PETITIONER: STATE OF MADHYA PRADESH Vs. RESPONDENT: BHAILAL BHAI & ORS. DATE OF JUDGMENT: 20/01/1964 BENCH: GUPTA, K.C. DAS BENCH: GUPTA, K.C. DAS GAJENDRAGADKAR, P.B. WANCHOO, K.N. <NAME>, J.C. AYYANGAR, N. RAJAGOPALA CITATION: 1964 AIR 1006 1964 SCR (6) 261 CITATOR INFO : RF 1965 SC1740 (11) R 1966 SC1089 (34) R 1969 SC 78 (4) E 1970 SC 898 (18,35,37,46,51,62,63) D 1972 SC2060 (4,5) E 1975 SC 813 (5,6) RF 1976 SC2243 (21) R 1982 SC 101 (28) E&R 1990 SC 772 (20,31,32) RF 1990 SC 820 (17) RF 1991 SC1676 (72) ACT: Constitution of India, 1950, Arts. 226, 301 and 304--Issue of Writ Unreasonable delay in moving <ORG>--what is--Sales Tax--Impeding inter State trade--Validity--Tax paid under mistake--Order of repayment--Jurisdiction of <ORG> under Art. 226. HEADNOTE: The respondents are dealers in tobacco in the State of Madhya Bharat. The appellant imposed sales tax on the sale of imported tobacco by the respondents. But no such tax was imposed on the sale of indigenous tobacco. The respondents filed petitions under Art. 226 of the Constitution for the issue of writ of mandamus 'directing the refund of sales tax collected from them. They contended that the impugned tax violated Art. 301 (a) of the Constitution and they paid the tax under a mistake of law and the tax so paid was refundable under s. 72 of the Indian Contract Act, 1872. The appellant contended that there was no violation of Art. 301 of the Constitution, even if there was such violation the tax came within the special provision under Art. 304(a ), the <ORG> bar. no power to direct refund of tax already paid and in any event the <ORG> should not exercise its discretionary power of issuing a writ of mandamus directing this to be done since there was unreasonable delay in filing the petition. The <ORG> rejected all the contentions of the appellant and a writ of mandamus was issued as prayed for. The appellants appealed to this <ORG>. Before this <ORG> substantially the same contentions as were canvassed before the <ORG> were raised. Held: (i) Even though the liability to pay tax was created by the sale of tobacco in Madhya Pradesh and not by the import itself the facts and circumstances showed that trade and commerce as between Madhya Bharat and other parts of India was directly impeded by the impugned tax and therefore the said tax violated Art. 301(a) of the Constitution. <CITATION> ,  1 S.C.R. 809, <CITATION> ,  1 S.C.R. 491 and Firm <ORG> v. State of Madras, A.I.R. 1963 S.C. 928, referred to. (ii) Even though the tax contravened Art. 301 of the Constitution it would he valid if it came within the saving provisions of Art. 304 of the Constitution. (iii) Tobacco manufactured or produced in the appellant State, similar to the tobacco imported from outside had not been subjected to the tax and therefore the tax was not within the saving provisions of Art. 304 (a) of the Constitution. 262 (iv) The tax which had already been paid was so paid under a mistake within s. 72 of the Indian Contract Act. The <ORG>s have power for the purpose of enforcement of fundamental rights and statutory rights to grant consequential reliefs by ordering repayment of money realised by the Government without the authority of law. Firm <ORG> v. State of Madras, A.I.R. 1963 S.C. 928 and <CITATION> ,  S.C.R. 1360,referred to. (v) As a general rule if there has been unreasonable delay the court ought not ordinarily to lend its aid to a party by the extraordinary remedy of mandamus. Even if there is not such delay, in cases where the opposite party raises a prima facie issue as regards the availability of such relief on the merits on grounds like limitation the <ORG> should ordinarily refuse to issue the writ of mandamus. (vi) Though the provisions of the Limitation Act do not as such apply to the granting of relief under Art. 226 the maximum period fixed by the legislature as the time within which relief by a suit in a Civil <ORG> must be claimed may ordinarily be taken to be a reasonable standard by which delay in seeking remedy under Art. 226 can be measured. The <ORG> may consider the delay unreasonable even if it is less than the period of limitation prescribed for a civil action for the remedy. Where the delay is more than this period it will almost always be proper for the court to hold that it is unreasonable. The period of limitation prescribed for recovery of money paid by mistake under the Iimitation Act is three years from the date when the mistake is known. In the result C.A. Nos. 861-867 are allowed in part and the other appeals are dismissed. JUDGMENT:

CIVIL APPELLATE JURISDICTION Civil Appeals Nos. 362-377 of 1962.

Appeals from the judgment and orders dated December 16, 1959 of <ORG> in Miscellaneous Petitions Nos. 144 to 158 and 160 of 1958.

Civil Appeals Nos. 858 to 867 of 1962.

Appeals from the judgment and orders dated 28th October, 1960, 16th September, 1960 and 29th July, 1960 of <ORG> in Miscellaneous Petitions Nos. 110, 119 and 136 of 1960, 198, 199, 202 to 206 of 1959 respectively. Civil Appeals Nos. 25 to 29 of 1963.

Appeals from the judgment and orders dated 29th July, 1960, 26th September, 1960, 28th October, 1960, 16th September, 1960 and 28th October, 1960 of <ORG> in Miscellaneous Petition Nos. 273 of 1958, 73, 74, 120 and 132 of 1960 respectively. <NAME>, Advocate-General, Madhya Pradesh and <NAME> for the appellants (in all the appeals). <NAME>, <NAME>, <NAME> and <NAME>, for the respondent (in C.A. No. 362/1962). <NAME>, <NAME> and <NAME>, for the respondents (in C.A. Nos. 363 to 377 and 858 to 867 of 1962 and 25 to 27 of 1963).

January 20, 1964. The Judgment of the Court was delivered by <NAME> 31 appeals by the State of Madhya Pradesh are against the orders made by <ORG> in 31 applications under Art. 226 of the Constitution by dealers in tobacco. All these petitioners carried on business in Madhya Bharat which later became part of the State of Madhya Pradesh. They were assessed to sales tax on their sales of tobacco in accordance with the notification issued by the State Government in exercise of powers under s. 5 of the State Sales Tax Act and large amounts were collected by <ORG> and later by <ORG>. The petitioners contended that the taxing provisions under which the tax was assessed and collected from them was unconstitutional as it infringed Art. 301 of the Constitution and did not come within the special provision of Art. 304(a). Accordingly, they prayed for appropriate writs or orders for refund of all the taxes that has been collected from them. In resisting these applications <ORG> contended, first, that the Wing provisions did not offend Art. 301 of the Constitution and that in any case, they satisfied the requirements of Art. 304(a). It was further contended that even if the taxing provision was unconstitutional and the assessment and collection of tax had been without any legal authority the petitioners were not entitled to the order for refund prayed for.

<ORG> was of opinion on a consideration of; the notification under which the tax was assessed that it imposed a tax only on imported tobacco and not on home grown tobacco and so it did not come within the special provisions of Art. 304(a) of the Constitution and consequently the infringement of Art. 301 of the Constitution which resulted from the imposition of a tax on import of goods made the provisions void in law. The prayer for refund was allowed in the applications out of which C.A. Nos. 362-377, C.A. Nos. 861--867 of 1962 and C.A. No. 25 of 1963 have arisen. The prayer was rejected in the remaining applications. In the present appeals the State of Madhya Pradesh challenges the correctness of <ORG> decision that the taxing provision was unconstitutional and void and also the orders for refund made in some of the petitions men- tioned above.

The liability to pay tax arose under s.3 of the Madhva Bharat Sales Tax Act. This Act came into force from the 1st day of May 1950. As originally enacted it provided that (a) every dealer who imports goods into Madhya Bharat shall be liable to pay tax on his taxable turnover in respect of sales or supplies of goods effected from the 1st day of May 1950 if his total turnover in the previous year in respect of sales or supplies of goods exceeded Rs 5,000; (b) similarly every manufacturer or processor whose turnover in the previous year exceeded Rs. 5,000 was made liable to pay tax on his taxable turnover in respect of sales or supplies of goods effected from the 1st day of May 1950; (c) every other dealer was made liable to pay tax on his taxable turnover in respect of sales or supplies of goods effected from the 1st day of May 1950, if the total turnover in the previous year exceeded Rs. 12,000. By later amendments the word "processor" was deleted from cl. (b) of the section and the meaning of the words "any other" in cl. (c) was made clearer by substituting the words "any goods of a dealer not falling in cl. (a) or cl. (b)". There was also an amendment in 1950 making it, clear that the taxable turnover on which the tax liability.

<NAME> was in respect of sales or supplies of goods effected in Madhya Bharat.

