judgement:
Civil Appeal No. 1733 of 1973.
From the Judgment and Order dated 26.7.1971 of the Bombay High Court in Income Tax Reference No. 112 of 1963.
G.C. Sharma, K.C. Dua and Miss A. Subhashini for the Appellant.
S.T. Desai, D.N. Misra and Mrs. A.K. Verma for the Respondent.
The Judgment of the Court was delivered by RANGANATH MISRA, J.
This appeal by special leave at the instance of the Revenue assails the decision of the Bombay High Court upon a reference under section 66 of the Income Tax Act, 1922 (hereinafter referred to as 'the Act ').
In respect of the assessment year 1954 55, the respondent assessee claimed deduction of a sum of Rs. 7,93,837, under section 10(1) or alternatively under 8.
10(2) (xv) of the Act in determining its business profits which the Income Tax Officer and the two appellate authorities in due course rejected.
On the application of the assessee the dispute regarding admissibility of the claim w referred to the High Court.
It agreed with the Tribunal that 'the assessee had acquired an asset of an enduring nature in lieu of the payment of the amount in dispute; yet, the High Court held that the payment represented business expenditure and the claim of deduction was tenable under 8.
10(2) (xv) of the Act.
On reaching this conclusion the Court was of the view that consideration as to whether the payment made by the assessee did not form part of its real income was unnecessary and answered the reference in favour of the assessee.
The Commissioner of Income Tax, on obtaining special leave, is in appeal before this Court.
The short facts relevant for appreciating the question for consideration are these: 520 M/s. Bharat Barrel & Drum Manufacturing Co. Ltd., ( 'Bharat Barrel ' for short) gave its sole selling agency to a firm Jalan Trading Co. by an agreement dated May 1, 1951, for two years with a right of renewal.
Assessee respondent is a private company incorporated on October 16, 1952.
& der a deed of assignment dated December 30, 1952, the benefits of the agreement dated May 1, 1951, were assigned to the assessee and from January 1, 1953, under the assignment the respondent carried on the business as selling agents of Bharat Barrel.
From May 1, 1953, on the basis of the option for renewal exercised by the assessee an agreement was entered into between Bharat Barrel and the assessee in respect of the sole selling agency and with a renewal clause.
The deed of assignment incorporated the following relevant terms: "WHEREAS after the incorporation of the said Company (assessee) lt was however agreed that the assignee company should take over not the whole of the business of the Assignors but only the benefit of the aforesaid contract dated the 1st May 1951 with the Said manufacturers on the terms and conditions mutually agreed to and as hereinafter appearing: 1.
In consideration of the premises and of the covenant on the part of the assignees hereinafter contain ed the Assignors as beneficial owners hereby assigns to the assignees: (i) The said agreement of the 1st day of May 1951 and made between the said Bharat Barrel & Drum Manufacturing Co. Ltd. Of the one part and the assignors of the other part and the full benefit thereof as and from the 1st day of January 1953 and all commission and other moneys payable or to be payable by the manufacturers; (ii) the full benefit of all pending contracts and orders entered into or given by the assignors in connection with the said agreement 2.
In consideration aforesaid the assignees hereby covenant with the assignors to pay to the assignors as and by way of Royalty an amount equivalent to 75% of their profits and commission remuneration and other 521 moneys received from the manufacturers under the said agreement or any further agreement that may be entered into by the Manufacturers with the Assignees in pursuance of the option to renew the agreement contained in cl. 5 of the said agreement dated 1st May 1951.
" Assessee claimed to have paid Rs. 7,93,887 being 75% of its net profits in the assessment year 1954 55 and claimed it as a business deduction but the same was rejected by the Assessing Officer as also the appellate authorities.
In dealing with the question raised, the Tribunal held: "The narrow question, therefore, that we have to decide in this case is whether the payment of Rs. 7,93,837 is made by the assessee for acquisition of an asset or benefit of an enduring character and, therefore, is of a capital nature.
In this the only relevant document to be considered, is the deed of assignment dated 30.12.1952.
Examining the said deed and particularly clause 2 therein which is already stated above, we think there is no doubt that the payment in question was made by the assessee to acquire the right to carry on the sole selling agency of Bharat Ltd. Or in any case to acquire a benefit of an enduring nature.
It is true that in this case no ascertained sum is mentioned for acquiring the right or the enduring benefit.
But in our opinion, this factor alone is not a decisive factor in every case.
The facts and the circumstances of every case have to be looked into and if on the whole it appears that what was acquired was an asset or an enduring benefit by expending a certain sum, the expenditure can well be held to be a capital expenditure and not a revenue expenditure.
In certain cases, it may well be that in conjunction with other facts, the fact that there is no ascertained sum mentioned in order to acquire the asset or the enduring benefit, would lead to the inference that the expenditure is not a capital expenditure.
But in this case, we have no doubt that the amount in question was spent for acquiring an asset of enduring benefit and, therefore, we have to hold that the expenditure in question was a capital expenditure. . " 522 The High Court also negatived the assessee 's stand that no enduring asset was acquired and held: We cannot accept the assessee 's submission that the asset acquired by it when lt obtained assignment of the sole selling agency agreement, is not of an enduring nature.
Counsel for the assessee says that the assessee only acquired the right to use the rights under the sole selling agency agreement and that is not an asset of a capital nature.
There is no warrant for the submission, because clause 1 of the deed of assignment provides in terms that the firm as a beneficial owner assigned to the assessee 'the said agreement of the 1st day of May 1951. . and the full benefit thereof as and from the 1st day of January 1953 and all commission and other moneys payable or to be payable. . by the manufacturers.
Secondly, the right which the assessee acquired under the deed of assignment was a right to act as the sole selling agents till the 1st day of May 1953 in the first instance, coupled with the right to have the sole selling agency agreement renewed for an indefinite period, though for two years at a stretch.
mere was some faint argument before us as to the true meaning and scope of the option of renewal, but we see no doubt that under the agreement of the 1st day of May 1951, the firm had the option to stipulate for a renewal on the same terms and conditions as were contained in that agreement, which must include the term regarding the option for a further renewal for an indefinite period.
m us, the assessee obtained an assignment of the agreement between the Company and the firm.
That agreement contained the right to have the sole selling agency agreement renewed for an indefinite period.
It must follow that the assessee acquired an asset of an enduring nature.
Ordinarily, out of this finding the conclusion would have followed that the claim of deduction was not admissible as the expenditure was for acquisition of a capital asset.
The High Court, however, referred to this Court 's decision in Travancore Sugars & Chemicals Ltd. vs Commissioner of Income Tax, Kerala, = ; and adopting the reasonings relied upon in that case to which we shall presently refer, came to hold: 523 In view of these circumstances, the Supreme Court held that the payment of the annual sum was not in the nature of capital expenditure but was in the nature of revenue expenditure.
Each one of the three features adverted to by the Supreme Court is present in the instant case.
and proceeded to conclude the matter by saying: We take the view that the case before us is in material respects similar to the Travancore Sugar case.
" The High Court did not examine the aspect relating to whether the payment made by the assessee did not form part of its real income by saying: 'It is enough for our purpose that the payment is deductible under section 10(2) of the Act.
A four Judge Bench of this Court in Assam Bengal Co. Ltd. vs Commissioner of Income Tax, West Bengal, 27 I.T.R. 34=[1955] 1 S.C.R. 972, indicated that the line of demarcation between capital expenditure and revenue expenditure is very thin.
Several English decisions were referred to and the Court approved the opinion of the Full Bench of the Lahore High Court in Benarsidas Jagannath, In re. , where Mahajan, J. (as he then was), speaking for the Court, had successfully attempted a synthesis.
This Court observed: The synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities.
In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure.
A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure.
The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment.
Such expenditure can be looked at either from the point of view what is acquired or from the point of view of what is the 524 source from which the expenditure is incurred.
If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure.
If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure.
If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically.
The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure.
The source or the manner of the payment would then be of no consequence.
It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether of the business or part of its circulating capital.
If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be the nature of revenue expenditure.
These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated.
It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations.
One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2) (xv) of the Income tax Act.
The question has all along been considered to be a question of fact to be determined by the Income tax authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such finding of fact if they have been arrived at on a proper application of these principles.
(emphasis ours) 525 In that case before this Court, a lease was obtained with certain stipulations including the payment of a sum of Rs. 5,000 per year.
The Court found that it was an enduring benefit for the benefit of the whole business of the company.
The fact that it was a recurring payment was immaterial because one had got to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired.
The asset which the Company had acquired in consideration of this recurring payment the right to carry on its business unfettered by any competition from outsiders within the area was in the nature of a capital asset and, therefore, the payment was not deductible under section 10(2) (xv) of the Act.
The broad tests laid down by this Court in Assam Bengal Cement Co. Ltd. 's case have been accepted in several subsequent decisions of this Court as also by the High Courts in India.
The facts in Travancore Sugars & Chemical 's case were peculiar.
The assessee in that case purchased Travancore Sugar Ltd., a Government distillery at Negercoil and the business assets of a Government Tincture Factory at Trivandrum under an agreement dated June 18, 1937, entered into between the Government of Travancore and the promoters of the assessee company.
