judgement:
Civil Appeal No. 982 (NT) of 1975.
From the Judgment and order dated 10.10.1974 of the Gujarat High Court in Gift Tax Reference No. 1 of 1973.
Dr. V. Gauri Shanker, K.C. Dua, C.V. Subha Rao and Miss A. Subhashini for the Appellant.
T.A. Ramachandran, Sonet P. Mehta.
D.N. Misra and Ms. Sunita Narhari for the Respondent.
The Judgment of the Court was delivered by VENKATACHALIAH, J.
This appeal, by certificate, by the Commissioner of Income Tax, Gujarat, directed against the order dated, 10.10.1974 of the Gujarat High Court in Gift Tax Ref.
No. 1 of 1973 raises a question touching the correct principles of valuation of certain shares constituting the subject matter of a gift, held in a company incorporated in the United Kingdom analogous to a private limited company in India.
Shri Ambalal Sarabhai, since deceased, held 480 shares in an English Company M/s. Bakubhai & Ambalal Ltd., London, the share capital of which consisted of 2000 shares of 10 each.
On 17.10.1964, under eight deeds of gift, the said Ambalal Sarabhai made gifts of the said 480 shares to certain members of his family.
In the proceedings of the assessment to gift tax respecting said gifts the question of the proper basis for determination of the value of the gifts having arisen, the assessee contended that, as the shares were not quoted in the stock exchange, their value be determined on the average of break up value indicated by the balance sheets of the Company as on 31.3.1964 and 31.3.1965.
The former figure was Rs.507 and the latter Rs.333 per share; the average of the two being Rs.420 per share.
The assessee also contended that in view of the decision of the General Body of the company, dated, 4.10.1961 to increase its share capital by issue of additional 2000 shares at 10 each, the value of the shares constituting the subject matter of the gifts which were transferred "ex right" would stand depreciated.
344 The Gift Tax Officer did not accept the contentions of the asses see.
He proceeded to value the shares at Rs.507 per share on the basis of the break up value yielded by and deducible from the balance sheet as on 31.3.1964.
The Appellate Assistant Commissioner dismissed the assessee 's appeal.
In the further appeal before the Income Tax Appellate late Tribunal, the Tribunal, placing reliance on what it considered to be the principles of valuation appropriate to such cases said to be contained in Lynal & Anr.
vs I.R. C. (H.L.), , valued the shares at Rs.450 each said to represent the break up value on the basis of the balance sheet of 31.3.1963.
The Tribunal held that it could not take into consideration any other document except the published in formation which, in this case, was the balance sheet as on 31.3.1963.
The Tribunal, at the instance of both the revenue and the assessee stated a case and referred three questions of law for the opinion of the High Court the first two at the instance of the revenue and the third at the instance of the assessee.
The assessee, it must be observed did not press the question referred at his instance and the High Court, accordingly, did not express any opinion on it.
The two questions referred for the opinion of the High Court at the instance of the Revenue were: "(1) Whether on the facts and in circumstances of the case.
the finding of the Tribunal based on the ratio of the case decided by the House of Lords in Lynall and Another vs Inland Revenue Commissioner, (83 l.
T.R. 563) and basing the valuation of the shares of Bakubhai and Ambalal Ltd., London, on its balance sheet as at 31.3.63 instead of 31.3.64 is bad in law? (2) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in accepting the valuation of the shares as returned by the assessee and deleting Rs.27,360 added by the Gift Tax officer under Section 15(3) of the Act?" The High Court by its order, now under appeal, answered the questions against the revenue.
It held: "The only information which was available as on October, 17, 1964 was in the form of the balance sheet as of March 31, 1963 and hence the Tribunal was right when it took into consideration for the purpose of arriving at the value of the 345 shares by the break up method, the balance sheet as at March 31, 1963 and not as the revenue was contending for the balance sheet as of March 31.
Dr. Gauri Shanker, Learned Senior Counsel urged in support of the appeal, that the entire exercise of valuation before the High Court rested on a case which had no application to the matter; that the case was governed squarely by the pronouncements of this Court in Commissioner of Wealth Tax, Assam vs Mahadeo Jalan & Ors., and, more particularly, in Commissioner of Gift tax, Bombay vs Smt.
Kusumben D. Mahadevia, ( and that the erroneous view of the High Court as to the principles of valuation should, therefore, not remain uncorrected.
Shri Ramchandran, learned senior counsel for the assessee, in the.
light of the aforesaid pronouncements to this court, found it difficult to support the principles on which the determination of the value of the shares proceeded before the authorities as well as before the Tribunal and the igh Court.
He, however, invited our attention to the following observations of the High Court: " .
As a matter of fact it may be pointed out that before the Tribunal it was common ground that the value of the shares should be ascertained by following the break up value method and the only difference was as to with reference to balance sheet of what date the total value of the assets has to be ascertained . and urged that in view of the consensus between the parties as to the basis of valuation it was not now open to the Revenue to turn around and urge the application of an altogether different principle.
We are afraid, the basis adopted by the High Court is clearly unsustainable in the light of the pronouncements of this court referred to earlier.
The reference to and reliance upon the Lynall principle was somewhat in apposite and misplaced.
That case principally dealt with the impermissibility of reliance on classified information considered confidential and privileged from disclosure.
Pointing out the inadequacy of the "break up value" method this court in Mahadeo Jalan 's case referred with approval to the following observations of Williams J in Mc.
Cathie vs Federal Commissioner 's of Taxation ; " . the real value of the shares . will depend 346 more on the profits which the company has been making and should be capable of making, having regard to the nature of its business than upon the amounts which the shares would be likely to realise upon liquidation . .
In Kusumben 's case referring to the principles of valuation relevant to the matter, this court said: ". .
But where the shares in a public limited company are not quoted on the stock exchange or the shares are in a private limited company the proper method of valuation to be adopted would be the profit earning method.
This method may he applied by taking the dividends as reflecting the profit earning capacity of the company on a reason able commercial basis but if it is found that the dividends do not correctly reflect the profit earning capacity because only a small proportion of the profits is distributed by way of dividends and a large amount of profits is systematically accumulated in the form of reserves, the dividend method of valuation may be rejected and the valuation may be made by reference to the profits.
The profit earning method takes into account the profits which the company has been making and should be capable of making and the valuation, according to this method is based on the average maintainable profits.
Of course, for the purpose of such valuation, the taxing authority is not bound by the figure of profits shown in the profit and loss account because it is possible that the amount of profits may have suffered diminution on account of unreasonable expenditure or the directors having chosen to take away a part of the profits in the form of remuneration rather than dividends.
The figure of profits in such a case would have to be adjusted in order to arrive at the real profit earning capacity of the company . ." The view of the High Court cannot, therefore, be said to reflect the position in law correctly.
The correct principle of valuation applicable to a given case Is a question of law.
The parties can agree upon a principle permissible under and recognised by law.
If two or more alternative principles ar equally valid and available, it might be permissible for the parties to agree upon one of the alternative modes of valuation in preference to 347 another.
In this case, the revenue cannot be said to be precluded from urging the correct legal position.
In the ultimate analysis, it requires to be held that the view of the High Court as to the principle of valuation in determining the value of the kind of shares concerned in this case cannot be held to be correct.
The first question of law referred for its opinion would otherwise, require to be answered in the affirmative and the second in the negative; both against the assessee.
As a logical consequence, the Tribunal would have to go through, over again, the exercise of determination of the value of the shares adopting the correct principle.
But the matter is already two and a half decades old.
The gift was in the year 1964.
The total Gift Tax as now assessed is Rs.5661.
Upon a fresh determination of the value of the shares adopting the somewhat intricate processes inherent in the 'profit method ' of valuation the difference in the quantum of the tax might, perhaps, not be substantial.
The magnitude of the mechanism for refixation of the value of the gifts and the difference in the quantum of the tax it might result in, do not bear a reasonable or sensible proportion.
Having regard to the pecuniary involvement in the case which is obviously small we think we should not expose the parties to a fresh round of litigation.
In this view of the matter, we think appellant should be content with the declaration of the law on the matter, without disturbing the valuation made by the Tribunal and approved by the High Court.
though the principle adopted is not supportable in law.
We therefore decline to interfere in the matter.
The valuation is therefore left undisturbed . 9.
The appeal is disposed of accordingly.
In the circumstances of the case, there will be no order as to costs.
