PETITIONER: <ORG> Vs. RESPONDENT: GOVT. OF KERALA & ANR. DATE OF JUDGMENT14/02/1989 BENCH: <NAME>, <NAME> (J) BENCH: <NAME>, <NAME> (J) <NAME>, S. CITATION: 1989 AIR 890 1989 SCR (1) 665 1989 SCC (2) 38 JT 1989 (1) 339 1989 SCALE (1)395 CITATOR INFO : D 1989 SC1263 (8,10) F 1990 SC 626 (5) F 1990 SC1340 (8,9,11) RF 1992 SC2192 (9,10) ACT: Arbitration Act , 1940: s. 30- --Non-speaking award--Validity of-Not open to court to probe the mental process of the arbitrator-Reasonableness of the reasons--Arbitrator the sole judge of quality and quantity of evidence-Interpretation of contract by arbitrator--Court cannot substitute its own decision--Setting aside of award--Grounds for. HEADNOTE: The appellant-contractor undertook construction of certain timebound projects. The work, however, could not be completed within the scheduled time due to various reasons. The contract was consequently cancelled at appellant's risk. The disputes arising therefrom between the parties were referred to the arbitrator named in the agreement. He made three awards allowing claim Nos. 1(e), 2, 5, 7(a), 7(b), 7(c), 13, 14, and 15 preferred by the appellant aggregating to Rs.31.15 lakhs under the several heads mentioned therein. Upon these awards, an application was made before the court for passing decrees in terms thereof. Objections were also filed. The trial court took the view that it could not adjudi- cate upon the justification for the conclusions arrived at by the arbitrator unless such awards were the result of corruption, fraud or there were errors apparent on the face of the award, that it was not necessary for the arbitrator to give reasons for his award, that there was no jurisdic- tion to investigate into the merits of the case and to examine the documentary and oral evidence for the purpose of finding out whether or not the arbitrator had committed an error of law or fact, that the arbitrator had not incorpo- rated in the award any materials for his conclusion nor did he incorporate the terms of the contract between the par- ties. Under such circumstances the award could not be set aside, especially when there was no error apparent on the face of it and there was nothing to show that the arbitrator had misconducted the proceedings or that the award had been improperly procured. In appeal before <ORG> it was contended for the respon- 666 dents that there were errors apparent on the face of the award, that the arbitrator had misconducted himself and travelled beyond the terms of the contract, and that the claims allowed were beyond and contrary to the agreement between the parties, whereas for the appellants it was contended that the award was a non-speaking award and, therefore, it was not open to the court to go into the correctness or reasonableness of the award. <ORG> set out the claims, noted the rival contentious and referred to the various clauses and the conditions of the contract, though the contract itself was made no part of the award, and concluded that there were errors apparent on the face of the award that the arbitrator had misconducted himself and travelled beyond his power. In the appeals by special leave, it was contended that <ORG> had exceeded its jurisdiction in acting in the manner it did on the aforesaid aspects. Allowing the appeals by special leave, HELD: 1.1 <ORG> fell into an error in deciding the question on interpretation of the contract. It had no jurisdiction to examine the different items awarded clause by clause by the arbitrator and to hold that under the contract these were not sustainable in the facts found by the arbitrator. [688D,E] 1.2 Once there is no dispute as to the contract, what is the interpretation of that contract, is a matter for the arbitrator and on which the court cannot substitute its own decision. So also, the court cannot substitute the decision of the arbitrator, as to what was meant by the contract, once a dispute under the contract is conceded to the arbi- trator. [687B,D] 1.3 In the instant case the court had examined the different claims not to find out whether these claims were within the disputes referable to the arbitrator, but to find out whether in arriving at the decision, the arbitrator had acted correctly or incorrectly. This the court had no juris- diction to do, namely, substitution of its own evaluation of the conclusion of law or fact to come to the conclusion that the arbitrator had acted contrary to the bargain between the parties. Whether a particular amount was liable to be paid or damages liable to be sustained, was a decision within the competency of the arbitrator. By purporting to construe the contract the court could not take upon itself 667 the burden of saying that this was contrary to the contract and, as such, beyond jurisdiction. [686D-F] 1.4 Furthermore, if on a view taken of a contract, the decision of the arbitrator on certain amounts awarded, is a possible view though perhaps not the only correct view, the award cannot be examined by the court in the manner done by <ORG> in the instant case. [688D] F.R. Absalom, Ltd. v. <ORG>,  AC 592; <CITATION> .  AC 356 and Attorney General for Manito- ba v. <ORG>.,  1 AC 268 distinguished. <CITATION> ,  1 KLT 781 and State of Kerala v. <NAME>,  1 KLT 604 partly over- ruled. 2.1 Where there are errors apparent on the face of the award it can only be set aside if in the award there is any proposition of law which is apparent on the face of the award, namely, in the award itself or any document incorpo- rated in the award. But where a specific question is re- ferred, the award is not liable to be set aside on the ground of an error on the face of the award even if the answer to the question involves an erroneous decision on a point of law. [684D- <CITATION> 1922 1A 324; <CITATION> ,  S.C.R. 793; <CITATION> .,  5 SCR 480 and <CITATION> .,  3 SCR 107 referred to. 2.2 An award can also be set aside if the arbitrator had misconducted himself or the proceedings. One of the miscon- ducts could be the decision by the arbitrator on a matter which is not included in the agreement or reference. But in such a case one has to determine the distinction between an error within the jurisdiction and an error in excess of the jurisdiction. [686C] <CITATION> ,  2 AC 147; Regina v. Noseda, Field, Knight & Fitzpat- rick,  1 WLR 793 and Halsoury's Laws of England, 4th Edn. Vol. para 622 referred tO. 668 2.3 An award may be remitted or set aside on the ground that the arbitrator in making it had exceeded his jurisdic- tion and evidence of matters not appearing on the face of it will be admitted in order to establish whether the jurisdic- tion had been exceeded or not, be because the nature of the dispute is something which has to be determined outside the award--whatever might be said about it in the award or by the arbitrator. [685H; 686A-B] <ORG> v. Genossenschaft Oesterreigh- ischer etc.,  1 QB 8; <ORG> v. <ORG>,  2 Lloyd's Rep, 223 and <NAME> on The Law of Arbitration, 20th Edn. 427 referred to. 2.4 An arbitrator acting beyond his jurisdiction, howev- er, is a different ground from the error apparent of the face of the award. In the former case the court can look into the arbitration agreement but in the latter it cannot unless the agreement was incorporated or recited in the award. In the instant case the contract in question was not incorporated or referred to in the award. [686B-C] 2.5 However, there is a distinction between disputes as to the jurisdiction of the arbitrator and the disputes as to in what way that jurisdiction should be exercised- There may be a conflict as to the power of the arbitrator to grant a particular remedy. The nature of the dispute has to be determined. [686F-G] Commercial Arbitration by Sir <NAME> & <NAME> page 84, referred to. 3.1 The court look into the reasoning only in a speak- ing award. It is not open to the court to probe the mental process of the arbitrator and speculate, where no reasons are given by the arbitrator, as to what impelled the arbi- trator to arrive at his conclusion. [683G-H] 3.2 Furthermore, in any event, reasonableness of the reasons given by the arbitrator, cannot be challenged. Appraisement of evidence by the arbitrator is never a matter which the court questions and considers. If the parties have selected their own forum, the deciding forum must be conced- ed the power of appraisement of the evidence. The arbitrator is the sole judge of the quality as well as the quantity of evidence and it will not be for the court to take upon itself the task of being a judge on the evidence before the arbitrator. [684B-C] 669 3.3 In the instant case, the award was not a speaking award. The arbitrator had merely set out the claims and given the history of the claims and then awarded certain amount. He had not spoken his mind indicating why he had done what he had done; he had narrated only how he came to make the award. In the absence of any reasons for making the award, it was not open to the court to interfere with the award. [684A- <CITATION> - har Rao,  4 SCC 93 and <CITATION> .,  4 SCC 497 referred to. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 840842 of 1989.

From the Judgment and Order dated 5.5.1988 of <ORG> in M.F.A. Nos. 72/83,346/83 and 380 of 1983. <NAME>, <NAME> and Miss <NAME> for the Appellant.

<NAME> and <NAME> for the Respondents. The Judgment of the Court was delivered by <NAME>, <NAME> granted.

These appeals arise from the judgment and order of <ORG>, dated 5th May, 1988. <ORG> by the impugned judgment and order in M.F.A. Nos. 72,346 and 380 of 1983 allowed the appeals of the respondent--the Govt. of Kerala, against the judgment and decree dated 25th Sep- tember, 1982 passed by the principal Sub-Judge, <NAME> in S.P. (Arbitration) Cases Nos. 184, 185 and 186 of 1982 by which the learned Sub-Judge had upheld the awards by the arbitrator on the ground that it was not open to the court to sit in appeal over the decision of the arbitrator and the court could not adjudicate upon the justification for the conclusions arrived at by the arbitrator unless such awards were the result of corruption, fraud or when there were errors apparent on the face of the award. The learned Sub- Judge further held that there was no error apparent on the face of the record and there was no allegation of corruption or fraud. <ORG> reversed the said decision.