Under the agreement, cash consideration of Rs. 3,25,000 was to be paid for buying the assets of Travancore Sugars Ltd. In regard to the distillery, the sale price had to be arrived at on the basis of joint valuation by the Engineers to be appointed by the parties.
As regards the Tincture Factory, the book valuation was to be adopted for fixing the consideration.
The existing distillery licence was agreed to stand recognised in the hands of the assessee for a period of five years after its termination.
Government also undertook to purchase pharmaceutical products manufactured by the assessee at the Tincture Factory.
Government reserved the right to nominate a director on the Board of Directors of the assessee company without voting powers.
The agreement further stipulated payment to Government of 20% of the net profits earned by the company every year subject to a limit of Rs. 40,000 per annum and certain other payments were also undertaken.
The 20% stipulation was reduced to 10% by a subsequent agreement.
The question that fell for consideration was whether payment of Rs. 42,480 by the assessee company to the Travancore Government in terms of the agreement referred to above as modified, was allowable expenditure under section 10 of the Act in the year under consideration.
This Court stated: It is often difficult, in any particular case, to decide and determine whether a particular expenditure 526 is in the nature of capital expenditure or in the nature of revenue expenditure.
It is not easy to distinguish whether an agreement is for the payment of price stipulated in instalments or for making annual payments in the nature of income.
The Court has to look not only into the documents but also at the surrounding circumstances so as to arrive at a decision as to what was the real nature of the transaction from the commercial point of view.
No single test of universal application can be discovered for a solution of the question.
The name which the parties may give to the transaction which is the source of the receipt and the characterization of the receipt by them are of little consequence.
The Court has to ascertain the true nature and character of the transaction from the convenants of the agreement tested on the light of surrounding circumstances.
So far as these observations formulating the tests are concerned, they are not different from those laid down by this Court in Assam Bengal Cement Co. 's case.
The Court then proceeded to apply these tests to the facts of the case and observed: Examining the transaction from this point of view, it is clear in the present case that the consideration for the sale of the three undertakings in favour of the appellant was: (1) the cash consideration mention ed in the principal agreement, viz., clauses 3, 4(a) and 5(a); and (2) the consideration that Government shall be entitled to twenty per cent of the net profits earned by the appellant in every year subject to a maximum of Rs. 40,000 per annum.
With regard to the second part of the consideration there are three important points to be noticed.
In the first place, the payment of commission of twenty per cent on the net profits by the appellant in favour of the Government is for an indefinite period and has no limitation of time attached to it.
In the second place, the payment of the commission is related to the annual profits which flow from the trading activities of the appellant company and the payment has no relation to the capital value of the assets.
In the third place, the annual payment of 20 per cent commission every year is not related to or tied up, in any way, to any fixed sum agreed between the undertakings.
There is not 527 reference to any capital sum in this part of the agreement.
On the contrary, the very nature of the payments excludes the idea that any connection with the capital sum was intended by the parties.
It is true that the purchaser may buy a running concern and fix a certain price and the price may be payable in a lump sum or may be payable by instalments.
The mere fact that the capital sum is payable by instalments spread over a certain length of time will not convert the nature of that payment from the capital expenditure into a revenue expenditure, but the payment of instalments in such a case would always have some relationship to the actual price fixed for the sale of the particular undertaking.
As we have already mentioned, there is no specific sum fixed in the present case as an additional amount of price payable in addition to the cash consideration and payable by instalments or by any particular method.
In view of these facts we are of opinion that the payment of the annual sum of Rs. 42,480 in the present is not in the nature of capital expenditure but is in the nature of revenue expenditure and the judgment of the High Court of Kerala on this point must be overruled.
As we have already observed, the facts in this case were peculiar.
There was a substantial amount of outright cash payment over and above which the indefinite annual payment had been stipulated.
It is interesting to note that this Court by its judgment in Travancore Sugars & Chemicals Ltd. had sent down the matter to the High Court for a re disposal and the very matter again came before this Court, this time at the instance of the Revenue and the judgment is reported in Commissioner of Income Tax, Kerala vs Travancore Sugars & Chemicals Ltd. = At page 10 of the Reports, this Court observed: "In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid being caught in the maze of judicial decisions rendered on different facts anc which always present distinguishing features for a comparison with the facts and circumstances of the case in hand.
Nor would it be conducive for clarity or 528 for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of the case with that of the case which requires determination.
The surer way of arriving at a just conclusion would be to first ascertain by reference to the expenditure is created and thereafter to apply the principle emblamed in the decisions of those facts.
Judicial statements on the facts of a particular case can never assist courts in the construction of an agreement or a statute which was not considered in those Judgments or to ascertain what the intention of the legislature was.
What we must look at is the contract or the statute or the decree, in relation to its terms, the obligation imposed and the purpose for which the transaction was entered into.
We agree with these observations.
The tests indicated by this Court in Travancore Sugars & Chemicals were not intended to be of general application but were given to bring into bold relief the special aspects of the case as the learned Judges themselves stated.
The High Court committed a mistake In importing these reasonings as tests of general application to be applied to the facts of the present case though the facts were indeed quite different.
As already pointed out, there was a definite sum of cash consideration in Travancore Sugars Chemicals ' case and the special features were taken into account.
In the dispute before us the High Court was categorically found that a capital asset had been acquired under the arrangement.
Admittedly, the assessee was a new company and it had no other business.
It acquired under the contract stipulating to pay 75% of its annual net profits, the right to carry on the business on a long term basis subject to the renewal of the agreement.
The first of the broad tests laid down in Assam Bengal Cement Co. 's case that the expenditure was made for the initial outlay squarely applies and on the finding that a capital asset had been acquired (a finding which has not been disputed before us) we must hold that the expenditure related to acquisition of a capital asset and was not admissible as a deduction under section 10(2) (xv) of the Act.
With this conclusion of ours and no more, the appeal deserved to be allowed.
Mr. S.T. Desai for the assessee respondent thereupon sought to raise the contention that once the assessee had paid 75% of its profits of the year, the 529 amount claimed as a deduction was no more in its hands as income and on the principle of real income in the hands of the assessee, we should hold the same was not income within the meaning of s.10(1) of the Act.
Initially, objection was raised to this move of Mr. Desai by learned counsel for the Revenue on the ground that such a plea had not been canvassed in the earlier stages of the matter.
The question referred to the High Court did raise the issue and the High Court in the penultimate paragraph of its judgment had declined to go into this question by saying that it was sufficient for the disposal of the reference once it took the view that the payment was deductible under section 10(2) (xv) of the Act.
Mr. Desai wanted this aspect of the matter to be sent back to the High Court, but we were not inclined to do so in consideration of the fact that the assessment is for the year 1954 55 a period three decades away.
Thereupon, counsel for both sides agreed to advance their arguments in regard to this aspect to enable this Court to finally deal with this question avoiding remand.
Section 10(1) of the Act provides: The tax shall be payable by an assessee under the head 'Profits & gains of business, profession or vocation ' in respect of the profits and gains of any business, profession or vocation carried on by him.
Tax, therefore, under the provision is payable on income and if income is not earned by the assessee no tax is payable.
It follows that tax is leviable on the real income in the hands of the assessee.
Mr. Desai for the assessee has maintained that when 75% of the net profits have been paid to the partnership firm, the real income in the hands of the assessee was reduced to 25% of the net profits and that amount alone was assessable to tax.
F M/s. Jalan Trading Co., the partnership had initially been appointed as the sole selling agent.
On October, 16, 1952, the assessee company came to be incorporated and soon after incorporation by agreement the rights of the firm were assigned to the assessee company.
Neither the Income Tax Officer nor the two appellate authorities and nor even the High Court went into the question as to whether the assessee was in fact separate from, and independent, of the partnership firm.
It is true that the tenability of the claim of deductibility as a business expenditure of the amount was examined by taking it for granted that the payment had been made by the assessee to the firm.
But the exact position having not been investigated no finding has been recorded at any stage.
The fact that the partnership and the 530 assessee company bear the same name and soon after incorporation the agreement assigning the firm 's rights in favour of the company had been entered, had obviously led the Income Tax Officer to doubt the bona fides.
That is why in his order of assessment the Income Tax Officer had observed: "The payment is also not allowable as it is only an apportionment of profits as pointed out above, as it is nothing but 75% of the net profits of the assessee company and although it has been written to the profit and loss account actually it is nothing but an apportionment of profits and as such the amount is not allowable.
The Appellate Assistant Commissioner took note of the position that the assessment of Jalan Trading Co., the firm, was not before him and observed: "The amount claimed cannot also be regarded as deduction in the trading account itself because the royalty is ascertained ultimately on the profits and does not go to add to the cost of the drums that are purchased from the manufacturers.
Therefore, there can be no question of giving any deduction under section 10(1) of the Act.
The concept of 'real income ' apparently based on the decision of the Bombay High Court in the case of 31 I.T.R. 735 has also no relevance because there is no question.
Of any deviation of profits of the appellant company by any overriding title.
