judgement:
on No. 271 of 1955.
Under article 32 of the Constitution for the enforcement of fundamental rights.
S.C. Isaacs (D. N. Mukerji, with him) for the petitioner.
M.C. Setalvad, Attorney General for India, (B. Sen and R. H. Dhebar, with him) for the respondents.
March 20.
DAS C.J. This is an application under article 32 of the Constitution praying for an appropriate writ and order restraining the Income tax Officer, Special Circle, Ranchi (respondent No. 3) from taking up and proceeding with the assessment of the petitioner to income tax and other ancillary reliefs.
The facts shortly are as follows: The petitioner is a firm carrying on business as manufacturer and seller of Bidi.
In 1948 it was registered as a firm under the Indian Partnership Act.
It has its head office in Calcutta, where its books of account are said to be kept and maintained and 270 where it is said to have its banking account.
It has its factories near Chakradharpur in the State of Bihar but it has no banking account there.
The members of the firm are citizens of India.
It is said that since its inception the firm has all along been assessed to income tax by the Income tax Officer, District III, Calcutta.
Thus assessments for the years 1948 49 and 1949 50 were made by the Income tax Officer, District 111, Calcutta.
Notices under section 22(2) of the Income tax Act were issued to the petitioner on different dates by the Income tax Officer, District III, Calcutta, calling upon the petitioner to submit returns for the assessment years 1950 51, 1951 52, 1952 53, 1953 54 and 1954 55, the notice for the last mentioned year being dated 23rd August 1954.
In compliance with these notices the petitioner duly submitted its returns for those respective years to the Income tax Officer, District III, Calcutta.
In the course of assessment proceedings for the year 1950 51 a question was raised regarding the location of the principal place of business of the petitioner.
Eventually the income tax authorities seem to have been satisfied that it was in Calcutta and on 18th December 1954 the Income tax Officer, District III, Calcutta, made assessment for the year 1950 51.
On the 25th January, 1955 the petitioner received a letter from the Income tax Officer, District III, Calcutta informing it "that in pursuance to orders under section 5(7 A) of the Income tax Act your assessment records are transferred from this office to the Income tax Officer, Special Circle, Ranchi with whom you may correspond in future regarding your assessment proceedingS".
The order referred to in the above communication was as follows: No. 55(70)IT/54.
Central Board of Revenue.
New Delhi, dated the 13th December, 1954.
ORDER.
No. 87.
Under sub section (7 A) of section 5 of the Indian Income tax Act, 1922 (XI of 1922) the Central Board of Revenue hereby transfers 271 the case of Biri Supply Company, 3/1, Madan Street, Calcutta from the Income tax Officer., District III(1) Calcutta to the Income tax Officer, Special Circle, Ranchi.
(K. B. Deb), Under Secretary, Central Board of Revenue.
It is alleged and not denied by the respondent that the petitioner had no previous notice of the intention of the Income tax authorities to transfer the assessment proceedings from Calcutta to Ranchi nor had it any opportunity to make any representation against such decision.
Thereafter on the 2nd May 1955 the Income tax Officer, Special Circle, Ranchi called upon the petitioner to submit its return for the assessment year 1955 56.
It is then that the present petition was filed under article 32 of the Constitution challenging the validity of the Order of transfer dated the 13th December 1954 and the law under which such order was purported to have been made.
The con tention is that sub section (7 A) of section 5 of the Indian Income tax Act, 1922 and the said Order of transfer made thereunder are unconstitutional in that they infringe the fundamental rights guaranteed to the petitioner by articles 14, 19 (1) (g) and 31 of the Constitution.
Article 14 of the Constitution enjoins that the State shall not deny to any person equality before the law or the equal protection of the laws within the territories of India.
The expression "the State" used in Part III of the Constitution which deals with fundamental rights includes, unless the context otherwise requires, the Government and Parliament of India and the Government and the legislatures of each of the States and all local or other authorities within the territory of India or under the control of the Government of India.
The scope and effect of article 14, in so far as it protects all persons against discriminatory and hostile legislation, have been discussed and explained by this court in a series of cases beginning with Chiranjit Lal Chowdhury vs The Union 36 272 of India(1) and ending with Budhan Chowdhry and others vs The State of Bihar(2).
In the last mentioned case a Full Bench of this court summarised the result of the earlier decisions on this point in the words following: "It is now well established that while article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation.
In order, however, to pass the test of permissible classification two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group and (2) that differentia must have a rational relation to the object sought to be achieved by the statute in question.
The classification may be founded on different bases; namely, geographical, or according to objects or occupations or the like.
What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration.
It is also well established by the decisions of this court that article 14 condemns discrimination not only by a substantive law but also by a law of procedure".
We have, therefore, to approach the problem posed before us bearing in mind the above principles laid down by this court in so far as they may be applicable to the facts of the present case.
Turning now to the Indian Income tax Act, 1922 we find that section 64 makes provision for determining the place of assessment.
By sub section (1), where an assessee carries on a business, profession or vocation at any place, he shall be assessed by the Income tax Officer of that area in which that place is situate or where the business, profession, or vocation is carried on at more than one place by the Income tax Officer of the area in which the principal place of business, profession or vocation is situate.
In all other cases, according to sub section (2), an assessee shall be assessed by the Income tax Officer of the area in which he resides.
If any question arises as to the (1) ; (2) ; 273 place of assessment such question shall be decided, after giving the assessee an opportunity to represent his views by the Commissioner or Commissioners concerned or in case of disagreement between them by,, the Board of Revenue (sub section (3)).
It is quite clear from the aforesaid provisions of section 64 that the Legislature considered the question of the place of assessment to be of some importance to the assessee.
The provisions of section 64 of the Indian Income tax Act, 1922 came up for discussion before the Bombay High Court in Dayaldas Kushiram vs Commissioner of Income tax, Central(1).
At pages 657 to 658 Beaumont, C.J. observed as follows: "In my opinion section 64 was intended to ensure that as far as practicable an assessee should be assessed locally, and the area to which an Income tax Officer is appointed must, so far as the exigencies of tax collection allow, bear some reasonable relation to the place where the assessee carried on business or resides.
There is Do evidence that there was any difficulty in restricting the area to which the Income tax Officer, Section II (Central), was appointed to something much narrower than the Bombay Presidency, Sind and Baluchistan.
Therefore, in my opinion, Income tax Officer, Section II (Central), is not the Income tax Officer of the area in which the applicant 's place of business is situate, and as there is such an officer in existence, namely, the Officer of Ward C, Section II, in my opinion, it is only the latter officer who can assess the assessee".
Kania, J. (as he then was) said at pages 660 661: "A plain reading of the section shows that the same is imperative in terms.
It also gives to the assessee a valuable right.
He is entitled to tell the taxing authorities that he shall not be called upon to attend at different places and thus upset his business".
It will be noticed from the above passages that the learned judges treated the provisions of section 64 more as a question of right than as a matter of convenience only.
It was for the above decision that the (1) I.L.R. ; 274 Indian Income tax Act, 1922 was amended by the Indian Income tax (Amendment) Act, 1940 (Act XL of 1940), by adding to clause (b) of sub section (5) of section 64 the words "in consequence of any transfer made under sub section (7 A) of section 5" and by adding sub section (7 A) to section 5.
The relevant portion of sub section (5) of section 64 so amended reads as under: "(5) The provisions of sub section (1) and subsection (2) shall not apply and shall be deemed never at any time to have applied to any assessee (a) . . . . . . . . . : . . . . . . . . . . (b)where by any direction given or any distribution or allocation of work made by the Commissioner of Income tax under sub section (5) of section 5, or in consequence of any transfer made under sub section (7 A) of section 5, a particular Income tax Officer has been charged with the function of assessing that assessee, or (c) . . . . . . . . . .
It is thus clear from this amendment that the benefit conferred by the provisions of sub section (1) and sub section (2) are taken away and is to be deemed and not to have existed at any time as regards the assessee with regard to whom a transfer order is made under sub section (7 A) of section 5.
