JUDGMENT <NAME>, C.J.

1. There are two appeals before us from a common judgment of <NAME>, J., by which the learned Judge dismissed both of two applications which the parties had made before him against each other in a suit in which one of them is the plaintiff and the other the defendant. The applications were made in the following circumstances.

2. On the 21st December 1953, an agreement was entered into at Bombay between one <NAME>, a cinema-actor and producer of films of that place, carrying on business under the name and style of <ORG> and <ORG>, a Calcutta firm carrying on the business of exhibiting and distributing films. By the agree-men, <NAME> appointed- the firm, distributors for the territories of 'C. P. and C. I. Circuits', in respect of three motion pictures going to be produced by him immediately after the production of a film called 'Jhansi-hi-Rani' had been completed. The appointment was for a period of seven years from the date of the delivery of the first censored print of each of the three pictures. Under the terms of the agreement, the distributors were to pay to the producer a certain sum in certain instalments and were to receive as their remuneration commission at certain rates. Clause 22 of the agreement provided that, in addition to other remedies, the producer would have the right to terminate the agreement summarily and forfeit all sums paid to him by the distributors in the case of breach or non-performance of any of the conditions or in the case of default in making the stipulated payments or submitting statements of accounts. Clause 28 of the agreement provided for the method by which the parties were to enforce their rights, if necessary. It said inter alia that if either party proceeded in <ORG>, it must not do so at any place other than Bombay.

3. On the same day, another- agreement was entered into by and between the same parties about the distribution rights of the same films on precisely the same terms and conditions, except that the area covered by this agreement was 'the Bengal Circuit' and that the consideration to be paid to the producer was a different sum.

4. Two days later, on the 24th December 1953, the producer wrote two letters to the distributors by which he authorised them to pay all moneys payable to him under the agreements to Messrs. Kapurchand Limited, New Queen's Road, Bombay. On some date thereafter, the instalments by which the payments were to be made appear to have been varied by an agreement between the parties. On the 8th of May 1954, there was a letter from the distributors to the producer which referred to that agreement and set out the instalments newly agreed to. It appears that a sum of Rs. 5,78,750 was still payable by the distributors under the two agreements and that a sum was to be paid in eleven instalments of which the first three instalments of Rs. 60,000 each were to be paid on the 10th May 1954, the 15th June 1954 and the 15th July 1954, respectively. The producer admitted the new arrangement by endorsing his confirmation of the letter.

5. The two instalments due on the 10th May 1954 and the 15th June 1954 were duly paid. Before the date of the next instalment arrived, the distributors addressed a letter to the producer on the 23rd June 1954. In the letter they stated that they had entered into the agreement on the representation made to them that one of the pictures would deal with a historical theme, another would deal with a social subject and the third would be a fantasy. They were, they said, under the impression that of the two of the coming productions of which they had come to know, 'Waris' was a social picture and 'Mirza Galib' a fantasy, but they had seen in one of the letter-heads of the producer that the third picture was going to be 'Kundan'. They therefore wanted to know if 'Kundan' would be a historical picture and if so, what historical event would be its subject-matter.

6. The producer replied on the 28th June 1954, and stated that there had been no representation by him other than that contained in the agreement. The productions, he added, were going to be exactly as stipulated for In the agreement which contained all his assurances and representations. He concluded by saying that 'Waris' was a social picture, 'Mirza Galib' a historical biography and 'Kundan' a costume picture. Thereafter, up to the 15th July 1954, some acrimonious correspondence between the parties followed, the distributors complaining of misrepresentation and seeking to avoid the agreements and the producer denying misrepresentation and complaining of default. Apparently because ,,of that dispute, the instalment of Rs. 60,000 due on the 15th July 1954, was not paid. Ultimately, by letter, dated the 19th July 1954 written through his solicitors, the producer terminated the agreements and notified forfeiture of all moneys paid by the distributors. This was done in purported exercise of the powers reserved to the producer by Clause 22 of the agreements.

7. Thereafter, on the 23rd July 1954, the producer instituted a suit against the distribu-tors in <ORG> in his own name for the recovery of Rs. 60,000 with interest thereon or, in the alternative, damages of the same amount or any other amount that the Court might adjudge, as also for a return of all publicity materials relating to the picture 'Waris' already supplied to the distributors. By a letter of the same date, the solicitors for the producer gave intimation of the institution of his suit to the solicitors for the distributors which they received in Calcutta on the 26th July 1954. The writ of summons issued was served upon a partner of the firm on the 11th August 1954.

8. The reaction of the distributors was immediate. On the 12th August 1954, they, in their turn, instituted a suit on the Original Side of this Court against the producer and <ORG>, in which they claimed a decree for Rs. 4,71,250 of which a sum of Rs. 2,91,250 was claimed as refund of money paid under the agreements and a sum of Rs. 1,80,000 as damages for loss of profits. An enquiry into damages and a decree for such Sum as might be found due were also prayed for.

9. It will be convenient now to call the producer by his name '<NAME>' and the distributor by the first term of their firm name, '<NAME>'.

10. In his suit filed at Bombay, <NAME>, referred to the agreements, complained of breaches of their terms, pleaded his termination of them and asked for the amount which had already accrued due or, in the alternative, damages. He referred to the allegations of misrepresentation which had been made by <NAME> in their letters and denied the Same. In their suit filed in Calcutta, <NAME> alleged false and fraudulent misrepresentation vitiating the agreements and rendering them void and on that basis asked for a refund of the moneys paid and also damages. No reference was made in their plaint to the purported termination of agreements by <NAME> or to the suit instituted by him earlier at Bombay.

11. On the 31st August 1954, <NAME> made an application in <ORG> for an injunction, restraining <ORG> from proceeding with their suit in Calcutta so long as the Bombay suit was not disposed of. An interim injunction wag granted by <NAME>, J., on the same day and it was made absolute on the 10th September ,1954. <ORG> preferred an appeal against that order, but pending disposal of the appeal, filed their written statement in the Bombay suit on the 12th November 1954.

12. The written statement of <ORG> pleaded fraudulent misrepresentation by which, it was alleged, the agreements had been brought about. The agreements were therefore impugned as void and it was said that they had already been repudiated. It was pleaded further that <ORG> themselves had become entitled to recover from <NAME> the Sum of Rs. 2,91,250 advanced to him, as on a failure of consideration or, in any event, as moneys had and received. It was also said that the purported termination of the contracts on the 19th July 1954, had been wrongful, because the time for the payment of the third instalment had been extended up to that date.

13. The appeal from the final order of injunction made by <ORG>, of <ORG> was disposed of by <ORG> on the 16th November 1954, when it was allowed and the injunction dissolved. The trial Judge had held that <NAME>'s suit in Calcutta had been brought in violation of Clause 28 of the agreements and therefore they were liable to be restrained from proceeding with that suit. <ORG> held that Clause 28 would apply only when the parties wanted to litigate their rights under the agreements. The Calcutta suit had been brought, not to enforce any such rights, but on the other hand, to avoid the agreements altogether. The learned Chief Justice added that the <ORG> could not exercise its inherent jurisdiction by way of restraining a party to a suit before it from proceeding with a subsequent suit instituted by him in another <ORG>. If the two suits were based on the same cause of action, the defendant in the subsequently instituted suit might seek his remedy under Section 10 of the Civil Procedure Code, but if the causes of action were different and consequently Section 10 did not apply, there would be no reason for the <ORG> to restrain the prosecution of a different and subsequent suit, brought on a different cause of action.

14. It was after the dissolution of the injunction issued by <ORG> that the two applications out of which the present appeals arise were made in the suit filed in this Court. On the 29th November 1954, <NAME> made an application for an injunction, restraining <NAME> from proceeding with the Bombay suit. <NAME> replied on the 17th December 1954 by making an application of his own for revocation of the leave granted under Clause 12 of the Letters Patent and, alternatively, for a stay of further proceedings in the suit under Section 10 of the Civil Procedure Code. By an order passed on the 28th March 1955, <NAME>, J., dismissed both the applications.

15. Appeal No. 64 of 1955 has been preferred by <NAME> against the dismissal of his application directed at the Calcutta suit. Appeal No. 80 of 1955 has been preferred by <NAME> against the dismissal of their application for an injunction restraining further prosecution of the suit in <ORG>.

16. The decision of <NAME>, J., compris-es three orders: an order refusing to issue an injunction against <NAME>, restraining him from prosecuting the Bombay suit; an order refusing to revoke the leave granted under Clause 12 of the Letters Patent; and an order refusing to stay the Calcutta suit under Section 10 of the Civil Procedure Code. A preliminary objection was taken in Appeal No. 64 of 1955 that no appeal lay under Clause 15 of the Letters Patent from either of the last two orders. In Appeal No. 80 of 1955, it was contended that no appeal lay from the first order either.