The Appellate Tribunal in answer to the reiteration of the point raised, said: "Shri Mistry next submitted that the amount in question is also deductible under section 10(1) as a trading item and in any event what is to be determined is the assessee 's real income and that can only be determined after deducting from the assessee 's total income the amount paid to M/s. Jalan Trading Co. It was also stated that in the hands of the recipient the said amount of Rs. 7,93,000 and odd was assessed as revenue receipts and assessing the same in the hands of the assessee would amount to double taxation.
In our opinion, this later submission of Shri Mistry can easily be disposed of because even though the real 531 income of the assessee is to be taxed, it is not that each and every outgoing is to be taken into consideration in arriving at the real income of the assessee and if the outgoing is in fact of a capital nature, the same can never be considered as an allowable deduction under the Act.
We are impressed by the argument advanced on behalf of the Revenue that if the amount had been spent for obtaining a capital asset, the assessee would not be entitled to claim it as a deduction under s.10(1) of the Act and on the principle of taxation that income tax is to be levied on the real income, the amount paid for obtaining capital asset would not be deductible.
In such circumstances, we are inclined to agree with the appellant 's submission that there is no merit in this aspect of the matter and no relief is admissible to the assessee on that score.
We allow the appeal and vacate the Judgment of the High Court and direct that the Tribunal 's decision shall be given effect to.
Parties are directed to bear their own costs both before the High Court as also this Court.
P.B.R. Appeal allowed.

summary:
A firm (JTC) obtained the sole selling agency for the products of a manufacturer for two years with a right of renewal.
A few months later, under a deed of assignment, the firm assigned the benefits of the agreement to the assessee company under which the assessee carried on the business as sole selling agents for the products of the manufacturer.
Under the deed of assignment the assessee company should take over not the whole of the business of the firm but only the benefit of the contract with the manufacturers in consideration whereof the assessee was to pay to the firm as and by way of royalty, an amount equal to 75% of their profits and commission, remuneration and other moneys received from the manufacturers.
The assessee had the option to renew the agreement.
In its income tax return the assessee claimed under section 10 (1) (sv) of the Act deduction of a sum of Rs. 7.93 lacs, which under the deed of assignment lt was required to pay to the firm, but the authorities below rejected the claim.
On appeal the Appellate Tribunal held that although no ascertained sum was mentioned for acquiring the right or the enduring benefit, the amount was spent by the assessee for acquiring an asset of enduring benefit, and therefore, the expenditure was capital expenditure.
On reference although the High Court held that the asset acquired by the assessee was of an enduring nature, purporting to follow the decision of this Court in Travancore Sugars Chemicals Ltd. vs Commissioner of Income Tax, Kerala lt held that the annual payment by the assessee of 75% of its profits was not in the nature of capital expenditure.
It was contended on, behalf of the Revenue that if the amount had been spent for obtaining a capital asset the assessee would not be entitled to claim it as a deduction.
518 On behalf of the assessee it was contended that once the assessee had paid 75% of its profits to the firm, the amount was no more in its hands as income and since 8.
10(1) envisage the levy of tax on real income in the assessee 's hands this was / t income within the meaning of S.10(1) and was not taxable.
Allowing the appeal, ^ HELD: On the finding of the High Court that the expenditure related to acquisition of a capital asset, it was not admissible as a deduction under section 10(2) (xv) of the Indian Income Tax Act 1922.
[528 G].
It is well settled that if an expenditure is made for acquiring or bringing into existence of an asset for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure.
The aim and object of the expenditure would determine, whether it is capital expenditure or revenue expenditure.
The source or the manner of the payment would be of no consequence.
Where a company had acquired an asset in consideration of recurring payment of certain sum per year which was a right to carry on its business unfettered by any competition from outsiders within the area it was held to be in the nature of a capital asset and the payment was not deductible under section 10(2) (xv) of the Act.
[524 A,C,G] Assam Bengal Cement Co. Ltd. vs Commissioner of Income Tax = [1955] S.C.B. 1972 applied.
In Travancore Sugars and Chemicals Ltd. which the High Court purported to follow there was a substantial aud definite amount of outright cash payment over and above which an indefinite annual payment had been stipulated.
The tests laid down in this case were not intended to be of general application but were given to bring into bold relief the special aspects of the case.
The Court itself has pointed this out.
Therefore, the High Court erred in importing this reasoning as a test of general application to be applied to the facts of the prevent case.
[528 D,E] In the instant case, the High Court has categorically found that a capital asset had been acquired under the agreement.
The assessee was a new company and had no other business.
Under the contract lt acquired the right to carry on the business on a long ter basis subject to renewal of the agreement.
Therefore, 519 the first of the broad tests l it down in Assam Bengal cases that A the expenditure was made for initial outlay applied and on the finding that a capital asset had been acquired, the expenditure is not liable as a deduction.
[528 F G] 2.
There is no merit in the assessee 's submission.
If the amount had been spent for obtaining a capital asset, the assessee would not be entitled to claim it as a deduction under section 10(1) (xv).
[531 C]


judgement:
Civil Appeal No. 1774 of 1980 etc.
From the Judgment and Order dated 28.
1978 of the Allahabad High Court in Civil Misc.
Writ No. 495 of 1975.
945 B.R.L. Iyenger, Yogeshwar Prasad, S.P. Gupta, V.P. Sachthey, K.K. Venugopal, O.P. Rana, Dr. Y.S. Chitale, K.G. Bhagat, F.S. Nariman, Soli J. Sorabjee, H.K. Puri, G. Gopalakrishnan, Khaitan & Co., A. Subba Rao, Naunit Lal, K.M.K. Nair, J.B.D. & Co., P.R. Ramasesh, Bishambar Lal, G. Subramanium, Ms. section Dikshit, Ms. A. Subhashini, K.R. Nambiar, R.N. Poddar, B.M. Nagaria, Mrs. Rani Chhabra, R.B. Datar, P.H. Parekh, K.R. Nagaraja, B.D. Sharma, V.J. Francis, section Markendaya, R.N. Sachthey, R. Ramachandran, S.S. Khanduja, Manoj Swarup & Co., P.K. Pillai, Baggar, K.L. Mehta, Swarup John & Co., G.S. Ramarao, C.V. Subba Rao, S.K. Gupta, G.S. Chatterjee, Probir Mittra, Mrs. J. Wad, S.K. Gambhir, Pramod Dayal, R.K. Jain, S.R. Srivastava, K.K. Mohan, Dhantaraj,D.K. Agarwal, S.K. Gupta, Raju Ramachandran, Ravindra Bana,Vinoo Bhagat, K.K. Jain, A.D. Sanger, Girish Chandra, C.K. Sucharita, T.C. Sharma, Mrs. Kitty Kumaramangalam.
A.V. Rangam, R.V. Ratnam and D.M. Popat for the appearing parties.
The Judgment of the Court was delivered by D R.B. MISRA, J.
The present group of appeals directed against the judgment of the High Court of Judicature at Allahabad dated July 28, 1978 raises a common question of law.
These appeals arise out of petitions under Article 226 of the Constitution challenging the two Notifications dated January 25, 1975 issued under section 14 of the U.P. Sugarcane (Purchase Tax) Act, 1961 (hereinafter referred to as the Act for short).
The petitioners also sought a Mandamus directing the State Government to grant remission in purchase tax of 0.51 paise per quintal to all the Sugar factories situated in the State of U.P.
As the pattern of facts is similar in all the cases, we would refer to the facts of Civil Appeal arising out of Writ Petition No. 409 of 1975 filed by M/s. Shri Sitaram Sugar Company Limited, Bhailtapur, District Deoris, against the State of Uttar Pradesh and others to bring out the question for consideration in these appeals.
The petitioner is a Public Limited Company and owns a sugar factory in Deoria known as Shri Sitaram Sugar Company Limited, Bhailtapur, U.P. The Sugar Factory is engaged in the manufacture of sugar by Vacuum Pan Process.
It purchases sugarcane from the reserved area allocated to Lt under the provisions of U.P. (Regulation of Supply and Purchase) Act, 1953 and Sugarcane Control Order.
1966 946 By a Notification dated September 29, 1973 issued under clause 3 of the Sugarcane (Control) Order, 1966, Central Government fixed the price of sugarcane for the factories situated in Uttar Pradesh.
The minimum price fixed by this Notification for the area in which the petitioner 's factory was situated was Rs. 8.38 per quintal.
The cane growers felt agitated as according to them, the price fixed was much too low.
They, therefore, made representation to the U.P. Government and as a result thereof the U.P. Government intervened in the matter and fixed sugarcane price at Rs. 12.25 per quintal for the Sugar Mills situated in the East Zone.
According to the petitioner, however, the price fixed was exorbitant and as the petitioner and other sugar factories were likely to suffer enormous loses, the Sugar Factories approached the State of U.P. and brought to its notice that they were not in a position to pay the higher sugarcane price.
The stand of the appellant petitioner and others is that the Chief Minister was satisfied with the demand made by the sugar factories and he assured them that the State Government would grant remission in purchase tax to all the factories situated in the East Zone.
By a Notification issued under section 14(1) of the Act, the State Government granted remission to the extent of 0.51 paise per quintal to 18 Sugar Factories mentioned in the area.