In order, however, to deprive a particular assessee of the benefits of sub sections (1) and (2) of section 64, there must be a valid order under section 5(7 A) and he will lose the benefit only to the extent to which that right is taken away by a valid order made under sub section (7 A) of section 5.
This takes us to the new sub section (7 A) of section 5.
Sub section (7 A) of section 5 runs as follows: "(7 A) The Commissioner of Income tax may transfer any case from one Income tax Officer subordinate to him to another, and the Central Board of Revenue may transfer any case from any one Income tax Officer to another.
Such transfer may be made at any stage of the proceedings, and shall not render 275 necessary the reissue of any notice already issued by the Income tax Officer from whom the case is transferred".
The sub section in terms makes provisions for the, transfer of a "case".
Under the Indian Income tax Act, 1922 a case is started when the Income tax Officer issues a notice under section 22(2) of the Act calling upon the assessee to file his return of his total income and total world income during the previous year and then the assessee submits his return in the prescribed form.
It is quite clear from the section that the notice and the return are to be confined to a particular assessment year and the sub section contemplates the transfer of such a "case", i.e., the assessment case for a particular year.
The provision that such a transfer may be made "at any stage of the proceedings" obviously postulates proceedings actually pending and "stage" refers to a point in between the commencement and ending of those proceedings.
Further the provision that such transfer shall not render necessary the reissue of notice already issued by the Income tax Officer from whom the case is transferred quite clearly indicates that the transfer contemplated by the sub section is the transfer of a particular case actually pending before an Income Tax Officer of one place to the Income Tax Officer of another place.
The fact that in this case the Income tax Officer, Special Circle, Ranchi issued fresh notice under section 22(2) quite clearly shows that he did not understand that any particular pending case of this assessee had been transferred to him.
Evidently he thought that the assessment of the petitioner 's income, generally and as a whole, bad been transferred to him and that it was, therefore, for him to initiate a case, i.e., assessment proceedings for a particular year.
In our judgment such an omnibus wholesale order of transfer is not contemplated by the sub section.
It is implicit in the sub section that the Commissioner of Income Tax or the Central Board of Revenue, as the case may be, should before making an order of transfer of any case apply his or its mind to the necessity or desirability of the transfer 276 of that particular case.
The fact that it is necessary or desirable to transfer a case of assessment of a particular assessee for any particular year does not necessarily indicate that it is equally necessary or desirable to transfer another assessment case of that assessee for any other assessment year.
We are accordingly of the opinion that the impugned order of transfer, which was expressed in general terms without any reference to any particular case and without any limitation as to time, was beyond the com petence of the Central Board of Revenue.
We did not understand the learned Attorney General to contend that such was not the correct interpretation of the sub section.
We do not consider it necessary, for the purpose of this case, to pause to consider whether the constitutionality of sub section (7 A) of section 5 can be supported on the principle of any reasonable classification laid down by this court or whether the Act lays down any principle for guiding or regulating the exercise of discretion by the Commissioner or Board of Revenue or whether the sub section confers an unguided and arbitrary power on those authorities to pick and choose individual assessee and place that assessee at a disadvantage in comparison with other assessees.
It is enough for the purpose of this case to say that the omnibus order made in this case is not contemplated or sanctioned by sub section (7 A) and that, therefore, the petitioner is still entitled to the benefit of the provisions of sub sections (1) and (2) of section 64.
All assessees are entitled to the benefit of those provisions except where a particular case or cases of a particular assessee for a particular year or years is or are transferred under sub section (7 A) of section 5, assuming that section to be valid and if a particular case or cases is or are transferred his right under section 64 still remains as regards his other case or cases.
As said by Lord Atkin in Eshugbai Eleko 's case(1) the executive can only act in pursuance of the powers given to it by law and it cannot interfere with the liberty, property (1)L.R. ; , 670.
277 and rights of the subject except on the condition that it can support the legality of its action before the court.
Here there was no such order of transfer as is contemplated or sanctioned by sub section (7 A) of section 5 and, therefore, the present assessee still has the right, along with all other Bidi merchants carrying on business in Calcutta, to have his assessment proceedings before the Income tax Officer of the area in which his place of business is situate.
The income tax authorities have by an executive order,, unsupported by law, picked out this petitioner and transferred all his cases by an omnibus order unlimited in point of time This order is calculated to inflict considerable inconvenience and harassment on the petitioner.
Its books of account will have to be produced before the Income tax Officer, Special Circle, Ranchi a place hundreds of miles from Calcutta, which is its place of business.
Its partners or principal officers will have to be away from the head office for a considerable period neglecting the main business of the firm.
There may be no suitable place where they can put up during that period.
There will certainly be extra expenditure to be incurred by it by way of railway fare, freight and hotel expenses.
Therefore the reality of the discrimination cannot be gainsaid.
In the circumstances this substantial discrimination has been inflicted on the petitioner by an executive fiat which is not founded on any law and no question of reasonable classification for purposes of legislation can arise.
Here "the State" which includes its Income tax department has by an illegal order denied to the petitioner, as compared with other Bidi merchants who are similarly situate, equality before the law or the equal protection of the laws and the petitioner can legitimately complain of an infraction of his fundamental right under article 14 of the Constitution.
It has further been urged that this order indirectly C affects the petitioner 's fundamental right under article 19(1)(f) and article 31.
There can be no gainsaying the fact that the order purports to deprive the petitioner of its right under section 64 to which 278 it would otherwise be entitled.
The order of transfer is certainly calculated to inflict considerable inconvenience and harassment to the petitioner as hereinbefore mentioned.
But in the view we have taken on the construction of sub section (7 A) of section 5 and the petitioner 's rights under article 14, it is not necessary for us, on this occasion, to express any opinion on the contention that the inconvenience and harassment referred to above constitute an imposition of such an interference as amounts to an unwarranted restriction on the petitioner 's rights under article 19(1)(g) or a violation of his rights under article 31.
For the reasons stated above this petition must be allowed.
Accordingly the impugned order is set aside and an injunction is issued in terms of prayer (c) of the petition.
The petitioner is entitled to the costs of this application.
BOSE J. I agree with my Lord the Chief Justice that this petition should be allowed but for different reasons.
In my opinion, sections 5(7 A) and 64(5)(b) of the Indian Income tax Act are themselves ultra vires article 14 of the Constitution and not merely the order of the Central Board of Revenue.
The only question is whether these sections contravene article 14.
Despite the constant endeavour of Judges to define the limits of this law, I am unable to deduce any clear cut principle from the oftrepeated formula of classification.
As I have said in another case, even the learned Judges who propound that theory and endeavour to work it out are driven to concede that classification in itself is not enough for the simple reason that anything can be classified and every discriminatory action must of necessity fall into some category of classification, for classification is nothing more than dividing off one group of things from another; and unless some difference or , distinction is made in a given case no question under article 14 can arise.
It is just a question of framing a set of rules.
It is elementary that no two things are exactly 279 alike and it is equally obvious many things have features that are common.
Once the lines of demarcation are fixed, the resultant grouping is capable of objective determination but the fixing of the lines is necessarily arbitrary and to ' say that governments and legislatures may classify is to invest them with a naked and arbitrary power to discriminate as they please.
Faced with the inexorable logic of this position,, the learned Judges who apply this test are forced to hedge it round with conditions which, to my mind add nothing to the clarity of the law.
I will pass over the limitations with which the classification test is now judicially surrounded, namely that it must be "reasonable", it must not be "discriminatory" or "arbitrary", it must not be "hostile"; there must be no "substantial discrimination", and so forth, and will proceed at once to a rule that is supposed to set the matter at rest.
The rule is taken from the American decisions and was stated thus in The State of West Bengal vs Anwar Ali Sarkar(1): be fulfilled,, namely (1) that the classification must be founded on an, intelligible differentia which distinguishes those that are grouped together from others and (2) that differentia must have a rational relation to the object sought to be achieved by the Act".