N.P.V. Appeal disposed of.

summary:
% The assessee contended in the gift tax assessment proceedings that the 480 shares in the English Company acquired as gift were not quoted in the stock exchange, that their value be determined on the average break up value indicated by the balance sheets of the Company as on 31.3.1964 and 31.3.1965, and that in view of the decision of the General Body of the Company dated 4.10.1961 to increase its share capital by issue of additional shares the value of the shares constituting the subject matter of the gifts which were transferred "ex right" would stand depreciated.
The Gift Tax officer valued the shares on the basis of the breakup value yielded by and deducible from the balance sheet as on 31.3.1964.
The Appellate Assistant Commissioner dismissed the assessee 's appeal.
In the further appeal before the Income tax Appellate Tribunal, the Tribunal, relying on the ratio laid down in the English Case, Lynall and another, vs Inland Revenue Commissioner, valued the shares at Rs.450 each, said to represent the break up value on the basis of the balance sheet of 31.3.1963, holding that it could not take into consideration any other document except the published information, which was the aforesaid balance sheet.
The Tribunal stated a case and referred the matter to the High Court, for its opinion.
The High Court held that since the only information which was available on the date of the gifts was in the form of the balance sheet as of March 31, 1963, the Tribunal was right in taking the same into consideration, for the purpose of arriving at the value of the shares by the 'break up ' method.
342 In the appeal to this Court it was contended on behalf of the Revenue that the principle of valuation relied upon by the High Court was erroneous, and that the case was covered by the decisions of this Court in Commissioner of Wealth Tax, Assam vs Mahadeo Jalan & Ors., and Commissioner of Gift Tax, Bombay vs Smt.
Kusumben .
Mahadevia, On behalf of the assessee it was urged that in view of the consensus between the parties as to the basis of valuation, it was not now open to the Revenue to urge the application of an altogether different principle.
Disposing of the appeal, ^ HELD:1.
The correct principle of valuation applicable to a given case is a question of law.
The parties can agree upon a principle permissible and recognised by law.
If two or more alternative principles arc equally valid and available it might be permissible for the parties to agree upon one of the alternative modes of valuation in preference to another.
[346G H] In the instant case, the Revenue cannot be precluded from urging the correct legal position.
[347A] 2.
When the shares in a public limited company are not quoted on the stock exchange.
Or are in a private limited company the proper method of valuation to be adopted would be the profit earning method.[346B C] Commissioner of Gift Tax, Bombay vs Smt.
Kusumben D. Mahadevia, , relied upon.
Commissioner of Wealth Tax, Assam vs Mahadeo Jalan .
& Ors.
, and, Williams J in Mc.
Cathie vs Federal Commissioner of Taxation, ; , referred to.
In the instant case, the view of the High Court as to the principle of valuation in determining the value of the kinds of shares concerned cannot be held to be correct.
As a logical consequence, the Tribunal would have to go through, over again, the exercise of determination of the value of the shares adopting the correct principle.
But, having regard to the fact that the matter is already two and a half decades old, and that the magnitude of the mechanism for the re fixation of the value of the gifts by adopting the somewhat intricate process inherent in the 343 "profit method" of valuation, and the difference in the quantum of tax that might result in, do not bear a reasonable or senible proportion, the valuation is left undisturbed.[347A D]


judgement:
Civil Appeal No. 2035 of 1987.
From the Judgment and order dated 23.4.1987 of the High Court of Punjab and Haryana in C.M.P. No 19 of 1987.
S.N. Kacker and R.S. Sodhi for the Appellant.
Mrs. Shyamla Pappu, A.M. Ashri, K.S. Thaper and V.K. Jain for the Respondents.
403 The Judgment of the Court was delivered by A SEN, J.
The controversy in this appeal by special leave centres, s around the words 'in writing and signed by the parties ' added to order XXIII, r. 3 of the Code of Civil Procedure, 1908 by the Code of Civil Procedure (Amendment) Act, 1976 and the precise question is whether when a settlement is arrived at between the parties in appeal before the Court, the compromise cannot be given effect to under Order XXIII, r. 3 of the Code unless the terms of the compromise are embodied in an agreement in writing.
First as to the facts.
The respondent herein Chatur Bhuj Goel, a practising advocate at Chandigarh first lodged a criminal complaint against Colonel Sukhdev Singh, father of the appellant, under section 420 of the Indian Penal Code, 1860 after he had served the respondent with a notice dated July 11, 1979 forfeiting the amount of Rs.40,000 paid by him by way of earnest money, alleging that he was in breach of the contract dated June 4, 1979 entered into between Colonel Sukhdev Singh, acting as guardian of the appellant, then a minor, and the respondent, for the sale of a residential house at 1577, Sector 18D, Chandigarh for a consideration of Rs.2,85,000.
In terms of the agreement, the respondent was to pay a further sum of Rs.1,35000() to the appellant 's father Colonel Sukhdev Singh by July 10, 1979 when the said agreement of sale was to be registered and vacant possession of the house delivered to him, and the balance amount of Rs. 1,10,000 on or before January 31, 1980 when the deed of conveyance was to be executed.
The dispute between the parties was that according to Colonel Sukhdev Singh, there was failure on the part of the respondent to pay the amount of Rs.1,35,000 and get the agreement registered, while the respondent alleged that he had already purchased a bank draft in the name of the appellant for Rs.1,35,000 on July 7, 1979 but the appellant 's father did not turn up to receive the same.
The respondent met him at his residence at Chandigarh on the morning of July 16, 1979 when it was agreed that they would meet in the District Court precincts later in the day for the purpose of registration of the agreement, but again the appellant 's father did not turn up.
Although the learned Additional Chief Judicial Magistrate by order dated October 31, 1979 dismissed the complaint holding that the dispute was of a civil nature and no process could issue on the complaint, a learned Single Judge of the High Court by his order dated February 11, 1980 set aside the order of the learned Additional Chief Judicial Magistrate holding that the facts brought out clearly warranted an inference of dishonest intention on the part of Colonel Sukhdev Singh and accordingly directed 404 him to proceed with the trial according to law.
Aggrieved, Colonel Sukhdev Singh came up in appeal to this Court by special leave.
This Court by its order in Criminal Appeal No. 595/80 dated September 2, 1980 reversed the judgment of the High Court on the ground that the dispute was purely of a civil nature and the criminal 13 process could not have been employed for the purpose of coercing the appellant 's guardian Colonel Sukhdev Singh to specifically perform the contract.
It was directed that Colonel Sukhdev Singh should return the earnest money of Rs.40,000 to the respondent on or before October 5, 1980 and in the meanwhile, the respondent was at liberty to file a suit for specific performance of the contract, if so advised.
It was observed that the return of the said amount of Rs.40,000 by Colonel Sukhdev Singh would be without prejudice to the rights and contentions of the parties, including the right of the respondent to claim specific performance of the contract, if he was in law otherwise so entitled.
Pursuant thereto, the appellant 's guardian Colonel Sukhdev Singh refunded the amount of Rs.40,000 to the respondent.
On October 3, 1980 the respondent instituted the suit in the Court of the District Judge, Chandigarh, out of which this appeal arises, for specific performance of the contract and, in the alternative, claimed Rs.2,50,000 by way of damages.
Both the learned District Judge as well as a learned Single Judge on a consideration of the evidence came to the conclusion that the breach of contract was on the part of the appellant 's guardian Colonel Sukhdev Singh and not on the part of the respondent and accordingly decreed the suit for specific performance.
Thereupon, the appellant preferred an appeal under cl. 10 of the Letters Patent.
The hearing of the Letters Patent Appeal commenced before a Division Bench on January 14, 1987 and continued for three days.
On January 16, 1987, the appellant 's counsel had not concluded and there fore the hearing was adjourned to January 28, 1987.
On that date, after the appellant 's counsel had addressed the Court for a while, the parties took time to explore the possibility of a settlement.
At the resumed hearing later in the day, the appellant 's father Colonel Sukhdev Singh made a statement to the effect: "I make an offer that I shall personally pay Rs.2,25,000 to the respondent Chatur Bhuj Goel by way of full and final settlement of the dispute between him and the appellant.
The said amount shall be paid by a bank draft in Court on 17.3.87.
In the event of failure on my part to pay the 405 amount as stipulated on that date, the Letters Patent Appeal No. 734 of 1983 shall stand dismissed and the appellant shall have no right to file an appeal against the decision to the Supreme Court.
