JUDGMENT <NAME>, C.J.

1. This appeal arises out of a suit to enforce payment of a sum of Rs. 10,000, principal and interest alleged to be due on foot of a mortgage, dated the 16th of July 1690, by sale of the mortgaged property. The mortgage-deed provided that the mortgagors should pay the principal amount secured in ton years by instalments of Rs. 625 yearly and that the interest should be paid monthly. There was this, further Clause: "If we fail to pay the interest aforesaid in any month or the principal by the stipulated period, as specified above, or no payment is made in a year, the mortgagee shall, under all these circumstances, be at liberty to realize the entire amount with the interest aforesaid in a lump sum through <ORG> by means of a suit from the mortgaged and other moveable and immoveable property and the person of us, the executants." Later on the deed has a provision which has been translated as follows: "If the mortgagee in order to get interest does not bring a suit in default of any instalment and we are unable to pay the money, the interest should continue up to the stipulated period of ten years and also after it up to the date, of realization." This last Clause seems to me simply to mean that the mortgaged property should remain and be security for the interest even if no suit was brought to enforce the monthly payment. No payment was ever made upon foot of either principal or interest up to the date of the institution of the present suit on the 12th of June 1912.

2. The <ORG> below has dismissed the plaintiff's suit, holding that the claim is barred by limitation. The plaintiffs appeal.

3. In my opinion the decision of the <ORG> below is correct. It is admitted that the Article of the Limitation Act which applies is Article 132. See the decision of their Lordships of the Privy Council in <CITATION> 30 M. 426 : 17 M.L.J. 444 : 4 A.L.J. 625 : 9 Bom. L.R. 1104 : 6 C.L.J. 379 : 11 C.W.N. 1005 : 34 I.A. 187 (P.C.) : 2 M.L.T. 333. This Article deals with "suits to enforce payment of money charged upon immoveable property." The period of limitation prescribed is 12 years and time begins to run from the date when the money sued for becomes due. No doubt if the mortgagors had fulfilled their contract, the mortgagees would not have been entitled to sue until the expiration of ten years from the date of the mortgage, and in that case the present suit would have been within time. The provision, however, in the deed admittedly entitled the mortgagge to bring a suit to recover principal and interest after the first default, and if it can be said that the money then "became due" the suit is barred by limitation. It is contended on behalf of the appellant that the mortgagees were entitled to sue, or not to sue and that accordingly on the true construction of the mortgage-deed the money did not "become due" until the expiration of ten years from the date of the mortgage. I cannot agree with this contention. It seems to me that money is "due" when it can he legally demanded, and it is admitted in the present case that the money secured by this mortgage could have been legally demanded and recovered after the first default, and had a suit been brought for its recovery by sale of the mortgaged property the defendants could not have pleaded that such a suit was premature. For this there is the high authority of the English <ORG> of Appeal in the case of <NAME> v. <NAME> (1891) 2 Q.B.D. 509 : 65 L.T. 329 : 39 W.R. 629 : 60 L.J.Q.B. 619. In that case the plaintiff lent money to the defendant under a written agreement for a fixed period of five years "subject to the power to call in the same at an earlier period in the events hereinafter mentioned," The defendant agreed to pay interest quarterly and the plaintiff agreed not to call in the money for five years if the defendant should regularly pay interest. It was further provided that if the defendant should make default in payment of any quarterly payment of interest for 21 days, the plaintiff might call in the principal. No interest was ever paid. The plaintiff commenced his action within six years from the end of the period of five years. It was held that time began to run against the plaintiff from the earliest time at which the action could have been brought, that is to say, 21 days after the first instalment of interest became due. Lindley, L.J., said: "I am of opinion that we cannot differ from the judgment below without altering the law. The agreement is one reasonably easy to be understood. It provides for a loan for five years, subject to a provision that if default is made in punctual payment of interest, the principal shall be recoverable at once. Now, the Statute of Limitations (21 Jac.1, Clause. 16) enacts that such actions as are therein mentioned, including "all actions of debt grounded upon any lending or contract without specialty," shall be brought 'within six years next after the cause of such action or suit, and not after.' This expression, 'cause of action,' has been repeatedly the subject of decision, and it has been held, particularly in <NAME> v. <NAME> 4 Q.B. 519 : 12 L.J.Q.B. 134 : 7 Jur. 302 : 3 G. & D. 402 : 114 E.R. 994 : 62 R.R. 422 decided in 1843, that the cause of action arises at the time when the debt could first have been recovered by action. The light to being an action may arise on various events; but it has always been held that the Statute runs from the earliest time at which an action could be brought."

4. <NAME>, L.J. said: "We have not to determine whether the defence here set up is handsome or conscientious, but whether it is good at law--and I am of opinion that it is. The agreement contains a stipulation that the lender shall not call in the principal sum for a period of five years, if the borrower should so long live, and should duly and regularly pay the interest. This implies a contract by the borrower that, the principal debt should be paid at once on the death of the borrower, or on default in payment of interest. The subsequent provisoes imply a contract by the lender not to enforce payment after the death of the borrower until the expiration of a six months' notice, and a contract not to enforce payment of the capital for default in payment of interest until 21 days after such default, thus giving the borrower further time. Subject to these stipulations, the implied contract to pay the principal remained in force. The principal, therefore, became payable 21 days after the first quarterly instalment of interest became due, and from that time the Statute of Limitations began to run. if authority is wanted, <NAME> v. <NAME> 4 Q.B. 519 : 12 L.J.Q.B. 134 : 7 Jur. 302 : 3 G. & D. 402 : 114 E.R. 994 : 62 R.R. 422 is in point." <NAME>, L.J., said: "The defendant alleges that the cause of action arose more than six years before the action was commenced, and that the action is barred by the Statute of Limitations, Now, when first had the plaintiff a cause of action? When default was made for 21 days in payment of an instalment of interest. <NAME> v. <NAME> 4 Q.B. 519 : 12 L.J.Q.B. 134 : 7 Jur. 302 : 3 G. & D. 402 : 114 E.R. 994 : 62 R.R. 422 is in point. It is said that this case is not good law, and that it has not been referred to for many years. I think that it has not been referred to because it has been acquiesced in, and it does not appear that it has ever been questioned." It seems to me that this case is the clearest authority (if authority were needed) that money "becomes due" as soon as it is legally recoverable, quite irrespective of when the suit was instituted.

5. This view was taken in the case of <CITATION> 24 C. 281 : 1 C.W.N. 229 and in the case of <CITATION> 20 M. 245 : 7 M.L.J. 222.

6. A somewhat contrary view was taken in the case of <CITATION> 22 M. 20 : 8 M.L.J. 167. In this last case, however, the Clause in the mortgage-deed was as follows: "In default of paying on the above dates, I shall pay the said sum with interest at Rs. 15 per cent, per annum, from the date of the bond, irrespective of the above due date, whenever you make the demand." The Court seems to have thought that the money did not become due on default unless a demand was made. It is unnecessary to express any opinion as to whether or not the learned Judges were correct in their construction of the deed in question, because there are no similar words in the deed in the present suit.

7. A. number of cases have been cited on behalf of the appellant, including the cases of the <CITATION> 29 A. 431 : A.W.N. (1907) 139 : 4 A.L.J. 336; <NAME> v. Jalpa Prasad 16 A. 371 : A.W.N. (1894) 115. and <NAME> v. <NAME> 30 A. 123 : A.W.N. (1908) 36 : 5 A.L.J. 72. All these cases dealt with the construction of Article 75 of the Limitation Act which contains no reference to the money becoming due," and in my opinion these cases have no bearing on the question which we have to consider in the present appeal see also <NAME> v. Baij Nath 20 Ind. Cas. 933 : 35 A. 455 : 11 A.L.J. 664 Article 75 is the Article applicable to quite a different suit from the present. The learned Advocate for the appellants also referred to a dictum of their Lordships of <ORG> in the case of <CITATION> 1 C. 163 : 25 W.R. 84 : 3 I.A. 1 : 3 Sar. P.C.J. 58 : 3 Suth. P.C.J. 222. The facts of that case were quite different and their Lordships expressly state that it was unnecessary to decide the question to which the dictum refers. Their Lordships have, moreover, in the recent case to which I have referred decided that Article 132 is the Article which applies to a suit on a simple mortgage to enforce payment of money charged on immoveable property. I am clearly of opinion that in the present case the money "became due" within the meaning of that expression in the Article of limitation when the first default was made and that accordingly the suit is barred by limitation, I would dismiss the appeal.

Banerji, J.