By another Notification of the same date, two more factories were granted the remission.
As the remission was not granted to the appellant petitioner and to some other factories similarly situated, they filed petitions under Article 226 of the Constitution challenging the aforesaid Notification issued by the State Government.
The State of U.P. resisted the petitions and denied the allegation of promissory estoppel and discrimination set up in the writ petition.
The High Court dismissed those petitions by the impugned judgment.
They have now approached this Court by special leave and raised the same contention before this Court as was raised by them before the High Court.
In order to appreciate the points involved in the case, it would be appropriate at this stage to refer to the relevant provisions of the Act.
Section 3 of the Act lays down that there shall be levied a tax on the purchase of sugarcane by the owner of (a) a factory at the rate of twenty five paise per maund of sugarcane; and (b) a unit at the rate of fifty 947 paise per quintal.
Section 3 A(l) provides that no owner of a factory shall remove, or cause to be removed any sugar produced in the factory either for consumption or for sale, or for manufacture of.
any other commodity in or outside the factory, until he has paid the tax levied under section 3, a sum specified under sub section (2), sub section (3) or sub section (4).
The next relevant section with which we are directly concerned is section 14.
It confers powers on the State Government to grant remission.
As the decision of these appeals hinges upon the interpretation of section 14(1), it would be advisable to read the section in full.
Section 14(1) reads : "Section 14(1).
The State Government, on being satisfied that it is necessary so to do in the public interest, with a view to (a) encourage or regulate the supply of sugarcane to, or its purchase by factories ; or D (b) encourage the establishment of new factories ; or (c) assist factories established after the crushing season 1957 58 and purchasing sugarcane yielding low sugar recovery, May by notification in the Gazette, remit, in whole or in part, the tax payable under this Act, in any assessment year, by every such factory falling under Clause (a) or Clause (b) or Clause (c).
" In the instant case, the Notification remitting the purchase tax was issued by the State Government on being satisfied so to do in the public interest with a view to encourage and regulate the supply of sugarcane to, or its purchase by the factories in the State of Uttar Pradesh during 1973 74 assessment year.
Dr. Chitale, appearing for the appellants with his usual candour and fairness, gave up the plea of promissory estoppel and confined his argument to discrimination made by the State Government in granting remission of tax to some factories and 948 not to the appellants.
According to him the encouragement and regulation as contemplated by clause (a) of section 14(1) of the Act was necessary to all the factories in the eastern zone and not only to a fortunate few.
But the U.P. Government has refused to extend the remission to the appellant illegally when clause (a) of section 14(1) contemplates giving benefit to all the factories and there was no justification for singling out the appellants For treating them differently.
The power conferred by clause (a) of section 14(1) of the Act, the counsel contends, could not be confined to Factories purchasing sugarcane yielding low recovery inasmuch as this was a consideration foreign to the purpose contemplated by clause (a) of section 14(1) of the Act.
The three clauses of sub section (1) of section 14 of the Act have different object and purpose.
The purpose of granting the power of remission under clause (a) is "encouragement and regulation" of the supply of sugarcane, the object of clause (b) is to encourage the establishment of new factories, and that of clause (c) is to assist factories established after the crushing season 1957 58 and purchasing sugarcane yielding low recovery.
Section 14(1) confers a discretionary power on the State Government.
Reading section 14 as a whole, it cannot be said that it was obligatory on the part of the State to grant exemption or remission to all the factories.
The discretion has been left to the State Government to decide whether any particular factory should be granted remission or not guided by the purpose set out in the relevant clause.
Neither in clause (a) nor in any other clause of section 14(1) of the Act, there is anything to indicate that the State Government must grant remission to all sugar Factories for encouraging or regulating the supply of sugarcane.
The reason is obvious.
It may be that a factory situated in one area or falling In one category is in need of this remission while those which are not either situated in that area or do not fall In that category may not need it.
It is true that the power conferred by clause (a) is to be exercised For the purpose of encouraging and regulating the supply of sugarcane but in exercising this power, the State Government may legitimately take the view that this purpose necessitates the grant of remission only to the sugar factories purchasing 949 sugarcane yielding low recovery.
By granting the remission only to sugar factories purchasing sugarcane of low recovery, the State Government in our opinion has not violated Article 14 of the Constitution.
Nor Is there any contravention of the provisions of clause (a) of section 14.
The question of contravention would arise if the grant of remission were founded on a ground extraneous to the provisions of section 14.
The Notifications issued by the State Government clearly show that the remission was granted with the sole object of encouraging and regulating the supply of sugarcane to these factories.
The exercise of the power by the State Government was in accordance with the provisions of clause (a), sub section (1) of section 14 and that by granting the remission to a few sugar factories it did not frustrate the purpose of the aforesaid provision.
The use of expression "encourage or regulate" clearly indicates that the factories which really need encouragement or regulation should get the benefit of the remission under clause (a) of sub section (1) of section 14.
The word "encourage" suggests that the State Government is required to exercise the power where it feels that the sugar factory requires the help for the purpose of making purchases of sugarcane.
Similarly, the word "regulate" also shows that the said power can be exercised with a view to take measures to promote the sale of sugarcane.
If the power conferred by clause (a) of sub section (1) of section 14 has been exercised for the purpose of granting remission to only those sugar factories which purchase sugarcane of low recovery, there is nothing wrong in so doing.
It was next contended by Dr. Chitale that the factories which had recovery of 8.5 or less had been granted the remission.
Some of the appellants were also in similar position and they have been refused unjustifiably and the State Government had discriminated between the factories falling in the same group and thus the Notification issued on January 25, 1975 suffered from the vice of Article 14 of the Constitution on that account also.
This argument losses sight of the other clauses of the section, viz, clauses (b) and (c) of sub section (1) of section 14.
Clause (b) provides for encouraging the establishment of new factories and clause (c) contemplates assistance to factories established after crushing season 1957 58 and purchasing sugarcane yielding low sugar recovery.
If the State Government had chosen to give 950 remission to these factories because they fall under clause (c), some argument could have been advanced against the validity of the Notification on that basis.
Under clause (c), remission is granted by way of support or aid to newly established factories to lesson the cost so that they could profitably compete in the market.
The remission under clause (c) has to be confined to new factories which is a different category of sugar factories.
The considerations needed for exercising the power under clause (c) are different from those under clause (a) or (b).
Considered from this aspect there is no discrimination at all.
Article 14 of the Constitution forbids class legislation but permits reasonable classification.
It however must fulfil the twin requirements: (1) it must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group, and (2) that the intelligible differentia must have a relationship to the object sought to be achieved by the Statute.
If authority be needed, we may refer to Anant Mills Co. Ltd. vs State of Gujarat & Ors., The remission was granted only to the factories where the recovery from the sugarcane was low to enable the factories to make timely payments towards the cost of sugarcane and non payment of the cane prices affecting the supply of cane to factories.
It was in these circumstances that the Government granted remission to the factories which needed the help.
The immediate factor affecting the economy is the recovery of sugar from sugarcane and the sugar content in the cane produced goes a long way to determine the cost of sugar.
Thus the sugar factories which were purchasing sugarcane yielding low recovery are distinguishable as a class separately from those which did not fall in it and there was a reasonable basis to classify those left out of that group.
For the foregoing discussion, the appeals must fail.
must are accordingly dismissed.
In the circumstances of the case, however, the parties shall bear their own costs.
All matters pending in this Court challenging the constitutional validity of the two Notifications dated January 25, 1975, will stand disposed of in terms of this judgment.
P.S.S. Appeals dismissed.

dataset_name: IN-Abs

summary:
Section 3(1)(a) of the U.P. Sugarcane (Purchase Tax) Act, 1961 provides for imposition of tax on the purchase of sugarcane by the owners of sugar factories.
Section 14(1) of the Act empowers the State Government to grant remission in whole or in part of the tax payable in the public interest, with a view to (a) encourage or regulate the supply of sugarcane to, or its purchase by the factories, or (b) encourage the establishment of new factories, or (c) assist factories established after the crushing season 1957 58 and purchasing sugarcane yielding low sugar recovery.
The Central Government by a notification dated September 29, 1973 issued under cl. (3) of the Sugarcane (Control) Order, 1966, fixed the minimum price of sugarcane for factories situated in eastern U.P. at Rs. 8.38 per quintal.
To meet the growers demand for a higher price the Government of U.P. refixed the sugarcane price at Rs.12.25 per quintal for the sugar mills situated in the east zone.
The sugar factories not being in a position to pay the higher price approached the State Government who by two notifications dated January 25, 1975 issued under s.14(1)(a) of the Act granted remission in purchase tax to the extent of Re. 0.51 per quintal to twenty sugar factories in the area for the assessment year 1973 74.
The appellants and some other factories having been denied any remission in purchase tax, challenged the notifications by filing petitions under article 226 of the Constitution which were dismissed by the High Court.