17. I do not consider it necessary to decide whether an appeal lies against the order refusing to issue an injunction against <NAME>, restraining him from proceeding with the Bombay suit. It was alleged that the suit was not a bona fide suit, but had been brought maliciously in order to forestall <NAME> who, it must have been known, were bound to institute the Calcutta suit and that the object was also to cause harassment to them. I agree entirely with the learned Judge that there is no ground whatsoever for treating the earlier suit of <NAME> as a mala fide suit. He has pleaded two business agreements which are not denied, set out the letters passed between the parties which are also not denied and asked the <ORG> to decide whether or not, on the facts pleaded by him, he is entitled to the reliefs claimed. The allegation of misrepresentation on which <NAME> have founded their own suit was not concealed in <NAME>'s plaint, but was expressly referred to and thus an opportunity was openly extended to them to prove their allegation, it they could, and defeat the suit. Like the learned trial Judge, I see no trace whatsoever of any mala fides in <NAME>'s suit in Bombay and no reason to restrain its further prosecution by an injunction. Appeal No. 80 of 1955 must fail on the merits and therefore it is not necessary to consider whether it is maintainable in law or not.

18. As to Appeal No. 64 of 1955, it is really directed, as I have already said, against two orders. Unfortunately, there is even no mention of the prayer for revocation of leave in the learned Judge's judgment, although it was the first prayer in the Notice of Motion, It was not contended by the respondents that the prayer had been abandoned. Since the relief prayed for was not granted, it must be deemed to have been refused. There is no similar difficulty about the prayer for a stay of the suit which was dealt with by the learned Judge at length and refused.

19. To take the order under Section 10 of the Civil Procedure Code first, it is not an order granting a stay of a suit, but an order refusing to stay it. Such an order was held to be appealable under the Letters Patent _by <ORG>, in <NAME> v. <NAME>. <ORG>, ILR 57 Bom 364: (AIR 1933 Bom 85) (A), and the decision was followed by <ORG>, in <NAME> v. <NAME> . <NAME>, J., expressed no opinion on the point, as the contention that no appeal lay had ultimately not been pressed. <CITATION> . , <ORG> again held that an order refusing stay of a suit under Section 10 of the Code was appealable. On the other hand, in <NAME> v. <ORG> of S. P. K. A. A. M, ILR 12 Rang 687: (AIR 1935 Hang 73 (1) ) (D), <ORG> held that an order under Section 10 of the Code, staying the hearing of a suit, was not appealable, but it preferred to reserve its opinion as to whether an appeal would lie from an order refusing stay. <CITATION> ., , <ORG> of <ORG> held that an order under Section 10 or any other provision of law for the stay of the trial of a suit was not appealable under the Letters Patent.

20. Whether or not an appeal lies under Clause 15 of the Letters Patent from any particular order depends upon whether the order is a 'judgment' within the meaning of Clause 15. The term 'Judgment' has been defined in the Civil Procedure Code, but that definition does not apply to the word, as occurring in the Letters Patent. The language of the Letters Patent which were issued in 1865 is not the language of <ORG>, but the language of English lawyers as it was in use amongst them before the words 'judgment', 'decree' and 'order' came to be clearly differentiated after the passing of the Judicature Acts. If one wanted to ascertain what the framers of the Letters Patent had really in mind when they used the word 'judgment', one would perhaps have to make a search in the vocabulary of old English lawyers, as appearing in contemporary rules and judicial decisions. But such search is no longer necessary because, by reason of judicial interpretation, the term, as used in the Letters Patents, <ORG>, has now acquired an Indian meaning. The two leading decisions are The Justices of the Peace for Calcutta v. <ORG>, 8 Beng LR 433 (F), a decision of this Court, given in 1872 and <CITATION> 35 Mad 1 (G), a decision of <ORG>, given in 1910. To that must now be added the decision of <ORG> in <CITATION> , , which is itself an interpretation of the two leading <ORG> decisions in their application to a particular type of order. All other decisions that can be found in the books justify themselves by referring to one or other of the above decisions ,or some part or other of them.

21. The test, according to the <NAME> decision, is that in order to be a 'judgment', a decision must affect 'the merits of the question between the parties by determining some right or liability', although it may be either a final judgment, determining the whole cause or suit or a preliminary or interlocutory judgment, determining only a part of it, leaving other matters to be determined. The Madras test is not wholly different but is a variant of the <NAME> test. According to it, the effect of the order on the relevant suit or proceeding must be seen and if the effect is to put an end to the suit or proceeding, so far as the <ORG> making the order is concerned, or if the effect be such that in case the order is not complied with, the suit or proceeding will end, it will be a 'judgment'. To that test there is a corollary. If the order is made on an independent proceeding which is ancillary to the suit and aims at rendering the judgment effective in case a judgment is obtained, such as an application for an interim injunction or for the appointment of a Receiver, then such an order also will be a 'judgment'. It will be seen that the second type of order admitted by the Madras test into the category of 'judgments' will not terminate the Suit or proceeding, nor can it strictly be said that it will affect the merits of the question between the parties by determining some right or liability, as required by the <NAME> test. On a strict construction of the <NAME> test, the right or liability must mean some right or liability which is a 'subject-matter of controversy in the suit or proceeding, but in its application to individual cases, that strict construction has not been adhered to and was indeed often departed from by <NAME>, C. J., himself who was the author of the test. Orders concerning the jurisdiction of the <ORG> to entertain a suit, as distinguished from matters of the actual dispute between the parties, were held by him to come within the category of judgments.

22. <ORG> had before it an order, made under Clause 13 of the Letters Patent, by which <ORG> had transferred to itself a suit pending in a subordinate <ORG> for trial in its Extraordinary Original Jurisdiction. The <ORG> refrained from giving ah exhaustive definition of the word 'judgment' as used in Clause 15 of the Letters Patent. They dealt only with the order before them and held that no appeal lay from it for three reasons. The order did not affect the merits of the controversy between the parties in the suit itself, nor did it terminate or dispose of the suit on any ground, nor was it at all an order made by the <ORG> in which the suit was pending. It was only an order made by a superior <ORG>, by which a live suit was transferred from one forum to another. It appears to me that since the Supreme <ORG> did not frame an exhaustive definition of the word 'judgment' which would be applicable in all cases, it would not be correct to hold that no order can be a 'judgment', if any of the negative reasons given by the Supreme <ORG> for holding the order before them to be not appealable, applies.

23. In view of the somewhat indeterminate terms in which the tests laid down in the two leading <ORG> decisions were framed, the task of deciding whether a particular order is or is not a judgment is not easy. But it appears to me that at least where a question of the jurisdiction of the <ORG> to entertain or proceed with a suit or proceeding is involved and a decision on that question is given, such decision affects the merits of the controversy between the parties. It is true that it does not touch the actual dispute regarding the respective rights and liabilities which is the subject-matter of the suit or proceeding, but whether those rights and liabilities can be adjudicated on by a particular <ORG> at all or adjudicated on at the time, is also a matter of controversy between the parties. To be entitled to have one's suit or proceeding decided by a particular <ORG> or to be entitled to object that a suit or proceeding brought by one's adversary cannot be tried or tried for the time being by the <ORG> in which it has been brought is, it seems to me, also a matter of right. To refuse to stay a suit under Section 10 is to uphold the right of the plaintiff to have his suit tried without interruption in the forum of his choice and to negative the defendant's claim to have the subject-matter tried by the other <ORG> where he has brought his own suit. I think where a <ORG> makes an order for stay, the position is clear, because although the suit does not terminate by reason of such an order, it is suspended ail the same and the suspension may be termination for all practical purposes, unless the other suit fails for non-prosecution or the matter is not decided in it. In any event, such an order affects the jurisdiction of the <ORG> to try the suit, although the bar created may be temporary. But an order refusing a stay also involves assumption of jurisdiction and in so far as it negatives the defendant's contention that the Suit cannot be proceeded with and upholds the plaintiffs claim that the suit must proceed, it seems to me that it affects the merits of a part of- the controversy between the parties, the particular controversy being a controversy in the suit as to where the subject-matter should be tried. I have already pointed out that the test laid down by the <NAME> decision has always been regarded as flexible, at least to this extent that, besides orders affecting merits of the disputes between the parties, orders concerning the jurisdiction of a <ORG> to entertain or try a dispute has always been held to be judgments. In , Beaumont, C. J., observed as follows:--

"It appears to me that a decision of the Judge, either to allow or to refuse a stay under that section is a decision which in fact goes to the jurisdiction of the <ORG>. If the case is brought within Section 10, then the <ORG> has no jurisdiction to proceed with the trial of this suit, so long as the earlier suit is pending; and when the earlier suit is determined, the matter in issue in this suit will probably be res judicata. Therefore, the decision of the Judge under Section 10 really determines the rights of the plaintiffs to sue in this <ORG>; and it seems to me that such a decision is a 'judgment' within Clause 15 of the Letters Patent and the authorities under that clause and that such a decision is not a mere order relating to procedure in the suit."