The questions-involved in these appeals are: how should the court examine an award to find out whether it was a speaking award or not; and if it be a non-speaking award, how and to what extent the court could go to determine whether there was any error apparent on the face of the award to be liable for interference by the court. The other question that arises in this case is, to what extent can the court examine the contract in question though not incorpo- rated or referred to in the award.

It may be noted that on 23rd December, 1976 the agree- ment No. 25/SESPC/1976-77 was entered into between the appellant and the respondent herein for construction of masonary dam across Siruvani river. Certain disputes arose between the appellant and the respondent. These disputes were referred to the arbitrator named in the agreement. The arbitrator passed the awards dated 12th, 16th and 23rd April, 1982, which were filed before the Sub-Judge and the appellant prayed for passing of decree in terms of the awards. The respondents filed petitions seeking to set aside the awards. The learned Judge refused to set aside the awards and passed decrees in terms of the awards. <ORG> held that there was no merit in the contention regard- ing limitation; and that the claims under the award were not barred by limitation. It was further held by the learned Trial Judge that the arbitrator had not incorporated in the award any material for his conclusion nor had he incorporat- ed the terms of contract between the parties. Under such circumstances the award could not be set aside, especially when there was no error apparent on the face and that there was nothing to show that the arbitrator had mis-conducted the proceedings or that the award had been improperly pro- cured. So the objection to the passing of the award was turned down.

Aggrieved thereby, the respondent filed appeals before <ORG>. <ORG> by the impugned judgment dated 5.5. 1988 set aside the awards and the decree of <ORG> on the ground that there were errors of law apparent on the face of the awards. It is contended that <ORG> in the circumstances of this case and in view of the settled principles of law, exceeded its jurisdiction by acting in the manner it purported to do. It is, therefore, necessary to refer to the award to determine how has the arbitrator proceeded and what actually the arbitrator has decided. The arbitrator has noted in the first award that the dispute related to the work of 'Siruvani drinking Water Supply project--Construction of an Intak Tower and allied structures'; and observed that an estimate amounting to Rs. 17.45 lakhs was sanctioned for the work and it was entrusted on contract to the claimant--appellant herein, on tenders. The value of the work arranged on contract was Rs. 14.45 lakhs as per the departmental estimate which the appellant undertook, as understood by the arbitrator, to carry out works at a total amount of Rs. 19.15 lakhs as per their tender. The contract was embodied in agreement No. 18/SC/SPS/1977-78 dated 17.3.78 between the claimants on the one side and the re- spondent No. 2 on behalf of the State of Kerala cited as respondent No. 1 on the other, in these proceedings. The work had been taken up as part of the scheme for augmenting the drinking water supply to Coimbatore city from the yield of the Siruvani river and due to acute scarcity of water in the city, work was taken up on an urgent footing and it was understood by both the parties that time was of utmost importance in the execution of work. The site for the work was handed over to the claimants on 17th December, 1977 and the work had to be completed by 15.6.1978. Accordingly to the arbitrator, however, it was clear that the work could not be completed within the stipulated period due to various reasons for which each party blamed the other. It was noted in the award that according to the respondents, after carry- ing out the work to the tune of Rs.3.46 lakhs (approx.) against the accepted probably estimate of contract of Rs. 19.15 lakhs, the appellant refused to proceed with the. balance work in spite of specific notices to them and so the respondents were constrained to terminate the contract at the risk and cost of the appellant. Several efforts were made to re-arrange the balance works and finally as per the situation obtaining then these works were to be expected to be completed at an excess cost of Rs.0.97 lakhs over the amount that would have been payable to the appellant as per the terms of the original contract. The arbitrator, <NAME>, noted that the appellant had raised in respect of the dispute which is the subject-matter in the first award, specific claims for an amount of Rs. 5.97 lakhs in addition to release of their retention sum of Rs. 32,139 and the security deposit of Rs.38,400 payment of final bill for the work done including the above claims, interest on amounts awarded and cost of the arbitration proceedings. It seems from the award of the arbitrator that the contention of the respondents had been that as per the terms of the contract, they were entitled to realise the excess cost on re-arrangement of the balance works estimated at Rs.0.87 lakhs from the claimant and so they proposed to appropriate the retention sum of Rs.32,139 lying in their hands, the Security Deposit of Rs.38,400 and the sums due to the claimant by way of final bill on other works as well. It was noted by the arbitrator that there was a prayer by the appellant for inspection of the site and the same was in- spected on 9.12.80. It was contended on behalf of the claimant that the site of work was situated on the Western Ghats far away from human habitation in dense forest infected with wild animals at an elevation of about 600 M and subject to heavy precipitation of upto 400 cms. annually and that access to the site was only from Coimbatore side in Tamil Nadu. Several obstacles for access to the site were highlighted before the arbitrator. Another important point on which considerable stress was laid was the compensation for losses occasioned to them on account of the unsatisfac- tory law and order situation coupled with labour unrest, stoppages and threats and even physical violence on the agents of the appellant. It was further highlighted that the termination of the contract at their risk despite the frus- tration and impossibility of performance was clearly illegal and unjustified. In the premises compensation was demanded for loss of equipments. The arbitrator noted that the main point of defence of the respondent was that the time for the completion of the work forming part of the time-bound pro- gramme was six months from the date of handing over the site. As the site was handed over on 16.12.77, the date of completion should have been 15.6.1978. Of the difficulties arising out of the location of the site of the work, it was emphasised by the respondent that the conditions under which the contract had to be performed were within the knowledge of the parties, and there could not be any ground for claim- ing any addition than those contemplated in the contract. It was definitely further stated that the additional haulage was due to the alternate route via Thachampara which was opened on 15.2.1977 and that any claim on this account subsequent to the above date was unjustified. Furthermore, that materials like sand, cement and steel were all issued in time and there could hardly be any justification regard- ing delays on these account. Regarding interruptions in power supply the respondents' case was that such interrup- tions were not unexpected at a site to which the power lines passed through virgin reserve area, and at any rate the claimants were not assured by the respondents of uninter- rupted power and there was hardly any items of machinery belonging to the appellant which had remained idle for want of power.

It was further stated that the various extra items of works including the work on the quarries had been adequately paid for by them and no further payments were due to the appellant; that there was no serious deterioration of the law and order situation; and that the losses were due to the conduct of the claimant and the materials left over by the claimant at the end of the second working seasons that had been taken over by them, duly accounted for and the credit thereof given in the final bill. It was further reiterated by the respondent that the work was not completed within the period agreed and, therefore, the respondent issued notice to resume the work and on the failure of the claimant to re-start the work, there was no other alternative except to terminate the contract as the work itself was part of a time-bound programme; and they had to make alternate arrangements and that would have cost Rs.0.87 lakhs additionally which was sought to be recovered from the appellant appropriating the retention money and security deposit. It was, therefore, claimed that the claims of the appellant should be rejected.

Considering all these contentions and noting the several respective claims, the arbitrator awarded as follows:

"Claims Nos. (1), (2) (a & b) and (3) These claims are declined.

Claim No. 4 The Respondents shall pay the Claimants a sum of Rupees Ninety Six Thousand only (Rs.96,000) in satisfaction of this claim including the various Sub Claims under the same.

Claims No. 5(a), (b) & (c)--The Respondents shall pay an amount of Rs. five thousand only (Rs.5,000) to the Claimants in satisfaction of this claim.

Claims Nos. (6), (7), (8) and (9)--These four Claims are declined.

Claim No. (10)--The retention moneys recovered from the Claimants in regard to this work shall be refunded to them by the Respondents. Claim No. 11--The f.oo. for the work shall be paid to Claimant for the sums awarded under Claims (4) and (5) Supra resulting in a net payment of Rupees one Lakh and One thousand only (Rs. 1,01,000).

Claim No. 12--The Respondents shall refund the security deposit held by the Claimants for this work subject to the rules regarding tax clearance.

Claim No. 13--The Claim for interest is de- clined.

Claim No. 14--The parties shall suffer their respective costs in these proceedings."

