judgement:
Appeals Nos. 2014, 2565 and 2567 of 1966.
Appeals from the judgment and order dated July 6, 7, 1965 of the Bombay High Court in Special Civil Applications Nos. 635, 517, 518 and 1816 of 1964 respectively.
S.V. Gupte, Solicitor General, S.A. Shroff, P.C. Bhartari, Ravinder Narain and O.C. Mathur, for the appellant (in C.A. No. 2014 of 1966).
213 S.T. Desai, A. B. Diwan, Ravinder Narain and O.C. Mathur, for the appellant (in C.A. No. 2565 of 1966).
A. B. Diwan, Ravinder Narain and O.C. Mathur, for the appellants (in C.As.
2566 and 2567 of 1966).
A. K. Sen, N.H. Gurshoni, Prahlad H. Advani and N.N. Keswani for the respondents Nos. 1 5 (in C.A. No. 2014 of 1966) and the respondents (in C.As.
2565 2567 of 1966).
S.P. Nayar for R.H. Dhebar for respondent No. 6 (in C.A. No. 2014 of 1966.
The Judgment of the Court was delivered by Shelat, J.
These four appeals by certificate from the High Court at Bombay raise common questions of law and are therefore disposed of by a common judgment.
As the facts in all these appeals are similar it is not necessary to.
narrate the facts of each appeal.
However, for appreciating the contentions raised in these appeals we propose to set out only the relevant facts in Civil Appeal No. 2014 of 1966 as typical.
By a notification dated October 30, 1959 the Government of Bombay proposed to set up a local area comprising.
of parts of Shahad, Ambernath and other villages into a municipal district under the name of the Municipal District of Ulhasnagar, the limits of which were set out in a Schedule thereto.
After considering the objections to the said proposal the Government by another notification dated September 20, 1960 issued under secs.
4 and 7 of the Bombay District Municipal Act, III of 1901 declared the said local area as the Municipal District with effect from April 1, 1960.
By the said notification the Government also set up an interim Municipality for Ulhasnagar, consisting of 18 Councillors with effect from November 1, 1960 for one year in the first instance or till an elected body took over, whichever was earlier.
Under sec.
46 of the Act the first respondent Municipality became entitled to frame rules and bye laws in relation to taxes it proposed to impose.
Accordingly, it framed Rules and in particular the House Tax Rules, with which these appeals are concerned.
On November 8, 1963 the Municipality served a notice under section 65(1 ) of the Act informing the appellant Company that it proposed to assess its buildings at Rs. 1,97,609/52.
On November 28, 1963 the appellant Company submitted its objections to the said assessment and the said bill.
On February 22, 1964 the assessing officer requested the appellant Company to furnish to him the cost of construction of its factories and buildings and on the appellant Company failing to do so he passed his order dated March 6, 1964 assessing the appellant Company t0 house tax at Rs. 1,13,647/ for the period from April 1, 1963 to March 31, 1964.
On March 20, 1964 the Municipality served a house tax bill for the said amount. 214 Similar house 'tax bills were 'served on the other appellant companies.
Thereupon the appellant Company in Civil Appeal No. 2014 of 1966 and the appellant companies in other appeals filed writ petitions in the High Court under articles 226 and 227 of the Constitution alleging that the said notifications, the said assessment and the said bills were invalid and should be quashed.
On April 20, 1964 the High Court issued a rule nisi against the respondent municipality in all the said petitions, but summarily dismissed the said petitions so far as respondents 2, 4 and 6 were concerned and also restricted the rule only to certain grounds in the petitions.
The petitions were resisted by the municipality on several grounds, viz., that they were not maintainable, that the proper remedy for the appellants was by way of appeal in the ,court of the first class judicial magistrate, as provided by the Act, that ,the municipality was competent to levy the said tax under section 59, that the said notifications were valid, that the tax was properly levied, that the assessing officer under sec.
67A was authorised to prepare, finalise and authenticate the assessment list and that the same was properly done.
The appellant Company, ,on the other hand, urged before the High Court (1 ) that the said rules were ultra vires as they did not provide for the basis for the fixation of valuation; (2) that the valuation was arrived at a flat rate on the carpet area, a method which was not permissible in law; (3) that, in any event, the Municipality was not entitled to tax the open lands; (4) that the assessment was bad on account of discrimination between the appellant companies inter se inasmuch as whereas assessment was made in the case of the Century Mills on the basis of cost of construction the assessment in respect of other appellant companies was made at a flat rate on the carpet area occupied by them; (5) that the register prepared under sec.
65 became operative after the date of the authentication of the said list and that therefore the tax for the period prior to the said date was illegal; (6) that the tax was 'imposed by the Municipality which had no legal existence as the tenure of one year of its councillors was over by September 30, 1961 and that therefore the said rules were ineffective and lastly that the appointment of the President and the Vice President of 'the respondent Municipality was illegal.
The High Court dismissed the petitions holding (1) that the said Rules were valid; (2) that.
the principles of valuation were not modes of valuation 'and therefore it was not necessary to lay down in the said Rules methods by which the valuation should be arrived at; (3) that 'the assessment list was proper; (4) that though under the said Rules only houses and buildings and not open lands could be 'taxed it was impossible to say in a writ petition without a detailed 'inquiry as to whether the tax in fact was 'levied on open lands or as adjuncts to their factories merely 'because their valuation was separately made and that therefore such a question should 215 be more properly raised in the appeals filed by the Companies;(5) (a) that the Municipality was entitled to levy tax for the Official year 1963 64, (b)that the appointment of the said President and Vice President was valid and lastly that the respondent Municipality though an interim municipality was competent to levy the said tax.
Mr. Gupte for the Century Mills raised the Following contentions which were adopted by Counsel for the other companies: (1) that the said notifications were invalid having regard secs.
4 and 7 of the Act; (2) that the House Tax Rules were not in conformity with secs.
59 to 63; (3) that the bill served on the Mills was not in accordance with the Rules; (a) to the extent that the said bill sought to assess open lands , (b) that the flat rate method on carpet area was not permissible as it was not a recognised method of determining the annual letting value and (c) that the assessing officer had arrived at the annual letting value on the basis of construction cost without giving an opportunity, to the Company to be heard on such cost; (4) that as the authentication was made to the assessment list on March 6, 1964 it could not operate under the said Rules for assessment for the period prior thereto, viz., April 1, 1963 to 'March 31, 1964 and lastly; (5) that the assessment suffered from discrimination inasmuch as the assessing officer assessed the Century Mills on the basis of construction cost while he did so in the case of the other companies at a flat rate on the carpet area occupied by them.
As regards the first contention, the argument was that sees.
4,7 and 8 do not permit the Government to constitute a local area by including in it not villages but only portions thereof and that when it is proposed to amalgamate different units such as villages or suburbs situate adjacent to each other to form one municipal district it can do so by bringing them into such a district as whole, units and not breaking them up and having a part or parts of such unit and not the rest.
The contention was rounded on the fact that the notification dated October 30, 1959 stated that the Government proposed to constitute the local area comprising of parts of Shahad, Ambernath,.
and other villages into a permanent municipal district, the limits of which were specified in the Schedule thereto.
The said Schedule set out the boundaries of the proposed municipal district by showing Ulhas river as its boundary in the north and certain survey numbers of 216 the.
said villages as boundaries in the east, south and west.
After considering the objections as required by the Act the Government by a further notification dated September 20, 1960 declared the said local area of which the same boundaries were set.
cut in the Schedule thereto to be a permanent municipal district.
It is true that in constituting the municipal district of Ulhasnagar the Government included parts of villages enumerated in the said Schedule.
But the question is, was the Government competent to do so or not.
Section 4 provides that subject to secs.
6, 7 and 8 the Government may declare by a notification any local urea to be a municipal district and may, by a like notification, extend, contract or otherwise after the limits of any municipal district, that every such notification constituting a new municipal district or altering the limits.
of an existing municipal district shall clearly set forth the local limits of the area to be included in or excluded from such municipal district as the case may be and when so done it is the duty of the municipality already existing or of every municipality newly constituted or whose limits are altered to set up as required by the Collector boundary marks defining its limits or the altered limits of the municipal district subject to its authority.
Section 7 provides that any local area which comprises of (a) a city, town, or station or two or more neighbouring cities, towns or stations with or without any village, suburb or land adjoining thereto or (b) a village or suburb or two or more neighbouring villages or suburbs, may be declared a permanent municipal district.