Section 5 of the Act provides that the tax payable by a dealer shall be at a single point and shall not be less than Rs. 1/9/- per cent or more than 6-1/4 per cent of the taxable turnover, as notified from time to time by the <ORG> by publication in the Official Gazette. This is subject to a proviso that the <ORG> may in respect of a special class of goods charge tax upto 12-1/2% on the taxable turnover. The second sub-section of s. 5 empowers the <ORG> to notify at the time of notifying the tax payable by a dealer, the goods and the point of their sale at which the tax is payable. The legal position therefore is that unless there is a valid notification under s. 5 no tax can be levied. The contention of the petitioners- dealers which has succeeded in <ORG> is that the notifications on the strength of which the tax was assessed on them were invalid.

The first notification was issued on April 30, 1950. This provided that with effect from the 1st day of May 1950 sales tax shall be collected in respect of goods specified in column 2 of the Schedule that was attached to the notification at the point of sale mentioned in column 3 at the rates mentioned in column 4. The relevant portion of the Schedule ran thus:-

-------------------------------------------------------- Sl Name of commodity The point of sale Rate of No. by dealers tax

9. Tobacco leaves, manufactu- Importer 6-4-0 red tobacco (for eating and Per cent smoking) and tobacco used Sales Tax for <ORG> manufacturing.

----------------------------------------------------------- This was followed by another notification dated May 22, 1950 under which a lower rate was prescribed for tobacco used for Bidi manufacturers. But the point at which the tax was payable remained unaltered. The rele-

vant portion of the Schedule to this notification was in these words:

----------------------------------------------------------- Sl. Name of commodity Point of sale Rate per-

No. by the dealers cent of tax in M. B.

10. Tobacco leaves and manu-

factured tobacco (for eating, Importer 6-4-0 smoking and snuffing)

11. Tobacco used for Bidi Importer 1-9-0 manufacturing.

------------------------------------------------------------ For a short period, i.e., from the 1st January 1954 to the 21st January 1954 these two notifications remained inoperative in consequence of a notification dated the 24th October, 1953, under which from the 1st January 1954 the point of sale at which the tax was payable was altered to "on a sale by a dealer direct to a consumer or to a dealer who does not hold a licence or registration certificate under the Sales Tax Act ". This last notification was again superseded by a notification dated the 21st January, 1954 in consequence of which the old position was restored with effect from January 22, 1954. That is, with effect from 22nd January 1954 the point at which the tax was payable, again became a sale by an importer.

There can be no doubt that the tax payable at the point of sale by the importer in Madhya Bharat directly impeded the freedom of trade and commerce guaranteed by Art. 301 of the Constitution. It is true that the import by itself would not bring in the liability to tax and that if the imported goods were not sold in Madhya Bharat no tax would be

-payable. Quite clearly however by far the greater part of the tobacoo leaves, manufactured tobacco (for eating and smoking) and tobacco used for Bidi manufacturing that would be imported into the State would be sold in Madhya Bharat. That a very considerable amount was so sold is clear from the very assessment orders made in these several cases. There can be no doubt therefore that even though it is the sale in Madhya Bharat of the imported goods that creates the liability to tax and not the import by itself, the trade and commerce as between Madhya Bharat and other parts of India is directly impeded by this tax. On the authority of this Court's decision in <CITATION> (1) it must therefore be held that the tax contravenes the provisions of Art. 301 of the Constitution. It may be mentioned that the later decision of this Court in <CITATION> (2) which slightly modified the majority decision in <ORG> case does not alter this position. If the tax could have been claimed to be regula- tory or compensatory it would have got the benefit of the latter decision. There is, however, no scope for such a claim (See Firm Mehtab Majid & Co. v. State of Madras) (3). The tax could still be good if even though it contravened the provisions of Art. 301 it came within the saving provi- sions of Art. 304(a) of the Constitution. That Article provides in its cl. (a) that notwithstanding anything in Article 301 or Art. 303 the legislature of a State may by law impose on goods imported from other States any tax to which similar goods manufactured or produced in that State are subject so however as not to discriminate between goods so imported and goods so manufactured or produced. An attempt was made on behalf of the State before <ORG> and also before us to construe the notification mentioned above to mean that not only the tobacco imported from other States but also similar goods manufactured or produced in Madhya Bharat were subject to this tax and at the same rate. It was argued that a dealer in these goods who was an importer and so sold goods imported by him into Madhya Bharat would also be selling goods not so imported but manufactured and produced in the State. We are prepared to agree that may well be so. What we are unable to see, however, is that in respect of sales of such other goods this person would be liable to (1)  1 S.C.R. 809.

(2) [1963] 1 S.C.R. 491.

(3) A.I.R. 1963 S.C. 928.

any tax under the notification. We are informed that in fact where importers dealt with goods other than imported goods the sales of such other goods were in fact excluded from tax. The learned Advocate-General of Madhya Pradesh who appeared before us in support of these appeals suggested that that was done by <ORG> on a mistaken interpretation of the law. We do not think so. In our opinion, the only reasonable interpretation of the notification as it stands, viz., that tax on tobacco leaves, manufactured tobacco and tobacco used for Bidi manufacturing would be payable at the point of sale by the importer, is that only the sale of goods which the importer had imported would be liable to tax and not sale of any other goods by him. If the intention had been as suggested by the learned Advocate-General that though the tax is payable at the point of sale by an importer the scale by the same person of goods manufactured or produced in Madhya Bharat would also be liable to tax, the word "importer" would not have been used in column 3 but the word "dealer" would have been used and the point of sale would have been indicated by some other words as the "first sale in Madhya Bharat" or "the sale to the retailer in Madhya Bharat" as the rule-making authority chose.

The matter becomes even more clear if in column 3 we read for "importer" the definition of "importer of goods" in s. 2(i) of the Act. Reading this we find that the point of sale in Madhya Bharat at which the tax is payable is the sale "by the dealer who brings or causes to be brought into Madhya Bharat any goods from outside for the purpose of processing, manufacturing or sale" or "who purchases goods in Madhya Bharat for the purpose of sale from a dealer who does not ordinarily carry on business in Madhya Bharat."When only such a sale is being made the point at which the tax is payable, there is hardly any scope for a serious argument that the notification was intended to make sales by that same dealer of goods manufactured or produced in Madhya Bharat liable to tax.

it may not be out of place to notice in this connection the distinction made by s.3 of the Madhya Bharat Sales  Tax Act between sales by a dealer who imports goods [cl.

(a)] and other dealers [cls. (b) and (c) ]. It is not un- reasonable to think that the Act itself contemplated the sales by an importer of goods as meaning only sales by him of goods imported by him into Madhya Bharat. Apart from this, it has to be noticed that admittedly the notification did not make dealers who dealt only in home grown or home produced tobacco liable to pay the tax. That by itself would be sufficient to bring in the vice of discrimination which is the purpose of Art. 304(a) to prevent. There can, therefore, be no escape from the conclusion that similar goods manufactured or produced in the State of Madhya Bharat have not been subjected to the tax which tobacco leaves, manufactured tobacco and tobacco used for Bidi manufacturing, imported from other States have to pay on sale by the importer. This tax is, therefore, not within the saving provisions of Art. 304(a). As already pointed out it contravenes the provisions of Art. 301 of the Constitution. The tax has therefore been rightly held by <ORG> to be invalid. It is clear that the assess- ment of tax under these notifications was thus invalid in law.

A portion of the tax thus assessed has been already paid by the petitioners. It cannot now be disputed that this payment was made under a mistake within s.72 of the Indian Contract Act and so the Government to whom the payment has been made by mistake must in law repay it. The question is whether the relief of repayment has to be sought by the tax- payer by an action in a civil court or whether such an order can be made by <ORG> in exercise of its jurisdiction under Art. 226 of the Constitution. The jurisdiction conferred by Art. 226 is in very wide terms. This Article empowers <ORG> to give relief by way of enforcement of fundamental rights and other rights by issuing directions, orders or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari. According to the petitioners a writ in the nature of mandamus can be appropriately used where money has been paid to the Government by mistake to give relief by commanding repayment of the same. That in a number of cases <ORG>s have used the writ of mandamus to enforce such repayment is not disputed. In a recent case in <ORG>, v. The State of Madras(1) this <ORG> made, in a petition under Art. 32 , an order for refund of tax illegally collected from the petitioner under Rule 16 of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939. The question whether the <ORG> has this power to order refund was not however raised there. in <CITATION> (2) the appellants disputed the correctness of <ORG>'s order made in an application under Art. 226 of the Constitution directing refund of taxes that had been paid under the U.P. Sales Tax Act on the respondent's forward transactions in silver bullion. After the levy of sales tax on such transactions was held to be ultra vires by <ORG> of Allahabad the respondent asked, for refund of the tax paid and when that was refused he applied to <ORG> under Art. 226 of the Constitution for a writ of certiorari for quashing the assessment orders and a writ of mandamus requiring the appellants to refund the amount illegally collected. The order made in this case by <ORG> for refund was affirmed by this <ORG> in appeal. In this case also the power of <ORG> to order such refund was not challenged either before <ORG> or before this <ORG>.