Regarding the counter-claims it was held that the order of the 2nd respondent terminating the contract in favour of the appellant was valid and as such, the respondents were free to arrange for the balance work in the manner they thought fit. The counter claim for costs of the respondents was also held by the arbitrator to be covered by other claims. The award was passed on 12th April, 1982. There was another award dated 16th April, 1982 which was with regard to the dispute that arose for controlling the work of "Siruvani Drinking Water Supply Project--Construct- ing a Masonry dam across Siruvani River Block Nos. I, II and III from Ch. 13 to 60 up to level + 883.00 metres and Block No. III from ch. 60 to 82 upto level + 870 metres". In respect of the aforesaid, an estimate amounting to Rs.71.5 lakhs had been sanctioned for the work and it was entrusted on contract to the appellant. It appears that the value of the work arranged on contract was Rs.67,72,760 as per de- partmental estimate which the appellant undertook to carry out at a total amount of Rs.76,55,300 as per their tender. The contract was embodied in the aforesaid agreement of 23rd December, 1976. The arbitrator recited the original claim and noted that the work could not be completed during the scheduled time and the respective contentions of the parties were, more or less, identical with the one made in the previous case.

There was inspection of documents and the parties were heard in person, it was noted. After noting the respective contentions the arbitrator awarded as follows:

"Claim No. (1)(A)--The Claim for additional payment on account of aslar work is declined. Claim No. (1)(B)--The Respondents shall pay the Claimants an additional amount of Rupees One Lakh only (Rs. 1,00,000) in satisfaction of this claim over and above the amounts al- ready paid by them in the various part bills. Claim No, (1)(c)--This claim for compensation on account of loss in hire charges and short- age of rubble is declined.

Claim No. 2--The Respondents shall pay the Claimants a sum of Rupees three lakhs and thirty six thousand only (Rs.3,36,000) in satisfaction of this claim.

Claim Nos. 3 & 4--These two claims are de- clined.

<NAME>

Claim No. 5--The Respondents shall pay the Claimants an increase of forty (40) per cent in the agreed rates for agreed items and rates derived from the agreement for the extra items for all work paid for after CC2 and part, such increase being worked out on the cost of the work excluding the value of the materials supplied by the Respondents.

Claim No. 6--The Claimant shall be entitled to a payment of Rupees twenty five thousand only (Rs.25,000) in satisfaction of this claim and the Respondent shall pay it accordingly. Claim No. 7(a)(b) & (c)--The Claimants shall be entitled to a consolidated payment of Rupees fifty thousand only (Rs.50,000) from the Respondents in satisfaction of these claims and the same shall be paid accordingly in addition to the payments already made. The Claimants on receipt of such payment shall have no lien whatsoever on the sheds, goods of whatever description and materials lying at the site of the work and said to belong to them. Claims 8, 9, 10, 11 & 12--These five claims are declined.

Claim No. 13--The retention amounts from the bills of the Claimants lying in the hands of the Respondents shall be released to them. Claim No. 14--An amount of Rupees two lakhs only (Rs.2,00,000 shall be paid to the claim- ants in settlement of the final claims on the work in addition to the specific items re- ferred to in the other claims as per this award.

Claim No. 15--The Security offered by the Claimants for this work shall be released to them subject to the rules regarding tax clear- ance.

Claim No. 16--The claim for interest is de- clined.

Claim No. 17--The parties shall suffer their respective costs in these proceedings."

Regarding the counter claims, it was reiterated by the arbitrator that the respondents were entitled to arrange for the balance work in any manner they deemed fit on the termi- nation of the contract by them. But the appellant should not be responsible for any loss that might be sustained for this re-arrangement. The counter claim for costs of the respondents was also dealt with.

There was a third award dated 23.4.1982 which was in respect of the sum due to Blocks Nos.7, 8 & 11. In respect thereof an estimate of Rs.69.7 lakhs had been sanctioned for the work and it was entrusted to the appellant. The value of the work arranged on that contract was Rs.63.68 lakhs as per the departmental estimate which the claimants undertook to carry but at a total amount of Rs.71.96 lakhs as per their tender. After reiterating that time was of the essence of the contract, the difficulties that arose in carrying out the contract and the respective contentions, which were identical with those in respect of the first two contracts were discussed. In respect of interruptions in power supply the case of the respondent was that such interruptions were not unexpected at a site through which the power lines passed through virgin reserve forest and that the claimants had not been assured by the respondents of uninterrupted power and in any case there was hardly any item of machinery belonging to the claimant which could have remained idle for want of power. In respect of the medical facilities it was submitted by the respondents that according to the terms of the contract it was the primary, duty of the appellant to provide for medical assistance to their work force. After setting out the rival contentions the arbitrator awarded as follows:

"Claim No. (1)(A)--The claim for additional payment on account of aslar work is declined. Claim No. (1)(B): The respondents shall pay the claimants an additional amount of rupees seventy five thousand only (Rs.75,000) in satisfaction of this claim over and above the amounts already paid by them in the various part bills.

Claim No. (1)(C): The claim for compensation on account of loss of hire charges and short- age of rubble is declined.

Claim No. 2: The respondents shall pay the claimants a sum of Rupees three lakhs and seventy five thousand only (Rs.3,75,000) in satisfaction of this claim.

Claim Nos. 3 & 4: These two claims are de- clined.

Claim No. 5: The respondents shall pay the claimants an increase of Forty (40) per cent in the agreed rates for agreed items and rate derived from the agreement for extra items for all work paid for after CC 2 and part, such increase being worked out on the cost of the work excluding the value of materials supplied by the respondents.

Claim No. 6: the claimants shall be entitled to a payment of rupees twenty five thousand only (Rs.25,000) in satisfaction of this claim and the respondents shall pay it accordingly. Claim No. 7(a)(b) & (c): The claimants shall be entitled to a consolidated payment of rupees fifty thousand only (Rs.50,000) from the respondents in satisfaction of these claims and the same shall be paid accordingly in addition to the payments already made. The claimants on receipt of such payment shall have no lien whatsoever on the sheds, goods of whatever description and materials lying at site of the work and said to belong to them. Claims Nos. 8, 9, 10, 11 & 12: These five claims are declined.

Claim No. 13: The retention amounts from the bills of the claimant lying in the hands of the respondents shall be released to them. Claim No. 14: An amount of rupees fifty thou- sand only (Rs.50,000) shall be paid to the claimants in settlement of the final claims on the work in addition to the specified items as per this award.

Claim No. 15: The security offered by the claimants for the work shall be released to them subject to the rules regarding tax clear- ance.

Claim No. 16: The claim for interest is de- clined.

Claim No. 17: The parties shall suffer their respective costs in these proceedings."

About the counter claims it was also stated that the claimants would not be responsible to carry out the balance work which the respondents might arrange in any manner they thought fit on termination of the contract, but it should not be at the risk of the claimants.

Upon these awards, an application was made before <ORG>-Judge, <NAME>, for passing decrees' in terms of the award. Objections were also filed. The learned Judge by his judgment and order dated 25th September, 1982 dealt with the objections. He rejected the contention that the claims were barred. He further held that it was not necessary for the arbitrator to give reasons for his award; and that there was no provision under the law which required that the arbitrator should furnish reasons for the award. It was submitted before him that the arbitra- tor ought to have given separate findings for the issues under claim No. 4 as the issues raised were entirely inde- pendent of each other. It was submitted that under sub-claim

(a) in claim No. 4 the appellant had claimed loss on account of the pressure tactics adopted by the labourers. Under sub-claim (b) the appellant had claimed compensation for the extra works done. In the statement of defence filed by the respondents it was more or less conceded that the claim for extra works would lie, and stated that the actuals should be accounted and paid along with the final bill. The learned judge noted that the arbitrator could only give a lump sum award with respect to various claims and that he need not quantify the sum awarded under each claim separately. It was contended before the learned Sub-Judge that in respect of claim No. 5, there was no evidence to support the claim. Under that claim the appellant had detailed the value of tools, plants and materials etc. that were left by him at the site. In the defence statement itself the respondent admitted that some materials belonging to the appellant were taken possession of by them and the value thereof would be paid in the final bill. Therefore, according to the learned judge, it was not correct to say that there was no evidence at all for allowing claim No. 5. Further,it was held that there was no jurisdiction to investigate into the merits of the case and to examine the documentary and oral evidence for the purpose of finding out whether or not the arbitrator had committed an error of law or fact. The learned judge reiterated that the arbitrator had not incorporated in the award any materials for his conclusion nor did he incorpo- rate the terms of the contract between the parties. Under such circumstances the award could not be set aside espe- cially when there was no error apparent on the face of it; and there was nothing to show that the arbitrator had mis- conducted the proceedings or that the award had been improp- erly procured. So the objection was repelled. In the prem- ises the judgment in terms of the award was passed. In respect of the three awards, three different judgments were delivered incorporating more or less the same reasons. Being aggrieved thereby the respondent preferred appeals before <ORG>. <ORG> of <ORG> by the judgment under appeal in F.M.A. Nos. 72, 346 and 380 of 1983 disposed of the appeals.

