THAPAR UNIVERSITY

Mercantile Law Cases

by Siddhant Sarup 400907027

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Contents Companies Act case Sales of goods Act case Law of Contract case Negotiable Instruments case Factories act case

Companies Act Case Judgment on section 403 of Companies Act - an example of corporate complications? IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 22.9.2010 THE HONOURABLE MR. JUSTICE K. VENKATARAMAN Company Appeal No.21 of 2010 & M.P.No.1 of 2010 Dr. K. Balasundaram .Appellant. Vs. Coromandel Engineering Company Ltd. & Others ..Respondents. Appeal filed under Section 10F of the COMPANIES ACT, 1956 to set aside the order dated 12.7.2010 made in C.A.No.84 of 2010 in C.P.No.7 of 2009 passed by the Company Law Board, Chennai Bench. For the Appellant : Aravind Dattar, S.C., for M/s. Durga Rao & Asso, Advocates. For the Respondents: R1, P.S. Raman, S.C., for B. Giridhara Rao, R2, R3 & R5 to R7, Karthik Seshadri for M/s. Iyer & Thomas, Advocates.

Challenging the order dated 12.7.2010 made in Company Application No.84 of 2010 in Company Petition No.7 of 2009 of the Company Law Board, Chennai Bench and for setting aside the same, the present company appeal was filed. 2. The short facts leading to the filing of the appeal as put forth by the appellant, are set out here under:(a) The second respondent is a private company incorporated on 23.10.1980. Late G. Kandaswamy was the in-charge of the second respondent company and other group companies until his demise. The appellant could not involve in the day to day affairs of the second respondent company and other companies as he had to travel to United Kingdom often for his treatment. During the life time of the said G. Kandaswamy, respondents 3 and 5 have been actively involved in the day to day affairs of the company and running the same. The appellant is entitled to about 28.29% of the shares in the second respondent company pursuant to the demise of his father. After the demise of his father, respondents 3 and 5 were running the second respondent company as if it was their proprietary concern and the appellant was kept in isolation as regards the affairs of the company.

(b) The appellant was shocked to notice some construction being carried on in the land belonging to the company situated at Athipalayam Road, Chinnavedampatti Village, Coimbatore, which is of an extent of 10 acres. The enquiry done by the appellant revealed that the said 10 acres valuable property of the company was being jointly developed along with M/s. Coramandal Engineering Company Limited, the first respondent herein. On further enquiry, the appellant came to know that a fraudulent transaction took place by which, sale deed was executed in favour of respondents 6 and 7, who are the sons of the fifth respondent. The said sale has been challenged before the Company Law Board by the appellant. The sale was made for the value which was below the market value. The execution of the company seal of the seller was duly authorized by the resolution of the shareholders in the Extraordinary General Meeting of the company held on 21.11.2005 and duly authorized by the Board of Directors of the company on the same day.

(c) The second respondent company has created a charge by way of an equitable mortgage on another property of the company situated at Chinnavedampatti Village, Coimbatore of the total extent of 3.37 acres on 29.5.1998 in favour of Dena Bank, Coimbatore to secure the facilities sanctioned by the said Bank to M/s.Akkammal Steel Private Limited to an extent of Rs.277 lakh. M/s.Akkammal Steel Private Limited is a group of company and the respondents hold the entire shares and control in the said entity and as such, the mortgage is completely illegal and any payment to and for the benefit of M/s.Akkammal Steel Private Limited from and out of the funds of the second respondent company is nothing but an unjust enrichment to respondents 3 and 5. On the strength of the said mortgage, the Dena Bank has extended credit facilities upto Rs.747 lakh to M/s.Akkammal Steel Private Limited. The credit facilities would also show that the sale of 6.63 acres of land to respondents 6 and 7 for a meagre amount of Rs.51,00,000/- is illegal resulting huge loss to the second respondent company and loss to the appellant herein, who is a substantial shareholder in the company. (d) The appellant had approached the Company Law Board under SECTION 397/398 of COMPANIES ACT, 1956 vide C.P.No.7 of 2009 seeking some reliefs. As the first respondent did not move forward with the project pursuant to the filing of the Company Petition No.7 of 2009, the appellant did not pursue the issue of getting an order of stay against the first respondent. (e) The value of the property sold by the second respondent would be Rs.15 Crores as per the market value at the relevant point of time. The first respondent filed C.A.No.84 of 2010 for a direction from the Company Law Board that the first respondent is entitled to proceed with the terms of the Joint Development Agreement dated 23.5.2008. The said application was allowed by the Company Law Board of its order dated 12.7.2010 and the same is under challenge in the present appeal. 3. The following substantial questions of law are framed for consideration in this appeal:(i) Whether the Company Law Board passed an order in favour of a third party and against a Minority Shareholder approaching the Board under SECTION 397/398 of the COMPANIES ACT, 1956?

(ii) Whether the Company Law Board passed an interim order against the petitioner under SECTION 397/398 of the COMPANIES ACT, 1956 without looking at the prima facie case and the evidence adduced? (iii) Whether the Company Law Board justified an order affecting the rights of the petitioner under SECTION 397/398 of the Company Act, 1956 on the sole ground that the company has other properties too? (iv) Whether the Company Law Board passed an interim order which amounts to giving a determination on the main Company Petition itself in a proceeding under SECTION 397/398 of the COMPANIES ACT, 1956? (v) Whether the Company Law Board confined its role to look at the alleged interests of the company alone when apparently larger public interest is involved by allowing the application through the impugned order? 4. I have heard Mr. Aravind Dattar, learned Senior Counsel for M/s.Durga Rao and Associates for the appellant, Mr. P.S. Raman, learned Senior Counsel, for Mr. B. Giridhara Rao, learned counsel for the first respondent and Mr. Karthik Seshadri, learned counsel for M/s. Iyer and Thomas, learned counsel for respondents 2 to 7. 5. The second respondent company is a private company incorporated on 23.10.1980. One G. Kandaswamy, the father of the appellant and respondents 3 and 5 were the major shareholders. The name of the shareholders and the number of shares held by them are set out here under:Name of the Shareholders G.Kandasamy (HUF) K.Narayanaswamy K.Narayanaswamy K.Balasundaram K.Venkatesh K.Lakshmiammal Master Sujay Senthil Ranga Sai Chit Funds P.Ltd G.K.Steels (Coimbatore) Ltd Total: Number of share held 10705 5480 415 5185 5558 3027 625 5 4000 35000

6. After the death of the said G. Kandaswamy, the shares held by him devolved on his sons. The appellant approached the Company Law Board under SECTION 397/398 of the COMPANIES ACT, 1956 (herein after referred to as the Act) in C.P.No.7 of 2009 seeking the following reliefs:(a) for a declaration that the impugned sale of the land belonging to the company to an extent of 6.63 acres under the Deed of Indentures dated 9.12.2005, 20.12.2005 and sale deed dated 21.7.2007 to the 5th and 6th respondents are illegal, non-est and void in law.

(b) To set aside all MOUs, Power of Attorney, Agreements, etc. entered into by the respondents in relation to the sale and joint-development of land to an extent of 10 acres situated at G/F,Nos.23/1, 24/2, 25/2, G.S.No.23/2A and S/F No.22/1A, Chinnavedampatti Village, Coimbatore. (c) For directing an investigation into the affairs of the first respondent company and surcharge the respondents to make good the loss caused to the first respondent company through their various acts of mismanagement. (d) To appoint a management committee consisting of the petitioner and one person from the respondents group and direct that the company be managed by the Managing Committee. (e) To remove the respondents 2 and 3 as Directors of the company and to declare that such persons are unfit to manage the company. (f) To regulate the conduct of the affairs of the first respondent company in future. (g) Grant such other reliefs and this Honble Board may deem fit in the interest of justice and equity. 7. The grievance of the appellant is that out of 10 acres of the lands situated at Athipalayam Road, Chinnavedampatti Village, Coimbatore, 6.63 acres of lands were sold by respondents 3 and 5 in favour of respondents 5 and 7, who are none else than the sons of the fifth respondent. A Joint Development Agreement was entered into with the seventh respondent. Hence, the said company petition came to be filed before the Company Law Board. 8. In the said proceeding, the first respondent filed an application in C.A.No.84 of 2010 under Section 403 of theCOMPANIES ACT read with Regulation 44 of the CLB Regulations, Chennai seeking permission to proceed in terms of the Joint Development Agreement dated 23.5.2008 entered into with the second respondent company. The said application came to be allowed by the Company Law Board, which made the appellant to approach this Court by filing the present appeal against the said order. 9. Learned Senior Counsel appearing for the appellant mainly contended that (i) maintainability of the said application filed by the first respondent herein was canvassed before the Company Law Board, but, however, no finding was given by the Company Law Board; (ii) the application filed by the first respondent under Section 403 of the Act is not at all maintainable since Section 403 does not contemplate filing of such application; (iii) the properties worth about several Crores have been sold to respondents 6 and 7, who are none else than the sons of the fifth respondent;

(iv) the Company Law Board has not considered whether a prima facie case was made out by the respondents and whether the balance of convenience is in favour of the first respondent while ordering the application filed by the first respondent; (v) when the main company petition itself was posted for hearing, the Company Law Board ought not to have entertained the interim application filed at the instance of the first respondent. 10. On the other hand, it was contended on behalf of the respondents that (i) the entire action in selling the properties was necessitated since SARFAESI proceeding were initiated against the properties owned by the company. Hence, in order to preserve the properties and also for the benefit of the company, the properties in question have been sold to respondents 6 and 7; (ii) the appeal filed against the interlocutory order passed by the Company Law Board is not maintainable. (iii) The appellant has sought for interim injunction restraining the first respondent from proceeding further with the project or implementation of the Joint Development Agreement, but, however, no interim order has been granted in favour of the appellant by the Company Law Board. On the contrary, the Bench directed respondents 2 to 7 to furnish all particulars including receipts and payments in relation to the Joint Development Agreement and financial position of the company. While so, there cannot be any impediment to proceed with the project by the first respondent. (iv) The overall value of the property in the hands of respondents 2, 6 and 7 will not be diluted on account of the Joint Development Agreement since 36% of the superstructure to be constructed will fall to the share of the owners and the owners will still be retaining 36% of the land. The interest of the appellant in the company could very well be safeguarded from out of the said share. 11. The first and foremost submission that was made on behalf of the appellant by the learned Senior counsel appearing for the appellant is that the application filed by the first respondent before the Company Law Board is not at all maintainable since Section 403 of the Act does not contemplate filing of such application. Before adverting to the said contention, it would be useful to extract Section 403 of the Act, which is extracted here under:403. Interim order by Tribunal:- Pending the making by it of a final order under SECTION 397 or 398, as the case may be, the Tribunal may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the companys affairs, upon such terms and conditions as appear to it to be just and equitable. 12. The above said provision makes it very clear that interim application could be filed pending final orders underSECTION 397/398 of the Act for regulating the conduct of the companies affairs. Admittedly, the first respondent has moved the application under Section 403 of the Act not for regulating the conduct of the affairs of the second respondent company. The first

respondent had filed the said application seeking a direction to proceed with the Joint Development Agreement dated 23.5.2008. In the counter affidavit of the appellant, who is first respondent in the said application, it is clearly stated that there is no provision under Section 403 of the Act which permits a respondent to apply for this type of relief. The powers are confined to regulating the affairs of the company.. when such a plea was taken before the Company Law Board by the appellant herein, the Company Law Board has not dealt with the same in its order. That is why the learned Senior Counsel appearing for the appellant contended that though the said plea was taken by the appellant in its counter before the Company Law Board, the Company Law Board has not given any finding and the said order is liable to be set aside. I did see force in the said contention. 13. That apart, as rightly contended by the learned Senior Counsel appearing for the appellant, interim order could be passed by the Company Law Board only for regulating the conduct of the affairs of the company and nothing more. Since in the present case on hand, interim order was passed not for regulating the conduct of the affairs of the second respondent company, the same is not maintainable in view of Section 403 of the Act. 14.1. On merits of the matter, both the learned Senior Counsel appearing for the appellant as well as first respondent and the learned counsel appearing for respondents 2 to 7 have made their submissions. It is contended by the learned Senior Counsel appearing for the appellant that the properties worth about several Crores have been sold to respondents 6 and 7 by respondents 3 and 5, who are none else than the sons of the fifth respondent. On the other hand, it is contended on behalf of the respondents that the sale came to be effected because of the SARFAESI proceedings initiated by the Bank. In order to preserve the property, such action was taken. That apart, the properties have been sold not for a meagre amount, but, on the market value prevailing thereon. I am of the considered opinion that these matters have to be considered only by the Company Law Board when it takes up the matter for final disposal of the company petition initiated by the appellant. At this stage, there need be no finding regarding the same. 14.2. It is further contended on behalf of the appellant by the learned Senior Counsel appearing for the appellant that by sale of the assets to respondents 6 and 7, the company has lost several Crores. It is contended that the project involves construction of 10,61,976 sq.ft., and the owners would be getting 3,82,311 sq.ft. If the sale is made by the first respondent by proceeding with the project, even if it is sold at the rate of Rs.2,000/- per sq.ft., the value of the project would be around Rs.212 Crores. Out of this, the value of the share of the owners would be around Rs.76.46 Crores. Due to the sale of the lands to respondents 6 and 7, the share of the company would be approximately about Rs.25.48 Crores and respondents 6 and 7, because of the sale deed by the company, would be getting Rs.51 Crores. That apart, the first respondent seems to have parted with Rs.3.65 Crores for Joint Development Agreement, out of which Rs.2 Crores have gone to respondents 6 and 7 in view of the sale effected in their favour. These are the matters to be gone into at the time of final disposal of the matter before the Company Law Board. While so, the Company Law Board ought not to have allowed the application filed by the first respondent to proceed with the project. Further, when the appellant filed a counter affidavit putting forth these pleas, the Company Law Board should have considered the same before allowing the application filed by the first respondent.

14.3. It is further contended on behalf of the respondents that the appellant was not taking much interest over the affairs of the company and that the entire action in selling the properties was necessitated since SARFAESI proceedings are initiated against the properties owned by the company. This contention also requires a detailed consideration by the Company Law Board when it takes up the main matter initiated by the appellant. 15. The next contention that is required to be considered is, whether any safeguard has been made by the Company Law Board while granting the relief to the first respondent in its application as contended by respondents? 15.1. It is vehemently contended on behalf of the respondents that the overall value of the property in the hands of respondents 2, 6 and 7 will not be diluted on account of the Joint Development, but, on the contrary, it will only get enhanced since 36% of the superstructure to be constructed will fall to the share of the owners and the owners will still be retaining 36% of the land area. The petitioners interest could very well be safeguarded from out of this owners share. Thus, it is contended that the total value of the properties owned by the company would not be depleted, but would only get enhanced. That apart, any cash flow arising out of the Joint Development Agreement in the hands of the company will obviously accrue only to the benefit of the company. 15.2. I am not inclined to accept the said contention raised on the side of the respondents for the following reasons:(i) It is the case of the appellant that he is holding 20.29% of the shares of the company, but, however, it is contended by the respondents that the appellant is having only 14.81% paid up share capital. The shares of the appellant cannot be considered at this stage. But, however, when the appellant has questioned the sale of company assets to respondents 6 and 7 herein, viz., to declare that the impugned sale of the land belonging to the company which is an extent of 6.63 acres made under the Deed Indentures dated 9.12.2005 and 20.12.2005 and sale deed dated 21.7.2007 to respondents 5 and 6 are illegal, non-est and void in law, the first respondent cannot be allowed to proceed with the Joint Development Agreement. In the event of setting aside the sale in favour of respondents 6 and 7, the Joint Development Agreement entered with the first respondent will be non-est. (ii) It is not for the first respondent to state that the appellant and the other respondents could work out their remedies out of 36% of the shares of the company over the constructed area. (iii) As stated earlier, even assuming that the appellant can work out his remedy out of 36% shares of the company over the constructed area, in the event of setting aside the sale deed executed in favour of respondents 6 and 7, the prospective purchasers of the apartments from the respondents will be made to suffer. The first respondent is not going to proceed with the construction without collecting money from the prospective purchasers of the apartments. Thus, the public money will be involved in the project. 16. Yet another submission that was made on behalf of the respondents is that the Company Law Board refused to grant interim order restraining the first respondent to proceed with the

implementation of the Joint Development Agreement. Hence, there cannot be any impediment to grant the relief that has been sought for by the first respondent to proceed with the project, when the first respondent wants the purchasers to have a clear title over the properties, in which it is going to put up a construction. Paragraphs 5 and part of paragraph 6 are re-produced here under:5. The applicant begs to point out that the Honble Bench has not restrained the further progress of the project of the implementation of the Joint Development Agreement even though such interim prayers have been sought for in the Company petition by the first respondent. On the contrary, this Bench directed respondents 2 to 7 to furnish all particulars including receipts and payments in relation to the Development Agreement and financial position of the company. The Bench has also subsequently noted that such details / particulars as directed by the Bench have been furnished by respondents 2 to 7. 6. It is submitted that given the fact that the applicant is a third party vis--vis the company and its promoters, and given the reputation that the applicant enjoys in the market, the applicant is different about proceeding with the project, even in the absence of any injunction order. The applicant who will be selling the constructed area with undivided share in the land and the purchasers have to be given clear title. In view of the above petition, the prospective purchasers cannot be given clear title. Hence, the applicant is approaching this Honble Bench seeking direction by this Honble Bench that the rights and remedies of the first respondent would be worked out from the share falling to the owners under the Joint Development Agreement. 17. In the affidavit filed on behalf of respondents 2 and 3 in the company application, it is stated as follows:At the outset it is submitted that there is no interim order passed by this Honourable Bench restraining alienation or further implementation of the Joint Development Agreement dated 23.7.2008. On the contrary, when injunction restraining alienation and further implementation of the Joint Development Agreement was pressed for by the first respondent in terms of his prayer in the company petition, this Honourable Bench did not grant such relief. On the contrary, vide order dated 30.1.2009, this Honourable Bench only directed these respondents to furnish all receipts and payment particulars relating to the Joint Development Agreement and complete particulars about the financial position of the second respondent company. In compliance with the order, all such particulars were furnished and the compliance of the order was duly recorded by the Honourable Bench at the subsequent hearing held on 20.2.2009. In the circumstances, it could be seen that the Honourable Bench was not convinced enough to grant any order impeding implementation of the Joint Development Agreement. In the circumstances and in the absence of any interim order, there is no impediment whatsoever in the applicant proceeding further with the Joint Development Agreement nor is there any difficulty in giving clear title to the prospective purchasers. 18. When the first respondent was conscious of the fact that there is no interim order against it for proceeding with the project, it is not known why it has approached the Company Law Board seeking direction to proceed with the project. Perhaps, it seeks a seal of approval to proceed with the project. By getting a seal of approval from the Company Law Board, it wants to attract the purchasers on its project. The first respondent cannot be allowed to have a seal of approval for

proceeding with the project especially when the main proceedings are pending before the Company Law Board. 19. That apart, the prayer sought for by the first respondent cannot be granted unless and until a full-fledged trial is carried out. The substantial issues raised in the company petition require a full-fledged enquiry into the affairs of the company and the conduct of the parties. It amounts to deciding the main issue without even commencing the enquiry and denying the relief that has been sought for by the appellant in his company petition. When the main petition itself was posted for hearing on 23.6.2010, the Company Law Board should not have passed an order in the application filed by the first respondent on 12.7.2010, which is few days before the date of hearing of main company petition. 20. Learned Senior Counsel appearing for the appellant contended that the appeal filed against the impugned order is maintainable even though the appeal is permissible only on the question of law, if the appellant is able to establish that the order of the Company Law Board is perverse and is based on no evidence. In this connection, he relied on the decision of the Honble Apex Court reported in (2005) 1 Supreme Court Cases 212 Dale & Carrington Invt. (P) Ltd., and another vs. P.K. Prathapan and others. Paragraph No.36 of the said judgment is re-produced here under:36. Section 10-F refers to an appeal being filed on a question of law. The learned counsel for the appellant argued that the High Court could not disturb the findings of fact arrived at by the Company Law Board. It was further argued that the High Court has recorded its own finding on certain issues which the High Court could not go into and, therefore, the judgment of the High Court is liable to be set aside. We do not agree with the submission made by the learned counsel for the appellants. It is settled law that if a finding of fact is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on the question of law. The perversity of the finding itself becomes a question of law. In the present case we have demonstrated that the judgment of the Company Law Board was given in a very cursory and cavalier manner. The Board has not gone into real issues which were germane for the decision of the controversy involved in the case. The High Court has rightly gone into the depth of the matter. As already stated, the controversy in the case revolved around alleged allotment of additional shares in favour of Ramanujam and whether the allotment of additional shares was an act or oppression on his part. On the issue of oppression the finding of the Company Law Board was in favour of Prathapan i.e. his impugned act was held to be an act of oppression. The said finding has been maintained by the High Court although it has given stronger reasons for the same. In the given case on hand, as pointed by me earlier, even though the appellant has raised a plea that the application filed by the first respondent was not maintainable, the Company Law Board has not considered the said aspect. That apart, the appellant has raised several grounds for dismissing the claim made by the first respondent. However, the same was not considered by the Company Law Board. Hence, I am of the considered view that the decision cited by the learned Senior Counsel appearing for the appellant is squarely applicable to the case of the appellant and the appeal filed by the appellant is perfectly valid.

21. Learned counsel appearing for respondents 2 to 7 relied on the decision reported in (2008) 6 MLJ 1081 Palanisamy and another vs. Milka Nutrients Private Limited, Erode and others and contended that the interim order made by the Company Law Board which had exercised its discretion, cannot be interfered with. Paragraph 8 on which emphasis has been made, is usefully extracted here under:As per clause 41 of the Articles of Association, subject to the direction and control of the Board of Directors, the general Management of the business of the company shall be carried on by the Managing Director. He shall by himself have absolute powers to operate the bank accounts of the company. Of course, hitherto the Managing Director and the Appellant were jointly operating the bank account as is seen from the cheques issued by the company. In the proposed BGM Resolution is sought to be passed in terms of clause 41 of the Articles of Association authorizing Managing Director to solely operate the bank accounts of the company and authorizing to sign cheques, instruments and necessary documents. Having regard to clause 41 of the Articles of Association, CLB has passed the order that any Resolution will not be implemented without leave of CLB, save in the matter of operation of the bank account by the Managing Director in the light of the authority envisaged in clause 41 of the Articles of Association. During the pendency of the company petition under SECTION 397 and 398, CLB has wide powers under Section 403 to make any interim order, which it thinks fit for regulating the conduct of the companies affairs, on such terms as appears to CLB as just and equitable. When CLB has passed the interim order for regulating the company affairs in the best manner, such discretionary order cannot be interfered with. That is the case where the appellant has sought for interim injunction restraining the Directors of the company from conducting and holding the proposed EGM of the company. While deciding the issue, this Court considering the aspect that during the pendency of the company petition, the Company Law Board has wide power under Section 403 of the COMPANIES ACT to make any interim order which it thinks fit for regulating the conduct of the companies affairs, on such terms as appears to Company Law Board as just and equitable. In those circumstances, it has been held by this Court that the discretion to order for regulating the companys affairs in the best manner cannot be interfered with. Hence, the said judgment may not be useful to the case of the respondents. 22. Learned Senior Counsel appearing for respondents 2 to 7 contended that the appellant being a shareholder has no right over the assets of the company and hence, he cannot stop the first respondent from proceeding with the Joint Development Agreement. In this connection, he relied on the judgment reported in AIR 1955 Supreme Court 74 (1) Mrs. Bacha F. Guzdar, Bombay vs. Commissioner of Income Tax, Bombay. Paragraph 9 of the said judgment is usefully extracted here under:9. It was argued that the position of shareholders in a company is analogous to that of partners inter se. This analogy is wholly inaccurate. Partnership is merely an association of persons for carrying on the business of partnership and in law the firm name is a compendious method of describing the partners. Such is, however, not the case of a company which stands as a separate juristic entity distinct from the shareholders. In Halsburys Laws of England, Vol. 6 (3rd Edn.), p. 234, the law regarding the attributes of shares is thus stated:

A share is a right to a specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles, and are not of the nature of real estate. Even assuming that the appellant has no right over the assets of the company being a shareholder, he can very well question the sale made by the Directors of the Company if he is able to establish that the sale is detrimental to the company and its shareholders. Hence, the contention of the learned counsel appearing for respondents 2 to 7 that the appellant being a shareholder, has no right over the affairs of the company and he cannot question the Joint Development Agreement entered into with the first respondent and cannot prevent the first respondent from proceeding with the construction as per the Joint Development Agreement cannot be accepted. 23. In view of the above facts and circumstances, I am of the considered view that the impugned order dated 12.7.2010 made in Company Application No.84 of 2010 in Company Petition No.7 of 2009 passed by the Company Law Board is liable to be set aside and accordingly set aside. 24. In fine, the company appeal stands allowed. The Company Law Board is directed to hear the main company petition in C.P.No.7 of 2009 and pass appropriate orders as expeditiously as possible, however, within two months from the date of receipt of a copy of this order. No order as to costs. Consequently, connected miscellaneous petition is closed.

Law of Contract Case Gherulal Parakh vs Mahadeodas Maiya And Others on 26 March, 1959 Equivalent citations: 1959 AIR 781, 1959 SCR Supl. (2) 406

Bench: Subbarao, K. ACT: Wager-Collateral contract-Agreement of Partnership to enter into wagering transactionsLegality-Indian Contract Act, 1872 (9 of 1872), ss. 23, 30. HEADNOTE: The question for determination in this appeal was whether an agreement of partnership with the object of entering into wagering transactions was illegal within the meaning of s. 23 Of the Indian Contract Act. The appellant and the respondent No. 1 entered into a partnership with the object of entering into forward contracts for the purchase and sale of wheat with two other firms and the agreement between them was that the respondent would enter into the contracts on behalf of the partnership and the profit or loss would be shared by the parties equally. The transactions resulted in loss and the respondent paid the entire amount due to the third parties. On the appellant denying his liability for the half of the loss, the respondent sued him for the recovery of the same and his defence, inter alia, was that the agreement to enter into the wagering contracts was unlawful under s. 23 Of the Contract Act. The trial Court dismissed the suit. The High Court on appeal held that though the wagering contracts were void under s. 30 Of the Indian Contract Act, the object of the partnership was not unlawful within the meaning of the Act and decreed the suit. It was contended on behalf of the appellant (1) that a wagering contract being void under S. 30 Of the Contract Act, was also forbidden by law within the 407 meaning of S.23 Of the Act, that (2) the concept of public policy was very comprehensive in India since the independence, and such a contract would be against public Policy, (3) that wagering contracts were illegal under the Hindu Law and (4) that they were immoral, tested by the Hindu Law doctrine of pious obligation of sons to discharge the father's debts. Held, that the contentions raised were unsustainable in law and must be negatived. Although a wagering contract was void and unenforceable under S. 30 Of the Contract Act, it was not forbidden by law and an agreement collateral to such a contract was not unlawful within the meaning of s. 23 Of the Contract Act. A partnership with the object of carrying on wagering transactions was not, therefore, hit by that section. Pringle v. Jafer Khan, (1883) I.L.R. 5 All.