We see no reason to think that <ORG> have not got this power. If a right has been infringed-whether a fundamental right or a statutory right-and the aggrieved party comes to the court for enforcement of the right it will not be giving complete relief if the court merely de- clares the existence of such right or the fact that that existing right has been infringed. Where there has been only a threat to infringe the right, an order commanding the <ORG> or other statutory authority not to take the action contemplated would be sufficient. It has been held by this Court that where there has been a threat only and the right has not been actually infringed an application (1) A.I.R. 1963 S.C. 928.

(2) [1959] S.C.R. 1350.

under Art. 226 would lie and the courts would give necessary relief by making an order in the nature of injunction. It will hardly be reasonable to say that while the court will grant relief by such command in the nature of an order of injunction where the invasion of a right has been merely threatened the court must still refuse, where the right has been actually invaded, to give the consequential relief and content itself with merely a declaration that the right exists and has been invaded or with merely quashing the illegal order made.

For the reasons given above, we are clearly of opinion that <ORG> have power for the purpose of enforcement of fundamental rights and statutory rights to give consequential relief by ordering repayment of money realised by the <ORG> without the authority of law. At the same time we cannot lose sight of the fact that the special remedy provided in Art. 226 is not intended to supersede completely the modes of obtaining relief by an action in a civil court or to deny defences legitimately open in such actions. It has been made clear more than once that the power to give relief under Art. 226 is a discretionary power. This is specially true in the case of power to issue writs in the nature of mandamus. Among the several matters which <ORG> rightly take into consideration in the exercise of that discretion is the delay made by the aggrieved party in seeking this special remedy and what excuse there is for it. Another is the nature of controversy of facts and law that may have to be decided as regards the availability of consequential relief. Thus, where, as in these cases, a person comes to the <ORG> for relief under Art. 226 on the allegation that he has been assessed to tax under a void legislation and having paid it under a mistake is entitled to get it back, the court, if it finds that the assessment was void, being made under a void provision of law, and the payment was made by mistake, is still not bound to exercise its discretion directing repayment. Whether repayment should be ordered in the exercise of this discretion will depend in each case on its own facts and circumstances. It is not easy nor is it desirable to lay down any rule for universal application. It may however be stated as a general rule that if there has been unreasonable delay the court ought not ordinarily to lend its aid to a party by this extraordinary remedy of mandamus. Again, where even if there is no such delay the <ORG> or the statutory authority against whom the consequential relief is prayed for raises a prima facie triable issue as regards the availability of such relief on the merits on grounds like limitation, the <ORG> should ordinarily refuse to issue the writ of mandamus for such payment. In both these kinds of cases it will be sound use of discretion to leave the party to seek his remedy by the ordinary mode of action in a civil court and to refuse to exercise in his favour the extraordinary remedy under Art. 226 of the Constitution. The prayer for refund has been allowed by the High <ORG> in the applications out of which Civil Appeal Nos. 362-377 of 1962 and Civil Appeal Nos. 861--867 of 1962 and Civil Appeal No. 25 of 1963 have arisen. It appears that the tax provisions under which these taxes had been assessed and paid was declared void by the High <ORG> of Madhya Pradesh in their decision in <CITATION> on January 17, 1956. Later, on August 27, 1957 <ORG>, in Madhya Bharat made an order relying on the High <ORG>'s decision mentioned above. The petitioners claim to have discovered their mistake in making the payments after they came to know of these decisions. it is reasonable to think however that the petitioners must have discovered their mistake as soon as the High <ORG>'s decision in the case of <CITATION> dated January 17, 1956 became known to them' All these 16 applications were made within less than three years from the 17th January, 1956. The High <ORG> has taken the view that this was not unreasonable delay and in that view has ordered refund. This appears to us to be a sound and judicial exercise of discretion with which this <ORG> ought not to interfere. it may be added that no triable issue as regards the availability of this consequential relief was raised before the High <ORG> nor has any been suggested before us. The order of refund made by the High <ORG> in these cases cannot therefore be dis- turbed-

The position in Civil Appeal Nos. 861 to 867 of 1962 is however different. The applications out of which these appeals have arisen were made in September 1959, i.e., about three years and eight months after January 17, 1956 when <ORG> gave their decision declaring the tax provisions in question to be void.

It was necessary for <ORG> to consider this question of delay before any order for refund was made. It does not appear however that any attention was paid to this question. In making the orders for refund in each of these cases <ORG> merely said this:-

The present case is governed by <NAME> Case (1960 M.P.C. 304). Learned Government Advocate formally raised the question of the remedy open to the petitioner for refund of tax in order to keep the point open in <ORG>. We accordingly allow this petition. and issue a writ directing the oppo- nents to refund to the applicant firm the amount of tax collected from it during the above-mentioned period."

The learned Judges appear to have failed to notice that the delay in these petitions was more than the delay in the petition made in <NAME> case out of which Civil Appeal No. 362 of 1962 has arisen. On behalf of the res- pondents-petitioners in these appeals (C.A. Nos. 861 to 867 of 1962) Mr. <NAME> has argued that the delay in these cases even is not such as would justify refusal of the order for refund. He argued that assuming that the remedy of recovery by action in a civil court stood barred on the date these applications were made that would be no reason to refuse relief under Art. 226 of the Constitution. Learned counsel is right in his submission that the provisions of the Limitation Act do not as such apply to the granting of relief under Art. 226. It appears to us however that the maximum period fixed by the legislature as the time within which the relief by a suit in a civil court must be brought 134--159 S.C. 18 may ordinarily be taken to be a reasonable standard by which delay in seeking remedy under Art. 226 can be measured. The Court may consider the delay unreasonable even if it is less than the period of limitation prescribed for a civil action for the remedy. but where the delay is more than this period, it will almost always be proper for the court to hold that it is unreasonable. The period of limitation prescribed for recovery of money paid by mistake under the Limitation Act is three years from the date when the mistake is known. If the mistake was known in these cases on or shortly after January 17, 1956 the delay in making these applications should be considered unreasonable. If, on the other hand, as Mr. <NAME> seems to argue, the mistake was discovered much later, this would be a controversial fact which cannot conveniently be decided in writ proceedings. In either view of the matter we are of opinion the orders for refund made by <ORG> in these seven cases cannot be sustained.

The application out of which Civil Appeal No. 25 of 1963 has arisen was also made in 1958, that is, within less than three years from the date of <ORG> decision in <CITATION> . <ORG> was therefore right in stating in its judgment in this case that it is governed by <NAME> case. We see no reason to interfere, with the order for refund made by <ORG> in this case.

In the result, Civil Appeals Nos. 861 to 867 of 1962 are allowed in part and the orders for refund made in those cases are set aside. The petitioners will be at liberty to seek such relief as they may be entitled to in a civil court, if it be not barred by limitation. There will be no order as to costs in these cases. In two other appeals, viz., Civil Appeal Nos. 28 and 29 of 1962, the respondents have not appeared; so there will be no order as to costs in them. In the other appeals which are dismissed, <ORG> will pay costs to the respondents. One hearing fee for all these appeals.

Appeals Nos. 861-867 partly allowed, other appeals dismissed.


CASE NO.: Appeal (civil) 7604-7605 of 2005 PETITIONER: The Commissioner of Income Tax, Madurai etc. etc RESPONDENT: M/s <ORG>Ltd DATE OF JUDGMENT: 10/08/2007 BENCH: <NAME> & <NAME> JUDGMENT:

J U D G M E N T With Civil Appeal Nos. 7606, 7597-98, 7596, 7599 and 7603 of 2005 KAPADIA, J.

Aggrieved by the common judgment dated 29.4.2005 passed by <ORG> at Madras in Tax Case (Appeal) Nos. 53/2004 etc., the <ORG> has come to this Court by way of a batch of civil appeals. For the sake of convenience, we have set out hereinbelow the facts in the lead case of <ORG> Saravana Spinning Mills Pvt. Ltd. (Civil Appeal Nos. 7604- 7605/2005).

2. In this group of civil appeals we are required to decide the extent and scope of Section 31(i) of the Income Tax Act, 1961 as it stood during the accounting years ending 31.3.1993 and 31.3.1994.

3. For this purpose, we quote hereinbelow Section 31 , as it stood during the relevant period:

"31. Repairs and insurance of machinery, plant and furniture.- In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed-

(i) the amount paid on account of current repairs thereto;

(ii) the amount of any premium paid in respect of insurance against risk of damage or destruction thereof."