24. These reasons were adopted or similar reasons were given in the other decisions to which I have referred where it was held that an order under Section 10 of the Code was a 'judgment'.

25. Proceeding from what I have so far said, I think I can reasonably go a little further. An order staying a suit under Section 10 of the Code can be said to affect even the actual dispute between the parties on the merits, because it compels the plaintiff to take the decision of the other <ORG> on the questions in controversy, however they may be decided, instead of the decision of the <ORG> of his choice which might well have been different. The merits of a controversy are, till they are decided, only claims and it is the decision of the <ORG> which determines the merits and thus affects them.

26. Relegation to the sole decision of an-other <ORG> of the questions in controversy in a suit, which a stay order under Section 10 means and involves, does therefore affect the merits. The decision of the other <ORG> will operate as res judicata and by so operating, affect the merits of the controversy in the suit that is stayed. Similarly, an order, refusing a stay, consigns the parties to the possibility of having conflicting declarations as to their rights and liabilities from two different <ORG>s and thereby affects the merits of questions in controversy by making it probable that the merits will be differently adjudged. This however will happen only when an order refusing a stay is wrongly made in spite of the other suit being earlier and involving the same subject-matter. But it must be remembered that an appeal is always on the ground that the order Sought to be appealed from is erroneous. In <NAME> case (H), the jurisdiction of the <ORG> of institution was certainly affected by the order of transfer, but there was no question ,of the decision of one <ORG> operating as res judicata as to the questions in controversy before another <ORG>, nor any question of conflicting decision's on the merits.

27. For the foregoing reasons I hold that the order of <NAME>, J., in so far as it is an order refusing a stay of <NAME>'s suit, is appealable.

28. The other order is an order refusing revocation of the leave granted under Clause 12 of the Letters Patent. As to whether such an order is appealable, there is a direct authority in <CITATION> , 13 Beng LR 91 (I), where it was held that an order, refusing to rescind a leave granted under Clause 12 of the Letters Patent, was appealable. The head-note stating that the order appealed from was an order granting leave is wrong, as will appear from pp. 93 and 94 of the report. In holding that an appeal lay from the order, <NAME>, C. J., with whom <NAME>, J., agreed, observed as follows:--

"It is not a mere formal order merely regulating the procedure in a suit, but one that has the effect of giving a jurisdiction to the <ORG> which it otherwise would not have and it may fairly be said to determine some right between them, viz., the right to sue in a particular <ORG> and to compel the defendants who are not within its jurisdiction, to come in and defend the suit, or if they do not, to make them liable to have a decree passed against them in their absence."

29. In <NAME> case (H), <ORG> had occasion to refer to orders of leave granted under Clause 12 of the Letters Patent and orders refusing to revoke such leave and in that context they referred to this decision. It is true that they disapproved of its application to orders passed under Clause 13 of the Letters Patent, but they did not say that even as regards orders under Clause 12, it was wrong. As to the general question regarding orders under Clause 12 of the Letters Patent, <NAME> observed as follows:--

"Leave granted under Clause 12 of the Letters Patent constitutes the very foundation of the suit which is instituted on its basis. If such leave is rescinded, the suit automatically comes to an end and there is no doubt that such an order would be a judgment. If, on the other hand, an order is made, dismissing the Judge's summons to show cause why the leave should not be rescinded, the result is ,as Sir <NAME> pointed out, <NAME> v. <NAME>, ILR 29 Bom 249 (J), that a decision on a vital point adverse to the defendant which goes to the very root of the suit becomes final and decisive against him, so far as the Court making the order is concerned. This brings the order within the category of a judgment as laid down in the Calcutta cases."

30. It was contended on behalf of the appellant that <ORG> were approving of what they set out as the view of Sir <NAME>, because they used the expression 'the result is, as Sir <NAME> pointed out' and, therefore, they were quoting what Sir <NAME> had said with approval. I cannot accept that contention, be-rause the judgment proceeds to say that the Court was not expressing any final opinion as to the propriety or otherwise of the view expressed by Sir <NAME>. The words 'as Sir <NAME> pointed out' merely mean 'according to Sir <NAME>' or 'as it has been put by Sir <NAME>'. But the fact remains that <ORG> did not disapprove of the decision in 13 Beng LR 91 (I). Otherwise too, I find, nothing in the principles laid down in <ORG>'s judgment which requires or authorises me to dissent from the earlier decision in 13 Beng LR 91 (I), which was also a decision of <ORG> and with the reasoning of which I respectfully agree. I would therefore hold that the order of <NAME>, J., in so far as it impliedly refused to revoke the leave granted under Clause 12 of the Letters Patent, is also appealable.

31. In the Madras Full Bench case of , the following observation about the judgment of <ORG> occurs in the judgment of <NAME>, J. "It also held that an order refusing to rescind leave to sue granted under Clause 12 of the Letters Pa-tent was hot a judgment under Clause 15 of the Letters Patent." With respect, that observation does not appear to be correct

32. I have now to proceed to consider the appeal on the merits. As regards the refusal to revoke leave, I have already pointed out that the learned Judge has not, unfortunately, mentioned the prayer for revocation and necessarily has given no reasons for not giving effect to it. He might have thought that the prayer was plainly not maintainable, but whether or not he took that view, does not appear.

33. As regards the order made under Section 10, it appears to me, if I may say so. with respect, that the learned Judge was under a mis-apprehension. He thought that since the decision of <ORG> was a decision binding on the parties and by that decision it had been held that the two suits were based on different causes of action, it was no longer open to him to apply Section 10 of the Civil Procedure Code. That view of the Bombay-judgment is hot correct, although I am free to confess, again with respect, that I find some confusion of language in the appellate judgment of <ORG>. The scheme of the judgment, however, is clear. The learned Chief Justice first points out that Clause 28 of the agreements cannot apply, because, the Calcutta suit was not a suit under the agreements, but a suit de hors them. It was also a subsequently instituted suit. If Clause 28 of the agreements was not attracted, there was no reason to injunct the Calcutta plaintiff against proceeding with his suit on the ground that he had brought it in breach of the agreement. Again, since his was a subsequently instituted suit, there could be no question of his having made an attempt to forestall the Bombay plaintiff, either for the purpose of harassing him by instituting a Suit in an inconvenient forum or for the purposes of acquiring the advantage of Section 10. If Section 10 applied, it would hit the Calcutta suit rather than the Bombay suit. The learned Chief Justice then proceeds to say that if the two suits had been filed 'on the same cause of action' -- as to which he was expressing no opinion -- then the Bombay plaintiff might proceed in Calcutta under Section 10 and try to get the defendant's Calcutta suit Stayed. I do not know why the learned Chief Justice used the expression 'cause of action', because Section 10 speaks of not 'cause of action' but of 'matter directly and substantially in issue'. It is also not clear how two persons, quarrelling over the same transaction and bringing separate suits with respect to it against each other, can have the same 'cause of action'. Be that as it may, what the learned Chief Justice means is that since the Calcutta suit was a subsequent suit, if could be stayed, if at all, by <ORG> under Section 10 of the Civil Procedure Code and the Bombay plaintiff ought to seek that remedy in Calcutta. It was argued on behalf of the Bombay plaintiff that the Calcutta suit would fall under Section 10 and the Bombay plaintiff might undoubtedly invoke the aid of that section, but he might also ask for relief from <ORG> by way of an injunction against the Calcutta plaintiff issued in the exercise of the <ORG>'s inherent jurisdiction. That contention was repelled. The learned Chief Justice states that however wide the powers of the <ORG> under Section 151 may be, they do not extend to the <ORG> granting relief under its inherent jurisdiction, when the same relief can be granted by another <ORG> under the express provisions of the Code. It would thus appear that what <ORG> said was that if Section 10 of the Civil Procedure Code applied to the two" suits -- about which it was expressing no opinion -- the Bombay plaintiff might seek his remedy under that section in this <ORG>. It is true that the ground for the application of Section 10 was inaccurately stated when the learned Chief Justice was referring to the hypothetical case of the section being applicable to the two suits. But he did not refuse an injunction on the finding that the Bombay plaintiff had an alternative remedy in Section 10 of the Code, as thought by the learned Judge, holding thereby that the subject-matter of the two suits or their 'causes of action' were identical, but he did so on the ground that the Calcutta suit was a subsequent suit and therefore it could not be stayed by an injunction and he added that the plaintiff might seek his relief in Calcutta under Section 10, if that section applied. The only positive opinion expressed by the learned Chief Justice, was that the Calcutta suit was not a Suit for the enforcement of rights under the contract, but it was a suit for avoiding the contract. He does not appear to have said anything about the nature of the Bombay suit. But assuming that he did say that the Bombay suit was a suit under the contract for the enforcement of rights conferred thereby, I am unable to see that the matter in issue in the two suits might not yet be substantially the same, though different reliefs might have been claimed by the two different plaintiffs on the basis of their respective cases. It is true that no written statement has yet been filed in the Calcutta suit, but what the defence in the Calcutta suit will be is fairly clear from the plaint in the Bombay suit itself as also the application made to this <ORG> by <NAME>. If the Calcutta plaintiff's defence in the Bombay suit is substantially his plaint in the Calcutta suit and if the Bombay plaintiff's defence in the Calcutta suit is virtually his plaint in the Bombay suit, the matter in issue between the parties in the two suits would seem to be substantially the same. The fact that one is a suit under the agreements and the other is a suit de hors the agreements does not make a substantial identity of the subject-matter per se impossible. The basis of the defence in the Bombay suit and the basis of the claim in the Calcutta suit appear to be both fraudulent misrepresentation and if the defence succeeds in Bombay, nothing will be left of that suit and, similarly, if in consequence the case of misrepresentation succeeds in Calcutta, this suit will be practically decided, the only, enquiry remaining being an enquiry as to the damages claimed in addition to a refund of the money paid. Similarly, again, if the defence fails in the Bombay suit, the basis of the Calcutta suit will be wholly destroyed. In my view, the principal matter in issue in the Calcutta suit is directly and substantially in issue in the Bombay suit, which is a suit previously instituted and that an un-necessary duplication of proceedings with the possibility of conflicting decisions being rendered will occur, if the Calcutta suit is not stayed.

