judgement:
Civil Appeal No. 2203 of 1970.
Appeal by Special Leave from the Judgment and order dated the 26th September.
1969 of the Allahabad High Court in Income Tax Ref No. 420 of 1963 11 L9255SupCI/75 650 A. K. Sen and M. M. Kshatriya, for the appellant.
B. B. Ahuja and section P. Nayar, for the respondent.
The Judgment of the Court was delivered by FAZAL ALI, J.
This is an appeal by special leave against the order of the High Court of Allahabad dated September 26, 1969 on a reference made to it by the Income tax Appellate Tribunal, Allahabad Bench.
The facts giving rise to the present appeal may be briefly summarised as follows: The appellant assessee is a public limited company known as `J.K. Cotton Manufacturers Ltd ' and the matter in dispute relates to the assessment year 1944 45.
The appellant entered into an agreement with the firm called Juggilal Kamlapat and employed the said firm as the Managing Agents of the Company.
The agreement was executed on August 8, 1941 and the Managing Agents were to work for the Company for a period of 20 years and were to charge commission at the rate of 21%.
About two years later the appellant decided to terminate the agreement executed in favour of Juggilal Kamlapat and the said Managing Agents readily accepted the offer made by the appellant as a result of which a deed of release was executed by the Managing Agents Juggilal Kamlapat on September 28, 1943.
Under the release the appellant agreed to pay a sum of Rs. 2,50,000 to the outgoing Managing Agents by way of compensation for terminating the agreement much earlier than stipulated under the original contract.
The appellant, however, employed another firm, namely, J.K. Commercial Corporation as their new Managing Agents and executed an agreement in their favour on September 30, 1943.
The action of the Company was approved by the Board of Directors.
The dispute in the instant case centres round the question as to whether the compensation of Rs. 2,50,000 paid to the outgoing Managing Agents was a capital or a revenue expenditure incurred by the appellant.
The stand taken by the assessee before the revenue was that as the expenses were incurred wholly and exclusively for the purpose of carrying on the business of the Company it would fall under section 10(2)(xv) of the Income tax Act, 1922, which is the same as section 37(1) of the Income tax Act, 1961, and therefore an allowable deduction under the aforesaid provision.
The appellant 's case was negatived by the Income tax officer, the Appellate Assistant Commissioner and also by the Tribunal.
The Tribunal also refused to make a reference to the High Court as in its opinion no point of law arose.
The appellant then approached the High Court of Allahabad which directed the Tribunal to make a reference on the following four points and accordingly the Tribunal made a reference to the High Court on those points: "1.
Whether there was any material on the basis ofwhichthe Appellate Tribunal could hold that the goodwill of 651 Juggilal Karnlapat Cotton Manufacturers Ltd, was transferred to the J.K. Cotton Manufacturers Ltd, 2.
Whether there was any material on the record for a finding that the said transfer had been for a sum of Rs. 1.00,000 or for any other sum, and 3.
Whether there was any material on the record from which it could be held that the land had appreciated in value form Rs. 49,526/13,/6 to Rs. 1 ,00,000, 4.
Whether a sum of Rs. 250,000 paid by the assessed to the Managing Agents for the termination of their Manning Agency is an expenditure admissible under Section 10(2) (xv) of the Income Tax Act," When the matter was heard by the High Court, the assesses did not press any other point excepting point No. 4 which related to the question whether a sum of Rs. 2,50,000 paid by the assesses to the outgoing meaning Agents was an admissible expenditure under section 10(2) (xv) of the Income tax Act, 1922.
The High Court by it judgment dated September 26, 1969, held that the expenditure in question was incurred wholly and exclusively, for the purpose of assessee 's business, but as the amount was in the nature if a capital expenditure it was not (deductible under the provisions of the income tax Act and hence this appeal before us by special leave.
Mr. Asoke Sen learned counsel for the appellant for submitted two points before us in support of his case.
In the first place it was contended that the High Court having held that the expenditure incurred was wholly and exclusively l`or the purpose of the business should have held that section 10(2) (xv) applied in terms and therefore.
the expenditure was a revenue expenditure which would be deductible under s 10(2) (xv) of the Income tax Act; and second, it was submitted that the High court was in error in not correctly applying the decision of this court in Godrej & Co. vs Commissioner of Income tax Bombay city(1).
The learned counsel for the appellant has adumbrated four pro positions before us for consideration: (1) Where a payment is made by the payer Company to the payee Company ill lieu of termination of its agency it does not follow that the said pay meat which was made for the purpose of business must ipso facto be considered to be capital expenditure in the hands of the player Company.
(2) So far as the payee Company is concerned.
the law is that generally any compensation received by it not he considered as capital receipt (1) 652 (3) So far as the payer Company is concerned, if payment is for the purpose of business, the mere fact that it has, bar virtue of the payment, increased its profits and reduced its expenses, should not be regarded as expenditure of capital nature but would be one in the course of business unless some oblique or gratuitous purpose is involved.
(4) The principles laid down in Godrej & Co. 's case (supra) would have to be read as laying down only a proposition that the payer company, namely, the managed company, was making a payment to the payee company as a capital contribution to the payee company and in the hands of the payee company the amount becomes a receipt of compensation for incurring losses.
In other words the High Court did not correctly apply the decision of this Court in Godrej & Company ' case (supra).
So for as propositions Nos.
(1) to (3) are concerned their correctness cannot be disputed, because these propositions are covered by abandon authorities.
As regards proposition No. (4) it seems to us that on a close and careful reading of the judgment of this Court in on Goderaj & Company case (supra) the contention of the learned counsel for the appellant on this point appears to be without any substance.
We shall show that the facts of the present case appear to be on all fours with the ratio laid down by this Court in Goderaj & Company 's case (supra).
Mr. Ahuja appearing for the revenue, however, submitted that the termination of the managing agency by the appellant was made for extra commercial reasons, the main intention being to benefit both the outgoing Managing Agents Juggilal Kamlapat and the incoming Managing Agents J.K. Commercial Corporation which belonged to the same family of Singhanias and, therefore, as the compensation paid to the outgoing Managing Agents led to a profit to the company it would amount to acquisition of a new asset and would, therefore be a capital expenditure.
Before dealing with the contentions raise before us by the learned counsel for the appellant, it may be necessary to mention a few facts which have been found by the Tribunal and whose correctness has not been disputed before us.
(1) That there was no suggestion nor any iota of evidence to show that the outgoing Managing Agents were in any way guilty of laches, negligence or that they had caused any loss or disadvantage to the appellant so as to justify a sudden termination of their agency after two years although it was stipulated to continue for 20 years.
On the other hand the annexures filed along with the statement of the case sent by the Tribunal to the High Court clearly show that the Board of Directors paid high compliments to the outgoing Managing Agents Juggilal Kamlapat.
653 (2) That although the` incoming Managing Agents J.K. Commercial Corporation were prepared to serve the appellant on a commission of 2 % only, there is nothing to suggest that the outgoing managing Agents had refused to reduce their commission if that was the only ground for changing hands of the managing agency .
(3) This is not a case where the appellant reduced its expenditure by doing away with the middleman 's profit, e.g. to get rid of the managing agency and taking the managing agency itself.
It is only question of substituting one Managing Agent l`or another (4) That although a compensation of Rs. 2,50,000 was paid by the appellant to the outgoing Managing Agents yet by employing the new Managing Agents a net profit of Rs 30,000 was made by the Company which was in the nature of a recurring benefit, apart from other facilities.
(5) That constitution of the two Managing Agents, namely, out going and the incoming Managing Agents shows that Singhania family (the appellant) had major interest in both of them.
These facts have been clearly proved by the additional documents filed in this Court which were the annexures filed by the Tribunal in the statement of the case sent to the High Court along with the reference.
Annexure 'G ' at p. 69 of the Paper Book shows that at the time of terminating the agency of Juggilal Kamlapat high compliments were paid to the said Managing Agents as would appear from the minutes of the meeting held on August 24, l 943 .
The following observation, were made in that meeting: "There was a frank discussion among the Directors and it was unanimously agreed that even though the present Managing Agents have been rendering very good services to the Company, and have been carrying on its affairs in a creditable manner, there was no denying of the truth that the appointment of Managing Agents of the constitution and composition of the J.K. Commercial Corporation Ltd. would give to the Company unique advantages which the present Managing agents may perhaps be not able to impart, being a partnership firm.
and further as the J.K. Commercial Corporation Ltd., has offered its services on lower terms, the company would be benefited by a saving of above Rs. 30,000/ per annum.
" The minutes quoted above would clearly show two things that vary high compliments were paid to the outgoing Agents for their very good services.
and (2) that by the terms offered to the new Agents, namely, J.K. Commercial Corporation there was to be a saving of Rs, 30,000/. per annum Similarly the Tribunal in its order of reference to the High Court and the statement of case has found as follows: (p. 65 of the Paper Book) 654 "The constitution of the two managing agents do show that the Singhania family has major interest in both them.
The Tribunal on the basis of these facts came to the conclusion that the compensation was paid due to extra commercial reasons and could not be regarded as expenditure incurred wholly and exclusively for the purpose of the business.
The High Court differed from the reasons given by the Tribunal but affirmed its view on the ground that the expenditure incurred by the assessee Company being of a capital nature it was not deductible Having regard to the facts and circumstances of the present case we have no doubt that this case is wholly covered by the decision of this court ill Godrej & Company 's case (supra).