4. The facts in Civil Appeal Nos. 7604-7605/2005 are as follows:

M/s <ORG> (the assessee) is a textile mill engaged in the manufacture of yarn. For the accounting year ending 31.3.1993, it claimed deduction on account of "modernisation and replacement expenses" amounting to Rs. 97,95,755.00 whereas in the case of year ending 31.3.1994 it has claimed Rs. 77,84,047.00 as deduction under the same head. The question which arises for determination in this case is whether the assessee was entitled to claim the aforestated amounts as "current repairs" under Section 31(i) . This is the basic controversy in the above civil appeals. To complete the chronology of events, it may be stated that the assessee claimed the aforestated amounts as deduction in its annual returns. The aforestated figures are mentioned in the Profit and Loss account for the year ending 31.3.1994. The return for the assessment year 1993-94 was filed on 31.12.1993. It was processed under Section 143(1)(a) . Subsequently, a Notice under Section 143(2) was issued to the assessee. Pursuant to the said Notice, the representative of the assessee appeared. He contended that during the previous year, the assessee had installed three Ring Frames at the cost of Rs. 23,99,855.00. According to the assessment order, the assessee claimed the cost of the new machinery as revenue expenditure on the ground that the expenditure involved should be treated as current repairs, since the new machinery was installed only as a replacement of the old machinery, which had become derelict (see page 93 of the Paper Book). According to the assessee, the whole Textile Mill was a "Plant" and the Ring Frames was one of the 25 machines which constituted one single process and, therefore, replacement of the frames be treated as replacement of part of <ORG> and not replacement of a machine. The claim of the assessee was disallowed on the ground that the expenditure was on capital account; that it was not a revenue expenditure as the assessee had obtained enduring benefit by replacing the old machine with new machine. The claim of the assessee was also rejected on the ground that the machine replaced was an independent machine by itself and that it was not a part or portion of the other textile machinery (plant) as claimed by the assessee. The above arguments of the assessee were rejected by the A.O. stating, that the entire mill cannot be construed as Plant/ Total Machinery; that the said Ring Frames constituted independent and separate machines; that each Frame was capable of independent and specific function and, therefore, it was not possible to hold that the entire process as one single item of machinery of which all the others are parts. In this connection, the A.O. held that the assessee had replaced the existing old machines by new machines and thereby it had obtained enduring benefit and, therefore, the expenditure incurred thereon constituted capital expenditure and not "current repairs". Accordingly, the assessee's claim for deduction was dismissed.

5. Aggrieved by the said order, the matter was carried in appeal to the CIT(A). By Order dated 24.10.1996 the CIT(A) came to the conclusion that the expenditure related to replacement of three Ring Frames, which constituted an integral part of the production system in a textile mill and, therefore, replacement of an item cannot be regarded as installation of separate machine. Accordingly, the CIT(A) allowed the appeal and allowed the expenditure as revenue expenditure.

6. Aggrieved by the said decision of <ORG>, the <ORG> carried the matter in appeal to the <ORG>, which took the view that different segments of a textile mill are integrated parts of a continuous process and the expenditure incurred on replacement of the machines in any segment of the plant should be treated as revenue expenditure. Accordingly, the appeals filed by the <ORG> stood dismissed.

7. Aggrieved by the decision of the <ORG>, the matter was carried in reference to the Division Bench of <ORG>. <ORG> has given a common judgment in this batch of civil appeals. There are different assessees including <ORG> <ORG>.. Apart from Ring Frames, different assessees have claimed deduction for other Items like simplex machines, doubling machines, cone winders, card conversion equipments. Each of these items have been treated by the <ORG> as independent machines in the mill.At this stage, suffice it to state that <ORG> had affirmed the decision of the <ORG> by holding that textile mills in Tamil Nadu have been claiming deduction on account of purchase of new machinery as revenue expenditure where the purchase was as a part of modernisation programme and where the purchase was concerning replacement of old machinery. This answer was given by <ORG> in para 6 of its judgment with reference to the question framed in para 5. We quote hereinbelow para 5 of the said judgment. "The point for consideration is, whether the modernization/current/repair expenditure is allowable as "revenue expenditure", as claimed by the assessees or the replacement of cards/blow room machinery/combing machinery etc., are to be considered as "capital expenditure", as claimed by the <ORG>?"

(emphasis supplied) While disposing of the appeals, <ORG> had relied upon the report of <ORG> ("<ORG>"), Coimbatore. Placing reliance on the said report, <ORG> held, that the process of converting fibre to yarn was one continuous interlinked process; that the output from various intermediate stages of production (Carding, Combing, Draw Frame Silvers and Roving) cannot be sold or marketed or used for any other purpose and, therefore, according to <ORG>, the entire textile mill should be considered to be as one continuous process plant commencing from the blow room to the winding section. In the context of the Ring Frame <ORG> held by placing reliance on the report of <ORG> that Ring Frame cannot work independently, but it can work only as a part of spinning unit. According to <ORG>, all the above items of machines put together would amount to one complete textile mill which is capable of manufacturing yarn. According to <ORG>, all the above items of machines, though independent, are part of an integrated textile mill and, therefore, the expenditure incurred on replacement of any one of the above items of machine was an expenditure incurred to maintain production without breakdown and, therefore, the assessee was entitled to claim deduction for the said expenditure as revenue expenditure under Section 31(i) . Accordingly, <ORG> has affirmed the view expressed by the <ORG>. Hence, these civil appeals.

8. The issue before us is whether the expenditure incurred by the assessee for modernisation and replacement came within the connotation of the words "current repairs" in Section 31(i) .

9. Before analysing Section 31(i) of the Income-tax Act, we must look at the process of manufacture and the composition of a textile mill in the broad sense. Broadly, a textile mill manufactures different varieties of yarns, namely, Cotton Yarn, Melange Yarn, Colour Melange, Polyester Viscose Yarn and the process of manufacture goes through various Segments/Divisions. The first Segment is the Blow Room. The function of the Blow Room is to clean the raw cotton thoroughly before it is fed to <ORG>. The function of <ORG> is to remove the waste in the cotton received from the Blow Room. In <ORG> there are individual carding machines. They are equipped with Autolevelers to produce silver. The carding machine removes neps formed in the blow room line during the process. The carding machine produces Silver for better quality of yarn. This Silver produced in <ORG> is carried to the Combing Department, for manufacturing Combed Yarn. After the carding operation, the impurities present in the Silver will be removed in the Combing Department. That silver which is produced in the Combing Department will pass through the Draw Frames used in the Drawing Department in order to obtain parallel fibers. These parallel fibers go through Speed Frames in the Roving Department in order to convert the Silver into thinner forms called as Roves which Roves are thereafter sent to <ORG>. In <ORG> we have what is called as the Ring Frames (machines) which are used to spin the Roves received from the Roving Department. The Ring Frames are machines, which are equipped with cleaners, removes the accumulated dirt. The Ring Frames play an important role in producing quality yarn. Thereafter, the yarn obtained from <ORG> goes to <ORG>. In <ORG> we have Autoconers in order to produce fault-free yarn.

10. From the above facts, it is clear that Blow Room, Carding, Combing, Drawing, Roving, Spinning and Winding are different Departments/Divisions in a textile mill. In each Department/Division there are several machines. Each of the above Departments/Divisions perform different functions and the functioning of each Department/Division produces a different Output which is carried forward to the next Department/Division having different machines therein. For example, in the Blow Room there are different beaters (machines) which open the raw- cotton and remove the dirt therefrom. That cotton is forwarded to the Carding Department in which there are Carding Machines equipped with Autolevelers which produces Silver which is then carried forward to the Combing Department. It is important to note that each Department has different items of machines, for example, in the Blow Room we have machines called as Beaters. Similarly, in the Carding Department we have Carding Machines with Autolevelers. If the Autoleveler fails, the Carding Machine becomes non-functional. If an Autoleveler is to be repaired then that repair would come within the connotation of the word "current repairs" because it is a part of the Carding Machine. Even if in a given case, replacement of an Autoleveler could come within the connotation of the word "current repairs" if the old part is not available in the market. It is a "current repair" because the Carding Machine remains as an asset without any change even after repair or replacement of the autoleveler. To give an example, a Compressor is an important part of an Air-condition Machine. Repair of the Compressor will come in the connotation of the word "current repairs" in Section 31(i) of the said Act because the assessee does not replace the Air-condition Machine. At the highest, he replaces a part of the Air-condition Machine. So is in the case of the picture tube in a Television Set, when the picture tube is replaced the Television Set is not replaced, therefore, such repairs alone can come within the connotation of the word "current repairs" in Section 31(i) of the said Act as it stood at the material time. They are effected to preserve and maintain the asset, viz, air- conditioner or carding machine. Lastly, it cannot be said that the textile mill constitutes a plant as it is one continuous process of manufacture beginning from Blow Room to the Winding Section. As stated above, different Outputs flow from different Segments of production like Blow Room, Carding, Combing, Roving, Winding etc. In the case of a textile mill there is no process whereby raw-material is fed on one end and the finished product comes out at the other end without intervention in-between. For example, in the case of continuous Casting Machine in the Steel Industry we have one continuous integrated process under which scrap (raw material) is put in and what comes out is steel or iron or aluminium. Another example, in the case of "Pasteurization Plant" we have three chambers and Ducts. In the first milk is collected, in the second it is heated and in the third it is cooled. Duct carries hot and cold water. The raw material is Raw Milk, the end product is the pasteurized milk. In the Heat chamber there is the heater. In the Cooling Chamber we have cooling plant which has a concept similar to air-condition plant. Such a process is one integrated process. Therefore, the <ORG> and <ORG> erred in holding that the manufacturing process in the textile mill is one continuous integrated process.