34. It remains to refer to one other matter. The learned Judge has also given it as a reason for refusing to stay the suit before him under Section 10 that there is an additional party in that suit. That, by itself, does not make Section 10 inapplicable. It is true that the section speaks of 'same parties', but it has been held that the 'same parties' mean 'the parties as between whom the matter substantially in issue has arisen and has to be decided'. Complete identity of either the subject-matter or the parties is not required. Authority for that proper sition will be found in (Six parties in one Suit and five parties in another); and <CITATION> 42 All 290: (AIR 1920 All 70) (K); ; and <ORG> v. <NAME>, ILR (1948) Nag 403: (AIR 1948 Nag 297) (L). The additional party impleaded in the Calcutta suit is the company <ORG>, to which the payments due to <NAME> under the agreements were to be made. No allegation is made against the company except that some money was paid to it and that it was a party to and knew of the misrepresentations made by <NAME>. I do not think that the joinder of <ORG>, on such allegations raises any separate and substantial issue as between it and the <ORG> so as to make Section 10 inapplicable.

35. As to the prayer for revocation of leave, I see no reason to grant it. The plaintiff has made a case in the plaint, according to which a part of the cause of action did arise in Calcutta. Since the suit is being stayed and the main question will be tried at Bombay, the question of convenience hardly survives.

36. In the result, Appeal No. 64 of 1955 is allowed in part. The order of the learned Judge, dated the 28th April 1953, in so far as, by it, he refused to stay the present Suit under Section 10 of the Code is set aside and it is directed that the suit be and do remain stayed so long as the Bombay suit, viz., Suit No. 1069/X of 1954, may remain pending. The rest of the order is upheld. Costs of this appeal, which will be half-costs, will be costs in the suit. Certified for two counsel.

37. Appeal No. 80 of 1955 is dismissed with costs. The undertaking given by the Respondent No. 1 not to proceed with the Bombay suit will stand discharged. Certified for two counsel.

Sarkar, J.

38. I agree.


JUDGMENT <NAME>, J.

1. The suit out of which this appeal arises was one for ejectment after service of notice to quit on the defendants. The Court of first instance found that the defendants were permanent tenure-holders and in that view dismissed the plaintiff's suit. The plaintiff appealed and the lower <ORG> was invited by both the parties to try the propriety and legality of the service of notice before going into the question of the status of the defendants. The learned Subordinate Judge found that the notices were not duly served and dismissed the suit on that ground.

2. The plaintiff has appealed to this Court and the only ground taken before us is that in the circumstances of this case it should have been held that the notices-were legally served. On this point three grounds were taken before the lower <ORG>. The first is that the defendant No. 1 was the <NAME> of the joint; family and the service of notice on him was sufficient in respect of all the members of the family including the defendant No. 9 on whom notice was not proved to have been served. The second ground is that defendant No. 1 being the registered tenant service on him alone was sufficient, and the third is that the defendants being; all tenants-in common service of notice on-one of them should be taken as service on all. The first two grounds have been finally disposed of by the learned Subordinate Judge by coming to certain findings of fact which cannot be challenged in second appeal. The learned Judge has found that defendant No. 1 was not the karta of the family and that he was not the sole registered tenant in the plaintiff's sherista. The ground which is pressed before us is the third ground namely, that all the defendants being tenants-in-common, or more properly, joint tenants, service of notice on any one of them is good in law. The learned Subordinate Judge observes that it was virtually admitted and was proved, that no notice to quit was ever served on defendant No. 9 who was all along ignored though his brothers-were treated as tenants and that he was subsequently added as a defendant in the suit. In support of the view urged by the appellant reliance has been placed on the decision of <ORG> in the case of <CITATION> A.I.R. 1918 P.C. 102. The facts of that case are that the plaintiff's gomosta had sent to each of the defendants by registered letters addressed to them at their addresses duplicates of the notices signed by all the plaintiffs. For this he received receipts of registration. The peon of <ORG> knew all their houses and got from all of them receipts for the letters delivered. The <NAME>, however, held upon the evidence that there was no proof of service of notice to quit on any of the defendants other than defendants Nos. 1, 4 and 5. Their Lordships of <ORG> examined the evidence on the point on the record and in their Lordships' view the evidence of delivery of notice to quit on all the principal defendants was adequately proved and constituted good service on them within the meaning of Section 106, Transfer of Property Act . In the course of their judgment their Lordships observe that " a notice under Section 106 , Transfer of Property Act , may be served either personally or to one of the family or servants of the person intended to be bound by it at his residence or if such tender or delivery be not practicable, affixed to a conspicuous part of the property. The personal tender or delivery may take place anywhere, the vicarious tender or delivery must take place at the residence of the person intended to be bound by the notice. The procedure in the case of joint tenants is that each is intended to be bound, and it has long ago been decided that service of a notice to quit upon one joint tenant is prima facie evidence that it has reached the other joint tenants." Their Lordships relied upon some of the English cases which will be considered later on. In this case it has been found by the learned Subordinate Judge that the place of residence of defendant No. 9 was in Calcutta and not at the place where the notice was served. The only question therefore for consideration is whether service of notice upon defendant No. 1 or any other defendant can be taken in law as good service on defendant No. 9. Section 106 , Transfer of Property Act , requires that every notice under that section must be in writing and tendered or delivered over personally to the party who is intended to be bound by it or to one of the family or servants at the residence, or if such tender or delivery is not practicable it can be affixed to a conspicuous part of the property. Reading the section as it stands without any help of the comments upon it by decided cases, it is manifest that it was the intention of the legislature that the notice must be served on the person who is intended to be bound by it. The notice must be addressed to and served on the person intended to be bound by it in any one of the modes suggested by the section. The section does not make any exception or lay down any special or peculiar procedure in the case of joint tenants. The law as to notice to quit is contained in Section 106 , Transfer of Property Act and it is not necessary to travel beyond it. Great stress has been laid upon the observation of <ORG> in <NAME>'s case A.I.R. 1918 P.C. 102 and on the oases referred to therein for the view that in the case of joint tenants it is sufficient to serve the notice to quit) on one of them alone and the service of notice on one of them is binding on the other tenants. We do not think that this contention can be sustained in view of the law laid down in those oases. In the <ORG> case, as we have observed, the notices were addressed to all the defendants and their Lordships found that it was served on all of them. In the case of <NAME> v. <NAME> (1805) 5 Esp. 196, one of the oases referred to by <ORG>, an oral notice to quit was given by the landlord to one of the two brothers who were joint tenants. This was followed by a written notice, dated the 8th April, served on both the tenants. The suit in ejectment was resisted by the defendants on the ground that the time allowed by law was not observed and that parol notice on one was not binding on the other. Lord <NAME> held that the written notice was not necessary and with regard to the oral notice, as the two defendants appeared to hold the lands jointly, service of notice to quit on one was sufficient and that the notice given on the 8th April, was within the statutory period. This case proceeded upon the English law then in force according to which oral notice was sufficient, but the law under the Transfer of Property Act is different. That case is therefore no authority for the view that if no notice is addressed to one of the joint tenants, the mere service of notice upon the other joint tenant is a sufficient notice according to law. The next case to which reference is made in the judgment of <ORG> in the case of <CITATION> A.I.R. 1918 P.C. 102 is the case of <NAME> v. <NAME> (1826) 7 East 551. In that ease also it appears that the notices to quit were addressed to both the defendants who were joint tenants and partners of the business. The notices, however, were served through one of the tenants living on the premises. On these facts it was held that the notice to quit served on one of the two joint tenants on the premises, who held under a joint demise, is evidence that the notice reached the other who lived elsewhere. That case also is no authority for the view that it is not necessary to address a notice to a joint tenant and that service on any one of them is sufficient in law.