443, Shibho Mal v. Lachman Das, 1901) I.L.R. 23 All. 165, Beni Madho Das v. Kaunsal Kishor Dhusar, (1900) I.L.R. 22 All. 452, Md. Gulam Mustafakhan v. Padamsi, A.I.R. (1923) Nag. 48, approved. ThacKer v. Hardy, (1878) L.R. 4 Q.B. 685, Read v. Anderson, (1882) L.R. 10 Q.B. 100, Bridger v. Savage, (1885) L.R. 15 Q.B. 363, Hyams v. Stuart King, [1908] 2 K.B. 696, Thwaites v. Coulthwaite, (1896) 1 Ch. 496, Brookman v. Mather, (1913) 29 T.L.R. 276 and Jaffrey & Co. v. Bamford, (1921) 2 K.B. 351, Ramloll Thackoorseydass v. Soojumnull Dhondmull, (1848) 4 M.l.A. 339, Doolubdas Pettamberdass v. Ramloll Thackoorseydass and Ors. (1850) 5 M.I.A. 109, Raghoonauth Shoi Chotayloll v. Manickchund and Kaisreechund, (1856) 6 M.I.A. 251, referred to. Hill v. William Hill, (1949) 2 All E.R. 452, considered. The doctrine of public policy was only a branch of the com- mon law and just like its any other branch, it was governed by precedents ; its principles had been crystallised under different heads and though it was permissible to expound and apply them to different situations, it could be applied only to clear and undeniable cases of harm to the public. Although theoretically it was permissible to evolve a new head of public policy in exceptional cirumstances, such a course would be inadvisable in the interest of stability of society. Shrinivas Das Lakshminarayan v. Ram Chandra Ramrattandas, I.L.R. (1920) 44 Bom. 6, Bhagwanti Genuji Girme v. Gangabisan Ramgopal, I.L.R. 1941 Bom. 71, and Gopi Tihadi v. Gokhei Panda, I.L.R. 1953 Cuttack 558, approved. Egerton v. Brownlow, 4 H.L.C. 1 ; 10 E.R. 359, Janson v. Driefontein Consolidated Mines, Ltd., (1902) A.C. 484, Fender v. St. JohnMildmay, (1938) A.C. :1 and Monkland v. Jack Barclay Ltd., (1951) 1 All E.R. 714, referred to. Like the common law of England, which did not recognise any principle of public policy declaring wagering contracts illegal, the Indian Courts, both before and after the passing of 408 Act 21 Of 1848 and also after the enactment of the Indian Contract Act, 1872, held that wagering contracts were not illegal as being contrary to public policy and collateral contracts in respect of them were enforceable in law. Ramloll Thackoorseydass v. Soojumnull Dhondmull, (1848) 4 M.I.A. 339, referred to. Gambling or wagering contracts were never declared to be illegal by courts in India as being contrary to public policy as offending the principles of ancient Hindu Law and it was not

possible to give a novel content to that doctrine in respect of gaming and wagering contracts. The State of Bombay v. R. M. D. Chamaybaugwala, [1957] S.C.R. 874, considered. The common law of England and that of India never struck down contracts of wager on the ground of public policy and such contracts had always been held not to be illegal although the statute declared them to be void. The moral prohibitions in Hindu Law texts against gambling were not legally enforced but were allowed to fall into desuetude and it was not possible to hold that there was any definite head or principle of public policy evolved by courts or laid down by precedents directly applicable to wagering contracts. There was neither any authority nor any legal basis for importing the doctrine of Hindu Law relating to the pious obligation of sons to pay the father's debt into the dominion of' contracts. Section 23 Of the Contract Act was inspired by the common law of England and should be construed in that light.' The word " immoral " was very comprehensive and varying in its contents and no universal standard could be laid down. Any law, therefore, based on such fluid concept would defeat its purpose. The provisions of S. 23 of the Indian Contract Act indicated that the Legislature intended to give that word a restricted meaning. The limitation imposed on it by the expression " the Court regards it as immoral " clearly indicated that it was also a branch of the common law and should, therefore, be confined to principles recognised and settled by courts. judicial decisions confined it to sexual immorality, and wager could not be brought in as new head within its fold. JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 215 of 1955. Appeal from the judgment and decree dated April 1, 1953, of the Calcutta High Court in Appeal from Original Decree No. 89 of 1946, arising, out of the judgment and decree dated December 4, 1945, of the Subordinate Judge, Darjeeling, in Money Suit No. 5 of 1940. 409 L. K. Jha and D. N. Mukherjee, for the appellant. C. B. Aggarwala, K. B. Bagchi and Sukumar Ghosh, for Respondents Nos. 1 to 5.

1959. March 26. The Judgment of the Court was delivered by SUBBA RAO, J.-This appeal filed against the judgment of the High Court of Judicature at Calcutta raises the question of the legality of a partnership to carry on business in wagering contracts. The facts lie in a small compass. They, omitting those not germane to the controversy before us, are as follows: The appellant, Gherulal Parakh, and the first respondent, Mahadeodas Maiya, managers of two joint families entered into a partnership to carry on wagering contracts with two firms of Hapur, namely, Messrs. Mulchand Gulzarimull and Baldeosahay Surajmull. It was agreed between the partners that the said contracts would be made in the name of the respondents on behalf of the firm and that the profit and loss resulting from the transactions would be borne by them in equal shares. In implementation of the said agreement, the first respondent entered into 32 contracts with Mulchand and 49 contracts with Baldeosahay and the nett result of all these transactions was a loss, with the result that the first respondent had to pay to the Hapur merchants the entire amount due to them. As the appellant denied his liability to bear his share of the loss, 'the first respondent along 'With his sons filed O. S. No. 18 of 1937 in the Court of the Subordinate Judge, Darjeeling, for the recovery of half of the loss incurred in the transactions with Mulchand. In the plaint he reserved his right to claim any further amount in respect of transactions with Mulchand that might be found due to him after the accounts were finally settled with him. That suit was referred to arbitration and on the basis of the award, the Subordinate Judge made a decree in favour of the first respondent and his sons for a sum of Rs. 3,375. After the final accounts were settled between the first respondent and the two merchants of Hapur and after 52 410 the amounts due to them were paid, the first respondent instituted a suit, out of which the present appeal arises, in the Court of the Subordinate Judge, Darjeeling, for the recovery of a sum of Rs. 5,300 with interest thereon. Subsequently the plaint was amended and by the amended plaint the respondents asked for the same relief on the basis that the firm had been dissolved. The appellant and his sons, inter alia, pleaded in defence that the agreement between the parties to enter into wagering contracts was unlawful under s. 23 of the Contract Act, that as the partnership was not registered, the suit was barred under s. 69(1) of the Partnership Act and that in any event the suit was barred under S. 2, Rule 2 of the Code of Civil Procedure. The learned Subordinate Judge found that the agreement between the parties was to enter into wagering contracts depending

upon the rise and fall of the market and that the said agreement was void as the said object was forbidden by law and opposed to public policy. He also found that the claim in respect of the transactions with Mulchand so far as it was not included in the earlier suit was not barred under s. 2, Rule 2, Code of Civil Procedure, as the cause of action in respect of that part of the claim did not arise at the time the said suit was filed. He further found that the partnership was between the two joint families of the appellant and the first respondent respectively, that there could not be in law such a partnership and that therefore s. 69 of the Partnership Act was not applicable. In the result, he dismissed the suit with costs. On appeal, the learned Judges of the High Court held that the partnership was not between the two joint families but was only between the two managers of the said families and therefore it was valid. They found that the' partnership to do business was only for a single venture with each one of the two merchants of Hapur and for a single season and that the said partnership was dissolved after the season was over and therefore the suit for accounts of the dissolved firm was not- hit by the provisions of subsections (1) and (2) of s. 69 of the Partnership Act. 411 They further found that the object of the partnere was to deal in differences and that though the said transactions, being in the nature of wager, were void under s. 30 of the Indian Contract Act, the object was not unlawful within the meaning of s. 23 of the said Act. In regard to the claim, the learned Judges found that there was no satisfactory evidence as regards the payment by the first respondent on account of loss incurred in the contracts with Mulchand but it was established that he paid a sum of Rs. 7,615 on account of loss in the contracts entered into with Baldeosahay. In the result, the High Court gave a decree to the first respondent for a sum of Rs. 3,807-8-0 and disallowed interest thereon for the reason that as the suit in substance was one for accounts of a dissolved firm, there was no liability in the circumstances of the case to pay interest. In the result, the 'High Court gave a decree in favour of the first respondent for the said amount together with another small item and dismissed the suit as regards " the plaintiffs other than the first respondent and the defendants other than the appellant ". Before we consider the questions of law raised in the case, it would -be convenient at the outset to dispose of questions of fact raised by either party. The learned Counsel for the appellant contends that the finding of the learned Judges of the High Court that the partnership stood dissolved after the season was over was not supported by the pleadings or the evidence adduced in the case. In the plaint as originally drafted and presented to the Court, there was no

express reference to the fact that the business was dissolved and no relief was asked for accounts' of the dissolved firm. But the plaint discloses that the parties jointly entered into contracts with two merchants between March 23, 1937, and June 17, 1937, that the plaintiffs obtained complete accounts of profit and loss on the aforesaid transactions from the said merchants after June 17, 1937, that they issued a notice to the defendants to pay them a sum of Rs. 4,146-4-3, being half of the total payments made by them on account of 412 the said contracts and that the defendants denied their liability. The suit was filed for recovery of the said amount. The defendant filed a written-statement on June 12, 1940, but did not raise the plea based on s. 69 of the Partnership Act. He filed an additional written-statement on November 9, 1941, expressly setting up the plea. Thereafter the plaintiffs prayed for the amendment of the, plaint by adding the following to the plaint as paragraph 10: " That even Section 69 of the Indian Partnership Act is not a bar to the present suit as the joint business referred to above was dissolved and in this suit the Court is required only to go into the accounts of 'the said joint business ". On August 14, 1942, the defendant filed a further additional written-statement alleging that the allegations in paragraph 2 were not true and that as no date of the alleged dissolution had been mentioned in the plaint, the plaintiffs' case based on the said alleged dissolution was not maintainable. It would be seen from the aforesaid pleadings that though an express allegation of the fact of dissolution of the partnership was only made by an amendment on November 17, 1941, the plaint as originally presented contained all the facts sustaining the said plea. The defendants in their written-statement, inter alia, denied that there was any partnership to enter into forward contracts with the said two merchants and that therefore consistent with their case they did not specifically deny the said facts. The said facts, except in regard to the question whether the partnership was between the two families or only between the two managers of the families on which there was difference of view between the Court of the Subordinate Judge and the High Court, were concurrently found by both the Courts. It follows from the said findings that the partnership was only in respect of forward contracts with two specified individuals and for a particular season. But it is said that the said findings were not based on any evidence in the case. It is true that the documents did not clearly indicate any period limiting the operation of the partnership, but from the attitude adopted by the 413

defendants in the earlier suit ending in an award and that adopted in the present pleadings, the nature of the transactions and the conduct of the parties, no other conclusion was-possible than that arrived at by the High Court. If so, s. 42 of the Partnership Act directly applies to this case. Under that section in the absence of a contract to the contrary, a firm is dissolved, if it is constituted to carry out one or more adventures or undertakings, by completion thereof. In this case, the partnership was constituted to carry out contracts with specified persons during a particular season and as the said contracts were closed, the partnership was dissolved. At this stage a point raised by the learned Counsel for the respondents may conveniently be disposed of. The learned Counsel contends that neither the learned Subordinate Judge nor the learned Judges of the High Court found that the first respondent entered into any wagering transactions with either of the two merchants of Hapur and therefore no question of illegality arises in this case. The law on the subject is wellsettled and does not call for any citation of cases. To constitute a wagering contract there must be proof that the contract was entered into upon terms that the performance of the contract should not be demanded, but only the difference in prices should be paid. There should be common intention between the parties to the wager that they should not demand delivery of the goods but should take only the difference in prices on the happening of an event. Relying upon the said legal position, it is contended that there is no evidence in the case to establish that there was a common intention between the first respondent and the Hapur merchants not to take delivery of possession but only to gamble in difference in prices. This argument, if we may say so, is not really germane to the question raised in this case. The suit was filed on the basis of a dissolved partnership for accounts. The defendants contended that the object of the partnership was to carry on wagering transactions, i. e., only to gamble in differences without any intention to give or take delivery of goods. The Courts, on the evidence, both 414 direct and circumstantial, came to the conclusion that the partnership agreement was entered into with the object of carrying on wagering transactions wherein there was no intention to ask for-or to take delivery of goods but only to deal with differences. That is a concurrent finding of fact, and, following the usual practice of this Court, we must accept it. We, therefore, proceed on the basis that the appellant and the first respondent entered into a partnership for carrying on wagering transactions and the claim related only to the loss incurred in respect of those transactions.

Now we come to the main and substantial point in the case. The problem presented, with its different facets, is whether the said agreement of partnership is unlawful within the meaning of s. 23 of the Indian Contract Act. Section 23 of the said Act, omitting portions unnecessary for the present purpose, reads as follows : " The consideration or object of an agreement is lawful, unlessit is forbidden by law, or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void." Under this section, the object of an agreement, whether it is of partnership or otherwise, is unlawful if it is forbidden by law or the Court regards it as immoral or opposed to public policy and in such cases the agreement itself is void. The learned Counsel for the appellant advances his argument under three sub-heads: (i) the object is forbidden by law, (ii) it is opposed to public policy, and (iii) it is immoral. We shall consider each one of them separately. Re. (i)--forbidden by law: Under s. 30 of the Indian Contract Act, agreements by way of wager are void; and no suit shall be brought for recovering anything 415 alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made. Sir William Anson's definition of " wager " as a promise to give money or money's worth upon the determination or ascertainment of an uncertain event accurately brings out the concept of wager declared void by s. 30 of the Contract Act. As a contract which provides for payment of differences only without any intention on the part of either of the parties to give or take delivery of the goods is admittedly a wager within the meaning of s. 30 of the Contract Act, the argument proceeds, such a transaction, being void under the said section, is also forbidden by law within the meaning of s. 23 of the Contract Act. The question, shortly stated, is whether what is void can be equated with what is forbidden by law. This argument is not a new one, but has been raised in England as well as in India and has uniformly been rejected. In England the law relating to gaming and wagering contracts is contained in the Gaming Acts of 1845 and 1892. As the decisions turned upon the relevant

provisions of the said Acts, it would help to appreciate them better if the relevant sections of the two Acts were read at this stage: Section 18 of the Gaming Act, 1845: " Contracts by way of gaming to be void, and wagers or sums deposited with stakeholders not to be recoverable at law- Saving for subscriptions for prizes................. All contracts or agreements, whether by parole or in writing, by way of gaming or wagering, shall be null and void; and......... no suit shall be brought or maintained in any court of law and equity for recovering any sum of money or valuable thing alleged to be won upon any wager, or which shall have been deposited in the hands of any person to abide-the event on which any wager shall have been made: Provided always, that this enactment shall not be deemed to apply to any subscription or contribution, or agreement to subscribe or contribute, for or towards any plate, prize or sum of money to be awarded -to the winner or winners of any lawful game, sport, pastime or exercise." 416 Section 1 of the Gaming Act, 1892: " Promises to repay sums paid under contracts void by 8 & 9 Viet. c 109 to be null and void.Any promise, express or implied, to pay any person any sum of money paid by him under or in respect of any contract or agreement rendered null and void by the Gaming Act, 1845, or to pay any sum of money by way of commission, fee, reward, or otherwise in respect of any such contract, or of any services in relation thereto or in connexion therewith, shall be null and void, and no action shall be brought or maintained to recover any such sum of money." While the Act of 1845 declared all kinds of wagers or games null and void, it only prohibited the recovery of money or valuable thing won upon any wager or desposited with stakeholders. On the other hand, the Act of 1892 further declared that moneys paid under or in respect of wagering contracts dealt with by the Act of 1845 are not recoverable and no commission or reward in respect of any wager can be claimed in a court of law by agents employed to bet on behalf of their principals. The law of England till the passing of the Act of 1892 was analogous to that in India and the English law on the subject governing a similar situation would be of considerable help in deciding the present case. Sir William Anson in his book " On Law of Contracts " succinctly states the legal position thus, at page 205: "................ the law may either actually forbid an agreement to be made, or it may merely say that if it is made the Courts will not enforce it. In the former case it is illegal, in the latter only void;

but inasmuch as illegal contracts are also void, though void contracts are not necessarily illegal, the distinction is for most purposes not important, and even judges seem sometimes to treat the two terms as inter- changeable." The learned author proceeds to apply the said general principles to wagers and observes, at page 212, thus: "Wagers 'beidg only void, no taint of illegality attached to a transaction, whereby one man employed another to make bets for him; the ordinary rules which 417 govern the relation of employer and employed applied in such a case." Pollock and Mulla in their book on Indian Contract define the phrase ',forbidden by law " in s. 23 thus, at page 158: "An act or undertaking is equally forbidden by law whether it violates a prohibitory enactment of the Legislature or a principle of unwritten law. But in India, where the criminal law is codified, acts forbidden by law seem practically to consist of acts punishable under the Penal Code and of acts prohibited by special legislation, or by regulations or orders made under authority derived from the Legislature." Some of the decisions, both English and Indian, cited at the Bar which bring out the distinction between a contract which is forbidden by law and that which is void may now be noticed. In Thacker v. Hardy (1), the plaintiff, a broker, who was employed by the defendant to speculate for him upon the stock Exchange, entered into contracts on behalf of the defendant with a third party upon which he (the plaintiff) became personally liable. He sued the defendant for indemnity against the liability incurred by him and for commission as broker. The Court held that the plaintiff was entitled to recover notwithstanding the provisions of 8 & 9 Viet. c. 109, s. 18 (English Gaming Act, 1845). Lindley, J., observed at page 687: " Now, if gaming and wagering were illegal, I should be of opinion that the illegality of the transactions in which the plaintiff and the defendant were engaged would have tainted, as between themselves, whatever the plaintiff had done in futherance of their illegal designs, and would have precluded him from claiming, in a court of law, any indemnity from the defendant in respect of the liabilities he had incurred: Cannan v. Bryce (3 B. & Ald. 179); McKinnell v. Robinson (3 M. & W. 434); Lyne v. Siesfeld (1 H. & N. 278). But it has been held that although gaming and wagering contracts cannot be enforced, they are (1) (1878) L.R. 4 Q.B. 685. 53

418 not illegal. Fitch v. Jones (5 E. & B. 238) is plain to that effect. Money paid in discharge of a bet is a good consideration for a bill of exchange: Oulds v. Harrison (10 Ex. 572); and if money be so paid by a plaintiff at the request of a defendant, it can be recovered by action against him : Knight v. Camber (15 C.B. 562); Jessopp v. Lutwyoho (10 Ex. 614); Rosewarne v. Billing (15 C. B. (N. S.) 316); and it has been held that a request to pay may be inferred from an authority to bet: Oldham v. Ramsden (44 L. J. (C. P.) 309). Having regard to these decisions, I cannot hold that the statute above referred to precludes the plaintiff from maintaining this action." In Read v. Anderson.(1) where an agent was employed to make a bet in his own name on behalf of his principal, a similar question arose for consideration. Hawkins, J., states the legal position at page 104 : " At common law wagers were not illegal, and before the passing of 8 & 9 Vict. c. 109 actions were constantly brought and maintained to recover money won upon them. The object of 8 & 9 Viet. c. 109 (passed in 1845) was not to render illegal wagers which up to that time had been lawful, but simply to make the law no longer available for their enforcement, leaving the parties to them to pay them or not as their sense of honour might dictate." After citing the provisions of s. 18 of that Act, the learned Judge proceeds to observe thus, at page 105 : " There is nothing in this language to affect the legality of wagering contracts, they are simply rendered null and void; and not enforceable by any process of law. A host of authorities have settled this to be the true effect of the Statute." This judgment of Hawkins, J., was confirmed on appeal (reported in 13 Q. B. 779) on the ground that the agency became irrevocable on the making of the bet. The judgment of the Court of Appeal cannot be considered to be a direct decision on the point. The said principle was affirmed by the Court of Appeal again in Bridger v. Savage (2). There the plaintiff sued his (1) (1882) L.R. 10 Q.B. 100. (2) (1885) L.R. 15 Q.B. 363. 419 agent for the amount received by him in respect of the winnings from the persons with whom the agent had betted. Brett, M. R., observed at page 366 :

"............ the defendant has received money which he contracted with the plaintiff to hand over to him when he had received it. That is a perfectly legal contract ; but for the defendant it has been contended that the statute 8 & 9 Vict. c. 109, s. 18, makes that contract illegal. The answer is that it has been held by the Courts on several occasions that the statute applies only to the original contract -made between the persons betting, and not to such a contract as was made here between the plaintiff and defendant." Bowen, L. J., says much to the same effect at page 367: "Now with respect to the principle involved in this case, it is to be observed that the original contract of betting is not an illegal one, but only one which is void. If the person who has betted pays his bet, he does nothing wrong; he only waives a benefit which the statute has given to him, and Confers a good title to the money on the person to whom he pays it. Therefore when the bet is paid the transaction is completed, and when it is paid to an agent it cannot be contended that it is not a good payment for his principal............ So much, therefore, for the principle governing this case. As to the authorities, the cases of Sharp v. Taylor (2 Phil. 801), Johnson v. Lansley (12 C. B. 468), and Beeston v. Beeston (I Ex. D. 13), all go to shew that this action is maintainable, and the only authority the other way is that of Beyer v. Adams (26 L. J. (Ch.) 841), and that case cannot be supported, and is not law." This case lays down the correct principle and is supported by earlier authorities. The decision in Partridge v. Mallandaine (1) is to the effect that persons receiving profits from betting systematically carried on by them are chargeable with income-tax on such profits in respect of a " vocation " under 5 & 6 Vict. c. 35 (the Income Tax Act) Schedule D. Hawkins, J., rejecting the argument that the (1) (1887) L.R. 18 Q.B. 276. 420 profession of bookmakers is not a calling within the meaning of the Income Tax Act, makes the following observations, at page 278: "Mere betting is not illegal. It is perfectly lawful for a man to bet if he likes. He may, however, have a difficulty in getting the amount of the bets from dishonest persons who make bets and will not pay." The decision in Hyams v. Stuart King (1) deals with the problem of the legality of a fresh agreement between parties to a wager for consideration. There, two bookmakers had betting transactions together, which resulted in the defendant giving the plaintiff a cheque for the amount of bets lost to him. At the request of the defendant, the cheque was held over by the

plaintiff for a time, and part of the amount of the cheque was paid by the defendant. Subsequently a fresh verbal agreement was come to between the parties, by which, in consideration of the plaintiff holding over the cheque for a further time and refraining from declaring the defendant a defaulter and thereby injuring him with his customers, the defendant promised to pay the balance owing in a few days. The balance was never paid and the plaintiff filed a suit to recover the money on the basis of the fresh verbal agreement. The Court of Appeal, by a majority, Fletcher Moulton, L. J., dissenting, held that the fresh verbal agreement was supported by good consideration and therefore the plaintiff was entitled to recover the amount due to him. At page 705, Sir Gorell Barnes posed the following three questions to be decided in the case: (1) Whether the new contract was itself one which falls within the provisions of 8 & 9 Vict. c. 109, s. 18; (2) whether there was any illegality affecting that contract; and (3) whether that contract was a lawful contract founded on good consideration. Adverting to the second question, which is relevant to the present case, the President made the following observations at page 707: "............... it is to be observed that there was nothing illegal in the strict sense in making the bets. (1) [1908] 2 K.B. 696. 421 They were merely void under 8 & 9 Vict. c. 109, and there would have been no illegality in paying them. There is no doubt whatever about this. There was also nothing illegal in giving the cheque nor would there have been any illegality in paying it, though the defendants could not have been compelled by the plaintiff to pay it, because by statute it was to be deemed and taken to have been made and given for an illegal consideration, and therefore void in the hands of the plaintiff........ The statutes do not make the giving or paying of the cheque illegal, and impose no penalty for so doing. Their effect and intention appear only, so far as material, to be that gaming or wagering contracts cannot be enforced in a Court of Law or Equity..............." The view expressed by the President is therefore consistent with the view all along accepted by the Courts in England. This case raised a now problem, namely, whether a substituted agreement for consideration between the same parties to the wager could be enforced, and the majority held that it could be enforced, while Fletcher Moulton, L. J., recorded his dissent. We shall have occasion to notice the dissenting view of Fletcher Moulton, L. J., at a later stage. The aforesaid decisions establish the proposition that in England a clear distinction is maintained between a contract which is void and that which is illegal and it has been held that though a wagering contract is void and unenforceable between parties, it is not illegal and therefore it does not affect the validity of a collateral contract.

'The same principle has been applied to collateral contracts of partnership also. In Thwaites v. Coulthwaite (1) the question of legality of a partnership of bookmaking and betting was raised. There the plaintiff and defendant were partners in a-bookmakers and betting business, which was carried on by the defendant; the plaintiff claimed an account of the profits of the partnership, and the defendant contended that, having regard to the nature of the business, no such relief could be obtained. Chitty, J., rejected the (1) (1896) 1 Ch. 496. 422 plea holding that the partnership was valid, for the following reasons, among others, and stated at page 498: - " The Gaming Act, 1845 (8 & 9 Vict. c. 109), did not make betting illegal; this statute, as is well known, merely avoided the wagering contract. A man may make a single bet or many bets; he may habitually bet; he may carry on a betting or bookmakers business within the statute, provided the business as carried on by him does not fall within the prohibition of the Betting Act, 1853." In Thomas v. Day (1), a similar question arose. There the plaintiff claimed an account and money due under a partnership which he alleged had existed between himself and the defendant to take an office and carry on a betting business as bookmakers. Darling, J., held that a partnership to carry on the business of a bookmaker was not recognized by law, that even if there was such a legal partnership, an action for account would not lie as between the two bookmakers founded on betting and gambling transactions. This judgment certainly supports the appellant; but the learned Judge did not take notice of the previous decision on the subject and the subsequent decisions have not followed it. When a similar objection was raised in Brookman v. Mather (2), Avery, J., rejected the plea and gave a decree to the plaintiff. There the plaintiff and the defendant entered into a partnership to carry on a betting business. Two years thereafter, in 1910, the partnership was dissolved and a certain amount was found due to the plaintiff from the defend ant and the latter gave the former a promissory note for that amount. A suit was filed for the recovery of the amount payable under the promissory note. Avery, J., reiterated the principle that betting was not illegal per se. When the decision in Thomas v. Day(1) was cited in support of the broad principle that the betting business could not be recognized as legal in a Court of Justice, the learned Judge pointed out that that case was decided without reference to Thwaites (1) (1908) 24 T.L.R. 272. (2) (1913) 29 T.L.R. 276.