" The above statement was duly endorsed by Shri V.K. Sharma, learned counsel appearing for the appellant and stated: B "The appellant makes an offer that in full and final settlement of the dispute between the parties, the appellant Gurpreet Singh in his personal capacity or through his father Colonel Sukhdev Singh shall pay Rs.2,25,000 to the respondent on 17.3.87 by a bank draft payable at Chandigarh, if the respondent agrees to the Letters Patent Appeal No. 734 of 1983 being allowed and that in the event of non payment of the amount on the stipulated date, the said appeal shall stand dismissed and the appellant shall have no right to file an appeal in the Supreme Court.
" The respondent Chatur Bhuj Goel who, as already stated, is a practising advocate, was respondent by Shri Bhagirath Dass, a senior advocate practising at Chandigarh.
Apparently, the respondent on mature deliberation made the following statement in the presence of his counsel "I accept the offer made by Colonel Sukhdev Singh and Shri V.K. Sharma, counsel for the appellant Gurpreet Singh. ' Thereupon, the learned Judges adjourned the appeal to March 17, 1987 i.e. the date on which the payment of Rs.2,25,000 was to be made.
The aforesaid statements form part of the proceedings of the Court.
Admittedly, the compromise was not reduced in writing and signed by the parties.
Taking advantage of this fact, the respondent on February 9, 1987 made an application by which he tried to resile from the compromise stating: "on 28th January 1987, the offer of compromise was made by the appellant, which was recorded.
The statement of the respondent was also recorded.
The respondent however did not sign the statement.
That the statement was made by the respondent without thinking of the repercussions of his statement.
He was influenced by the stand, which was 406 adopted by his Senior Advocate Shri Bhagirath Dass.
If the statement recorded by the Court which has not been signed by the respondent is given effect to, the respondent would suffer a tremendous loss.
" On the adjourned date i.e. March 17, 1987, the learned Judges directed that in view of the fact that the respondent was not prepared to abide by the proposed compromise, the appeal would now be heard and decided on merits, with a further direction that it be placed before another Bench.
Hence, this appeal by special leave.
In support of the appeal Shri S.N. Kacker, learned counsel for the appellant, contends that the requirements of order XXIII, r. 3 of the Code are mandatory and the claim in the suit for specific performance having been settled by a lawful compromise within the meaning of r. 3, the learned Judges were not justified in directing that the appeal be placed before another bench for decision on merits.
The learned counsel submits that order XXIII, r. 3 of the Code is in two parts.
According to him, the words 'in writing and signed by the parties ' qualify the words 'any lawful agreement or compromise ' appearing in the first part and these words cannot obviously be read into the second part at all.
It is urged that the first part of order XXIII, r. 3 of the Code refers to an adjustment on settlement of the claim in suit by a lawful agreement or compromise outside the Court, meaning thereby that where the parties make a statement before the Court that the dispute between them has been settled on certain terms and the statements so made form part of the proceedings of the Court, there is no legal requirement to have an agreement in writing embodying the terms of the compromise.
For a proper appreciation of the contentions advanced, it is necessary to set out the Statement of objects and Reasons which is in these terms: "Cl.
77 Sub cl(iii).
It is provided that an agreement or compromise under rule 3 should be in writing and signed by the parties.
This is with a view to avoiding the setting up of oral agreements or compromises to delay the progress of the suit.
The words 'lawful agreement or compromise ' in rule 3 have given rise to a conflict in the matter of interpreta 407 tion.
One view is that agreements which are voidable under section 19A of the Contract Act are not excluded.
While this stand is taken by the High Courts of Allahabad, Calcutta.
Madras and Kerala, a contrary view has been expressed by the High Courts of Bombay and Nagpur.
An Explanation has, therefore, been added to the rule to clarify the position.
A proviso has been added to clarify that no adjournment should ordinarily be granted where a decision is necessary as to whether an adjustment or satisfaction has or has not been arrived at In view of the words 'so far as it relates to the suit ' in rule 3, a question arises whether decree which refers to the terms of a compromise in respect of matters beyond the scope of the suit is executable or whether the terms of the decree relating to the matters outside the suit can be enforced only by a separate suit.
The amendment seeks to clarify the position.
" The provision contained in order XXIII, r. 3 of the Code, as amended, provides: "Where it is proved to the satisfaction of the Court that a suit has been adjusted wholly or in part by any lawful agreement or compromise, in writing and signed by the parties, or where the defendant satisfies the plaintiff in respect of the whole or any part of the subject matter of the suit, the Court shall order such agreement, compromise or satisfaction to be recorded, and shall pass a decree in accordance therewith so far as it relates to the parties to the suit, whether or not the subject matter of the agreement, compromise or satisfaction is the same as the subject matter of the suit Provided that where it is alleged by one party and denied by the other that an adjustment or satisfaction has been arrived at, the Court shall decide the question; but no adjournment shall be granted for the purpose of deciding the question, unless the Court, for reasons to be recorded thinks fit to grant such adjournment.
Explanation.
An agreement or compromise which is void or voidable under the (9 of 408 1872), shall not be deemed to be lawful within the meaning of this rule.
" According to the grammatical construction, the word 'or ' makes the two conditions disjunctive.
At first blush, the argument of the learned counsel appears to be plausible but that is of no avail.
In our opinion, the present case clearly falls within the first part and not the second.
We find no justification to confine the applicability of the first part of order XXIII, r. 3 of the Code to a compromise effected out of Court.
Under the rule prior to the amendment, the agreement com promising the suit could be written or oral and necessarily the Court had to enquire whether or not such compromise had been effected.
It was open to the Court to decide the matter by taking evidence in the usual way or upon affidavits.
The whole object of the amendment by adding the words 'in writing and signed by the parties ' is to prevent false and frivolous pleas that a suit had been adjusted wholly or in part by any lawful agreement or compromise, with a view to protract or delay the proceedings in the suit.
Under r. 3 as it now stands, when a claim in suit has been adjusted wholly or in part by any lawful agreement or compromise, the compromise must be in writing and signed by the parties and there must be a completed agreement between them.
To constitute an adjustment, the agreement or compromise must itself be capable of being embodied in a decree.
When the parties enter into a compromise during the hearing of a suit or appeal, there is no reason why the requirement that the compromise should be reduced in writing in the form of an instrument signed by the parties should be dispensed with.
The Court must therefore insist upon the parties to reduce the terms into writing.
In our considered opinion, the view to the contrary expressed by the High Court in Manohar Lal & Anr.
vs Surjan Singh & Anr., [1983] Punj.
LJ 402 that the first part relates to a lawful agreement or compromise arrived at by the parties out of Court, does not seem to be correct.
Sandhawalia, CJ speaking for himself and Tewatia, J. observes that the word 'or ' makes the two parts disjunctive and they visualise two distinct and separate classes of compromise.
According to the learned Judges, the first part relates to a lawful agreement or compromise arrived at by the parties out of Court, while the second is applicable where the defendant satisfies the plaintiff in respect of the whole or any part of the subject matter of the suit.
Such a restricted construction is not warranted by the language used in r. 3.
The word 409 'satisfies ' denotes satisfaction of the claim of the plaintiff wholly or in part, and for this there need not be an agreement in writing signed by the parties.
It is open to the defendant to prove such satisfaction by the production of a receipt or payment through bank or otherwise.
The satisfaction of the claim could also be established by tendering of evidence.
It is for the Court to decide the question upon taking evidence or by affidavits as to whether there has in fact been such satisfaction of the claim and pass a decree in accordance with order XXIII, r. 3 of the Code.
In any event, the present case clearly does not come within the ambit of the second part of order XXIII, r. 3 of the Code.
Under the terms of the proposed compromise, the appellant was required to pay Rs.2,25,000 by a bank draft on March 17, 1987, but the fact remains that the respondent before the due date resiled from the proposed compromise saying that it was detrimental to his interest.
That being so, the appellant could only fall back on the first part.
But in the absence of an agreement in writing, the learned Judges had no other alternative but to direct that the appeal be listed for hearing on merits.
In the result, the appeal must fail and is dismissed.
The High Court is directed to hear and decide the appeal on merits.
There shall be no order as to costs.
N.P.V. Appeal dismissed.