943 In these appeals by special leave, it was contended for the appellants that the State Government in refusing to extend the remission to the appellants had discriminated against them by singling them out for treating differently as the encouragement and regulation contemplated by cl.(a) of s.14(1) of the Act was necessary to all the factories in the eastern zone and not to a fortunate few, and that the impugned notifications suffered from the vice of article 14 of the Constitution in as much as the Government had discriminated between the factories falling in the same group as those which had a recovery of 8.5 or less had been granted remission, while the appellants who were also in similar position had been left out.
Dismissing the appeals, the Court, ^ HELD: 1.
Article 14 of the Constitution forbids class legislation but permits reasonable classification.
It, however, must fulfil the twin requirements: (1) it must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group, and (2) that the intelligible differentia must have a relationship to the object sought to be achieved by the statute.
[950 C D] 2.
Section 14(1) of the Act confers a discretionary power on the State Government.
It has been left entirely to the State to decide whether any particular factory should be granted remission or not, guided by the purpose set out in the relevant clause.
Neither in cl.
(a) nor in any other clause of section 14(1) there is anything to indicate that the State Government must grant remission to all sugar factories for encouraging or regulating the supply of sugarcane.
[948 E F] 3.
The three clauses of sub section
(1) of s.14 of the Act have different object and purpose.
The purpose of granting the power of remission under cl.
(a) is encouragement and regulation of the supply of sugarcane, the object of cl.(b) is to encourage the establishment of new factories, and that of cl.(c) is to assist factories established after the crushing season 1957 58 and purchasing sugarcane yielding low recovery factory situated in one area or falling in one category may be in need of remission, while those which were not either 944 situated in that area or did not fall in that category may not need it.
Though the power conferred by cl.(a) is to be exercised for the purpose of encouraging and regulating the supply of sugarcane, in exercising this power the State Government may legitimately take the view that this purpose necessitates the grant of remission only to the sugar factories purchasing sugarcane yielding low recovery.
[948 C E] 4.
The word 'encourage ' in cl.(a) of s.14(1) suggests that the State Government is required to exercise the power where it feels that the sugar factory requires the help for the purpose of making purchases of sugarcane.
The word 'regulate ' contemplates that the said power can be exercised with a view to take measures to promote the sale of sugarcane.
If the power conferred by cl.(a) of s.14(1) has been exercised for the purpose of granting remission to only those sugar factories which purchase sugarcane of low recovery, there is nothing wrong in so doing.
[949 D E] 5.
In the instant case by granting the remission only to sugar factories purchasing sugarcane of low recovery, the State Government has not violated article 14 of the Constitution.
Nor was there any contravention of the provisions of cl.(a) of s.14(1).
Such a question would have arisen if the grant of remission were founded on a ground extraneous to the provisions of section 14(1).
[949 A B] 6.
The immediate factor affecting the economy is the recovery of sugar from sugarcane and the sugar content in the cane produced goes a long way to determine the cost of sugar.
Thus, the sugar factories which were purchasing sugarcane yielding low recovery are distinguishable as a class separately from those which did not fall in it and there was a reasonable basis to classify those left out of that group.
[950 F G] Anant Mills Co. Ltd. vs State of Gujarat & Ors., , referred to.


judgement:
Civil Appeal No. 491 of 1985 From the Judgment and Order dated 26th July, 1984 of the Allahabad High Court in W.P. No. 4899 of 1983.
81 Pankaj Kalra for the Appellant.
Rameshwar Dial and Sarv Mitter for the Respondents.
2.9.1983 reverting the appellant from the post of Commercial Officer to that of Superintendent.
The appellant joined service in Kisan Sahkari Chini Mills Ltd., Bisalpur District Pilibhit, a sugar factory run and managed by the Uttar Pradesh Co operative Mills Federation.
While the appellant was working as Office Surperintendent, he was selected for promotion to the post of Commercial Officer and by Order dt.
August 29, 1980 appointed on probation for one year against a regular vacancy with a condition that his probationary period may be extended further and during the period of probation he could be reverted to the post of Office Superintendent without any notice.
On 2.7.1981 the appellant was transferred from Bisalpur to Majohla Sugar Factory where he continued to work as Commercial Officer.
By an Order dt.
2.10.1981 the appellant 's probationary period was extended for one year till 4.9.1982, the period so extended expired on 4.9.82 but no further order either extending the probationary period or confirming him on the post was issued, and the appellant continued to work as Commercial Officer.
The Managing Director of the U.P. Co operative Sugar Mill Federation Ltd. a "Co operative society" registered under the U.P.
Co operative Societies Act, 1965, which runs and manages a number of sugar factories in the State of Uttar Pradesh issued order on 2.9.83 reverting the appellant to the post of Office Superintendent.
The appellant challenged the validity of the reversion order before the High Court on the sole ground that on the expiry of the probationary period he stood confirmed, and he could not be reverted treating him on probation.
The High Court held that on the expiry of the probationary period the appellant could not be deemed to be confirmed as there was no rule prohibiting the extension of probationary period.
The U.P. Co operative Institutional Service Board constituted by the State of Uttar Pradesh in accordance with sub sec.
(2) of sec.
122 of the U.P. Co operative Societies Act, 1965 has framed the U.P. 82 Co operative Societies Employees Service Regulations 1975 which regulate the condition of service of employees of all the co operative societies placed under the purview of the Institutional Service Board by the Government Notification No. 366 C/XIIC 3 36 71 dt.
March 4, 1972.
These regulations contain provisions for recruitment, probation, confirmation, seniority and disciplinary control.
Regulation 17 provides for probation, it lays down that all persons on appointment against regular vacancies shall be placed on probation for a period of one year.
Proviso to the Regulation lays down that the appointing authority may, in individual cases, extend the period of probation in writing for further period not exceeding one year, as it may deem fit.
Clause (ii) of the Regulation provides that if, at any time, during or at the end of the period of probation or the extended period of probation, it appears to the appointing authority that the employee placed on probation, has not made sufficient use of the opportunity offered to him or has otherwise failed to give satisfaction, he may be discharged from service, or reverted to the post held by him substantively, if any, immediately before such appointment.
Regulation 18 provides for confirmation of an employee on the satisfactory completion of the probationary period.
Regulation 17 and 18 read together, provide that appointment against a regular vacancy is to be made on probation for a period of one year, this probationary period can be extended for a period of one year more.
The proviso to Regulation 17 restricts the power of the appointing authority in extending period of probation beyond the period of one year.
An employee appointed against a regular vacancy cannot be placed on probation for a period more than two years and if during the period of probation the appointing authority is of the opinion that the employee has not made use of opportunity afforded to him he may discharage him from service or revert him to his substantive post but he has no power to extend the period of probation beyond the period of two years.
Regulation 18 stipulates confirmation of an employee by an express order on the completion of the probationary period.
The regulations do not expressly lay down as to what would be the status of an employee on the expiry of maximum period of probation where no order of confirmation is issued and the employee is allowed to continue in service.
Since Regulation 17 does not permit continuation of an employee on probation for a period more than two years the necessary result would follow that after the expiry of two years probationary period, the employee stands confirmed by implication.
This is implicit in the scheme of Regulation 17 and 18.
In State of Punjab vs Dharam Singh ; , a Constitution Bench of this Court held, 83 "Where, as in the present case, the service rules fix a certain period of time beyond which the probationary period cannot be extended, and an employee appointed or promoted to a post on probation is allowed to continue in that post after completion of the maximum period of probation without an express order of confirmation, he cannot be deemed to continue in that post as a probationer by implication.
The reason is that such an implication is negatived by the service rule forbidding extension of the probationary period beyond the maximum period fixed by it.
In scuh a case, it is permissible to draw the inference that the employee allowed to continue in the post on completion of the maximum period of probation has been confirmed in the post by implication.
" In the instant case the order of appointment promoting the appellant on the post of Commercial Officer merely indicated that his probationary period could be extended and he could be reverted to the post of Office Superintendent without any notice.
Stipulation for extension of probationary period in the appointment order must be considered in accordance with the proviso to Regulation 17(1) which means that the probationary period could be extended for a period of one year more.
Undisputably on the expiry of the appellant 's initial probationary period of one year, the appointing authority extended the same for another period of one year which also expired on 4.9.82.
During the period of probation appellant 's services were neither terminated nor was he reverted to his substantive post instead he was allowed to continue on the post of Commercial Officer.
On the expiry of the maximum probationary period of two years, the appellant could not be deemed to continue on probation, instead he stood confirmed in the post by implication.
The appellant acquired the status of a confirmed employee on the post of Commercial Officer and the appointing authority could not legally revert him to the lower post of Superintendent.
Learned Counsel appearing for the U.P. Co operative Sugar Factories Federation urged that the U.P. Co operative Societies Employees Service Regulations 1975 do not apply to the appellant as he was an employee of the U.P. Co operative Sugar Factories Federation, as the condition of service of the appellant and other employees of the U.P. Co operative Sugar Factories Federation are regulated by the U.P. Co operative Sugar Factories Federation Service Rules 1976 84 framed by Cane Commissioner in exercise of his powers under sub sec.
(1) of sec.
121 of the Act published in the U.P. Gazette dt.
September 4, 1976.
Rule 3 of the U.P. Co operative Sugar Factories Federation Service Rules 1976 (herein after referred to as the Federation Service Rules) provides that these Rules shall apply to all the employees of the Federation.