423 v. Coulthwaite (1). This judgment, therefore, corrected the deviation made by Darling, J., in Thomas v. Day(2 ) and put the case law in line with earlier precedents. The earlier view was again accepted and followed in Keen v. Price (3) where an action by one of the partners in a bookmakers and betting business against the other for an account of the partnership dealings was entertained. But the Court gave liberty to the defendant to object to repaying anything which represented profits in such business. The reason for this apparent conflict between the two parts of the decision is found in the express terms of the provisions of the Gaming Act of 1892. Commenting upon Thwaites v. Coulthwaite (1) in which Chitty, J., held that such an action would lie for an account of the profits of the partnership, Sargant, J., pointed out that in that case the Gaming Act, 1892, was not referred to. At page 101, the learned Judge says: " Curiously enough, in that case the Gaming Act, 1892, was not referred to, and although the decision is a good one on the general law, it cannot be regarded as a decision on the Act of 1892." This judgment confirms the principle that a wager is not illegal, but states that after the Gaming Act, 1892, a claim in respect of that amount even under a collateral agreement is not maintainable. In O'Connor and Ould v. Ralston (4), the plaintiff, a firm of bookmakers, filed a suit claiming from the defendant the amount of five cheques drawn by him upon his bank in payment of bets which he had lost to them and which had been dishonoured on presentation. Darling, J., held that as the plaintiffs formed an association for the purpose of carrying on a betting business, the action would not lie. In coming to that conclusion the learned Judge relied upon the dissenting view of Fletcher Moulton, L. J., in Hyams v. Stuart King We shall consider that decision at a later stage. (1) (1896) 1 Ch. 496. (2) (1908) 24 T.L.R. 272. (3) (1914) 2 Ch. 98. (4) (1920) 3 K.B. 451. (5) [1908] 2 K.B. 696. 424 The opinion of Darling, J., was not accepted in Jeffrey Co. v. Bamford (1) wherein McCardie, J., held that a partnership for the purpose of carrying on a betting and bookmakers business is not per se illegal or impossible in law. The learned Judge says at page 356:

"............ betting or wagering is not illegal at common law...... . It has been repeatedly pointed out that mere betting on horse races is not illegal ". The learned Judge, after noticing the earlier decisions already considered by us and also some of the observations of Fletcher Moulton, L. J., came to the conclusion that the partnership was not illegal. We shall now scrutinize the decision in Hill v. William Hill (I) to see whether there is any substance in the argument of the learned Counsel for the appellant that this decision accepted the dissenting view of Fletcher Moulton, L. J., in Hyams v. Stuart King (3) or the view of Darling, J., in Thomas v. Day (4) and O'Connor and Ould v. Ralston (5). The facts in that case were: The appellant had betting transactions with the respondents, a firm of bookmakers. As a result of those transactions, the appellant lost pound 3,635-12-6. As the appellant was unable to pay the amount, the matter was referred to the committee of Tattersalls, who decided that the appellant should pay the respondents a sum of pound 635-12-6 within fourteen days and the balance by monthly instalments of pound 100. It was laid down that if the appellant failed to make those payments, he was liable to be reported to the said committee which would result in his being warned off Newmarket Heath and posted as defaulters The appellant informed the respondents that he was unable to pay the pound 635-12-6 within the prescribed time and offered to send them a cheque for that sum post- dated October 10, 1946, and to pay the monthly instalments of pound 100 thereafter. On the respondents agreeing to that course, the appellant sent a post-dated cheque to (1) (1921) 2 K.B. 351. (2) (1949) 2 All E.R. 452. (3) [1908] 2 K.B. 696. (4) (1908) 24 T.L.R. 272. (5) (1920) 3 K.B. 451. 425 them and also enclosed a letter agreeing- to pay the monthly instalments. As the post-dated cheque was dishonoured and the appellant failed to pay the entire amount, the respondents filed a suit claiming the amount due to them under the subsequent agreement. The respondents contended that the sum the appellant had promised to pay was not money won upon a wager within the meaning of the second branch of s. 18, but was money due under a new lawful and enforceable agreement and that even if the sum was to be regarded as won on a wager, the agreement was outside the scope of the second branch of s. 18 of the Gaming Act, 1845. The House of Lords by a majority of 4 to 3 held that the agreement contained a new promise to pay money won upon a wager and that the second branch of s. 18 applied to all suits brought to

recover money alleged to have been won on a wager and therefore the contract was unenforceable. In coming to that conclusion, Viscount Simon, one of the Judges who expressed the majority view, agreed with Fletcher Moulton, L. J., in holding that the bond constituted an agreement to pay money won upon a wager, notwithstanding the new consideration, and was thus unenforceable under the second limb of s. 18. In Hyams v. Stuart King(1), the facts of which we have already given, the suit was filed on the basis of a subsequent agreement between the same parties to the wager. The majority of the Judges held that the subsequent agreement was supported by good consideration, while Fletcher Moulton, L. J., dissented from that view. The basis for the dissenting view is found at page 712. After reading s. 18 of the Gaming Act, 1845, the learned Judge proceeded to state: " In my opinion too little attention has been paid to the distinction between the two parts of this enactment, and the second part has been treated as being in effect merely a repetition of the first part. I cannot accept such an interpretation. So far as the actual wagering contract is concerned, the earlier provision is ample. It makes that contract absolutely void, (1) [1908] 2 K.B. 696. 54 426 and it would be idle to enact in addition that no suit should be brought upon a contract that had thus been rendered void by statute. The language of the later provision is in my opinion much wider. It provides with complete generality that no action shall be brought to recover anything alleged to be won upon any wager, without in any way limiting the application of the provision to the wagering contract -itself. In other words, it provides that wherever the obligation under a contract is or includes the payment of money won upon a wager, the Courts shall not be used to enforce the performance of that part of the obligation ". These observations must be understood in the context of the peculiar facts of that case. The suit was between the parties to the wager. The question was whether the second part of the concerned section was comprehensive enough to take in an agreement to recover the money won upon a wager within the meaning of that part. Fletcher Moulton, L. J., held that the second part was wide and comprehensive enough to take in such a claim, for the suit was, though on the basis of a substituted agreement, for the recovery of the money won upon a wager within the meaning of

the words of that part of the section. The second question considered by the learned Judge was whether the defendants' firm which was an association formed for the purpose of a betting business was a legal partnership under the English Law. The learned Judge relied upon the Gaming Act. 1892 in holding that it was not possible under the English law to have any such partnership. At page 718, the learned Judge observed : In my opinion no such partnership is possible under English law. Without considering any other grounds of objection to its existence, the language of the Gaming Act, 1892, appears to me to be sufficient to establish this proposition. It is essential to the idea of a partnership that each partner is an agent. of the partnership and (subject to the provisions of the partnership deed) has authority to make payments on its behalf for partnership purposes, for which he is entitled 427 to claim credit in the partnership accounts and thus receive, directly or indirectly, repayment. But by the Gaming Act, 1892, all promises to pay any person any sum of money paid by him in respect of a wagering contract are null and void. These words are wide enough to nullify the fundamental contract which must be the basis of a partnership, and therefore in my opinion no such partnership is possible, and the action for this reason alone was wrongly framed and should have been dismissed with costs ". It would be seen from the said observations that Fletcher Moulton, L. J., laid down two propositions: (i) The second part of s. 18 of the Gaming Act, 1845, was comprehensive enough to take in a claim for the recovery of money alleged to be won upon a wager though the said claim was based upon a substituted contract between the same parties; and (ii) by reason of the wide terms of the Gaming Act, 1892, even the fundamental contract, which was the basis of a partnership, was itself a nullity. The learned Lord Justice did not purport to express any opinion on the effect of a void contract of wager on a collateral contract. In Hill's case (1) the only question that arose was whether the second part of s. 18 was a bar to the maintainability of a suit under a substituted agreement for the recovery of money won upon a wager. The majority accepted the view of Fletcher Moulton, L. J., on the first question. The second question did not arise for consideration in that case. The House of Lords neither expressly nor by necessary implication purported to hold that collateral contract of either partnership or agency was illegal; and that the long catena of decisions already referred to by us were wrongly decided. This judgment does not therefore support the contention of the learned Counsel for the appellant.

The legal position in India is not different. Before the Act for Avoiding Wagers, 1848, the law relating to wagers that was in force in British India was the common law of England. The Judicial Committee in Ramloll Thackoorseydass v. Soojumnull Dhondmull (2) (1) (1921) 2 K.B. 351. (2) (1848) 4 M.I.A. 339. 428 expressly ruled that the common law of England was in force in India and under that law an action might be maintained on a wager. The wager dealt with in that case was upon the average price which opium would fetch at the next Government sale at Calcutta. Lord Campbell in rejecting the plea that the wager was illegal observed at page 349: " The Statute, 8 & 9 Viet. c. 109, does not extend to India' and although both parties on the record are Hindoos, no peculiar Hindoo law is alleged to exist upon the subject; therefore this case, must be decided by the common law of England ". It is a direct decision on the point now mooted before us and it is in favour of the respondents. Again the Privy Council considered a similar question in Doolubdass Pettamberdass v. Ramloll Thackoorseydass and others There again the wager was upon the price that the Patna opium would fetch at the next Government sale at Calcutta. There the plaintiff instituted a suit in the Supreme Court of Bombay in January, 1847, to recover the money won on a wager. After the suit was filed, Act 21 of 1848 was passed by the Indian Legislature where under all agreements whether made in speaking, writing, or otherwise, by way of gaming or wagering, would be null and void and no suit would be allowed in any Court of Law or Equity for recovering any sum of money or valuable thing alleged to be won on any wager. This section was similar in terms to that of s. 18 of the Gaming Act, 1845. Their Lordships held that the contract was not void and the Act 21 of 1848 would not invalidate the contracts entered into before the Act came into force. Adverting to the next argument that under Hindu Law such contracts were void, they restated their view expressed in Ramloll Thackoorserdas v. Soojumnull Dhondmull (2) thus at page 127: " Their Lordships have already said that they are not satisfied from the authorities referred to, that such is the law among the Hindoos... . " The Judicial Committee again restated the law in similar terms in Raghoonauth Sahoi Chotayloll v.

(1) (1850) 5 M.I.A. 109. (2) (1848) 4 M.I.A. 339. 429 Manickchund and Kaisreechund (1). There the Judicial Committee held that a wagering contract in India upon the average price opium would fetch at a future Government sale, was legal and enforceable before the passing of the Legislative Act, No. 21 of 1848. The aforesaid three decisions of the Privy Council clearly establish the legal position in India before the enactment of the Act 21 of 1848, namely, that wagering contracts were governed by the common law of England and were not void and therefore enforceable in Courts. They also held that the Hindu Law did not prohibit any such wagers. The same view was expressed by the Indian Courts in cases decided after the enactment of the Contract Act. An agent who paid the amount of betting lost by him was allowed to recover the same from his principal in Pringle v. Jafar Khan (2). The reason for that decision is given at page 445: " There was nothing illegal in the contract; betting at horse-races could not be said to be illegal in the sense of tainting any transaction connected with it. This distinction between an agreement which is only void and one in which the consideration is also unlawful is made in the Contract Act. Section 23 points out in what cases the consideration of an agreement is unlawful, and in such cases the agreement is also void, that is, not enforceable at law. Section 30 refers to cases in which the agreement is only void, though the consideration is not necessarily unlawful. There is no reason why the plaintiff should not recover the sum paid by him...... ." In Shibho Mal v. Lachman Das (3) an agent who paid the losses on the wagering transactions was allowed to recover the amounts he paid from his principal. In Beni Madho Das v. Kaunsal Kishor Dhusar (4) the plaintiff who lent money to the defendant to enable him to pay off a gambling debt was given a decree to recover the same from the defendant. Where two partners entered into a contract of wager with a third (1) (1856) 6 M.I.A. 251. (3) (1901) I.L.R. 23 All. 165. (2) (1883) I.L.R. 5 All. 443.

(4) (1900) I.L.R. 22 All. 452. 430 party and one partner had satisfied his own and his co- partner's liability under the contract, the Nagpur High Court, in Md. Gulam Mustafakhan v. Padamsi (1) held that the partner who paid the amount could legally claim the other partner's share of the loss. The learned Judge reiterated the same principle accepted in the decisions cited supra, when he said at page 49: " Section 30 of the Indian Contract Act does not affect agreements or transactions collateral to wagers......... ." The said decisions were based upon the well-settled principle that a wagering contract was only void, but not illegal, and therefore a collateral contract could be enforced. Before closing this branch of the discussion, it may be convenient to consider a subsidiary point raised by the learned Counsel for the appellant that though a contract of partnership was not illegal, in the matter of accounting, the loss paid by one of the partners on wagering transactions, could not be taken into consideration. Reliance is placed in support of this contention on Chitty's Contract, p. 495, para. 908, which reads: " Inasmuch as betting is not in itself illegal, the law does not refuse to recognise a partnership formed for the purpose of betting. Upon the dissolution of such a partnership an account may be ordered. Each partner has a right to recover his share of the capital subscribed, so far as it has not been spent; but he cannot claim an account of profits or repayments of amounts advanced by him which have actually been applied in paying the bets of the partnership." In support of this view, two decisions are cited. They are: Thwaites v. Coulthwaite (2 ) and Saffery v. Mayer(3). The first case has already been considered by us. There, Chitty, J., in giving a decree for account left open the question of the legality of certain transactions till it arose on the taking of the (1) A.I.R. (1923) Nag. 48. (2) (1896) 1 Ch. 496. (3) L.R. (1901) 1 K.B. 11. 431 account. Far from helping the appellant, the observations and the actual decision in that case support the respondents' contention. The reservation of the question of particular transactions presumably related only to the transactions prohibited by the Betting Act, 1853. Such of the

transactions which were so prohibited by the Betting Act would be illegal and therefore the contract of partnership could not operate on such transactions. The case of Saffery v. Mayer(1) related to a suit for recovery of money advanced by one person to another for the purpose of betting on horses on their joint account. The appellate Court held that by reason of the provisions of the Gaming Act, 1892, the action was not maintainable. This decision clearly turned upon the provisions of the Gaming, Act, 1892. Smith, M. R., observed that the plaintiff paid the money to the defendant in respect of a contract rendered null and void and therefore it was not recoverable under the second limb of that section. The other Lord Justices also based their judgments on the express words of the Gaining Act, 1892. It will be also interesting to note that the Court of Appeal further pointed out that Chitty, J., in Thwaites' Case(2) in deciding in the way he did omitted to consider the effect of the provisions of the Gaming Act, 1892, on the question of maintainability of the action before him. The aforesaid passage in Chitty's Contract must be understood only in the context of the provisions of the Gaming Act, 1892. The aforesaid discussion yields the following results: (1) Under the common law of England a contract of wager is valid and therefore both the primary contract as well as the collateral agreement in respect thereof are enforceable; (2) after the enactment of the Gaming Act, 1845, a wager is made void but not illegal in the sense of being forbidden by law, and thereafter a primary agreement of wager is void but a collateral agreement is enforceable; (3) there was a conflict on the question whether the second part of s. 18 of the Gaming Act, 1845, would cover a case for the recovery of money or valuable thing alleged to be won upon (1) L.R. (1901) 1 K.B. 11. (2) (1896) 1 Ch. 496. 432 any wager under a substituted contract between the same parties: the House of Lords in Hill's Case,(1) had finally resolved the conflict by holding that such a claim was not sustainable whether it was made under the original contract of wager between the parties or under a substituted agreement between them; (4) under the Gaming Act, 1892, in view of its wide and comprehensive phraseology, even collateral contracts, including partnership agreements, are not enforceable; (5) s. 30 of the Indian Contract Act is based upon the provisions of s. 18 of the Gaming Act, 1845, and though a wager is void and unenforceable, it is not forbidden by law and therefore the object of a collateral agreement is not unlawful under s. 23 of the Contract Act; and (6) partnership being an agreement within the meaning of s. 23 of the Indian Contract Act, it is not unlawful, though its object is to carry on wagering transactions. We, therefore, hold that in the present case the partnership is not unlawful within the meaning of s. 23(A) of the Contract Act.

Re. (ii)-Public Policy: The learned Counsel for the appellant contends that the concept of public policy is very comprehensive and that in India, particularly after independence, its content should be measured having regard to political, social and economic policies of a welfare State, and the traditions of this ancient country reflected in Srutis, Smritis and Nibandas. Before adverting to the argument of the learned Counsel, it would be convenient at the outset to ascertain the meaning of this concept and to note how the Courts in England and India have applied it to different situations. Cheshire and Fifoot in their book on " Law of Contract ", 3rd Edn., observe at page " 280 thus: ' The public interests which is designed to protect are so comprehensive and heterogeneous, and opinions as to what is injurious must of necessity vary so greatly with the social and moral convictions, and at times even with the political views, of different judges, that it forms a treacherous and unstable (1) (1921) 2 K.B. 351. 433 ground for legal decision These questions have agitated the Courts in the past, but the present state of the law would appear to be reasonably clear. Two observations may be made with some degree of assurance. First, although the rules already established by precedent must be moulded to fit the new conditions of a changing world, it is no longer legitimate for the Courts to invent a new head of public policy. A judge is not free to speculate upon what, in his opinion, is for the good of the community. He must be content to apply, either directly or by way of analogy, the' principles laid down in previous decisions. He must expound, not expand, this particular branch of the law. Secondly, even though the contract is one which prima facie falls under one of the recognized heads of public policy, it will not be held illegal unless its harmful qualities are indisputable. The doctrine, as Lord Atkin remarked in a leading case, " should only be invoked in clear cases in which the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds .......... In popular language ... the contract should be given the benefit of the doubt "." Anson in his Law of Contract states the same rule thus, at p. 216: "Jessel, M. R., in 1875, stated a principle which is still valid for the Courts, when he said: '-You have this paramount public policy to consider, that you are not lightly to interfere with the

freedom of contract '; and it is in reconciling freedom of contract with other public interests which are regarded as of not less importance that the difficulty in these cases arises..... We may say, however, that the policy of the law has, on certain subjects, been worked into a set of tolerably definite rules. The application of these to particular instances necessarily varies with the conditions of the times and the progressive development of public opinion and morality, but, as Lord Wright has said public policy, like any other branch of the Common Law, ought to be, and I think is, governed by 55 434 the judicial use of precedents. If it is said that rules of public policy have to be moulded to suit new conditions of a changing world, that is true; but the same is true of the principles of the Common Law generally. " In Halsbury's Laws of England, 3rd Edn., Vol. 8, the doctrine is stated at p. 130 thus: " Any agreement which tends to be injurious to the public or against the public good is void as being contrary to public policy................. It seems, however, that this branch of the law will not be extended. The determination of what is contrary to the so-called policy of the law necessarily varies from time to time. Many transactions are upheld now which in a former generation would have been avoided as contrary to the supposed policy of the law. The rule remains, but its application varies with the principles which for the time being guide public opinion. " A few of the leading cases on the subject reflected in the authoritative statements 'of law by the various authors may also be useful to demarcate the limits of this illusive concept. Parke, B., in Egerton v. Brownlow(1), which is a leading judgment on the subject, describes the doctrine of public policy thus at p. 123: "'I Public policy' is a vague and unsatisfactory term, and calculated to lead to uncertainty and error, when applied to the decision of legal rights; it is capable of being understood in different senses; it may, and does, in its ordinary sense, mean I political expedience', or that which is best for the common good of the community; and in that sense there may be every variety of opinion, according to education, habits, talents, and dispositions of each person, who is to decide whether an act is against public policy or not. To allow this to be a ground of judicial decision, would

lead to the greatest uncertainty and confusion. It is the province of the statesman, and not the lawyer, to discuss, and of the Legislature to determine, what is best for the public good, and to provide for it by proper enactments. It 1s the province of the judge (1) 4 H.L.C. 1, 123; 10 E.R. 359,408. 435 to expound the law only; the written from the statutes; the unwritten or common law from the decisions of our predecessors and of our existing Courts, from text writers of acknowledged authority, and upon the principles to be clearly deduced from them by sound reason and just inference; not to speculate upon what is the best, in his opinion, for the advantage of the community. Some of these decisions may have no doubt been founded upon the prevailing and just opinions of the public good ; for instance, the illegality of covenants in restraint of marriage or trade. They have become a part of the recognised law, and we are therefore bound by them, but we are not thereby authorised to establish as law everything which we may think for the public good, and prohibit everything which we think otherwise. " In Janson v. Driefontein Consolidated Mines, Ltd.(1) an action raised against British underwriters in respect of insurance of treasures against capture during its transit from a foreign state to Great Britain was resisted by the underwriters on the ground that the insurance was against public policy. The House of Lords rejected the plea. Earl of Halsbury, L.C., in his speech made weighty observations, which may usefully be extracted. The learned Lord says at page 491: In treating of various branches of the law learned persons have analysed the sources of the law, and have sometimes expressed their opinion that such and such a provision is bad because it is contrary to public policy; but I deny that any Court can invent a new head of public policy ; so a contract for marriage brokerage, the creation of a perpetuity, a contract in restraint of trade, a gaming or wagering contract, or, what is relevant here, the assisting of the King's enemies, are all undoubtedly unlawful things; and you may say that it is because they are contrary to public policy they are unlawful; but it is because these things have been either enacted or assumed to be by the common law unlawful, and not because a judge or Court have a right to declare that such and such (1) (1902) A.C. 484. 436

things are in his or their view contrary to public policy. Of course, in the application of the principles here insisted on, it is inevitable that the particular case must be decided by a judge; he must find the facts, and he must decide whether the facts so found do or do not come within the principles which I have endeavoured to describe-that is, a principle of public policy, recognised by the law, which the suggested contract is infringing, or is supposed to infringe. " These observations indicate that the doctrine of public policy is only a branch of common law and unless the principle of public policy is recognised by that law, Court cannot apply it to invalidate a contract. Lord Lindley in his speech at p. 507 pointed out that public policy is a very unstable and dangerous foundation on which to build until made safe by decision. A promise made by one spouse, after a decree nisi for the dissolution of the marriage has been pronounced, to marry a third person after the decree has been made absolute is not void as being against public policy: see Fender v. St. John-Mildmay (1). In that case Lord Atkin states the scope of the doctrine thus at p. 12: " In popular language, following the wise aphorism of Sir George Jessel cited above, the contract should be given the benefit of the doubt. But there is no doubt that the rule exists. In cases where the promise to do something contrary to public policy which for short I will call a harmful thing, or where the consideration for the promise is the doing or the promise to do a harmful thing a judge, though he is on slippery ground, at any rate has a chance of finding a footing........ But the doctrine does not extend only to harmful acts, it has to be applied to harmful tendencies. Here the ground is still less safe and more treacherous ". Adverting to the observation of Lord Halsbury in Janson v. Driefontein Consolidated Mines Ltd. Lord Atkin commented thus, at page 11: "............... Lord Halsbury indeed appeared to decide that the categories of public policy are closed, (1) (1938) A. C. 1. (2) (1902) A.C. 484. 437 and that the principle could not be invoked anew unless the case could be brought within some principle of public policy already recognised by the law. I do not find, however, that this view received the express assent of the other members of the House; and it seems to me, with respect, too rigid. On the other hand, it fortifies the serious warning illustrated by the passages cited

above that the doctrine should only be invoked in clear cases in which the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds ". Lord Thankerton summarised his view in the following terms, at p. 23: " In the first place, there can be little question as to the proper function of the Courts, in questions of public policy. Their duty is to expound, and not to expand, such policy. Thai does not mean that they are precluded from applying ail existing principle of public policy to a new set of circumstances, where such circumstances are clearly within the scope of the policy. Such a case might well arise in the case of safety of the State, for instance. But no such case is suggested here. Further, the Courts must be watchful not to be influenced by their view of what the principle of public policy, or its limits, should be ". Lord Wright, at p. 38, explains the two senses in which the words " public policy" are used : " In one sense every rule of law, either common law or equity, which has been laid down by the Courts, in that course of judicial legislation which has evolved the law of this country, has been based on considerations of public interest or policy. In that, sense Sir George Jessel, M. R., referred to the paramount public policy that people should fulfil their contracts. But public policy in the narrower sense means that there are considerations of public interest which require the Courts to depart from their primary function of enforcing contracts, and exceptionally to refuse to enforce them. Public policy in this sense is disabling 438 Then the noble Lord proceeds to lay down the following principles on which a judge should exercise this peculiar and exceptional jurisdiction: (1) It is clear that public policy is not a branch of law to be extended ; (2) it is the province of the judge to expound the law only; (3) public policy, like any other branch of the common law, is governed by the judicial use of precedents ; and (4) Courts apply some recognised principles to the new conditions, proceeding by way of analogy and according to logic and convenience, just as Courts deal with any other rule of the common law. The learned Lord on the basis of the discussion of case law on the subject observes at p. 40: " It is true that it has been observed that certain rules of public policy have to be moulded to suit now conditions of a changing world : but that is true of the principles of common law generally.

I find it difficult to conceive that in these days any new head of public policy could be discovered ". The observations of the aforesaid Law Lords define the concept of public policy and lay down the limits of its application in the modern times. In short, they state that the rules of public policy are' well-settled and the function of the Courts is only to expound them and apply them to varying situations. While Lord Atkin does not accept Lord Halsbury's dictum that the categories of public policy are closed, he gives a warning that the doctrine should be invoked only in clear cases in which the harm to the public is substantially incontestable, Lord Thankerton and Lord Wright seem to suggest that the categories of public - policy are well-settled and what the Courts at best can do is only to apply the same to new set of circumstances. Neither of them excludes the possibility of evolving a new bead of public policy in a changing world, but they could not conceive that under the existing circumstances any such head could be discovered. Asquith, L. J., in Monkland v. Jack Barclay Ltd. (1) restated the law crisply at p. 723: "The Courts have again and again said, that where a contract does not fit into one or other of these (1) (1951) 1 All E.R. 714. 439 pigeon-holes but lies outside this charmed circle, the courts should use extreme reserve in holding a contract to be void as against public policy, and should only do so when the contract is incontestably and on any view inimical to the public interest ". The Indian cases also adopt the same view. A division bench of the Bombay High Court in Shrinivas Das Lakshminarayan v. Ram Chandra Ramrattandas observed at p. 20: " It is no doubt open to the Court to hold that the consideration or object of an agreement is unlawful on the ground that it is opposed to what the Court regards as public policy. This is laid down in section 23 of the Indian Contract Act and in India therefore it cannot be affirmed as a matter of law as was affirmed by Lord Halsbury in Janson v. Driefontein Consolidated Mines, Limited (1902 A. C. 484 at p. 491) that no Court can invent a new head of public policy, but the dictum of Lord Davey in the same case that " public policy is always an unsafe and treacherous ground for legal decision " may be accepted as a sound cautionary maxim in considering the reasons assigned by the learned Judge for his decision ".

The same view is confirmed in Bhagwant Genuji Girme v.Gangabisan Ramgopal (2) and Gopi Tihadi v. Gokhei Panda (3). The doctrine of public policy may be summarized thus: Public policy or the policy of the law is an illusive concept; it has been described as " untrustworthy guide ", " variable quality ", " uncertain one ", " unruly horse ", etc. ; the primary duty of a Court of Law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which form the basis of society, but in certain cases, the Court may relieve them of their duty on a rule founded on what is called the public policy; for want of better words Lord Atkin describes that something done contrary to public policy is a harmful thing, but the doctrine is extended not only to harmful cases but also to harmful tendencies; this doctrine of public policy is only a branch of common law, and, (1) I.L.R. (1920) 44 Bom. 6. (2) I.L.R. 1941 Bom- 71. (3) I.L.R. 1953 Cuttack 558. 440 just like any other branch of common law, it is governed by precedents; the principles have been crystallized under different heads and though it is permissible for Courts to expound and apply them to different situations, it should only be invoked in clear and incontestable cases of harm to the public; though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days. This leads us to the question whether in England or in India a definite principle of public policy has been evolved or recognized invalidating wagers. So far as England is concerned, the passages from text-books extracted and the decisions discussed in connection with the first point clearly establish that there has never been such a rule of public policy in that country. Courts under the common law' of England till the year 1845 enforced such contracts even between parties to the transaction. They held that wagers were not illegal. After the passing of the English Gaming Act, 1845 (8 & 9 Vict. c. 109), such contracts were declared void. Even so; the Courts held that though a wagering contract was void, it was not illegal and therefore an agreement collateral to the wagering contract could be enforced. Only after the enactment of the Gaming Act, 1892 (55 Vict. c. 9), the collateral contracts also became unenforceable by reason of the express words of that Act. Indeed, in some of the decisions cited supra the question of public policy was specifically raised and negatived by Courts: See Thacker v. Hardy (1); Hyams v. Stuart King (2) ; and Michael Jeffrey & Company v. Bamford (3). It is therefore abundantly clear that the common law of England did not recognize any principle of public policy declaring wagering contracts illegal.

