judgement:
Appeal No. 2 of 1958.
Appeal by special leave from the judgment and decree dated December 18, 1953, of the Madras High Court in Second Appeal No. 24 of 1949.
K. Bhimasankaram and T. V. R. Tatachari, for the appellant.
K. R. Choudhri, for respondents Nos. 1 and 2. 1961.
April 10.
The Judgment of the Court was delivered by MUDHOLKAR, J.
This is an appeal by special leave from the judgment of the Madras High Court in a second appeal reversing the decrees of the two courts below.
The plaintiff who is the appellant before us is the owner of survey No. 159 of the village Vemulavada while defendants 1 and 2 are owners of survey No. 158 lying to the north of survey No. 159 and adjoining.
The defendant No. 3 is the owner of a field lying to the north of survey No. 158.
To the south.
of survey No. 159 is survey No. 160 belonging to the brother of the plaintiff.
Immediately beyond this field and to the south are a "parallel drain", into which flow the waters of the Vakada drain, and Tulyabhaga drain both running west to east.
It would appear that the parallel drain is an artificial drain while the Tulyabhaga is a natural drain.
The parallel drain end,% abruptly at the eastern end of survey No. 150 at a distance of about two furlongs or so to the east of survey No. 160.
According to the plaintiff rain water falling on survey nos.
160 and 159 flows in the northern direction over survey No. 158 and then enters into a drain shown in the map and indicated by the letters EE.
In normal times the water in this drain flows towards the south and empties itself in the Tulyabhaga drain.
838 Sometime before the institution of the suit the defendants 1 and 2 constructed a bund running approximately east west on their own land.
Its height, according to the Commissioner, varies between 3 and 8 and its width is about 16 '.
Its length is reported by the Commissioner to be 1580.
Apparently the bund is not a continuous one and there are a few gaps in it.
About 5 to the south of the bund the defen dants had dug several trenches 15 ' in width and between 2 ' and 4 ' in depth.
These trenches run along a foot path which separates the fields of the parties.
The plaintiff 's grievance is that as a result of what the defendants 1 and 2 have done flood water flowing from his field in the northerly direction cannot find an outlet and stagnates on his land thus doing damage to his crops.
Further, according to him as a result of the digging of the pits the level of his land adjoining the footpath is gradually decreasing with the result that the top soil of his field is being washed away.
He, therefore, sought a mandatory injunction directing the defendants to fill up the trenches and demolish the bunds raised by them.
The plaintiff claims the right of drainage of all water falling on or invading his land including flood water on the basis of immemorial user.
The defence of the first two defendants was that the land actually slopes from north to south, that rain water and flood water naturally flow from the north to the south and that the plaintiff 's grievance is wholly imaginary.
They deny the existence of immemorial user upon which the plaintiff rested his case.
They admitted that flood waters do stagnate on the plaintiff 's land.
This, according to them, was a result of the closing of some vents in the Vakada drain by the ryots of that village as a result of which the water collected in that drain during heavy rains cannot find its natural outlet and floods the lands of a number of people including the plaintiff 'section The bund erected by the defendants was, according to them to protect their lands from being inundated by the flood waters of the Vakada drain and that it was open to the plaintiff to do likewise by constructing dams at appropriate places 839 in his field and thus keep back the flood waters of the Vakada drain.
Both the courts below arrived at the following findings of fact: (1) The land dips in the northerly direction.
(2) That a number of fields including fields nos.
158, 159 and 160 lie in a sort of a basin with elevations along the eastern and western boundaries into which drainage and rain water from all sides tends to accumulate.
(3) Ordinarily the surplus water from lands adjacent to the basin as well as rain water falling on the land in the basin is drained off from north and then finds its way in the drainage channel EE which runs north south and drains it into the Tulyabhaga drain.
(4) Whenever due to heavy rain Tulyabhaga drain is in spate the flood water which collects in the basin cannot flow through the channel EE and flows in the northerly direction towards another channel called Kongodu channel and that this is what has been happening from time immemorial.
(5) Whenever there is heavy rain the Vakada drain swells up and water therefrom floods survey Nos. 153 to 160.
(6) That this has, been happening since time immemorial and that the defendant 's contention that this is because of something done in recent times is not correct.
(7) That the inundation of the appellant 's land in the further flow of water northwards is not unusual, abnormal or occasional due to extraordinary floods but is an event which occurs every year in the usual course of nature.
The High Court, however, came to the conclusion that the flooding of fields Nos.
153 to 160 because of the swelling of the Vakada drain is not something which has been happening from time immemorial but only subsequent to the year 1924, that the flooding of these lands was not a usual and natural phenomenon but something unusual and that water being a common enemy of all, the defendants 1 and 2 were within 840 their rights in constructing the bunds and digging trenches.
According to the High Court the plaintiff had no right to prevent the defendants from taking the steps that they are taking and that a custom to allow flood water to flow over the neighbour 's land has not been so far established.
We may mention here that the High Court had actually called for certain additional findings from the appellate court and one of the questions raised was whether there was an immemorial user as contended by the plaintiff to let out Vakada drainage water beyond certain points.
In coming to the conclusion that the plaintiff has not been able to establish immemorial user in respect of the right claimed by him of draining of flood waters from his field on to the defendants the High Court has ignored the clear finding of the lower appellate court on this point.
We find that there is no justification for the course adopted by the High Court.
In para 17 of its judgment it has observed as follows: "It is well established on the evidence that from time immemorial flood water, as well as the surplus water, and the water from Vakada and Vemulavada, all collect and flow northwards through the cradle or basin in which the suit lands are situate, when the level of the water in Tulyabbaga is such as not to admit the flow of such water into it.
It has been customary from time immemorial for the said water, under such circumstances, to go northwards from the plaintiff 's fields onwards over the defendants ' fields, and the further fields beyond".
After remand the lower appellate court reiterated its conclusion and observed as follows in para 14 of its findings: "On the evidence on record and for the reasons I have given above I am of opinion that the oral evidence either way is inadequate, but on such little, evidence as available and on the probabilities of the case and relying upon the evidence of P. W. 4 and the clear indication of the existence of local drain Exhibit P 4, I would find that the Vakada drain 841 water should have been getting into parallel drain and through EE and F into Tulyabhaga drain for a considerably long period of time, at least from somewhere about the year 1920".
Earlier in its order the lower appellate court has observed: "In my opinion the parallel drain should have existed at least from the year 1924, if not many years before that".
It would thus be clear that even in the revised finding the appellate court has not been able to fix the precise year of commencement of the phenomenon.
It would, therefore, follow that upon the evidence available in this case the proper inference to be drawn would be that this phenomenon has been known from time immemorial.
A phenomenon is said to be happening from time immemorial when the date of its commencement is not within the memory of man or the date of its commencement is shrouded in the mists of antiquity.
No doubt the lower appellate court has referred to the years 1920 and 1924 in its finding but it has not said that the phenomenon was observed for, the first time in 1924 or even in 1920 It has made it quite clear that the phenomenon was known to be happening in these years and that it must have been happening for many years prior to that.
The basis of the plaintiff 's claim is not the natural right of the owner of higher land to drain off water falling on his land on to lower lands but the basis is that this right was being exercised with respect to the land of the defendants 1 and 2 from time immemorial.
The finding of fact of the lower appellate court being in his favour on this point his suit must succeed.
The High Court, following certain English decisions, came to the conclusion that water being the common enemy, every owner of land had a right to protect himself against it and in particular to protect himself from the ravages of such unusual phenomenon as floods.
Some of the cases upon which the High Court.
has relied deal with the rights of riparian owners and are thus not strictly appropriate.
106 842 The High Court seems to be of the opinion that the floods, as a result of which the plaintiff and the defendants suffer damage, are an unusual phenomenon.
Here again, the High Court has gone wrong because the lower appellate court has found that these floods were a usual occurrence.
Where a right is based upon the illustration (1) to section 7 of the (5 of 1882), the owner of higher land can pass even flood water received by him on to the lower land, at any rate where the flood is a usual or a periodic occurrence in the locality.
The High Court has quoted a passage from Coulson and Forbes on Waters and Land Drainage (1) and a passage from the judgment in Nield vs London & North Western Railway (2) in support of its conclusions.
In the passage in Coulson & Forbes it is stated that the owner of land must not take active steps to turn the flood water on to his neighbor 's property.
Here, the dam erected by the defendants 1 and 2 stems flood waters going from plaintiffs land down to the defendant 's land and so the passage does not support the conclusion of the High Court.
The decision in Nield 's case (2) is further based on the "common enemy" doctrine.
In that case also there are certain observations which would militate against the conclusion of the High Court For instance: "where, indeed, there is a natural outlet for natural water, no one has a right for his own purposes to diminish it, and if he does so he is, with some qualification perhaps, liable to any one who is injured by his act, no matter where the water which does the mischief came into the water course.