It will be seen that while the Government can declare a municipal district comprising of two or more neighbouring cities, towns or stations or a village or suburb or two or more neighbouring villages or suburbs, sec. 7 expressly provides that such a local area may comprise not only of two.
neighbouring villages or suburbs but also land adjoining to a village or suburb.
Therefore while constituting a municipal district the Government, when it is expedient so to do, can join to an existing village or suburb the land adjoining thereto.
Similarly sec.
4 empowers the Government to extend, contract or otherwise alter from time to time the existing limits of a municipal district or declare any local area to be a municipal district.
There is nothing either in sec.
4 or sec.
7 to limit the power of the Government in constituting a municipal district to include therein the whole of the village or suburb as contended.
The Act, on the other hand, permits the Government to include "land adjoining there to" which shows that a part of the land adjoining to an existing village or a suburb can also be added if it is thought expedient so to do.
Likewise, while altering the limits of an existing municipal district it can exclude from or include in it part of the land where it becomes necessary or expedient to do.
That being so, it is impossible to say that by taking parts of the villages set out in the Schedules to the two notifications the Government 217 formed a municipal district contrary to the provisions of secs.
4 or 7 or that the constitution by it of the municipal district of Ulhasnagar was in any way contrary to or ultra vires the two sections.
The next contention was that the House Tax Rules framed by the municipality were not in conformity with sec.
60 inasmuch as they failed to prescribe the basis of valuation of each class of property on which it imposed the house tax, that what these Rules provided was merely to impose the house tax at the rate 15% or Rs. 12/ whichever was more on the valuation arrived at after deducting 10% from the annual letting value without specifying the method by which such annual letting value was to be arrived at.
The argument was that it was incumbent on the Municipality to lay down specifically in the Rules, the method or methods by which such annual letting value had to be calculated and not having done so the Rules were not in accord with the. express provisions of sec.
Mr. Gupte argued that the High Court was in error in holding that this was not necessary on the.
mere ground that.
sub clause (iv a) of 'sec.
60(a) was inappropriate or that the legislature had inserted that sub clause without properly understanding its implications.
Dealing with this contention the High Court observed as follows : "Inasmuch as in 1901 Act in sec.
60 there was no ' provision corresponding to the Explanation to sec.
75 of the 1925 Act, the addition of sub clause (iv a) of sec.
60 was most inappropriate and has no meaning.
In the Act of 1925 it had to be provided because both the land and the building could be taxed on the basis of the annual letting value, or, if the Municipality so chose, the land could be taxed on the basis of capital value and it is for this reason that it became necessary to provide that a rule shall be framed by the municipality laying down the basis on which valuation has to be made." "In fact.
there is nothing, either in the provisions of the Municipal Boroughs Act or in the provisions of the present Act, to suggest that what was intended by clause 3 in sec.
75 of the 1925 Act and by sub clause ( 'iv a) of cl.
(a) of sec.
60 of the= 1901 Act, was that the Municipality was required to frame rules prescribing the modes by which the annual letting value was to be determined.
" Sec ' 3 (11) defines "annual letting value" as the annual rent for which.
any building or land might reasonably be expected 'to let 10Sup.
CI/67 15 218 from year to year.
59(1) provides.
that a municipality, after observing the procedure required by sec.
60 and with the sanction of the State Government in the case of city municipalities and in other cases of the Commissioner, may impose any of the following taxes, that is to say, (i) a rate on buildings, or lands or both, situate within the municipal district; (ii) a tax on all or "any vehicles, boats" etc.
Sub clauses (iii) to (ix) describe various other imposts which the municipality can impose such as toll, octroi, cess and a general or special water rate or tax.
It will be seen that though sub sec.
1 authorises the municipality to impose "the following taxes", when it comes to imposing a tax on buildings or lands or both it describes the tax as "rate", in distinction of the other imposts described variously as toll, cess, octroi and tax.
The distinction as pointed out in Patel Goverdhandas Hargovindas vs Municipal Commissioner, Ahmedabad(1) is a deliberate one.
As laid down there the word "rate" in sec.
59(1) must be understood to mean a tax for local purposes imposed by local authorities the basis of which is the annual value of the lands or buildings arrived at in one of the three ways, viz.
,(1) actual rent fetched by such land or building where it is actually let; (2) where it is not let rent based on hypothetical tenancy particularly in the case of buildings and (3 ) where either of these two modes is not available by valuation based on capital value from which annual value has to be found by applying a suitable percentage ,which may not be the same for lands and buildings.
It is therefore legitimate to infer that the legislature intended this meaning of the word "rate" in section 59(1) by using the word "rate" as distinct from other imposts specified in that very sub section and designated as toil, cess, tax etc.
Section 60 provides that before imposing any one of these taxes the Municipality shall by a resolution select one or other of those taxes, prepare rules therefore, specify by such resolution and in such.rules.
the class or classes of persons or of property or of both which the municipality desires to make liable, the amount for which or the rate at which it is desired to make such classes liable and by sub clause (iv a) in the case of a rate on buildings or lands or both the basis, for each class, of the valuation on which the rate is to be imposed.
Section 60 therefore requires the municipality both in the said resolution and the said rules to specify (a) the class or classes of persons or property which it desires to make liable; (b) the amount or rate at which it wants such classes to be liable and (c ) in the case of buildings or lands or both the basis of valuation for each class of property, that is, buildings or lands or both.
As aforesaid, in the case of buildings or lands or both the Municipality can impose a "rate" and not a "tax".
The rate is as understood in such statutes, viz., on the basis not of capital but on the annual (1) 219 letting value as observed in Patel Govardhandas Hargovindas vs Municipal Commissioner, Ahmedabad(1) ascertained by any of the said recognised methods.
The words "the basis, for each class, of the valuation" on which such rate is to be imposed indicate that the municipality can adopt any one of those basis for different classes of property, viz., buildings or lands for arriving at the annual value for each such class.
Section 60 thus leaves it to the option of the municipality for arriving at the annual value for assessment of the rate to choose any one of the aforesaid recognised methods, the only restriction being that it must specify in the rules which basis of valuation; capital or annual letting value or any other basis, it proposes to adopt.
Section 75 of the Bombay Municipal Boroughs Act, XVIII of 1925 contains provisions similar to those in sec.
60 of the present Act except that in addition it contains an Explanation which provides that "in the case of lands the basis of valuation may be either capital or annual letting value".
But under sec.
75 the Borough Municipality also as the District Municipality trader sec.
60 of the present Act is authorised to impose a "rate" and not a "tax" on buildings or lands or both.
The effect of adding the Explanation to sec.
75 therefore is simply that whereas sec.
60 of the District Municipal Act leaves it to the discretion of the municipality to assess the annual value upon any basis of valuation of its choice, the Explanation to sec.
75 in Act XVIII of 1925 restricts the choice to either the capital or the annual letting value.
In both the cases, however, the Municipality can impose a rate and not a tax as understood in local Acts, i.e., a rate on the annual letting value of the building or the land.
That was why in Lokmanya Mills vs Barsi Borough Municipality(2) it was held that a rate may be levied by a municipality under the Bombay Municipal Boroughs Act 1925 on the valuation made on the basis of capital or on the annual letting value of a building and not on a valuation computed merely on the floor area of the structures, that such a rate was clearly not a tax based either on the capital value or on the annual letting value, for, annual letting value postulates rent which a hypothetical tenant may reasonably be expected to pay for the building if let.
Therefore, the municipality had no power under that Act to ignore the basis of valuation prescribed by the Act and to adopt a basis not sanctioned by the Act.
There is therefore nothing inappropriate in adding sub cl.
(iv a) in sec.
60 (a) by sec.
10 of Bombay Act XXXV of 1954 as observed by the High Court.
The effect of both sec.
60 in the present Act and sec.
75 in the 1925 Act is the same.
Both the classes of municipalities are authorised to impose rate on buildings or lands or both.
The rate as consistently understood is a certain percentage on the annual value, such value being arrived (1) ; (2) ; 220 at on a basis specified by it.
The only difference is that whereas under the Bombay Act of 1925 where a rate is imposed on buildings or lands, the Borough Municipality can arrive at the annual value on either of the basis mentioned in the Explanation to sec.
75, that is either the capital value or the annual letting value only, no such restriction in the absence of such an explanation as in section 75 as to the basis of valuation is placed by sec.