The legal position is the same in India. The Indian Courts, both before and after the passing of the Act (1) (1878) L.R. 4 Q.B. 685. (2) [1908] 2 K.B. 696. (3) (1949) 2 All E. R. 452. 441 21 of 1848 and also after the enactment of the Contract Act, have held that the wagering contracts are not illegal and the collateral contracts in respect of GI. them are enforceable. We have already referred to these in dealing with the first point and we need not A,, cover the ground once again, except to cite a passage from the decision of the Judicial Committee in Ramloll Thackoorseydass v. Soojumnull Dhondmull (1), which is directly in point. Their Lordships in considering the applicability of the doctrine of public policy to a wagering contract observed at p. 350: " We are of opinion, that, although, to a certain degree, it might create a temptation to do what was wrong, we are not to presume that the parties would commit a crime; and as it did not interfere with the performance of any duty, and as if the parties were not induced by it to commit a crime, neither the interests of individuals or of the Government could be affected by it, we cannot say that it is contrary to public policy." There is not a single decision after the above cited case, which was decided in 1848, up to the present day wherein the Courts either declared wagering contracts as illegal or refused to enforce any collateral contract in respect of such wagers, on the ground of public policy. It may, therefore, be stated without any contradiction that the common law of England in respect of wagers was followed in India and it has always been held that such contracts, though void after the Act of 1848, were not illegal. Nor the legislatures of the States excepting Bombay made any attempt to bring the law in India in line with that obtaining in England after the Gaming Act, 1892. The Contract Act was passed in the year 1872. At the time of the passing of the Contract Act, there was a Central -Act, Act 21 of 1848, principally based on the English Gaming Act, 1845. There was also the Bombay Wagers (Amendment) Act, 1865, amending the former Act in terms analogous to those later enacted by the Gaming Act, 1892. Though the Contract (1) (1848) 4 M.I.A. 339. 56 442 Act repealed the Act 21 of 1848, it did not incorporate in it the provisions similar to those of the Bombay Act; nor was any amendment made subsequent to the passing of the English Gaming

Act, 1892. The legislature must be deemed to have had the knowledge of the state of law in England, and, therefore, we may assume that it did not think fit to make wagers illegal or to hit at collateral contracts. The policy of law in India has therefore been to sustain the legality of wagers. The history of the law of gambling in India would also show that though gaming in certain respects was controlled, it has never been absolutely prohibited. The following are some of the gambling Acts in India: The Public Gambling Act (111 of 1867); The Bengal Public Gambling Act (11 of 1867); The Bombay Prevention of Gambling Act (IV of 1887); Madhya Bharat Gambling Act(LI of 1949); Madhya Pradesh Public -Gambling Act; Madras Gaming Act (111 of 1930); The Orissa Prevention of Gambling Act (XVII of 1955); the Punjab Public Gambling Act (111 of 1867); the Rajasthan Public Gambling Ordinance (Ordinance XLVIII of 1949) and the U.P. Public Gambling Act. These Acts do not prohibit gaming in its entirety, but aim at suppressing gaming in private houses when carried on for profit or gain of the owner or occupier thereof and also gaming in public. Gaming without contravening the provisions of the said Acts is legal. Wherever the State intended to declare a particular form of gaming illegal, it made "an express statute to that effect: See s. 29-A of the Indian Penal Code. In other respects, gaming and wagering are allowed in India. It is also common knowledge that horse races are allowed throughout India and the State also derives revenue therefrom. The next question posed by the learned Counsel for the appellant is whether under the Hindu Law it can be said that gambling contracts are held to be illegal. The learned Counsel relies upon the observations of this Court in The State of Bombay v. R. M. D. Chamarbaugwala (1). The question raised in that case was (1) [1957] S.C.R. 874. 443 whether the Bombay Lotteries and Prize' Competition Control and Tax (Amendment) Act of 1952 extending the definition of " prize competition " contained in s. 2(1)(d) of the Bombay Lotteries and Prize Competition Control and Tax Act of 1948, so as to include prize competition carried on through newspapers printed and published outside the State, was constitutionally valid, It was contended, inter alia, that the Act offended the fundamental right of the respondents, who were conducting prize competitions, under Art. 19(1) (g) of the Constitution and also violated the freedom of inter- State trade under Art. 301 thereof This Court held that the

gambling activities in their very nature and essence were extra commercium and could not either be trade or commerce within the meaning of the aforesaid provisions and therefore neither the fundamental right of the respondents under Art. 19(1)(g) or their right to freedom of interState trade under Art. 301 is violated. In that context Das, C. J., has collected all the Hindu Law texts from Rig Veda, Mahabharata, Manu, Brihaspati, Yagnavalkya, etc., at pp. 922-923. It is unnecessary to restate them here, but it is clear from those texts that Hindu sacred books condemned gambling in unambiguous terms. But the question is whether those ancient textbooks remain only as pious wishes of our ancestors or whether they were enforced in the recent centu- ries. All the branches of the Hindu Law have not been administered by Courts in India; only questions regarding succession, inheritance, marriage, and religious usages and institutions are decided according to the Hindu Law, except in so far as such law has been altered by legislative enactment. Besides the matters above referred to, there are certain additional matters to which the Hindu Law is applied to the Hindus, in some cases by virtue of express legislation and in others on the principle of justice, equity and good conscience. These matters are adoption, guardianship, family relations, wills, gifts and partition. As to these matters also the Hindu Law is to be applied subject to such alterations as have been made by legislative enactments: See Mulla's Hindu Law, para. 444 3, p. 2. In other respects the ancient Hindu Law was not enforced in Indian Courts and it may be said that they became obsolete. Admittedly there, has not been a single instance in recorded cases holding gambling or wagering contracts illegal on the ground that they are contrary to public policy as they offended the principles of ancient Hindu Law. In the circumstances, we find it difficult to import the tenets of Hindu Law to give a novel content to the doctrine of public policy in respect of contracts of gaming and wagering. To summarize: The common law of England and that of India have never struck down contracts of wager on the ground of public policy ; indeed they have always been held to be not illegal notwithstanding the fact that the statute declared them void. Even after the contracts of wager were declared to be void in England, collateral contracts were enforced till the passing of the Gamina Act of 1892, and in India, except in the State of Bombay, they have been enforced even after the passing of the Act 21 of 1848, which was substituted by s. 30 of the Contract Act. The moral prohibitions in Hindu Law texts against gambling were not only not legally enforced but were allowed to fall into desuetude. In practice, though gambling is controlled in specific matters, it has not been declared illegal and there is no law declaring wagering illegal. Indeed,

some of the gambling practices are a perennial source of income to the State. In the circumstances it is not -possible to hold that there is any definite head or principle of public policy evolved by Courts or laid down by precedents which would directly apply to wagering contracts. Even if it is permissible for Courts to evolve a new head of public policy under extraordinary circumstances giving rise to incontestable harm to the society, we cannot say that wager is one of such instances of exceptional gravity, for it has been recognized for centuries and has been tolerated by the public and the State alike. If it has any such tendency, it is for the legislature to make a law prohibiting such contracts and declaring them illegal and not for this Court to resort to judicial legislation. 445 Re. Point 3-Immorality: The argument under this head is rather broadly stated by the learned Counsel for the appellant. The learned counsel attempts to draw an analogy from the Hindu Law relating to the doctrine of pious obligation of sons to discharge their father's debts and contends that what the Hindu Law considers to be immoral in that context may appropriately be applied to a case under s. 23 of the Contract Act. - Neither any authority is cited nor any legal basis is suggested for importing the doctrine of Hindu Law into the domain of contracts. Section 23 of the Contract Act is inspired by the common law of England and it would be more useful to refer to the English Law than to the Hindu Law texts dealing with a different matter. Anson in his Law Of Contracts states at p. 222 thus : " The only aspect of immorality with which Court of Law have dealt is sexual immorality............. ." Halsbury in his Laws of England, 3rd Edn., Vol. makes a similar statement, at p. 138: " A contract which is made upon an immoral consideration or for an immoral purpose is unenforceable and there is no distinction in this respect between immoral and illegal contracts. The immorality here alluded to is sexual immorality." In the Law of Contract by Cheshire and Fifoot, 3rd Edn., it is stated at p. 279: " Although Lord Mansfield laid it down that a contract contra bonos mores is illegal, the law in this connection gives no extended meaning to morality but concerns itself only with what is sexually reprehensible." In the book on the Indian Contract Act by Pollock and Mulla it is stated at p. 157:

" The epithet " immoral " points, in legal usage, to conduct or purposes which the State, though disapproving them, is unable, or not advised, to visit with direct punishment." The learned authors confined its operation to acts which are considered to be immoral according to the standards of immorality approved by Courts. The case law both in England and India confines the operation of the doctrine to sexual immorality. To cite 446 Only some instances: settlements in consideration of encubinage, contracts of sale or hire of things to be used in a brothel or by a prostitute for purposes incidental to her profession, agreements to pay money for future illicit cohabitation, promises in regard to marriage for consideration, or contracts facilitating divorce are all held to be void on the ground that the object is immoral. The word " immoral " is a very comprehensive word. ordinarily it takes in every aspect of personal conduct deviating from the standard norms of life. It may also be said that what is repugnant to good conscience is immoral. Its varying content depends upon time, place and the stage of civilization of a particular society. In short, no universal standard can be laid down and any law based on such fluid concept defeats its own purpose. The provisions of s. 23 of the Contract Act indicate the legislative intention to give it a restricted meaning. Its juxtaposition with an equally illusive concept, public policy, indicates that it is used in a restricted sense; otherwise there would be overlapping of the two concepts. In its wide sense what is immoral may be against public policy, 'for public policy covers political, social and economic ground of objection. Decided cases and authoritative text-book' writers, therefore, confined it, with every justification, only to sexual immorality. The other - limitation imposed on the word by the statute, namely, " the court regards it as immoral ", brings out the idea that it is also a branch of the common law like the doctrine of public policy, and, therefore, should be confined to the Principles recognized and settled by Courts. -Precedents confine the said concept only to sexual immora- lity and no case has been brought to our notice where it has been applied to any head other than sexual immorality. In the circumstances, we cannot evolve a new head so as to bring in wagers within its fold. Lastly it is contended by the learned Counsel for the appellant that wager is extra-commercium and therefore there cannot be in law partnership for wager within the meaning of s. 4 of the Partnership Act; for partnership under that section is relationship between 447

persons who have agreed to share the profits of a business. Reliance is placed in respect of this contention on the decision of this Court in The State of Bombay v. R. M. D. Chamarbaugwala (1). This question was not raised in the pleadings. No issue was framed in respect of it. No such case was argued before the learned Subordinate Judge or in the High Court; nor was this point raised in the application for certificate for leave to appeal to the Supreme Court filed in the High Court. Indeed, the learned Advocate appearing for the appellant in the High Court stated that his client intended to raise one question only, namely, whether the partnership formed for the purpose of carrying on a business in differences was illegal within the meaning of s. 23 of the Contract Act. Further this plea was not specifically disclosed in the statement of case filed by the appellant in this Court. If this contention had been raised at the earliest point of time, it would have been open to the respondents to ask for a suitable amendment of the plaint to sustain their claim. In the circumstances, we do not think that we could with justification allow the appellant to raise this new plea for the first time before us, as it would cause irreparable prejudice to the respondents. We express no opinion on this point. For the foregoing reasons we must hold that the suit partnership was not unlawful within the meaning of s. 23 of the Indian Contract Act. In the result, the appeal fails and is dismissed with costs. Appeal dismissed

Negotiable Goods Act Heerachand vs Jeevraj And Anr. on 28 March, 1958 Equivalent citations: AIR 1959 Raj 1 Author: K Wanchoo Bench: K Wanchoo, I Modi, J Narayan JUDGMENT K.N. Wanchoo, C.J. 1. This appeal has been referred to a Full Bench by a learned Single Judge as it involves important questions of law. The learned Judge has framed the questions also, but finally referred the whole appeal to the Full Bench.

2. The facts leading to this second appeal may be briefly narrated to understand the point involved. A suit was brought by Himmatmal and another against Jeevraj and another on the basis of a 'hundi' said to have been executed by Jeevraj in favour of Himmatmal on Migsar Sud 15 Samwat 1993 (equivalent to 1936 A.D.). The date on which the suit was filed is 4-1-1943. The case of the plaintiffs was that Jeevraj owed Rs. 450 to them for which he had executed this 'hundi'. But as the 'hundi' was dishonoured, the present suit was brought for Rs. 450 as principal and Rs. 300 as interest. 3. The suit was resisted by Jeevraj defendant. He admitted the execution of the 'hundi', but his case was that Himmatmal wanted a loan from him. Jeevraj had no ready mone., He, therefore, gave this 'hundi' to Himmatmal and that the 'hundi' was-without consideration. He also disputed the allegation of the plaintiff that the 'hundi' was executed in Dhamli. His case was that it was executed in Soda-was and that the court of Sojat had no jurisdiction. 4. Four issues were framed by the Munsif in this connection which are these: 1. Did the plaintiff ask for a loan from the-defendant and in consequence the defendant gave this 'hundi' Ex. P. 1 to Himmatmal to enable him-to get the money? 2. Was the Hundi Ex. P. 1 executed at Dhamli and has the court jurisdiction to hear the suit? 3. Whether the 'hundi' was dishonoured by Keshrimal Mishrimal to whom it was addressed. 4. Is the plaintiff entitled to any relief? 5. The burden of proving the first issue was placed on the defendant. The defendant examined four witnesses in support of his case. The plaintiff examined six witnesses on his behalf. In his evidence the plaintiff definitely put forward the case that he had paid Rs. 450 in cash to Jeevraj when the 'hundi' Ex. P. 1 was executed. The Munsif, on a review of the evidence on both sides, came to* the conclusion that the defendant's case was proved and that no cash was paid by the plaintiff to the defendant when the 'hundi' was executed. He therefore dismissed the suit. 6. There was an appeal by the plaintiff which was dismissed by the Civil Judge who held that the conclusion of the Munsif on the main issue was correct and that Himmatmal had not paid anything in cash to Jeevraj and that the 'hundi' had been executed in the circumstances mentioned by Jeevraj.

7. Then came the present second appeal to this Court. The learned Single Judge was not prepared to agree with the findings of the courts below that the defendant had discharged the burden of proving issue No. 1, namely that the 'hundi' had been executed in order that Himmatmal may get a loan from Jeevraj. The learned Single Judge also came to the conclusion that the findings of the courts below that the plaintiff had failed to establish the case that a cash loan had been advanced to defendant Jeevraj and that the 'hunch' was executed in lieu thereof did not call for any interference. 8. In this state of the finding, the learned Judge was of opinion that three important tions of law arose for considertion which mulated as below : 1. Whether the rule as to presumption of consideration embodied in section 118 of the Negotiable Instruments Act is a technical provision which can come into play only where the Negotiable Instruments Act is in force or it is a matter of principle based on general considerations as to negotiability of certain instruments, and effect should as a matter of law be given to it, irrespective of the consideration whether the Negotiable Instruments Act as such may or may not have been in force at the time the instrument was executed or when a suit in relation thereto happens to be brought. 2. Assuming that the aforesaid presumption is a matter of principle and not a technical provision, will the presumption be of help to the plaintiff in that type of cases where the court comes to the finding that the evidence of the maker of the negotiable instrument as to failure of consideration is untrustworthy and also the evidence of the plaintiff fails to carry conviction in the sense that it fails to establish the consideration that is alleged or relied upon by him; or would it be correct in such cases to hold that both parties having led their entire evidence the matter then rests upon such evidence and not upon presumption at all. 3. Is it a correct proposition of law to say that the presumption available under section 118 stands rebutted merely because one kind of consideration has been mentioned in the negotiable instrument but another kind of consideration is admitted by the plaintiff to have passed from him or appears to have flowed from him, and in such circumstances the burden to prove consideration is shifted to the plaintiff; or in such a case, the true rule of law still is that the burden continues to remain upon the defendant and it is for him to satisfv the court that no consideration had passed, and if he fails to discharge that burden, he should still fail.

9. I shall first deal with the three questions referred to the Full Bench for answer and then go on to consider the entire case. Let me begin with the first question. The question as framed is general, but I prefer to deal with it so far as the point raised therein which I confine to section 118(a) applies to the former State of Marwar from which this case comes. Before I actually take up the consideration of the question, I should like to refer to Shrinarain v. Chunnilal, AIR 1957 Raj 159 (A), to which I was a party. That was also a case of a 'huudi', which was executed in the former State of Kishengarh where also the Negotiable Instruments Act (hereinafter referred to as the Act) was not in force. The main point, however, with which the Court was concerned in that case is covered by the third question which has been put to us. While dealing with that aspect of the matter, the following observation was made at page 160 : "Under the circumstances, we cannot strictly apply the technical provisions of section 118 of the Negotiable Instruments Act in the appellants' favour." 10. It is said that these observations, particularly the use of the word 'technical' in this sentence shows that the provisions of section 118 of the Negotiable Instruments Act are not matters of principle and cannot, therefore, be applied in areas where the Act was not in force. I should like to say that the first question which has been referred to this Bench was not under consideration in that case and the use of the word "technical' in the above suit should not be held to mean that the Court was then of opinion that section 118 was a mere technical provision with no principle behind it and that the presumptions which that section contains can never be applied to an area where the Act is not in force, The word 'technical' appears to have slipped into that sentence and should not be given the far reaching implication that is sought to be given to it. I propose, therefore, to examine whether the presumption raised in section 118(a) is a mere technical provision with no principle behind it, so that it cannot be enforced in an area where the Act is not in force irrespective of this sentence in that case. 11. Now let me turn to the state of things as it was in Marwar before the Act was introduced in 1949. It is undoubted that the provisions in the Act are not all technical provisions, but are based on principles which may be enforced in areas even where the Act was not applicable. I may in this connection refer to Kanhyalal v. Ramkumar, AIR 1956 Raj 129 (B), to which I was a party.

That was a case of the former State of Bikaner where also the Act was not in force. It was held in that case that the provisions of the Negotiable Instruments Act 1881 in terms cannot be held to apply to cases of 'hundis' arising in the former State of Bikaner, but the principles underlying those provisions must be held to be applicable as rules of equity, justice and good conscience or as being rules as are being observed generally in practice among the merchants in this country. It was also observed that the stringent or technical provisions of the Negotiable Instruments Act with respect to presentment or notice of dishonour cannot be called into operation in determining the liability in the ease of 'hundis' which came to be executed in a territory where there was no Act in force at the relevant time. But where such 'hundis' are in oriental language, the rights of the parties concerned with respect to these 'hundis' fall properly to be determined cnly on the basis of and in consonance with the principles underlying the Negotiable Instruments Act or in accordance with the general custom in vogue in dealing with such instruments among merchants in that part of the country. 12. It is clear, therefore, that even though the Act may not be in force in any particular area, the principles behind the Act may be applied as rules of equity, justice and good conscience, though what are called technical or stringent provisions in the Act may not be so applied. 13. Now let me turn to the state of law in Marwar with respect to the Act so far as it is possible to find it. I may in this connection refer to certain decisions of the Marwar Chief Court which deal with the Act. In Meghraj v. Tulsiram, 1938 Mar LR 91 (2) (Civil) (C), section 76 of the Act was considered and applied. In Mt Jamni v. Ramnath, 1938 Mar LR 132 (Civil) (D), section 79 of the Act was considered and applied. In Meghraj v. Naraindas, 1940 Mar LR 76 (Civil) (E), section 48 of the Act was considered and applied. In Lachhmansingh v. Karansee, 1947 Mar LR 94 (Civil) (F), section 64 of the Act was considered and applied. I have not been able to lay my hands on any case relating to the application of section 118 of the Act, But these cases do show that though the Act was not in force in the former State of Marwar, its provisions were being actually applied in terms in that State. Of course, it would not be right to deduce from these judgments that the Act was in force in terms in the former State of Marwar; but it would, in my opinion, be right to hold that even though the Act was not in force, certain

provisions of it which appeared to be based on principle were being applied as rules of equity, justice and good conscience. 14. Now the question is whether section 118(a) is merely a technical or stringent provision which should not be applied where the Act is not in force or there is some principle behind it and that principle should be applied even though the Act was not in force in the former State of Mar-war. I am of opinion that there is a principle behind section 118(a) and it is not a mere technical provision to be found in the Act. The principle is that there is a presumption of consideration in the case of a negotiable instrument. The reason for this presumption is that negotiable instrument passes from hand to hand on endorsement and it would make trading very difficult and negotiability of the instrument impossible unless such a presumption of consideration was made. The presumption, therefore, is a matter of principle to facilitate negotiability as well as trade. There was such a presumption of consideration at Common Law also in England till it was given statutory recognition, in section 80 of the English Bills of Exchange Act. In Byles on Bills page 125 the rule is stated in the following terms : "Consideration is presumed until the contrary appears or at least appears probable." In Halsbury's Laws of England, Third Edition, Volume 3 para 218 page 142, principles of negotiability are mentioned and presumption of consideration is one of them as will appear from the fcllowing : "The outstanding characteristics common to bills, cheques and notes which found expression in the cases decided before 1882 (this is the date of the English Bills of Exchange Act) and are embodied in the codifying statute are (1) that in the case of such instruments a valuable consideration is presumed, so that there is no necessity to state it." 15. Presumption, therefore, as to consideration is the very ingredient of negotiability and in the case of a negotiable instrument, presumption as to consideration has to be made. I have therefore no difficulty in coming to the conclusion that there is a principle behind Section 118(a) of the Act and it is not a mere technical provision which cannot be looked into where the Act is not in force.

16. The next question which arises then is the exact form of this presumption of consideration which may be applied as principle of equity, justice and good conscience in the absence of the Act. Section 118(a) has been the subject of innumerable rulings and it is not necessary to refer to them here. But I should like to refer to one case decided by the Bombay High Court and reported as Tarmahomed Haji Abdul Rehroan v. Tyeb Ebrahim, AIR 1949 Bom 257 (G). That case has explained the extent of the presumption under Section 118(a) of the Act. I feel, however, that the interpretation given in that case goes to the extreme of the extent of the presumption. I am not prepared to hold that the principle behind Section 118(a) is of that extreme nature. I have my doubts with all respects about the correctness of that extreme view, but it is not necessary for present purposes to go into that. It is enough to say that the principle behind Section 118(a) whatever may be the exact meaning of the terms used in the section, cannot be of that extreme character. The principle can only be as mentioned by Byles on Bills that consideration is presumed until the contrary appears or at least appears probable. To put it in the language of Indian enactments I would say that the principle behind Section 118(a) is that consideration shall be presumed in the case of a negotiable instrument. 17. Section 4 of the Evidence Act which was in force in the former State of Marwar also defines three terms, namely "may presume", "shall presume" and "conclusive proof". The first raises a discretionary presumption and it is open to the Court to raise a presumption or not. The second raises a compulsory presumption and the Court is bound to presume the fact to which such compulsory presumption applies as proved unless and until it is disproved. The words "conclusive proof" go a little further and where a law declares one fact as conclusive proof of another, the Court shall on proof of the one fact regard the other as proved and shall not allow evidence to be given for the purpose of disproving it. 18. Now to my mind, the principle behind the presumption of consideration under Section 118(a) is of the second kind, namely that the Court shall presume a negotiable instrument to be for consideration and shall regard the consideration as proved unless and until it is disproved. The conclusion, therefore, to which I arrive is that in the former State of Mar-war, the principle behind Section 118(a) was applicable and that principle was that the Court shall presume a negotiable instrument to be for consideration, that is it shall regard the consideration as proved

unless and until it is disproved. The word "disproved" is also defined in the Evidence Act us follows : ''A fact is said to be disproved when, after considering the matters before it, the Court either believes that it does not exist, or considers its non-existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it does not exist." 19. Applying this definition to the principle behind the presumption in Section 118(a) the principle comes to this. The Court shall presume a negotiable instrument to be for consideration unless and until after considering the matters before it, it either believes that consideration does not exist or considers the non-existence of the consideration so probable that a prudent man ought, under the cicumstances of the particular case, to act upon the supposition that the consideration does not exist. I would, therefore, say that the principle as explained by me above behind Section 118(a) was in force in the former State of Marwar even when the Act was not in force before 1949. 20. This brings me to the second question. I find some difficulty as to the form of the question. I know that the question as put is based on the decision of the Bombav High Court in Tarmahomed Haji Abdul Rehman's case (G), but I find it difficult to understand how a Court could deal with the evidence in two water-tight compartments, first saying that the evidence of the maker of the negotiable instrument as to failure of consideration is untrustworthy and then saying that the evidence of the plaintiff fails to establish the consideration that is alleged or relied upon by him and stopping short there. Even in such a case the Court has, in my opinion, to go further and come to the conclusion where there is presumption of consideration in the sense explained above whether the consideration has been disproved. If it comes to the conclusion that the consideration has been disproved, the presumption is rebutted and the plaintiff must fail. If, on the other hand, it conies to the conclusion that the consideration has not been disproved, the defendant would fail and the plaintiff would get a decree on the negotiable instrument. Whether the consideration has been disproved or not in a particular case has to be decided by the Court after considering all the matters before it and then deciding whether it believes that the consideration does not exist or considers its non-existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it does not exist.