" Of course, the court in that case was dealing with water flowing along a natural water course.
But the point is whether a person has a right to create ail impediment in the flow of water along its natural direction.
Now the water on a higher ground must by operation of the force of gravity flow on to lower ground.
Where the owner of the lower ground by creating an embankment impedes the natural flow of water he would be obstructing the natural outlet for that water.
It makes little difference that the water (1) 6th Ed., p. 191.
(2) (1874) L.R. TO Ex 4.
843 happens to be not merely rain water but flood water provided the flood is of the kind to which the higher land is subjected periodically.
In England the early extension of the common drains all over the country under the supervision of the Commissioners of Sewers has rendered a discussion on the rights of flow of surface water needless and, therefore, there are no modern decisions upon the question.
But old precedents show that the common law rule appears to be the same as that under civil law.
In a case arising in Guernsey (1) the Privy Council has applied the rule of civil law to that island.
That this is adopted by the common law would appear from the decision in Nelson vs Walker (2).
The rule of civil law according to Domat is quoted thus at p. 2586 of Waters and Water Rights, Vol.
III, by Farnham: "If waters have their course regulated from one ground to another, whether it be the nature of the place, or by some regulation, or by a title, or by an in ancient possession, the proprietors of the said grounds cannot innovate anything as to the ancient course of the water.
Thus, he who has the upper grounds cannot change the course of the waters, either by turning it some other way, or rendering it more rapid, or making any other change in it to the prejudice of the owner of the lower grounds. . . " The learned author, after a discussion of old English cases on the point, has stated that the common law regarded the flow of rain water along natural courses as one of its doctrines and that there is no general right thereunder to fight surface water as a common enemy.
The author has then observed: "All rightful acts with regard to it are confined within very narrow limits which have not yet been fully defined.
And to state generally that such water is a common enemy, or that there is a right to fight it at common law, cannot be otherwise than misleading".
(p. 2590).
After discussing a number of precedents from the (1) Gibbons vs Lenfestey A.K.I.R. (2) ; 844 American State Courts he has pointed out that the common enemy doctrine is of very recent origin he has observed at p. 2591: "That surface water is not a common enemy, and that there is no right to fight it according to the pleasure of the landowner, clearly appear from the principles which have already been stated.
" We must, therefore, distinguish between cases pertaining to riparian lands and cases like the present.
But as pointed out in Niela 's case (1) the only right which a riparian owner may have is to protect himself against extraordinary floods.
But even then Jae would not be entitled to impede the flow of the stream &long its natural course (2).
We may repeat that the finding here is that, the floods from which the defendants 1 and 2 are seeking to protect themselves are not of an extraordinary type.
In the circumstances, therefore, the bund erected by them and the trenches dug up by them must be held to constitute a wrongful act entitling the plaintiff to the reliefs claimed by him.
For these reasons we allow the appeal, set aside the judgment of the High Court and restore that of the subordinate judge.
The costs throughout will be borne by the defendants respondents.
Appeal allowed.
(1) (1874) L.R. 70 Ex 4.
(2) Menzies vs Breadalbane, (1828) 3 Bhgh (N. section) 414; 4 E.R.I. 387.

summary:
The respondents 1 and 2 constructed a bund on their own land and dug trenches with a view to protect their lands from being inundated by the flood waters of the Vakada drain; as a result of that, the flood water flowing from appellant 's field in the Northerly direction could not find an outlet and stagnated on his land thus doing damage to his crops.
The appellant based the right of drainage in the Northerly direction of all water falling on or invading his land including flood water on immemorial user, and not on the natural right of the owner of higher land to drain off water failing on his land on to lower lands.
The Courts below found inter alia that the inundation of the appellant 's land was not unusual, abnormal or occasional but was.
an event which occurred every year in the usual course of nature, and was a happening from time immemorial.
The High Court came to the conclusion that the flooding of the fields was not an event recurring periodically from time immemorial but something unusual and that water being a common enemy of all, the defendants Nos. 1 and 2 were within their rights in constructing the bunds and digging the trenches.
The point was whether a person had right to create an impediment in the flow of water along its natural direction.
Held, that a 'phenomenon ' can be said to have been happening from time immemorial if the date when it first occurred was not within the memory of a man or was shrouded in the mist of antiquity.
Where the court upon the evidence available was unable to fix the precise year of commencement of the phenomenon, the proper inference would be that the phenomenon had been known to occur from time immemorial.
Held, further, that the only right the riparian owner may have, is to protect himself against extraordinary floods, but even then he would not be entitled to impede the flow of the stream along its natural course.
When the owner of the lower ground by creating an embankment impedes the natural flow of water he would be obstructing the natural outlet for that water.
It would make little difference that the water happened to be not merely rain water, but flood water provided the flood water was of a kind to which higher land was subjected perodically.
837 In the present case the bund erected and the trenches dug up by the respondents 1 and 2 causing stagnation of flood water constituted a wrongful act.


judgement:
Appeals Nos. 448 and 449 of 1959.
Appeals by special leave from the judgment and order dated February 12, 1958, of the Patna High Court in Misc.
Judicial Cases Nos. 679 and 680 of 1955.
A. V. Viswanatha Sastri and Naunit Lal, for the appellant (In both the appeals).
A. N. Kripal and D. Gupta, for the Respondent (In both the appeals).
January 5.
The Judgment of the Court was delivered by KAPUR, J.
These appeals by the assessee are brought against two judgments and orders of the High Court of Judicature at Patna in Income tax references under section 66(2) of the Income Tax Act answering the questions in the negative and against the assessees.
The questions were: (1). "Whether on the facts and circumstances of this case Rs. 72,963 12 0 was a revenue expenditure deductible under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income Tax Act?" (2). "Whether on the facts and circumstances of this case Rs. 76,526 1 3 was a revenue expenditure deductible under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income tax Act?" The facts of the appeals are these: The appellant was an employee of M/s. Karam Chand Thapar & Bros. and for each of the accounting years relating to the assessment years 1947 48 and 1948 49 his salary was Rs. 10,572.
He also had an income of Rs. 500 from shares in certain joint stock companies.
On December 20, 1945, he entered into a contract with 361 Bengal Nagpur Coal Company Ltd., for raising coal from Bhaggatdih Colliery, Jharia and actually started his business from January 1, 1946.
Evidently he did not have the requisite funds for his business and therefore in order to finance it, he entered into an agreement with the Mohini Thapar Charitable Trust on February 25, 1946.
The trust is a public charitable trust, which was created by Lala Karam Chand Thapar, who constituted himself as the Managing Trustee.
The relevant terms of this agreement between the appellant and the trust were that the trust was to advance a sum upto Rs. 11 lacs, the contract was to be "carried in accordance of the policy" settled between the appellant and the trust; the trust could withdraw its money at any time and to stop further advances; the trust was not to be liable for any losses; the appellant was to send monthly returns to the trust and the seventh clause was "that in consideration of the trust having agreed to finance my said contract business up to Rs. 11/2 lacs I have agreed to pay to the trust interest on the amount from time to time owing to the trust in respect of the monies to be advanced as above at the rate of 6 p.c. per annum in addition to a sum equivalent to 11/16th of the net profits of this business of mine.
" In pursuance of this agreement the appellant, besides interest, paid to the trust the sum of Rs. 72,963 for the first accounting year and Rs. 76,526 1 3 for the second accounting year corresponding to years of assessment 1947 48,1948 49 and claimed these amounts as allowable deductions under section 10(2)(iii) or under section 10(2)(xv) of the Income tax Act.
The amount of interest has been allowed but the claim in regard to the other sums paid was disallowed by the Income tax Officer on the ground that the agreement was not genuine and bona fide and that it was not prompted by ordinary business considerations.
The matter was taken in appeal to the Appellate Assistant Commissioner who upheld the order of the Income tax Officer.
An appeal to the Income tax Appellate Tribunal was also dismissed and so was an application 46 362 for reference under section 66(1), but the High Court directed the Tribunal to state the case on the questions set out above.
For the two assessment years the question was the same excepting for the amounts claimed as allowable deductions.
In its order dated April 4, 1955, the Appellate Tribunal had found that the payments were not for the purpose of the business and that taking into account the nature of the accounts, the nature of the payments and the relationship between the parties, it could not be said that the amounts were wholly and exclusively laid out for the purpose of the business and therefore rejected the claim.
In the statement of the case the Tribunal has said that the average amount which had been advanced by the trust to the appellant in the first year was Rs. 18,100 and the payments made to the trust in the two years were therefore a share of profits and not expenditure laid out wholly and exclusively for the purposes of the business.
The High Court approached the question from the same angle.
It was of the opinion that the question should be determined on principles of ordinary commercial trading and because the Managing Trustee was in a dominating position and only a small sum of money i.e., Rs. 18,100 on an average had been advanced, the payment of Rs. 72,963 in addition to interest was an absurdly large sum which with the interest paid work ed) out at about 400% interest.