Rule 5 provides that every employee shall be appointed on probation for such period as the appointing authority may specify and the period of probation may be extended by the appointing authority from time to time, the rule does not prescribe any limit on the extension of the probationary period.
Rule 6 provides that upon satisfactory completion of probationary period an employee shall be eligible for confirmation.
Placing reliance on rule 5 learned counsel for the respondents urged that since there was no order of confirmation the appellant 's probationary period stood extended, therefore, he could be reverted at any time to his substantive post.
It is true that rule 5 of the Federation Service Rules does not place any restriction on the appointing authority 's power to extend the probationary period, it may extend the probationary period for an unlimited period and in the absence of Confirmation Order the employee shall continue to be on probation for indefinite period.
It is well settled that where appointment on promotion is made on probation for a specific period and the employee is allowed to continue in the post after expiry of the probationary period without any specific order of confirmation he would be deemed to continue on probation provided the Rules do not provide contrary to it.
If Rule 5 applies to the appellant he could not acquire the status of a confirmed employee in the post of Commercial Officer and he could legally be reverted to his substantive post.
There are two set of rules (i) The U.P. Co operative Societies Employees Service Regulations, 1975, (ii) the U.P. Co operative Sugar Factories Federation Employees Service Rules, 1976.
The question is which of the rules apply to the employees of the Co operative Sugar Factories Federation.
While considering this question it is necessary to advert to the relevant provisions of the Act and the Rules framed thereunder and the Notifications issued from time to time.
Section 121 of the Act confers power on the Registrar, (an officer appointed as such by the State Government under sec.
3) to frame regulations to regulate the emoluments and conditions of service of employees in a Co operative Society or class of Co operative Societies.
Section 3(2) confers power on the State Government to appoint officers to assist the Registrar and to confer on them all or any of the powers of the Registrar.
An officer on whom powers of Re 85 gistrar are conferred by the State Government, has authority to frame rules regulating conditions of service under sec.
121(1) of the Act.
Section 122(1) confers power on the State Goverment to constitute an authority for the recruitment, training and disciplinary control of the employees of the Co operative societies or class of co operative societies and it may further require such authority to frame regulations regarding recuritment, emoluments, terms and conditions of service including disciplinary control of such employees.
Regulations so framed require approval of the State Government under sub sec.
Once approval is granted, the regulations take effect from the date of publication.
The State Government in exercise of its powers under sec.
122(1) issued a Notification No. 366 C/XIIC 3 36 71 dt.
March 4, 1972 constituting the U.P. Co operative Institutional Service Board as an authority for the recruitment, training and disciplinary control of the employees of the Apex Level Societies Central or Primary Societies, and it further conferred power on the Institutional Service Board to frame regulations regarding recruitment, emoluments, terms and conditions of service of the employees of the co operative societies of the Apex Level Societies Central or Primary Societies.
In pursuance thereof the Institutional Service Board framed the U.P. Co operative Societies Employees Service Regulations 1975 regulating the conditions of service of the employee of these Co operative Societies which were placed under the purview of the Institutional Board by the Government Notification No. 366 C/XII C 3 36 71 dt.
March 4, 1972.
This Notification states that the Board shall have authority to frame regulations for the recruitment, training and disciplinary control of the employees of the Apex Level Societies, Central, or Primary Societies.
Section 2(a 4) which defines "Apex Level Societies", expressly specifies the U.P. Co operative Sugar Factories Federation Ltd. as an Apex Level Society.
Since the Institutional Service Board was conferred power to frame regulations regulating the conditions of service of the employees of Apex Level Societies, the regulations framed by the Board apply to the employees of the U.P. Co operative Sugar Factories Federation Ltd. The respondents have failed to place any Notification before the Court to show that the power of the Institutional Service Board to frame regulations, regulating the conditions of service of the employees of Apex Level Societies including that of U.P. Co operative Sugar Factories Federation Ltd. was ever with drawn.
The U.P. Co operative Sugar Factories Federation Service Rules 1976 have been framed by the Cane Commissioner under sub sec.
(1) 86 of sec.
122 of the Act.
These Rules provide that they shall apply to all the employees of the U.P. Co operative Sugar Factories Federation Ltd., but the question is whether rules so framed by the Cane Commissioner would override the Service Regulations 1975.
As noted earlier, the Institutional Service Board was constituted an authority under sec.
122(1) of the Act and authorised to frame regulations regulating the conditions of service of employees of the Co operative Societies including those of Apex Level Societies.
Sub section (2) of sec.
122 provides that on approval of the Regulations by the State Government any rule or regulations framed by the Registrar in exercise of its powers under sec.
121(1) would stand superseded.
Sub section (1) of sec.
121 confers power on the Registrar which may include any other sub ordinate officer or authority to frame rules regulating the condition of service of employees of Co operative Societies, such rules do not require approval of the State Government.
While a regulation framed by an authority constituted under sub sec.
(1) of sec.
122 requires approval of the State Government and on such approval the regulation so framed supersedes any rules made under sec.
The scheme of sec.
121 and sec.
122 postulates that primacy has to be given to regulations framed by the authority under sec.
122 of the Act.
If there are two sets of rules regulating the conditions of service of employees of Cooperative societies the regulations framed under sec.
122 and approved by the State Government shall prevail.
In this view the provisions of the U.P. Co operative Sugar Factories Federation Service Rules 1976 do not override Service Regulations of 1975.
It appears that this position was realised by the State Government and for that reason it issued Notification No. U.O. 402(II)/C I 76 dt.
August 6, 1977 constituting the Commissioner and Secretary Sugar Industry and Cane Development Department as authority under sub sec.
(1) of sec.
122 for the recruitment, training and disciplinary control of employees of the U.P. Co operative Factories Federation Ltd. The learned counsel for the respondent urged that since the Government had constituted the Commissioner and Secretary of the Development Department as the competent authority for framing regulations for the recruitment, training and disciplinary control of the employees of the U.P. Co operative Sugar Factories Federation Ltd. 1975 Regulations framed by the Institutional Service Board do not apply.
We find no merit in this submission.
Firstly, the Notification dt.
August 6, 1977 merely designates the Commissioner and Secretary Sugar Industry and Cane Development Department as the authority for the recruitment, training and disciplinary control of the employees of the 87 U.P. Co operative Sugar Factories Federation, it does not confer power on the authority to frame any rule or regulations regulating the conditions of service of the employees of Sugar Factories Federation Ltd. But even if any such power can be inferred, admittedly no rules or regulations regulating the conditions of service of the employees of the Co operative Sugar Factories Federation have as yet been framed.
Learned counsel for the respondents conceded that draft service regulations have been prepared but those have not been approved by the Government as required by sub sec.
(2) of the Act.
In absence of approval of the State Government as required by sub sec.
(2) of sec.
122, regulations, if any, framed by the Commissioner and Secretary Sugar Industry and Cane Development Department do not acquire any legal force.
In this view 1975 Regulations framed by the Institutional Service Board continue to apply to the employees of the U.P. Co operative Sugar Factories Federation Ltd.
In view of the above discussion it is manifestly clear that the appellant 's services were regulated by the U.P. Co operative Societies Employees Service Regulations, 1975.
Since under those Regulations appellant 's probationary period could not be extended beyond the maximum period of two years, he stood confirmed on the expiry of maximum probationary period and thereafter he could not be reverted to a lower post treating him on probation.
The Order of reversion is illegal.
We accordingly allow the Appeal, set aside the order of the High Court and quash the order of reversion dt.
2.9.1983 and direct that the appellant shall be treated in service and paid his wages and other allowances.
The appellant is entitled to his costs which is quantified as Rs. 1,000.
S.R. Appeal allowed.

summary:
In the State of Uttar Pradesh there are two sets of service rules (i) The U.P. Cooperative Societies Employees Service Regulations 1975 framed by the U.P. Cooperative Institutional Authority constituted by the State Government through a Notification dated March 4, 1978 as an authority for the recruitment, training and disciplinary control of the employees of the Apex Level Societies Central or Primary Societies and; (2) the U.P. Cooperative Sugar Factories Federation Employees ' Service Rules 1976 framed by the cane commissioner by virtue of the power vested under section 122(1) of the U.P. Cooperative Societies Act which provided that they shall apply to all the employees of the U.P. Cooperative Sugar Factories Federation Ltd. While the proviso to Regulation 17 restricts the power of the appointing authority in extending the period of probation beyond the period of one year and in case of an employee appointed against a regular vacancy beyond two years, Rule 5 of the Federation Service Rules 1976 does not place any such restriction on the appointing authority 's power to extend the period of probation and in the absence of a confirmation order, the employee shall continue to be a probation for indefinite period.
Again while the Regulations framed by the Institutional Service Board require approval of the State 79 Government under sub section 2 of section 122 of the Act, the Rules do not provide for an approval.
Section 2(a 4) which defines "Apex Level Societies" specifies the U.P. Cooperative Sugar Factories Federation Ltd. as an Apex Level Society.
