judgement:
ivil Appeal No. 1011 of 1972.
Appeal by Special Leave from the Judgment and Order dated the 18th August, 1971 of the Punjab and Haryana High Court in Income Tax Reference No. 17 of 1971.
section T. Desai, (Mrs.) A.K. Verma and Shri Narain for the Appellant.
T.A. Ramachandran and R.N. Sachthey for Respondent.
The Judgment of the Court was delivered by BHAGWATI, J.
The short question that arises for determination in this appeal is whether certain commission paid by the assessee to two of its employees is an allowable expenditure in computing the profits of the assessee from business.
The assessee is a registered firm which at all material times consisted of five partners, namely, Chaman Lal, Madan Lal, Harbans Lal, Raj Mohan and Saheb Dayal representing a trust.
Chaman Lal was the son of Saheb Daval and Raj Mohan was the son of one Gurditta Mal.
During the accounting year relevant to the assessment year 1963 64, Chaman Lal and Harbans Lal had their own independent factories and hence they were not attending 531 to the business of the assessee and Raj Mohan too was not actively associated with the conduct of the business of the assessee as he was working with the Oriental Carpet Manu facturers India Pvt. Ltd. (hereinafter referred to as OCM).
Thus, from amongst the partners, only Madan Lal was looking after the day to day management of the business of the assessee and he was assisted by Saheb Dayal and Gurditta Mal who were engaged as employees of the assessee.
Saheb Dayal and Gurditta Mal were .looking after the busi ness of the assessee since a long time and they were each paid remuneration of Rs. 1000/per month.
The business of the assessee consisted of sole selling agency of OCM in respect of yarn, cloth and blankets manufactured by OCM and for the sales affected by the assessee as such sole selling agents, commission was paid to the assessee by OCM.
The figures show that the business of the assessee prospered from year to year from 1959 60 onwards and there was a gradual increase in the turnover of the assessee which jumped from the figure of Rs. 39.99 lacs for the assessment year 1962 63 to the figures of Rs. 54.28 lacs for the as sessment year 1963 64.
Since the assessee showed very satisfactory turnover from year to year, OCM started giving to the assessee, in addition to the usual commission, over riding commission at the rate of 21/2% on the sales affected by the assessee and the. over riding commission thus re ceived by the assessee during the previous years correspond ing to the assessment year 1960 61 to 1963 64 was as fol lows: Assessment year Amount Received 1960 61 Rs. 35,964/ 1961 62 Rs. 61,818/ 1962 63 Rs. 83,922/ 1963 64 Rs. 1,13,449/ Since the turnover of the sales reached the figure of Rs. 54.28 lacs and overriding commission increased to Rs. 1,13,449/ during the previous year corresponding to the assessment year 1963 64, the assessee decided to give to each of Saheb Dayal and Gurdita Mal, who were look ing after the business and were primarily responsible for the increased prosperity of the assessee, commission at the rate of 1/2% of the sales out of 21/2% overriding commis sion received from OCM and each of these two employees was accordingly paid by the assessee a sum of Rs. 22,690/ by way of commission.
The aggregate amount of commission paid to Saheb Dayal and Gurditta Mal thus came to Rs. 45,380/ and this amount of commission was claimed by the assessee as a deductible expenditure in its assessment to income tax for the assessment year 1963 64.
The Income Tax Officer, disallowed the claim of the assessee on the ground that there was no material produced by the assessee which would "prove the nature of services rendered by these two gentlemen in lieu of which the commission is claimed to have been paid" and there being no evidence to show that the increase in sales during the relevant accounting year was due to the efforts of Saheb Dayal and Gurditta Mal, the claim for deduction of the amount of commission as a business expenditure remained unproved.
The assessee appealed against the disallowance of the amount of commission but the Appellate Assistant Commis sioner in appeal affirmed the disallowance on the ground that no evidence had been 532 produced by the assessee to prove that the activities of Saheb Dayal and Gurditta Mal in the relevant account year were or a nature different from those in the earlier years or that they put in any extra time or energy,in the conduct of the business of the assessee so as to justify the payment of the commission and hence it could not be said that the commisson was paid for services rendered by them.