In this case, while it is true that this Court was dealing with the case of compensation in the hands of the payee Company who were the Agents, yet in view of the clear observations made by the Court there can be no manner of doubt that be expenses incurred in the present case by way of payment of compensation to the outgoing Agents would be of a capital nature.
This Court in the aforesaid case observed as follows: "In the light of those decisions the sum of Rs. 7,50,000 was paid and received not to make up the difference between the higher remuneration and the reduced remuneration but was in reality paid and received as compensation for releasing the company from the onerous terms as to remuneration as it was in terms expressed to be.
In other words, so far as the managed company was concerned, it was paid for securing immunity from the liability to pay higher remuneration to the assessee firm for the rest of the term of the managing agency and, _ therefore, a capital expenditure and some far as the assessee firm was concerned, it was received as compensation for the deterioration of injury to the managing agency by reason of the release of its rights to get higher remuneration and, therefore, a capital receipt within the decisions of this Court in the earlier cases referred to above." Mr. Asoke Sen tried to distinguish this case on the ground that the Court was concerned in the Godrej & Company 's case (supra) only with the nature of the payment in the hands of the payee company and any observations made as to what would be the nature of the payment in the hands of the payer company would be obiter, and, therefore.
not binding on this Court.
We are, however, unable to agree with this knew.
Godrej & Company 's case (supra) has considered all the previous decisions and has clearly laid down that in the circumstances.
such as the present, the expenditure incurred would be a capital expenditure in the hands of the payer company and a capital receipt in the hands 1 of the payee company within the meaning of section 10(2)(xv) of the Income tax Act.
The distinction sought to be made by the learned 655 counsel for the appellant is extremely subtle and it is a distinction without any difference.
Moreover, there are a number of other circumstances which clearly show that the expenditure concerned cannot, but be treated as a capital expenditure.
Mr. Asoke Sen then submitted that if the Godrej and Company 's case (supra) is held to be an authority for the proposition that the amount of compensation in the hands of the payer company also would be of a capital nature, then that case was wrongly decided and should be re considered by us.
We are, however, unable to agree with this argument, because apart from the principle of stare decisis, on the facts and circumstances of the present case, we do not find any special reasons to reconsider the decision in Godrej & Company 's case (supra) particularly when in view of the facts and circumstances of this case we are really of the opinion that the amount in question is undoubtedly a capital expenditure.
Reliance was placed by the learned counsel for the appellant on a decision of the Calcutta High Court in Anglo Persian oil Co. (India) Ltd. vs Commissioner of Income tax(1).
It is true that some observations in the aforesaid case are presumably in favour of the appellant but the Calcutta High Court was careful to guard itself against its decision being treated as a general principle to apply to all cases and in this connection it observed as follows: "The case of payer and payee must be considered upon an independent statement of the relevant facts provide in his presence, there being no over riding principle of law that the Income tax authorities are entitled to tax once at least on every payment." In that case the Court proceeded on the admitted finding of fact that the expenditure incurred was wholly and exclusively for the purpose of the business.
This, however, is not the case in the present case.
In these circumstances, the decision in Anglo Persian oil Co. (India) Ltd 's case(1) does not appear to be of any assistance to the assessee.
Reliance was also placed on a decision in Commissioner of Income vs Shaw Wallace and Company(2) in which case the Judicial Committee of the Privy Council merely affirmed the finding of the High Court that the sums received by the respondents were not income, profits or gains within the meaning of the Act though they gave different reasons for that conclusion.
It may be noticed that Shaw Wallace and Company case(2) turned upon the facts and circumstances of the case and the nature of the payment made to the Company.
While affirming the finding of the High Court their Lordships observed as follows: "The question was however, re stated by the learned Chief Justice in more precise terms namely, 'whether these sums are income profits or gains within the meaning of the (1) 80 I I.T.R. 129,133, (2) L.R. 59 L.A. 206, 211, 656 Act at all, ' and for the reasons stated in his judgment he came to the conclusion that they were not.
Their Lord ships think that his conclusion was right though they arrive at this result by a slightly different road.
" Reliance was also placed on a decision of this Court in Karam Chand Thapar and Bros. P. Ltd. vs Commissioner of Income tax (Central), (Calcutta(1), where this Court observed as follows: "As held by this court in Commissioner of Income tax , Chari and Chari Ltd. , that ordinarily compensation for loss of office or agency is regarded as a capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in the case where the agency was one of the many which the assessee held and its termination did not impair the profit making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may by terminated and fresh agencies man be taken.
" This was, however, a case where their Lordships were dealing with that question as to whether or not the amount of compensation in the hands of the payee company for loss of office or agency would be regarded as a capital receipt.
Karam Chand Thapar and Bros. Y. Ltd case (supra) does not throw any light on the point with which we are concerned in the instant case.
I Great reliance was sought to be placed on the decision of the Calcutta High Court in Commissioner of Income tax, Calcutta vs Turner Morrison & Company Private Ltd.(2) where the High Court observed as follows: "It is now well settled that the expression 'expenditure laid out or expended wholly and exclusively for the purpose of such business ' includes expenditure voluntarily incurred for commercial expediency and in order indirectly to facilitate business.
It is immaterial if a third party also benefits thereby.
It is further well settle that an expenditure incurred in maintaining the efficiency of the manpower from time to time utilised in a business is also expenditure wholly or exclusively laid out for the purpose of such business.
It is also well settled that the employment of, say a director, at a reasonable extra remuneration to supervise a particular business of the company, regard being had to his expert knowledge in that particular line of business, is expenditure within the meaning of section 10 (2) (xv) and the revenue authorities are not justified in reducing such remuneration.
The expression 'commercial expediency ' is an expression of wide import and expenditure in commercial expediency includes such expenditure as a prudent man may incur for (1) , 171.
(2) I.T.R R 147 156 657 the purposes of business.
An expenditure which is entirely gratuitous and has no connection with the business does not come within the meaning of section 10(2)(xv) of the Act.
" This case also is distinguishable from the facts of the present case, in as much as in Turner Morrison do Company 's case (supra) there was no question of termination of any managing agency but what had happened was that two directors had retired and in their place an expert director was appointed to manage the affairs of the company.
on the facts of that case this Court held that the expenditure was incurred for commercial expediency in order to facilitate business.
In the instant case, as we have already pointed out, termination of the.
managing agency of the outgoing Agents was a voluntary act not caused by any negligence, inefficiency by the outgoing managing agents In these circumstances on the facts a circumstances be would not consider whether it was commercially expedient in order to facilitate business that the managing agency of the outgoing Agents should have been terminated.
Learned counsel for the appellant also referred us to the decision of the Bombay High Court in Greaves Cotton & Co. Ltd. vs Commissioner of Income tax, Bombay City(1) where the Bombay High Court observed as follows: "We have already said that the inference drawn on the material on record is that the managing agency agreement had been terminated with the object of taking over its management by the board of directors and there is no evidence which will lead to an inference that it was done with the oblique motive or oblique purpose of securing the payment of the said amount of Rs. 17 lakhs to the managing agents.
For reasons stated above, our answer to the question is in the affirmative, i.e. in favour of the assessee.
" This was obviously a case where the Managing Agents had not changed hands at all but what happened that the managing agency was terminated and the managing agency was taken over by the Board of Directors themselves.
Thus this case also does not appear to be of any assistance to the appellant.
In C.I.T. West Bengal II, Calcutta vs Coal Shipment (P) Ltd.(2) this Court indicated the various considerations which would govern the Court in deciding whether a particular amount is of a capital nature.
Relying on a decision in the case of Atherton vs British Insulated and Helsby Cables Ltd.(3) this Court observed as follows: "The character of the payment can be determined, it was added by looking at what is the true nature of the asset which has been acquired and not by the fact whether it is a (1) , 134.
(2) [1971]3 S.C.C. 736, 740, 741.
(3) 10 T.C. 671.
658 payment in a lump sum or by installments.
It is also an accepted proposition that the words 'permanent ' and 'enduring ' are only relative terms and not synonymous with perpetual or ever lasting.
There are some other tests like those of fixed capital and circulating capital for determining the nature of the expenditure.
An item of disbursement can be regarded as capital expenditure when it is referable to fixed capital.
It is revenue when it can be attributed to circulating capital." Similarly in The Commissioner of Income Tax Madras vs M/s. Ashok Leyland Ltd. (1) this Court observed as follows: "A long line of decisions have laid down that when an expenditure is made with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade there is good reason (in the absence of special circumstances leading to the opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.
From the facts found, it is clear that the managing agency was terminated on business considerations and as a matter of commercial expediency.
There is no basis for holding that by terminating the managing agency, the company not only saved the expense that it would have had to incur in the relevant previous year but also for few more years to come.
It will not be correct to say that by avoiding certain business expenditure, the company can be said to have acquired enduring benefits or acquired any income yielding asset.
" It may be seen that in that case there was a finding of fact that the termination of the managing agency was purely on business considerations and as a matter of commercial expediency and that no enduring benefits were acquired by the company.
Similarly in M. K. Brothers (P) Ltd. v Commissioner of Income tax, Kalipur.(2) my brother Khanna, J., speaking for the Court indicated the real tests to determine whether an amount is of a capital nature.