Being aggrieved thereby, the appellant is before this Court. In the judgment under appeal, <ORG> of <ORG> has set out the claims and noted the rival contentions and referred to the various clauses and the conditions of the contract, though the contract itself was made no part of the award. <ORG> referred to the decision of the learned Sub-Judge. Before <ORG>, the main contention which succeeded was that there were errors apparent on the face of award, and further that the arbitrator had misconducted himself and travelled beyond the terms of the contract. On behalf of the appellant, however, it was contended that the award was a nonspeaking award and, hence, it was not open for the court to go into the correctness of the reasons of the award. <ORG> referred to the several decisions of this Court and other relevant decisions of <ORG>. In order, however, to appreciate the contentions, it is necessary to refer in detail to the judgment under appeal. <ORG> referred to the various clauses of the contract which were produced before <ORG>. The submissions were made on behalf of the respondents .that the claims allowed were beyond and contrary to the agreement between the parties. <ORG> noted that the arbitrator had allowed claims Nos. 1(b), 2, 5, 7(a), 7(b), 7(c), 13, 14 2 15 and had passed an award for payment of an amount of Rs.31.15 lakhs to the claimant towards his claim under the several heads mentioned therein. <ORG> noted the judgment of the learned Sub-Judge. It was held by the learned Sub-Judge that the court could set aside an award only when it was the result of corruption, fraud or there were errors apparent on the face of the award. According to the learned Sub-Judge there was no error apparent on the face' of the award and there was no allegation of fraud. Thereafter, the different points on which the learned Sub-Judge rested his decision, were noted by <ORG>. It was contended before <ORG> on behalf of the respondents that there were errors apparent on the face of the award, and that the arbitrator had misconducted himself and travelled beyond the terms of the contract.

The first contention urged on behalf of the respondents, however, was that the award was a non-speaking award and, there-

fore, it was not open to the court to go into the correct- ness or reasonableness of the award. <ORG> held that when the arbitrator was constituted the sole and final judge of all questions both of law and of facts, normally his decision should stand final and it was only when there was any error apparent on the face of the award either because a question of law arose on the face of the award or upon some paper accompanying or forming part of the award, it could be interfered with. Thereafter, <ORG> in para 8 of its judgment observed that in the light of several decisions it could say that there were any errors apparent on the face of the award, and that the arbitrator had mis- conducted himself and had travelled beyond his power. <ORG> referred to the decision of <ORG> of <ORG> in <CITATION> ,  1 KLT 781. <ORG>, thereafter, observed that it was not open to the arbitrator or the umpire to arrogate tO himself jurisdiction and answer a question not referred to him. In this connection, reference was made by <ORG> to several decisions, namely, Attorney General for Manitoba v. <NAME> and <NAME>.,  1 AC 268; <CITATION> ,  3 SCR 107; <CITATION> ,  2 SCR 793 and <CITATION> .,  5 SCR480. Regarding claim No. 1(b) it was the contention of the respondent that the award was over and above the amounts already paid under various part bills. It was argued before <ORG> that the <ORG> had measured and paid for all quantities of earth work and ruble work and the same had been entered in the measurement book and accepted by the contractor. Hence, the award of additional amount was unwar- ranted. It was also argued that as per clause 10 of Form No. 83 (Notice inviting tender) which formed part of the agree- ment, every tenderer was expected to inspect the site of the proposed work and quarries, and satisfy himself about the quality and availability of materials. It was also notified in the same clause that the <ORG>. would not, after accept- ance of the contract rate, pay any extra charges for lead or any other reason in case the contractor was found later on to have mis-judged the materials available. It was also notified that the <ORG> would not be liable for any claim raised later on the plea of non-access to the site. Ext. R2 was a copy of extract of Clause 10 of Form No. 83. It was argued that the award of Rs.75,000 under claim 1(b) was beyond the powers of the arbitrator. <ORG> held that the award on this aspect was beyond the provisions of the agreement, and therefore there were errors apparent on the face of the award.

Similarly, in respect of the claim for Rs.3,75,000 under claim No. 2, it was contended on behalf of the respondents that this was beyond the powers of the arbitrator and, as such, there were errors apparent on the face of the award. It was argued by him that clause No. 2 of the general speci- fication and special conditions of the contract clearly notified to the tenderers the site of the dam. It was also contended by the Govt. <NAME> that the period during which the contractor had conveyed sand through <ORG>, the claimant had been actually paid additional conveyance charges. Hence, after construing clause 10 of Form No. 83, namely, notice inviting tender, <ORG> held that it was necessary for the contractor to have inspected the site before tender. Therefore, in awarding, the amount as the arbitrator did on this head, there was error apparent on its face and such award was liable to be set aside. <ORG> did so accordingly.

With regard to claim No. 5, it was contended that the claim was beyond the powers of the arbitrator and reference was made to clause 6(6)111 of the General Specification and Special Conditions which stated that the <ORG> was not responsible for supply of uninterrupted electric supply, so any damage on that basis was also unwarranted. The finding on this issue found in the award was set aside. Similarly, in connection with claim No. 6, there was a claim for Rs.24,000 towards expenses for providing a perma- nent doctor. It was held to be contrary to Clause 7 of (IV) of the contract dealing with camp facilities--medical aid etc. which, according to the high Court, indicated that the contractor himself was responsible for providing medical facilities to the contract labourers and that the respond- ents were not bound to pay any additional medical expenses. The claim on this construction and view of the contract, was held to be not sustainable.

The arbitrator had awarded Rs.50,000 by way of damages for sheds and other materials left by the contractor at the site under claim No. 7. It was held by <ORG> that it was the duty of the contractor to remove the sheds and materials brought by him and, therefore, the award allowing such claim was definitely against the provision of the contract. On this head it was held that the award by the arbitrator was contrary to the provision of the agreement and as such bad.

Regarding claim No. 14 for an additional amount of Rs.50,000 it was held that it was unsustainable and due to the misconduct of the arbitrator that it was awarded. It was further ob- served that it was beyond the power of the arbitrator as it was against the provisions of the contract. While dealing with that part of the award which exoner- ated the contractor from the risk after holding that the termination of the contract by the respondent was valid, it was held that the same was opposed to the provisions of the agreement. The direction to release the amount and release of security deposit without taking into account the liabili- ty to account for the loss on re-arrangement of work amount- ed to errors apparent on its face. In the aforesaid light, <ORG> held that the award under claims Nos. 1(b), 2, 5, 6 & 7 and also the award of an additional sum of Rs.50,000 under claim No. 14 over and above the claim al- lowed was against the terms of the contract and, therefore, liable to be set aside.

Similarly, in M.F.A. No. 346/82, <ORG> went into the details of the claims and on the construction of the contract, came to the conclusion that the termination of the contract was legal and that the exoneration of the contractor from the risk and losses was opposed to that finding. In the aforesaid light, <ORG> set aside several claims as mentioned in the judgment on the award. On similar or, more or less, identical grounds several items of MFA No. 380/83, were set aside.

One of the claims under claim No. 4 was the award of Rs.96,000. <ORG> found that it was under clause 20(5) of the General Specification and Special Conditions of the contract, which stated that the <ORG> would not be liable to pay any damages or compensation for hold up caused by intervention of the court, labour strike or any other extraneous forces and therefore and award under claim No. 4 on the ground of labour unrest and extra work, suffered from being erroneous and was liable to be set aside. The clause of the contract covered only situations of labour strike and not labour unrest.

It was submitted before us that <ORG> had exceeded its jurisdiction in acting in the manner it did on these aforesaid aspects. The first question, therefore, that arises for consideration in this case is, whether the award in question was a speaking award or not. In our opinion, the award was not a speaking award. An award can also be set aside if the arbitrator had misconducted himself or the proceedings or had proceeded beyond his jurisdiction. These are separate and district grounds for challenging an award. Where there are errors apparent on the face of the award it can only be set aside if in the award there is any proposition of law which is apparent on the face of the award, namely, in the award itself or any document incorporated in the award. <ORG> in <CITATION> 1922 IA 324 has discussed this problem. It was held that an award of arbitration can be set aside on the ground of error of law apparent on the face of the award only when in the award or in a document incorporated with it, as for instance a note appended by the arbitrator stating the reasons for his decision, there is found some legal proposition which is the basis of the award and which is erroneous. In that case the appellants had sold cotton to the respondents by a contract which contained a submission to arbitration of disputes as to quality, and a further clause submitting to arbitration all other disputes arising out of the contract. Cotton was delivered, but the respondents objected to its quality, and upon arbitration an allowance was awarded; the respondents thereupon rejected the cotton. The appellants claimed damages for the rejec- tion, and upon that dispute being referred to arbitration under the further clause, were awarded damages. The award recited that the contract, the date and subject of which were stated, was subject to the rules of <ORG>, which were not further referred to; and that the respondents had rejected on the grounds contained in a letter of a certain date. That letter stated merely that as the arbitrators had made an allowance of a certain amount the respondents rejected the cotton. <ORG> set aside the award, holding that it was bad on its face, in that under one of the rules of the <ORG> the respond- ents were entitled to reject without liability. It was held by <ORG> that the award could not be set aside; the terms of the contract were not so incorporated with the award as to entitle the <ORG> to refer to them as showing, either that the award was wrong in law, or that under them the contract, and therefore the jurisdiction of the arbitrators, were terminated. This decision and the ratio on this proposition of law has always been accepted by the courts of this country and is well-settled. The next question on this aspect which requires consid- eration is that only in a speaking award the court can look into the reasoning of the award. It is not open to the court to probe the mental process of the arbitrator and speculate, where no reasons are given by the arbitrator, as to what impelled the arbitrator to arrive at his conclusion. See the observations of this <ORG> in <CITATION> ,  4 SCC 93. In the in-