The appellant joined service in Kisan Sahkari Chini Mills Ltd. Bisalpur District Pilibhit, a Sugar Factory run and managed by the U.P. Cooperative Mills Federation.
While working as an Office Superintendent, he was selected for promotion to the post of commercial officer and by an order dated 29.8.80 appointed on probation for a period of one year which was extended by another order dated 2.10.81 till 4.9.82.
No further order either extending the period of probationary period or confirming him on the post was issued and while so continuing he was reverted, by an order dated 2.9.83, to the post of office Superintendent.
The appellant challenged the validity of the reversion order before the High Court of U.P. (Lucknow Bench) on the sole ground that on the expiry of the probationary period he stood confirmed and he could not be reverted treating him on probation.
The High Court held that on the expiry of the probationary period, the appellant could not be deemed to be confirmed as there was no rule prohibiting the extension of the probationary period.
Hence the appeal by special leave.
Allowing the appeal, the Court ^ HELD: 1.1 Since the appellant 's services were regulated by the U.P. Cooperative Societies Employees Service Regulations, 1975 under which his services could not be extended beyond the maximum period of two years, he stood confirmed by implication on the expiry of maximum probationary period and thereafter, he could not be reverted to a lower post treating him on probation.
The order of reversion is illegal.
[87D E] 1.2 Reading Regulations 17 and 18 together it is clear that an employee appointed against a regular vacancy cannot be placed on probation for a period more than two years and if during the period of probation the appointing authority is of the opinion that the employee has not made use of opportunity afforded to him he may discharge him from service or revert him to his substantive post but he has no power to extend the period of probation beyond the period of two years.
Regulation 18 stipulates confirmation of an employee by an express order on the completion of the probationary period.
The regulations do not expressly lay down as to what would be the status of an employee on the 80 expiry of maximum period of probation where no order of confirmation is issued and the employee is allowed to continue in service.
Since Regulation 17 does not permit continuation of an employee on probation for a period more than two years the necessary result would follow that after the expiry of two years probationary period, the employee stands confirmed by implication.
This is implicit in the scheme of Regulation 17 and 18.
[82D H] State of Punjab vs Dharam Singh ; applied.
1.3 It is well settled that where appointment on promotion is made on probation for a specific period and the employee is allowed to continue in the post after expiry of the probationary period without any specific order of confirmation he would be deemd to continue on probation provided the Rules do not provide contrary to it.
In that sense, if Rule 5 of the U.P. Cooperative Federation Service Rules, 1976 were to apply, the appellant, no doubt could not acquire the status of a confirmed employee in the post of commercial officer.
But the scheme of sections 121 and 122 of the U.P. Cooperative Societies Act, 1965 postulates that primacy has to be given to Regulations framed by the Authority under section 122 of the Act and if there are two sets of rules regulating the conditions of service of employees of Cooperative Societies the Regulations framed under section 122 and approved by the State Government shall prevail.
In this view, the provisions of the U.P. Cooperative Sugar Factories Federation Service Rules do not override Service Regulations 1975 which is further evidenced by Government 's Notification dated 6.8.1977.
Since the Institutional Service was conferred power to frame regulations regulating the conditions of service of the employees of Apex Level Societies, the regulations framed by the Board alone will apply to the employees of the U.P. Cooperative Sugar Factories Federation Ltd. so long as such a power has not been withdrawn.
Further, constituting the commissioner and Secretary of the Cane Development Department as the competent authority for framing regulations for the recruitment, training and disciplinary control of the employees of the U.P. Cooperative Sugar Factories Federation Ltd. is of no consequence to the applicability of 1975 Regulations.
[84D E; 86D E; 85F; 86G]


judgement:
Civil Appeal No. 1795 of 1986: From the Judgment and order dated 25.9.1984 of the Delhi High Court in S.A.O. No. 283 of 1984.
Mrs. Shyamla Pappu, N.S. Das Bahl, P.K. Bahl and P.S. Mahindra for the Appellant.
R.P.Bansal, K.C.Dua and P.O.Gupta for the Respondent.
The Judgment of the Court was delivered by PATHAK, J.
Special leave granted.
This is a land lady 's appeal by special leave directed against the order of the High Court of Delhi dismissing her second appeal in limine.
The appellant is the owner of the premises No. F 8/ 17, Vasant Vihar, New Delhi.
It is a single storeyed house.
She let out the premises for a limited period of two years to the respondent, who is a judicial officer.
She did so after obtaining the requisite permission under section 21 of the Delhi Rent Control Act on April 22, 1980.
A registered deed was executed between the parties in that behalf.
The deed recorded the undertaking of the respondent to vacate the premises at the end of two years.
The two years expired on April 21, 1982 but the respondent did not hand over possession of the premises to the appellant.
Accordingly the appellant prayed for an order directing delivery of possession of the premises to her.
A warrant of possession was issued.
21 On October 20, 1982 the respondent filed his objection, alleging that the order granting permission under section 21 of the Act was obtained by fraud practised on the Rent Controller and was a nullity.
It was asserted that the premises were constructed in the year 1973 and were let out to an official of the Government under section 21 of the Act for a period of one year.
On the official vacating the premises after one year, it was alleged, they were let out to the respondent at a rent of Rs. 725 per mensem in the first week of April 1974 as a regular tenant.
It was said that on the request of the appellant the respondent joined in an application for permission under section 21 of the Act.
When the appellant applied for permission, it is alleged, she did not disclose to the Rent Controller that earlier also she had inducted a person as tenant after obtaining such permission.
On the expiry of three years, the respondent said, the appellant again, in the year 1977, obtained permission under section 21 of the Act for letting out the premises at an enhanced rent of R.S. 825 per mensem for a limited period of two years to the respondent.
That period expired in April 1980.
It was thereafter that the appellant obtained permission under section 21 of the Act for letting out the premises to the respondent for a period of two years.
The respondent urged that he was in uninterrupted possession since April 1974 and that no ground had been disclosed by the appellant in the application for permission under section 21 of the Act made in the year 1980 indicating the reason for letting out the premises for a limited period of two years.
It is alleged that permission was granted mechanically by the Rent Controller, and that it could not be recognised as binding on the respondent.
The appellant filed her reply to the objection and vehemently denied that the order under section 21 of the Act granting permission in 198() was nullity or had been obtained by fraud or that any material fact had been withheld in the application for permission.
The appellant asserted that in the beginning the premises had been let out to an official of the Government for a period of three years commencing from August 29, 1973, but the tenant vacated the premises after 6 or 7 months and thereafter it became necessary to let out the premises to the respondent on April 15, 1974 after obtaining permission under section 21 of the Act.
It was denied that the respondent had already occupied the premises as a regular tenant before permission under section 21 of the Act had been granted.
lt was maintained that the respondent occupied the premises on April 15, 1974 pursuant to the permission under section 21 of the Act.
The appellant stated further that the respondent had given notice to the appellant on February 27, 1977 expressing his intention to 22 vacate the premises and that in fact he did vacate the premises on that date after settling the account in respect of the rent.
But a few days after leaving the premises the respondent again approached the appellant for taking the premises on rent.
Accordingly, the premises were let out by the appellant to the respondent on March 11, 1977 after obtaining permission under section 21 of the Act.
It was pointed out that in the application under section 21 of the Act.
the respondent gave his address as Village Khandsara, near Gurgaon, Haryana where he was then residing in the factory premises of his son.
The possession of the premises was handed over to the respondent on March 11, 1977 in pursuance of the permission, and the rate of rent agreed to was Rs.825 per mensem.
The appellant further stated that on the expiry of the period, the respondent again vacated the premises and shifted to 13, Palam Marg, New Delhi.
Thereafter the respondent approached the appellant again to let out the premises for a limited period of two years.
As the appellant 's second son, who is an officer in the Indian Air Force, was posted at Bangalore and the appellant was not in a position to occupy the premises all alone, she agreed to let out the premises to the respondent.
On April 21, 198() the appellant and the respondent joined in the application for obtaining permission under s.21 of the Act to enable the appellant to let out the premises to the respondent for a period of two years.
The appellant urged that the premises were now required by her as her son, an Indian Air Force officer, had to shift his family to Delhi, and it was further pointed out that the premises were to be occupied by the appellant and the family members of that son as the climate of Bangalore did not suit them.
It was denied that the premises were available for indefinite letting, and the periodic tenancies, it was asserted, were entered into because of the circumstances prevailing on each occasion.
On January 21, 1984 the First Additional Rent Controller, Delhi upheld the objection filed by the respondent and dismissed the execution application of the appellant made under section 21 of the Act.
The appellant appealed to the Rent Control Tribunal and the Tribunal held that the allegation of the respondent that he had already entered into possession of the premises before permission was granted under section 21 of the Act in 1974 was false, and even if it be assumed that he had done so there was nothing to prevent him from surrendering the tenancy.
That was evident when he joined the appellant in the application for permission under section 21 of the Act in 1974.
The case of the respondent that he must be considered to be a tenant in possession without interruption ever since 1974 could not, in the opinion of the Rent Control 23 Tribunal, be accepted on the facts and circumstances of the case.
and that it was only the tenancy pursuant to the last permission which could be questioned.