dataset_name: IN-Abs

summary:
% A suit filed by the respondent for the specific performance of a C contract entered into between him and the father of the appellant was decreed by the trial court.
A Single Judge of the High Court affirmed the decree.
During the hearing of the Letters Patent Appeal filed by the appellant, a settlement was arrived at between the parties, and statements were made by them to that effect before the court.
The case was adjourned to the date on which payment in terms of the compromise was to be made.
Though the statements formed part of the proceedings, the compromise was not reduced in writing and signed by parties.
Taking advantage of this, the respondent tried to resile from the compromise.
When the case came up on the adjourned date, the Division Bench directed that since the respondent was not prepared to abide by the proposed compromise, the appeal would be decided on merits and that the case should be placed before another Bench.
ln the appeal by special leave against the aforesaid decision, it was contended on behalf of the appellant that the requirements of order XXIII Rule 3 Civil Procedure Code were mandatory, that the claim in the suit for specific performance having been settled by a lawful compromise within the meaning of Rule 3, the High Court was not justified in directing that the appeal be placed before another Bench for decision on merits, that the word "in writing and signed by the parties" qualified the words "any lawful agreement or compromise" appearing in the first part and, therefore, where the parties made a statement before the Court that the dispute between them had been settled on certain terms, and the settlement so made formed part of the proceedings of the Court, there was no legal requirement to have an agreement in writing embodying the terms of the compromise.
402 Dismissing the appeal, ^ HELD: The whole object of the amendment of Rule 3 of the Civil Procedure Code, 1908 by adding the words "in writing and signed by the parties" is to prevent false and frivolous pleas that a suit has been adjusted wholly or in part by any lawful agreement or compromise, with a view to protract or delay the proceedings in the suit.[408C D] Under Rule 3 as it now stands when a claim in suit has been adjusted wholly or in part by any lawful agreement or compromise, the compromise must be in writing and signed by the parties and there must be a completed agreement between them.
To constitute an adjustment, the agreement or compromise must itself be capable of being embodied in a decree.
When the parties enter into a compromise during the hearing of a suit or appeal, there is no reason why the requirement that the compromise should be reduced in writing in the from of the an instrument signed by the parties to reduce the terms into writing.
[408D F] The present case clearly does not come within the ambit of the second part of Order XXIII Rule 3 of the Code.
Under the terms of the proposed compromise, the appellant was required to pay Rs.2,25,000 by a bank draft on March 17, 1987 but before the due date the respondent resiled form the promised compromise, saying that it was detrimental to his interest.
That being so, that appellant could only fall back on the first part.
But, in the absence of an agreement in writing, the High Court had no other alternative but to direct that the appeal be listed for hearing on merits.
[409C D] Manohar Lal & Anr.
vs Surjan Singh & Anr., [1983] Punj.
Lj 402, overruled.


judgement:
Civil Appeal No. 689692 (NT) of 1975.
From the Judgment and order dated 8.5.1973 of the Allahabad High Court in Income Tax Reference No. 453 of 1971.
391 Miss A. Subhashini for the Appellant.
D.D. Gupta for the Respondent.
The Judgment of the Court was delivered by SABYASACHI MUKHARJI, J.
These appeals by special leave arise from the judgment and order of the Allahabad High Court at the instance of the revenue.
The Income tax Appellate Tribunal, Bombay Bench, referred the following question of law for the opinion of the Allahabad High Court: (The question related to the assessment years 1960 6 1, 1961 62, 1962 63 and 1963 64).
"Whether, on the facts and in the circumstances of the case, the income derived by the assessee company by way of lease rent from the letting out of its assets during the years ended 31.12.59, 31.12.60, 31.12.61 and 31.12.62 is assessable to tax under the head 'Profits and gains of business ' or under the head 'Income from other sources '?" The assessee company was a limited company.
It carried on the business of manufacture of textiles.
From 1949, the assessee company started running into losses.
At the end of December, 1953, the position was that as against the capital of Rs.11,00,000 the accumulated liabilities of the assessee company amounted to Rs.26,00,000.
Because of this the assessee company stopped its manufacturing activity from December, 1953.
This state of affair continued till 21.5.56 when one of the creditors of the company filed a winding up petition in the High Court.
M/s Industrial Finance Corporation, who was one of the major creditors of the company, had in exercise of its powers under an English mortgage of the fixed assets of the company taken actual physical possession of the immovable properties hypothecated to them.
Under Section 153 of the Indian Companies Act 1913, the High Court with the approval of the assessee company and the creditors evolved a scheme whereunder the business assets of the assessee company were let out to M/s General Fibres Dealers (Pvt.) Ltd., Calcutta on Rs.2,50,000 per year rent.
The lease was for ten years with an option of renewal for another ten years.
The intention, it was contended, was that the various creditors would be paid out of the lease money.
The management of the assessee company was transferred to a Board of Trustees appointed by the High Court.
The lease money realised by the assessee company for assessment years 1957 58 to 195960 was assessed by the Department under Section 10 of the Indian 392 Income Tax Act under the head 'Profits and gains of business '.
But in subsequent assessment years the Income Tax officer held that the income from the lease rent was liable to be taxed under.
the head 'income from other sources ' under section 12 of the Act.
The assessee company took the matter up in appeal.
It was urged before the Commissioner that the assets of the company were exploited and there was no intention of the assessee to discontinue the business activities.
The assets of the company, were let to the lessee with the principal object of liquidating a colossal liability and extricating itself from financial crises.
The Commissioner, however, upheld the finding of the Income Tax officer.
The assessee company then took the matter to the tribunal The Tribunal found: 1.
There was nothing on record to indicate that the assessee company was formed to let out its plant and machinery on hire 2.
On account of financial crisis, the assessee company found it advantageous to let out the machinery for a temporary period of ten years to the lessee.
The assessee company was able to liquidate its liabilities at the end of such period and regain the physical possession of it assets.
The assessee company was able to persuade its creditors not to make any distress sale of the machinery taken over by the Industrial Finance Corporation with a view to salvage the company from its total extinguishment.
At the end of the lease period, the assessee company did not dismantle the assets and did not sell away or otherwise dispose of the assets.
It appears that the maintenance of the assets by the company meant that the company had intention to restart manufacturing of textiles.
The Tribunal inferred that the intention of the company in letting out its assets was to exploit the commercial assets for the purpose of its business.
The Income Tax officer was directed to treat the income arising out of the letting out of the assets as business income.
The High Court noted in the Judgment under appeal which inci 393 dentally is reported in ITR Vol. 106 (1977) at page 829 that the assessee 's case was that the income received by it from the lease of the plant and machinery was business income and was liable to be adjusted against the unabsorbed loss of the preceding year.
It is here that the question arises.
If it was business income then the unabsorbed loss of the preceding year could be adjusted against such income.
If on the other hand it was not, then such income could not be adjusted against the loss of the previous year.
The rub of the matter lies there.
It is well known that Section 24 of the Indian Income Tax Act, 1922, deals with set off and carry forward of losses.
Under Sub, section (IJ where an assessee sustains a loss of profits or gains in any year under any of the head mentioned in Section 6, he shall be entitled to have the amount of the loss set off against his income profits or gains under any other head in that year.
Sub section (2) provides that where an assessee suffers loss in any business and the loss cannot be wholly set off under sub section (1), the unabsorbed loss shall be carried forward to the succeeding year and shall be set off against the income from the same business.
Before the loss could be carried forward it was necessary that the income against which the loss has to be set off should be income from any business (emphasis supplied).
It was submitted before the High Court on behalf of the assessee that the plant and machinery of the factory were commercial assets and any income from the letting out of such an asset would be the business income.
In support, reliance was placed upon several decisions of this Court.
One among them is the decision in the case of Commissioner of Excess Profits Tax, Bombay City vs Shri Lakshmi Silk Mills Ltd., 1.
This Court in Commissioner of Income tax West Bengal vs Calcutta National Bank Ltd., dealing with excess profit tax case, explained that.
the concept of profit and business was little wider under Excess Profits Tax Act of 1940.
The High Court relied on the several decisions, namely, the decision in the case of Commissioner of Excess Profits Tax, Bombay City vs Shri Lakshmi Silk Mills Ltd., (supra) and Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax, In view of the above decisions, the High Court held that the income derived by the assessee company by way of lease rent from the letting out of its assets during the years ended 31st December, 1959, 31st December, 1960, 31st December, 1961 and 31st December, 1962.
is assessable to tax under the head profits and gains of business.