The High Court also took into consideration the fact that the appellant was an employee of Lala Karam Chand or his company.
Put in their own words the High Court observed "having regard to the relationship between the parties and having examined the clauses of the agreement of the 25th February, 1946, between the assessee and the board of trustees I am of the opinion that the real legal position in this case is that there is a joint adventure between the parties, a quasi partnership which falls something short of partnership and that the arrangement between the parties was that the amount of profits should be ascertained and then they shall divide it up in certain specified proportions".
363 The payments, therefore, did not fall within section 10(2) (xv).
The question was therefore answered in the negative and against the assessee.
The appellant has come in appeal to this Court by special leave.
As far as the record goes at the relevant time the appellant was a person of comparatively small means.
No doubt he was getting a salary of Rs. 10,572 a year and had about Rs. 500 from his share holdings but beyond that he does not seem to have had any other means.
There is nothing to show on the record that he had any security to offer or did offer for the money that he was borrowing.
Thus the trust was lending monies to the extent of Rs. 11/2 lakhs without security and upon a venture which might or might not have been successful.
The Tribunal and the High Court seem to have fallen into an error by taking a mean of the advances made by the Trust to the appellant during the first accounting year.
The record shows that the advances were very considerable in the first year ranging from Rs. 12,000 in January 1946 to Rs. 1,86,000 in July of that year and in the following months of that year they ranged from Rs. 59,000 to Rs. 7,000.
In the following years beginning from the end of 1946 to 1953 considerable sums of money had been advanced which ranged on an average from Rs. 1,97,000 in 1947 to Rs. 3,17,000 in 1953.
In regard to 1947, the Tribunal has found that the average amount of loan was Rs. 1,20,317 but according to the figures supplied by the appellant in his petition for special leave to appeal to this Court, the average comes to Rs. 1,97,919.
In any case very considerable sums of money had been advanced by the Trust and as we have said above to a person who was not a businessman, who neither gave nor is shown to have been able to give any security.
The agreement between the appellant and the trust has to be considered in the context of those circumstances and if taking all the surrounding circumstances into consideration the trust found it necessary to have control over the working and over the finances and had offered stringent conditions it is not a matter which can be considered to be abnormal.
364 Another matter which was taken into consideration by the Tribunal was that the amounts claimed as deductible items were shown as a share of profits of the trust which had been debited in the appellant 's profit and loss appropriation account or in other words the appellant as per his accounts admitted that it was an appropriation of the profits to the trust.
The Tribunal thus was of the opinion that the interest to be received by the Trust was 11/16 part of the profits of the appellant 's business and that the method of accounting clearly showed that the appellant was only parting with the share of profits.
This, in our opinion, is an erroneous approach to the question.
The case has to be decided according to the tenor of the document as it stands and the circumstances of the case.
The genuineness of the document has not been challenged though an effort was made by the Revenue to so construe the document and so read the facts as to make both the amounts liable to tax in the hands of the appellant.
As to what is a deductible expense has to be viewed in the circumstances of each case.
In Commissioner of Income tax vs Chandulal Keshavlal (1) this Court observed that in deciding whether a payment of money is a deductible expenditure, one has to take into consideration the question of commercial expediency and the principles of ordinary commercial trading.
If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may enure for the benefit of a third party.
Another test laid down in that case was whether the transaction is properly entered into as a part of the assessee 's legitimate commercial undertaking in order to facilitate the carrying out of its business and it is immaterial that a third party also benefits thereby.
Thus in cases like the present one, in order to justify the deduction the sum given up must be for reasons of commercial expediency.
It may be voluntary but so long as it is incurred for the assessee 's benefit e.g. the carrying on of his business, the deduction would be claimable.
In Commissioner of Income tax, (1) 365 Bombay vs Jaggannath Kissonlal (1) the assessee executed a promissory note jointly with another person in order to raise the money for himself and for the other.
The other person became insolvent and the assessee had to.
pay the whole amount and claimed that amount as an allowable deduction under section 10(2)(xv) and it was found that it was a practice in the Bombay market to borrow money on such promissory notes and there was an element of mutuality in the transaction.
The loss sustained by the assessee was allowed as a deductible item on the basis that a commercial practice of financing the business by borrowing money on joint and several liability was established.
In another case decided by this Court M/s. Haji Aziz & Abdul Shakoor Bros. vs The Commissioner of Income tax (2) it was held that the expenses which are permitted as deductible are such as are made for the purpose of carrying on the business i.e. to enable a person to carry on business and earn profits in that business and the disbursements must be such which are for the purpose of earning the profits of the business.
See also Strong and Company of Romsey Ltd. vs Woodifield (3).
These cases therefore show that if any amount is expended which is commercially expedient and is expended for the purpose of earning profits it is a deductible expenditure.
In support of their opinion the High Court relied upon the cases hereinafter mentioned but in our opinion they do not apply to the facts and circumstances of this case.
The first case referred to is Pondicherry Railway Company vs Commissioner of Income Tax, Madras (4).
In that case the assessee company, incorporated in the United Kingdom, obtained a concession of constructing a railway in the territories of Pondicherry.
The assessee company was to pay to the French Government 1/2 of its net profits.
The French Government on its part gave land on which the railway was to be built free of charge and also agreed to pay a subsidy.
The question for decision in that case was whether the monies paid by the (1) ; (3) ; (2) ; (4) [1931] L.R. 58 I.A. 239.
366 assessee company to the French Government i.e., of its net profits were allowable as a deduction under the provisions corresponding to section 10(2)(xv).
Lord Macmillan observed at p. 251: "A payment out of profits and conditions on profits being earned cannot accurately be described as a payment made to earn profits.
It assumes that profits have first come into existence.
But profits on their coming into existence attract tax at that point, and the revenue is not concerned with the subsequent application of the profits.
" But these observations have been later on explained in other cases to which reference will be made presently.
In Union Cold Storage Co. Ltd. vs Adamson (1) the assessee leased lands and premises abroad reserving a rent of pound 9,60,000.
It was also provided in the deed that if at the end of the financial year it was found that after providing for this rent the result of the company 's operations was insufficient to pay interest on charger, and debentures etc., the rent for the year was to be abated to the extent of the deficiency.
In computing its profits the assessee company claimed the sums of rent paid in two respective years.
They were held not payable out of the profits or.
gains and were allowable deductions.
At page 318 Rowlatt J. said that the sum which was to be paid by the company was a recompense in respect of possession and use of the premises abroad and the company had entered into some liabilities by way of payment for their premises and that payment was an outgoing of the business which was to be provided for and allowed before profits of the business could be ascertained.
In the House of Lords Lord Macmillan distinguished the Pondicherry case,(1) by saying that in that case the ascertainment of profits preceded the coming into operation of the obligation to pay and when profits had been ascertained the obligation was to make over thereof to the French Government.
Dealing with the passage above referred to Lord Macmillan said at p. 331: "I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a (1) (2) (1931) L.R. 8 I.A. 239.
367 prescribed manner, after providing for all outlays incurred in earning them, and then to divide them.
Here the question is whether or not a deduction for rent has to be made in ascertaining the profits, and, the question is not one of the distribution of profits at all." In Tata Hydro Electric Agencies Limited, Bombay vs The Commissioner of Income tax, Bombay Presidency (1) the Tata Power Co. entered into an agency agreement with Tatasons Ltd. agreeing to pay to Tatasons Ltd. a commission of 10% on the annual net profits of Tata Power Co., subject to a minimum whether any profits were made or not.
Later on two persons D and S advanced funds to Tata Power Company on the condition that in addition to the interest payable to them by Tata Power Company they should each receive from Tatasons Ltd., 12 1.2% of the commission earned by Tatasons Ltd. Tatasons Ltd. assigned their entire right to the assessee company and the Tata Power Company entered into a new agency agreement with the assessee company and the assessee company received a commission and out of that paid 1/4 to D and section Relying on Pondicherry Railway case (2) the Bombay High Court held that that was not an allowable deduction as expenditure incurred solely for earning profits.
On appeal the Privy Council held that Pondicherry case did not govern the case.
The nature of the transaction was held to be this that the obligation to make the payments was undertaken by the assessee company in consideration of its acquisition of the right to property to earn profits i.e. of the right to conduct the business and not for the purpose of producing profits in the conduct of the business.
Dealing with Pondicherry Railway case (2) Lord Macmillan said: "In the Pondicherry case the assessees were under obligation to make over a share of their profits to the French Government.
Profits had first to be earned and ascertained before any sharing took place.
Here the obligation of the appellants to pay (1) [1937] L. R. 64 I.A. 215.
(2) (1931) L.R. 58 I.A. 239.
368 a quarter of the commission which they receive from the Tata Power Co. Ltd. to F. E. Dinshaw Ltd., and Richard.