60 of the 1901 Act.
As required by sec.
60, the Municipality has framed Rules under sec.
46 and selected the tax, viz., the house tax.
Subclause (iv a) of sec.
60(a) no doubt requires the Municipality in the case of the rate on buildings or lands or both to specify the basis, for each class, of the valuation on which such rate is to be imposed.
That is done in the present case by the Rules.
Rule 3 of the House Tax Rules provides that in respect of every building or house the house tax shall be payable to the Secretary or any other person appointed by the Municipality for that purpose in each year by the owner or occupier thereof at the rates calculated in accordance with Schedule 1.
The Rule thus requires the assessing authority to assess the house tax calculated in accordance with Schedule 1.
provides that the tax is to be assessed on the net annual letting value, that is, after deducting from the gross annual letting value 10% allowance in lieu of the cost of repairs or on any other account whatsoever.
It also.
provides that the house tax is to be 15% of such annual letting value or Rs. 12/ per year whichever is more.
Rule 3 and Sch.
I thus specify as required by sec.
60(a) the rate, the class of property to be made liable and in the case of houses or buildings the basis of valuation, viz., the annual letting value.
The effect of Rule 3 and Sch.
1 is that the assessing authority ' can assess the rate on buildings only on the annual letting value and no other value such as the capital value.
The Municipality therefore has complied with the procedure required by the Act before a tax is imposed by selecting the tax, by laying down the class of property which it desires to make liable, the amount of the rate at which such property would be liable and lastly the basis of valuation for purposes of the rate on buildings and houses.
We are unable therefore to accept the contention that the basis of valuation is the method of valuation of annual value or with the contention of Mr. Desai for the companies in other appeals that the Rules not only have to specify the classification of ' properties which are sought to be taxed but also the method of valuation for each class, viz., the rental basis, cost or capital value or the profits basis.
The fallacy in the contention lies in mixing up the method with the basis of valuation.
The basis as provided in the Rules is the annual value which can be ascertained or arrived at by any one or more of the recognised methods.
221 Though we are not able to accede to these contentions we think the appellants are on a surer ground in their third contention, viz. that the said house tax bills were not in accordance with the Rules to the extent that they sought to assess the open lands.
In the case of the Century Mills the assessment first made as aforesaid was for Rs. 1,97,609/52 nP assessed at flat rate on the carpet area occupied by the Mills.
The same was also the basis in respect of other appellant companies in the rest of the appeals.
When the assessment was objected to by the Century Mi11s the assessing officer changed the method of assessment from the flat rate on the carpet area to the construction cost taken from the Company 's balance sheet for ' 1962.
Taking the figure of Rs. 1,46,05,920 as the cost of construction of the buildings he assessed at 5% on the said cost after deducting 10% allowance in lieu of cost of repairs.
He fixed the rate on buildings at Rs. 98,590 and Rs. 15,057 on the open land at the rate of Rs. 2 per 1000 sq.
The total assessment arrived at by him thus came to Rs. 1,13,647.
In the case of the other companies he retained the method of valuation adopted by him, i.e., a flat rate on the carpet area but reduced the rate to a certain extent.
The objection raised by the appellant companies is two fold; (i) that the assessing officer can assess the buildings on their annual letting value and not at a flat rate on the carpet area and (ii) that in assessing the rate he cannot include the rate on open lands.
As regards the first part of the objection, Sch. 1 to the said Rules expressly provides that the house tax is to be assessed on the basis of the annual letting value.
The annual letting value can be arrived at by any one of the recognised methods.
Neither the Rules no.r Sch. 1 constrict the Municipality.
to adopt any one particular method of arriving at the annual letting value.
It may well be that a flat rate on the carpet area may correspond to the annual letting value of a building in which case it would be the annual letting value as provided by Sch. 1 which would be the basis of assessment.
If it is not, the owner or occupier of the building can legitimately challenge the assessment on the ground that such assessment on the basis of a flat rate on the carpet area does not reflect the annual value so calculated.
The question is at best one of calculation, viz., whether considering other similar buildings in the locality, their hypothetical rents and other data calculation of the house tax on the basis of carpet area at a flat rate, corresponds to their annual letting value.
Since such a question would be one of fact and can properly be decided in the appeals before the Judicial Magistrate we do not propose to go into this question.
It will be for the appellant companies to establish in those appeals that such a valuation at a flat rate on the carpet area is not equivalent to.
the annual letting value of their factories and other buildings.
10 Sup CI 67,16 222 The second part of the objection unlike the first part however touches upon the validity of the assessment.
The question is whether the bill includes assessment on open lands as such and if so whether the Rules permit their assessment.
The bill served on the Century Mills clearly shows that Rs. 15,057 out of the total assessment of Rs. 1,13,647 are assessed on the open lands calculated at the flat rate of Rs. 2 per 1000 sq.
The bills similarly served on the other appellants are all calculated at varying flat rates on different areas of their properties.
But the basis of the assessment though varying rates have been applied the carpet area and the carpet area does include open lands in the case of each of the appellant companies.
Is the assessing officer authorised by the Rules to include the open lands while assessing the rates ? Under sec.
59 (1) (b) (i) the municipality, subject to observing the procedure laid down in sec.
60, can impose a rate on buildings or lands or both.
As already observed the municipality, however, has by its resolution to select the tax, and in the Rules prescribing the tax so selected specify the class or classes of property which it desires to make liable as also the rate at which it wishes to subject such class or classes of property.
Sub clause (iv a) of sec.
60(a) requires that in the case of buildings or lands or both the basis of valuation for each such class has also to be specified by the said resolution and in the said Rules.
We must therefore turn to the Rules to see if they specify therein the open 'lands, the rate at which they are to be subjected to the tax and the basis of valuation of such open lands.
Rule 1 (ii) of the House Tax Rules provides that these Rules shall extend to "all buildings or houses or shops or huts (jhupras) whatsoever form any property" within the Ulhasnagar District Municipal limits except the tenements lying vacant etc.
Rule 3 (7 ) defines a building or a house to which these Rules apply by virtue of Rule 1 (iii).
A building or a house according to the definition given by Rule 3(7) means "any building, house, shop, hut (jhupras) and with a roof thereof constructed for human habitation or otherwise".
Section 3 (7 ) of the Act contains no doubt a wider definition of the word "building" and includes within that word any hut, shed or other enclosure whether used as human dwelling or otherwise and shall include also the Walls (including compound wall and fencing) 'verandahs, fixed platforms, plinths, door steps and the like.
But that definition cannot be available to the respondent municipality as Rule 3(9) provides in express terms that only the words and expressions other than those defined in Rule 3 shall be deemed to be used in the Rules in the same sense in which they are used in the Act.
Rule 3(7) therefore expressly excludes the definition of the building given in the Act by providing a special definition of a building or a house in Rule 223 3(7).
It is clear therefore that the word "building" or "house" must bear the meaning given to it by this Rule and not the meaning given to it by the Act.
It follows that as by virtue of Rule 1 (ii) these rules extend to buildings or houses or shops or huts (jhupras) only and a building or a house under Rule 3(7) means a building, house, shop, hut (jhupras) etc., with a roof thereon constructed for human habitation or otherwise, open lands obviously are not only not included in the term "building" or "house" but the Rules do not extend to such open lands.
In his assessment order dated March 6, 1964 passed against the Century Mills the assessing officer justified the inclusion of the open lands in the assessment by observing as follows: "The Superintendent (of the appellant Company) states that the Municipality has decided to levy tax on the buildings or shops only and that there is no resolution, rule or bye law for the levy of house tax on land.
Apparently the Superintendent 's contention seems to be correct.
But on deeper consideration it will be seen that the words "whatsoever form the property" have a significance and the same can include lands also.
According to the District Municipal Act of 1901, building includes, "any hut, shed or other enclosure whether used as human dwelling or otherwise" and also "walls, verandahs, fixed platforms, plinths, door steps and the like".
Now the Century Rayon Factory is bounded 'by a compound wall in which all the open space lies.
Whole enclosure can therefore be held as enclosure and is therefore liable for rating.
On the whole, the Act and the Rules have empowered the Municipality for the assessment on the open space." In our view, the assessing officer was clearly wrong, for, what he did was to apply the definition of a building as given in sec.
3 of the Act instead of the definition in R. 3(7).