That seems to be the only way in which the Court has to arrive at the conclusion whether the presumption of consideration, which it is bound to make in favour of the plaintiff in a case based on a negotiable instrument, has been displaced and the consideration has been disproved. The question, as put, seems to presume that the Court is not prepared to take the third step after it has taken two steps, namely that it has come to the conclusion that the evidence of the maker of the negotiable instrument as to failure of consideration is untrustworthy and also to the conclusion that the evidence of the plaintiff fails to establish the consideration that is alleged or relied upon by him. I am of opinion that in such a case the Court must take the third step also namely whether on a consideration of all the matters before it, it is of opinion that consideration has been disproved and there is no question of the Court not taking this third step and decreeing the suit after taking only these two steps on the basis of the presumption of consideration. It must, as the Evidence Act stands and as the words "shall presume" and "disproved" are defined in it, take this final step. I would, therefore, say in answer to the second question that the correct position in a case of this kind is that where both parties have led their entire evidence, the matter certainly rests on such evidence. It would, however not be correct to say that it does not rest upon presumption at all, for the Court cannot forget the presumption. It will always remember the presumption and judge the evidence in the light of the presumption, that is, it must come to the conclusion that the consideration has been disproved. In order to arrive at that conclusion, it will have to consider all the matters before it and then decide whether it believes that consideration does not exist or considers its non-existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it does not exist. If, however, I must answer the second question as it is put, my answer to the first part of it would be that if the Court is only prepared to take the two steps mentioned therein and is not prepared to take the further step indicated by me, the presump-tion will not be of help to the plaintiff. My answer to the second part of the question is that the correct position in such cases where both parties have led their entire evidence is that the matter rests upon such evidence, but the Court must not forget the presumption in favour of consideration and must come to the conclusion on the entire evidence whether the consideration has been disproved. 21. Then I come to the third question. The whole case has been referred to us and I am of opinion that on the facts of this case, the third question does not arise, for there is no variation of

considera-tion at any stage in this case. I would, therefore, not express any opinion on this question at present and leave it to be considered in a case where the variation arises. Till then the view taken in Shrinarain's case (A) which was directly concerned with this question must stand. 22. Let me now turn to the facts of this case. As I have already said earlier, the view of the learned Single Judge was that the defendant's evidence as to failure of consideration was untrustworthy. His view also was that the evidence of the plaintiff tailed to establish the consideration that was alleged and relied upon by him. I have already said that in such circumstances the presumption cannot be of help to the plaintiff and a decree cannot be passed merely on the presumption and the Court must take the third step which is necessary, namely whether the consideration has been disproved in this case after considering the entire evidence both of the plaintiff and the defendant. I am of opinion that on a consideration of the entire evidence both of the plaintiff and the defendant, I would be prepared to say that the consideration has been disproved. Therefore, though the Court was bound to presume consideration until it was disproved on a consideration of all the matters before it, I am of opinion that it has been disproved in the circumstances of this case within the meaning of the word "disproved" in Section 3 of the Evidence Act. I would therefore dismiss the appeal, but in the circumstances leave the parties to bear their own costs throughout. Jagat Naeayan, J. 23-24. I respectfully agree with my Lord the Chief Justice both in respect of the manner in which the questions referred to us should be answered and the manner in which the appeal should be disposed of. I.N. Modi, J. 25. I have had the advantage of perusing the judgment of my Lord the Chief Justice in this appeal which has come before this Full Bench on reference from a single Judge. As a few questions of general importance are involved in this appeal, and as the findings to which I have felt persuaded to come unfortunately do not coincide with those of my Lord on some of the points raised in the appeal or as to the final conclusion thereof, it has become necessary for me to state my conclusions separately together with the reasons therefor. 26. The facts in so far as they are material and which have culminated in the present reference may be shortly stated as follows. It would be convenient to refer to the appellant as plaintiff and

the respondents as defendant for the purposes of this judgment. The plaintiff brought this suit against the defendant on the footing of a Hundi alleged to have been executed by the defendant for ,a sum of Rs. 450/- on Migsar Sudi 15, Smt. 1993 (equal to some time in 1936 A. D.). The said defendant drew this Hundi in favour of the plaintiff on one Kesrimal Misrimal of Chikjajur, a village in the former State of Mysore. The plaintiff was a resident of village Dhamli (Paragana. Sojat) and the defendant of a village called Sodawas (Paragana Pali) -- both being in the former State of Jodhpur though the latter lived in village Kherwa. in Pargana Pali at the time the Hundi was executed. Kesrimal Misrimal conveyed their refusal to honour this Hundi by a letter dated Poh Badi 5, Smt. 1993. Consequently, the Plaintiff instituted this suit for Rs. 450/- as principal and Rs. 300/- as interest, total Rs. 750/- on 21-12-1942. 27. The defendant Jeevraj (the other defendant remaining ex parte) admitted to have executed the Hundi in suit but traversed the claim on the ground that he had received no consideration in lieu of the Hundi from the plaintiff. The defendant came out with a counter-story. That story was that the plaintiff was in need of money and he came to the defendant's village and wanted a loan from the defendant, The latter had no ready money with him and so he gave the Hundi in suit on Kesrimal Misrimal at Chikjajur. It may also be stated in this connection that the defendant's case was that he was a partnr of Kesrimal's firm in Chikjajur in Samvvat 1993 --but had separated from it, a year later, and that Kesrimal's alleged letter refusing to honour the Hundi had been secured by the plaintiff by collusion with the said Kesrimal later and not on Poh Badi 5, Smt, 1993 as alleged. 28. The Munsiff dismissed the suit on the main ground that the defendant's version that he had executed the Hundi by way of advancing a loan to the plaintiff was correct. On appeal the Civil Judge upheld the same finding and maintained the dismissal of the suit. A second appeal was then filed in the High Court which came before me sitting singly. As some important questions of law emerged for decision particularly in view of a bench decision of this Court in AIR 1957 Raj 159 (A) to which I propose to refer in some detail later, I proposed this reference to a full bench. 29. It is necessary at this stage briefly to point but what were the difficulties which made it necessary for this appeal being referred to the full bench. The main reason was whether the presumption as to consideration embodied in Section 118(a) of the Negotiable Instruments Act

was attracted into application in the circumstances of this case. I may state at once that the Negotiable Instruments Act as such was not in force in the former State of Jodhpur either at the time the Hundi in suit was executed or when the present suit was brought. There were, however, a number of decisions of the Chief Court of the former State of Jodhpur which unmistakably lead to the inference that the principles underlying the Negotiable Instruments Act were time and again held to be applicable in that State, as it then was. These decisions have been referred to in the judgment of my Lord the Chief Justice and are 1938 Mar LR 91(2) (C); 1938 Mar LR 132 (D); 1940 Mar LR 76 (E) and 1947 Mar LR 94 (F). On the strength of these decisions, I have no doubt that if this case had come up before the Chief Court or later the High Court of the former State of Jodhpur, that court would not have had any hesitation in applying (at least) the principle embodied in Section 118(a) of the Negotiable Instruments Act. It was, however, strenuously argued before me sitting singly that the decision of the division bench in AIR 1957 Raj 159 (A) was authority for holding that the rule as to presumption of consideration embodied in Section 118 or the Act was in the nature of a technical rule of law applicable only where the Negotiable Instruments Act was in force, and that it could not be applied elsewhere except in so far as it may be applied as a presumption under Section 114 of the Evidence Act. The decision in Shri Narain's case (A), with all respect, seemed to me to require fuller examination by larger bench, hence a reference to a full bench seemed to me to be called for. (30) Another difficulty which arose before me was caused by the fact that the judgment of the learned Civil Judge on appeal, seemed, and still seerns to me, to be vitiated by his entirely wrong approach to the case, inasmuch as he decided the appeal before him as if the burden of proving the main issue in this case lay on the plaintiff. I should like at this stage to reproduce the issue itself, so that we know how the case proceeded to trial. This issue translated into English runs as follows: "Did the plaintiff ask for a loan from the defendant and in consequence the defendant gave this Hundi Ex. P. 1 to Himmatmal to enable him to get the loan." The burden of this issue was obviously placed upon the defendant. 31. The learned Civil Judge, however while dealing with this case discussed the plaintiffs evidence, to begin with, in more than three pages of his judgment, and then came to the

conclusion that the plaintiffs story that he had advanced a cash loan of Rs. 450/- to the defendant was not worthy of reliance. Thereafter in a single paragraph covering just a few lines, he dealt with the defendant's evidence and expressed himself in the following words : -"I am further fortified in holding this view when I see that the defendant Jeevraj as D.W. 4 and his witnesses D.W. 1 Pukhraj and D.W. 3 Meg-raj satisfactorily prove the story of the defence. D.W. 3 Megraj's statement cannot be discarded simply because he is related to the defendant unless he appears to be biassed. Hence I hold that Ex. P-l is void for want of consideration." 32. This is the entire discussion of the evidence of the defendant in the judgment of the court of first appeal. In such circumstances I was (and am) definitely of the opinion that the judgment of that court was entirely vitiated and robbed of much of the value that would have otherwise attached to it as a final court of fact, and I felt constrained to go into that evidence independently of what the first court of appeal had said about it. On an independent appraisal of that evidence, I clearly formed the opinion and to this opinion I still adhere, for reasons which I shall have occasion to mention at some length presently, that the defendant's version that the Hundi had been executed by him by way of a loan to the plaintiff was quite false and no reliance could possibly be placed on it. I must further mention here that even so I was also not impressed with the veracity of the plaintiff's evidence to the effect that the defendant had executed the Hundi in suit for a cash loan of Rs. 450/- and formed the opinion that the plaintiff's evidence in support of that story could not be accepted at its face value. 33. It was in these circumstances that a somewhat difficult situation arose, and it became a serious question for consideration whether if at all, and if so, how far the presumption underlying Section 118 of the Negotiable Instruments Act was attracted into application in this case, or whether the rule embodied in Clause (a) of that section was a sort of a technical provision as stated by the Bench of this Court in Shri Narain's case (A), and, therefore, no help could be derived from the said rule in those areas where the Negotiable Instruments Act was not in force; and further assuming that the presumption as to consideration did arise, how it would work out in a case like the present where the evidence of both sides failed to carry conviction. It was strenuously argued before me sitting singly that the provision contained in Section 118(a) was a technical rule of evidence as held in Shri Narain's case (A) and that I was bound by that

decision as a Single Judge. Consequently, I decided to make the present reference, and though I propounded a few questions to concentrate attention on the salient points which seemed to me to arise for determination, I thought it best, having regard to all the circumstances of the case, to refer the entire appeal to the, Full Bench for decision. The following questions were framed by me in this connection:-(1) Whether the rule as to presumption of consideration embodied in Section 118 of the Negotiable Instruments Act is a technical provision which can come into play only where the Negotiable Instruments Act is in force or it is a matter of principle based on general considerations as to negotiability of certain instruments, and effect should as a matter of law be given to it, irrespective of the consideration whether the Negotiable Instruments Act as such may or may not have been in force at the time the instrument was executed or when a suit in relation thereto happens to be brought. (2) Assuming that the aforesaid presumption is a matter of principle and not a technical provision, will the presumption be of help to the plaintiff in that type of cases where the court comes to the finding that the evidence of the maker of the negotiable instrument as to failure of consideration is untrustworthy and also the evidence of the plaintiff fails to carry conviction in the sense that it fails to establish the consideration that is alleged or relied upon by him; or would it be correct in such cases to hold that both parties having led their entire evidence the matter then rests upon such evidence and not upon presumption at all. (3) Is it a correct proposition of law to say that ths presumption available under Section 118 stands rebutted merely because one kind of consideration has been mentioned in the negotiable instrument but another kind of consideration is admitted by the plaintiff to have passed from him or appears to have flowed from him and in such circumstances the burden to prove consideration is shifted to the plaintiff; or in such a case, the true rule of law still is that the burden continues to remain upon the defendant and it is for him to satisfy the court that no consideration had passed, and if he fails to discharge that burden, he should still fail. 34. Now before I address myself to the aforesaid questions, I should like to dispose of a preliminary objection which was forcefully raised before the Full Bench by learned counsel for the defendant. That objection, put briefly, was that both courts below had held that the Hundi was without consideration and that this finding was binding upon the High Court, that is as much on the single Judge as also upon the Full Bench, no matter that the impugned finding was erroneous.

Reliance was placed in support o this submission on the decisions of the Privy Council in Mahipati Surya Rao v. Secy, of State, AIR 1929 PC 152 (H), and Ramji Patel v. Rao Kishore Singh, AIR 1929 PC 190 (I). I have carefully examined this contention and am categorically of the view that, howsoever plausible the contention may seem, it is without any merit. I have already pointed out above what the precise issue settled by the trial court on this aspect of the case was and need not repeat it. The burden of proving that issue was laid, and rightly laid, on the defendant. I have also shown how the learned Judge of the appellate court below disposed of that issue. He dealt with the case as if the burden of proving this issue rested on the plaintiff, and having dealt with the plaintiffs evidence at considerable length he came to the conclusion that it did not inspire confidence. The learned Judge then directed his attention to the defendant's evidence (let it be remembered that the burden of proof was on the defendant) and dealt with it in a very summary, if not perfunctory manner and contented himself by saying that he was "fortified" in the view he came to because the defendant's evidence was as he roundly put it satisfactory and he saw no reason to discard it. Now what I firmly maintain, with all respect is that the approach of the learned Civil Judge in the appeal before him was thoroughly wrong and inverted. His discussion of evidence was naturally one sided. Leaving entirely out of account the consideration that the judgment of a first court of appeal to which the law in our country attaches a finality on questions of fact should show that such court has applied its own judicial mind to all important evidence on the record, what in my opinion vitiates the judgment of the Civil Judge is that he disposed of the appeal before him from an entirely wrong angle, that is, as if the burden of issue No. 1, which was the main issue in the case, lay upon the plaintiff. I am, therefore, unhesitatingly of the opinion that such a judgment cannot be rightly held to be binding on this Court in second appeal. I am also of opinion that a faulty approach like this in itself is a good ground for second appeal for that amounts to an error of law. I would invite attention in this connection to Ganga Ram v. Rulia, AIR 1921 Lah 128 (J), Rangavva v. Seshappa, AIR 1927 Bom 228 (K), and Pandurang v. Tukaram, AIR 1934 Nag 253 (L). Lastly, there is a judgment of their Lordships of the Privy Council reported in the same volume from which learned counsel for the defendant has cited certain cases in support of his contention and that judgment appears at page 13 (W. C, Macdonald v. Fred Latimer, AIR 1929 PC 13) (M). Their Lordships made the following observation in dealing with the appeal before them which in my opinion concludes the matter:

"Their Lordships would further observe that all the courts below seem to have thrown the onus upon the appellant of proving that the properties he claimed were his own instead of placing it as it should be upon the plaintiff. 'It therefore appears to their Lordships that there is no question of tact so found that can be binding upon the appellate court on a second appeal,' and that it is necessary for them to consider what is the true position". (The underlining here in ' ' is mine). The principle of the aforesaid decision fully applies to this case and concludes the preliminary objection as untenable. I have, therefore, no hesitation in holding that the judgment of the lower court of appeal cannot be of binding force on this Court whether in single bench or before this full bench, and the result, therefore, must be that the whole case is open before this Court, and it is for this Court to determine what the true position is without being tramelled by the consideration that the Civil Judge's finding on the issue in question is against the plaintiff. 35. I now turn to consider the question propounded for answer by the full bench. 36. Now, taking up the first question first, "the point for determination is whether the rule embodied in Section 118(a) of the Negotiable Instruments Act enshrines a general principle which ought to be held to apply to a negotiable instrument like the Hundi in the present case, regardless of the consideration that the Negotiable Instruments Act was not in force in the former State of Jodhpur at the time the Hundi was executed or it is a technical provision which applies and can be made use of only in those places where the Negotiable Instruments Act has, as such been brought into force. This brings us back to decision of the bench of this Court in Shri Narain's case (A). That was also a case based on Hundi and the Hundi was executed in the former State of Kishengarh at a time when the Negotiable Instruments Act was not in force there. It appears to have been stated in the plaint in that case that the Hundi was drawn partly for cash consideration and partly for the balance which was payable by the defendant on accounting. The terms of the Hundi are not given in the judgment, but it seems to have been taken for granted that the Hundi was written for cash. In these circumstances it was contended before the bench that the consideration which was mentioned in the Hundi was different from the consideration pleaded by the plaintiffs in their plaint, and, therefore the burden of proving the consideration was on the plaintiffs themselves and that the trial court had rightly placed the burden on them. It was in these circumstances that the Bench made the following observation :

"We cannot strictly apply the technical provisions of Section 118 of the Negotiable Instruments Act in the appellant's favour. It is settled law that when the execution of a document is admitted by the executant thereof, the burden of proving want of consideration lies on him; but if the plaintiff pleads a consideration different from that which is mentioned in the document sued upon, then the burden still rests upon the plaintiff to prove the consideration pleaded by him." Now, it may be accepted at once that all the provisions of the Negotiable Instruments Act cannot be bodily applied where the Act is not in force, as many of such provisions do not embody any principle at all but are technical rules, or matters of mere procedure. It would, therefore, have to be decided with respect to each such provision when it is sought to be applied to a particular case, where the Negotiable Instruments Act was not in force as to whether the provision sought to be applied embodies a principle, and if so, what that principle precisely is. This is what was said by the bench in AIR 1956 Raj 129 (B), to which I was a party, in connection with a suit which arose from the former State of Bikaner, where also the Negotiable Instruments Act was not in force. The question which mainly arose for decision in that case was whether a notice of dishonour to an endorser under Section 35 of the Negotiable Instruments Act by an endorsee was a requirement of principle which must be enforced by the courts even when the Act may not have been in force. After a careful discussion of the relevant matters, it was held that "a notice of dishonour must be given so far as the endorser is concerned and we consider that to be a matter of principle and not a mere technicality and we further consider that failure to give a notice of dishonour within reasonable time must absolve the endorser from all liability to the holder." It was further observed that "that is the principle which underlies Section 35 of the Negotiable Instruments Act, and must be enforced in the case of Hundis even though the Act may not in terms be applicable to them. This rule is in perfect accord with justice, equity and good conscience." At the same time it was held that the provisions as to adequacy of time for the notice of dishonour were in the nature of technical provisions and a strict compliance thereof need not be called for where the Negotiable Instruments Act as such has not been brought into force, and that the only requirement of principle in this regard would be that the notice given must be reasonable having regard to the surrounding circumstances of each particular case and the nature of the instrument involved and the usual course of dealing with respect to it.

37. It clearly seems to me that in order to determine whether a particular provision contained in the Negotiable Instruments Act, or for that matter in any other Act, the application whereof may be similarly invoked is a matter of principle or not, and if so to what extent, we must primarily look at the provision itself, find out its object and determine its general applicability or otherwise having regard to that object, and also take into account the consequences which would ensue by a refusal to apply such a provision in the light of public interest and it is only in this manner that we can decide about the character of a given provision as to whether it is a matter of principle or otherwise. Section 118, Clause (a) is in the following terms: "118. Until the contrary is proved, the following presumptions shall be made: (a) that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration." 38. Now I am willing to concede that we are not strictly called upon to determine in the present case the exact force and effect of the language of Section 118 with reference to Clause (a) thereof as the present is not a case which can be held to be governed in terms by the said section, and therefore, I think it best not to enter into any controversy for the purposes of the present appeal whether the interpretation put upon it by the learned Judges in AIR 1949 Bom 257 (G), is correct or not; but even without entering into that controversy, I am disposed to hold the view that it may be safely postulated that this clause embodies not, in any real sense, a merely technical provision but a far reaching principle and the principle embodied in the section in so far as it is material for the purposes of this appeal is that a negotiable instrument "shall be" presumed or deemed to have been made for consideration. The reason is not far to seek and is this. The one fundamental characteristic of instruments (for which provision has been made in the Act under consideration) is that such instruments are negotiable. In other words, they admit of being passed on from hand to hand like cash, and this is preeminently true of Hundis. The Legislature has obviously enacted this provision in the general interests of trade and traders. It is well-known that the Indian Negotiable Instruments Act is broadly speaking based upon the principles of English law, and under that law also^ a negotiable instrument is deemed to be for consideration. The relevant portion of Section 30 of the Bills of Exchange Act reads as follows;

"Every party whose signature appears on a bill is prima facie deemed to have become a party thereto for value." Again, a negotiable instrument is one which when transferred by delivery or by indorsement and delivery, as the case may be, passes to the transferee a good title to payment quite irrespective of the title of the transferor provided of course he is a bona fide holder for value without notice of any defect attaching to the instrument or in the title of the transferor. A negotiable instrument is thus a substitute 'par excellence' for money and as has been aptly said, "the party to whom such a bill of exchange is intended has only to read it, need look no further and has nothing to do with any private history that may belong to it." Now, this rule as to consideration, to my mind is clearly an inevitable deduction from the element of negotiability inherent in such instruments both according to law and the general custom in daily vogue in what may be called the trading world. It is that the Indian Act has put Section 118 under the heading "Special rules of evidence", but this is certainly not to say that this or the other rules enacted in this section are technical rules. I may again point out that if this rule were not to be regarded as a matter of principle, then the position of Hundis and the lot of those who may have had anything to do with their execution or acceptance would be reduced to a state of utter precariousness and the channels of trade would be thrown into tremendous confusion. That the learned Judges of the Chief Court of Marwar in cases relating to negotiable instruments were prepared to follow several provisions of law contained in the Negotiable Instruments Act in 1938 and onwards clearly shows to my mind at least this much that the learned Judges were prepared to adopt the provisions of the said Act to regulate dealings in negotiable instruments in so far as they were matters of principle because the adoption of a contrary practice would not have been in the interests of trade and would have made things needlessly complicated and uncertain in the commercial circles in this part of the country. It was contended by learned counsel for the defendant that the only rule of presumption which we should recognise as properly deducible from Clause (a) of Section 118 where the Negotiable Instruments Act is not in force is that such a presumption may be raised and not that it shall or must be raised. I am definitely of the opinion that this submission cannot be accepted.

The acceptance of such a view would place negotiable instruments on the same level as ordinary documents. Such a course would, to my mind, be an unwarranted infliction upon traders in this part of Rajasthan in relation to Hundis executed before 1949, when the Negotiable Instruments Act was first brought into force in the former Jodhpur State. Besides the adoption of this view would be clearly ruinous to the interests of trade and traders and would throw unnecessary confusion into the commercial circles. I may also add that such an answer would be entirely contrary to the tenor or decisions given by the highest Court in the former State of Marwar having regard to its decisions given over a number of years with, reference to several other sections of the Negotiable Instruments Act. 39. My answer, therefore, to the first question is that the rule as to consideration enacted in Clause (a) of Section 118 is essentially a matter of principle, and it is not a technical provision with the result that the Courts are bound to presume a negotiable instrument to be for consideration even though the Negotiable Instruments Act as such may not have been in force at the time the instrument was executed, and that this principle is founded upon and flows from the very element of negotiability which is an inherent and fundamental characteristic of such instruments. 40. I next turn to the second question. 41. Now before I deal with the second question, I consider it proper and desirable to deal with the evidence led by the parties on the main issue in this case and in particular with the evidence of the defendant upon whom the burden thereof was laid by the trial Court. The issue, if I may repeat it for facility of understanding was settled like mis : "Did the plaintiff ask for a loan from the defendant and in consequence the defendant gave the Hundi Ex. P-1 to Himmatmal to enable him to get the money". The defendant produced D.W. 1 Pukhraj and D.W. 3 Megraj apart from examining defendant Teevraj himself in support of his case. I shall briefly examine this evidence now. 42. The evidence of Pukhraj is that the plaintiff Himmatmal had asked for a loan for Rs. 400/- or Rs. 500/- from defendant Jeevraj in his presence. Jeevraj said that he had no money with him and that he could draw a Hundi upon Kesrimal Misrimal at Chikjajul, and he identified the Hundi Ex. P-2 to be the same which had been written by Jeevraj. According to this witness, Jeevraj had

inquired from him whether the Hundi had been properly written, whereupon the witness told him that it was all right. This witness is a resident of Pali and he states to have gone to Kherwa on that day to purchase wool which, surprisingly, he does not seem to have' cared to purchase at all. This witness is a businessman who has a shop in Pali. He was asked whether the expenses of his going to Kherwa were written in his account-books, and he evaded the question by saying that he had gone to Kherwa on foot, and therefore, had incurred no expenditure. There is nothing in the evidence of this witness to show why he happened to go to the defendant's house. He admitted that the defendant had no business dealings or Khata with him (the witness) at all. This witness seems to me to be a pure and simple chance witness. No reliance can be placed upon the evidence of such a witness. 43. The next witness D.W. Meghraj's evidence is, in my opinion, no better. He doubtless supports the story of the advance of a loan to the appellant by means of the Hundi. He is, however, the husband of defendant Jeevraj's own sister, a relationship which he seems to have been prepared not to disclose in his examination-in-chief and which he was compelled to admit in his cross-examination. I am not surprised therefore if this witness was prepared to support the defendant who is his brother-in-law in whatever the latter said. This witness was also asked whether he knew that there were any earlier dealings between the plaintiff and the defendant, and he deposed that he did not know. This witness also said that the main reason why Jeevraj gave the Hundi on Kesrimal at Chikjajur was that the defendant's brother Hemraj was in service at the shop of Kesrimal -- a story which the defendant Jeevraj does not himself propound. 44. The only other witness on the point is the defendant Jeevraj himself. He is the main witness in the case, and if his story does not inspire confidence, the rest of the evidence, in my opinion, cart-not improve his case, and is of little consequence in a case like this. His story is that Himmatmal had come to him in Kherwa and asked him for a loan of Rs. 400/- to Rs. 500/- whereupon the latter said that he could give a Hundi, as he had no ready money with him. Thereupon Himmatmal said that Jeevraj might give a Hundi, and this is how the Hundi was executed by him. In his cross-examination, this defendant clearly admitted that there were dealings between him and Himmatmal from before and that the earlier Khatas should be in

possession of the plaintiff. This part of the defendant's evidence is in my opinion not without significance. To my mind, it strongly suggests that the plaintiff was the lending party and financially better placed than the defendant, and, consequently, the story that the plaintiff required to borrow or hoped to obtain money from the defendant sounds not a little strange. Earlier Jeevraj had stated in his exa-mination-in-chief that 15 days after the Hundi had been executed, Himmatmal again came to Kherwa and told Jeevraj that he had no need for money, and that he had not sent the Hundi to Kesrimal Misri-mal, and, therefore, Jeevraj sent a letter to Kesri-mal Misrimal that the Hundi should not be cashed. Now, I have no hesitation in saying that the story of the defendant being in a position to lend money to the plaintiff is highly improbable. Besides, if one wants to arrange for a loan and undertakes a journey for it, one would require to have it handy and soon enough, and a Hundi on a firm (in which the defendant was a partner) in Mysore would under such circumstances not be found convenient at all for a person in need of money, and there was no sense, therefore, in Himmatmal being content with such an arrangement This is not all. The further story propounded by Jeevraj that Himmatmal had come to Kherwa just to inform him (Jeevraj) that he was no longer in need of money also sounds to me to be artificial to a degree. But if that story is correct as the defendant would have us believe then one should have clearly expected Jeevraj to take back or at least ask for the Hundi back as it was clearly a document which was very much liable to mis-use; but curiously enough, Jeevraj does not say a word on that aspect of the matter. 45. Having carefully considered the entire evidence of the defendant, therefore, I have no hesitation in coming to the conclusion that the defendant's story that he had executed the Hundi Ex. P-l by way of advancing a loan to the plaintiff is patently false and cannot be believed for a moment. 46. Now, if the matter had rested at this, this case would not have offered any serious difficulty in its decision, and the plaintiff would be clearly entitled to succecd on the ground that the defendant had failed to discharge me burden which lay upon him to disprove consideration. A good deal of confusion bas been created in the present case because the plaintiffs also led evidence to show that a cash considera tion of Rs. 450/- had been advanced to the defendant in lieu of which the lattei bad executed the Hundi..

Both plaintiffs Himmatmal and Hirachand exa-mined themselves, and they also produced P.W. 1: Chandmal, P.W. 2 Lumbaram and P.W. 6 Ganesh, This evidence has not been believed by the two Courts below, and having been taken through it myself, I am not prepared to hold that this evidence can be taken at its face value. The plaintiff's evidence is briefly as follows. 47. P.W. 1 Chandmal deposed that Jeevraj had executed the Hundi Ex P-l at Dhamli (where the plaintiff lived) in his presence. The witness was asked whether money had been given to Jeevraj in his presence by Himmatmal, and his reply was that money was lying there, and then he said that Jeevraj might have been paid the money but the witness appears to have been put in a state of considerable hesitancy and eventually said that Himmat-mal had given the money to Jeevraj in bis pre-sence. The evidence of this witness does not inspire confidence. 48. The evidence of P.W. Lumbaram is that he had met Jeevraj and Himmatmal at the house of Dulechand where he had gone to inquire after the latter's health and Jeevraj and Himmatmal were also there. Himmatmal asked for money in lieu of the Hundi to which Jeevraj's reply was that he would give it after some time. Thereupon Himmatmal said that if Jeevraj had no money he might give another Hundi. This evidence obviously relates to the non-payment of money in lieu of the Hundi in suit and it sounds strange that Himmatmal should have asked for another Hundi when the first one, which he had, had turned out to be of no use. 49. The evidence of P. W. Ganesh is that some money was due from him to the plaintiff and that Hirachand had come to him to ask for money in Section 1993, and Ganesh's version is that he was told by Hirachand that some money had to be given to Jeevraj who had come to Hirachand for the purpose. Thereupon according to the witness, he immediately gave Rs. 500/- to the plaintiff Heera-chand, and later when he went to Himmatmal's house he found defendant Teevraj there and had a talk with him. Heerachand of course supports this story. It is curious, however, that this story was not mentioned by Himmatmal when he had given his evidence earlier with respect to issue No. 1. Him-matmal's story simply is that he had given Rs. 450/-in cash to defendant Jeevraj at his village Dhamli where the latter had come and thereupon the latter had given him a Hundi in the name of Kesrimal Misrimal. He also said that be had written a letter to Kesrimal Misrimal whether they would be prepared to encash the Hundi in which case he might send it over to them. Kesrimal's reply was an emphatic negative, vide Ex. P2.