Tilden Smith 's administrators is quite independent of whether the appellants make any profits or not." and at page 225 Lord Macmillan said: "In short, the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business.
" At page 226 the Privy Council accepted the following test laid down by Lord President in Robert Addie & Sons ' Collieries, Ltd. vs Commissioners of Inland Revenue (1) where it is observed: "What is 'money wholly and exclusively laid out for the purposes of the trade ' is a question which must be determined upon the principles of ordinary commercial trading.
It is necessary, accordingly, to attend to the true nature of the expenditure, and to ask oneself the question, Is it a part of the Com pany 's working expenses; is it expenditure laid out as part of the process of profit earning".
In Commissioner of Income tax, Bombay Presidency vs Tata Sons Ltd. (2) the company received a commission on the basis of profits.
The managed company was in urgent need of money and the assessee company found a financier a Mr. Dinshaw and an agreement was entered into with the managed company and Mr. Dinshaw by which the latter agreed to lend a crore of rupees on the condition that the assessee company assigned to him a share in the commission which the assessee company might receive from the managed company.
That was held to be an agreement on the part of the assessee company to share their commission with Mr. Dinshaw and it was a part of the arrangement on which the assessee company obtained finance and therefore the payment to Mr. Dinshaw was an expenditure solely for the purpose of earning profits or gains and it was not of a capital nature.
At (1) (2) 369 page 203 Beaumont C.J. said that the question whether the payment of a part of the commission to a third person can be regarded as expenditure incurred solely for the purpose of earning that commission is a question which must be answered on the facts of each case on a commercial basis.
In The Indian Radio and Cable Communications Company Ltd. vs The Commissioner of Income tax, Bombay (1) it was observed that it was not universally true to say that a payment the making of which is conditional on profits being earned cannot properly be described as an expenditure incurred for the purpose of earning such profits.
Lord Maugham in explaining the judgment in the Pondicherry Railway case (2) said at page 278: " To avoid misconception it is proper to say that in coming to this conclusion they have not taken the view that the case is governed by the decision in Pondicherry Railway Co. Ltd. vs Commissioner of Income tax, Madras, though that case no doubt shows light on the nature of the problem which has to be solved in the present case.
It should perhaps be added that a sentence in the judgment in that case has been explained, if explanation was necessary, by Lord Macmillan in the subsequent case of W. H. E. Adamson vs Union Cold Storage Company.
" As to when a deduction is claimable and when it is not, it was said at page 277 that if a company had made an apparent net profit and then had to pay to a director as a contractual recompense, the net profit would be the difference between the two but if there was a contract to pay a commission on the net profits of the year it must necessarily be held to mean as net profits before the deduction of the commission.
In British Sugar Manufacturers Ltd. vs Harris (3) the assessee company agreed to pay two other companies a certain percentage of its annual profits after deduction of expenses and debenture interest in consideration of their giving to the assessee company the full benefit of their technical and financial knowledge (1) (2) [1931] L.R. 58 I.A. 239.
(3) 47 370 and experience.
Certain payments were made in pursuance of that agreement and it was held that payments under the agreement were permissible deductions in computing the assessee company 's profits.
Dealing with the Pondicherry Railway case, (1) at page 548, the learned Master of the Rolls said: " It is to be observed that Lord Macmillan in that paragraph was quite clearly using the word I profit ' in one sense and one sense only; he was using it ' in the sense of the I real net profit ' to which Lord Maugham referred.
That he was doing that is, I think, abundantly clear when the nature of the contract there in question is considered, which was merely a contract under which a percentage of profits was payable by the railway company to the French Government.
There was no question of services or anything of that kind in the case; it was merely a sum payable out of profits.
I do not find myself constrained by that expression of opinion, because it must be read; as Lord Macmillan has said in a subsequent case Union Cold Storage Co. Ltd. vs Adamson (2 ) at pp.
331 2, in relation to the particular subject matter with which he was dealing.
" As has been said above the question to be considered in this case is governed by the observations of this Court in Commissioner of Income tax vs Chandulal Keshavlal & Co. (3) and the circumstances under which the trust agreed to lend the appellant such a large sum of money shows the true nature of the transaction.
On the facts proved in the present case the Trust agreed to finance the business of the appellant on the terms set out in the agreement and there is nothing to show that he could have made any better arrangements or would not have lost the contract if he had failed to enter into the agreement i.e. the agreement to pay the amounts in dispute.
Therefore in a commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the business.
In our opinion, therefore, the High Court was in error and the question referred should have been (1) [1931] L.R. 58 I.A. 239.
(2) , 331 32.
(3) 371 answered in the affirmative in favour of the appellant.
The appeals are, therefore, allowed and the judgments, and orders of the High Court are set aside.
The appellant will have his costs in this Court and in the High Court.
One hearing fee.
Appeals allowed.

dataset_name: IN-Abs

summary:
The assessee entered into a contract for working certain collieries.
As he did not have the requisite funds, he entered into an agreement with M whereunder M was to advance a sum upto Rs. 11/2 lacs, but could withdraw the money at any time and stop further advances and was not liable for any losses; the assessee was to pay interest on the advances at 6% per annum in addition to a sum equivalent to 11/16th of the net profits of the business.
In pursuance of the agreement M made advances to the assessee and the assessee paid interest and 11/16th of his net profits to M.
The assessee claimed these amounts paid to M as allowable deductions under section 10(2)(iii) or under section 10(2)(xv) of the Income tax Act.
The amount paid as interest was allowed but the other sums paid were not allowed on the ground that these sums were not wholly and exclusively laid out for the purpose of the business.
Held, that the assessee was entitled to the deductions claimed.
The case had to be decided according to the tenor of the agreement and the circumstances of the case.
In order to justify the deduction of the sum given up had to be for reasons of commercial expediency; it may be voluntary but so long as it was incurred for the assessee 's benefit, e.g., the carrying on of his business, the deduction was claimable.
In the present case there was nothing to show that the assessee could have made any better arrangements or would not have lost the contract had he not entered into the agreement with M. Therefore in a commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the business.
Commissioner of Income tax vs Chandulal Keshavlal, , followed.
Commissioner of Income tax, Bombay vs M/s. jaggannath Kissonlal; , , M/s. Haji Aziz & Abdul Shakoor Bros. vs The Commissioner of Income tax, ; , and Strong vs Woodifield, ; , relied on.
Pondicherry Railway Company vs Commissioner of Income tax, Madras, (1931) L.R. 58 I.A. 239, distinguished.
Union Cold Storage Co. Ltd. vs Adamson, , 360 Tata Hydro Electric Agencies Ltd., Bombay vs The Commissioner of Income tax, Bombay Presidency.
(1937) L.R. 64 I.A. 215, Robert Addie & Sons ' Colleries, Ltd, vs Commissioners of Inland Revenue, , Commissioner of Income tax, Bombay Presidency vs Tata Sons Ltd. , The Indian Radio and Cable Communications Company Ltd. vs The Commissioner of Income tax, Bombay, , British Sugar Manufacturers Ltd. vs Harris, , referred to.


judgement:
Appeal No.84 of 1960.
888 Appeal from the judgment and decree dated July 26, 1956.
of the Bombay, High Court in Appeal No. he 138 of 1956.
The appellant in person.
B. R. L. Ayengar and D. Gupta, for the respondent.
April 12.
The Judgment of the Court was delivered by SINHA, C. J.
The main question for decision in this appeal, on a certificate of fitness granted by the ' High Court of Judicature at Bombay, is whether a public servant, who has been officiating in a higher post but has been reverted to his substantive rank as a result of an adverse finding against him in a departmental enquiry for misconduct, can be said to have been reduced in rank within the meaning of section 240(3) of the Government of India Act, 1935.
The learned Civil Judge, Senior Division, by his, Judgment and Decree dated October 31, 1955, held that it was so.
The High Court of Bombay, on a first appeal from that decision, by its Judgment and Decree dated July 26, 1956, has held to the contrary.
In so far as it is necessary for the determination of this appeal, the facts of this case may shortly be stated as follows.
The appellant was holding the rank of a Mamlatdar in the First Grade and Was officiating as a District Deputy Collector.
In the latter capacity he was functioning as a District Supplies Officer.
He had to undertake tours in the discharge of his official duties for which he maintained a motor car.
In respect of one of his travelling allowance bills, it was found that he had charged travelling allowance in respect of 59 miles whereas the correct distance was only 51 miles.
A departmental enquiry was held against him as a result of which he was reverted to his original rank as Mamlatdar, by virtue of the Order of the Government dated August 11, 1948, (exhibit 35), which was to the following effect: "After careful consideration Government have decided to revert you to Mamlatdar for a period of 889 three years and have further directed that you should refund the excess mileage drawn by you in respect of the three journeys.