That he was not fight in doing as Rule 3 (9) excludes the application of that definition.
He was bound by the definition of building in Rule 3(7) and in view of Rule 1 (ii) he could base his assessment only on the annual letting value of a building as provided by Sch. 1 and not the open lands.
He was also not entitled to rely upon the words "whatsoever form any property" in Rule 1 (ii) as those words go with the previous words "buildings or houses or shops or huts" and do not include open lands to means buildings or houses.
The reasoning of the High Court regarding the objection to the conclusion of the open lands in the assessment also does not appear to be correct.
Though the High Court on a consideration of the 'Rules held that the Municipality was not authorised to levy the 224 rate o.n open lands.
it observed that if an open ' land formed an adjunct of the factory building it would constitute an amenity, that in that event a hypothetical tenant would pay a higher rent taking such an amenity into consideration, that the assessing authority would be entitled in such a case to take into account such an additional amenity, that there could be no objection, if he did so and that to decide whether the assessing officer had valued the open land as an adjunct to the factory building or separately as open land evidence would have to be led and scrutinised and therefore it would not be possible to decide such a question in a writ petition.
With respect, it is not possible to agree with the High Court on this part of ifs judgment, firstly, because the open lands have been separately valued and secondly because the assessing officer in his said order has in clear terms repelled the appellants ' objection to his taxing the open lands by relying on the definition of building in sec.
3 of the Act as including open lands when bounded by compound walls and not on the ground that they formed an adjunct of the factory buildings and were an amenity or additional advantage which a hypothetical tenant would take into account when offering rent.
In our view the assessing officer was not entitled to include the open lands while rating the factory buildings of the appellant companies as such inclusion was ultra vires the Rules and therefore invalid.
So far as the rest of the contentions are concerned they can be dealt with, in our view, more properly by the appellate tribunal before whom the appeals by the appellant companies are at present pending rather than in these appeals.
We therefore do not propose to go into those questions, especially as it is agreed by Counsel for the Municipality (1 ) that the Municipality will not take any objection to these questions being canvassed in those appeals on the ground that any one or more of them were not taken by the 'appellants in their objections to the assessment list and (2) that it will not also take any objection to the appeal by the Century Mills having been filed beyond the time prescribed therefore.
Before the High Court the Municipality had in fact undertaken that it will not insist that the appellants should confine their objections in their appeals only to the grounds urged in their objections to the assessment list under sec.
65 ' of the Act.
The appellant Companies would therefore be entitled to urge that the valuation made by the assessing officer is erroneous or bad on any ground available to them under the Act.
The appeals are pertly allowed and the judgment and order passed by the High Court are set aside to the extent that the assessment on open lands in each of these appeals is declared ultra vires the Rules and therefore invalid.
We also set aside the order of costs passed by the High Court against the Century Mills.
225 far as these appeals are concerned the parties will bear their own costs.
Before parting with these appeals, we may mention that the appellant companies have filed a statement regarding the various amounts deposited by them either in the High Court or in this Court.
For 1963 64, the Century Mills.
deposited in the High Court Rs. 1,13,647, and the Municipality has withdrawn that amount.
Out of this amount Rs. 15,057 was, as held by us, wrongly included in the house tax bill and therefore that sum should be refunded to the Mills within one month from today.
The balance should be treated as deposit under sec.
86 of the Act in the appeal filed by the Company.
For 1964 65 also the Century Mills deposited Rs. 1,13,647 in this Court.
Out of this amount the Company will be at liberty to withdraw Rs. 15,057 and the balance may be withdrawn by the Municipality but it will be treated as deposit in the Company 's appeal for the year the Company has deposited Rs. 1,13,647 against the total assessment of Rs. 1,27,147, the difference being the tax on open lands.
The Municipality will be at liberty to withdraw the amount but it will be treated as deposit in the Company 's appeal pending before the said Magistrate.
For 1967 68 the Company has deposited Rs. 2,78,829/78 in this Court.
The Municipality will be at liberty to withdraw the amount but the said amount shall, be treated as deposit in the appeal pending before the said Magistrate.
The Indian Dye Stuff Industries Ltd., has deposited Rs. 49,282.92/ for the year 1963 64.
of this amount Rs. 14,722/92 nP is referable to assessment on open lands.
The Municipality will refund the sum of Rs. 14,722/92 nP to the Company within one month from today and treat the balance as deposit in the appeal filed by the Company.
For 1967 68 the Company has deposited Rs. 2,96,724.33 in this Court.
The Municipality is at liberty to withdraw this amount but shall treat the amount as deposit in the appeal filed by the Company as required by the Maharashtra Municipalities Act, 1965.
Amar Dye Chemical Co., has deposited with the Municipality Rs. 42,819.12 nP for 1963 64.
The Municipality will refund to the Company such amount out of this sum as is referable to tax on open lands within one month from today and retain the rest but shall treat such balance as deposit in the appeal filed by the Company before the Magistrate.
For the year 1967 68 the Company has deposited Rs. 1,07,553.92 nP. in this Court.
The Municipality will be at liberty to.
withdraw this amount but will treat the amount as deposit in the Company 's appeal pending before the Magistrate.
226 Power Cable (P) Ltd., has deposited Rs. 18,084.40 nP with the Municipality. 'The Municipality will refund to the Company such amount, if any, out of this amount as is referable to the tax on open lands and treat the balance as deposit in the appeal flied by the Company before the Magistrate.

summary:
By notifications issued under the Bombay District Municipal Act 1901, the State of Bombay set up.
the respondent Municipality comprising portions of certain villages.
The Municipality framed House Tax Rules under section 46 of the Act and served notice to the appellant company that it proposed to assess its buildings at a certain amount.
On, the appellants ' objections, it was asked to furnish the cost.
of constructions, which it failed to furnish.
The appellant was served a house tax bill.
Thereupon the.
appellant unsuccessfully filed petitions in the High Court under articles 226 and 227 of the Constitution for quashing the notifications, assessment.
and bills.
In appeal to this Court, the appellant, inter alia, contended: (i) that ' the notifications were invalid as sections 4 and 7 of the Act do not permit the Government to constitute a local area by including in it not villages but only portions thereof; (ii) that the House Tax Rules were not in conformity with sections 59 to 63 of the Act.
as they failed to prescribe the basis of valuation of each class of property on which it imposed the house tax; what these Rules provided was merely to impose the house tax at the rate of 15% or Rs. 12/ whichever was more on the valuation arrived at after deducting 10% from the annual letting value without specifying the method by which such annual letting value was to be arrived at: and (iii) that the bill served on the appellant was not in conformity with the Rules, as (a) the buildings could be assessed on their annual letting value and not at a flat rate on the carpet area.
and (b) in assessing the rate it could not include the rate on open lands.
Held: (i) The notifications were not in any way contrary to or ultra vires sections 4 or 7 of the Act.
There is nothing either in sections 4 or 7 to limit the power of the Government in constituting a municipal district to include therein the whole of the village or suburb.
The Act, on the other hand.
permits the Government to include "land adjoining thereto" which shows that a part of land adjoining an existing village or a suburb can, also be added if it is thought expedient so to do.
Likewise, while altering the limits of an existing municipal district it can exclude from or include in it part of the land where it becomes necessary or expedient so to do.
[216G, H] (ii) The word "rate" in section 59(1) means a tax for local purposes imposed by local authorities, the basis of which is the annual value of the lands or buildings arrived at in one of the three ways, viz. (1) the actual rent fetched by such land or building where it is actually let; (2) where it is not let rent based on hypothetical tenancy particularly in the case of buildings and (3) where either of these two modes is not available, by valuation based on capital value from which annual value has to be found 212 by applying a suitable percentage which may not be the same for lands and buildings.
It is legitimate to.
infer that the legislature intended this meaning of the word "rate" in section 59(1) by using the word "rate" as distinct from other imposts specified in that very sub section and designated as toll, cess, tax etc.
[218 C E] In case of buildings or lands or both the municipality cloud impose a "rate" and not a "tax" The rate is as understood in such statutes.
viz., on the basis not of capital but on the annual letting value ascertained by any of the said recognised methods.
Section 60 leaves it to the option of the municipality for arriving at the annual value for assessment of the rate to choose any one of the aforesaid recognised methods, the only restriction being that it must specify in the rules which basis of valuation.
capital or annual letting value or any other basis, it proposes to adopt.[218H; 219B] The Municipality had complied with the procedure required by the Act before a tax was imposed by selecting the tax, by laying down the class of property which it desired to make liable, the amount of the rate at which such property would be liable and lastly the basis of valuation for purposes of the rate on buildings and houses.
