that part of the resolution pertaining to the increase of the strength of Junior Engineers should be stopped and the resolution be sent to <ORG> for approval.

7. In view of the aforesaid situation, it cannot be said that the direction of <ORG> was confined only to the extent, what is provided under sub-section (2) of Section 26F of the Act.

8. Now it has to be seen as to whether <ORG> has been vested with any power to issue such directions to the Mandi Parlshad or not. Before dealing with the relevant clause, it is relevant to mention here that the Mandi Parlshad is a creation of the State as mentioned in Section 26A of the Act which provides that <ORG> shall, by notification in the <ORG>, and with effect from a date to be specified therein, constitute a Board (which herein before or after mentioned as <ORG>) by the name of <ORG> with its head office at Lucknow. Section 26M of the Act which provides for the power of <ORG> to issue directions is reproduced below :

"26M. Directions on questions of policy.--(1) In the discharge of its functions, the Board shall be guided by such directions on question of policy as may be given to it by <ORG>.

(2) If any question arises whether any matter is or is not a matter in respect of which <ORG> may issue a direction under subsection (1), the decision of <ORG> shall be final."

Mr. <NAME> contended that <ORG> is undoubtedly vested with power to issue directions, but that direction should pertain only to the policy and not to the powers of the <ORG> to make appointments. Hence any such direction by <ORG> would be of no value.

9. Section 26L of the Act deals with the powers and functions of the <ORG> which is exhaustive in nature by vesting several powers to the <ORG>. but Section 26 is silent on the question as to whether the <ORG> has been vested with a power to increase the strength of the staff or not. Does it mean that the <ORG> has an unfettered right to appoint as much people as it desires, without any consideration of resources available to it. for payment of the salaries to its employees.

10. We are of the view that as the Act does not vest to the <ORG> any power to increase the strength of the staff, while increasing the strength of the staff, the income and the resources of the <ORG> must have to be taken into account, but unfortunately that was not done. Increase of the staff is related to requirement of the posts, resources and income of the <ORG>. It is matter of policy and <ORG> has been vested with a power under Section 26M of the Act to issue such a direction. Probably for that reason, <ORG> exercised its power under Section 26M of the Act. and issued a direction to the <ORG>. not to implement the resolutions which it had passed and send it to <ORG> for approval. The <ORG> has no option except to implement the directions, as the <ORG> is to be guided by such directions, issued by <ORG>.

11. The question as to whether this direction pertains to the policy matter or not can be looked into, by the <ORG> itseif. Sub-section (2) of Section 26M provide that In such a situation, the <ORG> will decide as to whether any matter is or is not a matter in respect of which the <ORG> Government may issue a direction under sub-section (1) and in that regard, the direction of the <ORG> Government shall be final. Hence the arguments of Mr. <NAME>. that the matter did not pertain to a policy and hence that direction was illegal has no substance. There is another aspect of the matter that In these writ petitions that direction of the <ORG> Government has not been assailed. Hence this plea is not sustainable.

12. The other limb of the arguments of Mr. <NAME> is based on certain observations of <ORG> in <CITATION> ond others, as well as <CITATION> . AIR 1991 SC 309, wherein it has been indicated that if the appointment has been cancelled, then it is incumbent upon the authority, passing such ah order, to give opportunity to the person, against whom such an order was passed, and to give a finding whether the appointments were validly made. Similar observations were made in <NAME> v. State of U. P. and others. (1995) 2 UPLBEC 827, wherein a Division Bench of this Court, has observed that "whether it was ad hoc (appointment) or it was permanent would not go to create any defect in the selection procedure. Once the petitioners had been selected, their cases for subsequent consideration must be. by the same <ORG>, which had been constituted, under the rules then in force, to throttle the rights of the petitioners, by changing the <ORG> and also the criterion for promotion is taken away the vested right of each of the petitioners. In the last <ORG> quashed the impugned orders and directed the respondents to re-consider the matter of the petitioners' regularisation/confirmation by a validly constituted committee in accordance with applicable rules.

13. Before dealing with the question as to whether the principles of audi alteram partem can be attracted in the instant case or not, it would be worthwhile to consider the service regulations of the Utter Pradesh Agricultural Produce Markets Board (Officers and Staff Establishment) Regulations, 1984 (hereinafter referred to as the Regulations) which have been framed by <ORG> with the previous approval of <ORG> in exercise of the powers under Section 26X of the Act (U. P. Act No. XXV of 1964).