stant case the arbitrator has merely set out the claims and given the history of the claims and then awarded certain amount. He has not spoken his mind indicating why he was done what he has done; he has narrated only now he came to make the award. In absence of any reasons for making the award, it is not open to the court to interfere with the award. Furthermore, in any event, reasonableness of the reasons given by the arbitrator, cannot be challenged. Appraisement of evidence by the arbitrator is never a matter which the court questions and considers. If the parties have selected their own forum, the deciding forum must be conced- ed the power of appraisement of the evidence. The arbitrator is the sole judge of the quality as well as the quantity of evidence and it will not be for the court to take upon itself the task of being a judge on the evidence before the arbitrator. See the observations of this Court in <CITATION> .,  4 SCC 497.

The same principle has been stated in <CITATION> , (supra). There this <ORG> held that the award was liable to be set aside because of an error apparent on the face of the award. An arbitra- tion award might be set aside on the ground of an error on the face of it when the reasons given for the decision, either in the award or in any document incorporated with it, are based upon a legal proposition which is erroneous. But where a specific question is referred, the award is not liable to be set aside on the ground of an error on the face of the award even if the answer to the question involves an erroneous decision on a point of law. But an award which ignores express terms of the contract, is bad. Similarly, in <CITATION> . (supra), this <ORG> reiterated that an award by an arbitrator is conclusive as a judgment between the parties and the court is entitled to set aside an award if the arbitrator has misconducted himself in the proceeding or when the award has been made after the issue of an order by the <ORG> superseding the arbitration or after arbitration proceedings have become invalid under section 35 of the Arbitration Act or where an award has been improperly pro- cured or is otherwise invalid under section 30 of the Act. An award may be set aside on the ground of error on the face of the award, but an award is not invalid merely because by a process of inference and argument it may be demonstrated that the arbitrator has committed some mistake in arriving at his conclusion. The <ORG>, however, went into the ques- tion whether the arbitrator had included depreciation and appreciation of certain assets in the value of the goodwill which he was incompetent to include by virtue of the limits placed upon his authority by the deed of reference. The <ORG> found that was not a case in which the arbitrator had committed an error of fact or law in reaching his conclusions on the disputed questions submitted for adjudication. It was a case of assumption of jurisdiction not possessed by him and that rendered the award to the extent to which it was beyond the arbitrators' jurisdiction, invalid. This was reiterated by Justice <NAME> that if the parties set limits to action by the arbitrator, then the arbitrator had to follow the limits set for him and the court can find that he exceeded his jurisdiction on proof of such excess. In that case the arbitrator in working out net profits for 4 years took into account depreciation of immov- able property. For this reason he must be held to have exceeded his jurisdiction and it is not a question of his having merely interpreted the partnership agreement for himself as to which the Civil <ORG> could have had no say, unless there was an error of law on the face of the award. Therefore, it appears to us that there are two different and distinct grounds involved in many of the cases. One is the error apparent on the face of the award, and the other is that the arbitrator exceeded his jurisdiction. In the latter case, the courts can look into the arbitration agreement but in the former, it can not, unless the agreement was incorpo- rated or recited in the award. <CITATION> (supra), the respondent had taken over the appellant's undertakings, but as the parties were at variance on the true market value to be paid to the appellant, the matter was referred to arbitration. As the arbitrators were unable to agree on the question whether the appellant was entitled to compensation for the 'service lines' which were laid with the help of contributions made by consumers, they referred the question to the umpire. The umpire framed an issue and gave a finding that the appellant was not entitled to claim from the re- spondent the value of the position of the service lines which were laid at the cost of the consumers, for the sole reason that they were laid at the cost of the consumers. The appellant filed an application under section 30 of the Arbitration Act, 1940 challenging the validity of the award on the question. The lower court and the High <ORG> held against the appellant. Allowing the appeal, it was held by this <ORG> that the appellant's application for setting aside the award could succeed only if there was any error of law on the face of the award. There, it was found, that the umpire had made a speaking award and there was no question of the construction of any document incorporated in or appended to the award. If it was transparent from the award that a legal proposition which forms its basis is erroneous, the award is liable to be set aside.

An award may be remitted or set aside on the ground that the arbitrator in making it, had exceeded his jurisdiction and evidence of matters not appearing on the face of it, will be admitted in order to establish whether the jurisdiction had been exceeded or not, because the nature of the dispute is something which has to be determined outside award--whatever might be said about it in the award or by the arbitrator. See in this connection, the observations of <NAME> on The Law of Arbitration, 20th Edn. 427. Also see the observations of <ORG> v. <ORG>., [1954] 1 QB 8 at p. 10 and <ORG> Ltd v. <ORG>, [1978] 2 <ORG>. It has to be reiterated that an arbitrator acting beyond his jurisdiction--is a different ground from the error apparent on the face of the award. In Halsbury's Laws of England (4th Edn. Vol. 2 para 622) one of the misconducts enumerated, is the decision by the arbitrator on a matter which is not included in the agreement or reference. But in such a case one has to determine the distinction between an error within the jurisdiction and an error in excess of the jurisdiction. See the observations in <ORG> <ORG>, [1969] 2 AC 147 and <NAME> v. <NAME>, Field, Knight & Fitzpatrick, [1958] 1 WLR 793. But, in the instant case the court had examined the different claims not to find out whether these claims were within the disputes referable to the arbitrator, but to find out whether in arriving at the decision, the arbitrator had acted correctly or incorrectly. This, in our opinion, the court had no jurisdiction to do, namely, substitution of its own evalua- tion of the conclusion of law or fact to come to the conclu- sion that the arbitrator had acted contrary to the bargain between the parties. Whether a particular amount was liable to be paid or damages liable to be sustained, was a decision within the competency of the arbitrator in this case. By purporting to construe the contract the court could not take upon itself the burden of saying that this was contrary to the contract and, as such, beyond jurisdiction. It has to be determined that there is a distinction between disputes as to the jurisdiction of the arbitrator and the disputes as to in what way that jurisdiction should be exercised. There may be a conflict as to the power of the arbitrator to grant a particular remedy. See Commercial Arbitration by Sir N.J. Mustil and <NAME> page 84.

<ORG> in the judgment under appeal referred to the decision of <ORG> of <ORG> in <CITATION> , (supra). Our attention was also drawn to the said decision by the counsel for the respondents that if an arbitrator or the umpire travels beyond his jurisdiction and arrogates jurisdiction that does not vest in him, that would be a ground to impeach the award. If an arbitrator, even in a non-speaking award decides contrary to the basic features of the contract, that would vitiate the award, it was held. It may be mentioned that in so far as the decision given that it was possible for the court to construe the terms of the contract to come to a conclusion whether an award made by the arbitrator was possible to be made or not, in our opinion, this is not a correct proposi- tion in law and the several decisions relied by the learned Judge in support of that proposition do not support this proposition. Once there is no dispute as to the contract, what is the interpretation of that contract, is a matter for the arbitrator and on which court cannot substitute its own decision.