In this connection the Court observed as follows: "The answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by installments, as it does upon the purpose for which the payment has been made and expenditure incurred.
It is the real nature and quality of the payment and not the quantum or the manner of the payment which would prove decisive.
If the object of making the payment is to acquire a capital (1) [19731 S.C.C. 201, 204.
(2) 34.
659 asset, the payment would partake of the character of a capital payment even though it is made not in a lump sum but by installments over a period of time.
" It would thus appear that numerous cases have laid down various tests to determine as to when on the facts and circumstances of a particular case the expenses disbursed by an assessee amount to a capital expenditure or a revenue receipt.
The classic test laid down is by Viscount Cave, L.C., in Atherton 's case (supra) where he observed at pp.
192 193 as follows: But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.
" Atherton 's case (supra) has been followed by this Court in a large number of decisions such as in M/s. Ashok.
Leyland Ltd. case (supra) and Coal Shipment (P) Ltd 's case (supra) and lot of other cases.
Several tests that have been evolved over the years by this Court as also the other High Courts may be briefly formulated as follows: (1) Bringing into an ass or advantage of enduring nature would lead to the inference that the expenditure disbursed is of a capital nature These terms, such asset" or "advantage of enduring nature" are, however, purely descriptive rather than definitive and no rule of universal application can be laid down.
Ultimately the question will have to depend on the facts and circumstances of each case, namely.
quality to, and quantum of the amount, the position of the parties, the object of the transaction which has impact on the business, the nature of trade for which the expenditure is incurred and the purpose thereof etc.
(2) An item of disbursement may be regarded as of a capital nature when it is relatable to a fixed asset or capital, whereas the circulating capital or stock in trade would be treated as revenue receipt.
Lord Haldane in John Smith & Sons vs Moore(1) has aptly and adroitly explained the terms 'field capital ' and 'circulating capital ' thus: "Fixed capital is what the assessee turns into profit by keeping it in his own possession and circulating capital is what he makes profit of by parting with it and letting it change masters.
(1) , 282 660 (3) Expenditure relating to framework of business generally capital expenditure.
(4) Another important and safe test that may be laid down particularly in cases where the managing agency is terminated would be to find out whether the termination of the agency is in termination of purely voluntary for obtaining substantial benefits.
In other words, the decisive test to determine whether or not termination of the agency is in terrorem would be to find out is in such case commercial expediency requires that the agency should be terminated as it had become onerous or it was creating difficulties or the Agents were guilty of negligence etc.
It will also include payments for retrenchment compensation or conferment of benefits on employees or termination of other disadvantages or onerous relationships.
These arc some of the instances which I have given but they are by no means exhaustive The present case, however, falls within condition No (4) pointed out by us above, and the termination of the. agency cannot be said to be in terrorem but was voluntary so as to obtain an enduring or recurring benefit.
Before applying these tests to the facts of the present case, I would like to stress the important ingredients of section 10(2)(xv) of the Income tax Act, 1922 itself.
Section 10(2)(xv) runs thus: 10.
(2) Such profits or gains shall be computed after making the following allowances, namely: (xv) any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive.
and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expanded wholly and exclusively for the purpose of such business, profession or vocation An analysis of this section would clearly show that in order to be deductible expense the amount in question must fulfil two essential conditions: (i) that expense must be laid out wholly and exclusively for the purpose of the business, profession or vocation; and (ii) that it should not be expense of a capital nature.
Both these conditions have to be complied with before an assessee can claim deduction under section 10(2)(xv).
The High Court in this case has found that while the assessee had complied with the first condition that the expenditure was incurred for the purpose of the business, yet it has held that in the circumstances the expenditure is of a capital nature.
It cannot be argued as was suggested by Mr. Asoke Sen at one time that whenever an expenditure is incurred in the course of the business it would never be a capital expenditure because section 37 of the income tax Act, 1961, 661 itself contemplates contingency where even though the expenditure may be incurred wholly and exclusively for the purpose of the business yet it may be of a capital nature.
Let us now apply the tests laid down by the Courts as specified by us to the facts of the present case.
We have already given the facts found by the Tribunal which have not been disputed before us.
In this connection there are two circumstances which clearly indicate that the expenses incurred by the assessee were not dictated by commercial expediency but were inspired be a profit hunting motive: (1) That there was absolutely no necessity to terminate the managing agency of Juggilal Kamlapat only two years after the appellant entered into agreement with them.
There was no complaint that the Agents had m any way ' caused any loss or damage to the appellant or to their reputation, nor was there anything to show that the outgoing agents were guilty of negligence, laches, fraud or negligence.
In these circumstances, therefore, the only irresistible inference that could be drown is that the assessee wanted to benefit both the firms, namely, incoming agents and the outgoing agents, which belonged to the Singhania family as found by the Tribunal and not disputed before us.
The outgoing agents were benefited because an amount of Rs. 2,50,000 was paid to them and the incoming agents were benefited because they were given the managing agency of the Company and as found by the Tribunal the appellant had pledged their goods in lieu of advance, (2) That it is the admitted case of the appellant that by virtue of the fact that the incoming agents had agreed to charge only 2% commission, the appellant got a benefit of Rs. 30,000 per annum.
this amount is a recurring benefit to the appellant and can safely be regarded as an advantage of an enduring nature so as to fall within the definition laid down by Viscount Cave, L.C In these circumstances therefore, the present case is fully covered by the 'decision of this Court in Godrej Company 's case (supra).
For these reasons we are satisfied that the High Court was right in holding that the disbursement of compensation of Rs. 2,50,000 was of a capital nature and was, therefore, not deductible expenditure under section 10(2)(xv) of the Income tax Act 1922.
We, however, feel that the High Court was in error in giving a cryptic finding that the expenditure in question was incurred wholly and exclusively for the purpose of the business.
This finding has been arrived at without considering the facts mentioned by us above and is not borne out from the facts and circumstances proved in this case.
Nevertheless we uphold the order of the High Court on reasons different from those given by the High Court.
662 We would, however, like to make it clear that we have held that the compensation paid to the outgoing Agents in the peculiar facts of the present case amounts to capital expenditure.
But we should not be understood as laying down a general rule that in all cases where compensation is paid to the Managing Agents whose agency is terminated it would amount to capital expenditure.
We have already pointed out the various tests to be applied which are by no means exhaustive, nor are they of universal application.
Each case has to be examined in the light of the circumstances of the case.
The appeal accordingly fails and is dismissed with costs.
V.P.S. Appeal dismissed.

summary:
An analysis of section 10(2) (xv) of the Income tax Act, 1922, shows that in order to be a deductible expenditure the amount has to fulfil two conditions, (i) that it must be laid out wholly and exclusively for the purpose of the business, profession or vocation.
and (ii) that it should not be an expenditure of a capital nature.
Both these conditions have to be complied with before an assessee can claim deduction under the section.
[660 G] Some of the tests that have been evolved by courts for determining when.
an the facts and circumstances of a particular case, the expenses disbursed an assessee amount to a capital expenditure or revenue receipt arc: (a) Bringing into an asset or advantage of enduring nature would lead to the inference that the expenditure is of a capital nature.
The terms `asset ' or `advantage of enduring nature ' are descriptive and the question will depend upon the facts of each case.
(b) An item of disbursement may be regarded as of a capital nature when it is relatable to a fixed asset or capital, whereas circulating capital or stock in trade would be revenue receipt.
John Smith & Sons vs Moore , 282, referred to .
(c) Expenditure relating to frame work of the business is generally of a capital nature.
(d) When a managing agency is terminated the termination is in terrorem, that is if commercial expediency requires that the agency should the terminated as it had become one, or it was creating difficulties or the agents were guilty of negligence, etc., or if any payments were made as retrenchment compensation, or confirment of benefit an employees or for termination of other disadvantages or onerous relationship it would be a capital expenditure but if it is purely voluntary obtaining substantial benefits it would be revenue expenditure.
[659E 660D] In the present case, the appellant agreed to employ a firm as its managing agent for 20 years and to pay them commission at 2 1/2%.
But after two years the appellant terminated the agreement.
The managing agents received Rs. 25,000 as compensation and executed a release deed.
The appellant thereafter employed another managing agent at 2% commission.
There was nothing to show that the out going managing agents were guilty of any faches, negligence, or that they had cause and loss or disadvantage to the appellant so as to justify the sudden termination of their agency, or that they did not agree to reduce the commission.
On the other hand, the Board of Directors paid high compliments to the outgoing managing agents.
By employing the new managing agents at the lesser commission a net profit of Rs. 30,000 was made by the appellant per annum.
The members of the outgoing and incoming agents, belonged to the same family as the appellants, showing, that the appellants were interested in both of them.
The appellant contended that the expenses of Rs. 2,50,000 was incurred by the appellant wholly and exclusively for carrying on the business or the company and would therefore be an allowable deduction under section 10(2) (xv); but the department and the Tribunal negatived the contention.
On reference, the High Court held that the expenditure was incurred wholly and exclusively for the Purpose of `appellant 's business.
as the amount was in the nature of a capital expenditure, it was not deductible under the provision.
649 Dismissing the appeal to this Court, ^ HELD: The High Court was right holding that the disbursement of compensation of Rs. 2,50,000 was of a capital nature and was therefore not a deductible expenditure under section 10(2) (xv ).