11. An allowance is granted by clause (i) of Section 31 in respect of amount expended on current repairs to machinery, plant or furniture used for the purposes of business, irrespective of whether the assessee is the owner of the assets or has only used them. The expression "current repairs" denotes repairs which are attended to when the need for them arises from the viewpoint of a businessman. The word "repair" involves renewal. However, the words used in Section 31(i) are "current repairs". The object behind Section 31(i) is to preserve and maintain the asset and not to bring in a new asset. In our view, Section 31(i) limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery, plant or furniture by restricting it to the concept of "current repairs". All repairs are not current repairs. Section 37(1) allows claims for expenditure which are not of capital nature. However, even Section 37(1) excludes those items of expenditure which expressly falls in Sections 30 to 36 . The effect is to delimit the scope of allowability of deductions for repairs to the extent provided for in Sections 30 to 36 . To decide the applicability of Section 31(i) the test is not whether the expenditure is revenue or capital in nature, which test has been wrongly applied by <ORG>, but whether the expenditure is "current repairs". The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to "preserve and maintain" an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage. In fact, in the present case, in the balance sheet the assessee, viz, <ORG> <ORG> has indicated the above expense as an item incurred for purchase of a New Asset. In our view, <ORG> had erred in placing reliance on the report of <ORG> in coming to the conclusion that the textile mill is a plant under Section 31(i) . As stated above, each machine in a segment has an independent role to play in the mill and the output of each division is different from the other "Repair" implies the existence of a part of the machine which has malfunction. If the argument of the assessee herein before us is to be accepted it would result in absurdity and it would make the provisions of Section 31(i) completely redundant. According to <NAME>, learned senior counsel for the assessee, the textile plant consists of about 25 machines. One of such machines is the Ring Frame. If the argument of the assessee is to be accepted, it would mean that periodically one machine out of 25 would be replaced, and on that basis, from time to time, each of these 25 machines in the textile plant would be entitled to claim allowance under Section 31(i) . In our view, the A.O. was right in holding that each machine including the Ring Frame was an independent and separate machine capable of independent and specific function and, therefore, the expenditure incurred for replacement of the new machine would not come within the meaning of the words "current repairs". In the present case, it is not the case of the assessee that a part of the machine (out of 25 machines) needed repairs. The entire machine had been replaced. Therefore, the expenditure incurred by the assessee did not fall within the meaning of "current repairs" in Section 31(i) .

12. This Court in the case of <CITATION>  approved the test formulated by Chagla C.J. in the case of <CITATION> (1956) 30 ITR 338 as to when the expenditure can be said to have been incurred on current repairs. In that case it was observed as follows:

"The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of "repairs" because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure.

If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the <ORG> has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure."

In the said judgment, it has been further observed by <ORG> that the definition of the word "repair" does not create much difficulty, but the difficulty is created by the word "current" which qualifies the expression "repair". This adjective, namely, "current" is put in by the <ORG>. It indicates that the <ORG> did not intend that the assessee should be permitted to claim allowance for all kinds of repairs, even though conceptually the expenditure may be revenue expenditure. The <ORG> intended to stress that under Section 31(i) the permissible deduction admissible is only for current repairs, therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question as to whether such an expenditure comes within the etymological meaning of the expression "current repairs". In other words, even if the expenditure is revenue, it may not fall in the connotation of "current repairs" in Section 31(i) . The test formulated above applies to cases where the assessee claims allowance under Section 31(i) . In the present case, <ORG> has lost sight of the test to be applied for an expenditure to fall under Section 31(i) as "current repairs". It has embarked on the test which was not applicable, viz, whether the expenditure is revenue or capital in nature. The above test was not relevant during the assessment years in question as the explanation to Section 31(i) was inserted later on. In our view, applying the test laid down by <ORG> in the case of <ORG> (supra) the assessees were not entitled to claim allowance under Section 31(i) for current repairs. In our view, the Ring Frame by itself constituted an independent machine with an independent function, which was replaced by a new Ring Frame giving enduring advantage to the assessee and, therefore, the expenditure incurred in that regard cannot come within the expression "current repairs". In our view, replacement of three Ring Frames constituted substitution of an old asset by a new asset and, therefore, the expenditure incurred did not constitute current repairs.

13. On behalf of the assessee, reliance was placed on the judgment of this Court in the case of <CITATION> . reported in (1967) 3 SCR 957. In that case, the assessee carried on the business of manufacture and sale of cotton yarn. In the previous year relevant to assessment year 1956-57, the assessee spent Rs. 93,000 approx. for introduction of "Casablanca Conversion System" in its plant. The I.T.O. disallowed the claim of the assessee. <ORG> agreed with the I.T.O.. Before the <ORG>, the assessee contended that the amount expended for introducing Casablanca Conversion System was current expenditure under Section 10(2)(v) of the Indian Income Tax Act, 1922 ( Section 31(i) of the 1961 Act). The <ORG> inspected the spinning factory of the assessee. It studied the working of the machinery with the Casablanca Conversion System. It also studied the literature published by the manufacturer of Casablanca Conversion System. After a detailed study, the <ORG> held that on account of the stress and strain of production over a long period there was a need for change and that the assessee had replaced old parts by introducing the said System. Accordingly, the <ORG> treated the expenditure incurred for introducing the Casablanca Conversion System as allowance under Section 10(2)(v) of the Indian Income Tax Act, 1922. <ORG> accepted the findings recorded by the <ORG> saying that by the introduction of the Casablanca Conversion System no new machinery or plant was installed, but the introduction of the system amounted to fitting of improved version and the expenditure in that behalf was of revenue nature. <ORG> observed that certain parts of the machinery had worn-out, they needed replacement, and when it was found that the old type of replacement parts were not available in the market, the assessee had to introduce the Casablanca Conversion System. This finding was accepted by this Court in the above judgment. In our view, the said judgment has no application with the facts of the present case. At the outset, we may state that replacement generally may not fall under the expression "current repairs" but, in certain cases, where the old parts were not available in the market or where the old parts had worked for 50 to 60 years, replacement can, in such cases of exception, fall within the expression "current repairs". In <ORG> case (supra) the finding recorded by the <ORG> and <ORG> was that old type of replacement parts were not available in the market and, therefore, the expenditure came within the expression "current repairs". That is not the case before us, hence, the said judgment has no application to the facts of the present case. Moreover, the judgment of this Court in <ORG> (supra) has not defined the word "asset" to mean the entire production system in the textile mill. In the said judgment, it is nowhere stated that the entire textile mill is one single asset and that it represents one single integrated process.

14. Some of the decisions cited on behalf of the assessees are not being discussed by us as they deal with cases falling under Section 37 . That section is a residuary section. Under Section 37 , a particular item of expenditure may be deductible if the expenditure does not fall within Sections 30 to 36 ; that it should have been incurred in the accounting year; that it should be in respect of a business carried on by the assessee; that it should not be on personal account of the assessee; that it should not be in the nature of capital expenditure and that it should be spent wholly and exclusively for business. Whether expenditure is 'revenue' or 'capital in nature' would depend upon several factors, namely, nature of the expenditure, nature of the business activity etc. For example, construction of the building for self-use may be capital in nature whereas in the hands of the builder a building constitutes his stock-in-trade and, therefore, on the sale of the building the expenditure has to be revenue. Therefore, the builder would be entitled to deduct such expenditure from the sale proceeds/gross income. Therefore, whether an expenditure is revenue or capital in nature would depend on the facts of each case. We do not wish to express any opinion on the applicability of Section 37(1) in the present case. There were certain civil appeals wrongly tagged with the present batch which will be decided separately by us as they concern with Section 37(1) . Hence we do not wish to express any opinion on applicability of Section 37(1) .

15. Before concluding, one aspect needs to be discussed. It was submitted on behalf of the assessees, in the present case, that although the assessees had claimed deduction under Section 31(i) , they should be permitted to claim deduction under Section 37(1) as on facts it has been held by <ORG> <ORG> and <ORG> that the expenditure was revenue in nature. We find no merit in this contention. As stated above, even if the expenditure incurred is revenue in nature, still it may not fall in the connotation of the words "current repairs" under Section 31(i) which test has not kept in mind. As held by <NAME> in the case of <ORG> (supra) all repairs do not attract Section 31(i) even though the expenditure is revenue in nature. Therefore, the basic test, which had not been applied, in the present case, by <ORG> <ORG> and <ORG>, is whether the expenditure came within the expression "current repairs". Instead all the three authorities proceeded on the footing that since the expenditure was revenue it constituted "current repairs". It is for this reason that we have interfered with the concurrent findings given by <ORG> <ORG> and <ORG>.