8. The only question in this appeal is whether the plaintiffs' claim, which is one to enforce payment of the amount due on a simple mortgage by sale of the mortgaged property, is barred by limitation. The mortgage bond is dated the 16th of July 1899 and the time fixed for re-payment is ten years. Except for another provision in the bond, to which I shall presently refer, the amount secured by it was re-payable on 16th July 1900 and as the present suit was instituted on the 12th of June 1912, it would be within time under Article l32 of Schedule I of the Limitation Act, which has been held by their Lordships of <ORG> to be applicable to a suit of this kind. The defendants, however, rely on the following provision of the bond and urge that the amount of the mortgage became due when default was made in the payment of the first instalment and as more than 12 years have elapsed since the date of default, the claim is time-barred. The provision is this: "We shall pay Rs.625 yearly and we shall pay the interest on the said amount monthly at the rate of 8 annas per month. If we fail to pay the interest aforesaid in any month or the principal by the end of the stipulated period as specified above, or no payment is made in a year, the mortgagee shall, under all these circumstances, be at liberty to realize the entire amount with the interest aforesaid in a lump sum through <ORG> by means of a suit from the mortgaged and other moveable and immoveable property and the persons of us, the executants." Had this Clause stood alone, it might perhaps be said, on the authority of the English and other cases cited on behalf of the respondents, that the plaintiffs were bound to sue when default was first made in the payment of the instalment fixed in the bond. The document, however, goes on to provide that if the mortgagees in order to get interest do not bring a suit in default of payment of any instalment and we be unable to pay the money, the interest should continue up to the stipulated period of ten years and also after it up to date of realization." This Clause, in my opinion, means that the mortgagee is competent to wait for the full period of ten years stipulated in the bond and it is not obligatory on him to call in the money on the occurrence of a default in the payment of the instalment. The bond, in its earlier provisions, made the mortgaged property security both for principal and interest, and this Clause would be wholly unnecessary and redundant if the meaning of it was only to make the property security for interest or to provide for payment of interest. It says nothing about the security audit in my opinion, clearly intends that the mortgagee might, if he so chose, wait for the full term of ten years and if lie did so, interest would run till date of actual payment. This provision in the bond gives full power to the mortgagee not to enfoce his right to claim the entire amount of the mortgage on the happening of a default but to wait till the expiry of the stipulated period of ten years. It is true that under Article 132 time begins to run from the date when the money becomes due, but that date depends upon the terms of each document and a true construction of those terms. In my judgment, in view of the Clause in the bond in suit to which I have referred, the money secured by the bond did not become due until the expiration of ten years from the date of the bond. Where under the terms of the document the creditor is authorize to wait for the full period stipulated for re-payment, the money cannot be held to have become due within the meaning of Article 132 until the expiry of that period. The first Clause as to payment of the whole amount on the occurrence of a default was clearly inserted in the document for the benefit of the creditor and as he was expressly authorized not to take advantage of the Clause I am unable to hold that he was bound to sue when default was made. Any other view would, as observed in <CITATION> 29 A. 431 : A.W.N. (1907) 139 : 4 A.L.J. 336 be "very unfortunate" "It would be to punish a creditor for forbearance shown to his debtor, and compel him to press his demands at the earliest opportunity and insist upon speedy and full satisfaction of his claim." The question in that case was of the applicability of Article 75 , which, of course, does not govern this case, but the principle of the ruling applies. A similar view was held by <NAME>, C.J., and <NAME>, J. in <NAME> 16 A. 371 : A.W.N. (1894) 115 which was a case of execution of a decree. The decree in that case provided that the amount of it should be paid by eight instalments and that in case of default and non-payment of any instalment, the plaintiff had power to realize in one lamp sum the entire decretal money payable up to that time by executing the decree. It was held upon a construction of the decree that the "decree-holder on the happening of any default might, if he wished, execute the decree for all the decretal money then unpaid, but that it was not the intention that on the happening of a default the decree-holder should be bound to execute the decree once and for all". <CITATION> 1 C. 163 : 25 W.R. 84 : 3 I.A. 1 : 3 Sar. P.C.J. their Lordships of <ORG> expressed a similar opinion. That was a suit to recover the amount of a hypothecation bond in which the borrower engaged to re-pay the amount with interest on a day named, with a condition that in the event of the hypothecated lands being sold in execution of a decree before the day fixed for re-payment the lender should be at liberty at once to sue for the recovery of the debt. It was contended that the plaintiffs' cause of action arose on the 18th of May 1865, when the lands pledged were sold in execution and that the suit having been brought after six years from that date was time-barred. With reference to this contention their Lordships observed: "Their Lordships must not be supposed, in coming to this decision, to give any countenance to the argument of Mr. <NAME> that this would have been barred if the limitation of six years under Clause 10 had been applicable to it. They think upon the construction of this bond there would be good reason for holding that the cause of action arose within six years of the commencement of the suit." Their Lordships thus held that limitation would begin to run from the date fixed for payment and that the cause of action arose, that is to say, the money became due on that date and not on the date on which the hypothecated property was sold in execution. It true that their Lordhsips aid that it was not necessary to decide the point in the view which they took of the period of limitation applicable to the case before them, but an expression of opinion by their Lordships is entitled to the greatest weight and ought to guide the <ORG>s in this country. Considerable reliance was placed on behalf of the respondents on the cases of <CITATION> 24 C. 281 : 1 C.W.N. 229 and <CITATION> 20 M. 245 : 7 M.L.J. 222. In neither of those cases was there a Clause in the bond similar to the one in this case which expressly empowered the creditor to wait for the full term of the mortgage. Those cases, therefore, are, in my opinion, no authority on the question before us. The decision of that question depends upon the true construction of the terms of the bond and the intention of the parties as gathered from the bond. I am of opinion that upon a true construction of the bond in this case the money secured by it became due on the expiration of ten years from the date of the bond and that the claim is not barred by limitation. I would allow the appeal, set aside the decree of the <ORG> below and remand the case to that <ORG> for trial on the merits.

Tudball, J.

9. I concur with the learned Chief Justice that the present suit is barred by limitation. The matter to my mind is a simple one. Article 132 clearly applies and under that Article time began to run from the date on which the money became due. To find out the date on which the money became due one has to examine the conditions laid down in the bond. They are simple and run as follows: "It is covenanted that we shall pay the said amount of principal within ten years, that is, we shall pay Rs. 625 annually, and we shall pay the interest on the said amount monthly at the rate of 8 annas per month. If we fail to pay the interest aforesaid in any month or the principal in the stipulated period as specified above, or no payment is made in a year, the mortgagee shall under all these circumstances be at liberty to realise the entire amount with the interest aforesaid in a lump sum through <ORG> by means of a suit from the mortgaged and other moveable and immoveable property, and the persons of us, the executants. We or our heirs or representatives shall have no objection or excuse in any way." Then comes a Clause on which considerable stress has been laid on behalf of the appellants but which in my opinion is not of the slightest assistance to them. Correctly translated that Clause runs as follows: "If the mortgagee in his desire for interest does not bring a suit on any default of ours and we are unable to pay the money, the interest shall continue up to the stipulated period of 10 years and also after that up to the date of realization." It is an admitted fact that the mortgagors failed to make any payments of interest within the first year after the execution of the deed, and no instalment of principal or interest has ever been paid. Under the terms of the bond immediately on the first default occurring the mortgagor was clearly liable to pay the whole sum to the mortgagee. In other words, the money became due from the mortgagor to the mortgagee on the occasion of the first default. I fail to see how the last Clause, which I have mentioned above, helps the appellants in any way. It seems to me that this Clause was simply put into the document in order to make it quite clear that the interest should continue to run in spite of no suit being brought not only up to the expiry of the 10 years but also up to the date of realisation. It was simply put in to make it clear that interest would not cease to run after the expiry of 10 years. The mortgagee on the occurrence of the first default was fully entitled to demand his money and the mortgagor could not have met him with the plea that his demand was premature. There is no question of 'waiver,' for no waiver has been alleged, much less proved. Paragraph 3 of the plaint is practically a repudiation of any waiver. In my opinion under the clear terms of this bond the money "became due" in the year 1890 and the present suit was many years beyond time. I would, therefore, dismiss the appeal.