Mukherjea, J. (as he then was) said at page 321 ibid that "the classification should never be arbitrary, artificial or evasive.
It must rest always upon real and substantial distinction bearing a reasonable and just relation to the thing in respect to which the classification is made; and classification made without any reasonable basis should be regarded as invalid".
In another case, Ram Prasad Narayan Sahi and Another vs The State of Bihar and Others(), the same learned Judge said at page 1139 "but such selection or differentiation must not be arbitrary and should rest upon a rational basis, having regard to the object which the legislature has in view".
(1) ; , 334.
(2) ; 37 280 Ivor Jennings puts it another way: "Among equals the law shall be equal and shall be equally administered and that like shall be treated alike".
With the utmost respect all this seems to me to break down on a precise analysis, for even among equals a large discretion is left to judges in the matter of punishment, and to the police and to the State whether to prosecute or not and to a host of officials whether to grant or withhold a permit or a licence.
In the end, having talked learnedly round and around the article we are no wiser than when we started and in the end come back to its simple phrasing "The State shall not deny to any person equality before the law or the equal protection of the laws Within the territory of India".
The truth is that it is impossible to be precise, for we are dealing with intangibles and though the results are clear it is impossible to pin the thought down to any precise analysis.
Article 14 sets out, to my mind, an attitude of mind, a way of life, rather than a precise rule of law.
It embodies a general awareness in the consciousness of the people at large of something that exists and which is very real but which cannot be pinned down to any precise analysis of fact save to say in a given case that it falls this side of the line or that, and because of that decisions.
, on the same point will vary as conditions vary, one conclusion in one part of the country and another somewhere else; one decision today and another tomorrow when the basis of society has altered and the structure of current social thinking is different.
It is not the law that alters but the changing conditions of the times and article 14 narrows down to a question of fact which must be determined by the highest Judges in the land as each case arises.
(See on this point Lord Sumner 's line of reasoning in Bowman 's case(1)).
Always there is in these cases a clash of conflicting claims and it is the core of the judicial process to arrive at an accommodation between them.
Anybody can decide a question if only a single principle (1)[1917] A.C. 406, 466, 467. 281 is in issue.
The heart of the difficulty is that there is hardly any question that comes before the Courts that does not entail more than one so called principle.
As Judge Leonard Hand of the United States Court T. of Appeals said of the American Constitution "The words a judge must construe are empty vessels into which he can pour anything he will" These rules are useful guides in some cases but they do not, in my opinion, go to the root of the matter; nor am I alone in so thinking though my approach is more direct and fundamental than is usual.
Patanjali Sastri, C.J. said in The State of West Bengal vs Anwar., Ali Sarkar(1) that the reported decisions "underline the futility of wordy formulation, of so called 'tests ' in solving problems presented by concrete cases".
I endeavoured to point out in my judgment in Anwar Ali Sarkar 's case(1) at page 361 that one can conceive of classifications that conform to all these rules and yet which are bad: classifications made in the utmost good faith;/classifications that are scientific and rational, that 'Will have direct and reasonable relation to the object sought to be achieved and yet which are bad because despite all that the object itself cannot be allowed on the ground that it offends article 14.
In such a case, the object itself must be.
struck down and not the mere classification which,, after all, is only a means of attaining the end desired; and that, in my judgment, is precisely the point here.
It is the very point that Fazl Ali J. made in Anwar Ali Sarkar 's case(1) at pages 309 310: "It was suggested that the reply to this query is that the Act itself being general and applicable to all persons and to all offences, cannot be said to discriminate in favour of or against any particular case or classes of persons or cases,, and if any charge of discrimination can be levelled at all, it can be levelled only against the act of the executive authority if the Act is misused.
This kind of argument however does not appear to me to solve the difficulty.
The result of accepting it would be that even where discrimina (1) ; , 297.
282 tion is quite evident one cannot challenge the Act simply because it is couched in general terms; and one cannot also challenge the act of the executive authority whose duty it is to administer the Act, because that authority will say: I am not to 'blame as I am acting under the Act.
It is clear that if the argument were to be accepted, article 14 could be easily defeated.
I think the fallacy of the argument lies in overlooking the fact that the 'insidious discrimina tion complained of is incorporated in the Act itself ', it being so drafted that whenever any discrimination is made such discrimination would be ultimately traceable to it".
Nor, in the past, has this Court hesitated to strike, down the Act or Order itself when it confers unrestricted power as here.
That was what happened in the Coal Control Case( '); the Order itself was struck down and not the executive action taken by virtue of the unrestricted powers conferred by that law.
See page 813 where it was said "The Order commits to the unrestrained will of a single individual the power to grant, withhold or cancel licences in any way he chooses and there is nothing in the Order which would ensure a proper execution of the power or operate as a check upon injustice that might result from improper execution of the same".
So also in the State of Madras vs V. G. Row(2).
It is true that these were cases under article 19 and not 14 of the Constitution but the principle is the same.
I need not multiply instances.
What is the position here? Here is an Act that fixes a certain venue for assessment in section 64.
That is the normal law of the land for.
these purposes.
The language in sub sections (1) and (2) is mandatory: "be shall be assessed" If there is doubt or dispute about the correct venue, it can only be decided after hearing the party concerned.
Then come the provisions for transfer.
Now it is, I think, necessary that there should be powers of transfer and the mere conferral of such (1) ; (2) ; 283 powers would not offend article 14.
But, put at its lowest, it is anomalous that when similar powers are conferred on the High Courts and even on this Court under.
, for example, the Code of Criminal Procedure, they should be hedged round with limitations, whereas, when it comes to a Commissioner of Income tax or the Central Board of Revenue, no limitations whatever are placed upon them.
Section 526 of the Criminal Procedure Code confers only limited powers of transfer on the High Court and article 136 empowers this Court to intervene should those powers be exceeded by the High Court and should this Court in its discretion feel that has led, or is likely to lead, to hardship and injustice or to a miscarriage of justice; and in the case of this Court a right to transfer is conferred under section 527 only when that is expedient in the interests of justice".
Section 24 of the Civil Procedure Code is wider but that was a law made before the Constitution and, in any case, such an order would be open to review by this Court and in a suitable case, should the High Court act arbitrarily or along non judicial lines, such as directing a transfer without recording reasons and without hearing the parties concerned when it is possible to afford them a hearing, the matter would be set right here.
There is a big difference between investing a judicial authority with such powers and other non judicial bodies because judges must act in accordance with a recognised procedure and obey the laws of natural justice unless there is express indication to the contrary in the statute.
What is the position here? There is no hearing, no reasons are recorded: just peremptory orders transferring the case from one place to another without any warning: and the power given by the Act is to transfer from one end of India to the other; nor is that power unused.
We have before us in this Court a case pending in which a transfer has been ordered from Calcutta in West Bengal to Ambala in the Punjab.
After all, for whose benefit was the Constitution enacted? What was the point of making all this 284 pother about fundamental rights? I am clear that the Constitution is not for the exclusive benefit of governments and States; it is not only for lawyers and politicians and officials and those highly placed.
It also exists for the common man, for the poor and the humble, for those who have businesses at stake.
, for the "butcher, the baker and the candlestick maker '. '.
It lays down for this land "a rule of law" as understood in the free democracies of the world.
It constitutes India into a Sovereign Democratic Republic and guarantees in every page rights and freedom to the individual side by side and consistent with the overriding power of the State to act for the common good of all.
I make no apology for turning to older democracies and drawing inspiration from them, for though our law is an amalgam drawn from many sources, its firmest foundations are rooted in the freedoms of other lands where men are free in the democratic sense of the term.
England has no fundamental rights as such and its Parliament is supreme but the liberty of the subject is guarded there as jealously as the supremacy of Parliament.
The heart and core of a democracy lies in the judicial process, and that means independent and fearless judges free from executive control brought up in judicial traditions and trained to judicial ways of working and thinking.