Reference was also made to the decision in State of Kerala v. <NAME>, [1987] 1 KLT 604. Insofar as the court held therein that an arbitrator deciding a dispute under the contract, is bound by the contract, the court is right. The court cannot, however, substitute the decision of the arbitrator as to what was meant by the contract, once that dispute is conceded to the arbitrator. In so far and to the extent the aforesaid decision of <ORG> decided to the contrary, the same is not the correct law. <ORG> in certain decisions relied on certain authorities of England. In a decision of <ORG> in <ORG> v. <ORG>, [1933] AC 592 it was held that the arbitrator had erred in his construction of clause 30 of the contract. But as the judgment of Lord <NAME> at page 600 of the report, made it quite clear that the arbitrator had recited the terms of clause 32 of the contract in the award, and thereafter on the construction of that clause, the court decided that the arbitrator had misconstrued the effect thereof. That was a case where dispute was not within the contract. <CITATION> .,  AC 356 the controversy was entirely different. Similarly, in Attorney General for Manitoba v. <ORG>, (supra), upon which <ORG> in the judgment under appeal referred was again in a different context. There, in an action in Manitoba against building contractors to recover sums im- properly paid to them under a contract, and for damages, a judgment by consent was entered whereby it was provided, inter alia, that the plaintiff should recover, among other sums, "all loss to the plaintiff by reason of defective workmanship and materials", and that these should be set off against the sums recovered by the plaintiff the fair value of the work done and materials provided at fair contractor's prices. The judgment, however, provided further that the sums to be debited and credited were to be determined by two appraisers, and that any matter upon which they differed was to be referred to a named umpire whose decision thereon was to be final; and that the Manitoba Arbitration Act should not apply. The defendants moved to set aside or vary an award. It was held that under the words "all loss" there was jurisdiction to award to the plaintiff not only sums actually expended, but also a sum estimated as being necessary to make good the defects, and that extrinsic evidence was not admissible to show that the sum allowed to the defendants as set-off had been reduced in respect of defective work for which they had also been debited. Further, it was held that the award being within the jurisdiction conferred by the submission, and there being no error apparent on its face, it could not be questioned either on the facts or on the law. In the instant case, <ORG> seems to have fallen into an error of deciding the question on interpretation of the contract. In the aforesaid view of the matter we are of the opinion that <ORG> was in error. It may be stated that if on a view taken of a contract, the decision of the arbitrator on certain amounts awarded, is a possible view though perhaps not the only correct view, the award cannot be examined by the court in the manner done by <ORG> in the instant case.

In light of the above, <ORG>, in our opinion, had no jurisdiction to examine the different items awarded clause by clause by the arbitrator and to hold that under the contract these were not sustainable in the facts found by the arbitrator.

These appeals are, therefore, allowed. The judgment and order of <ORG> are set aside and the orders of the learned Sub Judge are restored. In the facts and the circum- stances of the case, however, the parties will bear their own costs.

<ORG> al- lowed.


PETITIONER: THE COMMISSIONER OF INCOME TAX, PUNJAB Vs. RESPONDENT: <ORG> DATE OF JUDGMENT: 25/11/1965 BENCH: <NAME>, A.K. BENCH: <NAME>, A.K. MUDHOLKAR, <NAME>R. BACHAWAT, R.S. CITATION: 1966 AIR 843 1966 SCR (2) 720 CITATOR INFO : R 1976 SC 10 (9) ACT: Income Tax Act 1922-s. 10(2) (xv)-Whether company carried on business-Therefore whether entitled to deduction of expenses. HEADNOTE: The assessee company carried on the business of supplying electricity to various cities under licences from the Government. All the licences, except one for the supply of electricity to the city of Lahore, were terminated or disposed of by 1942. Soon after that, <ORG> acquired the company's undertaking for the supply of electricity in Lahore and part of the value for the acquisition remained due to be paid to the company after the listing and valuation of the assets. The company also possessed considerable assets not appertaining to <ORG> and all its funds were invested in securities and shares, the income from which was the sole income after September 5, 1946. In its assessment to income-tax for the years 1948-49 and 1949-50, the company claimed deduction of various amounts under s. 10(2)(xv) of the Income-tax Act, 1922, on the basis that it had been carrying on business in the accounting years concerned and the expenses had been incurred solely for the purpose of that business. Their contention was rejected by the Income-tax Officer and his stand was confirmed by the Appellate Assistant Commissioner. However, the <ORG> held in appeal, that the question depended on what the intentions of the company were and on the facts took the view that the assessee company had not ceased to carry on business. <ORG>, upon a reference, also answered the question in the assessee's favour. In arriving at this conclusion, the <ORG> and <ORG> relied on, Inter alia, the following facts :- (1) the company did not sell its undertaking as a going concern; (2) it continued in possession of all assets of its undertakings other than those appertaining to <ORG>; (3) it continued to hold deposits from consumers of electricity which had to be returned with interest; (4) it had no intention of going into liquidation; (5) the Directors had indicated in their report that they were considering purchasing some manufacturing concern to have an additional source of profit; etc. HELD : (Per <NAME> and <NAME>.) None of the grounds set out by the <ORG> and <ORG> led to the conclusion that the company intended to carry on business. The facts found made it clear that since 1942 the only business of the company was to work the <ORG> licence. It stopped that business when the undertaking was taken over by the Government. Thereafter, during the accounting years concerned, namely 1947-48 and 1948-49 it bad not started any other business. [723 F] 721 The Commissioners of Inland Revenue v. <ORG> 12 T.C. 803, referred. The Commissioners of Inland Revenue v. <ORG> 12 T.C. 657, 712 distinguished. (Per <NAME>, <NAME>, dissenting) (i) The Memorandum of the assessee company showed that one of its subsidiary objects was to invest in stocks, shares, securities, etc. and to sell, exchange or otherwise deal with them from time to time. The main business of generating and supplying electricity having stopped, the company invested its funds in deposits and stocks and shares. The activity of investment and getting a return for its capital was a part of its legitimate business activities [728 H-729 B] The Commissioners of Inland Revenue v. <ORG> 12 T.C. 181; <CITATION> , (1962) 3 S.C.R. 368, 378; Laxminarayan Ram Gopal & Sons v. Govt. of.,, Hyderabad (1955) I S.C.R. 393, 405-407; The Commissioners of Inland Revenue v. <ORG> 12 T.C. 712; referred to. (ii) On the facts of the case, the <ORG> had rightly come to the conclusion that the company had not ceased to carry on its business. JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 813 and 814 of 1963.

Appeals by Special Leave from the Judgment and Order dated the December 30, 1960 of <ORG> in Income Tax Reference No. 10 of 1959.

<NAME>, Additional Solicitor-General, <NAME> and <NAME>, for the appellant.

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

The Judgment of <ORG> was delivered by <NAME>, J. delivered a dissenting Opinion.<NAME> The respondent is a company incorporated in 1912. The immediate object of the <ORG> was to acquire from <ORG> the licence it had obtained from the Government for the supply of electricity to Lahore city. The <ORG> acquired that licence in 1913 and the necessary plants and machinery for the generation and supply of electricity. Between 1923 and 1939 it acquired licences for similar purposes in regard to various other places in different parts of India. All these licences were however either terminated or disposed of one by one and in 1942 the only licence which the <ORG> possessed was that in respect of the city of Lahore. About the end of 1942 or beginning of 1943, the Government of the then Province of Punjab acquired the <ORG>'s undertaking in regard to the supply of electricity to the city of Lahore and on September 5, 1946, the <ORG> delivered its aforesaid undertaking with all assets to the Government. It was agreed that the <ORG> would pay to the Government half of the net profits of the Lahore electric supply undertaking arising between November 27, 1942 and September 5, 1946. On September 5, 1946, the <ORG> received from the Government a part of the moneys payable to it in respect of the Lahore electric supply undertaking leaving a large amount due which was to be paid after the listing and valuation of its assets. Besides this sum the <ORG> also possessed considerable assets not appertaining to the Lahore electric supply undertaking. All these funds were invested by the <ORG> in government and other securities and shares and the income from these investments appears to have been the sole income of the <ORG> after September 5, 1946.

In its assessment to income-tax for the years 1948-1949 and 1949-1950 the <ORG> claimed deduction of various amounts under S. 10(2)(xv) of the Income-tax Act, 1922, on the basis that it had been carrying on business in the accounting years concerned and the expenses had been incurred solely for the purpose of that business. This contention was rejected by the Income-tax Officer. On appeal by the <ORG> to the Appellate Assistant Commissioner, certain deductions were allowed but that authority did not accept the contention that the <ORG> was carrying on business so as to come within S. 10 of the Act. The <ORG> then took the matter up in further appeal to <ORG>. The <ORG> accepted the <ORG>'s contention and granted it large deductions under S. 10(2)(xv) of the Income-tax Act . The appellate Commissioner of Income-tax requested the <ORG> to state a case to <ORG> but that request was rejected. The appellant Commissioner thereafter on August 20, 1958 obtained an order from <ORG> of Punjab directing the <ORG> to refer the following two questions to <ORG> for its opinion :

1. Whether on the facts and in the circumstances of the case the conclusion of <ORG> that the assessee company had not ceased to carry on business during the relevant accounting period, is, in law, correct.

2.If the answer to the first question be in the affirmative, whether all the expenses which the <ORG> has allowed are admissible under section 10(2) of the Income-tax Act ?

Accordingly the <ORG> stated a case to <ORG> in regard to these two questions. <ORG> answered both the questions in the affirmative. Hence the present appeals by the Commissioner of Income-tax.

In this Court the learned Additional Solicitor General appearing for the appellant abandoned the second question. The only point, therefore, that arises for decision in this appeal is whether on the facts found it could be said that the Company had been carrying on business in the two accounting years.