10. The order of the <ORG> is that the appeal be dismissed with costs, including in this <ORG> fees on the higher scale.


JUDGMENT Dixit, <NAME>

1. This is a reference under Section 66 (1) of the Indian Income-tax Act , 1922, at the instance of the assessee, <ORG> Bhopal. The question, which <ORG> has referred to us for decision, is :

" Whether on the facts and in the circumstances of the case, the disallowance of the claims in the sum of Rs. 75,000 and Rs. 1,75,000 for earned leave wages and retrenchment compensation respectively by the <ORG> is justified in law ? "

2. The material facts are that the assessee is a private limited company engaged in the business of manufacture of textiles at Bhopal. It was incorporated in January 1956. In the assessment year 1957-58 on which the accounting period ended on 28-2-1957, the assessee claimed that in the computation of its profits and gains for the accounting period it was entitled to a deduction of Rs. 75,000 being the amount set apart as a reserve fund in its balance-sheet as on 28th February 1957 for the payments it may have to make to its workers in the next year on account of holiday wages under Section 79 of the Factories Act, 1948. Similarly, it claimed a deduction of Rs. 1,75,000 on account of the compensation it may be required to pay under Section 25F of the Industrial Disputes Act, 1947, to those of its workmen who may he retrenched in the following year.

The Income-tax Officer rejected the claim of the assessee on account Of both the deductions taking the view that the assessee's liability for holiday-wages under the Factories Act , 1948, and for payment of retrenchment compen. sation under the Industrial Disputes Act , 1947, was only a contingent liability and not an actual liability in praesenti and, therefore, the amounts of Rs. 75,000 and Rs. 1,75,000 which the assessee set apart for meeting these contingent liabilities could not be regarded as " expenditure deductible for income-tax purposes "; and that the "expenditure deductible for income-tax purposes" was one for meeting a liability actually existing at the time, but (he setting aside of an amount which would become expenditure on the happening of an event was not such a one. This decision of the Income-tax Officer was upheld in appeal by the Appellate Assistant Commissioner, as well as in second appeal by the <ORG>.

3. In our opinion, the <ORG> was right in upholding the decision of the taxing authorities in disallowing the deduction claimed by the assessee. The assessee obviously made the claim under Clause (xv) of Section 10 (2) of the Indian Income-tax Act , 1922. But it is now well settled that under this clause a deduction is not permissible for a contingent liability. They reason is that this clause allows deduction only in respect of "expenditure" and a contingent liability is not "expenditure" and, therefore, cannot be the subject of deduction even under the mercantile system of accounting; under the mercantile system a debit can bs equated with actual expenditure provided a liability has been incurred (see <CITATION> (1959) 37 ITR 66 : (AIR 1959 SC 1049) and <CITATION> , (1957) 32 ITR 138 (Mad), In the case of <ORG>, 1959-37 ITR 66: (AIR 1959 SC 1049) (supra), <ORG>, after explaining the meaning of the word " expenditure" as that which is paid out or away and is something which is gone irretrievably, has held that expenditure, which is deductible for income-tax purposes, is one which is towards a liability actually arising at the time, but that the putting aside of money which may become expenditure on the happening of an event is not " expenditure ".

It has further been held in that case that the income-tax law makes a distinction between an actual liability in praesenti and a liability de futuro which for the time being is only contingent; and that the former is deductible but not the latter. The distinction between a legal liability which is deductible and a liability which is future or contingent and for which no deduction can be made has been pointed out also in <CITATION> (1959) 37 ITR 1 : (AIR 1959 SC 1165). In that case, <ORG> has quoted with approval the statement contained in paragraph 230, at page 203, of Simon's " Income-tax " which is as follows :

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

The above passage makes it very clear that if an assessee out of prudence sets aside a part of the profits in one year to meet a contingency then he cannot claim any deduction on account of the money so set apart for the simple reason that the sum set apart does not amount to " expenditure ".

4. Now, it is clear from an examination of Section 79 of the Factories Act, 1948, that the liability of the assessee for holiday-wages under that provision is a contingent liability. Under Section 79 , every worker who has worked for a period of 240 days or more in a factory during a calendar year is allowed during the subsequent calendar year leave with wages for a number of days calculated at the rate specified in Sub-section (1) thereof. If a worker fails to avail himself of the whole of the holidays allowed to him during any period of twelve months, the leave not taken by him is added to the leave to be allowed to him in the succeeding calendar year subject, however, to the limit that the total number of days of leave that can be carried forward to a succeeding year does not exceed thirty in the case of an adult or forty in the case of a child. A worker is paid for the leave period to which be may be entitled only if (i) he takes the leave, or (ii) if he is discharged, or (iii) if being refused leave he quits his employment before the holidays are allowed to him.

Now, it is clear that it is impossible for an employer to know in advance in any one year as to how many of his employees will go on leave next year and at what rate wages would have to be paid to them for the period of leave. The question of payment of wages for leave to a worker would arise only if the worker goes on leave, or if he is discharged, or on being refused leave he quits his employment. Till these circumstances arise, the liability that rests on the employer to pay to a worker wages in accordance with Section 79 for leave period remains a contingent liability which the employer may or may not be called upon to discharge. That being so, any sum set apart by an employer in any year for meeting the contingency of some of his workers going on leave the next year cannot be regarded as a permissible expenditure under Section 10 (2) (xv) of the Indian Income-tax Act , 1922.

5. The view that the liability of the assessee under Section 79 of the Factories Act, 1948, is a contingent liability is fully supported by the decision of <ORG> in <CITATION> (1955) 2 Cal 13. In that case also, the assessee, which was a company, asked for a deduction of Rs. 6,800 which it had debited to its expenses account; the assessee claimed that this amount was allowable to it because it had incurred a liability for a corresponding amount to the employees on account of holiday-wages which would have to be paid to them sometime in the following year in accordance with Section 49B of the Factories Act, 1934. <ORG> agreed with the Tribunal that the assessee was not entitled to the deduction claimed both for the reason that no expenditure had been actually incurred and also for the reason that the amount could not be claimed even as an account representing a certain liability. After examining the provisions of Section 49-B of the Factories Act, 1934, the learned Chief Justice of <ORG> said :

" It should be clear from what I have stated above that such statutory liability for holiday wages as the Factories Act creates is only a contingent liability which may or may not have to be discharged and, secondly the measure of that liability can never be known in advance. It cannot be so known, because it cannot be known in advance how many employees will avail themselves or how many holidays and when and, necessarily, at what rate, holdiay wages would be payable. In these circumstances it is perfectly clear that not only is the amount claimed not allowable as an item of expenditure, because in fact, no expenditure had been incurred and not a pice had gone out of the funds of the company, but also that the amount does not even represent a certain liability which will have to be discharged in any event. It may be that although a particular amount is not actually expended during the currency of a particular accounting year, the assessee will still be entitled to a deduction if a certain liability for its payment has arisen so that it may be said that the expenditure is as good as made. The amount claimed in the present case is certainly not even of that character and, as I have already pointed out, it is not an amount which was actually spent."

Thus it was held by <ORG> that the liability under Section 49-B of the Factories Act, 1934, to pay holiday-wages depended on the arising of the circumstances specified therein, and since they might or might not arise, the liability was only a contingent and uncertain liability which might or might not have to be discharged. As there is no material difference between Section 49-B of the Factories Act, 1934 and Section 79 of the Factories Act, 1948, the decision of <ORG> must be taken as supporting the view that the liability of an employer under Section 79 of the Factories Act, 1948, to pay to his workers holiday-wages is a contingent liability.

6. The deduction of Rs. 1,75,000 claimed by the assessee on account of "retrechment compensation" is not different in character. It is also a deduction for a contingent liability. The assessee's liability to pay retrenchment compensation to a worker who has been retrenched rests on Section 25F of the Industrial Disputes Act, 1947. That section provides that no workman employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched until he has been given one month's notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid, in lieu of such notice wages for the period of the notice, and further until the workman has been paid at the time of retrenchment, compensation equivalent to fifteen days' average pay for every completed year of service or any part thereof in excess of six months. Section 25F thus laid down the conditions precedent for the retrenchment of workmen, and if these conditions are not complied with, then the retrenchment becomes illegal and improper.

But Section 25F does not cast on the employer a statutory obligation to retrench a particular number of employees in any particular year. It is for the employer to decide whether at any given moment because of business exigencies or vicissitudes of business it is necessary to retrench any of the workmen employed in the industry. It is plainly impossible for an employer to say in advance the number of employees he will be required to retrench at a subsequent point of lime having regard to the state of business then existing. Much less is it possible for him to evaluate his liability for payment of retrenchment compensation in the event of his being required to retrench some workmen. When, therefore, in any year of account the assessee claims a deduction of a sum which he may be required to pay as retrenchment compensation the next year or sometime later, then the deduction that is claimed is not on account of a liability in praesenti but on account of a liability which may arise in future on the happening of a particular contingency. As pointed out earlier, such a deduction is clearly not permissible under Section 10 (2) (xv) of the Indian Income-tax Act , 1922.