A question was put to the witness whether he maintained any Rokar or Nakal Bahi to which his reply was that he did not. He was also asked why he took a Hundi from Jeevraj on firm Kesrimal Misrimal The reply of Himmatmal was that defendant Jeevraj's brother Hemraj was in service at that shop; and we have it from the defendant Jeevraj himself that he was a partner of the firm Kesrimal Misrimal. This witness stated that when he gave the money, Chandmal and Jeevraj were present. The name of Hirachand was not mentioned among those present nor did Himmatmal say that money had been sent for from Ganesh through Heerachand and that Ganesh had paid it. In these circumstances I am not prepared to hold that the plaintiffs have succeeded in establishing the story that a cash payment had been paid to the defendant at the time the Hundi was executed by the defendant. 50. This is the gist of evidence of either party. The question arises: what is the legal effect of it: 51. Now let us look at the second question because having analysed the evidence of both parties, we should be in a proper position to appreciate this question, and if I may say so, with respect, we should be better prepared to answer it. I have already held above that there is a principle underlying Section 118(a) of the Negotiable Instruments Act and further that the presumption of consideration is not a discretionary one but it is obligatory. 52. Now Section 4 of the Indian Evidence Act, broadly speaking, classifies presumptions into permissive and obligatory. Again, both kinds of presumptions are rebuttable unless they fall under the category of conclusive proof within the meaning of that phrase as defined by this section. The definitions of the expression's "may presume" and "shall presume" are as follows: 'May presume." When it is provided by this Act that the Court may presume a fact, it may either regard such fact as proved, unless and until it is disproved, or may call for proof of it. 'Shall presume.' Whenever it is directed by this Act that the Court shall presume a fact, it shall regard such fact as proved, 'unless and until it is disproved'." (The underlining, here in 'is mine). 53. Again Section 3 of the Evidence Act defines 'disproved' as follows: "A fact is said to be disproved when, after considering the matters before it, the court either believes that it does not exist or considers its non-existence so probable that a prudent man ought under the circumstances of the particular case, to act upon the supposition that it does not exist."

54. Having regard to the answer given by me to the first question and the aforesaid definitions, the correct position in law may in my opinion be stated as something like this. Where the execution of a negotiable instrument is proved against or admitted by a defendant, the burden of proving absence of consideration lies very heavily upon him. This burden of proof in my opinion is not shifted merely because the plaintiff may have chosen to lead evidence in the first instance as in this case. In considering whether the burden has been successfully discharged. I agree with my Lord the Chief Justice, that the court should view the whole evidence, for both the parties, and try to arrive at a positive conclusion; and it would always be a matter of fact dependent upon the surrounding circumstances of each case whether this burden has been discharged or not. Now, three types of cases may arise in this connection. The first type is where the defendant's evidence is good and sufficient to disestablish the presumption whether by itself or taken with the evidence of the plaintiff upon a review of the entire evidence led by both parties. There should be no trouble as to the final result in such a case, and I am of opinion that there must be a decree in favour of the defendant and the plaintiff must fail. Another type of case arises where the evidence of the defendant is weak and the plaintiff has either led no evidence or his evidence discloses nothing against him. There need, in my opinion, be no trouble as to this type of case either, and there must be a decree against the defendant. There is, however, a third category of cases where the evidence led by the defendant is untrustworthy and the plaintiff has also led evidence in support of consideration and that evidence also inspires little belief. It is this type of case which presents considerable difficulty and the case before me falls precisely within this category. 55. Now, my lord the Chief Justice has laid down that in every case the court must come to the conclusion on a consideration of the evidence of both the parties whether consideration has been disproved or not, and that a court cannot and should not deal with the evidence. "in two water-tight compartments first saying that the evidence of the maker of the negotiable instrument as to failure of consideration is untrustworthy and then saying that the evidence of the plaintiff fails ^:o establish the consideration that is alleged or relied upon by him and stopping short there." With utmost respect, I find it extremely difficult to accept this position without reservation. I quite agree that in the vast majority of cases the court should be in a position to strike a just

balance between the evidence of the contending parties and would be in a position to come to a final and positive conclusion one way or the other. But it would, in my humble judgment, be an over simplification to hold that cases will not and cannot occur where the court cannot or in all conscience may not be prepared to hold that consideration has been disproved on such evidence as has been led on behalf of both parties. Such a case undoubtedly occurs where the evidence of the defendant upon whom the initial burden lay - has miserably failed (as in the present case) to establish the counter-case put forward by him as to how the negotiable instrument came to be executed by him and further the plaintiff, who need not have led any evidence, foolishly sets out to prove the passing of a consideration but also fails to carry conviction. It is not unknown that such cases do occur in the practical administration of justice and have come before the courts, and the presiding judges have found themselves unable to hold that the presumption as to consideration must necessarily stand disproved in such cases. The question of questions in such marginal cases is whether the presumption is of any help and how it operates. Such a case arose before the learned Judge of the Bombay High Court in Tarmahomed v. Tyeb Ebrahim (G). This type of case also seems to me to have arisen ito Madho Ram v. Nandu Mal, AIR 1920 Lah 295 (N), and Ram Nath v. Ram Chandra Mal, AIR 1935 All 154 (O). The same might be said of the present case so far as I am concerned. The way I look at the case is this. Here was a Hundi. The plaintiff founded his suit on it. The defendant admits to have executed this Hundi. The Hundi itself contains an admission that it had been executed for value received. Apart from that there is an obligatory presumption as to consideration (which cannot be lightly brushed aside) in favour of the plaintiff. The defendant wanted to meet this case by proving that he did not execute this Hundi for value received by him but that he had executed it by way of a loan to the plaintiff. It is not the defendant's case that he had got any khata executed by the plaintiff for this loan or that he took any receipt for this loan from the plaintiff. The story of loan to my mind is patently false, and, if I may say so, utterly absurd. The matter, however, did not rest at that. And, stupidly enough, the plaintiff also led evidence to show that he had advanced cash money to the defendant for which the Hundi was executed by the defendant. This story also does not inspire any belief and cannot be accepted at its face value.

If I may venture to express my own opinion in this connection (I am not unconscious that it is possible to condemn this as a pure conjecture but even so I maintain it is a conjecture which errs on the side of justice rather than otherwise) it seems to me that this Hundi was executed not for cash given by the plaintiff but in lieu of past liabilities owing by the defendant to the plaintiff. Again, that this reading of the situation is not simple imagination on my part will be apparent from the deposition of the defendant himself in which a question appears to have been put to him whether the defendant had any past dealings with the plaintiff and the defendant replied in the affirmative and further said that the Khatas connected with those dealings should be with the plaintiff. But even if this appraisement of the real situation be not accepted as permissible, the one difficulty which I am completely unable to get over in order to hold that consideration has been disproved in this case is how in reason it can possibly be held that the defendant has succeeded in discharging the burden which lay upon him when his own case is held to be utterly false and entirely unconvincing. I know that a defendant may discharge the burden resting upon him by relying on the plaintiff's evidence; but here again I would be very loath to accept that a defendant in such a position can or should be held to have been successful in discharging the burden which lay upon him by multiplying, if I may say so, his evidence which amounts to a cypher with something else. 56. It is this type of cases in relation to which the second question framed by me is really directed. Again from a slightly different angle, it may be said that such cases fall within a wellrecognised category under the caption of burden of proof, of which it may justly be said that the evidence on both sides is equally bad, or that there is little to choose between them; and where that is so, the proper and the only possible view to take in my judgment is that the party upon whom the onus lay cannot be said to have discharged the burden of disproving consideration and must lose. I am clearly of opinion that in such cases the circumstance that the presumption operates in favour of the plaintiff cannot but assume importance and is bound to tilt the scales in his favour. I may also add that it is from this branch of the law of evidence that the oft-used principle flows that the party upon whom the burden of proof lies cannot benefit by the weakness of his opponent's proof. There are innumerable cases in the law reports and text books to illustrate the force of this principle and I consider it entirely unnecessary to cite any cases in support of this.

The second question is founded on this class of cases, and, with utmost deference, I find myself unable to assent to the proposition that such cases are or should be an impossibility, or that they should not be allowed to occur because the Judge must in any event find either that consideration has been disproved or that it has not been. That such a class of cases has arisen or would still arise in the various High Courts cannot be disputed. I am of opinion that in this class of cases where there is little to choose between the evidence produced on either side or that the Court cannot arrive at such a conclusion one way or the other, it is inevitable that the question of onus probandi must play a dominating roie and must be held to be decisive of the fate of the case. 57. My answer to the second question is, therefore, this. As a rule, a court should arrive at a conclusion one way or the other as to whether the consideration underlying a negotiable instrument has been disproved or not by a cumulative examination of the entire evidence of both the parties. But it is not possible to lay down a rigid and inflexible, formula in this regard and exceptional cases are possible where a court cannot strike a just or positive conclusion between the evidence of one party and the other, or considers that the evidence of both the parties is evenly balanced, or, again, that there is little to choose between their evidence, then in such cases the court is bound to have due regard to the factor of presumption of consideration in favour of the party in whose favour the negotiable instrument has been made, and the defendant in such a case must fail on the principle that that side must fail upon whom the onus has been placed by law or in accordance with the principle of justice, equity or good conscience which clearly governs it. In such cases the onus is a potent factor and must determine the final deci-sion, the evidence on either side as if cancelling each other. 58. As to the third question, I need say only this much that it seemed to me sitting singly, and I have not been able to shake off that impression, that the truth of the matter in this case has been suppressed by both parties and was that the consideration for the suit Hundi was not cash advanced by the plaintiff to the defendant at the time of the execution of the Hundi but past dealings between the parties, of which suggestion is not wanting on this record, though naturally there is no positive evidence in this respect. But as this last question was not debated before the Full Bench at any length, I would not venture any opinion on it.

I should, however, like to add, with great respect, that the view propounded in this connection in Shri Narain's case (A), requires closer examination and I reserve my own opinion on that question until a proper opportunity may arise to deal with and decide it. 59. This brings me to the question as to how the present appeal should be decided on the premisas held by me above. Put very succinctly the net position is this. The Hundi in the present case was admittedly executed by the defendant Jeevraj. It was upon him to disprove the consideration for the Hundi. His case was that he had executed the Hundi by way of a loan, and not in lieu of any consideration received by him from the plaintiff. I have held that this counter story is quite false and incredible. The plaintiff also led evidence to show that the defendant had executed the Hundi for a cash loan given to him at the time the Hundi came to be executed. I also find it difficult to accept this story at its face value. The truth seems to me to lie midway between the two stories, and to my mind is that the Hundi was in all probability executed by the defendant in lieu of his past liabilities towards the plaintiff. Be that as it may, I find it very difficult for myself to hold that a party upon whom the burden of disproving consideration lay should be or can be held to have discharged the heavy burden which rested on him even though the story which he sought to prove is found to be utterly impossible of belief. In arriving at this conclusion I am fully alive to the consideration that the plaintiff's evidence also does not inspire belief. Even putting the matter in another way, I maintain from a perusal of the entire evidence on the record that the only conclusion to which I am able to come is that there is not much to choose between the evidence led on cither side in the case and, therefore, I do not find myself in a position to predicate with any approach to reasonable probability that there was absence of consideration in the present case and in any case I find it very difficult for me to hold that the defendant has successfully disproved consideration the burden of which lay heavily on him. In this state of affairs the circumstance that it was on the defendant that the burden to disprove consideration rested must receive its due importance, and in the net effect he must fail, having not been able to discharge that burden.

60. I would, therefore, hold that this appeal should be partly allowed and the suit decreed against defendant Jeevraj, the drawer of the Hundi for Rs. 450 with 6 per cent per annum simple interest from the date of the Hundi up to the date of suit. I also pass a decree for the same amount against the other defendant Shukanraj who being. Jeevraj's son (and was admittedly joint with him) is under a pious obligation to pay his father's debt even during the latter's life time, but this decree shall be executable against him to the extent of his interest in the joint family property only and shall not be personal. The plaintiff shall also be entitled to receive interest at 4 per cent per annum simple from the date of this decree until realisation. As to costs, I would direct that the parties shall bear their own costs throughout as both parties have suppressed the true state of things. By The Court 61. In accordance with the view of the majority, we answer the three questions put to us in the manner indicated in the judgment of the learned Chief Justice. We dismiss the appeal hut order parties to bear their own costs throughout.

Factories Act Case Grauer And Weil (India) Ltd. vs Collector Of Central Excise on 7 June, 1985 Equivalent citations: 1986 (6) ECR 297 Tri Delhi, 1986 (25) ELT 338 Tri Del ORDER G. Sankaran, Member (T) 1. This is an appeal against Order-in-Original No. 13/MP/83 dated 30-11-1983 passed by the Collector of Central Excise, Baroda. The facts of the case, briefly stated, are that Central Excise Preventive Officers of Bulsar Division paid a surprise visit on 30-1-1983 to the factory premises of M/s. Growel Chromates, a division of M/s. Grauer and Weil (India) Ltd., Bombay (hereinafter referred to as "the appellants") situated in plot No. 407, G.I.D.C., Vapi. It was found that Sodium Bichromate (falling under Item No. 14AA of the First Schedule to the Central Excise and Salt Act - GET, for short - and for which they held a licence) manufactured by them was removed on payment of duty under gate passes for captive consumption to their chromic acid sections situated adjoining their manufacturing premises, for the manufacture of chromic acid flakes (falling under Item No. 68 GET). The chromic acid flakes were found to be manufactured with the aid of power and removed under the delivery challans of the appellants without payment of duty. The officers detained 98 drums (4,900 kgs.) of chromic acid flakes lying in the chromic acid section for enquiries. On a subsequent visit on 2-2-1983, 126 drums (this included the 98 drums detained earlier), of chromic acid flakes (6,300 kgs. - valued at Rs. 1,89,000) in fully manufactured condition were seized in the belief that the goods were liable to confiscation as the appellants were not entitled to duty exemption under notification No. 46/81 dated 1-3-1981. The goods were subsequently released to the appellants against a bond. On investigation of the case, the department considered that the appellants had wrongfully availed themselves of duty exemption under notification 46/81 on the basis that the chromic acid section was not a "factory" within the meaning of the term in Section 2(m) of the Factories Act, 1948, though, according to the department, the said section, was part and parcel, of the appellants' factory. In due course, a notice was issued to the appellants on 14-7-1983 charging them with contravention of Central Excise Rule 173F read with Rule 9(1), Rule 173-B, Rule 173-C, Rule 173-G(2) read with Rule

52-A, Rule 173~G(4) read with Rule 53. They were called upon to show cause why penalty should not be imposed on them, why the goods seized and subsequently provisionally released should not be confiscated and why they should not be called upon to pay duty on 1,52,950 Kgs. of chromic acid flakes valued at Rs. 44,95,475.00 illicitly manufactured and cleared during the period from September, 1981 to January, 1983. The show cause notice said that the chromic acid section was nothing but a part of the appellants' factory since it was served by common electric and water connections, the payments for the same and the salaries of the staff and workers were paid by the appellants and further the raw material was supplied by the appellants and the final product was removed on the delivery challans of the appellants. In due course, on consideration of the written and oral submissions of the appellants, the Collector, by his impugned order No. 13/MP/83 dated 30-11-1983, held that the charges levelled against the appellants were conclusively proved. He imposed a penalty of Rs. 5,00,000/- on M/s. Growel Chromates of Vapi under Rule 173Q(1); he confiscated the chromic acid flakes valued at Rs. 1,89,000/- earlier seized and provisionally released under Rule 173Q(1) and ordered the appellants to pay a fine of Rs. 1,89,000/- in lieu of confiscation; he ordered that, on redemption, the confiscated goods should be properly accounted for by the appellants and cleared in accordance with law, if not already done and finally, he ordered M/s. Growel Chromates of Vapi to pay excise duty at the appropriate rates under item 68, GET on chromic acid flakes valued at. Rs. 44,95,475/- illicitly manufactured and cleared without payment of the duty leviable thereon during the period from September, 1981 to January, 1983 under the proviso to Section 11A(1) of the Central Excises and Salt Act, 1944 read with Central Excise Rule 9(2). 2. We have heard Shri K. Narasimhan, Advocate for the appellants and Smt. Vijay Zutshi, Senior Departmental Representative, for the Respondent-Collector. We have also gone through the record. 3. Notification No. 46/81 which is central to the dispute reads as follows : "In exercise of the powers conferred by Sub-rule (1) of Rule 8 of the Central Excise Rules, 1944, and in suppression of the notification of the Government of India, in the Ministry of Finance (Department of Revenue), No. 85/79-Central Excises, dated the 1st March, 1979, the Central Government hereby exempts all goods, falling under Item No. 68 of the First Schedule to the Central Excises and Salt Act, 1944 (1 of 1944), other than goods manufactured in a factory, from the whole of the duty of excise leviable thereon.

Explanation : In this notification, the expression "factory" has the meaning assigned to it in Clause (m) of Section 2 of the Factories Act, 1948 (63" of 1948). 2. This notification shall come into force with effect, from the 1st April, 1981." 4. Section 2(m) of the Factories Act, 1948, in so far as it is relevant for our present purpose reads thus : "Factory" means any premises including the precincts thereof (i) whereon ten or more workers are working, or were working on any day of the preceding twelve months and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on,'. 5. It is the appellants' contention that the chromic acid section of the appellants' premises constituted a unit different from the unit where sodium bichromate was being manufactured and that the chromic acid' unit was not a "factory" within the meaning of Section 2(m) of the Factories Act. If this contention is correct, then, the chromic acid manufactured therein would not attract duty under item No. 68-CET and the Department's case fails. On the other hand, if the appellants' contention is not correct, then, the chromic acid manufactured in the said unit would attract duty under item 68 GET and we will have to examine the other contentions of the appellants. 6. Shri Narasimhan's contention is that, in terms of Section 2(m) of the Factories Act, different manufacturing activities carried out in different sections of a premise might not be combined or aggregated. What matters is whether in the part of the premises where a manufacturing activity is being carried on with the aid of power, ten or more workers are working, or were working on any day of the preceding twelve months. Since this condition is not fulfilled, the chromic acid section does not come within the mischief of Section 2(m) of the Factories Act. Considerations of common ownership, payment of electricity and water charges etc. are not relevant for determining whether the chromic acid section is a "factory" or not. 7. In support of his contention, Shri Narasimhan relied upon the decision of the Madras High Court in the case of K.V.V. Sarma, Manager, Gemini Studios, Madras, A.I.R. 1953 (Madras) 269. In this case, the Court was concerned with the interpretation of the Factories Act, 1948, the Payment of Wages Act, 1936 and the Workmen Compensation Act, 1923. The main question was whether the studio in which films were produced was a "factory" within the meaning of the

term in the Factories Act and whether the persons employed were "workers" as defined in the Act. The case was an appeal against the conviction of the Manager of the Gemini Studios, Madras for having contravened the provisions of the Factories Act. The appellant contended that except for the three departments connected with carpenters, moulders and tinkers, the rest of the portions of the studio could not be called "factory" and that these three departments were housed in a separate building where all the requirements of the Factories Act had been attended to. It was stated that there were a number of buildings in the Gemini Studios in which various departments were housed. The Court observed that each of these buildings would be a factory if they employed 10 or more workers as defined in Section 2(1) of the Factories Act. The Court also considered the further question whether, if any of these departments was a "factory" as being situated within the precincts of the Gemini Studios, then it was legally possible to separate these departments from others which could not be styled as "factories". The building where carpenters, moulders and tinkers were carrying on their work was admittedly a factory. It was permissible to separate the carpentary, moulding and tinkering departments which were really unnecessary for the production of films from the others. There was no evidence to show that the other Departments were so intertwined as to be a composite one without being able to be separated. The Court said that it was possible, even if some of these Departments or factories separated those which were not factories from those which were factories. This decision, in our view, is not of any assistance to the appellants. It could be said that carpentry and such activities are not integral to filmmaking. In the present case, the chromic acid section was admittedly served by the same electricity and water connections. Payments for electricity and water were made by the appellants for the chromic acid section as well as the other sections. The wages and salaries of the workers in the chromic acid section were paid by the appellants. The raw material sodium bichromate was supplied by the appellants to the chromic acid section and the chromic acid manufactured out of the sodium bichromate was removed under the appellants' challans. Shri Narasimhan's contention that chromic acid could be manufactured out of sodium bichromate brought from outside (and not from the appellants' production) and that, therefore, the manufacture of chromic acid could not be said to be a manufacturing activity dependent on that of manufacture of sodium bichromate misses the realities of the situation. If, indeed, the appellant was not having any manufacturing activity besides the manufacture of chromic acid, the picture would have been entirely different. Here, the appellants were engaged in the manufacture of sodium bichromate, a vital input for manufacture of chromic acid and using it as

such. How the two activities can be said to be independent of each other passes our comprehension, especially considering the other features of the case, i.e. common water and power connections, common payments for these facilities, common payments to workers, common delivery challans, etc. This is not, therefore, a case in which it can be said that the activities in the chromic acid section were not connected with but were totally independent of the activities in the rest of the premises. 8. The next decision relied upon by Shri Narasimhan is that of Allahabad High Court reported in AIR 1955 (Allahabad) 702. The Court held that composition is a necessary part of the process of printing itself and is included in the definition of the expression "manufacturing process". The Court rejected the contention that the expression should be confined to the process by which impression is created on paper and to no other process preceding or succeeding of the making of the impression on the paper to be printed. Everything that is necessary before or after to complete the process would be included within the definition. In this view, the Court held that the composing section of the newspaper which was located on a particular road came within the definition of the word "factory" though the actual printing of the newspaper took place at a premise located on a different road. This decision, again, in our view, cannot come to the rescue of the appellants since it was rendered in the context of a dispute regarding payment of wages and we are not able to read from the judgment, even by implication, that a part of the premises belonging to a manufacturer could be segregated from the rest of the premises and a manufacturing activity could be carried on in the part so segregated such that that part of the premises may escape the mischief of section 2(m) of the Factories Act. In the case before the Court, two premises situated on two different roads were held by the Court to be "factories" because the activities in one were held to be crucial to those in the latter. In the case before us, both units are in the same plot and have common power, water connections, etc. The activities in the two units are not unrelated. 9. The third decision is that of the Bombay High Court in Kaushalya Narayanan and Ors. v. Dadajee Dhackjee & Co. (P) Ltd., 1980 ELT 102 (Bom). What the Court said was that it was not permissible to interpret the words "any manufacturing process" in the definition of "worker" in Section 2(1) of the Factories Act so as to include within its scope manufacturing or production of excisable goods. A process which has nothing to do with the manufacture or production of excisable goods and person's employed in such a process are not to be taken into account. In this view, the Court held that only the workers employed in the manufacture or assembly of batteries should be taken into account and not those engaged in repairs to motor cars or in recharging of

batteries since no manufacturing or production of excisable commodity or goods was carried on in those sections. The Court further held that regard should be had to the number of workers employed in the manufacturing process connected with or incidental to the assembling of batteries. This decision, again, in our view, does not help the appellants. Unlike in the above case, where, as a matter of fact, it was found by the Court that neither in the motor vehicle repair section nor in the battery recharging section was any manufacturing process connected with the production of batteries was carried on, in the case before us, the manufacture of sodium bichromate, the essential input for manufacture of chromic acid, was being carried or in the appellants' premises and that sodium bichromate was being supplied to the chromic acid section for production of chromic acid. We do not see how it can be said that manufacture of sodium bichromate was a process totally unconnected with the manufacture of chromic acid given the facts and circumstances of the case. 10. On her part, Smt. Vijay Zutshi, SDR, relied on the Bombay High Court decision in Jaichand Somchand Shah v. Vithal Baji Rao Maratha, AIR 1933 Bombay 109. The Court was concerned with Section 2(3)(a) of the Factories Act, 1911 which defined "factory" thus :"any premises wherein or within the precincts of which on any one day in the year not less than twenty persons are simultaneously employed and steam, water or other mechanical power or electrical power is used." The Court held that the above section was intended not to cover merely incidental business in any premises but was intended to denote any premises as a composite whole with a central source of power and that a saw mill and a ginning factory under the same roof and worked by the same motive power was a "factory". Though this decision was rendered in the context of the definition in the 1911 Act, it nevertheless constitutes an authority for the proposition that a premise in which unrelated (in the present case, the activities are related) activities are being carried on with a central common source of power constitutes a "factory". Shri Narasimhan urged that this would not be a true test especially in the context of industrial estates where the source of power may be common for a number of factories. But then each factory would pay its own bills which was not the case with the chromic acid section here.

Smt. Vijay Zutshi cited also the Tribunal's Order No. 227-234/85-C dated 4-3-1985 in the Tide Water Oil Co. Ltd. case. We have gone through the order. The dispute in that case was on the question who should be taken to be workers for the purpose of duty exemption. The question was not about the number of workers which was 56. The assessee claimed that only those workers who were engaged directly in the manufacturing processes should be considered as workers for the purpose of exemption and not workers like durwans, sweepers, etc. The decision of the Tribunal in that case has no relevance to the present matter as riqhtly contended by Shri Narasimhan. 11. Shri Narasimhan had contended that all that Section 2(m) of the Factories Act, 1948, laid down was that the number of workers in the precincts in which each manufacturing activity took place should conform to the prescribed form. The argument appears to be that if in any premise, different manufacturing activities are carried out in different precincts or parts thereof, and the number of workers in any such manufacturing activity is less than 10, then, such precint or part of the premise would not constitute a "factory". It appears to us that such an interpretation is a strained one and does not seem to flow naturally from the definition clause. If this were the correct interpretation, it would not be difficult - at least in some situations - to so arrange affairs that a premise having many manufacturing activities using power and having considerably more than 10 workers may yet. escape the mischief of the definition. That is not the intention is, in our view, clear from a reading of Section 4 of the Factories Act : "4. Power to declare different departments to be separate factories or two or more factories to be a single factory. The State Government may, on an application made in this behalf by an occupier, direct, by an order in writing, that for all or any of the purposes of this Act different departments or branches of a factory of the occupier specified in the application shall be treated as separate factories or that two or more factories of the occupier specified in the application shall be treated as a single factory." No such order as envisaged in the above Section in respect of the chromic acid section has been produced before us. 12. This brings us to another aspect of the case. It is that, according to the appellants, the Factories Act authorities had declared in the lay-out plan of the factory that the chromic acid section was not a "factory" in the words : "This premises does not come under Section 2(m) of

the Factory Act, 1948". Strangely enough, such an important notation has not been signed by a duly empowered officer administering the Factories Act. Shri Narasimhan told us in the course of the hearing that the notation was made by the appellants themselves. That this was so is confirmed by a perusal of the letter dated 20-6-1983 from the appellants to the Senior Factory Inspector, Bulsar in which it is stated that the appellants had demarcated the chromic acid section and had shown it as not a "factory" within the meaning of the Factories Act, 1948. The entire ground plan was, according to Shri Narasimhan, approved by the Factories Act authorities. It was not necessary that each and every notation, in the plan had to be separately signed by the authorities. This is rather strange logic. The conseguences of a part of the factory premises being declared to be not a "factory" are quite significant. That part goes out of the mischief of the Factories Act, together with the responsibilities, duties and obligations cast upon the "occupier" of the Factory by or under the Act. Surely, one would have thought that such an important notation would have been got signed by the authorities. Let us, however, examine the evidence on record on this aspect. The show cause notice dated 7-1-1983 issued by the Supdt. of Central Excise alleged, inter alia, that the chromic acid section was nothing but a part of the assessee's factory and that the said section could not be stated to be a separate one. The notice further stated that the documents relied upon for the purpose of the notice were listed in the annexure attached to the notice, and copies thereof, wherever not earlier supplied were enclosed or would be made available for inspection, on demand being made. The annexure lists at serial No. 10 "Letter No. 2199 dated 25-5-1983 of the Senior Inspector of Factories, Bulsar" with the remark "available for inspection". Referring to this letter in their reply dated 30-8-1983 to the notice, the appellants stated that they had not received such a letter from the Senior Inspector of Factories, Bulsar or a copy thereof from the department along with the show cause notice. They, therefore, wanted inspection of the said letter. There is no indication in the record whether the appellants took inspection of the said letter. The memorandum of appeal does not say that inspection was refused. When the show cause notice said the document was available for inspection, it was upto the appellants to have availed themselves of the offer. Shri Narasimhan made the point that the said letter had been made use by the Collector without the same having been disclosed to the appellants. However, he did not press for a remand of the case to the lower authorities on this score. Aside from this, certain correspondence exchanged between the appellants and the Inspector of Factories, Bulsar (copies at pages 98-101 of the appellants' paper book) show that the appellants were aware of the objection taken by the latter with respect to the chromic acid section. From the letter of 27-5-1983 to the appellants, it is seen that the drawing in connection with the bichromate division, approved on 9-2-1982, did not include the chromic acid division plant. The letter asks the appellants to produce copies of drawing of extension of chromic acid

plant with details. The letter also refers to the remarks made on 19-5-1983 by the Junior Factory Inspector in thye appellants' register. The said remark is to the effect that in the plan earlier approved on 9-2-1982, the chromic acid section was not shown. It calls upon the appellants to submit plans and particulars regarding the chromic acid section. The appellants in their letter of 20-6-1983 contends that the approved drawing clearly showed the details of the chromic acid section and that it was confirmed that the said section would be segregated from the bichromate section by ordinary fencing and, therefore, the chromic acid' section would not be treated as a "factory" under Section 2(m) of the Factories Act, 1948. There was no intention to extend the premises or vary or alter the approved premises. It is Mr. Narasimhan's contention that despite the threat of legal action, nothing further has been heard in the matter from the Inspectorate of Factories. It is thus seen that, to put it mildly, there is serious doubt whether the Inspectorate of Factories had, in fact, approved the appellants' declaration that the chromic acid section was not a "factory" within the meaning of Section 2(m) of the Factories Act. Quite apart from this, we have discussed earlier the authorities cited before us and found that the chromic acid section could not be said to be not a "factory" since it was an integral part of the appellants' factory premises. The fact that less than 10 workers were employed in the chromic acid section - which fact has not been challenged by the Respondent - is of no avail since the entire premises comprising also of the chromic acid section was, admittedly, a "factory". In this view of the matter, the benefit of Central Excise Notification No. 46/81 was rightly denied to the appellants in so far as chromic acid was concerned. 13. Now, let us turn to the limitation aspect. The show cause notice dated 7-1-1983 called upon the appellants to explain why duty should not be recovered on chromic acid manufactured and cleared during the period from September, 1981 to January, 1983 under the proviso to Subsection (1) of Section 11-A of the Central Excises & Salt Act read with Rule 9(2). The extended period of five years could have been invoked by the department only if there was fraud, collusion or any wilful misstatement or suppression of facts, or contravention of any of the provisions of the Act or the Rules with intent to evade payment of duty. The show cause notice, as noted earlier, alleged that the appellants had wrongfully availed themselves of exemption from duty on chromic acid by treating the chromic acid section to be not a "factory" within the meaning of Section 2 (m) of the Factories Act. We have already found that the chromic acid section was part of the appellants' premises and it could not be considered to be not a "factory". The corollary is that the duty exemption which was not due was wrongfully availed of.