As we have earlier stated, the <ORG> took the view that the Company had not ceased to carry on business. The <ORG> observed that the question would depend on what the intentions of the Company were. <ORG> was of the same opinion. We also think that that is the correct view. This postulates that the Company was not in fact carrying on any business for if it was, it would be superfluous to enquire whether the Company intended to carry on a business. The Courts below thought that the facts showed that the Company intended to carry on business. The facts on which they relied were(1) the Company did not sell its undertaking as a going concern; (2) it continued in possession of all assets of its undertakings other than those appertaining to the Lahore electric supply undertaking; (3) it continued to hold deposits made by consumers of electricity supplied by the Lahore electric supply undertaking which had to be returned to them with interest; (4) it had no intention of going into liquidation; (5) the Directors' report showed that the Directors were "considering if they could possibly purchase some manufacturing concern which might become an additional source of profit to the shareholders"; and (6) there was nothing to show that there was permanent discontinuance of the business of the Company. So far as <ORG> is concerned, it appears to have held that the Company was carrying on business because there was nothing to show that it intended to go into liquidation and because by keeping its staff and establishment it indicated that it would resume business, for otherwise it would not have retained them. <ORG> also took into account the fact that during the larger part of the accounting periods the situation in the country was abnormal as a result of the partition of India and that explained why the Company had not commenced any fresh business.

In our opinion, none of the grounds mentioned in the preceding paragraph leads to the conclusion that the <ORG> intended to carry on business. The facts found make it abundantly clear that since 1942 the only business of the <ORG> was to work the Lahore electric supply licence. It stopped that business on September 5, 1946 when the undertaking was taken over by the Government. Thereafter, during the accounting years concerned, namely, 1947-48 and 1948-49 it had not started any other business. The mere fact that the <ORG> had not gone into liquidation would not establish that it had the intention to do business. If it were not so, then in the case of all trading companies it had to be held that they were always doing business. There is neither authority nor principle to support such a proposition. There was further no question of the <ORG>'s going into liquidation in the accounting years, .for during that time it had not received from the Government the entire amount due to it as compensation for the acquisition of its Lahore electric supply undertaking. At the relevant time the <ORG> was not possessed of any commercial undertaking. What we have quoted earlier from the Directors' report would show that what was in the contemplation of the Directors was the purchase of a new concern. The Directors however had not stated that they did intend to do so. What they said was that they were considering whether they would do so or not. That does not express an intention to resume business. It is unnecessary to go into the question whether an expression of an intention to resume business in vacuo would amount to carrying on business. It is sufficient for the purpose of this case to state that even an intention to resume business has not been established.

It would, therefore, appear that the business was closed and the Company had not established an intention to resume it. That would be enough to show that no business was carried on and it would be irrelevant to enquire whether the business was permanently closed. We may add that we do not understand what was meant by saying that the Company did not sell its undertaking as a going concern. The only going trading concern that it possessed was the Lahore electric supply undertaking and that it sold; it had no other commercial undertaking. After the sale of the Lahore electric supply concern all it did was to invest its moneys and the <ORG> has not found this activity to be a business.

The facts that the Company had to pay the <ORG> half share of the profits between November 27, 1942 and September 5, 1946 and that it had to return the consumers the deposits made by them would not indicate that it was carrying on a business. It would be laying down strange law to hold that where a business has in fact ceased to be run, it must be deemed as continuing because the outstanding liabilities of that business had not been liquidated. The question whether the Company was carrying on business arises only because if it was, it would be entitled under s. 10 to deductions from its business income in regard to certain expenses incurred by it for the purpose of that business. Business as contemplated by that section is an activity capable of producing a profit which can be taxed. Payment of outstanding liabilities is not an activity which can ever produce such a result. It cannot be said, therefore, that because liabilities of a closed business were outstanding, it has to be held that either the business was continuing or that an intention to resume business must be inferred : see commissioners of <ORG> v. <ORG>).

Some reliance was placed in this connection on an observation of Lord <NAME> in The Commissioners of Inland Revenue v. <ORG> (2). There Lord <NAME> observed, "If, as was held in re <NAME>, (1896)2 Q.B. 407, a married woman continues to carry on business for the purpose of 45 & 46 Vict., c. 75, s. 1(5) , as long as her trade debts remain undischarged, there would seem to be a presumption that a company continues to carry on business as long as it is engaged in collecting debts periodically fall- ing due to it in the course of its former business." We are unable to hold that Lord <NAME> intended to lay down that a business which is closed down is deemed to be carried on so long as its outstandings are being collected. <ORG> case(2) was concerned with a financing company whose only activity after the finances had been furnished was to receive from the Government by way of profits of the financing activity, earlier a certain proportion of the net earnings of the undertaking financed which was being managed by the government and later a fixed sum and to receive from the Government the finance supplied when the Government acquired the undertaking as it intended to do. All that Lord <NAME> intended to say was that the receipt of the moneys was the business of the company and its only business after the financing had been completed. He was not concerned with the case of a closed business whose outstandings were being collected.

The <ORG> did not hold that the Company was in fact doing business or that anything that it did amounted to carrying on business. The onus of showing this was clearly on the Company. All that it did was to refer to the sale of its Lahore electric supply undertaking to the <ORG> and the listing of the assets of that undertaking and valuing it as the carrying on of business. This contention was rightly rejected by the <ORG> on the ground that the sale of the undertaking though within its memorandum was not (1) 12 T.C 803, 813.

L3Sup. CI/66-16 (2) 12 T.C. 657,712.

its business which was really the working of that undertaking. It also seems to us that the condition of the country immediately following the partition is by itself irrelevant for deciding whether the Company was doing business.

Learned counsel for the respondent contended that the Incometax Officer's order showed that in one of the assessment years the Company had received a certain amount as a result of a business of dealing in investments. The <ORG> however did not find this as a fact. Neither does it seem to us that the Income-tax Officer considered this income as business income though it described it as such, for he held that the Company was not doing any business at all.

In our opinion, it must, therefore, be held that the Company had ceased to carry on business and we would answer the first question in the negative. The appeals must be allowed with costs here and below and we order accordingly.

<NAME>, J. These appeals by special leave raise the question whether the respondent-Company was carrying on business during the according years 1947-48 and 1948-49 corresponding to the assessment years, 1948-49 and 1949-50, and, therefore, entitled to deduction of expenses for carrying on the business under s. 10(2)(xv) of the Indian Income-tax Act, 1922. The company was incorporated in 1912. In 1913, it acquired the license to supply electric energy in Lahore and thereafter it acquired other licenses for supply of electric energy at various other places. Before 1942, it disposed of all the licenses other than the Lahore license. <ORG> took steps for the acquisition of the undertaking relating to Lahore license under the Defence of India Act and Rules, and there were disputes and litigations between it and the company. The disputes were compromised by an agreement dated June 2, 1945, whereby the company sold the undertaking to the <ORG> at a price to be settled by valuation and also agreed to pay to the <ORG> half the net profits of the undertaking less taxes from November 27, 1942 till the date of the delivery of the undertaking to the <ORG>. Pending the compilation of the lists and the making of the valuation of the assets of the undertaking, the company and the Punjab <ORG> entered into a supplementary agreement dated September 2, 1946 under which the Company received a sum of rupees one crore towards part payment of the price, and on September 5, 1946 the company delivered the undertaking to the Punjab <ORG>.

It is common case that until September 5, 1946 the company was carrying on the business. The dispute is whether the company had ceased to carry on business thereafter and more particularly during the accounting years 1947-48 and 1948-49. During this period, the company was not generating or supplying electricity at Lahore or at any other place, and it carried on its activities with a reduced staff. It devoted a part of its activities for the making of the lists and the valuation of the assets sold to <ORG>. It had considerable undisposed of assets. The deposits of its old customers were outstanding and it was liable to repay the same with interest. It invested the cash received from the <ORG> and other sources in stocks and shares and bank deposits and received by way of income, large sums of money from interest on deposits and dividends. During the accounting year 1947-48, it was in receipt of some business income from the sale of its investments. It utilised its income to pay dividends to the shareholders and to meet its expenses. It had no intention of going into liquidation and successfully opposed a winding-up petition. In the directors' report for the accounting year, 1946-47 dated November 25, 1948, the directors stated :

"In the meanwhile, however, your Directors are considering if they could possibly purchase some manufacturing concern which might become an additional source of profit to the shareholders."

For the assessment years, 1948-49 and 1949-50, the company claimed deduction of expenses for carrying on its business during the accounting years 1947-48 and 1948-49 under s. 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer held that the company was not carrying on any business and totally disallowed contribution to employees' provident fund, pension and gratuity to old staff, valuer's remuneration, legal expenses, depreciation and income-tax provision, but he allowed a part of the salary paid to certain employees, rent, office expenses, interest, auditor's and directors' fees. On appeal, the Appellate Assistant Commissioner held that though there was some little business income, there was practically no business and be allowed in full the audit charges, directors' fees and payment for interest, but he reduced the rent and establishment charges allowed by the Income-tax Officer. On further appeal by the company, <ORG> recorded the following finding:

"Keeping in mind the entire facts and circumstances of this case, we have come to the clear conclusion that the assessee Company had not ceased to carry on its business."