7. <NAME>, learned counsel for the assessee, relied on a decision of <ORG> in <ORG> v. <NAME>, 1957 AC 334: (1957) 32 ITR 737, to support his contention that the possibility of retrenchment being effected in any running business was something which was usual and ordinarily incidental to the carrying on the business, that it was not a remote possibility; and that, therefore, if under Section 25F of the Industrial Disputes Act, 1947, a particular compensation on a particular basis had to be paid to the retrenched staff, then a provision made for payment of the anticipated retrenchment compensation would only amount to making a provision for meeting a liability in praesenti and not a contingent liability. In our opinion, the decision in the case of <ORG> 1957 AC 334: (1957) 32 ILR 737 (supra) is not in point here. In that case, there was a statutory obligation on an English Company operating in Peru to pay compensation on the termination of services of its employees depending on the length of service subject, however, to certain contingencies where the employee would forfeit the benefits.

The company claimed to deduct an estimated liability for this retirement compensation based on a proportion of the period of service of the employees at the end of the period of account though the employees had not retired and were in service. It was contended by the <ORG> that no deduction could be made there since there was no liability till the employees retired and that the whole of the compensation was deductible in the year of payment. <ORG> held that the company was eft-titled to charge each year in respect of its prospective lump-sum liabilities provided such deduction could be fairly estimated or otherwise satisfactorily assessed. The deduction claimed by the assessee was, however, disallowed on the ground that in calculating the amount which it claimed to deduct in each year the assessee had ignored the factor of discount and the estimation made by it was not reasonable.

The decision in the case of <ORG>, 1957 AC 334 : 1957-32 ITR 737, (supra) is distinguishable by the fact that here the assessee is not under any definite obligation in any relevant year to pay to its employees any retrenchment compensation; the liability to pay retrenchment compensation depends on the existence and fulfilment of certain conditions, and that makes the assessee's prospective liability, contingent until the services of any employees arc terminated by way of retrenchment. The principle laid down by <ORG> in the case of <ORG>, 1957 AC 334 : 1957-32 ITR 737 (supra) is, therefore, not applicable to the present case. The decision that is relevant here, and which fully supports the view we have taken, is the decision of <ORG> in <CITATION> , 1964-51 ITR 240 (Mad). In that case, it has been ruled that the liability of an employer assessee in respect of retrenchment compensation under Section 25F of the Industrial Disputes Act, 1947, is not a liability in praesenti but is only a contingent liability which cannot be taken into account as an accrued liability, even though the assessee has been maintaining his account books on the mercantile system.

8. For the foregoing reasons, our answer to the question referred to us for decision is in the affirmative. The assessee shall pay costs of this reference. Counsel's fee is fixed at Rs. 200.


JUDGMENT <NAME>, C.J.

1. In this case, a preliminary objection has been taken by the learned Advocate-General that a Revision Petition does not lie.

2. The order against which the Revision Petition has been presented is an order made by the District Judge of Tanjore under the powers conferred by Section 10 of the Religious Endowments Act of 1863. Section 10 provides "Whenever any vacancy shall occur among the members of a committee, a new member shall be elected to fill the vacancy by the persons interested." It goes on to provide " The remaining members of the committee shall...fix a day....for an election of a new member by the persons interested." It then declares, " Whoever shall be then elected, under the. said rules, shall be a member of the committee to fill such vacancy." Then the section goes on, " If any vacancy shall not be filled up by such election as aforesaid (within the prescribed period) <ORG>, on the application of any person whatever, may appoint a person to fill the vacancy, or may order that the vacancy be forthwith filled up by the remaining members of the committee." If that order is not complied with, <ORG>, under the section, may appoint a member to fill the said vacancy. The circumstances in which the order against which the present Revision Petition has been presented are these. An application was made to the District Judge of Tanjore with reference to a vacancy in a certain temple committee, more than three months having expired since the vacancy occurred, asking the <ORG> to order the committee to hold an election or to make such order as the <ORG> might deem fit. On that, the District Judge on the 6th January 1913, made an order in these terms. " It is clear to me that it is the duty of the committee to fill up the vacancy by election and that there is no obstacle preventing them from doing so. I therefore order that the vacancy be forthwith filled up by the remaining members of the committee." The remaining members of the committee then proceeded to hold an election, and on the '25th January 1913 the managing members of the committee wrote to the District Judge informing him that an election had been held and that one <NAME> had been elected, there being no other candidate.

3. On the 17th April, the District Judge made an order calling on the managing members to show cause why the election should not be treated as invalid, and restraining <NAME> from taking any part in the proceedings of the committee. On the 19th July 1913 two applications were made to the District Judge of Tanjore. One of them was by <NAME>. He asked for a declaration that his election was legal and valid. The other application was by a person interested asking that the vacancy among the members of the committee should be filled by nomination by the <ORG>. The order which the learned District Judge made on these two applications was, " I therefore consider the election of M. R. Ry. T. A. <NAME> was regular and I accept him as a member of the committee." It may be that these latter words " I accept him as a member of the committee" are surplusage. All that the learned Judge holds is that a good election had been held. It is obvious as it seems to me that the Judge did not intend to appoint <NAME>. All he says is " I accept him." As I understand the order, the Judge accepted him, because in the view of the Judge, the election was good and the vacancy was duly filled up. It is sought to impeach this order on the ground that the procedure by election was bad, and that, if so, the Judge had no power either to accept him as a member of the committee in pursuance of the election or to appoint him. The order of the learned Judge seems to me to be an adjudication on the question whether, the procedure having been by election, <NAME> was legally appointed. The question we have to decide is: Does a revision petition lie against such an adjudication.

4. The learned Advocate-General relied on the decision of <ORG> in <NAME> v. <NAME> (1887) I.L.R. 11 M. 26. There, <ORG> made an order appointing a certain individual a member of a temple committee. There was an appeal to <ORG>, and the ground of appeal was that the person appointed was not a suitable person for the office. <ORG> held that there was no right of appeal from that order from <ORG> to <ORG>. The first ground upon which they based their decision was that the act itself conferred no right of appeal. The right of appeal, it is scarcely necessary to say, is a creature of statute. Their Lordships of <ORG> say; " There is nothing in the Act which would suggest it, unless it is to be found in Section 10 ." Then their Lordships say : " In the opinion of their Lord-; ships the tenth section places the right of appointing a member of the committee in <ORG> not as a matter of Ordinary Civil jurisdiction, but because the officer who constitutes <ORG> is sure to be one of weight and authority, and with the best means of knowing the movements of local opinion and feeling, and one can hardly imagine a case in which it would be more desirable that the discretion should be exercised by a person acquainted with the district and with all the surroundings." They declined to consider the question whether there might not be a serious mischief without a remedy by reason of the fact that there was no appeal. Theysay, "There is force in this arguments but whether a person so improperly appointed could, as has been suggested, be removed by proceedings equivalent to proceedings by quo warranto in England, or whether, upon a full consideration of the merits, the appellant could be considered as a person improperly appointed, are questions upon which their Lordships are not called upon to express an opinion." They express no opinion on the question whether proceedings by way of revision would lie, although it would appear from the argument of Mr. <NAME>, who contended that there was a right of appeal, that reference was made amongst other enactments to Section 622 the revision section of the old Code of Civil Procedure. In <ORG> case there was no question of jurisdiction or of the powers under the Act and no question of the construction of any section of the Act. As I have said, the ground of Appeal to <ORG> was that the man whom the learned District Judge had appointed was unsuitable.

5. The question as to whether there was a right to proceed by way of Revision from an order made under Section 5 of the Religious Endowments Act, 1863, was raised in <CITATION> (1902) I.L.R. 26. M 85 which came before me sitting alone. There the question arose under Section 5 of the Religious Endowments Act, 1863. The <ORG> decision was with reference to Section 10 . But for the purpose of the point I had to determine no distinction can be drawn between the two sections. There was a Revision Petition to this court against the order of the District Judge. A preliminary objection was taken that no Revision Petition lay. My attention was called to the <ORG> decision, and it is scarcely necessary for me to say that, if I had been of opinion that the principle of the <ORG> decision applied to the facts of that case. I should have followed it; but the view I took was that the principle did not apply. There I pointed out that the question in the <ORG> case was one of appeal, and I cited the passage from the judgment which I have read.