Regulation 10 (2) (b) of the Regulations provides :

"50 per cent posts in class B shall be filled by promotion and 50 percent by direct recruitment."

Regulation 10 (4) of the Regulations provides :

"Promotion shall be confined to the posts within the same group as detailed in Appendix 'C' and shall be subject to the conditions (of) eligibility for promotion to different posts as mentioned therein."

Regulation 9 of the Regulations provides that the appointing authority of all posts in class B shall be the Director.

14. Regulation 11 of the Regulations which provides for the procedure for recruitment of classes 'A' and 'B' posts is reproduced below :

"11. (1) For the purposes of recruitment to Classes 'A' and 'B' posts, whether by direct recruitment of by promotion there shall be constituted <ORG> comprising the following :

(i) Two officers not below the rank of Deputy Secretary to be nominated by the Secretary to the State Government in <ORG>.

(ii) Three officers not below the rank of Deputy Director to be nominated by the Director.

(iii) The Chairman of <ORG> shall be nominated, by the Secretary of <ORG> in <ORG>, out of the members represented in class (i) and (ii).

15. Regulation 12 of the Regulations provides that:

"12. (1) The appointing authority shall determine the number of vacancies, in all the classes A, B, C and D, to be filled during the course of the year as also the number of vacancies to be reserved for candidates belonging to Scheduled Castes, Scheduled Tribes and other categories under Regulation 8.

(2) The vacancies in class 'B' posts shall be advertised in at least two leading newspapers of the State, for the posts in class 'C' and 'D' vacancies shall be notified to <ORG> in accordance with the rules and orders for the time being in force.

(3) When the applications of the candidates have been received in response to the advertisement made under sub-regulation (2) or the names are received through the employment exchanges, the appointing authority shall fix a date for selection and forward the applications and names to <ORG>.

(4) <ORG> shall scrutinise the applications and prepare a list of eligible candidates. The Committee shall, having regard to the need for securing due representation of the candidates belonging to Scheduled Castes, Scheduled Tribes and other Categories in accordance with Regulation 8, call the eligible candidates for test and/or Interview as it may decide. In the case of selection to classes 'C' and 'D' posts procedure prescribed for appointment to these classes of posts under <ORG> shall be followed. The committee shall prepare list of candidates in order of merit as disclosed by the marks obtained In the test and/or interview. If two or more candidates obtained equal marks, the committee shall arrange their names on the basis of their age, the older in age being placed higher.

(5) The names of the candidates belonging to such categories for whom vacancies are required to be reserved under Regulation 8 shall be arranged in a separate list according to their inter se-merit disclosed by the marks "obtained by them.

(6) The number of candidates to be selected will be larger (but not larger by more than 25 per cent) than the number of vacancies for which the selection has been made.

(7) The list prepared under sub-regulations (4) and (5) above shall be forwarded by <ORG> to the appointing authority mentioning the aggregate marks obtained at the selection by each candidate. The names of general and reserved candidates shall be arranged by the appointing authority in a common list according to the merit of the candidates having due regard to the posts reserved under Regulation 8."

Regulation 13 of the Regulations provides :

"13. (1) Selection for promotion shall be made by <ORG> to be constituted under Regulation 11. The criteria for selection shall be seniority subject to rejection of the unfit.

(2) The appointing authority shall prepare an eligibility list of the candidates arranged in order of seniority and place it before <ORG> along with their character and other necessary records pertaining to them.

(3) <ORG> shall consider the cases of the candidates on the basis of records referred to in sub-regulation (2) and if it considers necessary may Interview the candidates also.

(4) <ORG> shall prepare list of selected candidates arranged in order of seniority and forward the same to the appointing authority."

Regulation 14 of the Regulations provides :

"14. If appointment Is to be made both by direct recruitment and by promotion, combined select list shall be prepared by taking the names of the candidates from the lists prepared under Regulations 12 and 13 in such manner that the prescribed percentage of direct recruitment and promotion is maintained, the first name being from the list prepared under Regulation 13."

16. Regulation 15 (1) provides that the lists prepared under Regulations 12. 13 and 14 will remain in force for a period of one year from the date of their 'finalisation'. On the occurrence of substantive vacancies, the appointing authority shall make appointments by taking candidates in the order in which they stand on these lists.

Regulation 15 (2) provides that the appointing authority may make appointments in temporary and officiating vacancies also from lists referred to in sub-regulation (1).