16. For the aforestated reasons, we find merit in the above batch of civil appeals filed by the <ORG>. Accordingly, we hold in this batch of civil appeals that the assessees were not entitled to claim allowance under Section 31(i) of the Income Tax Act as it stood at the relevant time. Accordingly, the civil appeals stand allowed with no order as to costs.


PETITIONER: <ORG>, ENGINEERING KAMGAR SANGH Vs. RESPONDENT: <ORG>, <ORG> & <ORG>. DATE OF JUDGMENT: 05/05/1998 BENCH: S. SAGHIR AHMAD, M. JAGANNADHA RAO ACT: HEADNOTE: JUDGMENT:

THE 5TH DAY OF MAY, 1998 Present:

Hon'ble Mr. Justice <NAME> Hon'ble Mr. Justice <NAME>, Attorney General of India, <NAME>, Sr. Adv. and <NAME>, Adv. with them for the Appellants in C.A. Nos. 2572 and 2573/98 S. <NAME> and <NAME>, Advs. for the appellant in C.A. No. 2574/98 <NAME>, Additional Solicitor General, <NAME>, Ms. <NAME>, <NAME>, Advs. with him for the Respondent in C.A. No. 2572/98 <NAME>, Adv. for the Respondents in C.A.No. 2573/98 and C.A. No.2574/98 J U D G M E N T The following Judgment of the Court was delivered:

WITH CIVIL APPEAL NO .... 2573 ................. /1998 (Arising out of S.L.P. (C) No. 14750/1997) AND CIVIL APPEAL NO ........2574 .............../1998 (Arising out of S.L.P (C) No. 15736/1997) J U D G M E N T M. JAGANNADHA RAO, J.

Special leave granted in all the Special leave petitions.

Civil Appeal arising out of SLP (C) No. 14327/1997 is filed by <ORG>' against order of <ORG> dated 28.7.1997 passed by a Division Bench in an interlocutory appeal appointing a Receiver to take formal possession of the mortgaged properties which are subject matter of suit No. 82 of 1997 pending before a learned Single Judge of the said <ORG> on the Original Side. The respondent <ORG>, which is the plaintiff in the suit is claiming in consortium with <ORG> a sum of Rs. 23.67 crores (approximately) as due to it as on 24.12.1996. Earlier the Single Judge of the Bombay <ORG> in his order dated 10.1.1997 had disallowed the application for appointment of Receiver in view of the stay of appointment of provisional Liquidator granted by a Division Bench of the Bombay <ORG> in winding up proceedings on 20.12.1996.

Civil Appeal (arising out of SLP (C) No. 14750 of 1997) is filed by the appellant <ORG> against the order passed by another Division Bench of <ORG> dated 8.8.1997 in Appeal No. 1193 of 1996 by which the order of the learned Single Judge on <ORG> Side appointing a provisional Liquidator on 18.10.1996 was affirmed. Thereby an earlier order of stay dated 20.12.96 (granted by the Division Bench in respect of the <ORG> Judge's order dated 18.10.96) stood vacated. The respondents are <ORG>, the creditors, who filed the winding up petition 415/1996 on 6.8.1996 against the appellant in <ORG>.

Civil Appeal (arising out of SLP (C) NO. 15736/1997) is filed by the workmen (Engineering Kamgar Sangh) against the order dated 8.8.1997 passed by <ORG> in winding up proceedings confirming the order of the Single Judge appointing provisional Liquidator. They are supporting the appellant company.

That is how these three appeals have arisen and have come before us. The appellant company had, after taking some adjournments before the Division Bench in the Company Appeal

- which was filed against the order of the learned Single Judge appointing provisional liquidator - submitted a reference before <ORG> (hereinafter called the `<ORG>') on 17.7.1997 under the Sick Industrial Companies (Special Provision) Act, 1985 (hereinafter called the `Act'). The said reference was registered 24.7.1997 as Case No.97 of 1997. The point raised in these appeals is that once the reference was registered by the <ORG> on 24.7.1997, the Division Bench of <ORG> ought not to have passed orders on 8.8.1997 vacating the interim stay granted by it on 24.12.1996 and ought not to have confirmed the order of the learned Company Judge dated 18.10.1996 appointing provisional liquidator, in view of the mandate of section 22 of the Act. Likewise, it is argued that the order of <ORG> dated 28.7.1997 appointing a Receiver in the interlocutory appeal arising out of the Civil Suit is also had in view of section 22 of the Act.

We may state that the order of <ORG> in proceedings arising out of suit - appointing Receiver on 28.7.1997 was stayed by this Court on 5.8.1997 in SLP 14327/1997. Similarly the order of <ORG>, in proceedings arising out of winding up proceedings, dated 8.8.1997 vacating the stay and confirming the Company Judges order appointing provisional Liquidator was stayed on 12.8.1997 in SLP 14750/1997 and it was further ordered that the provisional Liquidator shall not take any further steps.

One other important fact to be noted is that on 10.11.1997 in SLP 14327/1997, this Court passed an order, - after hearing both sides, adjourning the SLPs "to enable the <ORG> to come to a decision'. This Court, however, directed the appellant-<ORG> not to dispose of or alienate or create any third party interests in any of the assets of the <ORG> except with the previous approval of the <ORG> and that before passing any orders, the <ORG> will give hearing to <ORG>. This Court also recorded an assertion by the <ORG> that the Receiver had taken formal possession of the properties. This assertion was no doubt denied by the <ORG>. This Court also noticed that <ORG> had, in its order dated 8.8.97 accepted as true the serious allegations made by <ORG> against the appellant <ORG>.

At this stage, it is necessary to refer to the conduct of the Company, already adverted to, which came up for severe criticism by <ORG> in its order dated 8.8.1997. What happened was that after securing a stay order from <ORG> on 20.12.1996 - in respect of the order of the learned Single Judge appointing a provisional Liquidator, - the Company obtained adjournments before <ORG> on 4.11.1996, 2.12.1996, 9.12.1996, 18.12.1996, 20.12.1996. On 20.12.1996 the case was adjourned to 22.7.1997 when an affidavit was filed - without disclosing that the Company had approached the <ORG> on 17.7.1997 - and the matter was got adjourned to 29.7.1997 and again to 8.8.1997. The factum of registration of the reference by the <ORG> on 24.7.97 was not disclosed to <ORG> till 8.8.1997. The Bench, therefore, rightly criticised the conduct of the appellant for not disclosing these facts to <ORG> before 8.8.1997. Further, in <ORG> the Company was opposing the appointment of provisional Liquidator on the plea that it was a viable unit but when it approached the <ORG>, it was claiming that it was a sick industry. These contradictory pleas also came up for adverse comment by <ORG>. The Bench referred to section 22 and section 16 of the Act and felt that the mere registration of the reference under Section 15 did not amount to "pendency of any inquiry" under Section 16 and that, therefore, section 22 was not attracted and, therefore, the Bench was well within its powers in vacating the stay and confirming the appointment of provisional liquidator or in appointing a Receiver. In that context, <ORG> followed a decision of <ORG> of <ORG> in <CITATION> [1991 (72) Com. Cases 146 (Cal.)] in preference to the Judgments of other High Courts which had taken a contrary view. The Bench then gave several findings to the effect that the Company had indulged in various "irregularities" or "misconduct" in its accounting procedures etc. with a view to show that it was a viable unit and to show that it was not liable to be wound up. Having enumerated the alleged financial irregularities as pointed by the <ORG> and the suppression of facts, <ORG> in its order dated 8.8.1997 vacated the stay order dated 20.12.1996 and confirmed the appointment of provisional Liquidator. It also issued a contempt notice to the officers of the Company.

It is necessary to refer to certain subsequent events which have since taken place after the orders under appeal were passed by <ORG>. These events relate mainly to three orders passed by the <ORG>.

(i) On 9.9.1997, the <ORG> passed orders, after hearing the representatives of the appellant - <ORG> and <ORG> and the <ORG> (which was also to get around Rs. 38 crores from the company), directing the <ORG> under Section 16(2) of the Act to examine and analyse the audited balance sheets of the <ORG> upto 30.6.1997 and submit a status report. The <ORG> was also directed to submit its reaction or comments to the <ORG>. The contentions raised by the <ORG>'s representatives were elaborately set out.

(ii) On 24.11.1997 the <ORG> passed orders recording that the <ORG> had submitted a report and that on that basis and on the basis of the submissions made, "the <ORG> was to be declared as a sick industry' under section 16 read with section 3(o) of the Act. It then said that it is necessary in the public interest to adopt the measures specified in Sections 18 and 19 of the Act in relation to the <ORG>. It accordingly appointed <ORG> as the Operating Agency under Section 16(2) of the Act and directed it under section 17(3) to prepare a rehabilitation Report. The <ORG> was directed under Section 22-A, not to alienate any of its assets.