3. The case of <NAME> v. <NAME> (1826) 7 East 551 is interesting in that it has been held in it that the question whether service of notice on one of the joint tenants was sufficient notice on the other tenant, who was not served, is a question of fact and must be left to the jury. In the present case the learned Subordinate Judge has come to a finding of fact on evidence that there was no service or tender of notice to defendant No. 9, nor was any notice addressed to him. The view we take is not supported by any reported authority in a direct form; but it is indirectly supported by the decision in the case of <CITATION> (1900) 4 C.W.N. 572. In that case a notice containing the names of all the joint tenants was delivered to one of the defendants and the objection taken was that there ought to have been as many copies of the notice as there were tenants. This objection was overruled in the view that the notice was addressed to and contained the names of all the tenants, though it was served on one of them. On a plain reading of Section 106 , Transfer of Property Act , and on the consideration of the authorities on this point, we are of opinion that it is necessary in order to bind even a joint tenant that the notice must be addressed to and served on him in one of the ways mentioned in the second clause of that section. It should be addressed to him and may be served either on him personally or to one of the family or servants or affixed to a conspicuous part of the property. It is difficult to hold that a person whose tenancy or existence is ignored and not recognised, as was defendant No. 9 in the present case. is a party to be intended to be bound," by the notice under Section 106 , Transfer of Property Act . The notice in this case on defendant No. 9 not having been thus served, the lower <ORG> was justified in holding that the service of the notice was not good and sufficient in law to determine the tenancy.

4. In this view of the law the appeal fails and is dismissed with costs.

Cuming, <NAME>

5. I agree.


JUDGMENT <NAME>, J.

1. <ORG> has referred the following question under s. 256(1) of the I.T. Act, 1961 :

"1. Whether, on the facts and in the circumstances of the case, Rs. 33,333 received by the assessee as rent for lease of its machinery, Rs. 5,661 being the export incentive received by the assessee from <ORG> and Rs. 15,780.80 received by the assessee from <ORG> as interest on the deposit of money could be treated as profit attributable to priority industry and would qualify for deduction under section 80-I of the Income-tax Act, 1961, for the assessment year 1970-71 ?

2. Whether, on the facts and in the circumstances of the case, Rs. 60,000 received by the assessee as rent for the lease of its machinery, Rs. 67,681 being the export incentive received by the assessee from <ORG> and Rs. 38,839.70, being the interest received by the assessee from <ORG> on the moneys deposited therein, could be treated as profit attributable to the priority and would qualify for deduction under section 80-I of the Income-tax Act, 1961, for the assessment year 1971-72 ?"

2. The assessee was incorporated as a company which took over all the assets and liabilities of a firm carrying on business in the manufacture and sale of radiators, oil coolers, heat exchangers and other automobile accessories with effect from 1st June, 1969. It closed its accounts for the first time on 31st March, 1970, and thereafter at annual intervals on 31st March. The two assessment years under consideration are 1970-71 and 1971-72. The assessee declared in its return Rs. 3,32,675 and Rs. 5,74,242 as its assessable income for the assessment years 1970-71 and 1971-72, respectively, and claimed relief under s. 80-I of the Act for the both the assessment years.

3. The <ORG> computed the business income for the assessment year 1970-71 at Rs. 3,58,589 and for 1971-72 at Rs. 6,23,131. Included in these amounts are the following three items, namely, (1) Rs. 33,333 and Rs. 60,000, being the amounts received in the two years by leasing the machinery ; (2) Rs. 32,926 and Rs. 47,157, being the interest received on deposits with banks and others in the two years ; and (3) Rs. 5,661 and Rs. 67,681, being the export incentive received by the assessee in the two years. The <ORG> granted relief under s. 80-I with reference to these three sets of amounts also.

4. The Additional Commissioner of Income-tax considered that the <ORG> had acted prejudicially to the revenue in taking these time of income as attributable to the priority industry, and in giving the relief under s. 80-I of the Act. Accordingly, after giving the assessee the necessary opportunity, he came to the conclusion that the assessee was not entitled to the deduction under s. 80-I of the Act in respect of the three sets of amounts given above for each of these two years. The assessee thereafter preferred appeals before <ORG>. After examining the materials and the contentions, <ORG> observed that the machinery belonging to the assessee had been leased out to <ORG>, that the directors of the said company had resolved to pay Rs. 40,000 per annum to the assessee for the use of its machinery for the assessment years 1970-71 and Rs. 60,000 per annum for the assessment year 1971-72 and that such machinery had been leased out by the assessee to the said company to enable the later to manufacture certain components which are automobile accessories. There were also payments made to the lessee by the assessee for making those components used as accessories for automobiles available to it. It was, therefore, held that the income derived by the assessee by way of rent for the lease of the machinery was to be treated as profits attributable to the priority industry and that it would qualify for the deduction under s. 80-I of the I.T. Act.

5. As regards the incentives received from the <ORG>, <ORG> pointed out that these incentives had been paid in pursuance of a scheme formulated by the <ORG> for promoting the export of engineering goods manufactured in India and in order to reimburse the loss suffered by the exporters by reason of their exporting at a lesser price than would be obtained if the goods were sold in India.

6. As regards the interest received form the bankers and other parties it was found that the assessee had placed Rs. 11,00,000 in fixed deposit with <ORG> and that the assessee had borrowed from the said bank Rs. 4,50,000 as on March 31, 1970, and Rs. 5,81,255 as on March 31, 1971. The borrowing was said to be for business purposes. The interest on such borrowings had been allowed as a deduction. In the view of the <ORG>, the making of the deposit and the borrowings on the security of the deposits showed that they could be treated as part of the assessee's business and that, consequently, the interest received on such deposits from the bank was to be treated as profits attributable to the priority industry. It is in this view that the <ORG>'s action in granting the relief under s. 80-I of the Act in respect of the three amounts for the two years was considered to be proper. The Commissioner has challenged these conclusions of the Appellate <ORG> in the form of the questions set out already.

7. We shall take up each of the three amounts covered by the questions separately. We shall first consider the rent received by the assessee on the lease of machinery and examine whether it is income attributable to the priority industry, coming within the scope of s. 80-I of the Act. This section was deleted with effect from 1st April, 1973. At the relevant time, when the section was in operation, it ran as follows :

"Deduction in respect of profits and gains from priority industries in the case of certain companies. -(1) In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company...."

8. There are two other sub-sections to s. 80-I of the Act, and it is not necessary to extract them here. The section would apply where the gross total income included any profits and gains attributable to any priority industry. When once the operation of this section is attracted, then there has to be an allowance by way of deduction from the profits attributable to the priority industry, an amount equal to eight per cent. of such profits in computing the total income. Therefore, the point that requires scrutiny is, whether the rent received from the lease of the machinery used in the priority industry is a profit attributable to the priority industry.

9. It is not in dispute that the product manufactured by the assessee comes within the scope of the 6th-Schedule to the Act as it was in force at the relevant time. The term "priority industry" has been defined in s. 80B(7) of the Act as meaning, among others, manufacture or production of any one or more of the articles or things specified in the list in the 6th Schedule. The said Schedule thus describes such of those articles or things the manufacture of which would constitute a priority industry. Item (20) describes automobile ancillaries as one of the articles and things, the manufacture of which would constitute a priority industry. It is not in dispute that the assessee was manufacturing automobile ancillaries before the factory was leased out and even after leasing out, the factory was producing the same articles. The question is, whether the rent received would, on these facts, be profits attributable to the priority industry.