6. Our attention has been called to the decision of <ORG> in <NAME> v. <NAME> (1895) I.L.R. 21 B. 279. There the question arose with reference to a section of the Bombay District Municipal Act Amendment Act of 1884. That enactment contains a section ( Section 23 ) providing that, where the validity of any election of a Municipal Commissioner is brought in question, the District Judge, after such inquiry as he deems necessary, may make an order confirming the election or setting it aside. The Chief Justice and Mr. Justice <NAME> were of opinion that " a District Judge acting under Section 23 of the Bombay District Municipal Act Amendment Act, 1884, is not a court within the meaning of the word in Section 622 of the old Civil Procedure Code." They suggest that he was a persona designata apparently for a specific purpose. That seems to be so. It seems to me that under the Act in question the District Judge is a persona designata for a specific purpose and not an officer exercising judicial functions under the Act. As regards the Religious Endowments Act , it is clear that for the purpose, of several sections of the Act, <ORG> is not a persona designata but <ORG> exercising jurisdiction under the Act. For instance, Section 9 provides that no member shall be removed except by an order of <ORG>. Section 14 is another section : Section 16 is another under which the District Judge exercises judicial functions as <ORG> and not as a persona designata. It seems to me it would be inconvenient if for certain purposes the District Judge is <ORG> exercising judicial functions under the Act, and for other purposes under the Act he is a persona designata not exercising judicial functions. My learned brother calls my attention to Section 18 which provides, " No suit shall be entertained under this Act without a preliminary application being first made to the court for leave to institute such suit." When an application is made to the court under Section 18 , the District Judge who constitutes the court is asked to adjudicate judicially and not to exercise his discretion as a persona designata; I am told by my learned brother--he speaks from experience as a District Judge--that it is the practice of <ORG> to entertain revision petitions from orders made under Section 18 of the Act. I do not want to say more than is necessary for the purposes of this case. All I desire to say is that the order made in this case seems to me to be an order which might be impeached by way of a revisfon petition,

7. The only other point is the argument in connection with Section 115 of the new Civil Procedure Code, which corresponds to Section 622 of the old code. It was suggested by the learned Advocate General that the matter which he has argued was not a case, and that the District Judge was not a Court. It seems to me for the reasons, I have already stated that the Judge in dealing with this matter was <ORG> and there the matter was " a case." I think the preliminary objection fails and that the petition should be disposed of on the merits.

Oldfield, J.

8. I concur.

9. This petition coming on again for hearing on the merits on Monday the 8th day of September 1913.

<NAME>, <NAME>

10. I have set out the facts of this case in dealing with the preliminary objection.

11. The question whether the learned Judge's order can be supported depends on the construction of Section 10 of the Act of 1863.

12. The order of the learned Judge made on July 19, 1913 was a decision to the effect that by virtue of the fact that <NAME> had been elected the vacancy in the committee had been legally filled up.

13. The scheme of Section 10 appears to me to be this. In the first instance a vacancy is to be filled up by election, and provision is made for the time within which, and the manner in which, the election is to be held. Then the section lays down what is to be done if the vacancy has not been filled up by election within the prescribed period. In that event the <ORG> may appoint a person to fill the vacancy, or the <ORG> may order that the vacancy be forthwith filled up by the remaining members of the committee. Lastly, if the <ORG> makes the order that the vacancy be filled up by the remaining members of the committee, and the order is not complied with, the <ORG> may appoint a person to fill the vacancy. The object of the section would seem to be to prevent a dead lock when the committee do not do their duty and arrange for an election, by providing that where an election has not been held within the prescribed time, the <ORG> may make the appointment if it thinks fit, or if it does not think fit to do so, may order the remaining members of the committee to appoint. The section does not say either expressly, or, as it seems to me, by implication, that the remaining members of the committee are to hold an election before they appoint. No provision is made as to the time within which an election is to be held, the word "forthwith" indicates that what is to be done should be done at once. The holding of an election would involve further delay, which, I think, is what the legislature desired to obviate. If the construction adopted by the learned Judge is right, the mode of dealing with the situation created by the remaining members of the committee not doing their duty in the first instance by holding an election, is that the <ORG>, if it does not think fit to make an appointment, should order the committee to do what the section required them to do. I should not be disposed to adopt this construction unless the language of the section was clear. It is not necessary to empower the <ORG> to make such an order as a condition precedent, if it is not complied with, to the <ORG> appointing, as the <ORG> already has the power to appoint, if it thinks fit to exercise it, without reference to the committee.

14. It is to be observed that the rules made by <ORG> for the election of <ORG> members make no provision for the holding of an election after three months have elapsed since the vacancy occurred. The procedure prescribed by the rules would seem to apply only to an election held under paragraphs Nos. 1 and 2 of the Section

15. I should have had little difficulty as regards this question of construction, if it had not been for the decision of this <ORG> in <CITATION> (1895) 6 M.L.J. 1. I am not sure whether the facts are fully set out in the report, but the learned Judges no doubt held that where there has not been an election within three months of the vacancy, and the remaining members of the committee are ordered by the <ORG> to fill up the vacancy, an appointment by a majority of the remaining members, without holding an election, is bad.

16. For the reasons I have stated I find myself unable to agree with the learned Judges as regards the construction of the Section In their judgment they observe that the construction which appears to me to be the right construction, which would give the committee the power of taking advantage of their own default in not giving the notice and taking the action which under the section they are bound to take, and that it is reasonable enough to say that, if the committee abstain from acting, the appointment may be made by the Judge, but that it is quite another thing to confer this power on the committee as a result of their omission to comply with the law. With all respect, I cannot follow this reasoning.

17. No power is conferred upon the committee as a result of their omission to comply with the law. If they fail to comply with the law the court can make the appointment without reference to the committee. If the court is not prepared to do this it may direct the remaining members of the committee to fill up the vacancy. In that case the power of the committee is derived from the order of the <ORG>, and the <ORG> is not bound to give them this power unless it thinks fit to do so.

18. I do not think this question of construction was discussed in Stanthaiya v. <NAME> (1910) I.L.R. 34 M. 1 but in my judgment in that case I made an observation to the effect that the surviving members of the committee must act so that the date of the election should be fixed not later than three months from the date of the vacancy and that, if they did not so act, their powers of election were gone.

19. The case in <ORG> to which I have referred has not been reported in the authorised reports and I observe that in Mr. <NAME>'s book on the Law relating to Hindu and Mahomedan Religious Endowments the correctness of the decision is doubted. I am not prepared to follow it.

20. It occurred to us that, if we were satisfied that the remaining members of the committee would appoint <NAME> if they were given an opportunity of doing so, it might not be necessary for us to interfere with the order of <ORG>. The case was adjourned in order that the views of the remaining members might be ascertained. It would seem that they are not prepared to intimate what action they would take.

21. The order of <ORG> must be set aside and the case sent back in order that the Court may deal with it by the light of this Judgment.

22. We make no order as to the costs of the petitions to <ORG> or of the revision petition to this Court. We direct that the costs of the remaining members of the committee be paid personally.

Oldfield, J.

23. I agree.


ORDER <NAME>, Member (T)

1. M/s. <ORG> has filed this appeal being aggrieved with the order passed by the Additional Collector <ORG>. The Additional Collector in his order had held as under :

"11. In view of the facts and evidences discussed above, I find that the goods in question were not covered by necessary import licence OGL No. 18/85 read with Letter of Approval and approved project report in this case. I also find that the goods imported against hard currency did not undergo any manufacturing process in the zone and were exported as such to a rupee payment area. The conditions for exemption from duties as stipulated in the <ORG> Notification No. 339/85-Cus., dated 21-11-1985 as amended from time to time have not been complied with by the importer viz. M/s. Concord International Pvt. Ltd., since, these goods are found not to be in conformity with the conditions of import licence and the conditions of <ORG> Exemption Notification have not been complied with by the importer, I find the goods liable to confiscation under Sections lll(d) and (o) of the <ORG> Act , 1962 and M/s. Concord International Pvt. Ltd., who by their acts of commission/omission have rendered the goods liable to confiscation under the aforesaid Section have also rendered themselves liable to penalty under Section 112 of the Act ibid. I also find that the goods are not covered by exemption Notification No. 339/85 and that the show cause notice was issued to the party in accordance with the <ORG> Law and it is well within the jurisdiction of <ORG> to take appropriate action in the matter including adjudication.

In view of the forgoing facts, circumstances and evidences and my findings, I pass the following order.

ORDER I order that goods are liable to confiscation, however, since, the goods are not available for confiscation, an effective order to confiscate the same cannot be passed. I therefore, taking into consideration all the facts and circumstances, impose a penalty of Rs. 10,00,000/ (Ten Lakhs only) on M/s. Concord International Pvt. Ltd. I also hold that the goods were not eligible for free entry under <ORG> Notification No. 339/85, dated 21-11-1985. Since the conditions subject to which the said exemption was granted were not fulfilled. Hence, the importer shall pay the import duty assessed by the Assistant Collector of <ORG>, <ORG>, within 45 days of receiving a demand from the said officer.

This order is being passed without prejudice to the action that may be taken under Customs Act or any other law for the time being in force".