14. Shri Narasimhan drew our attention to the declaration dated 15-4-1981 filed by Growel Chromates before the Supdt. of Central Excise (page 22-23, Paper book). This declaration was required from manufacturers who fell in the exempted sector - exempted from duty and from licensing. Against the column "Reference to the notification under which exemption from duty is claimed" is the remark "105/80 dated 19-6-1980. Notification No. 92/81 (Not falling under Factories Act having less than 10 workers)". It must be noted that notification 105/80 has no application to the present case. It pertains to factories wherein the total investment on plant and machinery is not over Rs. 10 lakhs). At the time of the hearing, Smt. Zutshi, however, produced before us the original of the declaration form (a photo copy is on the file) in which the remark "Not. No. 92/81. Not falling under Factories Act having less than 10 workers" does not appear. The copy filed in the paper book is apparently not a true copy. When this discrepancy was pointed out, the Counsel for the appellants said that the declaration was not of the appellants but that of Growel Chromates Pvt. Ltd. This firm was taken over by the appellants on 2-9-1981. On 19-9-1981, the appellants wrote further to the declaration of 15-4-1981 to say that the premises wherein chromic acid was manufactured was not a factory within the meaning of Section 2(m) of the Factories Act, 1948. It further said the premises were completely segregated and that the goods manufactured therein were exempted from duty by virtue of notification No. 46/81 dated 1-3-1981 as amended by notification No. 92/81 dated 1-4-1981. It is Shri Narasimhan's contention that both Growel Chromates Pvt. Ltd. before its take-over by the appellants as well as the appellants genuinely believed that the chromic acid section and the sodium bichromate section were different units, the former, however, not being a "factory". The premises were, according to Shri Narasimhan, inspected by the Central Excise authorities on 8-12-1981 and 192-1982. Therefore, Shri Narasimhan said, it was not as though the department was not aware of or was not kept informed of the state of affairs. In fact, the sodium bichromate manufactured by the appellants was transferred to the chromic acid section for manufacture of the acid during the period. The department, however, did not at any time raise any objection. 15. Smt. Zutshi, however, argued that the appellants' letter dated 19-9-1981 by itself and without the department's reply did not constitute or amount to the department's permission or approval to the chromic acid section being considered as not a "factory". The ground plan submitted to the department by the appellants for approval of licence for manufacture of sodium bichromate did not show the chromic acid section. Had it shown that section with the appellants' stand being made clear as to the non-"factory" status of the said section, things might have been different. The statements recorded during the investigation showed that the chromic acid section was part of the appellants' factory premises.

16. We have carefully considered the material on record and the submissions before us. It is the position of the appellants (as see from their averments in W.P. 3470 of 1983 filed before the Gujarat High Court) that the ground plan submitted to the Inspectorate of Factories showed the chromic acid section separately with the legend about its not being a "factory" whereas the ground plan submitted to the Excise authorities did not show the place of manufacture of chromic acid. The verification and approval of the ground plan by the Excise authorities cannot, therefore, be taken to mean that they had approved the non-"factory" status of the chromic acid section because that section was simply not shown in the ground plan. However, it is true that the appellants, by their letter dated 19-9-1981, told the Supdt. of Central Excise about the status (according to them) of the chromic acid section and what is more important, told the Supdt. that the goods manufactured therein were exempt by virtue of notification No. 46/81 as amended by notification No. 92/81. Why the Excise authorities did not investigate the matter on receipt of this letter is a mystery and has not been explained. While the appellants have been less than candid and forthcoming in that they did not show the chromic acid section in the ground plan submitted to the Central Excise authorities, they have made their position known in their letter dated 19-9-1981 to the Supdt. It is true that this was further to Growel Chromate Pvt. Ltd.'s declaration of 15-4-1981 which, it now transpires, did not stake a claim for exemption of chromic acid under notification No. 46/81 but under notification No. 105/80. But, the letter of 19-9-1981 was from the appellants and specifically referred to the chromic acid section and the claim for exemption under notification No. 46/81. The endorsement regarding the non-"factory" status of the chromic acid section was (according to the appellants) approved by the Inspector of Factories on or around 9-2-1982 which means that the statement about the non-"factory" status of the said section in their letter of 19-9-1981 did not have the backing even of the purported approval of the Inspector of Factories. This factor, coupled with the discrepancy noticed earlier between the declaration dated 15-4-1981 filed before the department and the copy furnished in the paper book, lends support to the Collector's conclusion that the intention of the appellants was mala fide. This conclusion is further strengthened by the fact that the correspondence between the Inspector of Factories and the appellants does not bear out the letter's stand that the former had approved the non-"factory" status of the chromic acid section. 17. For availing oneself of duty exemption, the assessee has not merely to stake a claim for exemption but should have the claim accepted by the proper excise authorities. In this case, in particular, notification No. 46/81 read with Section 2(m) of the Factories Act reguired the manufacturer to fulfil one or the other of the two prescribed conditions. The basis for the claim has to be set out clearly. It is not enough to say baldly that the goods are exempt since the place

of production is not a "factory", especially bearing in mind the fact that the purported approval of the Factory Inspector was of February, 1982, i.e. long after the claim of 19-9-1981 was made. It will not do to stake a claim and take it for granted that the department had accepted the claim. It is the contention of the appellants that the excise authorities had "accepted, acknowledged and recognised that the place of manufacture of chromic acid is not the (sic) "factory" and allowed us the benefit of exemption of central excise duty under the said notification." (See reply dated 308-1983 to the show cause notice). However, no material has been placed before us in support of this averment. We fail to see, therefore, how the question of the department abruptly and arbitrarily withdrawing the benefit of the exemption already granted could arise - nor how the question of estoppel against the department could arise. 18. Shri Narasimhan has contended before us that there has been no violation on the part of the appellants of Rule 9(1). This Rule applies only to licensed premises. The appellants had not taken out a licence in respect of the chromic acid section for manufacture of the acid. Therefore, there could be no question of "specification" of a place or premise by the Collector or "removal" from such place or premise, as contemplated in the said Rule. This contention is not tenable in view of the Calcutta High Court decision in N.S. Metal Industries v. Union of India and Ors. [Matter No. 226 of 1970, 1977 TLR (NOC) 31 (Cal.)]. The Court held that duty was leviable under Rule 9(2) and not Rule 10 when no licence is obtained for manufacture and the goods manufactured are removed without observing excise procedure and without payment of duty. 19. Shri Narasimhan cited certain authorities in support of the proposition that Rule 9(2) had no application to the present case. The first authority is Acme Metal Industries Pvt. Ltd. v. S.S. Pathale, Inspector of Central Excise and Ors., 1980 ELT 156 decided by the Bombay High Court. It was held that to attract the provisions of Rule 9(2), the goods should have been removed in contravention of Rule 9(1) and the removal must be clandestine and without assessment. But if the goods were cleared openly and with the knowledge and consent of the department, Rule 9(2) would not be attracted. In the above case, certain goods were removed during the period of the dispute with assessment at nil rate of duty. The Inspector failed to enforce the provisions of law and to charge and collect the proper amount of duty leviable. Therefore, duty was short-levied through inadvertence or error on the part of the Inspector. The Court held that the demand would be governed by Rule 10 and that Rule 10A had no application.

This authority is of no avail to the appellants. We have already held on the authority of the N.S. Metal Industries case (supra) that when goods are manufactured and cleared without licence, Rule 9(2) would be attracted. Apart from this, the present case is not one where there has been any assessment. The goods were presumed by the appellants to be exempt from duty and were never presented for assessment to the proper officer. The second authority cited is an order of the Central Government in revision in the case of Dabur Pvt. Ltd., Calcutta, 1980 ELT 117. In this case the assessee had manufactured and cleared goods after the approval of the Central Excise officers regarding the non-excisability of the goods. Against this background, the Central Government held that Rule 9(2) applies only to cases where goods are manufactured and cleared from a licensed premise fradulently without giving notice to the Central Excise officers. In the facts and circumstances of the case, the Central Government held that Rule 10 read with Rule 173-J and not Rule 9(2) was attracted. In the case before us, the Central Excise officers had not approved the claim that the chromic acid section was not a "factory" and, therefore, the acid was exempt from duty in terms of notification No. 46/81. This decision is of no application. 20. Another point taken up by Shri Narasimhan was that the show cause notice must allege fraud, collusion or suppression in order that the longer period of 5 years for demand of duty might be attracted. He cited the Tribunal's decision in G.D. Industrial Engineering, Faridabad v. Collector of Central Excise, Chandigarh, 1983 ELT 1994. The Tribunal held therein that the show cause notice must allege fraud or mis-statement or suppression of facts and furnish particulars thereof. Otherwise, the case would not fall within Clause (1) of proviso to Section 11A of the Central Excises & Salt Act so as to attract the extended period of 5 years. Nor would the 2nd Clause of the proviso apply where there was no contravention of the Rules with intent to evade payment of duty. In our opinion, the show cause notice sets out sufficient particulars and lays a foundation for the charge of suppression of the fact that the chromic acid section was a "factory". We have already found that in the facts and circumstances of the case the malafide intention of the appellants was apparent. In this view, the decision cited is of no help to the appellants. 21. The second decision is again of the Tribunal in Shri Ram Piston & Rings Ltd., Ghaziabad v. Collector of Central Excise, Meerut, 1983 ELT 1927. Here again, the Tribunal said that if there was no allegation of fraud or mis-statement or suppression of facts or contravention of the

provisions of the Act or the Rules with intent, to evade payment of duty in the show cause notice, the extended period of 5 years would not be available. The same is the ratio of the Tribunal's decision in Ganga Spinning &. Weaving Mills, Ludhiana v. Collector of Central Excise Chandigarh-1983 ELT 1674 as also in Raymond Woollen Mills Ltd. v. Collector of Central Excise, Bombay, 1984 (15) ELT 243. Our observations in the preceding paragraph apply here also. 22. On the subject of penalty levied by the Collector on the appellants, Shri Narasimhan submitted that there was no mens rea on their part. They had placed their cards on the table and did not hide anything from the department. They honestly believed that the chromic acid section was not a "factory" and that, therefore, the acid produced was exempt. In this background, said Shri Narasimhan, no penalty was leviable. He cited the Supreme Court's decision in Hindustan Steel Ltd. v. State of Orissa, 1978 ELT J-159. In that case, penalty was levied by the Sales Tax authorities on Hindustan Steel Ltd. for failure to register itself as a dealer. The Supreme Court said that the liability to pay penalty did not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-judicial proceeding and penalty will not ordinarily be imposed unless the party either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. The Court further held that the authority competent to impose penalty would be justified in refusing to do so when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bonafide belief that the offender is not liable to act in the manner prescribed by statute. In the case before us, the statutory obligations of the appellants did not cease merely by writing a letter on 19-9-1981 to the Supdt. of Central Excise that the chromic acid section was not a "factory" and that the goods were, therefore, exempt from duty. We have, in the earlier part of this order, analysed at length how the chromic acid section was not shown in the ground plan submitted to the Central Excise authorities for approval, how in the declaration of 15-4-1981 there was a material discrepancy between the original as produced by the departmental representative and the copy as filed in the paper-book, how the appellants had acted unilaterally and without approval of the Central Excise authorities in treating the chromic acid produced in the chromic acid section as exempt from duty and other circumstances which, in our opinion, show the mala fide intention of the appellants. We do not, therefore, think that the Supreme Court decision has any application to the present case.

Nor do we think that the Supreme Court decision in Cement Marketing Co. of India Ltd. v. Assistant Commissioner of Sales Tax and Ors., 1980 ELT 295, has application to the present case. In that case, the Court held that a return cannot be said to be false unless there is an element of deliberation in it. Where the assessee does not include a particular item in the taxable turnover under a bonafide belief that he is not liable to include it, it would not be right to brand the return as a false return inviting penalty. In the light of our finding that the appellants had mala fide intention, this decision can have no application. 23. While the imposition of penalty in the facts and circumstances of the case was correct, the amount of penalty levied was, in our opinion, excessive having regard to the duty involved. We would accordingly reduce the penalty from Rs. 5 lakhs to Rs. 1 (one) lakh only. 24. The last point remaining to be considered is Shri Narasimhan's contention that in terms of the B-11 bond executed by the appellants in order to get the goods provisionally released, they should have been asked to produce the goods before the adjudicating authority. This was, however, not done. The bond amount was ordered by the Gujarat High Court to be returned to the appellants. The goods had already been released provisionally. Nothing was, therefore, available to be confiscated by the Collector. Shri Narasimhan, therefore, submitted that there could be no fine in lieu of confiscation. The only way the Collector could have gone about was to enforce the bond in a Court of law. We are inclined to agree with Shri Narasimhan. Once the goods are released provisionally against a bond and the goods are not physically available for confiscation, we fail to see how the Collector could have confiscated the goods and given an option to the appellants to pay a fine in lieu of confiscation to redeem the goods. The proper course would have been to enforce the bond for breach of its provisions either by forfeiting the bond amount or by enforcing the terms of the bond in a Court of law. We, therefore, set aside the order of confiscation and imposition of fine in lieu of confiscation. 25. In the result, the demand for duty by the Collector is confirmed. The penalty is reduced to Rs. 1,00,000/- (Rupees one lakh) only. The order of the Collector confiscating a quantity of chromic acid and imposing a fine in lieu of confiscation is set aside. But for these modifications, the Collector's order is upheld. Whatever relief flows from this order must be granted to the appellants within 4 months from the date of communication of this order.

Sales Of Goods Act Case Malabar Fruit Products Company ... vs The Sales Tax Officer And Ors. on 25 January, 1972 Equivalent citations: 1973 30 STC 537 Ker Author: P S Poti Bench: P S Poti

JUDGMENT P. Subramonian Poti, J. 1. The main question that arises in all these original petitions is one of validity and construction of Section 5A of the Kerala General Sales Tax Act, 1963. All the petitioners are assessees who have been assessed to tax on the purchase turnover of certain goods under Section 5A of the said Act. In some of the petitions, there are other questions also raised. I will first refer to and deal with common questions here. 2. Section 5 of the Kerala General Sales Tax Act, 1963 (hereinafter referred to as the "Act"), charges to tax the taxable total turnover of every dealer subject to certain conditions, "Total turnover" has been defined in Section 2(xxvi) of the Act to mean the aggregate turnover in all goods by a dealer at all places of business in the State, whether or not the whole or any portion of such turnover is liable to tax. The taxable turnover of a dealer is the turnover on which he is liable to pay tax as determined after making such deductions and in such manner as has been prescribed. Turnover may be purchase turnover or sales turnover. Section 2(xxvi) defines turnover as the aggregate amount for which goods are either bought or sold, or supplied or distributed by a dealer. The proceeds of the sale by a person of agricultural or horticultural produce grown by himself or grown on any land in which he has an interest, whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover. The tax under Section 5 may be on the taxable purchase turnover or the taxable sales turnover of a dealer. That sub-section itself provides that in the case of goods specified in the First or Second Schedule, it would be at such points against such goods as are specified in the schedule and in the case of other goods at all points of sales. Therefore, it is apparent that all goods (which is a term defined in the Act) are liable to tax under the Act either at all points of sale or a particular point specified in the First or Second Schedule. These specified points are either points of purchases or of sales. The definition of a dealer indicates that it includes a casual trader and even a person who sells produce obtained by him from agriculture or horticulture or otherwise; though when he, a "dealer" within the definition of the term, sells those goods, it is not part of his turnover. 3. Section 5A of the Act was inserted in the Act by Section 3 of the Kerala General Sales Tax (Amendment) Act (Act 14 of 1970). Earlier, the corresponding section had been incorporated in the Act by Ordinance No. 9 of 1970 which was repealed by Act 14 of 1970. The object as apparent from the statement of objects and reasons of the Amending Act is stated to be "a measure for checking evasion of sales tax". The section itself runs as follows :

5A. Levy of purchase tax.-(1) Every dealer who in the course of his business purchases from a registered dealer or from any other person any goods, the sale or purchase of which is liable to tax under this Act, in circumstances in which no tax is payable under Section 5, and either(a) consumes such goods in the manufacture of other goods for sale or otherwise ; or (b) disposes of such goods in any manner other than by way of sale in the State ; or (c) despatches them to any place outside the State except as a direct result of sale or purchase in the course of inter-State trade or commerce, shall, whatever be the quantum of the turnover relating to such purchase for a year, pay tax on the taxable turnover relating to such purchase for that year at the rates mentioned in Section 5. (2) Notwithstanding anything contained in Sub-section (1), a dealer (other than a casual trader or agent of a non-resident dealer) purchasing goods, the sale of which is liable to tax under Section 5, shall not be liable to pay tax under Sub-section (1) if his total turnover for a year is less than ten thousand rupees : Provided that where the total turnover of such dealer for the year in respect of the goods mentioned in Clause (i) of Sub-section (1) of Section 5 is not less than two thousand five hundred rupees, he shall be liable to pay tax on the taxable turnover in respect of those goods. (3) Notwithstanding anything contained in the foregoing provisions of this section, a dealer referred to in Sub-section (1) who purchases goods, the sale of which is liable to tax under Clause (ii) of Sub-section (1) of Section 5, and whose total turnover for a year is not less than ten thousand rupees but not more than twenty-five thousand rupees may, at his option, instead of paying the tax in accordance with the provisions of Sub-section (1), pay tax at the rates mentioned in Clause (i) of Sub-section (1) of Section 7 in accordance with the provisions of that section. 4. It is evident from the provision in Section 5A that in cases where any dealer purchases goods, the sale or purchase of which is liable to tax under the Act in circumstances in which no tax is payable under Section 5, he is liable to tax relating to such purchases in case one of the three conditions is satisfied, namely, (1) the goods are consumed in the manufacture of goods for sale or otherwise, (2) the goods are disposed of in any manner other than by way of sale in the State, and (3) the goods are despatched outside the State except as a direct result of sale or purchase in

the course of inter-State trade or commerce. Goods which are purchased by a dealer could either be used by him in the State itself or could be sent outside the State. In cases where goods are sent outside the State as a direct result of sale or purchase in the course of inter-State trade or commerce, there is no liability under Section 5A. But if the goods are sent for any other purpose outside the State whether it be for the purpose of consignment sale or for the purpose of consumption outside the State Section 5A is attracted. Within the State the goods purchased by the dealer could either be consumed by him or could be otherwise disposed of including by way of sale within the State. If it is disposed of inside the State by sale, Section 5A will not be attracted in regard to those purchases. But if the goods are disposed of in any other manner including consumption in the manufacture of other goods for sale he becomes liable to pay tax on the purchase turnover. The scheme apparently appears to be that if the goods are not available as such goods for being taxed in the State at some other subsequent point, the dealer is liable to tax on his purchase turnover though but for such a situation he would not be liable to tax on such purchase turnover. Viewed in this manner, the case of a sale inside the State in which case it could be taxed by the State and the despatch outside the State as a direct result of inter-State sale or purchase are not really exceptions. The object of Section 5A appears to be to tax the. goods which would normally have been taxed at some point in the State subsequent to their purchase by the dealer if they are not available for such taxation. This too, only if in regard to the purchase by the dealer the goods did not suffer tax at the purchase point or the sale point. 5. In the scheme of the section, it goes without saying that the purchase by the dealer who is taxed under the section becomes taxable in his hands only if the goods are consumed or disposed of in any manner other than by way of sale or despatch to places outside the State otherwise than as a result of inter-State purchases. These are all subsequent events and, therefore, the time at which tax is imposed is postponed to the happening of subsequent events, but by the very fact of purchase the dealer becomes liable to pay tax on the purchase. It depends upon subsequent contingencies and tax becomes payable when the event mentioned in the section happens. The main attack against the validity of the section is based upon legislative competence of the State to tax the purchases on the happening of such future contingencies. The contention of the counsel for the petitioners in all the petitions is that the Legislature of the State was not competent to impose a tax which does not arise on the occasion of the sale but is made to depend upon subsequent consumption or use of the goods or dealing with the goods and which, therefore, according to counsel, renders it a tax other than a sales tax, possibly a tax on consumption or use, the imposition of which is beyond the competence of the State Legislature.

6. The power of the State Legislature to enact the sales tax law is derived from entry 54 in List II of the Seventh Schedule to the Constitution of India. That entry, as substituted by the Constitution (Sixth Amendment) Act, 1956, for the original entry 54 reads thus: 54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I. 7. Could it be said that a tax apparently imposed on the sale or purchase of goods cannot be justified with reference to entry 54 in List II because it is a tax which does not arise on the occasion of the sale ? The main attack against the validity of Section 5A is that the occasion for the taxation under that section is not the purchase by the dealer which event is ultimately sought to be taxed but subsequent dealing by him with the goods which may be long after the purchase itself. It is a contingency which may or may not happen. The goods purchased by a dealer can be sold within the State in which case he is not liable to tax under Section 5A. He may sell the goods in inter-State trade or commerce and despatch the goods outside the State as a result thereof. Then again the goods are not liable to be taxed. At the time when he purchases the goods it cannot be said whether he is going to deal with the goods in this manner or whether he is going to consume the goods in the manufacture of other goods for sale or otherwise. It is urged that in these circumstances, the tax liability is not one which arises on the occasion of the purchase sought to be taxed under Section 5A but it arises on a subsequent occasion when goods are used or consumed or otherwise dealt with. Therefore, according to counsel, it may appropriately be called a "use tax" or "consumption tax" and not a sales tax. 8. According to me, this contention is based on a misconception of the scope of taxation on the sale of goods. It is true that sales tax is a tax imposed on the occasion of the sale of goods. But it has no reference to the point of time at which the sale or purchase takes place. It refers to the connection with the event of purchase or sale and not the point of time at which such purchase or sale takes place. To read it otherwise would render any retrospective imposition of sales tax invalid as in every such case the tax would not be one which arises on the occasion of sale. By the same logic, it would not be possible to tax any goods at the last purchase point in the State, for the last purchase point in regard to any goods could be determined only when the goods are sold later and not when the goods are purchased. On the same reasoning as urged by counsel, one should say in such a case that since the goods are taxed only when the goods are sold outside the State or are despatched for such sale outside the State and so the last purchases are taxed not on the "occasion" of the purchases and, consequently, it is beyond the competence of the Legislature. That certainly cannot be and the Supreme Court has held in the decision in State of