10. The expression "attributable to" occurring in a similar provision in the same Act came to be considered by <ORG> in <CITATION>  113 ITR 84. In that case, the assessee was running a priority industry. It had certain machinery which was sold. The balancing charge as result of the sale of the machinery was brought to tax under s. 41(2) of the Act. The question was, whether the amount so brought to tax could be treated to be profits attributable to the priority industry so as to be eligible for exemption or relief contemplated by s. 80E which corresponds to s. 80-I of the Act, now under consideration. In construing the expression attributable to", <ORG> pointed out at a page 93 :

"As regards the aspect emerging from the expression 'attributable to' occurring in the phrase 'profits and gains attributable to the business of' the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression 'attributable to' and not expression 'derived from'. It cannot be disputed that the expression 'attributable to' is certainly wider in import than the expression 'derived from'. Had the expression 'derived from' been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the <ORG> wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance, in section 80J . In our view, since the expression of wider import, namely 'attributable to', has been used, the <ORG> intended to cover receipts from sources other than the actually conduct of the business of generation and distribution of electricity."

11. It is clear from the passage given above that the term "attributable to" is wider that the term "derived from". We have thus to find out whether the profit is ascribable to the running of the priority industry. There is nothing in the provision which requires that the assessee alone should run the priority industry. It may be that on account of business exigencies the assessee, instead of directly running the factory, my lease it to another and purchase the end product. So long as the end product is manufactured in the factory, the manner in which the business is carried on is not really material. The assessee may run the industry himself or may have it run by another. He may appoint a manager, for instance, and run the business. He may lease it out. So long as the factory manufactures the products coming within the list of articles and things in the Sixth Schedule, the <ORG> would be eligible for the relief under s. 80-I of the Act, as the profits derived from the factory either by lease or otherwise would be attributable to the priority industry. The assessee must have something to do with the factory and the income earned must have nexus with the priority industry. If these attributes are satisfied, then the assessee would be eligible for the concession under s. 80-I of the Act.

12. The last sentence in the passage from <ORG> judgment extracted above cannot be understood to mean that any income received from sources other than the actual conduct of the business of the priority industry would qualify for the relief, however remote the connection of such income may be. This passage has to be understood in the sense that it would envisage the relief being granted in all cases where there is some direct nexus between the income and the priority industry. The nature of the source would be immaterial. For instance, in the present case, even if the income from the lease of the factory had been assessed under the head "Other sources", the above passage would support the view that it is eligible for the concession. It is in that sense that the last sentence of <ORG> judgment has to be understood.

13. The learned counsel for the Commissioner contended that the source or receipt by the assessee was only the lease amount and that it cannot have anything to do with the priority industry contemplated by s. 80-I of the Act. The source cannot be divorced from its origin, namely, the factory in the present case. As the factory is producing the automobile ancillaries, the income either by way of rent or by direct manufacture would qualify for the relief under s. 80-I of the Act. The result is that the rental income would have to be taken as eligible for the relief under s. 80-I of the Act.

14. We would now take up for consideration the amount derived by the assessee as and by way of export incentives. From the statement of facts given above, it would be clear that this incentive has been given to the assessee in order to make good the loss that arose to it by reason of the export fetching a lower price than what the assessee would have obtained if the products had been sold in India. The export incentive is thus bound up with the manufacture and sale of automobile ancillaries and is, therefore, attributable to the business of priority industry. The amount of incentives would, therefore, qualify for the relief under s. 80-I of the Act.

15. The last item to be considered is the interest earned by the assessee from the fixed deposit with <ORG>. It had also derived interest on deposits from other banks, etc., as well as from the <ORG> Bonds. With references to the rest of the items, the denial of the relief under s. 80-I of the Act is not in dispute. It is only with reference to the interest received from <ORG> on the fixed deposit that the assessee claims that such interest should be attributed to the priority industry and should qualify for the relief envisaged by s. 80-I of the Act. The connection between the fixed deposit and the priority industry is stated to be that the amount was found to be surplus in the assessee's hands and it was, therefore, invested in the bank and that thereafter when the assessee wanted money from the bank, on the security of the said fixed deposit, amounts were lent by the bank. The total amount in the fixed deposit was Rs. 11,00,000 and the assessee had borrowed as on the closing date of each of these two years Rs. 4,50,000 and Rs. 5,81,255.62 respectively.

16. <ORG>, in dealing with this claim of the assessee, has observed as follows :

"Such borrowing was obviously for business purposes and the interest paid by the assessee on such borrowing had been included in the expenditure. The interest referred to above was interest received by the assessee from the said bank on such fixed deposit. (The above details are apparent from the balance-sheet of the assessee as on March 31, 1970, and March 31, 1971). In these circumstances, the making of the deposit and the borrowing of the moneys on the same fixed deposit can be treated as part of the assessee's business. The result is, the income received from the bank by way of interest on such fixed deposit can be said to be attributable to the profits of the priority industry."

17. <ORG> seems to have missed the real point that arises in this case. The real question is, whether the interest derived from the deposit is attributable to the priority industry. The surplus funds, whenever deposited, in the bank were clearly not required for the priority industry and that is how it came to be kept in a fixed deposit for a term. If nothing more had happened, the fixed deposits could only be taken as originating from the funds not required by the priority industry. Its connection with the priority industry would only be remote.

18. As and when the assessee required moneys, it approached the bank for loans. It was at that stage that the bank took this fixed deposit as security for the loans. We are, however, concerned with the deposit having nexus with the priority industry at the stage at which the amounts were deposited in the bank and started earning interest. Else, it would be enough for an assessee to offer as security all his properties and claim the entire amount of income earned from all of them as eligible for the relief under s. 80-I . Such a result could not have been intended. Just as any person can make a fixed deposit in the bank, the assessee also did. For instance, in the present case itself, there were deposits in <ORG>. The assessee did not get relief in respect of the interest income from the said deposits as attributable to the priority industry, and in our opinion rightly, as there was no connection between the fixed deposit and the priority industry. We have to consider the question of the interest income at the stage at which the deposit was made and the use of the deposit receipt as security does not make the income that of the priority industry.

19. In fact, in a case which arose in this court in Addl. <CITATION> .  119 ITR 523, the question of the character of the interest or its relation to the priority industry came to be examined. That was a case of a company engaged in the distribution of electricity. It had to create a "contingencies reserve". The sums appropriated to that reserve had to be invested in approved securities contemplated by the Indian Trusts Act , 1882. The assessee received interest on such investments and claimed the relief as a priority industry in respect of such interest. It was contended by the assessee that since it was a statutory obligation to invest the amount available in the contingencies reserve in an approved security and since it could not carry on the business without complying with statutory obligation, the interest arising from such investment should be considered as attributable to the profits and gains of the priority industry within the meaning of s. 80-I of the Act. This contention was negatived by this court, At page 526, it was pointed out that deduction is possible only in respect of profits and gains arising from the specific activities or business of generation or distribution of electricity or any other form of power and that the immediate source of income in that case was the investment in <ORG>. securities. It was added (p. 526) :

"In order to attract the provisions of s. 80-I the income should be in the nature of profits or gains arising out of the business of a priority industry. Neither the statutory reserve not the securities in which the amounts have been invested can be considered to be a trading asset of the assessee. Any investment of the contingency reserve, therefore, could not be taken as having a direct relationship or nexus with the business of generating and supplying energy. The interest received on such investment, therefore, could not be considered to be profit or gain attributable to the business of the assessee which alone can be taken into account for the purpose of s. 80-I of the Act."

20. During the course of the argument there was some debate as to whether this particular passage would have validity after the judgment of <ORG> in [1978] 113 ITR 84 ( <CITATION> ). In the context of the pronouncement of <ORG>, the view taken by this court that the profits and gains must arise from the specific activities or business of generation of electricity may have to be reconsidered. As "attributable to" is wider than "derived from", the relief is not confined only to the profits of the priority industry strictly so called. It would have a wider ambit. However, the conclusion arrived at in that case is unexceptionable because the character of the interest is different from the character of the income attributable to the priority industry. The result is that in so for as the interest income was concerned, the <ORG> acted erroneously in granting the relief. The questions are answered accordingly. There will be no order as to costs.