Being aggrieved by the aforesaid decision revenue has come up 394 in appeal before this Court by Leave under Article 136 of the Constitution.
Whether a particular income received by the assessee as a result of activities carried on by the assessee is business income or rental income depends upon the manner of the exploitation of the assets of the assessee.
It only varies from facts and circumstances of each case.
This question was discussed in detail by this Court in Commissioner of Excess Profits Tax, Bombay City vs Shri lakshmi Silk Mills Ltd., (supra}) where this Court found that if a commercial asset was not capable of being used as such, then its being let out to others did not result in an income which was the income of the business but it could not be said that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade.
The yield of income by a commercial asset was the profit of the business irrespective of the manner in which that asset was exploited by the owner of the business.
He was entitled to exploit it to the best advantage and he might do so either by using it himself personally or by letting it out to somebody else.
The view that in order to constitute business income the commercial asset must at the time it was let out be in a condition to be used as commercial asset by the assessee himself was not correct.
In that case the assessee company was a manufacturer of silk cloth and as a part of its business it installed a plant for dyeing silk yarn.
During the chargeable accounting period, Ist January, 1943 to 31st December, 1943 owing to difficulty in obtaining silk yarn on account of the war it could not make use of this plant and it remained idle for some time.
In August 7 1943, it was let out to a person on a monthly rent.
The question was whether such sum representing the rent for five months realised by the assessee was chargeable to excess profits tax as profits of business or was income from other sources and was therefore not chargeable to excess profits tax.
It was held by this Court that it was a part of the normal activities of the assessee 's business to earn money by making use of its machinery by either employing in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it and that the dyeing plant had not ceased to be a commercial asset of the business and the sum representing the rent for five months received from the lessee by the assessee was therefore income from business and was chargeable to excess profits tax.
As mentioned hereinbefore, the question arose in the context of Excess Profit Tax Act; the consequence will be the same in the case of Income Tax Act.
This Court observed again that the yield of income by a commercial asset irrespective of the manner in which the assets VINEET 395 are exploited by the owner of the business would be income from business.
It was emphasised that the assessee was entitled to exploit it to the best advantage and he might do so either by using it himself personally or by letting it out to somebody else.
This Court gave an example.
For instance, in a manufacturing concern use of its plant and machinery could advantageously be made owing to the paucity of raw materials only for six hours in a working day, and in order to get the best yield out of it, another person who has got the requisite raw materials is allowed to use it as a licensee on payment of certain consideration for three hours.
The question was posed: could it be said in such a situation with any justification that the amount realised from the licensee was not a part of the business income of the licensor.
The Court noted that in that case the company was incorporated purely as a manufacturing concern with the object of making profit.
It had installed plant and machinery for the purpose of its business and it was part of it, if at any time it found that any part of its plant "for the time being" could not be advantageously employed for earning profit by the company itself, to earn profit by leasing it to somebody else.
In such circumstances, it would be improper to refuse it to treat it as such being the advantage of business income.
This Court noted the observations of the Court of Appeal in Inland Revenue Commissioner vs Broadway Car Co Ltd., In that case the company had carried on the business of motor car agents and repairers on land held on lease from 1935 to 1956 at an annual rent of 750.
By 1940 the company 's business had dwindled under war conditions to such an extent that no more than one third of the land was required.
In those circumstances the remainder was sublet for fourteen years at an annual rent of 1150.
The General Commissioner of Income Tax decided that the difference of 1400 between the outgoing of 1750 for the land retained and the incoming of 1150 for the land disposed of was "income received from an investment", and business not being one within the special categories mentioned in the Finance Act 1939 that 1400 was not taxable.
Lord Scott, J. held that the word 'investment ' must be construed in the ordinary popular sense of the word as used by business men and not as a term of art to say that the Commissioners had erred in law in coming to the conclusion that the transaction resulted in an investment.
Lord Scott, J. emphasised on the point that after the business of the company had dwindled, it partitioned part of the land from the rest and sublet it by installing a heating apparatus for the sublessee.
It was found that war conditions had reduced the company 's business to very small proportions and they cut their LOSS by going out of business in respect of the major part of their land and put it out of their power for fourteen years to resume business there.
In such a 396 situation, it could not be business any more.
That was a peculiar circumstance when the assessee had a desire to part with that type of business.
Therefore, whether a particular income is from business or from investment must be decided according to the general commonsense view of those who deal with those matters in the particular circumstances and conduct of the parties concerned.
Has the assessee evidenced any intention to switch over from exploitation of assets by itself and used the asset as a rented one? This Court in the aforesaid decision found that it was a part of the normal activities of the assessee 's business to earn money by making use of his machinery by either employing it in his own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it.
The High Court in that case was in error, therefore, in holding that the dyeing plant had ceased to be a commercial asset of the assessee and the income earned by it and received from M/s Parakh & Co was chargeable to excess profits tax.
This Court had again occasion to examine this question in Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax, That was a case under Excess Profits Tax Act, 1940.
It was observed by this Court that before the Excess Profits Tax officer could embark upon an enquiry as to whether a transaction was effected for the avoidance or reduction of liability to excess profits tax within the meaning of Section 10A of the Excess Profits Tax Act, 1940 and to make such adjustments as he considered appropriate under that section there must be proof that the assessee was, during the chargeable accounting period, carrying on business of kind referred to in Section 5 of the Act.
There the assessee firm was carrying on a manufacturing business consisting of three partners, N and his two sons R and G. In April 1940 a public limited company was incorporated with the object of taking over the business from the assessee firm.
The Company was director controlled and the directors were N, his three sons R, and S and a brother in law of G. the company purchased only the buildings and leasehold rights from the assessee firm but took over from it on lease at an annual rent the plant and machinery.
The assessee firm did not thereafter manufacture anything and it had accordingly no further trading or commercial activity.
In July, 1940 the company executed a managing agency agreement in favour of U & Co. consisting of R and as partners.
In January, 1941, the company appointed as its selling agent R & Co. consisting of R, and S as partners.
In April, 1941, the shares of the partners in the assessee firm were adjusted so as to 397 equalise, as far as possible, the share of N with the shares which his sons got in the several firms.
All the three firms were registered under Section 26A of the Indian Income Tax Act, 1922.
The question was whether the Excess Profits Tax Authorities were justified in amalgamating the income of U & Co. and R & Co. with the income of the assessee firm under the provisions of Section 10A of the Excess Profits Tax Act, 1940.
It was held that in the facts and circumstances of the case the letting out of the plant and machinery by the assessee firm to the company could not be held to fall within the body of the definition of "Business" under section 2(5) and as the assessee firm had, therefore, no business during the relevant period to which the Act applied, Section 10a could not be invoked by the Excess Profits Tax Authorities.
It was further held that the application of Section 10a with a view to amalgamating the income of the firms of U & Co. and R & Co. with the income of the assessee firm was not valid in law.
Dealing with this question, this Court noted that "business" as defined under Section 2(5) of the Excess Profits Tax Act included amongst others, any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture.
The first part of this definition of a "business" in the Excess Profits Tax Act is the same as the definition of a business in Section 2(4) of the Indian Income Tax Act, 1922.
Whether a particular activity amounted to any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture is always a difficult question to answer.
The Judicial Committee noted in the case of Commissioner of Income tax vs Shaw Wallace & Co., Cal. 1343 that the words used in the definition are no doubt wide but underlying each of them is the fundamental idea of the continuous exercise of an activity, (emphasis supplied).
It was also emphasised by this Court that the word "business" indicated some real, substantial and systematic or organised course of activity or conduct with a set purpose.
In that case, this Court pointed out the difference between Excess Profits Tax Act and the Indian Income Tax Act, 1922.
So far as the question before us is concerned, this difference is not material.
Shri Manchanda, learned counsel for the revenue draw our attention to Commissioner of Income tax, West Bengal vs Calcutta National Bank Ltd., This Court reiterated that the term "business" is a word of very wide, though by no means determinate, scope.
There the assessee, which was a banking company in a large way of business, owned a six storeyed building, where its offices were located on the ground floor and a part of the sixth floor, while the rest 398 of the building was let out to tenants.
The question was whether the income realised by the assessee by way of rent for the portion of the building let out was liable to excess profits tax and could be included in the profits of the business under rule 4(4) of the First Schedule to the Excess Profits Tax Act, 1940.