[661 (G] (1) Merely because the expenditure is incurred in the course of the business is in could not be said that it would never be a capital expenditure.
Section 37 of the 1961 Act corresponding to section 10(2)(xv) of the 1922 Act.
itself templates a contingency where, even though the expenditure us incurred wholly and exclusively for the purpose of the business, it may still be of a capital nature.
But the High Court was in error in this case in holding that the expenditure was wholly and exclusively the purpose of the business, because.
the finding is not borne out by the facts and circumstances of the case.
[660 H 661 A, G H] (2) The question whether compensation paid to the outgoing managing agents is capital or revenue expenditure depends on the facts and circumstances of each case.
[662 A B] (3) The present case is covered by the decision of this Court in Godrej Company vs C.I.T. Bombay City (47 I.T.R. 381).
That case has considered all the previous decisions and has laid down that in circumstance such as in the instant case the expenditure would be a capital expenditure in the hands of the payer and a capital receipt in the hands of the payee company within the managing of section 10(2) (xv) .
The contention that the case was concerned any as with the nature of the payment in the hands of the payee company and that the observations regarding the nature of the payment in the hands of the payer company would be abiter, is without substance.
[654C, G H] (4)(a) The appellant has brought into existence an advantage of an enduring nature by the change in managing agency, because, the amount of Rs. 30,000 which the appellant got by way of recurring benefit per annum must be regarded as an advantage of an enduring nature so as to fall within its definition in Atherton vs British Insulated and Helsby Cables Ltd. (10 T.C 671) leading to the inference that the expenditure is of a capital nature.
[661 F] (b) It was not the case of the appellant reducing its expenditure by getting rid of the managing agency and taking over the management itself to save the middleman profit.
[653 B] (c) In the present case the only inference that could be drawn from the circumstances of the case is that the termination of the managing agency by the appellant was with the oblique motive of benefiting both the managing agents, in whom the appellant was interested, and not because of and commercial expediency.
[661 D] C.I.T West Bengal II Calcutta vs Coal Shipment (P) Ltd ; , 740 41.
The Commissioner of Income tax Madras vs M/s. Ashok Leyland Ltd ; 204 and M. K. Brothers (P) Ltd. vs Commissioner of Income tax Kanpur ; , 34 followed.
Anglo Persian oil Co. (India) Ltd. vs Commissioner of Income tax 133; Commissioner of Income tax vs Shaw Wallace and Company L.R. 59 I.A. 206, 211; Karam Chand Thopar and Brothers.
(P) Ltd. vs Commissioner of Income tax (Central) Calcutta , 171.
Commissioner of Income tax Calcutta vs Turner Morrison & Company.
Private Ltd. , 156 and Greaves Cotton & Co. Ltd. vs Commissioner of Income tax Bombay City , 134, explained.


judgement:
Civil Appeal No. 716 of 1968 Appeal by Special Leave from the Judgment and order dated the 2nd March, 1967 of the Patna High Court in Letters Patent Appeal No. S of 1962.
section C. Mishra and U. P. Singh for the appellant.
S N. Prasad , A. K. Srivastava, M. section Narasimhan and B. P. Singh for the respondents.
The Judgment of the Court was delivered by KRISHNA IYER, J.
This appeal, by special leave, turns substantially on the application of section 6 of the Bihar Land Reforms Act, 1950 (hereinafter called, the Act), to the case situation the facts having been decided concurrently and finally in favour of the appellant.
Still he lost at the stage of the Letters Patent Appeal, because 3 Division Bench of the High Court held that he had been robbed of his right to sue by Section 6 of the Act.
We may set out the relevant facts briefly.
Although a number of items of immovable property were involved in the suit, which was for ejectment on title.
the lands now in dispute are bakasht lands in the 'B ' Schedule to the plaint.
for easy reference called suit lands.
Regarding the rest the plaintiff 's suit has been decreed.
several items of property were gifted by one Ram Badan Singh to his two wives whose names were duly mutated in the revenue register.
The further course of the proprietary history takes us to the creation of a wakf and the office of mutawalli which are not relevant to the controversy before us but are interesting when we remember that the donees were Hindus and yet they had executed a wakf and constituted themselves as mutawallis.
This shows how community life absorbs and blends jural concepts, overriding religion in the creation of an inter laced legal culture.
This is by the way.
742 We may now take up the thread at the point where by further Gift deeds and transfers the lands covered be the original gift deeds case to vest in the plaintiff and defendants, second party.
they divided them as per a partition deed Exhibit 4 'a dated (October 30, 1952 whereby the suit lands fell to the exclusive share of the plaintiff, along with some other items while other properties were similarly allotted to defendants 2nd party.
Undaunted by this fact defendants, second ;3 party, sold the suit lands to the defendants first party alleging an oral partition sometime before August 1952 and under cover of that case, committed trespass.
Thereupon, a scramble for possession these properties and a proceeding under section 145 Cr.
P.C. ensued in which the defendants, first party, got their possession upheld by the Magistrate`s order dated 5.4.1954.
Inevitably the plaintiff brought the present suit in April 1955 for a declaration of his title, for possession and mesne profits on the score that his exclusive possession was by force taken away in July August 1954 by defendants, first party.
The latter put forward the plea of prior oral partition and exclusive hostile possession, tracing their claim through defendants second party.
The courts of fact found against the defendants and decreed the suit as prayed for, but in Letters Patent Appeal, the present contestig respondents, i.e., the defendants 1st party, urged with success that the plaintiff had lost his title thanks to the operation of sections 3 and 4 of the Act and could not salvage any interest under section 6 thereof.
The defeated plaintiff has come up to this Court, as appellant, assailing the findings of the High Court mainly on three grounds: According to Shri section C. Misra, learned counsel for the appellant section 6 of the Act applied to his case and so there was no vesting of title in the State of the suit lands.
He further pressed that, any way, this case, resting on the Act, which had been on the statute block for several years had not been set up at the earlier stages of the litigation and should not have been permitted at the Letters Patent Appeal stage in the High Court for the first time.
His third contention was that the deed of partition Exhibit 4/a was not legally divestative of rights in view of the provisions of the Estates Partition Act, 1897 which, in his submission, empowered the Collector alone to partition the properties, which not having been done, the lands remained in co ownership wherefore the possession of the defendants, first party, was that of co sharers.
If that were so, the possession of one co sharer was constructive possession of the other co sharer and the plaintiff was thus in khas possession under section 2k of the Act and, on that basis, section 6 of the Act saved the disputed properties from vesting in the State.
All these three fold contentions were sought to be repelled by counsel for the respondent and we proceed to examine them.
We may as well mention here, but dilate on it later, that certain items out of the B Schedule bakasht lands are, on the showing of defendants second party, not in their possession, although the plaintiff has averred.
, in his pleading, dispossession of all the B Schedule lands The legal impact of this circumstance on section 4(a) and the schemes of the Act has to be gauged, in the context of the relief claimed by the plaintiff and the eligibility of possessory benefits of the contesting defendants.
743 The central issue obviously is the resolution of the competition between vesting of the suit lands in the State by virtue of sections 3 and 4 and their exemption from such deprivation by the saving provision in section 6 in favour of tile plaintiff.
A close up of the profile of the land reform law would help us appreciate the purpose and programme of the statute and the meaning of the provision under construction .
The project, as highlighted in the Preamble in grandiose and in keeping with Part IV of thus Constitution, but ill actual implementation drags its feet.
Indeed, counsel on both sides were readily agreed only on one point, viz., that neither his Act nor the law setting a ceiling on land ownership slumbering the statue book since 1962, has been seriously enforced.
The Ninth Schedule to the Constitution can immunise a legislation from forensic challenge but what schedule can invigorate a half inert Administration into quick implementation of welfare oriented, urgently needed, radical legislation now Lying mummified in the books ? If the assertion of non implementation of land reforms laws made at the bar were true, the Bihar State Government has much to answer for to 'We the People of India ' and to the stultified legislature whose 'reform ' exercise remains in suspended animation.
In this very case, before the High Court, the Advocate General has appeared for the plaintiff landowner and yet the State has not bestirred itself to appear and claim the suit lands.
We are left in obscurity on the vital point, neither counsel nor the records throwing any light on whether the State has been given notice in the case in the High Court.
The social transformation cherished by the Constitution involved re ordering of the land system and a vigilant administration would have intervened in this 20 year old litigation long ago and extinguished the private contest to the advantage of the State.
The feudal will may, not unoften, furtively hide, in strategic positions may, be.
We may begin consideration of the merits of the rival cases by a broad projection of the Act.
Its basic object is to extinguish the proprietary rights and transfer absolutely, and free from all private interests, such ownership to the Stat.
The tillers are not to be up rooted and so, they i.e., the raiyats and under raiyats are to be settled on terms of fair rent.
The Act, making; a simplistic dischotomy sufficient for our study, thus absolutely vests in the State all lands, freed from all private rights (sec. 3) as from a date notified under section 4, but carves out of this land mass and leaves untouched.
apart from raiyati holdings, the bakasht lands in the khas possession of the 'intermediary ' i.e., the prior full owner (sec. 6).