2. The facts of the case are that Notfn. No. 339/85, dated 21-11-1985 exempted certain specified goods when imported into India for the production of goods for exports out of India or for being used in connection with the production or packaging of goods for exports out of India for promotion of such exports by units within the Noida Export Processing Zone at Ghaziabad under certain terms and conditions. The appellants were granted approval by <ORG> to set up a new industrial undertaking in Noida Export Processing Zone for manufacture of computer systems, peripherals, spare parts and software. The appellants imported invoiced as computers /automatisation systems and filed Bills of Entry for their clearance claiming exemption from <ORG> Duties under Notification No. 339/85-Cus., dated 21-11-1985. The appellants also claimed clearance of the goods in terms of provisions contained in Appendix 15 of Import Export Policy 1985-88 read with OGL No. 18/85, dated 12-4-1985. On examination of the goods at the time of import, the <ORG> Authorities were of the view that imported goods valued at Rs. 20,80,522/- covered by B/E No. NEPZ/34/87 and imported goods valued at Rs. 45,05,073/ covered under B/E No. NEPZ/35/87 were not in conformity with their project report approved by <ORG> nor were they eligible for exemption under Notfn. No. 339/85-Cus. on the ground that the afore-mentioned goods were in fully assembled form and that what was permitted was discrete components like P.C.Bs, I.Cs., Sockets, connectors, transistors, resistors, capacitors, cables keys etc. during the first year in the phased programme as indicated in the appellants' letter dated 11-2-1987. Further at the time of export, it was noticed that the afore-mentioned goods were in the nature of complete systems for hotel projects/roads/ construction/ institution and did not require any systems engineering. It was therefore alleged that the appellants did not undertake any manufacturing operations in the Noida Export Porcessing Zone on the aforesaid goods for production of goods for export as required under the approved project. It was also alleged that the appellants' import/export was in the nature of switch deal gather than an activity being undertaken on goods for production of export goods. Accordingly, a show notice was issued to the appellants on 1-9-1987.

3. On the date of hearing, <NAME>, learned Advocate along with <NAME>, Director of the appellant company appeared for the appellants and submitted that the impugned goods invoiced under computerised automatisation systems have been procured as parts and components of the computer systems; that the definition of computer systems is given in the Import Policy 1985-88; that the imported goods are covered under Appendix 15 of the Policy 1985-88 read with OGL No. 18/85, dated 12-4-1985; that the revised proposal dated 11-2-1987 clearly envisaged that the end-product was Computer Based Facility Management/Automation systems which was approved as a computer systems; that the items imported fall very closely under OGL and have been received in the form of parts and components of the computer systems; that the exemption Notification No. 339/85-Cus., dated 21-11-1985 should be read as a whole; that in para (iii) of the Notification, it has been laid down that the imports are allowed if the importer satisfies <NAME> of the Zone that the imported goods will be used for the production of goods for exports out of India or in connection with the production or packaging of goods for export out of India or with the promotion of such exports of goods; that they were not aware as to whether the power of <NAME> have been delegated to the Assistant Collector for satisfying as to imports; that in the absence of satisfaction of <NAME>, the consignment cannot be detained; that the difference in wording of Clause (iii) and (vii)(b)(i) of the Notification No. 339/85-Cus. clearly points out that the <ORG> Authorities come into picture only at the stage of non-export; that clause (iii) to Notification No. 339/85-Cus. clearly says that it is for <NAME> to record satisfaction as to whether the goods so imported will be used for production of goods to be exported out of India; that at the point of importation, there was no role for the Collector to play; that the interpretation of the Letter of Approval was the exclusive task of <NAME>; that in terms of Clause (vii) of the aforesaid Notification, the importer was liable to pay duty only on such goods which were not used in connection with the production or packaging of goods within the Zone for export out of India; that the role of <ORG> starts only when some goods in relation to which exemption was claimed were not actually used in connection with the production of the export goods; that it is well settled in law that even testing and checking is a process of manufacture and therefore, even this aspect will amount to manufacture or production; that the question of <ORG> being to see whether there has been any manufacture or production at the stage of consignment being exported did not seem to arise; that the above contention was supported by the fact that even packaging is one of the functions allowed in free trade zone; that even simple entre-pot trade is an important means of earning foreign exchange and import into and export from bond after sorting and packaging or even mere re-export have been traditionally allowed; that the value has been added by high technology inputs of selection of items, testing and physical additions; that reading Notification No. 339/85-Cus., it would be found that conditions of Clauses (i), (ii), (iii) and (vii)(b)(i) are applicable in their case. According to the revised proposal dated 11-2-1987, <ORG> approved addition of necessary capital goods in the second and third year of manufacture; that the impugned items are estimated material requirements in the form of discrete components of the assembled computer systems as envisaged in the 1st year of the phased programme; that the approved proposal clearly envisages import of discrete components in an assembled form initially; that in the first phase of the manufacturing programme required absorption of the technical know-how of such high technical products; that computer technology was a relatively new concept; that the company had necessary infrastructure facilities in the said field, had export orders for exporting computer based facility management systems and that the <ORG> had given them time as theirs was a phased manufacturing programme; that the process of analysing of the end-user requirements and translating the same into components and parts of the computer system both in the form of hardware and software is a substantial input requiring enormous knowledge; that engineers were already on the job; that it was neither envisaged nor stated in the approved proposal that the computer systems parts and components would be imported in 100% CKD and/or discrete form in the first year; that the proposal clearly envisaged putting together parts and components of the computer systems along with the software to make them functional; that the assembly of PCBs was not envisaged in the first year as the soldering equipment required for such assembly was to be imported during the second year of programme; that as the goods were allowed for processing prima facie, it appeared that the <ORG> were satisfied that the goods fell within the ambit of the Notification No. 339/85-Cus.; that the show cause notice in para 9 clearly brings out that processing had been carried out by the appellants. On the question of processing, the learned counsel submitted that in the case of <CITATION> . reported in STC (16) 935, the Hon'ble Calcutta High Court had held " The activity contemplated by the word "process" is general, requiring only continuous and regular action or succession of actions leading to the accomplishment of some result but it is not one of the requisites that the activity should involve some operation on some material in order to its conversion to some other stuff. That being the view, by converting powder into camphor cubes the petitioner processed camphor powder into camphor cubes".

4. That in the case of <CITATION> reported in STC (14) 1067, the Hon'ble Calcutta High Court had held - "Chopping of timber into firewood is a manufacturing process, and therefore firewood is a manufactured article. There is no reason to exclude the chopping of timber into firewood from the ambit of manufacturing process".

5. That in the case of <ORG> and <ORG>., <ORG> had held -" Where any commodity is subjected to a process or treatment with a view to its 'development or preparation for the market', it would amount to processing of the commodity within the meaning of Section 8(3)(b) and Rule 13. The nature and extent of processing may vary from case to case. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of the change is not material. The question is not whether there is manual application of energy or there is application of mechnaical force. Whatever be the means employed for the purpose of carryinq out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes 'processing'. This <ORG> speaking through one of us (<NAME>, J.) pointed out: 'Commonly manufacture is the end-result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. <ORG> gives the following meaning of the word 'process' : 'to subject to some special process or treatment, to subject (especially raw material) to a process of manufacture, deveopment or where therefore any commodity is subjected to process or treatment with a view to its 'development or preparation for the market', as for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of Section 8(3)(b) and Rule 13. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder. What is necessary in order to characterise an operation as 'processing' is that the commodity must, as a result of the operation, experience some change. The question is not whether there is manual application of energy or there is application of mechanical force. Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes 'processing'."

6. That in the case of <CITATION> reported in AIR 1981 SC 1014, <ORG> had held - "Processing" - What is -Blending of ore of different qualities for obtaining ore of requisite specification - It amounts to processing within contemplation of Section 8(3)(b) . The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of the change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by <ORG>. What is necessary in order to characterise an operation as 'processing' is that the commodity must, as a result of the operation, experience some change".

7. That in the case of <CITATION> . reported in AIR 1979 Bombay 38, <ORG> held - "The word 'process' has got several meanings and in fact may mean different things in different context. But looking to the context in which it is used and gathering the natural meaning of the word 'process' must be held to mean to subject a particular product or a commodity with the object of making it finer or improving its quality. It may mean to treat a particular commodity by any method but not in such a way that the commodity itself is completely transformed into a new commodity."