" The appellant made a number of representations to the Government challenging the correctness of the findings against him and praying for re consideration of the Order of Reversion passed against, him but to no effect, in spite of the fact that ultimately the Accountant General gave his opinion that the appellant had not overcharged and that there was no fraud involved in the travelling allowance bill which was the subject matter of the charge against him.
But ultimately, by a Notification date& March 26, 1951, (exhibit 61), the appellant was promoted to the Selection Grade with effect from August 1, 1950, but even so the Order of Reversion passed against the appellant remained effective and appears to have affected his place in the Selection Grade.
Eventually, the appellant retired from service on superannuation with effect from November 28, 1953.
He filed his suit against the State of Bombay on August 2, 1954, for a declaration that the Order of the Government dated August 11, 1948, was void, inoperative, wrongful, illegal and ultra vires, and for recovery of Rs. 12,866 odd or account of his arrears of salary, allowances, etc.
with interest and future interest.
The learned Civil Judge Senior Division, at Belgaum, came to the conclusion that the first part of the departmental enquiry held against the plaintiff leading up to the findings against him was free from any defect but that he had no been given the opportunity of showing cause against the punishment proposed to be inflicted upon him a a result of those findings, in so far as no show cause notice was given to him nor a copy of the enquire, report showing the grounds on which the findings ha, been based.
There was, thus, according to the finding of the Trial Court, no full compliance with the requirements of section 240(3) of the Government of India Act 1935.
The Court also held that the Order of Reversion amounted to a penalty imposed upon the plaintiff as a result of the enquiry.
The Court, therefore, cam 890 to the conclusion that the Order aforesaid passed by the Government reverting him to the substantive rank was void and granted him that declaration, but dismissed his suit, with costs, in respect of the arrears Claimed by him as aforesaid on the ground that it was based on tort and not on contract.
There was an appeal by the plaintiff in respect of the dismissal of his claim for arrears, and cross objections by the State in respect of that part of the judgment and decree which had granted declaration in favour of the plaintiff.
The High Court dismissed the appeal by the plaintiff and allowed the cross objections of the de fendant respondent in respect of the declaration, but made no orders as to the costs of the appeal and the cross objections.
The High Court held that the Order of Reversion, even assuming that it was a punishment as a result of the departmental enquiry against the appellant, was not a punishment within the meaning of section 240(3) of the Government of India Act, 1935.
It also held that the Order of Reversion was not a punishment at all.
In this Court, the appellant, who has argued his own case with ability, has urged in the first place, and in our opinion rightly, that his case is covered by the observations of this Court in Parshotam Lal Dhingra vs Union of Indid (1).
Those observations are as follows: "A reduction in rank likewise may be by way of punishment or it may be an innocuous thing.
If the Government servant has a right to a particular rank, then the very reduction from that rank will operate as a penalty, for he will then lose the emoluments and privileges of that rank.
If, however, he has no right to the particular rank, his reduction from an officiating higher rank to his substantive lower rank will not ordinarily be a punishment.
But the mere fact that the servant has no title to the post or the rank and the Government has, by contract, express or implied, or under the rules, the right to reduce him to a lower post does not mean that an order of reduction of a servant to a lower (1) , 863 64.
891 post or rank cannot in any circumstances be a punishment.
The real test for determining whether the reduction in such cases is or is not by way of punishment is to find out if the order for the reduction also visits the servant with any penal consequences.
Thus if the order entails or provides for the forfeiture of his pay or allowances or the loss of his seniority in his substantive rank or the stoppage or postponement of his future chances of promotion, then that circumstance may indicate that although in form the Government had purported to exercise its right to terminate the employment or to reduce the servant to a lower rank under the terms of the contract of employment or under the rules, in truth and reality the Government has terminated the employment as and by way of penalty.
The use of the expression "termi nate" or "discharge" is not conclusive.
Tn spite of the use of such innocuous expressions, the court has to apply the two tests mentioned above, namely, (1) whether the servant bad a right to the post or the rank or (2) whether he ha,,; been visited with evil consequences of the kind hereinbefore referred to? If the case satisfies either of the two tests then it must be held that the servant has been punished and the termination of his service must be taken as a dismissal or removal from service or the reversion to his substantive rank must be regarded as a reduction in rank and if the requirements of rules and article 311, which give protection to Government servant have not been complied with, the termination of the service or the reduction in rank must be held to be wrongful and in violation of the consti tutional right of the servant.
" He has rightly pointed out that he would have continued as a Deputy Collector but for the Order of the Government, dated August 11, 1948, impugned in this case, as a result of the enquiry held against him, and that his reversion was not as a matter of course or for administrative convenience.
The Order, in terms, held him back for three years.
Thus his emoluments, present as well as future, were adversely affected by the 892 Order aforesaid of the Government.
In the ordinary course, he would have continued as a Deputy Collector with all the emoluments of the post and would have been entitled to further promotion but for the setback in his service as a result of the adverse finding against him, which finding was ultimately declared by the Account ant General to have been under a misapprehension of the true facts.
It is true that he was promoted as a result of the Government Order dated March 26, 1951, with effect from August 1, 1950.
B ' that promotion did not entirely cover the ground lost by him as a result of the Government Order impugned in this case.
It is noteworthy that the Judgment of the High Court under appeal was given in July, 1956, when the decision of this Court in Dhingra 's case (1) had not been given.
The decision of this Court was given in November, 1957.
Of the two tests laid down by this Court, certainly the second test applies, if not also the first one.
He may or may not have a right to hold the post or the rank, but there is no doubt that he was visited with evil consequences.
Ordinarily, if a public servant has been officiating in a higher rank it cannot be said that he has a substantive right to that higher rank.
He may have to revert to his substantive rank as a result of the exigencies of the service or he may be reverted as a result of an adverse finding in an enquiry against him for misconduct.
In every case of reversion from an officiating higher post to his substantive post, the civil servant concerned is deprived of the emoluments of the higher post.
But that cannot, by itself, be a ground for holding that the second test in Dhingra 's case (1), namely, whether he has been visited with evil consequences, can be said to have been satisfied.
Hence, mere deprivation of higher emoluments as a consequence of a reversion cannot amount to the "evil consequences" referred to in the second test in Dhingra 's case (1); they must mean something more than mere deprivation of higher emoluments.
That being so, they include, for example, forfeiture of substantive pay, loss of seniority, etc.
Applying that (1) [1058] S.C.P. 326, 863 64. 893 test to the present case, it cannot be said that simply because the appellant did not get a Deputy Collector 's salary for three years, he was visited with evil conse quences of the type contemplated in Dhingra 's case (1).
Even if he had been reverted in the ordinary course of the exigencies of the service, the same consequences would have ensued.
If the logs of the emoluments attaching to the higher rank in which he was officiating was the only consequence of his reversion as a result of the enquiry against him, the appellant would ' have no cause of action.
But it is clear that as a result of the Order dated August 11, 1948 (exhibit 35), the appellant lost his seniority as a Mamlatdar, which was his substantive post: That being so, it was not a simple case of reversion with no evil consequences; it had such consequences as would come within the test of punishment as laid down in Dhingra 's case.
If the reversion had not been for a period of three years, it could not be said that the appellant had been punished within the meaning of the rule laid down in Dhingra 's case, (1).
It cannot be asserted that his reversion to a substantive post for a period of three years was not by way of punishment.
From the facts of this case it is clear that the appellant was on the upward move in the cadre of his service and but for this aberration in his progress to a higher post, he would have, in ordinary course, been promoted as he actually was sometime later when the authorities realised perhaps that he had not been justly treated, as is clear from the Order of the Government, dated March 26, 1951, promoting him to the higher rank with effect from August 1, 1950.
But that belated justice meted out to him by the Government did not completely undo the mischief of the Order of Reversion impugned in this case.
It is clear to us, therefore, that as a result of the Order of Reversion aforesaid, the appellant had been punished and that the Order of the Government punishing him was not wholly regular.
It has been found that the requirements of section 240(3) of the Government of India Act, 1935, corresponding to article 311 (2) of the Constitution, had not been fully complied with.
His (1) ,863 64. 894 reversion in rank, therefore, was in violation of the Constitutional guarantee.
In view of these considerations it must be held that the High Court was not right in holding against the appellant that his reversion was not a punishment contemplated by section 240(3) of the Government of India Act, 1935.
On this part of the case, in our opinion, the decision of the High part has to be reversed and that of the Trial Court hat his reversion to his substantive rank was void, must be restored.
The question then arises whether he is entitled to any relief in respect of his claim for arrears of salary and dearness allowance.
He has claimed Rs. 10,777 odd as arrears of pay, Rs. 951 odd as arrears of dearness allowance, as also Rs. 688 odd as arrears of daily allowance plus interest of Rs. 471 odd, thus aggregating to the sum of Rs. 12,886 odd.