The main bulwarks of liberty and freedom lie there and it is clear to me that uncontrolled powers of discrimination in matters that seriously affect the lives and properties of people cannot be left to executive or quasi executive bodies even if they exercise quasi judicial functions because they are then invested with an authority that even Parliament does not possess.
Under the Constitution, Acts of Parliament are subject to judicial review particularly when they are said to infringe fundamental rights, therefore, if under the Constitution Parliament itself has not uncontrolled freedom of action, it is evident that it cannot invest lesser authorities with that power.
If the legislature itself had done here what the Central Board of Revenue 285 has done and had passed an Act in the bald terms of the order made here transferring the case of this petitioner, picked out from others in a like situation, from one State to another, or from one end of India to the other, without specifying any object and without giving any reason, it would in my judgment, have been bad.
I am unable to see how the position is bettered because the Central Board of Revenue has done this and not Parliament.
I quote Mukherjea J. (as he then was) in a case which is not in point here but in a passage whose language seems apt to the present position.
The quotation is from Ram Prasad Narayan Sahi vs The State of Bihar(1): "It is impossible to conceive of a worse form of discrimination than the one which differentiates a particular individual from all his fellow subjects and visits him with a disability Which is not imposed upon anybody else and against which even the right of complaint is taken away" and again, "It is true that the presumption is in favour of, the constitutionality of a legislative enactment and it has to be presumed that a Legislature understands and correctly appreciates the needs of its own People.
But when on the face of a statute there is no classification at all, and no attempt has been made to select any individual or group with reference to any differentiating attribute peculiar to that individual or group and not possessed by others, this presumption is of little or no assistance".
In the case of Liversidge vs Sir John Anderson(1) the learned Law Lords were at great pains to see whether the British Parliament had in fact left the matter under consideration there to the subjective satisfaction of a Secretary of State.
There was no doubt that the British Parliament could do so because it is ' supreme and its action is not fettered by a written constitution, but the encroachment on the liberty of the subject was so great that the House of Lords was reluctant to reach the conclusion which it ulti (1) ; , 1143.
(2) ; 286 mately did by a majority, that had in fact been done; and one of the learned Law Lords, Lord Atkin, read a powerful dissenting opinion.
One of his criticisms at page 226 was that the order of detention was made "by an executive minister and not by any kind of judicial officer; it is not made after any inquiry as to facts to which the subject is party, it cannot be reversed on any appeal. .
It is an absolute power which, so far as I know, has never been given before to the executive".
In my opinion, that is the very point here.
In England the power can be conferred but, because it so vitally affects the liberty of the subject, the judges there fight against any interpretation that would lead to that conclusion and in the end reach it only when compelled to do so for overwhelming reasons.
In India the fundamental freedoms conferred by the Constitution are guarded with equally jealous care and it seems to me that the whole point of having this Chapter on Fundamental Rights is to ensure that the very things that the English judges fight against in their courts will not happen here.
In England the task of the judges is to see whether their Parliament has conferred those wide powers; in India our task is to see whether the Constitution has done so.
In England the conferral of those powers is never conceded unless Parliament uses clear, express and unambiguous words.
In our Constitution I find an absence of any such clarity; on the contrary, the whole trend of the Constitution points the other way If an executive authority or a quasi judicial body, or even Parliament itself, were to be given the right to determine these matters to their subjective satisfaction, there would be no point in these fundamental rights, for the courts would then be powerless to interfere and determine whether those rights have been infringed.
The whole point of the chapter is to place a limitation on the powers of all these bodies, including Parliament, save in its constituent capacity.
Therefore, no power resting on the subjective satis 287 faction of any of these bodies can ever be conferred; the satisfaction must always be objective in the sense in which Lord Atkin explained so that its exercise is open to judicial review.
In my opinion, the power of transfer can only be conferred if it is hedged round with reasonable restrictions, the absence or existence of which can in the last instance be determined by the courts; and the exercise of the power must be in conformity with the rules of natural justice, that is to say, the parties affected must be heard when that is reasonably possible, and the reasons for the order must be reduced, however briefly, to writing so that men may know that the powers conferred on these quasi judicial bodies are being justly and properly exercised.
In a democracy functioning under the Rule of Law it is not enough to do justice or to do the right thing; justice must be seen to be done and a satisfaction and sense of security engendered in the minds of the people at large in place of a vague uneasiness that Star Chambers are arising in this land.
We have received a rich heritage from a very variegated past.
But it is a treasure which can only be kept at the cost of ceaseless and watchful guarding.
There is no room for complacency, for in the absence of constant vigilance we run the risk of losing it.
"It can happen here.
" I would hold for these reasons, and in particular for the reason given by Fazl Ali J. in the passage from one of his judgments quoted above, that section 5(7 A) is ultra vires article 14 of the Constitution and so is section 64(5)(b) in so far as it makes an order under section 5(7 A) as it now exists, inviolate.
I would allow the petition.

summary:
The petitioners registered firm has its head office in Calcutta where its books of account are kept and maintained and where it has its banking account, the members of the firm being citizens of India.
Since its inception the firm has all along been assessed to income tax by the Income Tax Officer, District III, Calcutta.
The assessments for the years 1948 49 and 1949 50 were made by the Income Tax Officer, District III, Calcutta.
Notices under section 22(2) of the Income Tax Act were issued to the petitioner by the Income Tax Officer, District III, Calcutta to submit returns for the years 1950 51, 1951 52, 1952 53, 1953 54 and 1954 55.
The Income Tax Officer, District III, Calcutta made assessment for the year 1950 51 on 18 12 1954 being satisfied that the principal place of business of the petitioner was in Calcutta.
On the 25th January 1955 the petitioner received a letter from the Income Tax Officer, District III, Calcutta that in pursuance to orders dated 13th December 1954 under section 5(7 A) of the Income Tax Act its assessment records were transferred from that office to the Income Tax Officer, Special Circle, Ranchi with whom the petitioner was to correspond in future regarding its assessment proceedings.
The order stated that the Central Board of Revenue "hereby transfers the case of" the petitioner.
The petitioner had no previous notice of the intention of the Income Tax authorities to transfer the assessment proceedings from Calcutta to Ranchi nor bad it an opportunity to make any representation against such decision. 'When called upon to submit its return for the assessment year 1955 56 the petitioner by an application under article 32 of the Constitution contended that sub section (7 A) of section 5 of the Indian Income Tax Act, 1922 and the order of transfer made thereunder were unconstitutional in that they infringed the fundamental rights guaranteed to the petitioner under articles 14, 19(1)(g) and 31 of the Constitution.
section 64 of the Indian Income Tax Act makes provisions for determining the place of assessment.
Sub section (1) of that section provides 268 that where an assessee carried on a business, profession or vocation at any place he shall be assessed by the Income Tax Officer of that area in which that place is situate or where the business, profession, or vocation is carried on at more than one place by the Income Tax Officer of the area in which the principal place of business, profession or vocation is situate.
In all other cases, according to sub section (2), an assessee shall be assessed by the Income Tax Officer of the area in which he resides.
If any question arises as to the place of assessment such question shall be decided, after giving the assessee an opportunity to represent his views by the Commissioner or Commissioners concerned or in case of disagreement between them by the Board of Revenue.
The section is imperative in terms and gives a valuable right to the assessee.
By amending the Indian Income Tax Act 1922 by the Indian Income Tax (Amendment) Act, 1940 (Act XL of 1940) by adding to clause (b) of sub section (5) of section 64 the words "in consequence of any transfer made under sub section (7 A) of section 5" and by adding subsection (7 A) to section 5 the benefit conferred by the provisions of subsection (1) and sub section (2) of section 64 is taken away and is to be deemed not to have existed at any time as regards the assessee with regard to whom a transfer is made under sub section (7 A) of section 5.
Held that as under section 22(2) of the Act, the notice and the return are to be confined to a particular assessment years sub section (7 A) of section 5 contemplates the transfer of such a "case" i.e. the assessment case for a particular year.