[220F G] (iii) (a) Schedule 1 to the Rules expressly provides that the house tax is to be assessed on the basis of the annual letting value.
The annual letting value can be arrived at by any one of the recognised methods.
Neither the Rules nor Sch.
1 constrict the Municipality to adopt any one particular method of arriving at the annual letting value.
It may well be that a flat rate on the carpet area may correspond to the annual letting value of a building in which case it would be the annual letting value as provided by Sch. 1 which would be the basis of assessment.
if it is not, the owner or occupier of the building can legitimately challenge the assessment on the ground that such assessment on the basis of a 11at rate on the carpet area does not reflect the annual value so calculated.
[221E G] Patel Goverdhandas Hargovindas vs Municipal Commissioner, Ahmedabad, and Lokmanya Mills vs Barsi Borough Municipality.v, ; referred to.
(b) The open lands could not be included while rating the factory buildings of the appellant companies as such inclusion was ultra vires the Rules and therefore invalid.
Rule 3(7) expressly excludes the definition of a building or a house in sec.
The word "building" or "house" must therefore bear the meaning given to it by the Rule and not the meaning given to it by the Act.
By virtue of r. 1 (ii) these rules extend to buildings or houses or shops or huts (jhupras) only and a building or a house under r. 3(7) means a building, house, shop, hut (jhupras) etc.
with a roof thereon constructed for human habitation or otherwise.
Open lands obviously are not only not included in the term "building" or "house" but the Rules do not extend to such open lands.
[222H 223B]


judgement:
Appeals Nos. 114 and 115 of 1965.
Appeals from the judgment and decree dated May 7, 1958 of the Allahabad High Court in Special Appeals Nos. 46 and 48 of 1952.
N.D. Karkhanis and J.P. Aggarwal, for the appellants (in both the appealS).
Shanti Bhushan and B.P. Maheshwari, for the respondents (in both the appeals).
The Judgment of the Court was delivered by Shah, J.
The Grain Chamber Ltd,, Muzaffarnagar, a Company registered under the Indian Companies Act, 1913 with a share capital of Rs. 1,00,000 divided into 1,000 shares of Rs. 100 each, was formed for the purpose of carrying on business of an exchange in grains, cotton, sugar, gut, pulses and other commodities.
By article 5 of its Articles of Association nO person or firm could remain a member of the Company who was found not to be doing any transaction or business through the Company for a continuous period of six months.
By article 46 it was provided that a member of the Company who owned 10 shares of the Company in his own name or in the name of the firm of which he was a proprietor or partner may be elected a director of the Company.
By article 51, until otherwise fixed, the quorum in the meetings of directors was to be four.
In the years 1949 and 1950 the Company was carrying on business principally in "futures" in gut.
The method of carrying on business in "futures" was explained as follows by the parties to the dispute in an agreed statement submitted before the Company Judge.
The transactions for sale and purchase of gut have to be in the units called 'Bijaks ' of 100 maunds.
The buyer and the seller who are members of the Company negotiate transactions of sale and purchase in gut through their respective brokers and then approach the Company.
The Company enters into.
two independent contracts whereby the Company is the purchaser from one and is the seller to the other at rates agreed upon between the seller and the buyer.
The seller has therefore to sell to the Company a specified quantity and the buyer agrees to purchase the same quantity from the Company under an independent contract.
For the due performance of their contracts, the buyer and the seller deposit with the Company rupee one per maund as Sai and annas eight per maund as Chook 'margin '.
If there is a rise in the price, the Company calls upon the seller to pay the difference, and if he fails to deposit the difference demanded.
the Company enters into a reverse transaction with a purchaser 255 at the current rate of the day and squares up the transaction of sale.
purchaser is also entitled to withdraw from the Company the profits he has made consequent On the rise in price.
If the seller is adjudged an insolvent or for any other reason is incapable of performing his obligations, the buyer remains unaffected, Even if the Company is unable to recover anything from the seller, it has still to pay to the buyer the profits earned by him.
Similarly if there is a fall in the price, the buyer has to make good the difference.
If on the day fixed for delivery of goods the parties intend to settle the transaction by paying and receiving the difference, the Company fixes the rate at which the transaction is to be settled and the transaction is settled at the rate fixed by the Company.
Both the buyer and the seller send bills known as "Dailies" setting out the amounts paid and received according to the rates fixed.
On March 14, 1949, the Board of Directors of the Company passed a resolution sanctioning transaction of business in "futures" in gur for Phagun Sudi 15 Samvat 2006 (March 4, 1950) settlement.
On August 9, 1949, Seth Mohan Lal and Company purchased one share of the Company and qualified for membership.
They commenced dealing with the Company in "futures" in gur.
By December 1949 Seth Mohan Lal and Company who will hereinafter be called 'the appellants ' had entered into transactions with the Company which aggregated to 1136 Bijaks of sale of gur for the Paush Sudi 15, 2006 delivery.
The appellants also claimed that they had entered into sale transactions in 2137 Bijaks in the benami names of five other members.
In January 1950 there were large fluctuations in the prices of gur ', and in order to stabilise the prices, the directors of the Company passed a resolution in a meeting held on January 7, 1950, declaring that the Company will not accept any settlement of transaction in excess of Rs. 17/8/ per maund.
The sellers were required to deposit margin money between the prices prevailing on that date and the maximum rate fixed by the Company.
The appellants deposited in respect of their transactions Rs. 5,26,996/ '14/ as margin money.
They claimed also to have deposited amounts totaling Rs. 7 lakhs odd in respect of their benami transactions.
In exercise of the powers conferred by section 3 of the Essential Supplies (Temporary Powers) Act 24 of 1946, the Government of India issued a notification on February 15, 1950, amending the sugar (Futures & Options) Prohibition Order, 1949, and made it applicable to "futures" and options in gur.
By that Order entry into transactions in "futures" after the appointed day was prohibited.
On the same day the Board of Directors of the Company held a meeting and resolved that the rates of gur which prevailed at the close of the market on February 14, 1950, viz., 256 Rs. 17/6/ per maund be fixed for settlement of the contracts of Phagun delivery.
It was recited in the resolution that five persons including Lala Mohan Lal, partner of the appellants, were present at the meeting on special invitation.
In cl. 2 of the resolution it was recited that as the Government had banned all forward contracts in gur it was resolved to take the prevailing market rate on the closing day of.
February 14, 1950, which was.
Rs. 17/6/per maund for Phagun delivery and to have all Outstanding transactions of Phagun delivery settled at that rate '.
Entries were posted in the books of account of the Company on the footing that a11 outstanding transactions in futures in gur were settled on February 15, 1950.
In the account of Mohan Lal & Company an amount of Rs 5,26,996/14/ stood to the credit of the appellants.
Against that amount Rs. 5,15,769/.5/were debited as "loss adjusted", and on February 15, 1950, an amount of Rs. 11,227/9/ stood to their credit.
Similar entries were posted in the.
accounts of other persons who had outstanding transactions in gur.
On February 22, 1950, the appellants and their partner Mohan Lal filed a petition in the High Court of Judicature at Allahabad for an order winding up the Company.
Diverse grounds were set up in the petition.
The principal grounds were that the Company was unable to pay its debts, that it was just and equitable to wind up the Company, because the directors and the officers of the Company were guilty of fraudulent acts resulting in misappropriation of large 'funds, and that the substratum of the Company had disappeared, the business of the Company having been completely destroyed.
On February 23, 1951, another petition was filed by the appellants and their partner Mohan Lal for an order winding up the Company.
It purported to raise certain grounds which it was, submitted had not been raised in the first petition and which had arisen since the first petition was instituted.
In the second petition it was averted that by virtue of the notification issued by the Government, the forward contracts in gur had become void and the appellants were entitled to be repaid all the amounts deposited by them, that the outstanding ' contracts.
stood.
rescinded, and the Company having paid out large sums to its directors and other shareholders was not in a position to meet its liability to the appellants.
Brij Mohan Lal, J., held that the Company was not unable to pay its debts and that it was not just and equitable to wind ' up the Company on the grounds set out in the petition.
Orders passed by Brij Mohan.