This claim is spread over the period August, 1946, to November, 1953, that is to say, until the date of his retirement from Government service, plus future interest also.
On this part of the case the learned Trial Judge, relying upon the case of the High Commissioner for India and Pakistan vs I. M. Lall (1) held that a government servant has no right to recover arrears of pay by an action in a Civil Court.
He got over the decision of this Court in the State of Bihar vs Abdul Majid (2) on the ground that that case has made a distinction between a claim based on a contract and that on a tort.
In the instant case, he came to the conclusion that as the plaintiff had claimed the difference between the pay and allowance actually drawn and those to which he would have been entitled but for the wrongful orders, the claim was based on tort and, therefore, the plaintiff was not entitled to any relief.
On the question of limitation, he held that the suit would be governed by article 102 of the Indian Limitation Act (IX of 1908) as laid down by the Federal Court in the case of The Punjab Province vs Pandit Tarachand (3).
In that view of the matter, the learned Judge held that adding the period of two months of the statutory notice under section 80 of the Code of Civil Procedure given to (1) (1948) L.R. 75 I.A. 225.
(2) ; (3) 895 Government, the claim would be in time from June 2, 1951.
Hence the Trial Court, while giving the declaration that the Order impugned was void, dismissed, the rest of the claim with a direction that the plaintiff was to pay 3/4ths of the costs of the suit to the defendant.
The High Court dismissed the suit in its entirety after allowing the cross objections of the State.
The appellant contended that his suit for arrears of salary would not be governed by the three years rule laid down in article 102 of the Limitation Act and that the decision of the Federal Court in Tarachand 's case (1) was not correct.
The sole ground on which this contention was based was that "salary" was not included within the term "wages".
In our opinion, no good reasons have been adduced before us for not following the aforesaid decision of the Federal Court.
In the result, the appeal is allowed in part, that is to say, the declaration granted by the Trial Court that the Order of the Government impugned in this case is void, is restored, in disagreement with the decision of the High Court.
The claim as regards arrears of salary and allowance is allowed in part only from the 2nd of June, 1951, until the date of the plaintiff 's retirement from Government service.
There will be no decree for interest before the date of the suit, but the decretal sum shall bear interest at 6% per annum from the date of the suit until realisation.
The plaintiff appellant will be entitled to three fourths of his costs throughout, in view of the fact that his entire claim is not being allowed.
Appeal allowed in part.

summary:
The appellant, who held the rank of a Mamllatdar in the first grade and was officiating as District Deputy Collector, was alleged to have wrongly charged travelling allowance for 59 miles instead of 51 and was, as the result of a departmental enquiry, reverted to his substantive rank for three years and 887 directed to refund the excess be had charged.
He made a re presentation to the Government which was of no avail although the Accountant General was of the opinion that the appellant had not overcharged and committed no fraud.
Ultimately the appellant was promoted to the selection grade but the order of reversion remained effective and affected his position in the selection grade.
After retirement he brought a suit for a declaration that the order of reversion was void and for recovery of Rs. 12, 516 and odd as arrears of salary, allowances, etc., with interest and future interest.
The trial court held that there was no compliance with the provisions of section 240(3) of the Government of India Act, 1935, granted the declaration but refused the arrears claimed.
The plaintiff filed an appeal and the State a cross objection and the High Court dismissed the appeal and allowed the cross objection, holding that the order of reversion was not a punishment within the meaning of section 240(3) of the Government of India Act, 1935.
Held, that the matter was covered by the observations of this Court in Purshottam Lal Dhingra 's case and of the two tests of punishment laid (town by this Court, namely, (1) whether the servant had a right to the rank or (2) whether he had been visited by evil consequences of the kind specified therein, the second certainly applied.
The appellant might or might not have the right to hold the higher post, but there could be no doubt that the was visited with evil consequences as a result of the order of reversion.
Mere deprivation of higher emoluments, however, in conse quence of an order of reversion could not by itself satisfy that test which must include such other conseqnences as forfeiture of substantive pay and loss of seniority ' In the instant case, by the order of reversion for three years to his substantive post, the appellant lost seniority and promotion and the belated action of the Government could not wholly undo the mischief.
Since the requirement of section 240(3) of the Government of India Act, 1935, which corresponds to article 311(2) of the Constitution, had not been found to have been fully complied with, the order of reversion must be held to be void.
Purshottam Lal Dhingra vs Union of India, , applied.
The claim of arrears of salary was governed by article 102 of the Indian Limitation Act, and the appellant, therefore, was entitled to no more than what fell due during the 3 years previous to his retirement.
The Punjab Province vs Pandit Tarachand, [1947) F.C.R. 89, followed.


judgement:
Appeal No. 135 of 1961.
Appeal by special leave from the judgment and order dated January 3, 1961, of the Rajasthan High Court, Jodhpur, in Civil Writ Petition No. 1 of 1961.
M. K. Nambiar, R. K. Garg, D. P. Singh, M. K. Ramamurthi and section C. Agarwala, for the appellant petitioner.
H. N. Sanyal, Additional Solicitor General of India, C. C. Kasliwal, Advocate General of Rajasthan, Khan Singh and D. Gupta, for the respondents.
April 14.
The Judgment of the Court was delivered by WANCHOO, J.
These two connected matters arise out of an order approving a scheme framed under Chap.
IV A of the , No. IV of 1939, (hereinafter referred to as the Act) and will be disposed of together.
The brief facts necessary for present purposes are these.
The appellant was plying a bus between Jaipur and Ajmer on a permit granted to him for three years by resolution of the Regional Transport Authority, Jaipur, dated December 16/17, 1958.
In August, 1960, the State Government promulgated rules under section 68 1 of the Act, called the Rajasthan State Road Transport Services (Development) Rules, 1960 (hereinafter called the Rules).
The Rules were framed for carrying out the purposes of Chap.
IV A of the Act and provided inter alia for framing of schemes, hearing of objections, determination and payment of 980 compensation, and other incidental matters.
A draft scheme was published on September 7, 1960, for taking over the Jaipur Ajmer route.
The appellant made objections to the draft scheme within the time allowed by the notification thereof.
The State Government appointed the Legal Remembrancer to hear and decide the objections under r. 7 of the Rules.
It appears that in the meantime an application was made under article 226 by some bus operators before the Rajasthan High Court challenging the constitutionality of section 68 D of the Act and the legality of the Rules framed by the State Government.
This application was dismissed and the High Court inter alia decided while considering r. 7(6) that it was not open to the officer hearing the objections to cancel the draft scheme and seems to have held that there was no such power even under section 68 D(2) of the Act.
This decision was given on November 9, 1960.
The draft scheme came up for consideration before the officer appointed to hear objections on November 21,, 1960.
An application was made before him that the appellant should be permitted to give evidence on points of fact which were narrated in the application in order that the officer may be in a position to decide the objections justly.
This application was rejected by the officer on the ground that there was no provision in the Rules for recording of evidence of witnesses.
The matter then came up for consideration on November 23, 1960.
On that date another application was made in which it was said that the appellant wanted to lead evidence to show that the draft scheme must be rejected in its entirety, and it was contended that the view taken by the Rajasthan High Court to the effect that it was not open to the officer to cancel a draft scheme was incorrect.
This application was also rejected by the officer with the observation that he was bound hand and foot by the decision of the Rajasthan High Court and if there was anything wrong in the interpretation given by the High Court the remedy lay elsewhere.
Thereafter the officer gave a hearing to the appellant in the sense that he heard arguments on behalf of the appellant and approved the draft scheme 981 by his order dated December 7, 1960.
The approved scheme was then published on December 12,1960.
On January 9, 1961, the Regional Transport Authority informed the appellant that his permit was cancelled, as from January 26, 1961, or such later date from which the buses of Rajasthan State Roadways begin to operate on the above mentioned route.
In the meantime, the appellant unsuccessfully moved the Rajasthan High Court, and his prayer for leave to appeal to this Court was also rejected.
The appellant then applied for special leave to appeal to this Court which was granted; and that is how the matter has come up before us.
Two main points have been urged before us on behalf of the appellant, namely, (i) the officer was wrong in the view he took that it was not open to him to reject the draft scheme in its entirety, and (ii) the officer was wrong in holding that he could not take evidence, whether oral or documentary, and all that he had to do under section 68 D of the Act was to hear arguments on either side.
It is contended that in view of these two wrong decisions of the officer his approach to what he had to do in dealing with objections under section 68 D was quite incorrect.
, with the result that there was no effective hearing of the objections and any approval given to the scheme in these circumstances is liable to be set aside and the appellant is entitled "to be heard" in the real sense in which those words were used in section 68 D (2).
Section 68 D (2) with which we are concerned is in these words: "The State Government may, after considering the objections and after giving an opportunity to the objector or his representatives and the representatives of the State transport undertaking to be heard in the matter, if they so desire, approve or modify the scheme.