It was held that the realisation of rental income by the assessee was in the course of its business in prosecution of one of its objects in the memorandum.
It depends in the facts and circumstances of each case.
In New Savan Sugar and Gur Refining Co. Ltd. vs Commissioner of Income Tax, Calcutta, , this Court was dealing with a case, where the appellant company was carrying on the business of crushing sugarcane and gur refining.
Its managing agents wrote a letter addressed to its shareholders referring to the alarming increase of Government interference in the affairs of this sugar industry in Bihar and the increase of wages of the workers, the levy of a cess and deterioration in cane crops and advising the acceptance of an offer of the lease of the company as a running concern.
Thereafter examination, it was found that the cumulative effect of different clauses of the deed suggested that the assessee would have no concern with the production of the company.
It was therefore held that the terms of the lease deed that the intention of the appellant was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease.
In each case the intention has to be gathered as to whether the commercial asset was intended to be exploited by the assessee or whether it was intended to be used by letting it out for a temporary period.
It depends upon the facts and circumstances of each case.
The circumstances of the instance case were as follows as appears from the statement of the case: "The assessee company incurred losses in its business of manufacture of textiles from the year 1949.
On account of heavy losses, its manufacturing activities were stopped from December, 1953.
By 1956, colossal loss had accumulated.
Its liabilities had amounted to Rs.26 lakhs as against the capital of Rs.11 lakhs.
A winding up petition was filed in the Allahabad High Court by the creditors.
M/s. Jawala Prasad Radha Krishan in February 1954.
The Industrial Finance Corporation was one of the creditors of the company and the company had a liability of Rs.12.5 lakhs to 399 that undertaking secured by the fixed assets in terms of a mortgage deed dated 19.12.1950.
The Punjab National Bank had advanced a loan of Rs.6.5 lakhs to the company by movable assets of the company such as cotton, cloth and yarn.
The Industrial Finance Corporation had taken physical possession of the immovable properties of the company on 12th July, 1954, on the company 's failure to pay off its debts to the I.F.C.
The High Court thereafter approved a scheme, by an order dated 21.5.1956 whereby the assets and the entire business of the assessee company were let out to M/s. General Fibres Dealers (Pvt.) Ltd., Calcutta, at a least rent of Rs.2,50,000 per year.
The management of the assessee company was transferred to a Board of Trustees appointed by the High Court pursuant to the scheme referred to above.
According to the terms of the lease dated 7.7.1956 with the lessee, the General Fibres Dealers (Pvt.) Ltd., the assets of the company were let out for an initial period of ten years, with a right given to the lessee to exercise the option for a further period of ten years.
The assesse company had maintained a skeleton staff thereafter.
" In the context of these facts, it appears that it was a possible conclusion that the assessee intended that there should be a temporary suspension of the business for the purpose of reconstruction of the company and for that matter there must be stoppage of the user of the machinery by the assessee.
It was temporary lease though for 10 or 19 years on renewal years and after the expiry of the period the property reverted back to the assessee.
It is pre dominantly a matter of intention.
Intention is an inference to be drawn from the relevant facts.
All the relevant facts, it appears have been considered by the Tribunal from the correct standpoint, i.e. Ordinary prudent businessman or as in England it used to be "man on the top of the platform omnibus.", or "director 's arm chair".
If on that test a plausible conclusion has been drawn no objection can be taken.
On that basis applying the correct principle the Tribunal found that the intention was not to part with the machine but to lease it out for a temporary period as a part of exploitation.
In such a circumstance, it cannot be said that no business was carried on and their income derived from the machine letting was only a rent income.
There 400 was a temporary suspension of business for a temporary period for an object to tide over the crisis condition.
There was never any act indicating that the assessee never intended to carry on the business.
In the background of these principles and in the facts and circumstances of the case so found, we cannot say such a finding was either perverse or not sustainable.
In the aforesaid view of the matter, the High Court was right in the view it took and the appeals must accordingly fail and are dismissed with costs.
In the view we have taken in the first matter, the special leave petitions Nos.
5324 and 5325 of 1978 are also dismissed.
But there will be no order as to costs.
S L Appeals & Petitions dismissed.

summary:
% The respondent, the assessee company, carried on business of manufacture of textiles.
From the year 1949, the respondent started running into losses, resulting in the stoppage of its manufacturing activity from December, 1953.
In May, 1956, one of the creditors of the company filed a winding up petition in the High Court.
One major creditor of the respondent company, in exercise of its powers under an English mortgage of the fixed assets of the company took actual possession of the immovable properties hypothecated to the creditor.
The High Court, with the approval of the assessee company and its creditors, evolved a scheme whereunder the business assets of the company were let out on a rent of Rs.2,50,000 per year.
The lease was for ten years with option of renewal for another ten years.
The intention was that the various creditors would be paid out of the lease money.
The lease money realised by the company for the assessment years 1957 58 to 1959 60 was assessed by the Income Tax Department under section 10 of the Income Tax Act under the head "Profits and gains of business".
But in the subsequent assessment years, the Income Tax officer held that income from the lease rent was liable to be assessed under the head "Income from other sources" under section 12 of the Act.
The assessee company filed an appeal against the order of the Income Tax officer.
The Commissioner upheld the order of the Income Tax officer.
The assessee took the matter to the Income Tax Tribunal.
The Tribunal directed the Income Tax officer to treat the income arising out of the letting out of the assets as 'business income '.
The matter then went to the High Court.
The High Court held that the income derived by the assessee company by way of the lease rent from the letting out of the assets during the years ending 31st December, 1959, 31st December, 1960, 31st December, 1961 and 31st December, 1962, is assessible to tax under the head "profits and gains of business".
Aggrieved by the decision of the High Court, the revenue appealed to this Court.
390 Dismissing the appeal (as also the connected petitions for special leave), the Court, ^ HELD: Whether a particular income received by the assessee as a result of the activities carried on by the assessee is business income or rental income depends upon the manner of the exploitation of the assets of the assessee.
It only varies from the facts and circumstances of each case.
In each case, the intention has to be gathered as to whether the commercial asset was intended to be exploited by the assessee or whether it was intended to be used by letting it out for a temporary period.
From the facts and circumstances of the case, it appears that it was a possible conclusion that the assessee intended that there should be a temporary suspension of the business for the purpose of re construction of the company and for that matter, there must be stopping of the user of the machinery by the assessee.
It was a temporary lease though for 10 or 19 years on renewal, and after the expiry of the period, the property reverted back to the assessee.
It is pre dominantly a matter of intention, which is an inference to be drawn from the relevant facts.
All the relevant facts, it appears, have been considered by the Tribunal from the correct stand point.
The Tribunal found that the intention was not to part with the machine but to lease it out for a temporary period as a part of exploitation.
In such circumstances, it cannot be said that no business was carried on and the income derived from the machine letting out was only a rent income, and in the facts and circumstances of the case, it cannot be said that such a finding was perverse or not sustainable.
The High Court was right in the view it took.
[398F; 399E H; 400A B] Commissioner of Excess Profits Tax, Bombay City vs Shri Lakshmi Silk Mills Ltd., ; Commissioner of Income Tax, West Bengal vs Calcutta National Bank Ltd., ; Narain Swadeshi Weaving Mills vs Commissioner of excess Profits Tax, ; Inland Revenue Commissioner vs Broadway car Ltd, ; Commissioner of Income Tax vs Shaw Wallace & Co., Cal. 1343 and New Savan Sugar and Gur refining Co. Ltd. vs Commissioner of Income Tax, Calcutta, , referred to.


judgement:
Appeal Nos.
4026 27 of 1987.
From the judgment and order dated 10.9.1986 of the Madhya Pradesh High Court in M.P. No. 2191 and 413 of 1985.
A.K. Sanghi for the Appellant in C.A. No. 4026 of 1987.
G.L. Sanghi and J.R. Das for the Appellant in C.A. No. 4027 of 1987.
S.N. Khare, R.K. Sharma and T.C. Sharma for the Respondents.
The Judgment of the Court was delivered by VENKATACHALIAH, J.
In these petitions under Article 136 of the Constitution of India, petitioners seek special leave to appeal from the Judgment and order dated, 10.9.1986 of the Madhya Pradesh High Court in Misc.
Petition 2919 of 1985 and Misc.