8. The learned counsel therefore, submitted that having regard to the ratio of the decisions in the above cases, it may safely be concluded that processing was a sort of manufacture and that admittedly as processing of the goods was done by the appellant, they are legally entitled to the benefit of exemption under Notification No. 339/85-Cus. It was further submitted by the learned counsel that the Development Commissioner had allowed the import as he was satisfied that the goods were essential for the export product and had cleared the import; that the letter from Olivetti, Italy for export of computer systems by us to other countries indicates that the processing done by us is of significant nature and was not just a screw-driver technology; that the computer systems parts/components have been assembled and tested for the end-use by the appellants; that switch deal is an import control matter and appropriately falls within the jurisdiction of the licensing authorities; that this case is covered under OGL, it does not fall in the jurisdiction of <ORG>; that the Joint Development Commissioner on 29-7-1987 had verbally agreed that the appellants' end-product being computer systems, the components admissible for import under OGL shall be inter alia computers, peripheral accessories, spare etc.; that the validity of the import is to be seen in terms of the provisions of Appendix 15 of ITC Policy, 1985-88; that if there was a doubt, a reference might have been made to <ORG> for clarification; that for unit in NEPZ Letter of Approval read with relevant OGL is treated as import licence; that the raw material consists of mini-computers, personal computers, monitors key board floppy disc drive, hard disc drive, micro computers work stations, systems software etc.; that it was a turn-key project where sub-systems and components consist of mini-computers, microcomputers, peripheral accessories/spares; that the project never envisaged the production/manufacturing of these sub-systems and components from basic items during the first year; that the process consisted of interaction with the end-user, identifying sources and procurements of suitable hardware, assembling thereof, the development of customised software, systems integration, training of personnel; that the letter dated 27-12-1988 clearly shows that manufacturing of micro-computers from component stage was to start only in the second year.

9. The learned Advocate submitted that the Additional Collector has exceeded his jurisdiction by issue of show cause notice at the point of import as the <ORG> Authorities come into picture only when the goods are not exported; that in letter dated 11-8-1987, the Collector of <ORG> desired that it is worthwhile to await certificate from the Joint Development Commissioner. Referring to the letter dated 6-6-1989 of <ORG>, the learned counsel submitted that that was not the final decision of the licensing authority. The learned counsel submitted that this view was taken by the Development Commissioner not independently and therefore, cannot be termed as a final order of the Development Commissioner.

10. On the question of the exemption under Notification No. 339/85-Cus., dated 21-11-1985, the learned counsel submitted that the benefit was available in respect of production of goods for export out of India or for being used in connection with production/prackaging or for promotion of such exports. The learned Counsel submitted that admittedly, the goods imported by the appellants were used in connection with the production of export goods and therefore, they were fully entitled to the benefit under exemption Notification No. 339/85-Cus.

11. The learned Counsel submitted that in the case of <ORG> reported in 1987 (31) E.L.T. 66, <ORG> had held - "Counsel for the appellant has made a solemn statement before us that the entire imported goods would be utilized for export under the existing contract; in case this undertaking really works out, then the appellant shall be entitled to exemption from duty under the scheme. The learned Counsel submitted that this decision squarely covers their case and in view of the admitted position that impugned goods stand exported no duty should be demanded from the appellant and to that extent the order of the Additional Collector should be set aside. Tho learned Counsel also referred to this <ORG>'s order. Final Order C/177/93-B in Appeal No. C/1975/92-B in the case of <CITATION> , wherein this <ORG> had held that "Further the goods have been permitted to be re-exported and therefore, the demand of duty is no longer sustainable. We therefore, set aside the impugned order". The learned counsel submitted that the goods in their case were permitted to be re-exported and actually re-exported and hence following the ratio of the <ORG>'s judgment in the above case, the demand for duty in their case should be quashed.

12. The learned counsel also cited and relied upon the decision of <ORG> in the case of <ORG> reported in 1995 (77) E.L.T. 32. Relying on the judgment of the <ORG> in the case of <ORG> reported in 1995 (8) RLT 289, the learned counsel submitted that this <ORG> had held "The allegation of the <ORG> that the imported components/assemblies and sub-assemblies in the guise of complete machine was not sustainable in view of the earlier show cause notice alleging the import of complete machine in CKD condition without import licence." The learned counsel submitted that the appellant would be entitled to Drawback under Section 74 of the Customs Act, 1962, and therefore, to that extent at least the benefit may be granted to them if their other pleas failed.

13. Concluding his submissions, the learned counsel submitted that in view of the above submissions, the appeal may be accepted.

14. <NAME>, the learned JDR appearing for the respondents submitted that a careful reading of the Notification will show that the <ORG> Authorities had a jurisdiction over the matter, that a lot of arguments were adduced by the appellants stating that it is the satisfaction of the Development Commissioner and not the <ORG> Authorities for invoking Clause (iii) of the Notification. The learned DR submitted that Clause (vii)(b)(i) reads," the importer shall pay on demand an amount equal to duty leviable on the goods other than capital goods as are not proved to the satisfaction of the Collector of <ORG> to have been used in connection with the production or packaging of goods ( within the Zone) for export out of India or with the promotion of such export of goods or re-exported within a period of one year from the date of importation thereof or within such extended period as the Collector of <ORG> may, on being satisfied that there is sufficient cause for not using them or for not re-exporting them within the said period allow"; that this clause very clearly says that the Collector of <ORG> has the authority to demand duty in terms of conditions stipulated in the clause referred to above; that the first clause reads - The importer shall pay on demand an amount equal to duty leviable on the goods as are not proved to the satisfaction of the Collector of <ORG> to have been used in connection with the production or packaging of goods. It is clear that the <ORG> were of the view that the goods in dispute were neither used in the production of export product nor for packaging of the export product. Referring to the appellants' application dated 11-2-1987, the learned DR submitted that annexure 5 available at page 64 of the paper book clearly indicates the estimated annual requirement of the material during the first year reading as under :

____________________________________________________________________________ S. Item 1st Year 2nd Year . 3rd Year No. No. Imp. Indg. Imp. Indg. Imp. Indg. value value value value value value ____________________________________________________________________________ A. HARDWARE 1. PCBs 35.54 1.00 45.40 2.80 53.10 4.20 2. ICs 56.92 - 73.70 - 90.10 3. Sockets 3.78 - 5.20 1.80 6.30 2.30 4. Connectors 15.92 - 21.80 - 25.50 5. Transistors 8.50 2.50 11.30 3.25 23.30 4.10 6. Capacitors 8.12 1.50 12.40 2.40 23.70 2.60 7. Cabinets 15.20 4.00 11.90 6.80 23.10 8.40 8. Resistors 7.80 2.00 9.80 3.60 11.50 4.10 9. Cables 4.00 1.00 5.90 1.90 6.40 2.30 10. Keys 5.00 - 6.70 - 7.00 4.00 11. Peripherals (a) Printer 33.10 - 46.70 - 50.00 (b) Monitors (high density) 18.57 " 27.00 " 33.10 (c) Plotters 15.92 - 22.15 - 27.60 (d) Mag. Tape Systems 4.81 - 7.20 - 8.82 (e) Hard disk drive 26.86 - 35.80 - 46.50 (f) Floppy Disc 19.89 " 27.30 - 24.40 12. Accessories and consumables cage for peripherals (a) Mag. tapes 1.00 - 1.80 - 1.70 (b) Floppy diskettes 3.65 - 4.90 - 6.30 (c) Cartridge tapes 1.65 - 2.25 - 2.85 (d) Others 3.15 0.40 4.30 0.60 6.80 0.80 13. Spares 20.60 0.37 30.20 0.80 42.60 1.00 B. SOFTWARE 25.00 - 30.00 - 30.00 ____________________________________________________________________________ 334.94 12.77 454.10 24.10 540.67 30.20 ____________________________________________________________________________

The learned DR, therefore, submitted that since they had not imported these raw materials but had imported completely assembled goods, therefore, they had not used these goods for the production or packaging or in connection with the production of the export goods out of India. The learned DR submitted that a close look at the goods imported shown in the show cause notice will clearly show that the items were in fully assembled form and therefore, they were not used in the production or packaging or in relation to the production of the finished goods and hence were not eligible for the benefit of duty exemption under the aforesaid Notification. On the question whether the goods in question were covered under OGL 18/85 and whether the Letter of Approval and approved project report is to be read along with the OGL for allowing import and granting exemption from duties under the aforesaid Notification, the learned DR submitted that the benefit under the Notification was available to an importer located in the Noida Export Processing Zone and if he was the actual user of the goods imported; that the appellants were required to manufacture the goods indicated in their approved project report right from the first year of their production; that <ORG> in their letter No. 8/28/86-NEPZ, dated 6-6-1989 addressed to the appellants clarified that OGL certificate in respect of disputed items cannot be issued; that this was a clear indication showing that the goods in dispute imported by the appellants were not covered by the approval granted to them and therefore, the learned DR submitted that the lower authorities rightly denied them the benefit under Notification No. 339/85. The loarned DR submitted that insofar as testing and checking of the goods as a process of manufacture was concerned, the goods in question were supplied by <ORG> of Italy and before supplying them they must have tested and checked them in their factory. Since the goods were to be exported to Russia they would have been further checked and tested in the factory in Russia before being put to use. Hence, the plea of the appellants that they had tested and checked the goods before exporting them amounts to processing is not acceptable as has rightly been done by the lower authorities. The learned DR also submitted that the shipping bills etc. did not show nor any claim made in the shipping bills to indicate that there was processing of goods for production so as to be eligible for duty exemption under Notification No. 339/85. The learned DR also submitted that there was hardly any role to be played by the appellants in respect of the disputed goods inasmuch as the goods were imported in fully assembled form and were exported as such and therefore, there was no production or manufacturing.