Madras v. Narayanaswami Naidu[1968] 21 S.T.C. 1 (S.C.) that the goods are taxable in such cases in the financial year when they become the last purchases. 9. The petitioners seek inspiration for their contention in the decisions of the Federal Court of India in In re C.P. Motor Spirit Act A.I.R. 1939 F.C. 1 and in Madras Province v. Boddu Paidanna & Sons A.I.R. 1942 F.C. 33. The first of these cases was a reference by His Excellency the Governor-General of India to the Federal Court under Section 213 of the Constitution Act, 1935, and it concerned the vires of the Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act (14 of 1938). Whether that legislation, which was by a Provincial Legislature which had power to tax sale of goods, could be sustained on the basis of its taxing power was the question that the Federal Court had to answer and this called for a consideration of the essential distinction between duties of excise and sales tax. Sulaiman, J., at page 22 of the report said thus : Obviously the power to tax the sale of goods is quite distinct from any right to impose taxes on use or consumption. It cannot be exercised at the earlier stage of import or manufacture or production, nor at the later stage of use or consumption, but only at the stage of sale. The successive stages of manufacture or production, sale, use or consumption are separate, and it is possible to impose duty at any of these stages. There is a fine distinction between taxes on the sale of goods and taxes on the goods themselves. The essence of a tax on goods manufactured or produced is that the right to levy it accrues by virtue of their manufacture or production. It is immaterial whether the goods are actually sold or consumed by the owner or even destroyed before they can be used. If duty is imposed on the goods manufactured or produced when they issue from the manufactory, then the duty becomes leviable independently of the purpose for which they leave it and irrespective of what happens to them later. On the other hand, a duty on the sale of goods cannot be levied merely because goods have been manufactured or produced. Nor can it be levied merely because the goods have been consumed or used or even destroyed. The right to levy the duty would not at all come into existence before the time of the sale. It cannot at all be levied unless the goods are actually sold, and may not be leviable if they are transferred in some other form. Thus a duty on goods manufactured or produced is distinct, separate and independent from a duty on their sale and, (except probably at the stage of the first sale) there seems to be no good reason why they may not co-exist without overlapping. Later the validity of the Madras General Sales Tax Act, 1939, was called into question before the Federal Court. There again the question was whether the tax which was imposed was really in

the nature of a duty of excise. Dealing with the question. Sir Maurice Gwyer, C. J., referring to the opinion given by the Federal Court in In re C.P. Motor Spirit Act [1939] F.C.R. 18 said thus : The duties of excise which the Constitution Act assigns exclusively to the Central Legislature are, according to the Central Provinces case [1939] F.C.R. 18 duties levied upon the manufacturer or producer in respect of the manufacture or production' of the commodity taxed. The tax on the sale of goods, which the Act assigns exclusively to the Provincial Legislatures, is a tax levied on the occasion of the sale of the goods.... In the case of sales tax, the liability to tax arises on the occasion of a sale, and a sale has no necessary connection with manufacture or production. That the Federal Court was not referring to the time of sale as determining factor in the matter of competence of the Legislature to tax by reason of the entry corresponding to entry 54 in List II of the Seventh Schedule of our Constitution is evident. The Supreme Court had to consider a more or less similar argument advanced in a case Where the challenge was made to the competency of the State Legislature to enact U. P. Sales Tax (Validation) Act, 1958. That validated an earlier notification of the State imposing the tax on the sale proceeds of jute which had been struck down. The contention before the Supreme Court was that, notwithstanding the Validation Act, the notification continued to be void and inoperative because it had not been in fact valid and the Act itself was ultra vires. Several grounds were urged and one of the main grounds was that the Act could not be said to be authorised by entry 54 in List II as it enabled the tax to be levied otherwise than on the occasion of the sale. Dealing with this question, the Supreme Court said in J.K. Jute Mills Co. v. State of U.P. A.I.R. 1961 S.C. 1534 thus : But it is urged on the strength of certain observations in The Province of Madras v. Boddu Paidanna & Sons [1942] F.C.R. 90 that a sales tax is a tax on the occasion of sale, and that, therefore, it could not be imposed with retrospective operation. This contention is, in our judgment, wholly without substance. Now, the point for decision in that case was whether a tax imposed by a Provincial Legislature on the sale of oil by a person who manufactured it was bad on the ground that it was in essence an excise duty. While a sales tax could be imposed by a Provincial Legislature, an excise duty could be imposed only by the Federal Legislature. In holding that the tax in question was a sales tax and not an excise duty, the court observed as follows : The duties of excise which the Constitution Act assigns exclusively to the Central Legislature are, according to the Central Provinces case, (In the matter of Central Provinces and Berar Sales

of Motor Spirit & Lubricants Taxation Act, 1938 1939 F.C.R. 18), duties levied upon the manufacturer or producer in respect of the manufacture or production of the commodity taxed. The tax on the sale of goods, which the Act assigns exclusively to the Provincial Legislatures, is a tax levied on the occasion of the sale of the goods. Plainly a tax levied on the first sale must in the nature of things be a tax on the sale by the manufacturer or producer; but it is levied upon him qua seller and not qua manufacturer or producer.' (p. 101 of F.C.R.) In the context, the words, 'on the occasion of the sale' have reference to the character of the transaction and not to the point of time at which the duty becomes leviable, and they have no bearing on the question as to when such a tax could be imposed. 10. These observations of the Supreme Court would be sufficient to answer the contention of the petitioners. Entry 54 in List II of the Seventh Schedule confers on the Legislature authority to enact laws imposing tax on sale or purchase of goods. When the competency of the Legislature in relation to a particular enactment is under challenge, the question would be whether there has been a sale. Of course, the Legislature cannot under the guise of taxing sales impose tax on transactions or incidents which are not sales. Attempt to tax an agreement to sell failed as held in Sales Tax Officer v. Budh Prakash Jai Prakash A.I.R. 1954 S.C. 459 . Similarly, attempt to tax works contract failed as held in the case of Madras State v. Gannon Dunkerley & Co. A.I.R. 1958 S.C. 560. It was held by the Supreme Court that: Where the transaction is one of sale of goods as known to law the power of the State to impose the tax thereon is plenary and unrestricted subject only to any limitation which the Constitution may impose and in the exercise of that power it will be competent to the Legislature to impose a tax on sales which are taken place prior to the enactment of the legislation. 11. Before parting with the discussion on this question, I may refer to the decision of the Supreme Court in Andhra Sugars Ltd. v. State of A. P. A.I.R. 1968 S.C. 599 There the challenge was made to the validity of levy under Section 21 of the A. P. Sugarcane (Regulation of Supply and Purchase) Act, 1961. That section enabled taxation of purchase of sugarcane made under agreements. The attack to that section was that sugarcane was taxed on the purchases when it was required for use, consumption or sale in a factory, and on the wording of Section 21, there could be no purchase tax with reference to the subsequent use, consumption or sale. It was further contended that such a tax would be a use tax. The Supreme Court, dealing with these contentions, said thus:

Mr. Chatterjee submitted that the tax levied under Section 21 was a use tax and referred to McLeod v. Dilworth and Co. (1943) 322 U.S. 327 and Govindarajulu Naidu and Co. v. State of Madras. He argued that the State Legislature could not levy a use tax which was essentially different from a purchase tax. The assumption of counsel that Section 21 levies a use tax is not well-founded. The taxable event under Section 21 is the purchase of goods and not the use or enjoyment of what is purchased. The constitutional implication of a use tax in American law is entirely irrelevant. The observation in the Madras case A.I.R. 1953 Mad. 116 at pp. 127-128 that the explanation to Article 286(1)(a) of the Constitution conferred a power on the State Legislature to levy a use tax is erroneous. The explanation fixed the situs of certain sales. It did not confer upon the Legislature any power to levy a use tax. 12. That Section 5A of the Act infringes Article 301 of the Constitution of India is the next attack. It is said that the imposition of tax is really in the nature of a restraint on trade and that for that reason, the freedom guaranteed under Article 301 is infringed. Of course, there is no case that if there is an infringement of Article 301, the law is validated by compliance with Article 304 of the Constitution. Therefore, what calls for consideration in this context is whether the impugned provision is in any way restrictive of the freedom of trade envisaged in Article 301 of the Constitution. 13. Though at one time there was considerable controversy as to whether the very imposition of tax would amount to a restriction within the meaning of Article 301 of the Constitution it could be said that the question is now well-settled by the decisions of the Supreme Court. In the decision inAtiabari Tea Company v. The State of Assam [1961] 1 S.C.R. 809 Gajendra-gadkar, J., observed thus : Taxes may and do amount to restrictions ; but it is only such taxes as directly and immediately restrict trade that would fall within the purview of Article 301. The argument that all taxes should be governed by Article 301 whether or not their impact on trade is immediate or mediate, direct or remote, adopts, in our opinion, an extreme approach which cannot be upheld. 14. Dealing with Section 21 of the A. P. Sugarcane (Regulation of Supply and Purchase) Act, 1961, which I have adverted to in this judgment earlier, the Supreme Court dealt with the infringement of Article 301 of the Constitution by the measure of taxation under the said provision. As I mentioned earlier, that provision imposed a levy of tax on purchase of sugarcane for use and consumption and, therefore, it was contended that this provision impeded free trade, commerce and intercourse. The Supreme Court referred to its earlier decision in Firm A.T.B.

Mehtab Majid & Co. v. State of Madras1, dealing with a similar contention in regard to import of hides and skins and quoted the following passage: It is therefore now well-settled that taxing laws can be restrictions on trade, commerce and intercourse, if they hamper the flow of trade and if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade and it will then offend against Article 301 and will be valid only if it comes within the terms of Article 304(a). The Supreme Court distinguished that case from the case before it. The case in Firm A. T. B. Mehtab Majid & Co. v. State of Madras A.I.R. 1963 S.C. 928 was one where there was discrimination between goods imported from other States and that of indigenous origin and this was found to impede the free flow of trade but the tax levied under Section 21 with which the Supreme Court was concerned did not discriminate against any imported cane. The same rate of tax was levied on purchase of cane required for use, consumption or sale in a factory. The Supreme Court, therefore, held thus : A non-discriminatory tax on goods does not offend Article 301 unless it directly impedes the free movement or transport of the goods. 15. Of course, when a tax is imposed operating directly as a physical bar restricting free movement of goods, the position would be different. It would then be a tax, the effect of the imposition of which would be to act as an immediate restraint on the movement of goods within the territory of India. Taxation provisions such as the one impugned here do not impose any such restriction to the physical movement of the goods. The provision in Section 5A does not also discriminate between the goods imported and the goods of indigenous origin. Therefore, there is no scope for the plea that Section 5A operates in infringement of Article 301 of the Constitution. 16. Yet another attack urged by counsel for the petitioners is that the provision in Section 5A is discriminatory and violative of Article 14 of the Constitution of India. The only point urged in this connection before me was that the State was discriminating between dealer and dealer in that taxes are imposed only on such purchases in the hands of the dealers of goods which are used in the manufacture or which are disposed of in any other manner otherwise than by its sale within the State. It is stated that there is no logical basis for this classification of dealings for the

purpose of taxation. Counsel for the petitioners rely upon the observation in the decision of the Supreme Court in Bhawani Cotton Mills Ltd. v. State of Punjab [1967] 20 S T.C. 290 (S.C.). The Supreme Court observed thus : It is not open to the State to urge that it is entitled, in the matter of levying tax on transactions by way of purchase, to tax only the category of purchases for use in the manufacture of goods for sale. Further, the State has not been able to satisfy us that there is any reasonable classification made, which will enable this court to sustain the notification. This observation has, according to me, no relevance to the cases here. Under Section 5A it is not only goods which are consumed in the manufacture or sale that are taxed on their purchase turnover in the hands of the dealer. The three categories mentioned in Section 5A exhausts all manner of dealirrg with the goods. The goods may be used inside the State or may be destroyed within the State. The goods may be sent outside the State, whether it be for the purpose of sale or whether as the result of the sale. All such cases are covered by the three classes in Section 5A(1). In all cases excepting those where sales take place within the State or sales take place in interState trade or commerce, tax is levied on the purchase turnover. In the case of sales which take place within the State, there is no question of any evasion of tax as goods are taxed at a subsequent point. But, when goods are used in the manufacture of other goods the goods as such lose their identity and become some other goods and, therefore, these goods as such are not available for taxation in the State any more. So is the case with goods being disposed of in any other manner which may include disposal by consumption or disposal by destruction. In all such cases, there is no scope of the State getting revenue by way of taxation in regard to such goods thereafter and if they have not suffered tax in the transaction of sale to the dealer, who is sought to be assessed under Section 5A, his purchase turnover is taxed. The classification is, therefore, evident and the purpose is to tax when the goods cannot otherwise be taxed in the State thereafter. The charge of discrimination must, therefore, fail. 17. Counsel, Sri T. L. Viswanatha Iyer, appearing in O.P. Nos. 688 of 1971 and 3958 of 1970, urged yet another attack to the section. According to him, the retrospective operation given to Section 5A is such as to violate the fundamental rights of the petitioner under articles 14, 19(1)(f) and 31 of the Constitution. This is founded on the plea that while all dealers are enabled to pass on the tax to the purchasers, those affected by Section 5A, like the petitioner, were not in a position to collect this new levy during the period 1st April, 1970, to 15th May, 1970, for which period the section has been made retrospective, for the reason that there was no such levy then. It is urged that the result of retrospectivity of Section 5A is that the petitioner has to pay

very large amounts out of the capital investment in the business. In short, the argument is that the retrospectivity of a levy may operate as an unreasonable burden which is likely to make the carrying on of business of the dealer impossible and this is an unreasonable restriction on the right to carry on business. Reliance is placed by counsel on the decision in Rai Ramkrishna v. State of Bihar [1963] 50 I.T.R. 171 (S.C.). It is now well-settled that a taxation statute has also to satisfy the test of reasonableness. Taxing statutes are not beyond the purview of the constitutional limitations imposed by articles 14 and 19 of the Constitution or the test of reasonableness prescribed by Article 304(b). Taxing statutes should not be confiscatory, and it is open to the courts to see whether the statute is really a disguise or a cloak to achieve confiscatory purposes. But mere retrospective operation of a taxing statute cannot give it the character of a confiscatory statute. This is the case even in regard to a tax which the person sought to be taxed is allowed to pass on to a third party like the consumer. In regard to taxing statutes the Supreme Court said in the above decision thus : In other words, it may be open to a party affected by the provisions of the Act to contend that the retrospective operation of the Act so completely alters the character of the tax imposed by it as to take it outside the limits of the entry which gives the Legislature competence to enact the law ; or, it may be open to it to contend in the alternative that the restrictions imposed by the Act are so unreasonable that they should be struck down on the ground that they contravene his fundamental rights guaranteed under Article 19(1)(f) and (g). Referring to the retrospective character of a tax legislation, the Supreme Court said thus : The position, therefore, appears to be well-settled that if in its essential features a taxing statute is within the legislative competence of the Legislature which passed it by reference to the relevant entry in the List, its character is not necessarily changed merely by its retrospective operation so as to make (sic take) the said retrospective operation, outside the legislative competence of the said Legislatuie, and so, we must hold that the challenge to the validity of the retrospective operation of the Act on the ground that the provision in that behalf is beyond the legislative competence of the Bihar Legislature must be rejected. The retrospective operation of the statute with which the Supreme Court was concerned in the above case was for the period between 1st April, 1950, and 23rd September, 1961. Based on this, it was contended in that case that any such retrospectivity for more than 10 years must be held to be a relevant test to determine the reasonableness of the statute. Dealing with this question, the Supreme Court said that they did not think that such a "mechanical test can be applied in

determining the validity of the retrospective operation of the Act". The learned Judges further said thus : It is conceivable that cases may arise in which the retrospective operation of a taxing or other statute may introduce such an element of unreasonableness that the restrictions imposed by it may be open to serious challenge as unconstitutional ; but the test of the length of time covered by the retrospective operation cannot, by itself, necessarily be a decisive test. We may have a statute whose retrospective operation covers a comparatively short period and yet it is possible that the nature of the restriction imposed by it may be of such a character as to introduce a serious infirmity in the retrospective operation. On the other hand, we may get cases where the period covered by the retrospective operation of the statute, though long, will not introduce any such infirmity. Take the case of a validating Act. If a statute passed by the Legislature is challenged in proceedings before a court and the challenge is ultimately sustained and the statute is struck down, it is not unlikely that the judicial proceedings may occupy a fairly long period and the Legislature may well decide to await the final decision in the said proceedings before it uses its legislative power to cure the alleged infirmity in the earlier Act, In such a case, if after the final judicial verdict is pronounced in the matter the Legislature passes a validating Act, it may well cover a long period taken by the judicial proceedings in court and yet it would be inappropriate to hold that because the retrospective operation covers a long period, therefore, the restriction imposed by it is unreasonable. That is why we think the test of the length of time covered by the retrospective operation cannot by itself be treated as a decisive test. 18. Counsel would contend that on the facts of the case the retrospective levy must be held to be bad. This levy is said to be such a heavy burden on the business that it practically destroys the right to carry on the business. Necessarily this would depend upon the enormity of the burden imposed by the retrospectivity of the statute. The mere fact that it is not possible to pass on the levy to the consumer has been held to be not sufficient to affect the competency of the Legislature to impose the tax. That is because by its very nature the tax is on the sale or purchase and not on the consumer and it is not obligatory that it should be permitted to be passed on to the consumer though the statute may enable this. Therefore, unless it is shown that the effect of the levy for a period prior to the enactment of the amendment creates such a burden that thereafter business will not be possible, it is not for this court to say that there has been an infringement of Article 19(1)(f) or Article 31 of the Constitution. On the facts of this case, it has not been shown that by the retrospectivity for the short period there has been any such situation here. It has also not been shown with reference to the facts that the business is likely to suffer so heavily as to

render the tax confiscatory. It is not the counsel's case that the Legislature is not competent to pass a taxing statute of the nature of the Act before me to operate not only prospectively but retrospectively too. 19. Having therefore found that the attack on the validity of Section 5A of the Act is without merit, I will have now to proceed to consider the contention raised in each one of these petitions. That again in most of the cases involves the construction of Section 5A for the purpose of application to the facts of each case. This is because there is a controversy as to the meaning and scope of Section 5A. 20. In 0. P. No. 145 of 1971, the petitioner is a dealer in pineapple preparations and in the course of his business he purchases pineapples from growers and produces canned pineapple slices and also pineapple juice and jam. According to him, the pineapples are sliced, canned and exported. Besides this, pineapple juice is extracted from the pineapple and that too sold. Trimmings are crushed and pineapple jam is prepared. He would say that the purchase from the growers of pineapple for the purpose of "conversion" into pineapple slices, juice and jam cannot attract Section 5A. He has also a contention that pineapple is a vegetable and, therefore, at any rate, it is not liable to be taxed as it is one of the articles exempted from taxation under Section 10 of the Act. Therefore, the question, raised is whether pineapple is a vegetable and further whether by conversion of pineapple into slices, jam and juice, there is a process of manufacture of goods so as to attract Section 5A of the Act. In this connection, I may notice the contention of Sri C. K. Viswanatha Iyer, counsel for the petitioner, that if it is not so used in manufacture, it continues to retain its identity in which case there is no scope for applying Section 5A. 21. The Third Schedule to the General Sales Tax Act enumerates goods exempted from tax under Section 9 thereof. That section provides that a dealer, who deals in the goods specified in the Third Schedule, shall not be liable to pay any tax under this Act in respect of the sale or purchase of such goods subject to such restrictions and conditions as may be prescribed. Item 10 in the Third Schedule is vegetables and that item runs as follows: 10. Vegetables (other than green ginger), whether roots, green fruits or leaves, used for human consumption including tapioca, yam potatoes, lime, sabola and tomatoes, except their manufactured products. Explanation.-The term 'vegetables' shall not include any goods of the description specified in the First or Second Schedule.

This indicates that roots, green fruits and leaves may be vegetables if such are used for human consumption. According to the petitioner, pineapple should be considered a vegetable. That it is not a vegetable has been held by this court in Deputy Commissioner v. Mammootty 1970 K.L.T. 142. This is because the term vegetable in a taxing statute should be understood as in common parlance. Normally, the housewife who seeks to purchase vegetables or any person who goes to the market to purchase vegetables does not intend pineapple to be included in that term. In common parlance, pineapple is a fruit and not a vegetable. In the light of the Bench decision of this court, I do not think that I need go into this question further. 22. More relevant argument of counsel is that only if the pineapple is either used in the manufacture or disposed of otherwise, would tax liability under Section 5A arise. According to him, when pineapple is sliced and canned for the purpose of sale, there is no process of manufacture at all, and the goods remain the same. I need not go into this question because even assuming that the contention of the petitioner is true, Section 5 A will be attracted if the goods are either consigned for sale outside the State or otherwise consumed in the State. If they are sold in the State or moved out of the State as a result of sale or purchase in the course of inter-State trade or commerce, Section 5A will not be attracted. If it is disposed of otherwise tax liability under Section 5A would arise, if, at the point of sale to the petitioner, it has not suffered tax even though the goods are such as should suffer tax. The petitioner admittedly purchases -pineapple from growers and he has no case that they paid tax on the sales to the petitioner. In fact, if they are liable there is no question of application of Section 5A at all. If this is a case where there has been no such liability to tax, though sale of pineapple is taxable because the sale took place under such circumstances that it was not liable to be taxed, then Section 5A will arise for application irrespective of the question whether the goods have been used in the manufacture of other goods and exported or whether the goods have been sent outside the State for sale in the same form or as the same goods. Therefore, I have to consider whether the construction that I have sought to put on Section 5A is correct. 23. In order to attract Section 5A the following elements are necessary: (1) a dealer must purchase goods in the course of his business; (2) the purchase must be from a registered dealer or from any other person ; (3) the purchase must be of any goods, the sale or purchase of which is liable to tax under the Act; and

(4) the purchase must be in circumstances in which no tax is payable under Section 5. Now, to illustrate this, supposing B purchases goods from A and deals with the goods in one or other of the ways specified in Clauses (a) to (c) to Section 5A(1), for determining the liability of B under Section 5A the following questions will have to be asked : (1) Whether B is a dealer who is making purchases in the course of his business ? (2) Is the purchase of goods, the sale or purchase of which is liable to tax under the Act ? (3) Is the purchase from a registered dealer or from any other person ? (4) Is the purchase under circumstances under which no tax is payable under Section 5 ? 24. The first of these requirements should be satisfied if B happens to be a dealer who is making the purchases in the course of his business and not casual purchases otherwise than in the course of his business. 25. That the purchase by B should be of goods, the sale or purchase of which is liable to tax under the Act is the next requirement. The term "goods" is denned in Section 2(xii) of the Act as follows : (xii) 'goods' means all kinds of movable property (other than newspapers, actionable claims, electricity, stocks and shares and securities) and includes live-stock, all materials, commodities, and articles (including those to be used in the fitting out, improvement or repair of movable property), and all growing crops, grass or things attached to, or forming part of, the land which are agreed to be severed before sale or under the contract of sale. The term "goods" is exhaustive enough to include all kinds of movable property and growing crops, grass or things attached to or forming part of the land. Therefore, what is the purpose of the further qualification to the term "goods", namely, the sale or purchase of which is liable to tax ? The qualification can possibly refer only to the provisions for exemption such as that in Section 10 of the Act. Section 10 provides that Government may, if they consider it necessary in the public interest, by notification in the gazette make an exemption or reduction in rate, in respect of any tax payable under the Act on the sale or purchase of any goods, at all points or at a specified point or points in the series of sales or purchases by successive dealers. Several goods have been exempted at all points of sale or purchase in the State by any person, as, for example,

vegetables. They are no doubt goods as the term is defined, but are not goods liable to tax under the Act because of the exemption under Section 10. If this clause "the sale or purchase of which is liable to payment of tax" is not read in this manner, the entire clause becomes redundant as otherwise all goods are brought within the scheme of taxation under Section 5 of the Act. All movable properties included in the definition of the goods are automatically within the scheme of taxation at some point or other under Section 5(1) of the Act. If that be the case the qualification of the term "goods" by the words "sale or purchase of which is liable to tax under this Act" if intended as a qualification can only refer to such provisions of Section 10 of the Act. Such a construction is evidently reasonable because in regard to such goods which are exempted at all points there is no reason to think that tax should be levied under Section 5A as there could not be any idea of checking of evasion in regard to sales tax on such goods. 26. In order that Section 5A may apply, the next requirement is that purchase by B must be from a registered dealer or any other person. The sale can be effected by a registered dealer, a nonregistered dealer or a non-dealer. These three categories, so far as I could see, must exhaust the categories of sellers. Therefore, the words "any other person" may refer to a non-registered dealer as well as a non-dealer. A registered dealer is liable to pay tax on his sales under Section 5(1) of the Act. A dealer even though not registered is also liable to pay tax under the Act on his turnover. But in both cases, there is a minimum turnover prescribed as a condition to attract the liability for payment of tax. A non-dealer is not made liable under the Act and sales by him, therefore, is not within the purview of Section 5. One instance of such sales by non-dealers will be casual sales. These casual sales are to be distinguished from sales by casual traders, a term which is denned in the Act itself. 27. Though normally a sale by a registered dealer or by a dealer attracts tax, there may be circumstances under which the seller may not be liable as, for example, when his turnover is below the specified minimum. In such cases the "goods" are liable to be taxed, but the sales take place in circumstances in which no tax is payable at the point at which tax is levied under the Act. If the goods are not available in the State for subsequent taxation by reason of one or other of the circumstances mentioned in Clauses (a), (b) and (c) of Section 5A(1) of the Act, then the purchaser is sought to be made liable under Section 5A. Yet another instance is where, in the hands of the seller, whether he be a registered dealer or non-registered dealer, the tax is not due on the sales. This may be the case where some particular classes of sellers are exempted in regard to the sale of certain goods though persons of other class may not be entitled to the same exemption on the sales of the same commodity. As an example may be cited, the case of a

turnover relating to sale of goods other than those specified in the First or Second Schedule to the Act by wholesale co-operative societies in the State to the primary co-operative societies who are members of the wholesale co-operative societies. The goods sold may be taxable at multipoint of sales, the turnover of the seller may exceed the minimum but the sales by the wholesale co-operative societies are exempted under the notification made under Section 10. This is a case where the goods are taxable, but in the hands of the seller A it is not taxable and, therefore, in the hands of B it could be taxed at the point of purchase provided other conditions to attract Section 5A(1) are present. 28. Another instance I can conceive of is a case of a dealer selling agricultural or horticultural produce grown by him or grown in any land in which he has interest, whether as owner, usufructuary mortgagee, tenant or otherwise. From the definition of "turnover" in Section 2(xxvii) of the Act it is evident that the proceeds of such sale would be excluded from the turnover of a person who sells goods produced by him by manufacture, agriculture, horticulture or otherwise, though merely by such sales he satisfies the definition of a "dealer" in the Act. Thus, such a person selling such produce is treated as a dealer within the meaning of the Act and the sales are of goods which are taxable under the Act but when he sells these goods, it is not part of his turnover. Therefore, it is a case of a dealer selling goods liable to tax under the Act in circumstances in which no tax is payable under the Act. In such a case, the purchaser is sought to be taxed under Section 5A provided the conditions are satisfied. The case of growers selling goods to persons to whom Section 5A thus applies is covered by this example. 29. Yet another possible case is where casual sales are made by persons who are not dealers as the term is defined in the Act. The goods may be such as to attract tax on their sales, but the sales are under circumstances which would not attract the levy on account of the character of the seller. The conditions to attract Clauses (a), (b) or (c) of Section 5A(1) may be present. The transactions of sales are not taxable in the circumstances in which they were effected because the person who effected the sales was not a dealer liable to tax under the Act and the circumstances indicate that at no subsequent point the goods would suffer taxation in the State. It is then sought to be taxed in the hands of the purchaser under Section 5A. This, according to me, is the scheme of Section 5A of the Act "and bearing this in mind, I am proposing to resolve the questions of tax liability of the various petitioners whose petitions are before me. 30. In O. P. No. 145 of 1971, it is evident that the petitioner is purchasing from growers goods which are taxable under the Act but are not taxed because the persons who sell the goods to the petitioner are not dealers within the meaning of the Act. Goods are no longer available in the

State and one or the other circumstance provided in Section 5A(1)(a), (b) or (c) happens to the goods. If it does not happen, there is no scope for taxation. That has happened here and, therefore, the assessment made on the petitioner must stand. 31. Petitioners in O. P. Nos. 1690, 1700, 1704 and 1706 of 1971 are all persons who purchase timber in the course of their business. All the petitioners in these petitions are running match factories and they purchase timber for the purpose of manufacture of splints for their match industries. It is not stated in the petitions that at the point of sale to the petitioners the goods are liable to tax in the hands of their sellers. The department has apparently proceeded on the basis that Section 5A is attracted as there has been no liability to taxation at that point. If the petitioners have a case that the goods have already suffered tax in the hands of sellers or are liable to be taxed in their hands and, therefore, Section 5A does not apply, it is for them to set up such a case. Having not set up such a case, I do not think that there is any reason to hold that Section 5A will have no application. The petitions have, therefore, to be dismissed. 32. Same is the case with O. P. No. 4734 of 1971. That again is a case of a person conducting a match factory purchasing timber. There is no averment in the petition that the sale to the petitioner was taxed in the hands of the seller or was liable to be taxed. Hence, Section 5A would apply. 33. In O. P. Nos. 4843, 4852 and 4866 of 1971, the petitioners are dealers in timber. The first two of them are running saw mills and the third is apparently a dealer in timber. It is stated that the petitioners purchase timber logs and get them cut and sawn into planks and sell them. It is not averred here also, just as in the other cases, that the sale to the petitioners had suffered tax or was liable to tax. This is the case also with the petitioner in O. P. No. 4866 of 1971, who also is a dealer in timber. Hence, these petitions have no merit. 34. In O. P. Nos. 3958 of 1970 and 688 of 1971, the petitioners purchase copra and oil and deal in oil and oil-cakes. I need not examine whether their purchases are from persons who are liable to tax under Section 5. That is because in both these cases, assessments have only been proposed and no assessment orders have been passed. So this is not a matter which requires investigation now. 35. In the result, all the original petitions are dismissed. In the circumstances of the case, parties are directed to suffer costs