Regulation 16 deals with placing of such appointees on probation for a period of one year.

Regulation 17 provides for confirmation and Regulation 18 provides for seniority.

17. From the perusal of the aforesaid Regulations, it is evident that the appointment on the post of Junior Engineer or promotion to the post of Assistant Engineer shall be made on the occurrence of substantive vacancies which shall be advertised in the newspaper and thereafter appointment/promotion shall be made through a Selection Committee.

18. It has been more or less conceded by the petitioners themselves, that their appointments on the posts of Junior Engineers and promotions on the posts of Assistant Engineers were made as stop-gap arrangement and were not made in accordance with service regulations, meaning thereby, that their appointments on stop-gap promotions de hors the service regulations. Most of the petitioners are not even confirmed as Junior Engineers. By means of the impugned orders, they were reverted to the posts of Junior Engineers. Their appointments/promotions were not in accordance with regulations but the same were a product of a spoiled system. They were asked to work as Assistant Engineers as a stop-gap arrangement through the back door. They were rightly asked to return to their original post, from the same door.

19. <CITATION> . , the appellant was made permanent as Junior Engineer, in violation of the interim order of injunction, passed by <ORG>, in the writ proceedings which debarred the respondents from confirming any Junior Engineer. In the light of these facts, <ORG> observed :

"Since the order of confirmation of the appellant was made in violation of the injunction order, the mistake committed in passing the order of confirmation was correct. In our view, in such circumstances, the appellant was not required to be given any opportunity of being heard for correcting such mistake because there was no occasion to take one view or the other in the matter of correction of the said mistake on the basis of the representation to be made by the appellant. The order of confirmation was per se illegal and in violation of the order of injunction passed by <ORG> and the same being invalid was got to be corrected, in any event. The finding of the <ORG> that the impugned order of termination was passed without any stigma and not as a punitive measure has been upheld by <ORG> and we find no justification in taking a contrary view simply because the appellant was a President of <ORG> at Kanpur, and according to him. he had raised demands on behalf of the employees."

<CITATION> . , it was held:

"Justice means justice between both the parties. The interests of justice equally demand that the guilty should be punished and that technicalities and irregularities which do not occasion failure of justice are not allowed to defeat the ends of justice. Principles of natural justice are but the means to achieve the ends of justice. They cannot be perverted to achieve the very opposite end. That would be a counter-productive exercise. These principles cannot be put in a strait-jacket. Their applicability depends upon the context and the facts and circumstances of each case."

<CITATION> 's <NAME> and others, , <ORG> observed :

"It Is a well-settled legal position that it is the legal or executive policy of the <ORG> to create a post or to prescribe the qualifications for the post. The <ORG> or Tribunal Is devoid of power to give such direction."

20. In the present cases before us, the petitioners have no lien on the posts of Assistant Engineers. They were asked to work as Assistant Engineers as a stop-gap arrangement which de hors the rules. Their return from the back door from which they entered, cannot be subjected to judicial scrutiny. Since the order of their promotion as a stop-gap arrangement to the posts of Assistant Engineers was made in violation of the service regulations, the Illegality committed in passing the order of promotion has only been corrected by means of the impugned orders. In such a situation the petitioners were not required to be given an opportunity of being heard for correcting such a mistake or illegality.

21. The action of the Director of <ORG> who has passed the impugned orders cannot be faulted, because he was bound to follow the direction of the State Government as contained in Section 26M of the Act. The State Government has the power to issue such directions under the Uttar Pradesh State Control Over Public Corporation Act, 1975. Section 2 of which Is reproduced below:

"2. Power to issue directions to the statutory bodies.--(1) Every statutory body (by whatever name called) established or constituted under any Uttar Pradesh Act , Excepting Universities governed by the Uttar Pradesh State Universities Act. 1973 as re-enacted and amended by the Uttar Pradesh Universities (Re-enactment and Amendment) Act , 1974, shall in the discharge of its functions, be guided by such directions on questions of policies, as may be given to it by <ORG>, notwithstanding that no such power has expressly been conferred on <ORG> under the law establishing or constituting such statutory body.

(2) If any question arises whether any matter is or is not a matter as respects which <ORG> may issue a direction under subsection (1), the decision of <ORG> shall be final."

22. In view of the aforesaid position, the Director of <ORG> had no option except to revert the petitioners to the post on which they were appointed. Therefore, it cannot be said that the impugned orders suffer from any infirmity or illegality. Consequently, the writ petitions deserve to be dismissed.