The provision that such a transfer may be made "at any stage of the proceedings" obviously postulates proceedings actually pending and "stage ' I refers to a point in between the commencement and ending of those proceedings.
Further the transfer contemplated by the sub section is the transfer of a particular case actually pending before an Income Tax Officer of one place to the Income Tax Officer of another place.
Accordingly such an omnibus wholesale order of transfer dated 13th December 1954 as was made in the present case is not contemplated by the sub section and therefore the impugned order of transfer which was expressed in general terms without any reference to any particular case and without any limitation as to time was beyond the competence of the Central Board of Revenue and the petitioner was still entitled to the benefit of the provisions of subsections (1) and (2) of section 64.
The impugned order is discriminatory against the petitioner and violates the fundamental right guaranteed to it by article 14 of the Constitution in as much as the income tax authorities by an executive order unsupported by law picked out the present petitioner and transferred all his cases by an omnibus order unlimited in point of time,which order is calculated to inflict considerable inconvenience and harassment on the petitioner.
BOSE J. Section 5(7 A) of the Indian Income Tax Act is ultra vires article 14 of the Constitution and so is section 64(5)(b) in so far as it 269 makes an order under section 5(7 A) as it now exists, inviolate.
The power of transfer can only be conferred if it is hedged round with reasonable restrictions, the absence or existence of which can in the last instance be determined by the courts; and the exercise of the power must be in conformity with the rules of natural justice, that is to say, the parties affected must be heard when that is reasonably possible, and the reasons for the order must be reduced however briefly, to writing so that men may know that the powers conferred on these quasi judicial bodies are being justly and properly exercised.
Chiranjit Lal Chowdhury vs The Union of India ([1950] S.C.R. 860), Budhan Chowdhry and others vs The State of Bihar, ([1955] 1 S.C.R. 1045), Dayaldas Kushiram vs Commissioner of Income Tax Central (I.L.R. ; [1940] 8 I.T.R. 139), Eshugbai Eleko 's case ; , The State of West Bengal vs Anwar Ali Sarkar ([1952] S.C.R. 284), Ram Prasad Narayan Sahi and Another vs The State of Bihar and Others ' ([1953] S.C.R. 1129), Bowman 's case ([1917] A.C. 406), Coal Control case ([1954] S.C.R. 803), State of Madras vs V. G. Bow ([1952] S.C.R. 597), and Liversidge vs Sir John Anderson ([1942] A.C. 206), referred to.


judgement:
Civil Appeals Nos.
2001 2002 of 1978.
Appeals by Special Leave from the Judgment and order dated 14 12 1971 of the Kerala High Court in Income Tax Reference No 19 of 1969.
V. section Desai, section P. Nayar and Miss A. Subhashini for the Appellant section T. Desai, N. Sudhakaran and P. K. Pillai for the Respondent.
The Judgment of the Court was delivered by TULZAPURKAR, J.
These appeals by special leave raise a common question whether on proper construction of the Agreement dated November 10, 1955, entered into by the assessee with Kamala Mills Ltd., the latter was the "manager" of the assessee within the meaning of section 384 read with section 2(24) of the and if so, whether the remuneration paid by the assessee to the latter in the two calendar years 1957 and 1958 relevant to the assessment years 195859 and 1959 60 cannot be allowed as business expenditure under section 10(2) (xv) of the Indian Income Tax Act, 1922? The facts giving rise to the question may briefly be stated as follows: The assessee (M/s Alagappa Textiles (Cochin) Ltd.) is a public limited company carrying on business of manufacture and sale of yarn and has its registered office at Alagappa Nagar in Kerala State.
It entered into an Agreement dated November 10, 1955 with Kamala Mills Ltd. Coimbatore for financing and managing the assessee mills at Alagappa Nagar for a period of five years.
Clause 8 of the Agreement provided that Kamala Mills Ltd. shall be paid, for the services rendered by it by way of purchases, sales and management, remuneration at the rate of 1% on all purchases made by it for the assessee mills and at half a per cent on all sales of yarn, yarn waste and cotton waste and other products of the mill.
Pursuant to the aforesaid term Kamala Mills Ltd. drew remuneration to the tune of Rs. 1,03,547/ and Rs. 18,294/ respectively for the calendar years 1957 and 1958 727 corresponding to the assessment years 1958 59 and 1959 60.
These amounts were assessed to tax in the hands of Kamala Mills Ltd. The assessee in its assessment proceedings for the said two assessment years claimed deduction in respect of the said two amounts as business expenditure under section 10(2) (xv) of the Act.
The claim was disallowed by Income Tax officer on the ground that under section 384 of the new , which had come into force on April 1. 1956, the continuation of a body corporate as manager was prohibited for the period beyond six months from the coming into force of the Act, that remuneration paid to Kamala Mills Ltd. subsequent to October 1, 1956, was illegal being in violation of section 384 and, therefore, the deduction claimed in respect of such payment for the calendar years 1957 and 1958 could not be allowed.
In the appeals preferred by the assessee against the decision of the Income Tax officer, it was contended that though the payment of remuneration to a body corporate as Manager after October 1, 1956 was illegal under section 384, the payments were for services rendered and were fully justified by commercial expediency and as such the same should be allowed under section 10(2) (xv) of the Act.
It was also urged that even if the expenses incurred were in violation of the statute such expenses should be allowed since in computing the profits even of illegal business only the net profit was taxed after allowing all the expenses.
The Appellate Assistant Commissioner was not impressed by these arguments; but he disallowed the deduction mainly on the ground that the assessee by its own conduct had disputed its liability to pay any remuneration to Kamala Mills Ltd. after October 1, 1956 and in that behalf he relied on an admitted fact that the assessee had filed a suit against Kamala Mills Ltd. to recover such remuneration which had been paid to it in contravention of section 384 on the basis that since the payment was illegal Kamala Mills Ltd. was holding such amounts of remuneration in trust for and on behalf of the assessee and in such a situation the deduction could not be allowed.
The assessee carried the matter in further appeals to the Tribunal, but the Tribunal confirmed the view of the taxing authorities that under section 384 of the it was not legal for the assessee to have permitted Kamala Mills Ltd. to continue to work as its Manager after October 1, 1956 and that the payment of remuneration after the said date was illegal and could not be considered as valid expenditure for the purpose of Income Tax Act.
fn this behalf the Tribunal relied on two decisions in C.I.T. vs Haji Aziz and Abdul Sakoor Bros. and Raj Woollen Industries vs C.I.T. An argument was raised before the Tribunal that Kamala 728 Mills Ltd. was not only a manager but also a financier and that the remuneration should be treated as having been paid to the financier While observing that it was a new case put forward by the assessee, the Tribunal negatived the contention holding, on construction of the Agreement, that it was by virtue of its position as Manager that Kamala Mills Ltd. was allowed to carry on the financial affairs of the assessee and the remuneration was payable to it as Manager and in no other capacity.
The Tribunal also held that the claim for deduction was in respect of a disputed liability inasmuch as the assessee had not merely filed a suit to recover the amount but had in the meantime obtained a decree against Kamala Mills Ltd., and, therefore, the amounts could not be lawfully claimed as permissible deduction.
At the instance of the assessee the following question was referred to the High Court for its opinion: "Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the claim of the assessee for deduction of Rs. 1,03,547/ and Rs. 18,294/ from the income of the assessment years 1958 59 and 1959 60 as not an admissible business expenditure under sec.
10(2)(xv) of the Indian Income Tax Act, 1922 " The High Court answered the question in the negative in favour of the assessee and against the Department.
The High Court, on construction of the Agreement dated November 10, 1955, took the view that since in the matter of the exercise of its powers and the discharge of its functions thereunder Kamala Mills Ltd. could not be said to be "subject to the superintendence control and direction of the Board of Directors" of the assessee, Kamala Mills Ltd. was not a "manager" of the assessee within the definition given in section 2(24) of the , and, therefore, the illegality under section 384 was not attracted and as such the remuneration paid by the assessee to Kamala Mills Ltd. for services rendered during the calender years 1957 and 1958 was allowable as a business expenditure under section 10(2) (xv) of the Act.