" The view taken by the Rajasthan High Court in its decision of November 9, 1960, seen is to be that this section does not justify what it called the cancellation of the scheme.
We are of the opinion that this view is 982 not correct.
What section 68 D(2) provides is that after hearing the parties, the State Government may approve or modify the draft scheme.
This in our opinion clearly implies that the authority which has to approve or modify the scheme has the power also, if it so thinks fit, not to approve the scheme at all.
What is before the.
State Government under section 68 D (2) is a draft scheme.
That sub section provides that the State Government may approve or modify the scheme; that does not mean that the State Government is bound to approve the scheme with or without modifications.
An authority to which power has been given to approve or modify some proposal has certainly in our opinion the power to say that it will not approve the proposal at all, for the words "may approve" on a reasonable interpretation include "may not approve".
If a person may approve he is not bound to approve.
Up to the stage when the hearing takes place under sub s.(2) the draft scheme is merely a proposal before the State Government and it will only become effective if it approves of it with or without modifications.
But this power clearly implies the power to say that it does not approve the draft scheme at all; and if it says that, the draft scheme will stand rejected and the State Transport Undertaking may have to submit another scheme for approval.
When section 68 E speaks of cancellation it refers to a scheme already approved under section 68 D(3), and in that con.
text the word "cancellation" is properly used.
But the fact that section 68 E provides for the cancellation of a scheme which has already been approved, does not mean that it is not open to the State Government under section 68 D(2) to say, after hearing the objections, that it does not approve the scheme at all which is put up before it as a draft for approval.
We are therefore of the opinion that under section 68 D(2) it is open to the State Government to say after hearing objections that it does not approve of the draft scheme at all, in which case the draft scheme will stand rejected and the State Transport Undertaking may have to frame a fresh scheme in accordance with the procedure provided in Chap.
The officer therefore was wrong 983 in holding that he had no power to reject the scheme in the sense that he could withhold approval of it altogether, though we may add that he came to that conclusion because of the earlier decision of the Rajasthan High Court.
As for r. 7(6) of the Rules it is in similar terms as section 68 D(2) and must therefore mean what we have said above with respect to section 68 D(2).
If, however, by the use of the word "shall" in r. 7(6) in place of the word "may" which appears in section 68 D(2) the intention is to curtail the power of the officer hearing the objections, the rule would be bad as going beyond what is provided in section 68 D(2).
But we do not think that the use of the word "shall" in r. 7(6) makes any difference, for the word "shall" had to be used there according to the rules of English Grammar and has no greater force than the word "may used in section 68 D(2) The learned Additional Solicitor General who appeared for the State of Rajasthan did not contest that what we have said above was the true position in section 68 D(2) and r. 7(6).
(ii) The next question is the scope of the hearing under section 68 D(2).
The officer has held that the scope of the hearing is confined only to hearing of arguments and no more, and that is why he rejected the prayer of the appellant for leading evidence, whether oral or documentary.
Now it has been held by this Court in Gullapalli Nageswara Rao vs Andhra Pradesh State Road Transport Corporation (1) that a State Government acts as a quasi judicial tribunal when giving a hearing under section 68 D.
The purpose of the hearing is that the State Government has to satisfy itself that the opinion of the State Transport Undertaking formed under section 68 C, namely that the scheme is for the purpose of providing an efficient, adequate, economical and properly coordinated road transport service, is correct.
The objections are all made to show that the scheme does not provide for an efficient, adequate, economical and properly coordinated road transport (1) [1959] Supp. 1 S.C.R. 319 984 service.
In order therefore to arrive at the conclusion that the draft scheme provides for a transport service of this nature, the State Government as a quasi judicial authority may require materials to come to that conclusion.
A hearing before a quasi judicial authority does not merely mean an argument; it may in proper cases include the taking of evidence, both oral and documentary.
It seems to us that in the circumstances of the provision contained in section 68 D(2) and the purpose of the hearing thereunder, taking of evidence, whether oral or documentary, that maybe desired to be produced by either party, may be necessary before the State Government can arrive at a just conclusion with respect to the objections to the draft scheme.
We cannot therefore agree with the officer that there is no warrant for taking any evidence at all at a hearing under section 68 D(2).
It seems to us, considering the nature of the objections and the purpose for which the hearing is given, that production of evidence, either oral or documentary, is comprehended within the hearing contemplated in section 68 D(2).
The officer therefore was wrong in loading that it was not open to the parties to produce evidence before him and they were confined only to submit their arguments on the basis of the draft scheme on the one hand and their written objections on the other.
We may however point out that the production of evidence (documentary or oral) does not mean that the parties can produce any amount of evidence they like and prolong the proceedings inordinately and the State Government when giving the hearing would be powerless to check this.
We need only point out that though evidence may have to be taken under section 68 D(2) it does not follow that the evidence would be necessary in every case.
It will therefore be for the State Government, or as in this case the officer concerned, to decide in case any party desires to lead evidence whether firstly the evidence is necessary and relevant to the inquiry before it.
If it considers that evidence is necessary, it will give a reasonable opportunity to the party desiring to produce evidence to give evidence relevant to the enquiry and within reason and it 985 would have all the powers of controlling the giving and the recording of evidence that any court has.
Subject therefore to this over riding power of the State Government or the officer giving the hearing, the parties are entitled to give evidence either documentary or oral during a hearing under section 68 D(2).
In view of what we have said above the approach of the officer in this case was wrong on both the points.
He was wrong in his view that it was not open to him to reject the scheme in toto and withhold approval altogether.
He was also wrong in the view that it was not open to him to take evidence, whether oral or documentary, though of course, as we have said above the control on this evidence must be in him.
The result of this wrong approach to our mind has certainly been that the appellant did not get a hearing to which he was entitled under section 68.D(2).
In the circumstances we must hold that the approval of the scheme was without a proper hearing under section 68 D(2), which, even though arguments were heard in full in this case, vitiates the approval given to the scheme by the officer concerned.
We therefore allow the appeal and set aside the order of the officer concerned approving the scheme and direct that the draft scheme be reconsidered by the said officer or such other officer as the State Government may appoint hereafter after giving a hearing in the light of the observations we have made above.
The appellant will get his costs from the State of Rajasthan.
In the circumstances no order is necessary in the writ petition, which is hereby dismissed.
We pass no order as to costs in the writ petition.
Petition dismissed.

summary:
By section 68 D(2) of the , "The State Government may, after considering the objections and after giving an opportunity to the objector or his representatives and the representatives of the State Transport Undertaking to be heard in the matter, it they so desire, approve or modify the scheme".
The appellant 's objections to the draft scheme in question were heard by the Legal Remembrance, appointed by the State Government to hear such objections, under r. 7(6) of the Rajasthan State Transport Services (Development) Rules, 1960, framed under section 68 1 of the Act.
The appellant applied to the said Officer for permission to give evidence in order that he could show that the entire scheme ought to be rejected.
His applications were rejected by the Officer holding that the Rules did not provide for recording of evidence and that according to a decision of the Rajasthan High Court, dated November 9, 1960, section 68 D(2) of the Act did not empower him to cancel the draft scheme in its entirety.
He, therefore, heard the arguments addressed on behalf of the appellant and approved the scheme.
After moving unsuccessfully the Rajasthan High Court, the appellant appealed to this Court by special leave, Held, that the Officer was in error on both the points.
Section 68 D(2) of the Act clearly implies that the authority which has to approve or modify the scheme, has also the power, if it thinks proper, to disapprove the scheme altogether.
The words " may approve" in the section, properly construed, must also include "may not approve".
The use of the word "shall" in r. 7(6) of the Rules instead of the word "may", which is otherwise similar in its terms to section 68 D(2) of the Act,.can make no difference.
In hearing objections under section 68 D(2) of the Act, the State Government or its Officers act as a quasi judicial tribunal and regard being to the nature of the objections and the purpose of the hearing thereunder, there can be no doubt that production of evidence, both oral and documentary, is clearly contemplated by the section.
979 Gullapalli Nageswara Rao vs Andhra Pradesh State Road Transport Corporation, [1959] Supp. 1 S.C.R. 319, referred to.
Bat that does not mean that the parties can produce any amount of evidence merely to prolong the proceeding.
It is for the State Government or the Officer to decide whether the evidence sought to be adduced is necessary and relevant to the enquiry and, if so, they will have all the powers that a court has of controlling the giving and recording of such evidence.
Where a draft scheme is disapproved under section 68 D(2) and thus stands rejected, any fresh scheme that may have to be framed, must be framed according to the procedure prescribed by Ch.
IVA of the Act.


judgement:
No. 71 of 1958.
23 Writ Petition under article 32 of the Constitution of India for the enforcement of Fundamental Rights.
section K. Venkataranga Ayengar and section J. section Fernandez, for the petitioner.