Lal, J. ', dismissing. the petitions were confirmed by the ' High ' Court 'of Allahabad in its appellate jurisdic 257 tion.
With certificates granted by the High Court, these two appeals have been preferred by the appellant 's and their partner Mohan Lal.
The High Court held that by the notification dated February 15, 1950, the outstanding transactions of "futures" in gur did not become void; that in.
fixing the rate of settlement by resolution dated February 15, 1950, and settling the transactions with the other contracting parties at that rate the directors acted prudently and in the interests of the Company and of the shareholders, and in making payments to the parties on the basis of a settlement at that rate the directors did not commit any fraudulent act or misapply the funds.of the Company; that the case of the appellants that apart from the transactions entered into by them in their firm name, they had entered into other transactions benami in the names of other firms, and that the Company had mala fide settled those transactions with those other firms was not proved; and that the Board of Directors was and remained properly constituted at all material times and no provision of the Companies Act was violated by the directors trading with the Company.
Counsel for the appellants contended (a) that by virtue of the Notification issued by the Central Government on February 15, 1950, all outstanding "futures" in gur became void; (b) that the resolution dated March 14, 1949, was void because there was no quorum at the meeting of the Company; (c ) that their solution dated February 15, 1950 by the Board of Directors was not passed in the interests of the Company but to serve private interests of the directors; (d) that the Company having.
repudiated the outstanding contracts, it was bound to refund the deposits received from the members; and (e) that in any event, the substratum of the Company ceased to exist, and the Company could not after the Government Notification carry on business in gur.
In support of his contention that by the order isued by the Central Government on, February 15,1950, the outstanding transactions in futures in gut became void, counsel for the appellants relied ' upon a press note issued by the Government of India relating to the amendments made in the Sugar (Futures and Options) Prohibition Order, 1949.
In the press note apparently it was stated that all transactions in ,futures" in sugar, gur, gur shakkar, and rab made before the commencement of the order or remaining to be fulfilled ' shall be void and not enforceable by law.
The interpretation of the order depends not upon how the draftsman of the press note understood the notification, but upon the words used therein.
The relevant clauses of the Order, after the amendment, ,read as follows: " 2 ' (d) Futures in sugar and gur mean any agreement relating to the purchase or sale of sugar or gur on 258 a forward basis and providing for delivery at some future date and payment of margin on such date or dates, as may be expressly or impliedly agreed upon by the parties.
2(e) 'margin ' means the difference between the price specified in an agreement relating to the purchase of or sale of sugar and gur and the prevailing market price for the same quality and quantity of sugar or gut on a particular day.
2(f) 'Option in sugar or gur ' means an agreement for the purchase or sale of a right to buy or a right to sell or a right to buy and sell, any sugar or gut in future and includes a teji mandi and teji mandi in any sugar.
On or after the appointed day no person shall (a) save with the permission of the Central Government in this behalf or of an officer authorised by the Central Government in this behalf, enter into any futures in sugar or gur, or pay or receive or agree to pay or receive any margin in connection with any such futures.
(b) enter into any option in sugar or gur.
Any option in sugar or gur entered into before, the appointed day and remaining to be performed.
whether wholly or in part shall be void within the meaning of the,Indian Contract Act, 1872, and shall not be enforceable by law.
" By cl. 3(a) all persons are prohibited, save with the permission of the Central Government in that behalf from entering into "futures" in sugar or gut: the clause also prohibits receipt or payment of, or agreement to pay or receive any margin in connection with any such futures.
The clause in terms operates prospectively.
Clause 3(b) prohibits options in gut and sugar, and el. 4 expressly invalidates options in sugar and gut entered into before the appointed day and remaining to be performed whether wholly or in part.
The contrast between the provisions relating to "futures" and "options" is striking.
While imposing a prohibition on options, the Central Government has also expressly provided that all outstanding options shall be void.
No such provision is made in respect of outstanding "futures".
Counsel for the appellants however commended that when the Central Government imposed a prohibition against payment or receipt or agreement to pay or receive, any margin in connection with the outstanding "futures," the "futures" were also prohibited.
But the prohibition imposed against payment or receipt, or ' agreement to 259 or receive margin is made in connection with such futures,pay and the expression such futures means "futures" of the like or similar kind previously mentioned,i e transactions in "futures" to be entered into on or after February 15, 1950.
If it was intended by the Central Government to declare void outstanding transactions in "futures", the Central Government would.
specifically have imposed a prohibition against payment or receipt of,or agreement to pay or receive, margin in connection with.
all"futures".
A transaction in "future" in gur may be settled by payment of margin or by actual delivery, and the Order does not prohibit the settlement of the transaction by specific delivery of goods.
If the plea for the appellants be accepted, the Central Government may be attributed a somewhat singular intention of permitting outstanding futures in gur to be carried out by giving and taking actual delivery of goods contracted for, but not by payment and receipt of margin.if it was intended to invalidate transactions in futures which were outstanding on February 15,1950, an express provision to that effect could have been made.
No such provision has been made, and there are clear indications in the terms of the notification which show a contrary intention.
Prohibition against payment or receipt of margin money under, transactions entered into after February 15,1950 is not redundant: it was enacted presumably with a view to maintain control over the transactions made with the sanction of the Central Government.
But, said counsel for the appellants, the resolution dated March 14, 1949, which permitted the Company to enter into transactions in "futures" in gut was invalid, because the directors who took part in the meeting were disqualified under sections 861(1) (h) and 9lB of the Indian Companies Act, 1913, and the Company could not retain money paid in pursuance of unauthorised transactions, It was resolved unanimously in the meeting of the Board of Directors convened on March 14, 1949, that forward transactions in gut for Phagun Sudi 15, Samvat 2006, i.e., March 4, 1950 "may be started according to the rules" laid down therein.
It was said that the resolution which authorised transactions of "futures" in gur in the manner in which the Company was carrying on its business entailed disqualification of the Directors and as the Directors were disqualified there was no quorum and no proper resolution and therefore all transactions entered into and any payment made pursuant to that resolution were invalid and the Company was bound to refund the amounts paid by the appellants from time to time.
The Company had 11 directors: out of these 9 directors were carrying on business with the Company.
It appears that at the meeting dated March 14, 1949 all the directors present were those who carried on business in "futures" in gur with the Company, and did after March 14, 1949, 260 carry on that business.
Under the Indian Companies Act, 1913, as originally enacted, there was no prohibition against a director entering into transactions with the Company, and on that footing the scheme of the Company 's business was devised.
Under the Articles. of Association no person could remain a member of the Company who was found not to ' be doing any transaction or business :through the Company continuously for six months, and a person could be elected a director if he held 10 shares in his own name or in the name of the firm of which he was a proprietor or a partner.
A director of the Company had therefore to hold ten shares and had to carry on business with the Company.
If he ceased to do business for a period of six months he ceased to be a member of the Company, and on that account ceased also to be a director of the Company.
The Articles of Association prescribed diverse contingencies in which a director was to vacate his office, but carrying on business with the Company was not made a ground of disqualification The Company had started business in the year 1931.
In 1936, several important amendments were made in the Indian Companies Act 1913.
By section 86F which was incorporated by Act 22 of 1936, it was provided: "Except with the consent of the directors, a director of the company, or the firm of which.
he is a partner or any partner of such firm, or the private company of which he is a member or director, shall not enter into any contracts for the sale, purchase or supply of goods and 'materials with the company, Section 861 enumerated the Conditions or situations in which the office of ' director was vacated.
Insofar as the section is material it provides: "(1) The office of a director 'shall be vacated if__ (h) he acts in contravention of section 86F.
Section 91B which was inserted by Act 11 of 1914 as modified by Act 22 of 1936 by the first sub section provided: "No director shall, as a director, vote on any contract or arrangement in which he is either directly or 'indirectly concerned or interested nor shall his presence 'count for the purpose of forming a quorum at the time of any such vote;and if he does so vote his vote shall not be counted :" 261 After the amendment of the Indian Companies Act by Act 22 of 936, the Rules of the Company were not modified and the Company apparently carried on business in the same manner in which it was originally carrying on its business.
It appears that the directors were oblivious of the requirements of section 86F and of the provisions of section 861 and section 91B, and the modus operandi of the business continued to remain the same as it was previously.
On the terms of section 86F(1) all directors of the Company were prohibited, unless the directors consented thereto, from entering into contracts for the sale, purchase or supply of goods and materials with the Company.