As regards the decree that had been obtained by the assessee against Kamala Mills Ltd. the High Court observed that the appeal filed by Kamala Mills Ltd. against the said decree was still pending in the High Court and if ultimately the appeal was dismissed and the amounts were recovered back from Kamala Mills Ltd., the assessee could be taxed on those amounts under section 41(1) of the 1961 Act, but that could not be a valid ground for disallowing the deduction claimed by the assessee.
The Revenue has challenged in these appeals the view of the High Court that Kamala Mills Ltd. was not the Manager of the 729 assessee within the meaning of section 384 read with section 2(24) of the and the further view that the remuneration paid to Kamala Mills Ltd. during the calendar years 1957 and 1958 was deductible as business expenditure under section 10(2) (xv) of the Act.
Before we consider the principal question relating to the proper construction of the Agreement dated November 10, 1957, it will be desirable to note the relevant provisions of the Indian Companies Act, 1913 as also the new , which have a bearing on the question at issue.
Since the Agreement between the assessee on the one hand and the Kamala Mills Ltd. On the other was entered into at a time when the Indian Companies Act, 1913 was in force it will be proper first to refer to the definition of 'Manager ' given in section 2(9) of the said Act.
Section 2(9) ran thus: "2(9) "manager" means a person who, subject to the control and direction of the directors has the management of the whole affairs of a company, and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not.
It will be clear that to satisfy the aforesaid definition a person, which could include a firm, body corporate or an association of persons, apart from being in management of the whole affairs of.
a company had to be "subject to the control and direction of the directors".
This definition has undergone a substantial change under the .
Under this Act section 2(24) defines the expression "manager" thus.
2(24) "manager means an individual (not being the managing agent) who, subject to the superintendence, control and direction of the Board of directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not." In this definition three conditions are required to be satisfied: (a) the manager must be an individual, which means that a firm or a body corporate or an association is excluded and cannot be a manager (a fact which is expressly made clear in section 384), (b) he should have the management of the whole or substantially the whole affairs of the company and (c) he should be subject to the superintendence, control and directions of the Board of Directors in the matter of managing the affairs of the company.
Subject to the changes made in the aspects 730 covered by (a) and (b), in both the definitions the aspect that a manager has to work or exercise his powers under the control and directions of the Board of Directors is common and essential.
In fact it is this aspect which distinguishes 'Manager ' from 'Managing Agent '.
If the definition of 'Manager ' as given in section 2(24) is compared with that of 'Managing Agent ' as given in section 2(25) it will appear clear that though there is an overlapping of the functions of the manager as well as the managing agent of the company the essential distinction seems to be that whereas the manager has to be subject to the suprintendence, control and direction of the Board of directors the managing agent is not so subject.
Section 384 of the in express terms prohibits, after the commencement of the Act, the appointment of a firm or a body corporate or an association of persons as a manager as also the continuation of such employment after expiry of six months from such commencement.
It runs thus: "384.
No company shall, after the commencement of this Act, appoint or employ, or after the expiry of six months from such commencement continue the appointment or employment of, any firm, body corporate or association as its manager.
The aforesaid provision positively disqualifies a firm, body corporate or association from being appointed as manager of a company or from continuing the employment of a firm, body corporate or association as manager after the expiry of six months from the commencement of the Act.
Obviously, to attract the prohibition or disqualification contained in section 384, a firm, body corporate or association must be a "manager" within the meaning of section 2(24), that is to say, it should be in management of the whole or substantially the whole of the affairs of a company, and should be under superintendence, control and direction of the Board of directors of the company.
It was not seriously disputed that under the terms and conditions contained in the Agreement dated November 10, 1955, Kamala Mills Ltd. could be said to be in management of substantially the whole of the affairs of the assessee mills but the question is whether it was working under the superintendence, control and direction of the Board of directors of the assessee so as to be its 'Manager ' within section 2(24) of the Act? Turning now to the Agreement in question it may be stated that at the commencement of the deed the parties thereto have been described in a particular manner, namely, the assessee has been described 731 and referred to as the "Company" while Kamala Mills Ltd. has been described and referred to as the "Managers" throughout the document.
Then follow two recitals which make very clear the object or purpose with which the Agreement was entered into; according to these recitals the assessee was not having sufficient finance to carry on its business of manufacture and sale of yarn and the Board of directors thought it proper of find out a financier who was agreeable to help the assessee monetarily and take active interest in its business and that since Kamala Mills Ltd. agreed to assist the assessee with sufficient finance and to manage the assessee 's mill on certain terms and conditions which the Board of Directors had approved, the Agreement was executed between the parties.
Then follow the operative parts of the deed setting out the terms and conditions on which Kamala Mills Ltd. agreed to provide sufficient finance as also to manage the business of the assessee.
Clause 1 enlisted in sub clauses (b) to (m) the powers and functions which were to be exercised and performed by Kamala Mills Ltd. during the period of five years for which the Agreement was to operate; such powers were conferred and functions entrusted for the purpose of "managing and running the mill" of the assessee; inter alia, Kamala Mills Ltd. was to make purchases of all cotton, staple fibre or any other raw material for the manufacture of the yarn and to enter into contracts in that behalf at such rates and prices as it may deem fair and proper and make payments for all such purchases and incur all expenses incidental thereto; it was also to make purchases of all stores and spares and other materials necessary for the manufacture of yarn; it was to appoint all staff, technical or non technical and workers skilled and unskilled as also clerks and other staff necessary for the working of the mill and fix their terms and remuneration and could discharge or dismiss or take disciplinary action against them; it had to sell and make contracts for sale for immediate or future delivery of yarn, yarn waste or cotton waste or any other material or products of the mill at such rates or prices and on such terms and conditions as it may think fit; it could decide, lay down and change from time to time the programme of manufacture of yarn and other products of the mill and to insure against fire and other risks all cotton, yarn, material, stock in trade and incur and pay all premia necessary in that behalf; it could pledge, secure and hypothecate all stocks and stores and stock in trade with such bank or banks where arrangements for overdrafts shall have been completed by the Board of Directors; and it could claim, demand, realise and sue for all goods, materials and amounts due to the assessee in the exercise and carrying out of any or all of the powers conferred under sub cls.
(a) to (k).
Clause 2 of the Agreement stipulated that Kamala Mills Ltd. shall 732 provide funds or arrange for finance necessary for exercising the powers of purchase of cotton, stores and other materials and for payment of wages, salaries, commissions and allowances and for meeting all expenses incidental to manufacture and sale of yam and other pro ducts of the mill.
Under clause 3 the assessee was to open a separate Current Account and an overdraft Account for a limit not exceeding Rs. 30,00,000/ with such bankers as Kamala Mills may require with power to Kamala Mills to operate on the said accounts exclusively by itself and in the name of the assessee and it was to have power to receive, endorse, sign, transfer and negotiate all bills, cheques, drafts etc.
that may be received in the name of the assessee in the course of the management of the mill and it was specifically agreed that no one except Kamala Mills shall have power to operate on the said accounts.
Clause 4 entitled Kamala Mills Ltd. to charge the assessee interest at the rate of 7.5% per annum with half yearly rests on all advances made by it and funds provided for the purposes set out in clause 2.
Clause 5 gave Kamala Mills Ltd. a first and prior charge on all the stocks and stores and stock in trade for all the moneys and amounts that may be advanced by it to the assessee except to the extent of any charge or security of such stocks and stores and stock in trade that may be created in favour of the banks for the overdraft account and such charge in favour of Kamala Mills was to be a possessory charge.
Clause 8 quantified the remuneration payable to Kamala Mills Ltd. for services rendered by way of purchases, sales, and the management of the mill at the rate of 1 % on all purchases made by it for the assessee mill and at 0.5% on all sales of products effected for and on behalf of the assessee.