15. On the question of processing amounting to manufacture, <ORG> submitted that it is well settled in law that every process is not manufcture and only that process amounts to manufacture which brings into existence a new product distinct in name, character and use. <ORG> submitted that in the present case no new goods were produced and hence the case law cited and relied upon by the appellants does not help them.

16. On the question of duty <ORG> submitted that the goods should pay duty, however drawback if any admissible to them may be adjusted.

17. On the question of penalty, the ld. <ORG> submitted that the case of imposition of penalty is supported by the decision of <ORG> in the case of <ORG> (supra), the learned <ORG> submitted that the penalty be confirmed. Reiterating the findings of the lower authorities, the learned <ORG> prayed that the appeal may be rejected.

18. Heard the submissions of both sides and considered them. The appellants argued at length that <ORG> had no jurisdiction and that jurisdiction vested only in the Development Commissioner. They referred to clause (iii) of the Exemption Notification No. 339/85-Cus. which stipulated that the importer shall satisfy the Development Commissioner that the goods so imported will be used in relation to the production or packaging of goods for export out of India or with the promotion of such export goods. We find that the exemption under Notification No. 339/85 was applicable to such imports and under this Notification, there was a clear stipulation that on a demand by the <ORG> Authorities - The importer shall pay the duty leviable on the goods which are not used in the production etc. of the goods exported. We observe from the records in their application dated 11-2-1987 Annexure V, they had indicated that they would be importing PCBs, ICs sockets, Transistors, resistors etc. but what they imported were personal computers, micro-computers, mini-computers etc.; that the disputed goods were in fully assembled form and hence no operation for production of these goods was undertaken. Arguments were adduced by the appellants that if these goods were not produced, they were used in connection with the production of computer systems. From the records, we find that computer systems for a specific purpose were imported and computer systems for the specific purpose were exported. The shipping bills etc. did not indicate that there was any assembly or use of these goods for the production of some different goods. Thus, there was no production in respect of these goods. Moreover, it has been very clearly brought out in the show cause notice that the disputed goods were exported in the same condition as they were imported whereas in the letter of approval of their project, the appellants have clearly specified that during the first year, they would be importing items as indicated in Annexure V. On actual examination, the <ORG> have found that the goods imported were not raw material as indicated by the appellants but were fully assembled goods and exported in the same condition. It was also argued that the satisfaction of the Development Commissioner was necessary and the <ORG> have no part to play. We find from the language of the Notification that there are two pertinent steps that arise in the present issue. The first step was the approval of the project and the second point was the levy and collection of customs duty. Insofar as the approval of the project was concerned, it was the sole function and task of the Development Commissioner but insofar as the applicability of the exemption Notification was concerned, it was the sole responsibility of the <ORG> and therefore, the appellants were not correct in assuming that the <ORG> had no jurisdiction. On the question that <ORG> came into picture only when the goods were not exported. We find that this presumption is not correct inasmuch as the customs for the purpose of admissibility of the exemption under Notification No. 339/85-Cus. had to satisfy that the goods were strictly in accordance with the proposal approved. As the goods were not found in conformity with the list in Annexure V of the application for approval, the <ORG> Authorities rightly held that the goods were not eligible to exemption under the aforesaid notification. This contention of the department has not been rebutted and no evidence has been brought on record to show that the disputed goods conformed to the goods shown in the approved proposal. We hold that this plea of the appellants was misconceived and hold that the <ORG> had a jurisdiction to go into the question whether the goods were eligible for duty exemption under Notification No. 339/85-Cus. or not.

19. The second issue that was agitated was that computer facility was new at the time for India and therefore training of a sophisticated kind was necessary. It was argued by the appellants that they trained their personnel by sending them to Italy to get acquainted with the high technology involved as also to Russia to find out the requirement of the user and that they developed software for the purpose and exported computers equipped with software. When pointedly asked whether in the shipping bills, there was any indication that at the time of export, the computers were furnished with software, the learned counsel could not show that this was so. No evidence has been brought on record to prove against the allegation that fully assembled goods were imported whereas the proposal approved by the Development Commissioner envisaged the import of raw materials as indicated in Annexure V of letter dated 11-2-1987. Instead of bringing evidence in support of the proposal approved for the first year the appellants simply submitted that during the first year, they imported goods in semi-assembled form as no manufacturing activity was required to be undertaken during the first year. This contention however, is not supported by the facts on record as according to the proposal submitted to <ORG> for approval, the items to be imported as component parts have been indicated in Annexure V to letter dated 11-2-1987. As the appellants did not conform to the pattern of import proposed by them and approved by the Development Commissioner during the first year and imported fully finished goods instead of components and raw materials, therefore, the lower authorities have rightly denied them the benefit of exemption under Notification No. 339/85.

20. On the question whether some processing was done on the goods in dispute, we find that as against the clear allegation by the <ORG> that the appellants imported fully assembled goods, the appellants could not produce any evidence that they had done any processing on the goods before their export. Instead of bringing in evidence as to what kind of processing of goods was done, the appellants submitted that they checked and tested the goods; that they prepared software according to the requirement of the user before exporting goods. We observe that checking and testing of the goods at the intermediate stage by the appellants was not called for as the goods had been checked and tested by the supplier and were to be checked and tested after installation; that the guarantee for proper operation of the goods was given by the foreign supplier i.e. <ORG> of Italy. A lot of case law was cited and relied upon by the appellants in regard to the term 'processing'.

21. We find that the Hon'ble Supreme Court in the case of <CITATION> . reported in ECR C 216 (SC) had held-- " We are unable to agree with the learned counsel that by inserting this definition of the word manufacture under <CITATION> , the <ORG> intended to equate the processing to manufacture and intended to make mere processing as distinct from the manufacture in the sense bringing into existence of a new substance known to the market, liable to duty". <ORG> further held- "The sole purpose of inserting this definition is to make it clear that at certain place in fact, the word 'manufacture' has been vised to mean a process incidental to the manufacture of the article. Thus in the very item under which the excise duty is claimed in this case, we find the word in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power". From this ruling of <ORG>, we find that only such process as brings in a new product with a distinct name, character and use into existence shall be equated with the process of manufacture. In the instant case, the admitted position was that the products set out in the show cause notice were exported as such and these goods were not used for production of new articles into existence in respect of these goods. The case law cited and relied upon by the appellants also supports this view that the process must bring into existence a new product which was not the case in the case before use. We therefore, hold that these items were not eligible for exemption under Notification No. 339/85. The above findings are supported by the ratio of the decision of this <ORG> in the case of M/s. <ORG> reported in 1994 (1) RLT 466. In this case, this <ORG> [Paras 5 and 6] had held as under:

* * * * * * * In the case of <ORG> cited supra, <ORG> had held that "The counsel for the appellants has made a solemn statement before us that the entire imported goods would be utilized for export under the existing contract. In case this undertaking really works out then the appellant should be entitled to exemption from duty under the scheme. "Similar finding was rendered by this <ORG> in the case of <ORG> cited supra holding that - "The goods have been permitted to be re-exported and therefore, the demand of duty is no longer sustainable". In the instant case, we find that the goods have admittedly been exported and therefore, we follow the ruling of <ORG> as well as of this <ORG> and hold that demand of duty is not sustainable.

22. On the question of pleadings that the /Appellants were entitled to the benefit of drawback under Section 74 of the Customs Act, 1962 and we agree that in case the appellants'case for claim of drawback was admitted by the proper authority they would have been entitled to a particular amount of duty drawback.

23. However, in the matter of penalty we find that <ORG> in the case of <ORG> had held "The finding that there has been a violation cannot be interfered with". Appellants had imported the impugned goods and had re-exported them within a short time and this was their first time of import of the goods in the export processing zone, we find that the penalty of Rs.10 lakhs is very much on the higher side. Having regard to the fact that the goods were re-exported, we reduce the penalty to Rs. 2,00,000/ (Rupees two lakhs only).

24. In view of the above findings, the impugned order is modified to the extent stated above and the appeal is disposed of accordingly.