PETITIONER: INCOME TAX OFFICER, I WARD, DIST, VI, CALCUTTA & ORS. Vs. RESPONDENT: <NAME> DAS DATE OF JUDGMENT30/03/1976 BENCH: <NAME>, HANS RAJ BENCH: <NAME>, HANS RAJ GOSWAMI, P.K. CITATION: 1976 AIR 1753 1976 SCR (3) 956 1976 SCC (3) 757 CITATOR INFO : F 1977 SC 429 (10) R 1986 SC1857 (7) RF 1987 SC1897 (32) ACT: Income Tax Act , 1961-S. 148-Scope of-Words & Phrases- "Reason to believe" meaning of 'rational nexus'-What postulates. HEADNOTE: In March 1967, after obtaining the satisfaction of the Commissioner the appellant issued a notice under s. 148 of the Income Tax Act, 1961 stating that he had reason to believe that the respondent's income chargeable to tax for the assessment year 1958-59 had escaped assessment. The respondent replied that the I.T.O. had no competence or jurisdiction to reopen the assessment under s. 147 of the Act on a mere change of opinion. Since there was no reply from the appellant, the respondent moved <ORG> for a writ. <ORG> held that the conditions precedent for the exercise of jurisdiction by the Income Tax Officer were not fulfilled because the report submitted by the Income Tax Officer to the Commissioner under s. 147(a) was defective. On appeal to this Court it was contended that <ORG> was not right in holding that the Income Tax Officer's report was defective. Dismissing the appeal, ^ HELD: <ORG> was right in holding that the material before the Income Tax Officer could not have led to the formation of the belief that the income of the assessee had escaped assessment because of his failure or omission to disclose fully and truly all material facts. [965H] 1. (a) The two conditions required to be satisfied before the Income Tax Officer issued a notice under s. 148 of the Income Tax Act are that he must have reason to believe (i) that the income chargeable to tax had escaped assessment and (ii) that such income had escaped assessment by reason of the omission or failure on the part of assessee, to disclose fully and truly material facts necessary for assessment for that year. Both these conditions must co-exist in order to confer jurisdiction on the Income Tax Officer. Further the Income Tax Officer should record his reasons before initiating proceedings under s. 148(2) ; before issuing the notice after the expiry of four years from the end of the relevant assessment year, the Commissioner should be satisfied on the reasons recorded by the Income Tax Officer that it was a fit case for the issue of such notice. [962C-D] (b) The duty cast upon the assessee does not extend beyond making a true and full disclosure of the primary facts. It is then for the Income Tax Officer to draw the correct inference from the primary facts. Where his inference subsequently appears to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening the assessment. [962F-G] (c) The grounds or reasons leading to the formation of the belief under s. 147(a) must have a material bearing on the question of escapement of income. Once there exist reasonable grounds for the Income Tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. While the sufficiency of grounds which induce the Income Tax Officer to act is not justiciable, it is open to the assessee to contend that the Income Tax Officer did not hold the belief that there was such non-disclosure. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-Tax Officer. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. [962H] 957 <CITATION> 79 I.T.R. 603, <CITATION> , 41 I.T.R. 191 and <CITATION> 63 I.T.R. 219 followed. In the instant case the grounds given by the Income Tax Officer for reopening the assessment were (i) that the three persons whose names were mentioned in the list of creditors, were known name lenders and (ii) that another person shown as a creditor of the assessee had since confessed that he was doing only name lending. The first ground mentioned by the Income Tax Officer could not have led to the formation of the belief that the income of the respondent had escaped assessment for that year because of his failure or omission to disclose fully and truly all material facts. <ORG> was justified in excluding that ground from consideration. [963D-E] As regards the second ground there is nothing to show that the confession of another person related to a loan to the assessee and not to someone else. There is no indication as to when the confession was made and whether it related to the assessment year sought to be re-opened. To infer from that confession that it related to the period of assessment and that it pertained to the loan shown to have been advanced to the assessee would be far-fetched. [964G] 2(a). Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income Tax Officer and the formation of his belief that there had been escapement of income of the assessee from assessment in the particular year. It is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" in s. 34 of 1922 Act before its amendment in 1948 do not find a place in s. 147 would not lead to the conclusion that action could now be taken for reopening assessment even if the information was wholly vague, indefinite, far-fetched and remote. [965B-D] (b) The powers of the Income Tax Officer to reopen assessment, though wide, are not plenary. The words are "reason to believe" and not "reason to suspect". The provisions of the Act depart from the normal rule that there should be finality about orders made in judicial and quasi- judicial proceedings. It is, therefore, essential that before such action is taken the requirement of the law should be satisfied. [965E-F] In the instant case the live link or close nexus between the material before the Income Tax Officer and the belief which he was to form regarding the escapement of the income was missing or at any rate the link was too tenuous to provide a legally sound basis for reopening the assessment. [G] JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2526 of 1972.

Appeal from the Judgment and Order dated the 13th January, 1972 of <ORG> in Matter No. 326 of 1967.

<NAME> and <NAME>, for the Appellant. <NAME>, <NAME>, (Mrs.) <NAME>, <NAME>, <NAME> and <NAME> for the Respondent.

The Judgment of the Court was delivered by <ORG>, J. This appeal on certificate is against the <ORG> judgment of <ORG> whereby on petition under article 226 of the Constitution of India filed by the respondent that court by majority quashed notice under section 148 of the Income-tax Act, 1961 (hereinafter referred to as the Act) issued by appeallant No. 2 (Income-tax Officer E Ward, Hundi Circle, Calcutta) (hereinafter referred to as the appellant) for the purpose of reopening assessment of the income of the respondent for the assessment year 1958-

59. The respondent was assessed for the assessment year 1958-59 under section 23(3) of the Indian Income-tax Act, 1922 on June 14, 1960. His total income was assessed to be Rs. 37,872. While making the assessment the Income-tax Officer allowed deduction of a sum of Rs. 15,991 by way of expenses claimed by the respondent. The expenses included Rs. 10,494/4 As/3 Pies by way of interest. According to the respondent, he produced through his authorised representative all books of accounts, bank statements and other necessary documents in connection with the return. On March 14, 1967 the respondent received notice dated March 8, 1967 issued by the appellant under section 148 of the Act stating that the appellant had reason to believe that the respondent's income which was chargeable to tax for the assessment year 1958-59 had escaped assessment within the meaning of section 147 of the Act and that the notice was being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax. The respondent was called upon to submit within 30 days from the date of the service of the notice a return in the prescribed form of his income for the assessment year 1958-59. On May 2, 1967 the respondent through his lawyer stated that there was no material on which the appellant had reason to believe that the respondent's income had escaped assessment and, therefore, the condition precedent for the assumption of jurisdiction by the appellant had not been satisfied. The appellant was said to have no competence or jurisdiction to re-open the assessment under section 147 of the Act on a mere change of opinion. The appellant was also called upon to furnish all the materials on which he had reason to believe that income had escaped assessment. As, according to the respondent, there was no satisfactory response from the appellant, he filed petition under article 226 of the Constitution for quashing the impugned notice.

It was denied in the affidavit on behalf of the appellant that all materials relevant and necessary for the assessment of the respondent's income for the assessment year 1958-59 had been produced before the Income-tax Officer at the time of the original assessment. It was further stated:

"Subsequent to the assessment for the assessment year 1958-59, it was discovered, inter alia, that some of the loans shown to have been taken and interests alleged to have been paid thereon by the petitioner during the relevant assessment year were not genuine. The Income-tax Officer had reason to believe and bona fide believed that the said alleged loans and the interest alleged to have been paid thereon are not genuine. If necessary, I crave leave to produce before the hon'ble Judge hearing the application, the relevant records on the basis of which the said Income-tax Officer had reason to believe that the income of the petitioner escaped assessment as aforesaid at the hearing of the application."

During the pendency of the proceedings <ORG> directed that a copy of the report made by the appellant to the Commissioner of Income-tax for obtaining latter's sanction under section 147 be produced. The report was accordingly produced, and the same reads as under:

"There are hundi loan credits in the name of <NAME>, <NAME>, <NAME>, etc., who are known name-lenders, and also hundi loan credit in the name, <NAME>, who has since confessed he was doing only name-lending. In the original assessment these credits were not investigated in detail. As the information regarding the bogus nature of these credits is since known, action under section 147 (a) is called for to reopen the assessment and assess these credits as the undisclosed income of the assessee. The assessee is still claiming that the credits are genuine in the assessment proceedings for 1962-63. Commissioner's sanction is solicited to reopen the assessment for 1958-59, under section 147(a) ."

All the three Judges who constituted <ORG> found that the assessee was not being charged with omission to disclose all facts: he was charged for having made an untrue disclosure because the assessee had stated that he had received certain sums of money from certain persons as loans when, in fact, he had not received any sum at all from these persons. It was also stated by the assessee at the time of the original assessment that he had paid interest to certain persons when, in fact, he had not, if the information received later was true. The duty of the assessee, it was held, was not only to make a full disclosure of all material facts, his duty was also to make a true disclosure of facts and not to mislead the assessing officer by disclosing certain things which did not represent facts. <ORG> accordingly held that once an assessee infringes this rule, any subsequent discovery of fact by the assessing officer which would raise a resonable belief in his mind that the assessee had not made a true and correct disclosure of the facts and had thereby been responsible for escapement of his income from assessment would attract section 147 of the Act. Two of the learned Judges, <NAME> and <NAME>., however, took the view that the conditions precedent for the exercise of jurisdiction by the Income-tax Officer under section 147 of the Income-tax Act were not fulfilled in the case as the report submitted by the Income- tax Officer to the Commissioner for sanction under section 147(a) was defective. The defects in the report, in the opinion of <ORG>, were the same as had been pointed out by this Court in the case of <CITATION> .(1) The Commissioner, while according permission for taking action under section 147 , it was observed, acted mechanically because the Commissioner had not expressly stated that he was satisfied that this was a fit case for the issue of notice under section 148 . As against the majority, <NAME> held that notice under section 148 of the Act was valid and did not suffer from any infirmity. It was also observed that the Commissioner of Income-tax had not acted improperly in giving sanction.