Lands not falling within the saved category will be directly managed by the State (sec. 13), if need be, by ejecting trespassers if they are found ill illegal occupation [sec. 4(g)]. 'rh valuable rights attached to or imbedded in lands, like trees, fisheries, minerals also go to the State.
A seemingly bold legislation stroke of substantial land nationalisation will be reduced to pathetic futility if the flood gates of evasion are kept ajar by plausible but diluted interpretation of section 6 as urged by the landlords.
The Court must suppress the mischief and advance the remedy .
Indeed.
if we may anticipate our conclusion, the pronouncements of this Court in Surajnath Ahir vs 744 Prithinath Singh(1) and Ram Ran Bijai Singh & Ors vs Behari Singh @ Bagandha Singh,( ') bar and bolt the, door of escape in a big way and counsel for the appellant has striven to impress on us the need to reconsider and distinguish that view because it is inconsistent with vintage jurisprudence and Anglo American concepts bearing on possession of an owner.
Let us get down to an openheart surgery in a limited way to check upon the soundness of this cardinal submission.
The consternation expressed by appellant 's counsel that the High Court 's interpretation of sec.
6 will create rights in rank trespassers and distort and defeat the right to possess enjoyed by Zamindars does not, by itself, disturb us.
We are in a juridical province of agrarian reform.
The creative legal ideas needed to effectuate this developmental plan are conceptually alien to the old land law and 'rural ' jurisprudence, wearing as they do radical contenance.
The Court, in the process of construction must help the chariot of land reform move forward and sections 3 and 6 are the vital wheels.
Having regard to the significance of the State 's presence even in private litigation bearing on eviction and the like, section 4(ee) provides for notice to the State in certain classes of cases but the present suit and later proceedings are not covered by the term of section 4(ee) and counsel on either side, when we enquired, did not show interest in taking steps to implead the State or otherwise to give notice to it in the present appeal.
We have to Leave it at that.
The consequence of non impleader or absence of notice to the State will naturally be visited on the parties, in the sense that the State will not be bound by this adjudication and its rights vis a vis the plaintiff and the defendants, first party will remain unaffected.
So also of other third parties on the suit lands.
We have already adverted to the skeletal scheme of the Act, of vesting the lands in the State and saving in the hands of proprietors such lands as are in their khas possession, including certain categories spelt out in s.6 by settling them on fair rents under the State.
So, the crucial concept of khas possession calls for judicial scrutiny rather closely so i has loopholes for escape through the meshes of s.6 may not frustrate the land reform law itself.
But what is legitimately due by way of legislative justice to erstwhile proprietors should not be denied.
With this and in view, the Legislature has defined khas possession in s.2k which reads thus: G "2.
Definitions In this Act, unless there is anything repugnant in the subject or context, (k) 'khas possession ' used with reference to the possession of a proprietor or tenure holder of any land used for agricultural or horticultural purposes means the possession of such proprietor or tenure holder by cultivating (1) (2) 745 such land or carrying on horticultural operations thereon himself with his own stock or by his own servants or by hired labour or with hired stock; Explanation : "Land used for horticultural purposes" ' means lands used for the purpose of growing fruits, flowers or vegetables." He who runs and read will readily make out that what is meant is actual possession with one 's feet on the land, plough in the field and hands in the soil, although hired labour is also contemplated.
The emphatic point is that possession is actual possession and admits of no dilution except to the extent s.6 itself, by an inclusive process permits.
This basic idea banishes the importation of the right to possess as tantamount to khas possession.
It would be a perversion of definition to equate the two.
Of course, Shri section C. Misra, appearing for the appellant, has preset before us that jurisprudentially even the right to possess should be regarded as possession.
Indeed, this Court has had occasion to consider and construe the relevant provision in Surajnath Ahir and Ram Ran Bijai Singh (supra) and our task is largely to explain and adopt.
Before we examine this quintessential aspect presented before us will complex scholarship by Shri section C. Misra we Had better make.
short shrift of certain other questions raised by him.
He has desired ` us, by way of preliminary objection, not to give quarter to the plea, founded on section 6 of the Act, to non suit his client, since it was a point raised be nova at Letters Patent state.
The High Court have thought to this objection but overruled it, if we may say so rightly.
The Court narrated the twists and turns of factual and legal circumstances which served lo extenuate the omission to urge the point earlier but hit the nail on the head when it held that it was well settled that a pure question of law going to the root of the case and based on undisputed or proven facts could be raised even before the Court of last resort, provided the opposite side was not taken by surprise or otherwise unfairly prejudiced.
Lord Watson, in Connecticut Fire Insurance Company vs Kavanach,(1) stated the law thus: When a question of law is raised for the first time in a Court of last resort upon the construction of a document or upon facts either admitted or proved beyond controversy, it is not only competent but expedient in the interest of justice to entertain the plea.
The expediency of adopting that course may be doubted when the plea cannot be disposed of without deciding nice questions of fact in considering which the Court of ultimate review is placed in a much less advantageous position than the courts below.
But their Lordships have no hesitation in holding that the course ought not any case to be followed unless the Court is satisfied that the evidence upon which they are asked to decide establishes beyond doubt that the facts if fully investigated would have supported the new plea." (1) , 480.
17 L925SupCI /75 746 We agree with the High Court that the new plea springs from the common case of the parties, and nothing which may work injustice by allowance of this contention at the late stage of the Letters Patent Appeal has been made out to our satisfaction.
Therefore, we proceed to consider the impact and applicability of s.6 of the Act to the circumstances of the present case.
Counsel for the appellant, in his turn, in this Court went a step further to raise two new points not urged in the prior state of the litigation.
We have heard him but arc not persuaded to, agree with him.
According to him, the defendants, first party, had stated in their written statement that their possession of the disputed items as based on the order of the Magistrate under s.145 Cr. P.C.`.
That order having been found erroneous, no benefit could accrue to the defendants.
So stated, it is a little obscure and indeed the point itself is obscure.
There was a proceeding under s.145 Cr.
P.C. before the criminal court in view of the dispute regarding the claims of actual possession.
In the order of the Magistrate, the oral partition relied on by the defendants was held proved and the subsequent deed of partition relied on by the plaintiff held not been acted upon.
Counsel says that this led to the occupation by trespass of the suit properties.
Since the Magistrate 's order had led to this prejudicial consequence it was not proper to permit the party to benefit by his own wrong founded on an 'actus curiae '.
We see no force at all in this contention.
The Magistrate did not direct possession of the B shedule properties to be handed over to the defendants, first parts, but declared their actual possession.
He has done no wrong nor conferred any unjust advantage.
There is no principle on which it could be held that these circumstance deprive a party of the benefit of his possession and d of the dispossession of the plaintiff flowing from s.6 of the Act; if any rights accrued from a statutory provision, it could not withheld for the reasons urged by counsel for the appellant The next new discovery in this Court turns on the absence of jurisdiction of the civil court to give relief when the substance the matter falls within the special jurisdiction of the revenue authorities .
Counsel submitted that this new point occurred to him on reflection and was being pressed by him because it had force .
The plaintiff 's prayer .
for declaration of title and for possession was negatived by the High Court in the light of s.6 of the Act wherein it was held that he had no khas possession and his interests could not in any manner be saved by that provision It was not a case of the defendant claiming or securing any relief regarding possession but the plaintiff"s title standing negatived.
The suit itself was for ejectment on little and sans title, ejectment could not be granted The title of the plaintiff was sought to be rested on s.6 at the letters patent Appeal level but on a construction of that Provision the Court held against him In short the High Court did nothing to investigate into the possession of parties but on the admitted fact that the Defendants" first party, were in possession by trespass the plaint alleges this the Court Dismissed the suit, since section 6 of the Act divested 747 the plaintiff of his quondam proprietorship.
Moreover, there is nothing in section 35 of the Act, relied on by counsel to substantiate his submission, depriving the civil court of its jurisdiction to decide questions of declaration of title and consequential relief of possession.
Section 35 deals with different types of suits Indeed, s.6(1) with which we are concerned, also contains no inhibition against the civil court 's power to decide the issue of title and right to possession of the plaintiff and, as a necessary corollary, the claim of actual possession set up by the defendants first party Nor, can section 6(2) inferentially interdict the plenary power of the civil court.
In short, the plea of bar of the restriction is specious and fails Another peripheral issue invoked before the High Court and here to undo the defendant 's claim of exclusive possession and consequential absence of khas possession in the plaintiff was based on the provisions of the Estates Partition Act, 1897.
Shri Misra propounded what, unfortunately, strikes us as a fallacious proposition.
He went to the extreme extent of maintaining that a partition of lands, to be valid, should be in terms of the Estates Partition Act, 1897 and.
until then, a deed or decree effecting division by metes and bounds does not legally operate.
If so, Ex.4/a remains an arrangement for separate enjoyment between co owners, title continuing, joint.
The follow up of this reasoning is that the suit properties are in the possession of co shares viz, defendants first party (derived from defendents., second party) and possession of one co sharer is possession of the other.
The plaintiff thus is in constrictive possession good enough to bring him into the rescue shelter provided by s.6 Of the Act.
He relied on the ruling in Mahanth Ram Bhushan Das vs Ramrati Kuer(1) and the various provisions of the Estates partition Act to Make out his thesis.