Petition No. 413 of 1985 respectively.
The appeals raise a short and interesting question whether stacks of "eucalyptus wood ' sold by the forest department after separating the "Ballies" and "poles" constitute and answer the description of 'Timber ' under entry 32 A of Part 11 of Schedule II to the Madhya Pradesh General Sales Tax Act 1958 (The 'Act ').
The High Court, rejecting the appellant 's contention that what was sold, being left overs after the extraction of "poles" and "Ballies" of Eucalyptus ' (Nilgiri) Trees, was merely 'fire wood ' within the meaning of and attracting entry No. 12 of Part V of Schedule II of the Act, held that the goods were 'Timber ' under the said entry 32 A.
It was, accordingly, held that appellants were liable to pay sales tax at the rate of 16% ad valorem.
504 2.
Special Leave is granted in both the cases.
The appeals are taken up for final hearing, heard and disposed of by this common judgment.
We have heard Shri G.L. Sanghi, Senior Counsel and Shri A.K. Sanghi for the appellants and Shri T.C. Sharma for the respondents .
Though, the notification inviting tenders and certain other documents appear to describes the goods variously as "eucalyputs fire wood stacks '.
, "eucalyptus wood stacks", 'Nilgiri fuel wood ' etc.
, the nomenclature is not determinative or conclusive of the nature of the "goods" which will have to be determined by the application of certain well settled principles, guiding the matter.
Three entries as they then stood in the Schedule to the 'Act ' were pointed out by learned counsel as the possible alternatives: Schedule II Part II Entry 32 A: Timber. 16% PART V Entry 12 : Fire wood & charcoal .
3% Part Vl Entry I : All other goods not included in Schedule I or any other part of the Schedule .
10% Appellants contention urged before the High Court and reiterated before us was that what was sold were the leftovers and remnants of eucalyptus trees after the extraction of the substantial timber in the form of "poles" and "Ballies" and that even on the basis of what the forest department itself described the goods to be while putting the 'goods ' to tender, the goods were 'fire wood heaps '.
It was urged that having regard to the well known concept of what constitutes 'Timber ' the wood stacks sold could, by no stretch of imagination, be held to answer the description of 'Timber '.
The wood sold, it was said 505 "fire wood" or at all events, plain 'wood ' not amounting to 'Timber ' or A 'firewood ' in which case the goods fall within the residuary entry.
This contention did not find favour with the High Court.
In a taxing statute words which are not technical expressions or words of art, but are words of everyday use, must be understood and given a meaning, not in their technical or scientific sense, but in a sense as under stood in common parlance i.e. "that sense which people conversant with the subject matter with which the statute is dealing, would attribute to it".
Such words must be understood in their 'popular sense '.
The particular terms used by the legislature in the denomination of articles are to be understood according to the common, commercial understanding of those terms used and not in their scientific and technical sense "for the legislature does not suppose our merchants to be naturalists or geologists or botonists".
The expression 'Timber ', it seems to us, has an accepted and well recognised legal connotation and is nomen juris.
It has also a popular meaning as a word of everyday use.
In this case, the two meanings to 'Timber ' the legal and the popular, coalesce and are broadly subsumed in each other.
In Honeywood vs Honeywood, , at p. 309.
Sir George Jessel referred to what distinguishes and is "Timber": E "The question of what timber is depends, first on general law, that is, the law of England; and secondly, on the special custom of a locality.
By the general rule of England, oak, ash and elm are timber, provided they are of the age of 20 years and upwards, provided also they are not so old as not to have a reasonable quantity of useable wood in them, sufficient . to make a good post.
Timber, that is, the kind of tree which may be called timber, may be varied by local custom.
There is what is called the custom of the country, that is, of a particular country or division of a country, and it varies in two ways.
First of all, you may have trees called timber by the custom of the countrybeech in some countries, hornbeam in others.
and even whitethorn and black thorn, and many other trees are considered timber in peculiar localities in addition to the ordinary timber trees.
Then again, in certain localities, arising probably from the nature of the soil, the trees of 506 even 20 years old are not necessarily timber, but may go to 24 years, or even to a later period, I suppose, if necessary; and in other places the test of when a tree becomes timber is not its age but its girth.
" In Shantabal vs State of Bombay & Ors. ; this court, referring to the distinctions between 'standing timber ' and 'tree ' referred to the following lexicographic meaning of 'timber ': "(30) Timber is well enough known to be "wood suitable for building houses, bridges, ships etc., whether on the tree or cut and seasoned".
(Webster 's Collegiate Dictionary).
It was, accordingly, held: Therefore, "standing timber" must be a tree that is in a state fit for these purposes and, further a tree that is meant to be converted into timber so shortly that it can already be looked upon as timber for all practical purposes even though it is still standing.
(emphasis supplied) Legal Glossary, (published by the Ministry of Company Affairs Law & Justice) gives this meaning of 'Timber ': "wood meant for building or such like use".
In the Chambers 20th Century Dictionary, the meaning of the word 'Timber ' is this: 'wood suitable for building or carpentry, whether growing or cut: standing trees of oak, ash, elm, (locality by custom) other kinds etc.
(emphasis supplied) In words and phrases by John B. Saunders (Vol. 5) 'Timber ' is heed to be: 'Trees less than six inches in diameter have been said not to be timber.
(emphasis supplied) 507 5.
In its popular sense, 'timber ' is understood to be 'Imarathi Lakdi '.
In a popular sense Timber ' has certain association of ideas: as to its size, stability, utility, durability, the unit or measure of quantity and of valuation etc.
The question is whether by the standards of these popular connotations, the 'wood stacks ' or 'wood heaps ' sold to, and purchased by, the appellants can be held to answer the popular notions of ' 'Timber ' '.
When 'standing timber, is sold as uncut tree different considerations may arise.
The nature of the "wood" sold is described in the letter, dated, 30.5.1985, addressed by the Divisional Forest officer.
The subject matter of the sale has been referred to as 'Nilgiri fuel wood '.
The wood was offered for sale in stacks of the size of l x 1.
25 x 2 mtrs.
With each piece of a length of 1.25 meters and a girth, at the thinner end, of not less than 10 cms.
They were sold not by volume or by the number of pieces.
The wood was offered with a particular kind of user in mind, viz, as a source of industrial raw material for 'pulp ' in the manufacture of synthetic fibre.
As pointed out by the High Court, in the returns filed by the respondents, it was mentioned that eucalyptus plantation was a recent development and promoted with the specific purpose for use in specifically in the preparation of pulp and sold throughout the state with this specific object.
Respondents in their endeavor to controvert appellants ' contention that the wood sold was "fire wood" went on to say that while stacks of fire wood of similar sizes fetch prices between Rs.20 to Rs.80 each, the stacks of the eucalyptus wood on the other hand, fetch to Rs.300 to Rs.600 per stack and that, therefore, nobody uses eucalyptus as "fire wood".
The High Court, felt pursuaded to the view that the 'wood ' sold did not admit of being described as "fire wood".
It reasoned: "Fire wood in common commercial parlance and as understood by the trade as well as by the consuming public, is not just any wood that can be used as logs of fuel.
Every kind of wood is potential fire wood, for you can start a fire with any wood.
But this is not the test.
Firewood is wood of a kind which has attained notoriety as fuel.
Nobody who sells fire wood debarks the wood before sale.
Nobody who buys firewood requires them to be shaved and debarked.
Purchasers may desire the wood to be cut to size.
But that is all.
There may be eccentric sellers and eccentric buyers who may indulge their fancies in specialities in firewood.
508 But that, again, is not the test.
Where the wood is not, in the normally accepted commercial practice, firewood, and more especially, where the wood is sold and purchased subject to specifications which conduce the wood to particular purposes other than fuel, which is the case in the present two revisions, the goods sold cannot be regarded as firewood.
" While something, perhaps, could be argued in support of this reasoning, what however, emerges is that the finding that the goods was 'Timber ' appears to have been reached as a necessary consequence and logical corollory of the goods not being 'fire wood ': If the wood is not "fire wood", it need not necessarily and for that reason alone be 'Timber '.
All wood is not timber as, indeed, all wood is not 'fire wood ' either though perhaps it may not be incorrect to say that both 'firewood ' and 'Timber ' are 'wood ' in its generic sense.
The High Court further reasoned: " .
It has also been mentioned that timber is obtained by cutting standing trees.