In the result, by majority <ORG> quashed the notice issued by the appellant to the respondent.

In appeal before us Mr. <NAME> on behalf of the appellants has assailed the judgment of the majority of the learned Judges in so far as they have held that the report submitted by the Income-tax Officer to the Commissioner of Income-tax for sanction was defective. As against that, Dr. <NAME> on behalf of the assessee-respondent has canvassed for the correctness of the view taken by the majority regarding the defective nature of the report. Dr. <NAME> has in his own turn assailed the finding of all the three learned Judges of <ORG> in so far as they have held that the assessee was being charged with omission to disclose true facts. Contention has also been advanced by Dr. <NAME> that the material on the basis of which the Income-tax Officer initiated these proceedings for reopening the assessment did not have a rational connection with the formation of the belief that the assessee had not made a true disclosure of the facts at the time of the original assessment.

Before dealing with the points of controversy, it would be useful to reproduce the relevant provisions of the Act. Sections 147 and 148 which deal with income escaping assessment and issue of notice where income has escaped assessment read as under:

(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of section 148 to 153 , assess or ressess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in sections 148 to 153 referred to as the relevant assessment year). Explanation 1.-For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:-

(a) where income chargeable to tax has been under assessed; or

(b) where such income has been assessed at too low a rate; or

(c) where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act , 1922 (XI of 1922); or

(d) where excessive loss or depreciation allowance has been computed.

Explanation 2.-Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.

148. Issue of notice where income has escaped assessment.-

(1) Before making the assessment, reassessment or recomputation under section 147 , the Income-tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 139 ; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.

(2) The Income-tax Officer shall, before issuing any notice under this section, record his reason for doing so."

Sub-section (1) of section 149 prescribes the time limit for notice and reads as under:

"(1) No notice under section 148 shall be issued"

(a) in cases falling under clause (a) of section 147-

(i) for the relevant assessment year, if eight years have elapsed from the end of that year, unless the case falls under sub-clause (ii);

(ii) for the relevant assessment year, where eight years, but not more than sixteen years, have elapsed from the end of that year, unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees fifty thousand or more for that year;

(b) in cases falling under clause (b) of section 147 , at any time after the expiry of four years from the end of the relevant assessment year."

Section 151 pertains to the sanction for issue of notice and reads as under:

"151. Sanction for issue of notice.-(1) No notice shall be issued under section 148 after the expiry of eight years from the end of the relevant assessment year, unless the <ORG> is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.

(2) No notice shall be issued under section 148 after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice."

The provisions of sections 147 to 153 of the Act correspond to those of section 34 of the Indian Income-tax Act, 1922. There have been some points of departure from the old law, but it is not necessary for the purpose of the present case to refer to them.

It would appear from the perusal of the provisions reproduced above that two conditions have to be satisfied before an Income-tax Officer acquires jurisdiction to issue notice under section 148 in respect of an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, viz., (1) the Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment, and (2) he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee (a) to make a return under section 139 for the assessment year to the Income-tax Officer, or (b) to disclose fully and truly material facts necessary for his assessment for that year. Both these conditions must co-exist in order to confer jurisdiction on the Income-tax Officer. It is also imperative for the Income-tax Officer to record his reasons before initiating proceedings as required by section 148(2) . Another requirement is that before notice is issued after the expiry of four years from the end of the relevant assessment years, the Commissioner should be satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice. We may add that the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Income-tax Officer of the account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure contemplated by law. The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the Income-tax Officer with regard to the inference which he should draw from the primary facts. If an Income-tax Officer draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment.

The grounds or reasons which lead to the formation of the belief contemplated by section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exist reasonable grounds for the Income- tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law [see observations of this Court in the cases of <CITATION> and <CITATION> while dealing with corresponding provisions of the Indian Income-tax Act , 1922].

Keeping the above principles in view, we may now turn our attention to the facts of the present case. Two grounds were mentioned in the report made by the Income-tax Officer for reopening the assessment of the assessee respondent with a view to show that his income had been under-assessed because of his failure to disclose fully and truly material facts necessary for the assessment. One was that <NAME>, who was shown to be one of the creditors of the assessee, had since confessed that he was doing only name- lending. The other ground was that <NAME>, <NAME>, <NAME>, etc., whose names too were mentioned in the list of the creditors of the assessee, were known name-lenders. So far as the second ground is concerned, neither the majority of the Judges of <ORG> nor the learned Judge who was in the minority relied upon that ground. Regarding that ground, the learned Judge who was in the minority observed that no basis had been indicated as to how it became known that those creditors were known namelenders and when it was known. The majority while not relying upon that ground placed reliance upon the case of <NAME> (supra). In that case the Income- tax Officer while submitting a report to the Commissioner of Income-tax for obtaining his sanction with a view to issue notice under section 148 of the Act stated:

"During the year the assessee has shown to have taken loans from various parties of Calcutta. From D.I.'s Inv. No. A/P/Misc. (5) D.I./63-64/5623 dated August 13, 1965, forwarded to this office under C.I.T., Bihar and Orissa, Patna's letter No. Inv. (Inv.) 15/65- 66/1953-2017 dated Patna September 24, 1965 it appears that these persons are name-lenders and the transactions are bogus. Hence, proper investigation regarding these loans is necessary. The names of some of the persons from whom money is alleged to have been taken on loan on hundis are:

1. <NAME>

2. <NAME>

3. <NAME> The amount of escapement involved amounts to Rs. 1,00,000."

In dealing with that report this Court observed: "From the report submitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had reasons to believe that by reason of the assessee's omission to disclose fully and truly all material facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year, nor could it be said that he, as a consequence of information in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year. We are not satisfied that the Income-tax Officer had any material before him which could satisfy the requirements of either clause (a) or clause (b) of section 147 . Therefore he could not have issued a notice under section 148 ".

Reference to the names of <NAME>, <NAME>, <NAME>, etc., in the report of the Income-tax Officer to the Commissioner of Income-tax in the instant case does not stand on a better footing than the reference to the three names in the report made by the Income-tax Officer in the case of <NAME>. We would, therefore, hold that the second ground mentioned by the Income-tax Officer, i.e., reference to the names of <NAME>, <NAME>, <NAME>, etc., could not have led to the formation of the belief that the income of the respondent assessee chargeable to tax had escaped assessment for that year because of the failure or omission of the assessee to disclose fully and truly all material facts. All the three learned Judges of <ORG>, in our opinion, were justified in excluding the second ground from consideration.

We may now deal with the first ground mentioned in the report of the Income-tax Officer to the Commissioner of Income-tax. This ground relates to <NAME>, against whose name there was an entry about the payment of Rs. 74 Annas 3 as interest in the books of the assessee, having made a confession that he was doing only name- lending. There is nothing to show that the above confession related to a loan to the assessee and not to someone else, much less to the loan of Rs. 2,500 which was shown to have been advanced by that person to the assessee-respondent. There is also no indication as to when that confession was made and whether it relates to the period from April 1, 1957 to March 31, 1958 which is the subject-matter of the assessment sought to be reopened. The report was made on February 13, 1967. In the absence of the date of the alleged confession, it would not be unreasonable to assume that the confession was made a few weeks or months before the report. To infer from that confession that it relates to the period from April 1, 1957 to March 31, 1958 and that it pertains to the loan shown to have been advanced to the assessee, in our opinion, would be rather far-fetched.

As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far- fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" which were there in section 34 of the Act of 1922 at one time before its amendment in 1948 are not there in section 147 of the Act of 1961 would not lead to the conclusion that action cannot be taken for reopening assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.

The powers of the Income-tax Officer to reopen assessment though wide are not plenary. The words of the statute are "reason to believe" and not "reason to suspect". The reopening of the assessment after the lapse of many years is a serious matter. The Act , no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi- judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. The majority of the learned Judges in <ORG>, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts. We would, therefore, uphold the view of the majority and dismiss the appeal with costs.

P.B.R. Appeal dismissed.