The support derived from the decision is more apparent than real because, as noticed by the High Court, the suit there was not, unlike here, brought on the foot of` a partition and the ruling(r laid down that any 'amicable division ' among, co sharer would not bind the Revenue until the partition was effected as visualised under the Estates Partition Act.
Shri Misra 's study of the provisions of the said Act is free from confusion, save in one fundamental respect That one point, missed by him, is that the whole statutory project is to protect the land revenue, not to affect title.
The partition is valid, it divests title, it binds all; but, so far as land revenue liability is concerned, it relieves parties from the burden falling, on the other sharer 's land only if the exercise prescribed in the Estates Partition Act is gone through.
The statute is a Protective fiscal armour not a mono for division among co owners to travel.
Section 7 makes it clear.
Not that Courts have lost power to decree partition nor that co owners have become impotent to separate their shares voluntarily but that land revenue shall not be prejudiced without the procedure under that Act being gone through.
More clinching is the fact that the plaintiff has here come to Court on the sole case of partition by metes and bounds and has founded his relief not as co sharer (1) 1965 Bihar L. J. 119.
748 but as exclusive owner.
Seeming legal ingenuity has small chance in A court and to miss the point and pertinence of a measure is to travel to a wrong destination.
Now we come to the master problem presented at learned length by Shri section C. Misra and deferentially listened to by us to discover its substance and the solution. 'A 'blind understanding ' has been the result, and as his argument concluded we 'came out by the same door, as in (we) went '.
It behaves us to set out counsel 's submission and the setting of the Act to explain why we do not agree with him and what we regard is the master key to the construction of section 6.
We must first appreciate that it is a land reform law we are interpreting and not just an ordinary statute.
The social economic thrust of the law in this area should not be retarded by judicial construction but filliped by the legal process, without departing from the plain meaning and objective of the Act.
We may delineate the content and contours of section 6 with which we arc directly concerned in the present case.
The preamble to the Act, which sheds skylight on the statute, reads: "An Act to provide for the transference to the State of the interests of proprietors and tenure holders in land and of the mortgages and lessees of such interests including in tersest in trees, forests, fishries, jalkars, ferries, hats bazaars.
mines and minerals and to provide for the constitution of a l and Commission for the State of Bihar with powers to advise the State Government on the agrarian policy to be pursued by the State Government consequent upon such transference and for other matters connected therewith" From this it is fairly clear that the legislative goal s to liquidate all intermediary interests and vest the ultimate ownership on land in the State.
In this sense, the import of the Act is a tepid measure of land nationalisation.
Section 3 in unmistakable language vests the absolute proprietorship in all the lands in Bihar in the State, the succeeding sections spell out details.
F We may here read sections 3, 4(g) and 6(1) of the Act: "3.
Notification vesting an estate or tenure in the State (1) The State Government may, from time to time, by notification declare that the estates or tenures of a proprietor or tenure holder, specified in the notification, have passed to and become vested in the State.
(2) The notification referred to in sub section (1) shall be published in the official Gazette A copy of such notification shall be sent by registered post, with acknowledgement due, to the proprietor of the estate recorded in the general registers of revenue paying or revenue free lands maintained under the Land Registration Act, 1876 (Ben.
Act 7 of 1876), or in case where the estate is not entered in 749 any such registers and in the case of tenure holders, to the proprietor of the estate or to the tenureholder of the tenure is the Collector is in possession of a list of such proprietors or tenure holders together with their addresses, and such posting shall be deemed to be sufficient service of the notification on such proprietor or., where such notification is sent book post to the tenure holder, on such tenure holder for the purposes of this Act.
(3) The publication of such notification, in the Official Gazette shall be conclusive evidence of the notice of the declaration to such proprietors or tenure holders whose interests are affected by the notification" "4.
Consequences of the vesting of an estate or tenure in the State Notwithstanding anything contained in any other law for the time being in force or in any contract, on the publication of the notification under sub section (1) of section 3 or sub section (1) or (2) of section 3A the following consequences shall ensue, namely: (g) Where by reason of the vesting of any estate or tenure or any part thereof in the State under provision of this Act, the Collector is of opinion that the State is entitled to the direct possession of any property he shall, by an order in writing served in the prescribed manner on the person in possession of such property, require him to deliver possession thereof to the State or show cause, if any, against the order within a time to be specified therein and if such person fails to deliver possession or show cause or if the Collector rejects any cause shown by such person after giving him a reasonable opportunity of being heard, the Collector shall for reasons to be recorded" take or cause to be taken such steps or use or cause to be used such force as, in his opinion, may be necessary for securing compliance with the order or preventing a breach of the peace: Provided that if the order under clause (g) is passed by an officer below the rank of the Collector of a district, an appeal shall, if preferred within sixty days of the order., lie to the Collector of the district and the Collector shall dispose of the appeal in accordance with the prescribed procedure" "6.
Certain other lands in khas possession of intermediaries to be retained by them on payment of rent as raiyats having occupancy rights (1) on and from the date of vesting all lands used for agricultural or horticultural purposes, which were in khas possession of an intermediary on the date of such vesting, including (a)(1) proprietor 's private lands let out under a lease for a term of years or under a lease from year 750 to year, referred to in section 116 of the Bihar A Tenancy Act, 1885 (8 of 1885), (ii) landlord 's privileged lands let out under a registered lease for a term exceeding one year or under a lease, written or oral" for a period of one year or less, referred to in section 43 of the Chota Nagpur Tenancy Act, 1908 (Ben.
Act 6 of 1908), (b) lands used for agricultural or horticultural purposes and held in the direct possession of a temporary lease of an estate or tenure and cultivated by himself with his own stock or by his own servants or by hired labour or with hired stock, and (c) lands used for agricultural or horticultural purposes forming the subject matter of a subsisting mortgage on the redemption of which the intermediary is entitled to recover khas possession thereof; shall, subject to the provisions of section 7A and 7B be deemed to be settled by the State with such intermediary and he shall be entitled to retain possession thereof and hold r them as a raiyat under the State having occupancy rights in respect of such lands subject to the payment of such fair and equitable rent as may be determined by the Collector in the prescribed manner: Provided that nothing contained in this sub section shall entitle an intermediary to retain possession of any naukarana land or any land recorded as chaukidari or goraiti jagir or mafi goraiti in the record of rights or any other land in respect of which occupancy right has already accrued to a raiyat before the date of vesting.
Explantion.
For the purposes of this sub section. 'naukarana land ' means land held as a grant burdened with service in lieu of rent or held simply in lieu of wages for services to he rendered.
" Although there is a blanket vesting of proprietorship in all the lands in the State, the legislation is careful, in this initial state of agrarian reform, not to be too deprivatory of the cultivating possession of those who have been tilling the land for long.
Therefore, while the consequence of the vesting is stated to be annihilation of all interests, encumbrances and the like in the land, certain special categories of rights are saved.
Thus, raiyats and under raiyats are not dispossessed and their rights are preserved.
The full proprietor 's khas possession is if so not disturbed.
Certainly.
the large landholders, whose lands have for long been under tenancy, lose their lands to the State by virtue of the vesting operation (of course, compensation is provided for).
751 Nevertheless, the reform law concedes the continuance of a limited species of interests in favour of those Zamindars.
The three fold class of lands is brought into the saving bucket by including them in the khas possession of the proprietors.
They are legislatively included in khas possession by an extended itemisation in section 6(1).
The purpose and the purport of the provision is to allow the large land holders to keep possession of small areas which may be designated as the private or privileged or mortgaged lands traditionally held directly and occasionally made over to others, often servants or others in the shape of leases or mortgages.
The crucial point to remember is that section 3 in its total sweep" transfers all the interests in all lands to the State, the exception being lesser interests under the State set out in detail in sections 5, 6 and 7.
So much so, any person who claims full title after the date of vesting notified under section 4 has no longer any such proprietorship.
All the same, he may have a lesser right if he falls within the saving provisions viz., sections 5, 6 and 7 Sections 5 and 7 do not apply here.
The claim of the plaintiff is that he can sustain his right to recover possession in this suit, as coming within the oasis of section 6(1).
There is no case that the sub clauses (a), (b) and (c) of section 1) 6(1) apply.
Counsel 's contention is that he comes within the ambit of the main paragraph, being allegedly in khas possession.
To appreciate the further discussion, it is useful to recapitulate that the appellant has averred in his plaint that he had been dispossessed as early as 1954 by a brazen act of trespass by the contesting respondents who were holding adversely to him.
Undaunted by this fatal fact counsel claimed to be in possession and argued still.
The focus was turned by him on the concept of khas possession defined in section 2(k).
He presented a historical perspective and suggested that the genesis of khas possession could be traced to the Bengal Tenancy Act, 1885.
May be, the draftsmen might have drawn upon those earlier land tenure laws for facility, but we must understand right at the outset that the Constitution of India has inaugurated a new jurisprudence as it were, guided by Part IV and reflected in Part II.
When there has been a determined break with traditional jurisprudence and a big endeavour has been made to over turn a feudal land system and substitute what may be called transformation of agrarian relations, we cannot hark back to the bygone jura or hold a new legislation captive within the confines of vanishing tenurial thought.
De hors the historical links a break away from the past in the socio legal system is not accomplished by worship of the manes of the law khas possession means what the definition, in plain English, says.
The definition clause is ordinarily a statutory dictionary, and viewed that way, we have in the early part of this judgment explained how it means actual, cultivatory possession nothing less nothing else.