Clause 10 required Kamala Mills Ltd. to maintain proper accounts in respect of all purchases, sales and expenses, commissions and remunerations due to it etc.
and submit to the assessee monthly statements of accounts.
Clause 11 put the outer limit of Rs. 15,00,000/ at any one point of time on the advances and financial assistance to be given by Kamala Mills Ltd. to the assessee and it was provided that if and when sums over and above the said limits become necessary to be advanced, Kamala Mills would be entitled to appropriate and take for itself as owner such quantity of yarn as may be in stock as in value would be equivalent, at cost or market value whichever was lower, to the sum that it may be obliged to advance over and above Rs. 15,00,000/ .
Clause 13 of the Agreement is very important having a crucial bearing on the question at issue and may be set out verbatim.
It ran thus: "13.
The Company (assessee) either represented by its Managing Agent or Board of Directors shall not exercise the powers delegated to the Managers (Kamala Mills Ltd.) 733 under the foregoing clauses, except by way of general supervision and advice, nor interfere with the discretion of the Managers in the exercise of their functions and powers vested in them by virtue of this Agreement.
" Under cl. 14 it was provided that the Managers ' (Kamala Mills Ltd.) powers were limited in the manner aforesaid and they were not and shall not be deemed to be managers in charge of the whole affairs of the company within the meaning of section 2(9) of the Indian , a significant provision showing the intention of the parties that Kamala Mills Ltd. was not to be regarded as a 'Manager ' under the Indian Companies Act, 1913.
Clause 16 is significant and it provided that the Agreement shall be, in force for a period of five years commencing from the date thereof and that "this Agreement for management being an Agency coupled with interest", it could be revoked before the expiry of the said period of five years by 12 months notice in writing being given by one party to the other but if the assessee were to revoke it the assessee shall be liable to compensate Kamala Mills for the loss of remuneration for the unexpired period of the Agreement at the average rate at which Kamala Mills Ltd. had been earning by way of remuneration under the Agreement till the date of such notice of termination.
A modification by introducing one additional term.
in the Agreement was made on November 21, 1955 but the additional term is not material for our purposes.
On a perusal of the aforesaid clauses of the Agreement in question two or three things stand out very clearly.
It is true that at the commencement of the deed Kamala Mills Ltd. has been described and referred to as the "Managers" of the assessee throughout the document but mere label or nomenclature given to a party in the document will not be decisive.
It is also true that the.
several powers and functions were entrusted to Kamala Mills Ltd. under cl. 1 of the Agreement to enable it "to manage or run the mill" of the assessee.
But simply because powers and functions were given to Kamala Mills Ltd. for the purpose of "managing and running the mills" of the assessee, it would not follow that Kamala Mills Ltd. was in truth and substance a 'manager ' of the assessee within the meaning of section 2(24) of the 1956 Act.
For this purpose the Agreement will have to be read as a whole and the Court will have to decide that was the true, intention of the parties in entering into such agreement.
The two recitals clearly indicate the object with which and the purpose for which the Agreement was entered into.
It does appear that the assessee was in financially straightened circumstances and on that account was utterly unable to carry on its business of manufacture and sale of yarn and, therefore, 734 the board of directors were in search of a financier who would make available the necessary finances for the running of the mill as also to take active interest in the business of the assessee and when Kamala Mills Ltd. agreed "to assist the company (assessee) with sufficient finance and manage the mill" belonging to the assessee on terms and conditions that were approved b y the Board of Directors of the assessee that the Agreement was entered into between the parties; in other words, it is clear that the dominant object with which the Agreement was entered into was that Kamala Mills Ltd. should really act as financier so that the assessee mill could run and since heavy finances were to be procured by Kamala Mills Ltd. large powers and functions connected with the working of the mill were entrusted to it.
This aspect becomes abundantly clear from cl. 16 of the Agreement wherein the parties expressly provided that this Agreement for management was by way of and amounted to an Agency coupled with interest so far as Kamala Mills Ltd. was concerned and, therefore, revocation of the Agreement before the expiry of the five years ' period was made dependent upon 12 months ' notice in writing being given by one party to the other and further if such revocation was done by the assessee suitable compensation was made payable to Kamala Mills Ltd. In other words, managerial functions were incidental and had to be entrusted to Kamala Mills because of the financier 's role undertaken by it.
The large powers and functions entrusted to Kamala Mills Ltd. under the several sub clauses of cl. 1 of the Agreement do show that management of substantially the whole, if not the whole, of the affairs of the assessee company had been made over to Kamala Mills Ltd. But the crucial question is whether such management was to be done by Kamala Mills Ltd. under "the superintendence, control and direction of the Board of Directors" of the assessee and in that behalf cl. 13 of the Agreement which we have quoted above is very eloquent.
In terms it provided that so far as the powers conferred and the functions entrusted to Kamala Mills Ltd., were concerned, the Board of Directors shall not exercise or perform the same except by way of general supervision and advice and it was further made clear that the Board of Directors shall not interfere with the discretion of Kamala Mills Ltd. in the exercise of their functions and powers vested in it by virtue of the Agreement.
In other words, the general supervision or advice of the Board of Directors was of such character that the Board had not say whatsoever nor could it interfere with the discretion of Kamala Mills Ltd. in the matter of the exercise of the powers and the discharge of the functions entrusted to Kamala Mills Ltd. under the Agreement.
It is thus clear to us that the dominant object of the Agreement was that Kamala Mills Ltd. should act as financiers of the assessee mill and in the 735 matter of the exercise of its powers and discharge of its functions Kamala Mills Ltd. was never "subject to the superintendence, control or direction" of the Board of directors of the assessee.
If this position clearly emerges on true construction of the Agreement in question then it is obvious that Kamala Mills was not acting or working as the "Manager" of the assesses within the meaning of section 2(24) of the and as such the illegality of section 384 of that Act was not attracted.
In this view of the matter, the remuneration paid by the assessee to Kamala Mills Ltd. for the two calendar years 1957 and 1958 relevant to the assessment years 1958 59 and 1959 60 could not be regarded as being in violation of section 384 of the and as such the expenditure incurred by way of paying such remuneration would be deductible as business expenditure under section 10 (2) (xv) of the Income Tax Act.
In view of our aforesaid conclusion the aspects whether the assessee had disputed its liability to pay such remuneration to Kamala Mills Ltd. Or had filed a suit at the instance of the Company Law Board to recover it back from Kamala Mills Ltd. Or had obtained a decree in that behalf against Kamala Mills Ltd. become irrelevant.
However, we would like to place on record the fact that the decree obtained by the assessees against Kamala Mills Ltd. has been reversed or set aside in appeal by the Kerala High Court a fact which was brought to our notice by the Advocate on Record for the assessee communicated to him by his client in a letter dated 22nd August, 1979.
However, even 7 if in further appeal the trial court 's decree were restored and the assessee were to recover back the remuneration the assessee can be taxed on the two amounts under section 41(1) of the 1961 Act.
In our view, therefore, the High Court was right in answering the question in favour of the assessee.
The appeals are, therefore, dismissed with costs.
V.D.K. Appeals dismissed.

dataset_name: IN-Abs

summary:
Respondent, assessee (M/s. Alagappa Textiles (Cochin) Limited company was carrying on business of manufacture and sale of yarn.
It entered into an Agreement dated November 10, 1955 with Kamala Mills Ltd., Coimbatore for financing and managing the assessee Mills at Alagappa Nagar for a period of five years.
Clause 8 of the Agreement provided that Kamala Mills Ltd. shall be paid for the services, rendered by it by way of purchases, sales and management remuneration at the rate of 1% on all purchases made by it for the assessee Mills and at half a percent on all sales of yarn, yarn waste and cotton waste and other products of the Mill.