On behalf of the Company it was urged that by the resolution dated March 14, 1949, the directors resolved generally to sanction all transactions of the directors for the sale and purchase in commodities in which the Company carried on business, and on that account notwithstanding the prohibition contained in section 86F, the directors did not vacate their office.
Counsel for the appellants urged that the consent of the directors contemPlated by section 86F is consent in respect of each specific contract to be entered into and no general consent can be given by the directors authorising a director or directors of the Company to sell, purchase or supply goods and materials to the Company.
Such a general resolution without considering the merits of each individual contract would, it was urged, amount to repealing the provisions of section 86F.
Strong reliance was placed upon the judgment of the Bombay High Court in Walchandnagar Industries Ltd. and others vs Ratanchand Khimchand Motishaw(1).
It is not necessary for the purpose of this case to decide whether in any given set of circumstances a general consent may be given by the Board of Directors, to a director or directors to enter into contracts for sale or purchase or supply of goods and materials with the Company so as to avoid the prohibition contained in section 86F of the Indian Companies Act, for, in our view, the resolution dated March 14, 1949, cannot be challenged in view of Regulation 94 of Table A which, for reasons to be presently mentioned must be deemed to be incorporated in the Articles of Association of the Company.
Regulation 94 of Table A in the First Schedule is not one of the obligatory regulations which is to be deemed by section 17(2) of the Indian Companies Act 1913 to be incorporated in the Articles of Association.
Section 18 provides: "In the case of a company limited by shares and registered after the commencement of this Act, if articles are not registered, or, if articles are registered, insofar as the articles do not exclude or modify the regulations (1) I.I.R. , 262 in Table A in the First Schedule those regulations shall, so far as applicable, be the regulations of the company in the same manner and to the same extent as if they were contained in duly registered articles.
" The respondent Company is limited by shares and was registered after the commencement of the Indian Companies Act, 1913: the Company has adopted special Articles of Association, but there is no Article which excludes or modifies Regulation 94 of Table A, and by the operation of section 18 of the Act that Regulation must be deemed to apply in the same manner and to the same extent as if it was contained in the registered articles of the Company.
We are unable to hold that because the Company has not incorporated regulation 94 of Table A in its Articles of Association, an intention to exclude the applicability of the regulation to the Company may be inferred.
Regulation 94 of Table A is not expressly excluded by the Articles of the Company that is common ground.
It is not excluded by implication for it is not inconsistent with any other express provision in the Memorandum of the Articles of Association.
It, therefore.
follows that Regulation 94 must be deemed to be incorporated in the Articles of Association of the Company.
That Regulation provided: "All acts done by any meeting of the directors or of a committee of directors, or by any person acting as a director shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such directors or persons acting as aforesaid.
or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director.
" There is no evidence that the directors were aware of the disqualification which would be incurred by entering into contracts of sale or purchase or supply of goods with the Company without the express sanction of the directors.
By the subsequent discovery that they had incurred disqualification, because they had entered into contracts with the Company for sale or purchase or supply of goods,the resolution passed by them is not rendered invalid.
It is in the view we have taken, unnecessary to decide whether section 86 of the Indian Companies Act 1913 also grants protection to acts done by directors who are subsequently discovered to be disqualified.
Section 91B imposes a prohibition against a director voting on any contract or arrangement in which he is either directly or indirectly concerned or interested.
But the directors of the Company are not shown to have voted on any existing contract or 263 arrangement.
At the meeting dated March 14, 1949, they resolved that the Company shall commence business in "futures" in gur according to the rules set forth in the resolution.
Thereby the directors were not voting on a contract or arrangement in which they were directly or indirectly concerned or interested.
It must then be considered whether the resolution of February 15, 1950, was passed by the Board of Directors with a view dishonestly to make profit for themselves and for others who were purchasers, and to cause loss to the appellants.
In the light of the situation prevailing on February 15, 1950, in our judgment, the Board of Directors acted, in passing the resolution, as prudent businessmen for the protection of the interests of, the Company and the members.
Since the promulgation of the sugar and Gur (Futures and Options) Prohibition Order, 1950, if any member of the Company failed to pay the margin, the Company could not enter into a reverse transaction.
That was prohibited.
Whereas the outstanding transactions were valid, a very important sanction which the Company could impose against the member who failed to pay the margin became ineffective.
It was therefore necessary in the interest of the Company to devise an effective scheme for settlement of those transactions.
Again in view of the imposition of severe restrictions by the Government on transport of gut by rail or by mechanised transport, it was well nigh impossible for the members to give or take delivery of gut.
It was therefore resolved that all outstanding contracts shall be settled at the rate prevailing on the evening of February 14, 1950.
It may be recalled that on January 7, 1950, the Board of Directors had resolved, because the prices of gur were spiraling that all outstanding transactions in gut will be settled at the rate of Rs. 17/8/ ' per maund whatever may be the price ruling at the date of settlement.
The appellants had sold 1,123 Bijaks of gut at an average rate of Rs. 12/13/9 per maund, and those transactions in "futures" were not invalidated by the notification issued by the Government.
But since No. reverse transaction to protect the Company against loss, if a member failed to pay margin, was possible, the only practical way out was to provide for settling the outstanding transactions.
This the Board of Directors did by taking the rate which was prevailing in the evening of February 14, 1950, as the rate of settlement of all the outstanding transactions.
The resolution, however, did not put an end to the outstanding contracts as on February 15, 1950: the resolution merely fixed the rate at which the transactions were to be settled on the due date, the possibility of any fresh transactions in futures so long as the Order remained in force being completely ruled out.
It may, be noticed that the appellants ' representative, was present at the meeting, and he was apparently heard.
Whether or not he agreed to the passing of the resolution iS immaterial.
But we are unable to hold that the resolution was passed with a view 264 to benefit the directors: it appears that the resolution was passed with a view to protect the interests of the Company and its members.
But it was urged that simultaneously large amounts were tended to be paid to the members who had purchase contracts outstanding, and for that purpose it was resolved to borrow money from the Allahahad Bank and the Central Bank of India Ltd. This, it was urged, disclosed anxiety on the pan of the directors to appropriate to themselves the liquid funds and to deprive the appellants of the benefit of any fall in the prices after February 15, 1950.
It is true that in the books of account of the Company the transactions were shown to have been settled as on February 14, 1950.
But we agree with the High Court that the entries in the books of account of the Company were not in accordance with the resolution, and no intimation was given to any of the members of the Company 'that the transactions were so closed.
There is no clear evidence about the dates on which payments were made to the purchasers in respect of their out.
standing transactions.
But that in our judgment is not material.
It appears from the agreed statement flied before the Company Judge that if the seller made a deposit to cover the rise in prices, the purchaser was entitled to withdraw from the Company the profit which he had made under his cross transaction.
even before the date of settlement.
It was clearly contemplated that when a seller deposited the difference between the price at which he had agreed to sell gut, for future delivery the ruling rate being higher than the rate at which he had agreed to sell, it was open to the purchaser to approach the Company and to call upon it to pay him the profit.
Whether or not this right was strictly enforced is irrelevant.
It appears from Ext.
D 10 that as many as 133 persons having sale transactions had made deposits of diverse amounts with the Company aggregating to Rs. 36,38,932/2/9.
The purchasers under the corresponding transactions were entitled to withdraw the profits.
earned by them out of the deposits so made.
By allowing the purchasers to withdraw the amounts which they were entitled to under the business rules of the Company after the contracts were frozen, the directors of the Company acted according to the rules and not contrary thereto.
The attitude of the appellants in respect of the outstanding contracts since February 15, 1950, has also an important bearing.
On February 23, 1950, the management of the Company addressed a letter informing the appellants that in the interests and for the benefit of the trade, the Board of Directors had passed a resolution on February 15, 1950, to settle the outstanding, transactions at the rate prevailing in the market on February 14, 1950; That resolution, it was stated, was for the benefit of the appellants, 265 but if the appellants wanted to deliver the goods, they should intimate the date and place on which they were prepared to give delivery of goods according to the outstanding contracts on Phagun Sudi 15, Sam vat 2006 in terms of the rules and bye laws of the Company.
The appellants denied having received this letter. ' But we are unable to accept that denial.