Of course, section 6(1) makes a special addition by 'including ' other demised lands by express enumeration.
Section 6 does not stop with merely saving lands in khas possession of the intermediary (erstwhile proprietor) but proceeds to include certain lands outstanding on temporary leases or mortgages with others.
752 as earlier indicated.
These are private lands as known to the Bihar Tenancy Act, privileged lands as known to the Chota Nagpur Tenancy Act, land outstanding with mortgagees, pending redemption and lands which are actually being cultivated by the proprietor himself.
Ordinarily what is outstanding with lessees and mortgagees may not fall within khas possession.
The Legislature, however, thought that while: the permanent tiller 's rights should be protected and therefore, raiyats and under raiyats should have rights directly under the state, eliminating the private proprietors, the Zamindar or proprietor also should be allowed to hold under the State., on payment of fair rent, such lands as have been in his cultivatory possession and other lands which were really enjoyed as private or privileged lands or mortgaged with possession by him.
With this end in view, section 6(1) enlarged its scope by including the special categories.
The word 'include ' is generally used in interpretation clauses in order to enlarge the meaning of that words or phrases occurring in the body of the statute.
It is obvious that section 6(1) uses the word 'including ' to permit enlargement of the meaning of khas possession for the limited purpose of that section, emphasising thereby that, but for such enlargement, the expression khas possession excludes lands outstanding even with temporary lessees.
It is perfectly plain, therefore, that khas possession has been used in the restricted sense of actual possession and to the small extent it had to be enlarged for giving relief to proprietors in respect of 'private ' 'privileged ' and mortgaged lands inclusive expressions had to be employed.
Khas possession is actual possession, that is "a foothold on the land, an actual entry, a possession in fact, a standing upon it, an occupation of it, as a real, administrative act done"(l).
Constructive possession or possession in law is what is covered by the sub clauses of section 6(1).
Even so, it is impossible to conceive, although Shri Misra wanted us to accept, that possession is so wide as to include a mere right to possess, when the actual dominion over the property is held by one in hostility to the former.
Possession, correctly understood, means effective, physical control or occupation.
"The word possession is sometimes used inaccurately as synonymous with the right to possess".
(Words and Phrases, 2nd Edn., John B. Sounders., p.151).
"In the Dictionary of English Law (Earl Jowitt) 1959 at p. l 367 "possession" is defined as follows: 'possession, the visible possibility of exercising physical control over a thing, coupled with the intention of doing so, either against all the world, or against all the world except certain persons.
There are, therefore, three requisites of possession.
First, there must be actual or potential physical control.
Secondly, physical control is not possession, unless accompanied by intention; hence, if a thing is put into the hand of a sleeping person, he has not possession of it.
Thirdly, the possibility and intention must be visible or evidence by external signs for if the thing shows no signs of being under the control of anyone, it is not possessed; . ' In the end of all, however the meaning of 'possession ' must depend on the context." (ibid.
p. 153).
May be, in certain situations, possession may cover right to possess.
It is thus clear that in Anglo American jurisprudence also, possession is actual possession and in a limited set of cases, may include constructive possession, but when (1) American Jurisprudence, Words & Phrases Vol. 33, p. 103.
753 there is a bare right to possess bereft of any dominion or factum of control, it will be a strange legal travesty to assert that an owner is in possession merely because he has a right to possess when a rival, in the teeth of owner 's opposition, is actually holding dominion and control over the land adversely, openly and continuously.
Admittedly in the present case" the possession of the plaintiff had ceased totally at least two years before the vesting under section 4 took place.
This situation excludes khas possession.
We have the uniform authority of this Court to hold that the possession of a trespasser, by no stretch of imagination, can be deemed to be khas possession or even constructive possession of the owner.
In Surajnath Ahir (supra) this Court considered the definition of khas possession in the Act in the context of section and after adverting to Brij Nandan Singh vs Jamuna Prasad, on which Shri Misra placed massive reliance, observed: "Reliance was placed by the High Court on the case reported as Brijnandan Singh vs Jamuna Prasad for the construction put on the expression 'khas possession ' to include subsisting title to possession as well, and therefore for holding that any proprietor, whose right to get khas possession of the land is not barred by any provision of law, will have a right to recover possession and that the State of Bihar shall treat him as a raiyat with occupancy right and not as trespasser.
We do not agree with this view when the definition of khas possession ' means the possession of a proprietor or tenure holder either by cultivating such land himself with his own stock or by his own servants or by hired labour or with hired stock.
The mere fact that a proprietor has a subsisting title to possession over certain land on the date of vesting would not make that land under his 'khas possession ' ".
The attempt to distinguish this decision on the score that the observation is obiter does not appeal to us and the rule laid down there is in conformity with the principle as we have earlier expounded.
The law has been indubitably laid down in Ram Ran Bijai Singh (supra) where a Bench of five Judges of this Court discussed khas possession in section 2k and the scope of section 6 of the Act.
The same Full Bench(1) case earlier referred to was pressed before the learned Judges, and over ruling that case, Ayyangar,, J. speaking for the Court stated the law in these unmincing words: "Mr. Sarjoo Prasad however relied on certain observations in the judgment of the Full Bench of the Patna High Court in Sukdeo Das vs Kashi Prasad where the learned Judges appear to consider the possession even of a trespasser who has not perfected his title by adverse possession for the time requisite under the Indian Limitation Act as the khas possession of the true owner.
We consider that this equation of the right to possession with 'khas possession ' (1) A.I.R. 1958 Pat.
754 is not justified by principle or authority.
Besides this is also inconsistent with the reasoning of the Full Bench by which constructive possession is treated as within the concept of khas possession.
The possession of the contesting defendants in the present case was in their own right and adverse to the plaintiff, even on the case with which the appellants themselves came into Court." .
In this context the plea made by the plaintiffs relevant to the character of the possession of the contesting defendants assumes crucial importance, for if they were admittedly trespassers then they could not be said to hold the property on behalf of the mortgagors and the entire basis of the argument as to the property being ill the khas possession of the plaintiffs would disappear.
It was on the basis of their possession being wrongful that a claim was made against them for mesne profits and it was on the footing of their being trespassers that they were sued and possession sought to be recovered from them.
In these circumstances we consider that it is not possible for the appellants to contend that these tenants were in possession of the property on behalf of the mortgagor and in the character of their rights being derived from the mortgagor. ' The Court rejected the theory that the possession of a trespasser was that of the owner.
Other decisions of the Patna High Court and this Court were referred to at the bar but the position having been made unmistakable by the two cases just mentioned, we do not wish to burden this judgment with case law any further.
The conclusion we, therefore, draw is that on the facts found indeed, on the facts averred in the plaint the plaintiff had no khas possession of the suit lands and cannot use section 6 as a rescue raft.
His title was lost when section 4 was notified as applicable to the suit lands by section 3 in 1956.
Without title he could not maintain the action for recovery of possession.
But that is not the end of the matter.
He is certainly entitled to mesne profits from the defendants, first party, until the date of vesting, i.e." January 1, 1956.
We, grant him a decree in this behalf subject to the qualification mentioned below.
Again, the contesting defendants, in paragraph 27 of their written statement, have admitted that they had no possession of or connection with some of the plots mentioned in Schedule to the plaint and set out therein.
The High Court has dismissed the suit in entirety after noticing the admission of the contesting defendants that they have not been in possession of those items covered by paragraph 27 of the written statement.
The plea in that paragraph is that these lands have been made over to the defendants, second party.
It is undeniable that the plaintiff had title to the entire Schedule properties as against defendants.
first party, and second party.
If defendants, first party. were not in possession and defendants, second party,, were in possession, the plaintiff would still be entitled to a decree for possession of the same.
It neither is in possession the presumption that the owner is in possession holds good and he is entitled to that 755 possession being restored to him.
Therefore, a decree for possession of these items covered by paragraph 7 of the written statement filed on behalf of the contesting defendants, first party, is also granted.
Here we must utter a word of caution and condition our decree accordingly.
The State, by the vesting operation, has become the owner and very probably the plaintiff cannot sustain any claim to be in possession as against the State.
While we do not investigate this aspect, we wish to make it perfectly plain that the rights of the State, as against the plaintiff, in regard to the items for which we are giving him a decree, will not in any manner be affected.
Likewise, if some third party is in possession of those items unclaimed by the defendants, first party, their possession, if any, also will not be prejudiced.
After all, the decree of this Court can bind and regulate the rights of the parties to the litigation and not others.
Inevitably, the mesne profits which we have decreed will be confined to those items which are found to be in the possession of the defendants, first party.
There is a disturbing feature about this case.
We have already indicated how there is an apparent indifference on the part of the State in securing its rights granted by the Act.
Here is a case where the defendants, first party,, are rank trespassers and have no evident equity in their favour.
Section 4(f) declares that the Collector shall be deemed to have taken charge of the estates and interests vested in the State This means he has a public duty to take charge of lands vested in the State.
Surely, a responsible public officer like the Collector, charged with a duty of taking delivery of possession of lands which by virtue of the vesting the State is entitled to take direct possession of, will proceed to dispossess the trespasser.
In this case, defendants first party, are trespassers and the plaintiff being out of the pale of section 6, the State is entitled to the direct possession of the suit lands.