23. In view of what we have stated herelnabove, the writ petitions are dismissed. However, it is provided that in case the posts of Assistant Engineers are still vacant from promotional quota, the Mandi Parishad may fill up the same In accordance with the service regulations, The interim order, dated 4.12.1997 is vacated.


JUDGMENT <NAME>, J.

1. This appeal by special leave raises the question of the interpretation of Item No. 39 of the Notification No. 58, dated October 24, 1953, hereinafter called the 'Notification', issued by <ORG> under the Madhya Bharat Sales Tax Act, Samvat 2007 (Act No. 30 of 1950), hereinafter called the Act.

2. The facts are as follows : <NAME>, the respondent, is the manager of a joint Hindu family carrying on business in the name and style of "Messrs. <NAME>". The joint family owns a re-rolling mill situated in Indore City called <ORG>. The said family purchases scrap iron locally and imports iron plates from outside and after converting them into bars, flats and plates in the <ORG> sells them in the market. The respondent made a default in furnishing the returns prescribed by s. 7(i) of the Act for the period April 1, 1954, to March 31, 1955. On February 27, 1956, the Sales-tax Officer, Indore, determined the taxable turnover at Rs. 2,26,000 and the sales-tax payable thereon at Rs. 8,000; and he also imposed a penalty of Rs. 1,000 under s. 14(1)(c) of the Act. On the same day he issued demand notices to the respondent for the payment of the said sales-tax and the penalty. On September 10, 1956, the respondent filed a petition in <ORG> of Madhya Bharat (afterwards Madhya Pradesh) under Arts. 226 and 227 of the Constitution for the issue of appropriate writs quashing the assessment of tax and penalty and to restrain the State from giving effect to the said orders of the Sales-tax Officer. A Division Bench of <ORG> held that the iron bars, flats and plates sold by the respondent were exempted from sales-tax under the Notification. In that view, the orders of the Sales-tax Officer were quashed. The state has filed the present appeal, by special leave.

3. The only question in this appeal is whether the said iron bars, flats and plates are not iron and steel within the meaning of Item No. 39 of the Notification.

4. <ORG> enacted Essential Goods (Declaration and Regulation of Tax on Sales or Purchases) Act, 1952 (Act No. 52 of 1952), which came into force on August 9, 1952. In Schedule I of the said Act, iron and steel were declared essential for the life of the community. Thereafter, <ORG>, in exercise of the powers conferred by s. 5 of the Act, issued the Notification as also Notification No. 59, dated October 24, 1953. The material part of Schedule I of Notification 58 reads :

"No tax shall be payable on the sale of the following goods :-

S. No. Description of goods. --------------------------------------------------------------------- 39 Iron and steel. ---------------------------------------------------------------------- 5. Notification No. 59 described the goods sales of which were taxable at particular rates. Schedule IV thereof reads :

"List of articles under section 5 of the Madhya Bharat Sales Tax Act, 1950, on the assessable sale proceeds of which sales tax at the rate of Rs. 3/2/- per cent. shall be payable, showing the nature of articles on which the tax is payable.

S. No. Name of article Stage of sale in Madhya Bharat at which the tax is payable. ---------------------------------------------------------------------- 9 .... goods prepared from sale by importer or producer. any metal other than gold and silver....... ----------------------------------------------------------------------

6. Learned counsel for the <ORG> contends that the expression "iron and steel" means iron and steel in the original condition and not iron and steel in the shape of bars, flats and plates. In our view, this contention is not sound. A comparison of the said two Notifications brings out the distinction between raw-materials of iron and steel and the goods prepared from iron and steel : while the former is exempted from tax, the latter is taxed. Therefore, iron and steel used as raw-material for manufacturing other goods are exempted from taxation. So long as iron and steel continue to be raw-materials, they enjoy the exemption. Scrap iron purchased by the respondent was merely re-rolled into bars, flats and plates. They were processed for convenience of sale. The raw-materials were only re-rolled to give them attractive and acceptable forms. They did not in the process lose their character as iron and steel. The dealer sold "iron and steel" in the shape of bars, flats and plates and the customer purchased "iron and steel' in that shape. We, therefore, hold that the bars, flats and plates sold by the assessee are iron and steel exempted under the Notification. The conclusion arrived at by <ORG> is correct.

7. In the result, the appeal fails and is dismissed with costs.

8. Appeal dismissed.