The Rent Control Tribunal then addressed itself to the principal issue whether fraud had been practised on the Rent Controller in obtaining permission under section 21 of the Act in 1980.
The Tribunal referred to the circumstance that the appellant had let out the premises from time to time for limited periods on earlier occasions and observed that it was evident that the premises were available for being let out for an indefinite period.
It adverted to a statement made by the appellant regarding the transfer of her son to Delhi, and deduced from the language employed by her that she wanted to convey that her son had been posted earlier in Delhi and that he was now being transferred back to Delhi.
It also pointed out that the unsuitability of the climate of Bangalore in regard to her grandson as the reason for the family desiring to settle in Delhi had not been mentioned at the initial stage of the litigation.
Upon that, the Rent Control Tribunal held that the appellant had practised fraud on the Rent Controller when obtaining permission under section 21 of the Act in 198().
A second appeal by the appellant was dismissed summarily by the High Court.
We have considered the case with great care.
Ordinarily, this Court declines to interfere with findings of fact and refuses to entertain special leave petitions questioning such findings.
But it seems to us that in this case the entire approach of the statutory authorities has been vitiated by a gross misconstruction of the facts and circumstances of the case, ignoring material evidence on the record, and arriving at inferences which fly in the face of reason and the law.
All this has resulted in grave injustice.
At the outset it is apparent from the record that the finding of the Rent Control Tribunal that the property was available for being let for an indefinite period proceeds on the unwarranted assumption that the grant of the three leases, from 1974 through 1977 to 1980, points to that as the only conclusion.
That assumption would have been justified if there was positive material to indicate that from the very beginning there was never any intention on the part of the appellant to occupy the premises herself.
There is no such material at all on the record.
It seems to have been ignored altogether that it is perfectly possible for the owner of a premises, on looking to the immediate future, to find that for certain reasons he is unable to occupy the premises forthwith himself but that he may do so later in the not very distant future.
It is not always that a man can plan his life ahead with any degree of definiteness.
Prevailing uncertainty in the circumstances surrounding him may not permit clear sighted vision 24 into the future.
The circumstances may justify his envisioning his need for the premises two or three years later, and therefore applying for permission under section 21 of the Act to let out the premises accordingly.
And yet, thereafter, on the expiry of that period he may find that the circumstances have changed and his use of the premises has now to be postponed by another few years.
In cases such as this the mere fact that the owner has let out the premises after obtaining permission under s.21 of the Act for a limited period, and thereafter on the expiry of that period has found it necessary to obtain permission to let out the premises again for another limited period cannot necessarily lead to the inference that from the very beginning the premises were available for letting out indefinitely.
The Rent Controller and the Rent Control Tribunal should have examined the circumstances prevailing on each occasion when an application was made under section 21 of the Act.
The changing facts of social existence do not permit the application of unimaginative perspectives and inflexible assumptions.
The mutating kaleidoscope of human life portrays a different reality.
It is this fundamental error into which the Rent Control Tribunal has fallen.
Because of that it has unwittingly fallen further into the error of misconstruing the significance of the statement made by the appellant.
A copy of her statement is before us, and all that the appellant said was that the premises could be spared for letting because her son had been posted at Bangalore and that after two years he would be back in Delhi.
Much has been made by the Rent Control Tribunal of this minor inconsistency, of the circumstance that instead of stating that her son would be posted in Delhi the appellant had stated that her son would be posted "back" in Delhi.
It seems to us wholly irrelevant to the issue in the case whether the son was being posted in Delhi for the first time or was being posted again in the city.
It was wholly immaterial to the question in 1980 whether the premises, which had been constructed a few years before, should be let out for a period of two years.
What was material was the expectation that the son and his family would be in Delhi after two years.
The central issue in the case has been clouded by a circumstance which has no bearing on it.
In our judgment, the orders of the First Additional Rent Con troller, the Rent Control Tribunal and of the High Court cannot be sustained An attempt was made by learned counsel for the appellant to refer to material, now placed on the record, establishing that the appellant 's son had in fact been transferred to Delhi in May 1985 and that 25 he was compelled, with a family of six members, to share a small accommodation with a friend at Delhi.
There is also clear evidence showing that his eldest child was suffering from bronchial asthma and had been hospitalised in the Command Hospital at Bangalore three times, and that medical specialists had advised a change of place immediately.
We need not take this material into consideration.
After examining the material already on the record, a task to which we are compelled by the erroneous approach adopted by the statutory authorities to the case, we have come to the conclusion that the evidence does not make out that any fraud was practised on the Rent Controller when permission was granted in 1980 under section 21 of the Act, and there is nothing to show that the permission can be regarded as a nullity or that material facts were concealed.
On the contrary, it seems to us that the haphazard manner in which the case has been dealt with by the First Additional Rent Controller and the Rent Control Tribunal leaves much to be desired.
The appeal is allowed, the order dated January 21, 1984 of the First Additional Rent Controller, the order dated May 2, 1984 of the Rent Control Tribunal and the order dated September 25, 1984 of the High Court are set aside and the objection filed by the respondent to the appellant 's application for possession under section 21 of the Delhi Rent Control Act is rejected and the said application is allowed.
The appellant will be entitled to delivery of possession of the premises.
But in the circumstances, we allow the respondent a period of two months from today for vacating the premises.
There is no order as to costs.
S.R. Appeal allowed.

summary:
The appellant land lady is the owner of, a single storeyed house, at Vasant Vihar, New Delhi.
It was constructed in the year 1973.
The premises was let out to an official of the government after obtaining necessary permission under section 21 of the Delhi Rent Control Act for a period of one year.
The tenant vacated the premises after six or seven months and thereafter the premises were let out to the respondent on April 15, 1974, after obtaining permission again under section 21.
The respondent vacated the premises on 27.2.
1977 after settling account in respect of the rent.
The premises were again let out by the appellant to the respondent on March 11, 1977 after obtaining permission under section 21 of the Act for a period of three years.
After the expiry of the said period the respondent again vacated the premises and thereafter once again at his request the appellant let out the premises for a limited period of two years after obtaining the permission under section 21.
The two years period expired on April 21, 1982 but the respondent did not hand over possession of the premises to the appellant, forcing her to move the Rent Controller for an order directing delivery of possession of the premises.
In the Execution Application, the respondent filed his objection on October 20, 1982 alleging that the permission under section 21 of the Act was obtained by fraud practised on the Rent Controller.
On January 21, 1384 the First Additional Rent Controller, Delhi upheld the objection filed by the respondent and dismissed the execu 19 tion application.
In appeal, the Rent Control Tribunal held: (i) that the A allegation of the respondent that he had already entered into possession of the premises before permission was granted under section 21 of the Act in 1374 was false, and even if it be assumed that he had done so there was nothing to prevent him from surrendering the tenancy; and (ii) that the respondent cannot be considered to be a tenant in possession without interruption ever since 197.1 and that it was only the tenancy pursuant to the last permission that he continued.
Basing on a statement made by the appellant regarding the transfer of her son to Delhi and her omission to mention in her application about the additional fact of unsuitability of climate of Bangalore and her grandson 's illness, the Tribunal, however, held that the appellant had practised fraud on the Rent Controller and dismissed the appeal.
The second appeal by the appellant was dismissed summarily by the High Court.
Hence the appeal by special leave.
Allowing the appeal, the Court ^ HELD: l. Ordinarily, the Supreme Court declines to interfere with findings of fact and refuses to entertain special leave petitions questioning such findings under Article 136 of the Constitution.
However, this is a case, where the entire approach of the statutory authorities has been vitiated by a gross misconstruction of the facts and circumstances of the case, ignoring material evidence of the record, and arriving at inferences which fly in the face of reason and the law, all resulting in grave injustice , calling for necessary interference.
[23 D F] The evidence in this case, does not make out that any fraud was practised on the Rent Controller when permission was granted in 1980 under section 21 of the Delhi Rent Control Act.
The changing facts of social existence do not permit the application of unimaginative perspectives and inflexible assumptions.
The mutating kaleidoscope of human life portrays a different reality.
It is this fundamental error into which the Rent Control Tribunal has fallen and because of that it has unwittingly fallen further into the error of misconstruing the significance of the statement made by the appellant.
[24 C D] 2.
It is perfectly possible for the owner of a premises, on looking to the immediate future, to find that for certain reasons he is unable to occupy the premises forthwith himself but that he may do so later in the not every distant future.
It is not always that a man can plan his life ahead with any degree of definiteness.
Prevailing uncertainty in the 20 circumstances surrounding him may not permit clear sighted vision into the future.
The circumstances may justify his envisioning his need for the premises two or three years later, and therefore, applying for permission under section 21 of the Act to let out the premises accordingly.
And yet, thereafter, on the expiry of that period he may find that the circumstances have changed and his use of the premises has now to be postponed by another few years.
In cases such as this the mere fact that the owner has let out the premises after obtaining permission under section 21 of the Act for a limited period, and thereafter on the expiry of that period has found it necessary to obtain permission to let out the premises again for another limited period cannot necessarily lead to the inference that from the very beginning the premises were available for letting out indefinitely.
[2G H; 24A C]