We expect the Collector to do his duty by section 4(g).
Counsel for the respondents drew our attention to rule 7H: "7 H. How to deal with cases in which proprietor, etc. not found in possession on the date of vesting If the Collector holds on the report of enquiry held under rule 7 E or 7 F that the outgoing proprietor or tenure holder, or his temporary lessee or mortgagee" was not in possession of the lands or buildings referred to in rule 7 G, he shall fix the fair rent or ground rent thereof in the manner prescribed in these rules and the person who may be found to be in possession of such lands or buildings shall thereupon be liable to pay the rent or ground rent so fixed to the State Government with effect from the date of vesting.
" Although we need not elaborately study the implications of this pro vision, it is fairly clear that this rule does not confer any right or equity to be in possession in favour of d trespasser.
All that it does is to make the man in possession, be he trespasser or not, "liable to pay the rent or ground rent so fixed to the State Government with effect from the date of vesting. ' It is the liability to pay rent that is created, not the equity to claim possession.
After all, the land reform 756 measure is intended to conserve as much land as is available in the hands of the State and any trespasser who distorts this claim and snatches possession, cannot benefit by his wrong.
May be.
there are special circumstances which may persuade the State to give possession of any land either to its erstwhile proprietor or to one who has been in long possession rightly of wrongly.
We do not make any observation in that behalf but point out that prima facie section 4(f) and (g) and rule 7 H attract the jurisdiction of the State and its revenue 13 authorities.
The policy of the Act includes the State taking over and managing lands not saved by sections 5, 6 and 7 and are not found to be in possession of the proprietor so that the eventual distribution to the landless and the like may be worked out smoothly.
The appeal is dismissed in substantial measure except to the extent of the relief by way of mesne profits and possession in regard to a few items mentioned in paragraph 27 of the contestants ' written statement The parties will bear their costs throughout in the peculiar circumstances of the case.
This judgment will not affect the rights, if any.
either party may seek or has secured from the State.
V.M.K. Appeal dismissed.

dataset_name: IN-Abs

summary:
Section 3 of the Bihar Land Reforms Act, 1 950, transfers all interests in estates or tenures of a proprietor or tenure holder to the State as from a date notified under section 4.
Section 6 carves out of this land mass and leaves untouched, apart from raiyati holdings the bakasht lands in Khas possession of the 'intermediary ' i.e., the prior full owner.
Several items of property were gifted by one Ram Badan Singh to his two wives whose names were duly mutated in the revenue register.
By further gift deeds and transfers the lands covered by the original gift deeds can to vest in the plaintiff and defendants, second party.
They divided them as per a partition deed Exhibit 4/a dated October 30, 1952 whereby the suit lands fell to the exclusive share, of the plaintiff along with some other items while other properties were similarly allotted to defendants 2nd party.
Despite this fact defendants, second party, sold the suit lands to the defendants first party alleging an oral partition sometime before August 1952 and under cover of that ease, committed trespass.
Thereupon, a scramble for possession of these properties and a proceeding under section 145 Cr.
P.C. ensued in which the defendants, first party, got their possession upheld by Magistrate 's order dated S 4 1954.
The plaintiff brought the present suit in April 1955 for a declaration of ' his title, for possession and mesne profits on the score that his exclusive possession was by force taken away in July August 1954 by defendants first party the latter put forward the plea of prior oral partition and exclusive hostile possession, tracing their claim through defendants second party.
The courts of tact found against the defendants and decreed the suit, but in Letters Patent Appeal, the respondents i.e., the defendants 1st party succeeded on the ground that the plaintiff had lost his title on account of the operation of sections 3 and 4 of the Bihar Land Reforms Act, 1950.
In this appeal filed on the basis of the special leave granted by this court, it was contended for the appellant that (i) Section 6 of the Act applied to the facts of the case and so there was no vesting of title in the State of the suit lands; (ii) This case, resting on the Act, which had been on the statute book for several ' years, had not been set up at the earlier stages of the litigation at and should not have been permitted at the Letters Patent Appeal stage in the High Court for the first time; and (iii) The deed of partition was not legally divestative of rights in view of the provisions of the Estates Partition Act, 1897, which empowered the Collector along to partition the properties, which not having been done, the lands remained in co ownership therefore the possession of ' the defendants first party, was that of co sharers.
If that were so.
the possession of one co sharer was constructive possession of the other co sharer and the plaintiff was thus in khas possession under section 2k of the Act and, on that basis, section 6 of the Act saved the disputed properties from vesting in the State.
Rejecting the contentions except to a small extent of modifying the decree, ^ HELD: (i) It is well settled that a pure question of law going to the root or the case and based on undisputed or proven f acts could be raised even before the Court of last resort, provided the opposite side was not taken by surprise or otherwise unfairly prejudiced [745 E F] Connecticut Fire Insurance Company vs Kavanach.
, 480.
referred to.
740 In the present case the new plea springs from the common case of the, parties and nothing which may work injustice by allowance of this contention has been made out.
[746 A] (ii) The Magistrate did not direct possession of the B Schedule properties to be handed over to the defendants, first party, but declared their actual possession.
He has done no wrong nor conferred any unjust advantage.
There is no principle on which it could be held that these circumstances deprive .
party of the benefit of his possession and of the dispossession of the plaintiff flowing from s.6 of the Act.
[746D E] (iii) Neither the provisions of section 6(1) nor those of section 35 contain any prohibition against the civil court 's power to decide the issue of the and right to possession of the plaintiff and, as a necessary corollary, the claim of actual possession set up by the defendants, first party.
Nor can section 6(2) inferentially interdict the plenary power of the Civil court.
[746.A B] (iv) The partition is valid, it divests title it binds all.
but, so far as land revenue liability is concerned, it relieves parties from the burden falling on the other sharer 's land only if the exercise prescribed in the Estates Partition Act is gone through.
The statute is a protective fiscal armour, not a monorail for division among co owners to travel.
Section 7 makes it clear.
Not that Courts have lost power to decree partition nor that co owners have become powerless to separate their shares voluntarily but that land revenue shall not be prejudiced without the procedure under that Act being gone through.
More clinching is the fact that the plaintiff has here come to Court on the sole case of partition by metes and bounds and has founded his relief not as co sharer but as exclusive owner.
[747 G H, 748 Al Mahanth Ram Bhushan Das V. Ramrati Kuer, 1965 Bihar L.J. 119, referred (v) The purpose and purport of section 6(1) is to allow the large land holders to keep possession of small areas which may be designated as the private or privileged or mortgaged lands traditionally held directly and occasionally made over to others, often servants or others, in the shape of leases or mortgages.
It is obvious that section 6(1) uses the word 'including ' to permit enlargement of the meaning of khas possession for the limited purpose of that section, emphasising thereby that, but for such enlargement, the expression khas possession excludes lands outstanding even with temporary lessees.
It is perfectly plain, therefore, that khas possession has been used in the restricted sense of actual possession and to the small extent it had to be enlarged for giving relief to proprietors in respect of 'private ', 'privileged ' and mortgaged lands, inclusive expressions had to be employed.
Khas possession is actual possession.
Constructive possession or possession in law is what is covered by sub clauses of section 6(1).
It is not correct to say mat possession is so wide as to include a mere right to possess, when the actual dominion over the property is held by one in hostility to the former. [751 AB, G H, 752 C E.] (vi) In Anglo American jurisprudence also possession is actual possession and in a limited set of cases, may include constructive possession, but when there is a bare right to possess bereft of any dominion or factum of control, it will be a strange legal travesty to assert that an owner is in possession merely because he has a right to possess when a rival, in the teeth of owner 's opposition.
is actually holding dominion and control over the land adversely, openly and continuously.
This court has rejected the theory that the possession of a trespasser was that of the owner.
[752 H, 753A, 754 D.] Surajnath Ahir vs Prithinath Singh , Ram Bijai Singh & Ors vs Behari Singh @ Bagandha Singh relied on.
Brij Nandan Singh vs Jamuna Prasad A.I.R. 1958 Pat. 589, referred to.
(vii) It is undeniable that the plaintiff had title to the entire Schedule properties as against defendants, first party, and second party.
If defendants.
first party, were not in possession the plaintiff would still be entitled for a decree 741 for possession of the same.
If neither is in possession, the presumption that the owner is in possession holds good and he is entitled to that possession being restored to him.
Therefore, the plaintiff is entitled to a decree for possession regarding the items of properly covered by paragraph, 27 of the written statement filed on behalf of the contesting defendants, first party.
the rights of the State as against the plaintiff in regard these items of property, will not in any manner be effected.
[754H. 755 A B] observation: Prima facie section 4 (f) and (g) of the Act and rule 7 H of the Rules framed under the Act attract the jurisdiction of the State and its revenue authorities.
In the present case, the defendants, first party, are rank trespassers and have no equity in their favour.
Section 4(f) declares that the Collectors shall be deemed to have taken charge of the estates and interests vested in the State.
This means he has a public duty to take charge of lands vested in the State.
Surely, a responsible public office like the Collector, charged with duty of taking delivery of possession of lands which by virtue of the vesting the State is entitled to take direct possession, will proceed to disposses the trespasser.
In this case, defendants, first party the trespassers and the plaintiff being out of the pale of section 6, the State ii entitled to the direct possession of the suit lands.
[756B, 755 D E]