On March 1, 1950, the appellants wrote a letter stating that because of the notification issued by the ' Central Government the performance of the contracts had become impossible, and that the Company was liable to refund all the amounts deposited with interest thereon, and that the illegal settlement dated February 15, 1950, amounted to repudiation of the contracts by the Company and those contracts stood rescinded.
The appellants apparently insisted that the transactions became impossible of performance in view of the prohibition contained in the notification published by the Central Government, and contended that the resolution amounted to repudiation of the contracts by the Company.
But by the resolution, in our judgment, there was no repudiation of the contracts by the Company.
The contracts, if they were to be settled by payment of differences, could be settled on the due date at the rates fixed: it was however open to the appellants to deliver goods under the contracts if they desired to do so.
The plea that there was frustration of the contracts, and on that account the Company was liable to refund all the amounts which it had received, has no substance.
As we have already held, the outstanding contracts were not at all affected by the Government Order.
Imposition by the Central Government of a prohibition by its notification dated March 1, 1950 restraining persons from offering and the Railway Administration from accepting for transportation by rail any g.r, except with the permit of the Central Government from any station outside the State of Uttar Pradesh which was situated within a radius of thirty miles from the border of Uttar Pradesh does not lead to frustration ' of the contracts.
Fresh contracts were prohibited but settlement of the outstanding contracts by payment of differences was not prohibited, nor was delivery of gut in pursuance of the contract and acceptance thereof at the due date by the Company prohibited.
The difficulty arising by the Government orders in transporting the goods needed to meet the contract was not an impossibility contemplated by section 56 of the Contract Act leading to frustration of the contracts.
Finally, it was urged that by reason of the notification issued by the Central Government, the substratum of the Company was destroyed and no business could be carried on by the Company thereafter.
11 was said that all the liquid assets of the Company were disposed of and there was no reasonable prospect of the Company commencing or carrying on business thereafter.
266 The Company was carrying on extensive business in "futures" in gut, but the Company was formed not with the object of carrying on business in "futures ' in gut alone, but in several other commodities as well.
The Company had immovable property and liquid assets of the total value of Rs. 2,54,000.
There is no ' evidence that the Company was unable to pay its debts.
Under section 162 of the Indian Companies Act, the Court may make an order for winding up a Company if the Court is of the opinion that it is just and equitable that the Company be wound up.
In making an order for winding up on the ground that it is just and equitable that a Company should be wound up, the Court will consider the interests of the shareholders as well as of the creditors.
Substratum of the Company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the Company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities.
In the present case the object for which the Company was incorporated has not substantially failed, and it cannot be said that the Company could not carry on its 'business except at a loss, nor that its assets were insufficient to meet its liabilities.
On the view we have taken, there were no creditors to whom debts were payable by the Company.
The appellants had, it is true, filed suits against the Company in respect of certain gur transactions on the footing that they had entered into transactions in the names.
of other persons.
But those suits were dismissed.
The business organisation of the Company cannot be said to have been destroyed, merely because the brokers who were acting as mediators in carrying out the business between the members had been discharged and their accounts settled.
The services of the brokers could again be secured.
The Company could always restart the business with the assets it possessed, and prosecute the objects for which it was incorporated.
It is true that because of this long drawn out litigation, the Company 's business has come to a stand still.
But we cannot on that ground direct that the Company be wound up.
Primarily, the circumstances existing as at the date of the petition must be taken into consideration for determining whether a case is made out for holding that it is just and equitable that the Company should be wound up, and we agree with the High Court that no such case is made out.
The appeals fail and are dismissed with costs.
One hearing fee.

dataset_name: IN-Abs

summary:
The respondent company, registered under the Indian Companies Act 1913, was formed for the purpose of carrying on the business of an exchange in various commodities including gur and started its business in 1931.
The Articles of Association of the Company provided that no person could remain a member of the company who was found not to be doing any transaction or business through the company.
The Board of Directors of the company on March 14, 1949, passed a resolution sanctioning transactions in 'futures ' in gut.
All the directors present at the meeting were, those who carried on business in 'futures ' in gut with the company and did after March 14, 1949 carry on that business.
The company 's business was devised on the basis of the Companies Act, 1913, as Originally enacted, when there was no prohibition against a director entering into transactions with the company.
Even after the Amendments to the Company 's Act by Act 22 of 1936 which imposed disqualification on directors entering into transactions with their companies, the modus operandi of the business of the company continued to remain the same as it was previously.
The appellant company qualified for membership of the respondent company and entered into dealing with it in 'futures ' in gut and deposited large amounts with the respondent in respect of their transactions.
On February 15, 1950 the Government of India issued a notification amending the Sugar (Futures & Options) Prohibition Order and made it applicable to 'futures ' and Options in Gur.
By that order no person could, after the appointed day, enter into 'future ' in gur or "pay or receive or agree to pay or receive any margin in connection with any such futures.
" The Board of Directors of the respondent on February 15, 1950 resolved to settle outstanding transactions at the prevailing rate on the closing day of February 14. 1950.
The appellants then filed a petition for winding up of the Company.
The High Court dismissed the petition.
In appeal to this Court it was contended that: (i) by virtue of the notification dated February 15, 1950, all outstanding transactions in 'futures ' in gut became void (ii) the resolution dated March 14, 1949, which permitted the company to enter into transactions in 'futures ' in gut was invalid since the directors who took part in the meeting were disqualified under sections 861(1)(h) and 91 B of the Indian Companies.
Act, 1913, as amended by Act 22 of 1936 and the company had not incorporated in its Articles Regulation 94 of Table A, which validated acts done by directors when disqualifications attaching to them were subsequently discovered; (iii) the resolution dated February 15, 1950 was not passed in the interests of the company and the resolution amounted to repudiation 253 of the contracts by the company; and (iv) by reason of the notification by the Government the substratum of the company was destroyed and no business could be carried on by the company thereafter.
HELD: No Case was made out for winding up of the company.
(i) The notification prohibiting transactions in 'futures ' in gut operates only prospectively.
The prohibition imposed against payment or agreement to pay or receive margin is made in connection receipt or agreement and the expression 'such ' futures ' means transactions in futures to be entered.
into on or after the date if the notification.
No express provision has been made to invalidate outstanding transactions in 'futures ' and there are clear indications in the terms of the notification which show a contrary intention.
[259 A D] (ii) The resolution dated March 14, 1949 cannot be challenged in view of Regulation 94 of Table A.
By the operation of section 18 of the Companies Act the Regulation must be deemed to be incorporated in the Articles of Association of the CompanY.The Regulation was not expressly excluded by the Articles; it was not excluded by implication,because, it was not inconsistent with any other express provision in the Angeles.
There is no evidence that the directors were aware of the disqualification which would be incurred by entering into transactions with the company without the express sanction of the directors and by the subsequent discovery of such a disqualification the resolution was not rendered invalid.
[262 C G] Section 91 B imposes a prohibition against a director voting on any contract or arrangement in which he is "directly or indirectly concerned interested".
By passing a resolution that the company shall commence or ".
By passing a in gur the directors were not voting on a contract or business in futures.
in gur the directors were not voting on a contract or arrangement in which they were directly concerned.
[262 H 263 B] (iii) In passing the resolution dated February 15, 1950, the Board of Directors acted, in the light of the situation prevailing then, as prudent businessmen for the protection of the interests of the company and its members.
Since, after the notification.
no reverse transaction to protect the company against loss, if a member failed to pay margin, was possible, the company had to devise effective means to settle the outstanding transactions.
The resolution did not put an end to outstanding contracts; it merely fixed the rate at which transactions were to be settled on the due date, the possibility of any fresh transactions in futures so long as the notification remained in force being completely ruled out.
The contracts, if they were to be settled by payment of differences, could still be settled on the due date at the rates fixed and it was open to the appellants 10 deliver goods ' under the contract if they desired to do so.
Imposition by the Central Government of a prohibition by its notification dated March 1, 1950, restraining persons from offering and the Railway administration from accepting for transportation by rail any gur except with the permit of the Central Government does not lead to frustration of the contracts.
[263 C H; 265 C D] (iv) In the present case the object for which the company was incorporated has not substantially failed and it cannot be said that the company could not carry on its business except at a loss nor that its assets ' were insufficient to meet its liabilities.
Primarily the circumstances existing ' at ' the date of the petition must be taken into consideration for determining whether a case is made out for holding that it is lust and equitable that the company should be wound up [266 C, D] LISup.
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