On this finding, the <ORG> held that in addition to the expenses allowed by the Appellate Assistant Commissioner the whole of the contribution to provident fund, pension, gratuity, rent, depreciation, establishment charges and office expenses and the legal expenses for resisting the winding-up should be allowed. Under the orders of <ORG>, the <ORG> referred the following questions of law for the decision of <ORG> :

"(1) Whether on the facts and in the circumstances of the case the conclusion of <ORG> that the assessee company had not ceased to carry on business during the relevant accounting period is, in law correct ?

(2) If the answer to the first question be in the affirmative, whether all the expenses which the <ORG> has allowed are admissible under section 10(2) of the Income-tax Act ?"

<ORG> answered both the questions in the affirmative, and the Commissioner of Income-tax now appeals to this Court by special leave. Counsel for the appellant conceded that if the first question is answered in the affirmative, the second question must also be answered in the affirmative. The sole question before us is, therefore, whether on the facts found the company had ceased to carry on business during the accounting years 1947-48 and 1948-49.

The memorandum of the company discloses the objects for which the company was constituted. If a question arises whether a particular activity of the company is a business activity, it is pertinent and relevant to enquire whether it is so regarded in its memorandum. See <ORG> v. <ORG>), <CITATION> , West Bengal(2), <ORG> v. <ORG>("). In the instant case, the memorandum of the company discloses that its main purpose is to carry on the business of electric light and power company in all its branches, including generating and supplying electricity. Clause 4 of the memorandum shows that one of its subsidiary objects is to invest in stocks, shares, investments or securities of all classes and descriptions and to hold, sell, (1)  12 T.C. 181.

(2) [1962] 3 S.C.R. 368, 378.

(3) [1955] 1 S.C.R. 393, 405-407.

exchange or otherwise dispose of, deal with them from time to time, A company may of course own shares and make investments, and still not carry on any business; but in this case there is nothing to show that its investments are not to be regarded as part of its business activities. The main business of generating and supplying electricity had stopped and the company, therefore, invested its funds in deposits and stocks and shares. The activity of investment and getting a return for its capital is a part of its legitimate business activities. In <ORG> v. <ORG>), the objects of the company were, inter alia, to acquire steamships and other vessels, to build, charter, let out on hire and trade with ships, to carry on business as shipowners, merchants, etc., and to invest and deal with the moneys not immediately required. At the outbreak of the war, the company owned and traded with five ships. Of these, one was detained by the enemy at Hamburg, one was sold and the remaining three (all insured) were sunk during the war. The proceeds of sale and the insurance moneys received were all placed on deposit or invested in easily realisable investments in order to facilitate the resumption of trading or winding up. In an assessment of the company to Corporation. Profits Tax, it was held on the authority of <ORG> v. <ORG>) that the company was carrying on a trade or business, and that it was liable to assessment to Corporation Profits Tax. The wording of s. 52 of the Finance Act, 1920 made no difference, for as pointed out by Viscount <NAME>, L.C in <ORG> case(2) at p. 705, the words "including the holding of investments" in the statute referred not to all cases in which the company had money invested, but to cases where the holding of investments was the business or part of the business of the company. The activity of investment of its available funds may be regarded as a business activity of the company even though the company for the time being may not be carrying on its main business. The company's main business may be quiescent, but, nevertheless, it may still carry on business.

It has been specifically found that the company was dealing in investments during the accounting year, 1947-48 and that a surplus of Rs. 2,447/- realised by the company from sale of its investments during the year was a business income of the assessee. See paragraph 6 of the statement of case dated March 6, 1959, paragraph 4 of the order of the Appellate Assistant Commissioner dated April 18, 1951 and the last part of the order of the Income-tax Officer for (1) 12 T.C. 712. (2) 12 T.C. 657.

Sup. C.I./66-17 the assessment year, 1948-49, dated August 21, 1949. The order of the Income-tax Officer specifically stated that even the balancesheet for the period ending March 31, 1947 showed that the difference on realisation of assets stood at Rs. 1,25,783/, and it thus appeared that the company was dealing in securities. The <ORG> thus claimed to assess the surplus on the realisation of the investments as the profits of a business under S. 10 , and its claim has been upheld. I fail to see how the <ORG> can take an inconsistent stand and claim that the activity of investment was not a business activity of the company.

The <ORG> also found that the entire business of the company was not sold to <ORG> as a going concern and the company continued to own and hold considerable assets not appertaining to the Lahore licence. The company sold and disposed of only its undertaking relating to the Lahore license, on September 5, 1946. Even then, <ORG> did not take up all the business debts and liabilities of the undertaking. The company continued to remain liable to the old consumers in respect of their deposits, The company continued to pay interest on these deposits to the consumers. In paragraph 12 of its order dated December 8, 1951, the <ORG> observed, and, in my opinion, rightly :

"If payment of interest on consumers deposits was a proper business expense in the preceding years, we do not see why or how its character changed in the years under review."

The <ORG> rightly pointed out that the activity of making lists and valuing the assets of the company for the purpose of ascertaining the price of the Lahore undertaking from <ORG> is not a business activity of the company. But, looking at the other facts and circumstances of the case and the relevant authorities on the point, the <ORG> came to the clear conclusion that the company had not ceased to carry on its business, There is enough material on the record to support this finding.

There is no set formula for determining whether in a given case a company is carrying on business. For the right understanding of the matter, one must import a little common sense. From the shareholders' and the directors' point of view, the company was undoubtedly carrying on business during the relevant accounting periods. From the popular point of view, what the company did during these years was a business activity. Again, if the question arose whether the company was carrying on business during these years for the purpose of s. 20 of the Code of Civil Procedure, I have no doubt in my mind that the answer would be in the affirmative. From whatever point of view the matter is looked at, the conclusion is irresistible that the company was carrying on business during the relevant accounting years. There is ample material on which the <ORG> could come to this finding, and I see no reason for disturbing its finding.

In the result, the appeals are dismissed with costs. ORDER In accordance with the majority Judgments, the Appeals are allowed with costs here and below.


JUDGMENT

1. The first question argued in this appeal relates to the payments pleaded by defendants Nos. 1 to 3. They form the subject of the 1st issue. We agree with the finding of the District Judge on it.

2. The only substantial question in the case relates to the liability of the 6th defendant's share in the mortgaged property. The suit mortgage is dated 6th December 1890. The 6th defendant did not join in the execution, although he had been given a share in it under Exhibit VIII which is dated 7th May 1886. It was not argued before us on behalf of the respondent that the mortgage bound the 6th defendant's interest also, even though he was no party to the document. The ground on which the plaintiff has been given a decree for a portion of the mortgage money against the 6th defendant's interest in the property, is that it was applied in discharge of an earlier mortgage, Exhibit B, dated the 15th of August 1884, which was binding on the whole mortgaged property as it was, anterior to the carving out of a share in favour of the 6th defendant. The question we have to consider is whether the plaintiff is entitled to claim subrogation and to stand in the shoes of the mortgagee under Exhibit B. We may dismiss at once the argument of Mr. <NAME> that there is nothing to show that part of the mortgage money under Exhibit A was applied in discharge of Exhibit B. It is not open to the appellant to raise this contention for there was no express denial IK the written statement of the allegation in the plaint that part of the mortgage money was so applied. Exhibit A recites the purpose. No question appears to have been raised before the District Judge as regards the actual application of the money. But the more important question remains as to the right to subrogation. We think this case is exactly covered by the decison of <ORG> in <NAME> v. <NAME> (1882) I.L.R. 9 C. 961. The facts of that case are closely analogous to those of the present case. A second mortgagee from a certain person applied part of the mortgage money in discharge of a prior mortgage which bound the interest of another person as well. There was no express statement of an intention to keep alive the discharged mortgage. There was no intermediate incumbrance against which the prior mortgage might be presumed to be kept alive. The rate of interest stipulated under the suit mortgage differed from that provided in the earlier encumbrance. All these facts are present in the case before us. The principle underlying that decision is unaffected by the later decision of <ORG> in <NAME> v. <NAME> (1883) I.L.R. 10 C. 1035. We accept the law as expounded in <NAME> v. <NAME> (1905) I.L.R. 2 C.L.J. 288 by Mr. Justice <NAME> and followed in <NAME> v. <NAME> (1907) 6 C.L.J. 134 and by this <ORG> in <CITATION> (1907) 6 C.L.J. 134. We must modify the decree of the <ORG> below by exonerating the 6th defendant's share under Exhibit VIII in the suit properties from all liability. The 6th defendant is entitled to his costs in this and the lower <ORG> against the respondent. The appeal is otherwise dismissed with costs.