(iii) A notice was issued by <ORG> fixing 15.12.1997 as the date on which the allegations of <ORG> against the Company would be heard. On 15.12.1997, the <ORG> passed further orders after hearing the <ORG>'s representatives observing that the allegations made by the <ORG> against the Company had been considered by the <ORG> and that the <ORG> had prepared a status report and that the <ORG> was satisfied that the allegations of the <ORG> against the company - in regard to the change in the accounting year and provision for depreciation and interest and in regard to the preparation of the balance sheet - could not be accepted inasmuch as these actions "were permissible under the various provisions of the Companies Act , 1956 and as such these were valid under law". The matter was adjourned to enable the company to submit its revival/rehabilitation proposals. These are the three orders passed by the <ORG> subsequent to the impugned orders of <ORG>.

It was contended before us by <NAME> and <NAME>, appearing for the <ORG> in the two appeals filed by the <ORG> and by the counsel for the workmen in the third appeal that <ORG> ought not have vacated the stay dt. 20.12.96 nor confirmed the appointment of provisional Liquidator dated 18.10.96 by its order dated 8.8.1997 when by that date, Section 22 of the Act had come into play on account of the registration of the reference dated 17.7.1997 by the <ORG> on 24.7.1997. For the same reasons, it was contended that <ORG> could not have appointed a Receiver on 28.7.1997 in the interlocutory appeal filed in the suit proceedings. It was contended that the appeals should, therefore, be allowed and the impugned orders vacated in view of the mandate under Section 22 . Sri <NAME> cited several rulings of <ORG> to contend that registration of the reference was sufficient for purposes of the applicability of Section 22 . It was argued that now the matters have reached the stage of section 17(3) of the Act before the <ORG> and, therefore, no orders can be passed restoring the Receiver or the provisional liquidator. It was also brought to our notice that <ORG> had dropped the contempt proceedings by its order dated 13.2.1998 pursuant to the apology tendered.

On the other hand, the learned Additional Solicitor General, <NAME> contended that while the contention of the appellants in relation to Section 22 could be correct, the appellant was guilty of suppression of facts before <ORG> of <ORG> as pointed in the order dated 8.8.1997. It took adjournments before <ORG> without informing the Court that it was either approaching or that it had approached the <ORG> and got its reference registered. The Company also took contradictory pleas before <ORG> and before the <ORG>, in regard to its viability. This conduct was wholly unbecoming. On account of its suppression of facts and mutually contrary pleas, the reference to the <ORG> must be treated as vitiated and as amounting to `fraud' and, therefore, all consequential orders of the <ORG> must be ignored.

On the basis of the above contentions, the following points arise for consideration:

(1) Could it be said that the conduct of the appellant Company before <ORG> on account of the contrary pleas taken by it before <ORG> and the <ORG> and on account of the suppression of facts, - would render the reference under section 15 and the registration of the reference and the subsequent orders of the <ORG> bad? (2) Whether, once the <ORG> had registered the reference dated 17.7.97 on 24.7.97 under section 15 of the Act read with the Regulations, it was permissible for <ORG> of <ORG> to pass orders on 8.8.97 vacating the stay order dated 20.12.96 and confirming the appointment of provisional liquidator on the company side and also whether it was permissible for <ORG> of the High court to appoint a Receiver on 28.7.97 in the proceedings arising out of the suit, in view of section 22 of the Act?

Point 1:

It is true that in the winding up proceedings and in the civil suit, the appellant company contended that it was a viable unit and that neither a Receiver nor a provisional liquidator could be appointed. The appellant was, on the one hand seeking adjournments before <ORG> while on the other hand it had approached the <ORG> on 17.7.97 and got its reference registered on 24.7.97 seeking to be declared a sick company. It is also true that in the affidavit filed on its behalf in <ORG> on 22.7.97 seeking an adjournment, it had not disclosed to <ORG> that it had moved the <ORG> on 17.7.97. The Company sought an adjournment to 29.7.97 and then again to 8.8.97. Neither on 22.7.97 nor on 29.7.97 was <ORG> informed about the application filed before the <ORG> nor about its registration. A disclosure of these facts was made only on 8.8.97.

This conduct of the appellant, in our view, was certainly very unfair to <ORG> and, therefore, <ORG> had rightly depreciated the same. In our view, there was a clear attempt to keep the <ORG> in the dark.

But the question is whether, on that account, the reference application to the <ORG> would become bad. It is clear from the application filed before the <ORG> that the <ORG> was informed about the proceedings taken against the company in <ORG> both on the company side and on the original side. So far as the <ORG> was concerned, there was no suppression of facts before it. We are at a loss to understand as to how any conduct of the appellant company before <ORG> of Bombay could make the registration of the reference before the <ORG> bad. If any orders were obtained by the <ORG> from <ORG> by way of fraud it was certainly open to the respondent to ask <ORG> to recall such orders. No such thing was done. We, therefore, cannot accept the contention of the respondents that the reference under section 15 of the Act and the registration thereof by the <ORG> became bad because of any conduct of the <ORG> before <ORG>. It follows that equally the subsequent orders passed by the <ORG> on the reference cannot, on that account, be said to be invalid. This contention of the respondents is rejected. Point 1 is held against the respondents.

Point 2:

The legal issue under this point is of considerable importance in proceedings arising under this Act.

We shall, therefore, refer to the relevant provisions of the Act and Regulations and the headings of the Chapters in the Act and the headings of the Chapters in the Regulations.

Chapter III of the Act contains section 15 to section 22A and bears the heading "Reference, Inquiries and Schemes". Section 15 of the Act refers to the `Reference to Board' either by the industrial Company under sub-clause (1) of Section 15 or by <ORG> or <ORG> or <ORG> or by a public financial institution or by <ORG> local institutions or <ORG>. Section 16 refers to `Inquiry into the working of Sick Industrial Companies' and to the declaration of the unit as a sick industry, after inquiry. Section 17 deals with `Powers of Board to make suitable orders on the completion of inquiry' to the company so as to make its net worth exceed its accumulated losses within a reasonable time or to direct the operating agency to prepare a scheme in the manner provided in section 18 . Section 19 deals with `Rehabilitation by the giving financial assistance'. Section 20 refers to the winding up of the industrial unit if it is not likely that the Company will be able to make its net worth exceed its accumulated losses. Section 22 of the Act with which we are concerned here, deals with `Suspension of legal proceedings, contracts etc.' where `an inquiry under section 16 is pending or any scheme under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 before the appellate authority (<ORG>) is pending.

The point which has, in this context, been raised in several <ORG> is that the mere registration of a reference by the <ORG> under the Act, would not result in the automatic cessation of all proceedings which are pending either in civil courts or in <ORG> etc. as against its assets. It is argued that in order that section 22 of the Act can come into operation, the <ORG> must - subsequent to the registration of the reference under section 15 - apply its mind and consider it necessary under section 16 to make an inquiry and issue notices on the reference to the affected parties who are required to be heard, and that only then it can be said that an `inquiry' is pending. Unless an inquiry is pending there cannot be a statutory stay of proceedings etc. as contemplated by section 22 of the Act.

For the purpose of understanding the above point, it is necessary to refer to sub-clauses (1) to (4) of section 16 and section 22(1) of the Act. They read as follows:

"S. 16: Inquiry into working of sick industrial companies - (1) The Board may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company-

(a) upon receipt of a reference with respect to such company under Section 15 ; or

(b) Upon information received with respect to such company or upon its own knowledge as to the financial condition of the company. (2) The Board may, if it deems necessary or expedient so to do for the expeditious disposal of an inquiry under sub-section (1), require by order any operating agency to enquire into and make a report with respect to such matters as may be specified in the order.

(3) The <ORG> or as the case may be, the operating agency shall complete its inquiry as expeditiously as possible and endeavour shall be made to complete the inquiry within sixty days from the commencement of the inquiry. Explanation - For the purposes of this sub-section, an inquiry shall be deemed to have commenced upon the receipt by the <ORG> of any reference or information or upon its own knowledge reduced to writing by the <ORG>.

(4) Where the Board deems it fit to make an inquiry or to cause an inquiry to be made into any industrial company under sub- section (1) or, as the case may be, under sub-section (2), it may appoint one or more persons to be a special director or special directors of the company for safeguarding the financial and other interests of the company or in the public interest.

" Section 22(1) : suspension of legal proceedings, contracts etc.: Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act , 1956 , or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof (and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company) shall lie or be proceeded with further, except with the consent of the <ORG> or, as the case may be, <ORG>."

It is to be noticed that according to section 22 , in case an "inquiry under section 16 " is pending, then, notwithstanding anything in the Companies Act or any other instrument etc., no proceedings for the winding up of the company or for execution or distress or the like against the property of the company or for the appointment of a receiver and no suit for recovery of money or enforcement of any security or of any guarantee - shall lie or be proceeded with further, except with the consent of the <ORG> or, as the case may be, by the appellate authority. Section 22A permits the <ORG> pass certain conditional orders.