B. R. L. Iyengar, for respondent No. 1.
R. Gopalakrishnan and T. M. Sen, for the respondent No. 2. 1961.
April 17.
The Judgment of the Court was delivered by SARKAR, J.
This petition under article 32 of the Constitution raises a question of the constitutional validity of section 3(3)(a) of the Mysore House Rent and Accommodation Control Act, 1951 (Mysore XXX of 1951).
Shortly put, that provision enables an authority set up by the Act to select any Government, local authority, public institution, officer of a government, local authority or public institution or any other person as the tenant of a vacant house.
Under the Act the owner is bound to let the premises to the tenant so selected.
The petitioner, for whom a tenant had been selected under this provision, challenges its validity on the ground that it puts an unreasonable restriction on his fundamental right to property under article 19(1)(f) of the Constitution and is outside the protection of el.
(5) of that article.
The petitioner had a building in respect of which he had made some sort of arrangement with one Misri Lal for the making of certain alterations in it and for letting it thereafter to him for the purpose of a boarding house.
He later gave a notice as required by section 3(2)(a) of the Act to respondent No. 2, the Controller, who had the authority under section 3(3)(a) to select a tenant, that the house had become vacant.
Thereupon respondent No. 2 considered applications for the tenancy of the house of which there were two.
One was from Misri Lal mentioned above and the other was from respondent No. 1, who was a private indivi dual carrying on business of a boarding house keeper.
Respondent No. 2 selected respondent No. 1 as the 24 person to whom the house should be let by the petitioner.
He fixed the rent at Rs. 350 per month which was the rent demanded by the petitioner.
There does not appear to have been any specification of the terms of the tenancy and no question as to such terms arises in this case.
The petitioner was dissatisfied with this decision as he wanted that the premises should be let to Misri Lal, and appealed to the District Judge under section 15 of the Act.
The District Judge affirmed the decision of respondent No. 2.
The petitioner then went up in revision to the High Court under section 17 of the Act but the High Court refused to interfere.
Before the District Judge and the High Court the petitioner bad contended that Misri Lal was a more suitable tenant than respondent No. 1.
But such contention was rejected.
Having failed in the High Court he has now challenged the Act itself by the present petition.
The, only question is whether section 3(3)(a) imposes an unreasonable 'restriction on the petitioner 's right to property.
The validity of no other part of the Act has been challenged in this petition.
The provision challenged is in these words: section 3(3)(a).
On receipt of the intimation under sub section (2), the Controller shall, taking into consideration any representation made by the landlord and after making such inquiry as he considers necessary, select the State Government or the Central Government or the Government of any other State in India, or any local authority or any educational or other public institution or any officer of any Government, authority or institution, aforesaid, or any other person (hereinafter referred to as the allotted), to be inducted as a tenant in the house and direct the landlord by a written order (hereinafter referred to as the allotment order ') to let the house to such allotted at such rent as shall be specified in the allotment order and to deliver possession of the house to the allotted on such date as shall be specified in the said order: Provided that before making an allotment order in favour of any authority or person, other than 25 the State Government, the Central Government or the Government of any State in India or a local authority, the Controller shall consider any representation of the landlord about the suitability of the proposed tenant and shall not allot the house to any person who, in the opinion of the Controller, is an unsuitable tenant: The petitioner does not contend that the provision in so far as it allows the Controller to select as a tenant a Government, local authority, public institution or any of the officers mentioned, imposes any unreasonable restriction on the right to property.
As we understood learned counsel for the petitioner, it was conceded that selection of such tenant would constitute a public purpose and the restriction thereby imposed, would be reasonable.
It would therefore appear that it is not contended that the selection of a tenant by the Controller would by itself amount to imposing an unreasonable restriction on the right to property.
We do not think that such a contention, if made, would have been well founded.
It is clear that the Act deals with houses which are vacant.
It does not deprive an owner of his right to live in his own house.
It provides for vacant houses not needed for the use of the owner being made available for the use of others who are without accommodation.
The Act was necessary because of the scarcity of housing.
It was, therefore, passed to regulate the letting of houses and to control rent and also to prevent unreasonable eviction: see the preamble to the Act.
Does the Act then by leaving it to the Controller to select any person other than a Government, local authority, public institution or an officer of any of these as the tenant, impose an unreasonable restriction on the right to property? We do not think it does so.
If the Controller could validly choose a Government, a local authority or any institution which as we have said is not disputed it can make no difference that instead of such a tenant the Controller chooses a private individual as a tenant.
The idea of this provision is that people in need should be 4 26 found accommodation.
Persons in need of accommodation are the public and therefore serving their need, would be serving a public purpose.
An individual would be a member of the public and as the accommodation available can be let out to one, a restriction caused by selection of a member of the public would be one in the interest of the general public.
Such a restriction is furthermore not unreasonable.
It is enforced only when the owner does not want the house for his own use.
It can then make no reasonable difference to the owner if a private individual is chosen as the tenant.
The Act further makes ample provision to see that the tenant chosen is suitable.
By providing the appeal to the District Judge and a right to move the High Court in revision, full safeguard has been given to secure that an unsuitable person is not foisted on an owner as his tenant.
It is true that the Act does not define who would be a suitable person but we do not think that a definition was required.
Any man of experience would know who is a suitable tenant.
Further., the owner has been given the right to have the suitability of the tenant chosen examined by the highest court.
In the explanation to section 3(3)(a) certain persons have been declared to be unsuitable tenants.
We are unable to accept the contention of the learned counsel for the petitioner that the result of this explanation is that all others are suitable.
The explanation only shows that the persons coming within the description are unsuitable.
As to whether others would be suitable or not would have to be decided on the merits of each.
Thedecision as to the suitability of a tenant is not to be controlled by the explanation at all except to the extent of making certain persons unsuitable as tenants and taking it out of the discretion of the authority concerned to go into the question of their suitability If the Act had left it to the house owner to choose a tenant, then there was every likelihood of its purpose being defeated.
It would be easy for the owner to make secret arrangements for his own gain in creating a tenancy.
The tenant would obviously be 27 in a disadvantageous situation in view of the scarcity of housing, in the matter of bargaining for the house.
He could easily be made to yield to the terms imposed by the owner who has a much superior bargaining situation.
If scope was left for this kind of thing to happen, then the entire object of the Act would have been defeated.
The Act intends to avoid this situation and hence the provision for a power in the Controller to select a tenant for the owner.
Neither do we think that any objection to this pro.
vision can be based on article 14 of the Constitution on the ground that it provided no guidance as to how a tenant is to be chosen and so enabled the authority concerned to make an arbitrary choice.
This contention is not in any event open to the petitioner, an owner, for the provision does not enable any discrimination being made between one owner and another.
If a tenant had challenged the validity of the provision relying on article 14, which is not the case here, we do not think that challenge would have been of substance.
There is, in our view, ample guidance given to the authority as to how to choose a tenant.
The tenant has first to be suitable.
All persons are entitled to apply for being selected as tenants and so all have equal chance to get the house.
The choice will have to be made from amongst the applicants and that choice will depend on an examination of the comparative merits of their claims.
Further, the owner has a right to have his views in the matter being given due consideration by the authority selecting the tenant.
Again, the ultimate decision would be a judicial decision, and if required, of the highest tribunal in the State.
We, therefore, think that the challenge to the Act is ill founded.
In the result we dismiss this petition.
The petitioner will pay the costs of the appearing respondent.
Petition dismissed.

summary:
Section 30(3)(a) of the Mysore House Rent and Accommodation Control Act, 1951, authorised the Controller to select any Government, local authority, public institution, officer of a government, local authority or public institution or any other person as a tenant of a vacant house.
Under the Act the owner was bound to let the house to the tenant so selected.
The petitioner was the owner of a house for whom the controller selected a tenant under these provisions.
He challenged the constitutionality of section 3(3)(a) in so far as the selection of "other persons" was authorised on the grounds that: (i) it put an unreasonable restriction on his fundamental right to property and (ii) it offended article 14 of the Constitution as it provided no guidance for choosing the tenant and enabled the controller to make an arbitrary choice.
Held, that section 3(3)(a) of the Act was valid and did not violate article 14 or 19(1)(f) of the Constitution.
An individual was a member of the public and the restriction caused by his selection was in the interest of the general public.
The restriction was not unreasonable.
It was enforced only when the owner did not want the house for his own use.
It could make no reasonable difference to him whether an individual was selected or government, local authority, public institution or any officer of any of these was selected.
The Act made provision for selection of a suitable tenant.
This was further secured by providing for an appeal to the District judge and thereafter a revision petition to the High Court.
There was ample guidance given in the Act to the Controller to choose a suitable tenant.
Every one had been given a right to apply for being selected as a tenant; and the owner bad been given the right to have his views also considered.
The ultimate decision was a judicial decision, and if required, of the highest tribunal in the State.