Clause 13 of the agreement was to the effect that "the company (assessee) either represented by its managing Agent or Board of Directors shall not exercise the powers delegated to the Managers (Kamala Mills Ltd. under the foregoing clauses, except by way of general supervision and advice nor interfere with discretion of the managers in the exercise of their functions and powers vested in them by virtue of this Agreement." Clause 14, provided that the Managers (Kamala Mills Ltd.) powers were limited in the manner aforesaid and shall not be deemed to be manager in charge of the whole affairs of the company within the meaning of section 2(9) of the companies Act, 1913.
Clause 16 provided that the agreement shall be in force for a period of five years commencing from the date thereof and that "this Agreement for management being an Agency coupled with interest" could be revoked before the expiry of the said period of five years by 12 months ' notice in writing being given by one party to the other, but if the assessee were to revoke it the assessee shall be liable to compensate Kamala Mills for the loss of remuneration for, the unexpired period of the Agreement at the average rate at which Kamala Mills Ltd. had been earning by way of remuneration under the Agreement fill the date of such notice of termination Pursuant to the aforesaid terms, Kamala Mills Ltd. drew remuneration to the tune of Rs. 1,03,547/ and Rs. 18,249/ respectively for the calendar years 1957 and 1958 corresponding to the assessment years 1958 59 and 1959 60.
The amounts were assessed to tax in the hands of Kamala Mills Ltd. Respondent, Assessee in its assessment proceedings for the said two assessment years claimed deduction in respect of the said two Amounts as business expenditure under section 10(2)(xv) of the Income tax Act.
The claim was disallowed by the Income Tax officer on the ground that under section 384 of the companies Act.
1956 which had come into force on April 2, 1956 the continuation of a 724 body corporate as manager was prohibited for the period beyond six months from the coming into force of the Act, that the remuneration paid to Kamala Mills Ltd. subsequent to October 1, 1956 was illegal being in violation of section 381.
The Appellate Assistant Commissioner rejected the Appeal mainly on the ground that the assessee by its own conduct had disputed its liability to pay any remuneration to Kamala Mills Ltd. as after October 1, 1956 and in that behalf he relied on an admitted fact that the assessee had filed a suit against Kamala Mills to recover such remuneration which had been paid to it in contravention of section 384 of the on the basis that since the payment was illegal Kamala Mills was holding such amounts of remuneration in trust for and on behalf of the assessee.
Respondent carried the matter in further appeals to the Tribunal, but the Tribunal confirmed the view of the taxing authorities.
On a reference, the High Court answered the question in the negative in favour of the assessee and against the Revenue.
The High Court held that Kamala Mills could not be said to be "subject to the superintendence, control and directions of the Board of Directors" of the respondent and therefore was not a "manager" of the assessee within the meaning of section 2(14) of the , so as to attract the illegality under section 384 ibid.
and (b) that in view of the provisions of section 41(1) of the Income tax Act, the pendency of an appeal against the Judgment the suit for recovery could not be a valid ground for disallowing the deduction permissible under ) section 10(2)(xv) of the Income tax Act.
Dismissing the appeal by Revenue by special leave, the Court ^ HELD: 1.
Section 384 of the in express terms prohibits, after the commencement of the Act, the appointment of a firm or a body corporate or an association of persons as manager as also the continuation of such employment after expiry of six months from such commencement.
To attract the prohibition or disqualification, under this section, a firm, body corporate or association must be a "manager" within the meaning of section 2(24), that is to say, it should be in management of the whole or substantially the whole of the affairs of a company and should be under superintendence, control and direction of the Board of Directors of the company [730 C D, E F] 2.
Section 2(24) of the requires three conditions to be satisfied: (a) the Manager must be an individual, which means that a firm or body corporate or an association is excluded and cannot be a Manager (a fact which is expressly made clear in section 384).
(b) he should have the management of the whole or substantially the whole affairs of the company and (c) he should be subject to the superintendence, control and directions of the Board of Directors in the matter of managing the affairs of the company.
Subject to the changes made in the aspect covered by (a) and (b), in both the definitions [section .2(9) of 1913 Act and section 2(24) of the 1956 Act], the aspect that a Manager has to work or exercise his powers under the control and directions of the Board of Directors is common and essential.
In fact, it is this aspect which distinguishes 'Manager ' from "Managing Agent".
A comparison of the definition of "Manager" as given in s; 2(24) of the 1956 Act with that of "Managing Agent" in section 2(25) makes it clear that though there is an overlapping of the functions of the Manager as well as the Managing Agent of the company the essential distinction is that whereas the 725 Manager has to be subject to the superintendence, control and direction of the Board of Directors, the managing Agent is not so subject.
[729 G H, 730 A C] 3.
On a perusal of the clauses and in particular clauses 8, 13, 11 and 16 of the Agreement dated November 10, 1955 in the instant case, two or three things stand out very clearly.
It is true that at the commencement of the deed Kamala Mills Ltd. has been described and referred to as the "Managers" of the asses see throughout the document but mere label or nomenclature given to a party in the document will not be decisive.
It is also true that the several powers and functions were entrusted to Kamala Mills Ltd. under clause 1 of the Agreement to enable it "to manage or run the Mill" of the assessee.
But simply because powers and functions were given to Kamala Mills Ltd. for the purpose of "managing and running the Mills" of the assessee, it could not follow that Kamala Mills Ltd. was in truth and substance a 'manager ' of the assessee within the meaning of section 2(24) of the 1956 Act.
For this purpose the Agreement will have to be read as a whole and the Court w ill have to decide what was the true intention of the parties in entering into such Agreement.
[733 E G] 4.
The dominant object with which the Agreement was entered into was that Kamala Mills Ltd. should really act is a financier so that the assessee Mill could run and since heavy finances were to be procured by Kamala Mills Ltd. large powers and functions connected with the working of the mill were entrusted to it.
This aspect become abundantly clear from cl. 16 of the Agreement wherein the parties expressly provided that this Agreement for management was by way of and amounted to an Agency coupled with interest so far as Kamala Mills Ltd. was concerned and, therefore, revocation of the Agreement before the expiry of five years ' period was made dependent upon 12 months ' notice in writing being given by one party to the other and further if such revocation was done by the assessee suitable compensation was made payable to Kamala Mills Ltd. In other words, managerial functions were incidental and had to be entrusted to Kamala Mills because of the financier 's role undertaken by it.
The large powers and functions entrusted to Kamala Mills Ltd. under the several sub clauses of cl. 1 of the Agreement do show that management of substantially the whole, if not the whole, of the affairs of the assessee company had been made over to Kamala Mills Ltd. [734 B E] 5.
Clause 13 of the Agreement which is very eloquent.
provided that so far as the powers conferred and the functions entrusted to Kamala Mills Ltd. were concerned, the Board of directors shall not exercise or perform the same except by way of general supervision and advice and it was further made clear that the Board of Directors shall not interfere with the discretion of Kamala Mills Ltd in the exercise of their functions and powers vested in it by virtue of the Agreement.
In other words, the general supervision or advice of the Board of directors was of such character that the Board had no way whatsoever nor could it interfere with the discretion of Kamala Mills Ltd. in the matter of the exercise of the powers and the discharge of the functions entrusted to Kamala Mills Ltd. under the Agreement.
It is thus clear that the dominant object of the Agreement was that Kamala Mills Ltd. should act as financiers of the assessee Mill and in the matter of the exercise of its powers and discharge of its functions Kamala Mills Ltd. was never "subject to the superintendence control or direction" of the Board of 726 directors of the assessee.
This is the position which clearly emerges on true construction of the Agreement.
[734 F H, 735A] 6.
Therefore, Kamala Mills Ltd. was not acting or working as the "Manager" of the assessee within the meaning of section 2(24) of the and as such the illegality of section 384 of the Act was not attracted.
In this view of the matter, the remuneration paid by the assessee to Kamala Mills Ltd. for the two calendar years 1957 & 1958 relevant to the assessment years 1958 59 and 1959 60 could not be regarded as being in violation of section 384 of the companies Act, 1956 and as such the expenditure incurred by way of paying such remuneration would be deductible as "Business Expenditure" under section 10(2)(xv) of the Income tax Act, 1922.
[735A D]