It is also to be noticed that sub-clause (1) of section 16 says that the <ORG> `may' make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial unit - (a) upon receipt of a reference under section 15 or (b) upon information received by it or upon its own knowledge as to the financial condition of the company. Under sub-clause (2) of section 16 , the <ORG> `may', if it deems it necessary or expedient, require any operating agency to inquiry and report to it. Under sub-clause (3), the <ORG> or the operating agency is to endeavour to complete the inquiry within 60 days from the date of commencement of the inquiry. Explanation below sub- clause (3) explains that for purposes of sub-clause (2), that is to say, for computing the period of 60 days, an inquiry shall be deemed to have commenced upon the receipt by the <ORG> or any reference or information or upon its own knowledge reduced to writing by the <ORG>. Under sub-clause (4), when the <ORG> deems it fit to make an inquiry under sub-clause (1) or (2) of section 16 , it may (the word `shall' has been omitted by Act 12 of 1994) appoint one or more directors etc. Relying on the use of the word `may' in section 16(1) of the Act it has been contended in some High Courts that the word `may' in that section shows that the <ORG> has power to reject a reference summarily without going into merits and that it is only when the <ORG> takes up the reference for consideration on merits under section 16(1) that it can be said that the `inquiry' as contemplated by section has commenced. It is argued that if the reference before the <ORG> is only at the stage of registration under section 15 , then section 22 is not attracted. This contention, in our opinion, has no merit. In our view, when section 16(1) says that the <ORG> can conduct the inquiry "in such manner as it may deem fit", the said words are intended only to convey that a wide discretion is vested in the <ORG> in regard to the procedure it may follow for conducting an inquiry under section 16(1) and nothing more. In fact, Once the reference is registered after scrutiny, it is, in our view, mandatory for the <ORG> to conduct an inquiry. If one looks at the format of the reference as prescribed in the Regulations, it will be clear that it contains more than fifty columns regarding extensive financial details of the <ORG>'s assets, liabilities, etc. Indeed, it will be practically impossible for the <ORG> to reject a reference outright without calling for information/documents or without hearing the <ORG> or other parties. Further, the Act is intended to revive and rehabilitate sick industries before they can be wound up under the Companies Act , 1956. Whether the <ORG> seeks a declaration that it is sick or some other body seeks to have it declared as a sick <ORG>, it is, in our opinion, necessary that the <ORG> be heard before any final decision is taken under the Act. It is also the legislative intention to see that no proceedings against the assets are taken before any such decision is given by the <ORG> for in the case the <ORG>'s assets are sold, or the company wound up it may indeed become difficult later to restore the status quo ante. Therefore, in our view, <ORG> in <CITATION> . [1990 67 Comp. Cases 412 (All)], <ORG> in <CITATION> . [1990 68 Comp. Cases 201 (AP)], <ORG> in <CITATION> .  78 Comp. Cases 264] are right in rejecting such a contention and in holding that the inquiry must be treated as having commenced as soon as the registration of the reference is completed after scrutiny and that from that time, action against the <ORG>'s assets must remain stayed as stated in section 22 till final decisions are taken by the <ORG>.

The other view that mere registration does not amount to "commencement of inquiry under section 16(1) " for purposes of section 22(1) has been taken by <ORG> in Bengal Lamps Case (supra), and by <ORG> in <CITATION> . [1995 82 Comp. cases 485 (Raj)]. This view is mainly based upon the provisions of the Regulations made under the Act.

We shall refer to these Regulations briefly. Chapter II of the Regulations framed under section 13 of the Act bears the heading `Reference under section 15 ' and contains Regulation 19. Chapter III deals with `General provisions regarding Inquiries' and contains Regulation 20 while Chapter IV which bears the heading "Inquiry under section 16 " contains Regulations 21 to 25. Chapter V deals with proceedings under section 17 and contains Regulation 26. For the present purpose, we are not referring to the other Chapters which are not very relevant.

The Division Bench of <ORG> in Bengal Lamps Ltd Case (supra) - which case has been relied upon by <ORG> in the impugned order dated 8.8.1997,

- has held that at the stage of registration of the Reference under section 15 of the Act read with Regulation 19 (in Chapter II of the Regulations which refers only to section 15 ), there can be no question of commencement of any `inquiry' referable to section 16 of the Act. Such an inquiry can be treated as having commenced only at the stage of section 16 read with Regulation 21 (in Chapter IV of the Regulations which refers to section 16 ). On that reasoning it held that there can be stay as contemplated by section 22 only when section 16(1) stage of inquiry has arrived and not at the stage of section 15 dealing with registration of the reference. It further held that it is only when the <ORG>, i.e. the Bench of the <ORG> issues notices under section 16(1) for inquiry or asks the operating agency to inquire, - that the `inquiry' can be said to have commenced. This line of reasoning has been applied by <ORG> also and by <ORG> in the judgment under appeal. Question is whether this view is correct?

Now, Regulation 19(4) which is concerned with section 15 requires that upon receipt of a reference, an acknowledgement is to be issued stating expressly that the reference has been received `subject to verification that the reference is in order'. If on scrutiny, the reference is in order, then it will be registered under Regulation 19(5). Regulation 19(5) has been amended recently with effect from 24.3.1994 which is of a date very much subsequent, in point of time, to the date of Judgment of <ORG>. The new Regulation 19(5) as substituted w.e.f. 24.3.1994 is in two parts and reads as follows:

"Reg. 19(5): If on scrutiny, the reference is found to be in order, it shall be registered, assigned a serial number and submitted to the Chairman or assigning it to a Bench. Simultaneously, remaining information/documents required, if any, shall be called for from the informant."

The first part says that the reference, if it is in order, will be registered. The second part says that simultaneously notice shall be issued calling for information or documents from the informant. The effect of the amended Regulation 19(5) is that even before any Bench of the <ORG> can think of calling for information under Regulation 20(1) or under Regulation 21 read with section 16 , it is now mandatory after the amendment that as soon as a reference is registered, information/documents shall be called for from the informant straightaway. The point is whether when such information/documents are required to be simultaneously called for at Regulation 19(5) stage, can it be said that an `inquiry' under section 16(1) has commenced?

The above question depends upon what is meant by the word `inquiry' used in section 16(1) of the Act. According to the New Standard Dictionary, the word `inquiry' includes `investigation' into facts, causes, effects and relations generally; `to inquire', according to the same dictionary means `to exert oneself to discover something. Chamber's 20th Century Dictionary lays down that the meaning of the term `to inquire' is "to ask, to seek" and the meaning of the term `inquiry' is given as: "search for knowledge; investigation : a question".

Inasmuch as under the latter part of Regulation 19(5) it is necessary that simultaneously with the registration of the reference, information/documents are to be called for from the informant - the `inquiry' must, in our opinion, be deemed to have commenced under section 16 of the Act at that stage itself, namely, at stage of the second part of Regulation 19(5) and it is no longer permissible to say that such a stage is reached only when the <ORG> issues notices and starts an inquiry under Regulation 20 calling for additional information `in relation to the inquiry' or only when orders are passed by the <ORG> under Regulation 21, read with section 16(1) . The result is that strictly speaking, after the amendment of Regulation 19(5) on 24.3.1994 the latter part of Regulation 19(5) falls into Chapters III and IV of the Regulations which are referable to `Inquiries' under section 16 of the Act, rather than into Chapter II which deals with `References' under section 15 . The Chapter headings cannot, in out opinion, be treated as rigid compartments.

There can, therefore, be no difficulty in holding that after the amendment to Regulation 19 w.e.f. 24.3.1994, once the reference is registered and when once it is mandatory simultaneously to call for information/documents from the informant and such a direction is given, then inquiry under section 16(1) must - for the purposes of section 22 - be deemed to have commenced. Section 22 and the prohibitions contained in it shall immediately come into play. In that view of the matter, we need not go into the correctness of the view expressed by the Calcutta, Rajasthan and Bombay <ORG> which relied upon the unamended Regulation 19. Point 2 is decided accordingly.

On the facts of this case, the impugned orders dated 28.7.1997 and 8.8.1997 of <ORG> have been passed after the BIFR proceedings reached the stage of second part of Regulation 19(5) on 24.7.1997 that is to say, when proceedings, as per the amended Regulation 19(5) reached the stage of inquiry under section 16(1) . It must, therefore, be deemed that the said orders are illegal and are in violation of the prohibition contained in section 22 of the Act.

For the aforesaid reasons, the order passed by the Division Bench on 28.7.97 appointing Receiver and the order passed by another Bench of <ORG> on 8.8.97 restoring the provisional liquidator, are set aside. The Civil appeals are accordingly allowed. There will be no order as to costs. The respondents are free, if need be, to approach the <ORG> under section 22 and section 22A of the Act for further orders, if any, in addition to the orders already passed by the <ORG> in this behalf.