It may be hard wood timber or soft wood timber.
Eucalyptus trees are covered by soft wood timber . " " .
The petitioners offered to purchase the goods which could be used for manufacture of woodware, furniture, etc.
as well as manufacture of Pulp.
The petitioners deal in timber .
Here again, pushed to its logical conclusions, the reasoning incurs the criticism of proceeding to determine the nature of the 'goods ' by the test of the use to which they are capable of being put.
The 'user test ' is logical; but is, again, inconclusive.
The particular use to which an article can be applied in the hands of a special consumer is not determinative of the nature of the goods.
Even as the description of the goods by the authorities of the forest department who called them varyingly as 'eucalyptus fuel wood ' 'eucalyptus wood heap ' etc.
is not determinative, the fact that the purchasers were dealers in timber is also not conclusive.
The High Court also observed: ". .
The length of the pieces is not relevant criteria to 509 determine whether the wood is timber or not.
The goods A offered for sale were eucalyptus wood stacks . .
Length is, no doubt a relevant consideration; but it is a relative concept and associated with the idea of utility.
A piece of rope, it is said, is itself a rope, provided It serves the purpose of one.
The question is not really whether "Eucalyptus"(Nilgiri) Tree is or is not a 'Timber ' tree.
By every reckoning it is.
Eucalyptus is a large, rapid growing, evergreen tree of the myrtle family, originally a native of Austrailia, Tasmania and Malaysis.
There are a large number of its species.
The ideal species under ideal conditions, it would appear, reaches a height of 370 ft. with a girth of nearly 25 ft.
Apart from its utility as a source of gum and medicinal oils, the slow growing species are especially known for the quality of its timber marked for strength size and durability (See: Encyclopaedia Britannica: 1968: Vol. 8 page 806 & 807; Encyclopaedia American: Vol.
10 pages 648 & 649).
But the question is whether the subsidiary parts of the tree sold in heaps after the 'Ballies ' and 'poles are separated, can be called 'Imarathi Lakdi ' or 'Timber '.
We think, it would be somewhat of a strain on the popular meaning of the expression 'Timber ' with the sense size and utility implicit in the idea.
to call these wood heaps 'Timber ', meant or fit for building purposes.
Persons conversant with the subject matter will not call these wood heaps 'Timber ' whatever else the goods might, otherwise, be.
It would appear that at one stage the forest department itself opined that the 'goods ' were not timber; but only "fire wood".
We must, however, add that no tests of general validity applicable to or governing all cases can at all be laid down.
The point to note and emphasis is that all parts or portions of even a timber tree need not necessarily be 'Timber '.
Some parts are timber, some parts merely "fire wood" and yet others merely 'wood '.
Having regard to the nature and description of the wood in the present case, we think, the 'wood heaps ' are not susceptible to be or admit of being called 'Timber ' with all the concomitants and associations of that idea.
Perhaps, different considerations might apply if, say, the pieces of eucalyptus wood are of a longer length or of a higher girth.
Differences of degree can bring about differences of kind. 7.
What emerges therefore, is that the goods in question are not 'Timber ' within the meaning and for purposes of entry 32A of the Act.
In regard to the question as to what other description the goods answer and which other entry they fall under, learned counsel on both 510 sides submitted that, if we hold that entry 32 A is not the appropriate one, the matter be remitted to the High Court for a fresh consideration of the matter in the light of such other or further material the parties may place before the High Court.
We accept this submission.
In the result, these appeals are allowed in part and the finding of the High Court that the goods in question fall within and attract entry 32 A of Part II of Schedule II of the 'Act ' is set aside and the matter is remitted to the High Court for an appropriate decision as to which other entry the goods in question attract.
The appeals are disposed of accordingly.
We might advert to yet another submission of Sri Sanghi.
He submitted that consistent with the finding that the 'goods ' do not attract tax at 16% under the said entry 32A respondents cannot retain the tax already collected at 16%.
Learned Counsel submitted that even if the goods are said to fall under the Residuary entry, the rate of tax would only be 10% and that respondents, accordingly, should be directed to refund to the appellants sums equivalent to 6% of the tax, wherever tax at 16% has been collected, without waiting for a decision on remand as indeed, there would be no prospect of the goods attracting tax at a rate higher than 10% now that entry 32 A is held inapplicable.
This, in our opinion is a reasonable request and requires to be accepted.
The concerned Respondents are directed to refund to the appellants ' sums equivalent to 6% wherever the taxes are already recovered at 16%.
In the circumstances, there will be no order as to costs.
R.S.S. Appeals allowed.

summary:
% Words and Phrases 'Timer ' 'Fire ' wood ' Meaning of.
The Forest Department of Madhya Pradesh sold to the appellants, who are dealers in timber, stacks of "eucalyptus wood" after separating the "Ballies" and "poles".
Sales tax at the rate of 16% ad valorem leviable on the sale of 'timber ' under Entry 32A of part II of Schedule Il of the Madhya Pradesh General Sales Tax Act, 1958, was sought to be recovered from the appellants on the grounds that what was sold was 'timber '.
The levy was challenged by the appellants in the High Court of Madhya Pradesh.
The High Court rejected the appellants ' contention that what was sold, being left overs after the extraction of "poles" and "Ballies", was merely 'fire wood ' within the meaning of and attracting entry No. 12 of Part V of Schedule II of the Act and thus liable to sales tax only at the rate of 3%.
The High Court upheld the levy on the view that the goods were 'Timber ' and attracted entry 32A of Part II.
The High Court took the view that where the wood was not, in the normally accepted commercial practice, fire wood, and more especially, where the wood was sold and purchased subject to specifications which conduce the wood to particular purposes other than fuel, the goods sold cannot be regarded as firewood.
The appellants ' contentions reiterated before this Court were (t) that what was sold were the left overs and remnants, (2) that the forest department had itself described the goods in the tender notice as 'fire wood heaps ', (3) that the wood stacks could, by no stretch of imagination, be held to answer the well known concept of 'Timber ', and (4) that the wood sold was 'fire wood ' or at all events, plain 'wood ' not amounting to 'Timber ' or 'firewood ' in which case it fell within the residuary entry.
502 The respondents, on the other hand, urged that the 'wood ' sold did not admit of being described as 'fire wood ' because nobody used eucalyptus wood as fire wood due to its very high cost.
Allowing the appeal in part and remitting the matter to the High Court it was, ^ HELD: (I) The finding of the High Court that the goods was 'Timber ' appears to have been reached as necessary consequence and logical corollory of the goods not being 'fire wood '.
If the wood is pot "fire wood" it need not necessarily and for that reason alone be 'Timber '.
All wood is not timber as, indeed, all wood is not 'fire wood ' either though perhaps it may not be incorrect to say that both 'firewood ' and 'Timber ' are 'wood ' in its generic sense.[508C] (2) All parts of portions of even a timber tree need not necessarily be 'Timber '.
Some parts are timber, some parts merely 'fire wood ', and yet others merely 'wood '.
[509F] (3) In a taxing statute words which are not technical expressions or words of art, but are words of everyday use, must be understood and given a meaning, not in their technical or scientific sense, but in a sense as understood in common parlance i.e. "that sense which people conversant with the subject matter with which the statute is dealing, would attribute to it.
" Such words must be understood in their popular sense.
[505B C] (4) The use to which the 'goods ' are capable of being put is not determinative of the nature of the goods; nor even the nomenclature of the goods as given by till theoretic is determinative.
The fact that the purchasers were dealers in timber is also not conclusive.
[508G] (5) The expression 'Timber ' has an accepted and well recognised legal connotation and is nomen juris.
It has also a popular meaning as a word of everyday use.
In its popular sense, 'timber ' is understood to be 'imarathi Lakdi '.
In a popular sense 'Timber ' has certain association of ideas: as to its size, stability, utility, durability, the unit of measure of quantity and of valuation etc.
[505D; 507A] (6) Having regard.
to the size, nature and description of the wood in the present case, the 'wood heaps ' were not susceptible to be or did not admit of being called 'Timber ' with all the concomitants and associations of that idea.
[509F] 503 (7) No tests of general validity applicable to or governing all A cases can at all be laid down.
Perhaps different considerations might apply if, say, the pieces of eucalyptus wood are of a longer length or of a higher girth.
Differences of degree can bring about differences of kind.
[509E G] Shantabai vs State of Bombay, ; ; referred to.