The matter was carried in further appeal before the Tribu nal, but the Tribunal also took the same view and held that since there was no proof to show that any services were rendered by Saheb Dayal and Gurudayal Mal for which payment of commission in addition to salary and bonus could be justified, commission could not be said to have been paid for services rendered so as to attract the applicability of section 36, subsection (1 ) clause (ii).
The Tribunal observed that it was not possible to say "that the increase in the turnover in the year under appeal was due to the extra efforts put in by these two employees or that the employees had worked in the hope of receiving extra commission" and since bonus equivalent to three months ' salary was paid to saheb Dayal and Gurditta Mal in addition to their salary during the relevant accounting year, any extra services rendered by them, if any, "should be deemed to have been covered by the payment of this bonus" Since in the view taken by the Tribunal it was necessary that there should be some extra services rendered by Saheb Dayal and Gurditta Mal for which payment of commission could be said to be justi fied and there was nothing to show that any such extra services were rendered by them, the Tribunal came to the conclusion that the payment of commission could not be said to be justified on grounds of commercial expediency and section 36, sub section (1), clause (ii) had no application.
The assessee being aggrieved by the order made b the tribu nal applied for a reference of the question of law arising out of the order of the Tribunal and on the application of the assessee, the following question of law was referred for the opinion of the High Court: "Whether on the facts and circum stances of the case the sum of Rs. 45,380/ paid to L. Gurandittamal and L. Sahebdiyal, employees of the applicant firm is permissi ble deduction in computing the business income of the applicant ?" The High Court answered the question in favour of the Revenue.
The view taken by the High Court was that in order to attract the applicability of section 36, sub section (1), clause (ii), it was necessary that the payment of commission should be for services rendered and since there was no evidence led on behalf of the assessee to show that any extra services were rendered by Saheb Dayal and Gurditta Mal, which were responsible for increase in the sales and consequent enlargement of the overriding commission, there was no justification for payment of commission to them and the commission paid could not be said to be for services rendered.
The High Court in this view held that section 36, sub section (1), clause (ii) was not applicable and no claim for deduction could be sustained under it.
The correctness of this decision is impinged in the present appeal preferred by the assessee with special leave obtained from this Court.
533 Now, before we proceed to consider, the question which arises for determination before us, we must make it clear at the out set that m the present case the genuineness of the payment of commission made to Saheb Dayal and Gurditta Mal was at no time doubted by the Revenue authorities.
It was not the ease of the Revenue that this payment was not made or that it was sham or bogus.
If that had been the finding, there would have been an end of the case of the assessee.
No question would then have arisen for considering the applica bility of section 36, sub section (1), clause (ii).
No payment having been made, no deduction would have been permissible.
But here the commission was paid: it was a genuine payment and the only question was whether it was deductible as an allowable expenditure under section 36, sub section (1), clause (ii).
Section 36, sub section (1) provides for making of various deductions in computing the income of an assessee under the head: "Profits and Gains of Business or Profession" and one such deduction is set out in clause (ii) which, as it stood at the material time during the assessment year 1963 64, read as follows: "36(1)(ii) Any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividend if it had not been paid as bonus or commission: Provided that the amount of bonus or commission is reasonable with reference to (a) the pay of the employee and the condi tions of his service; (b) the profits of the business or profes sion for the previous year in question; and (c) the general practice in similar busi ness or profession.
" Saheb Dayal and Gurditta Mal were admittedly employees of the assessee.
They were each paid a salary of Rs. 1000/ per month and for the previous year relevant to the assess ment year 1963 64 bonus equivalent to three months ' salary was also paid to each of them.
The income Tax Officer disal lowed even this salary and bonus paid to Saheb Dayal and Gurditta Mal on the ground that there was nothing to show that any services were rendered by them and the payment of salary and bonus appeared to be ex gratia.
But this deci sion was reversed in appeal by the Appellate Assistant Commissioner who, following his earlier order dated 12th December, 1967 in the appeal against the assessment to tax for the assessment year 1962 63, allowed the payment of salary and bonus as a deductible expenditure.
The Appel late Assistant Commissioner c:early recognised that Saheb Dayal and Gurditta Mal were employees of the assessee and were attending to the business of the assessee as such employees since a long time and Gurditta Mal was in fact "a seasoned and experienced businessman" and he looked after the assessee 's transactions with OCM and on behalf of 'he assessee advised OCM in connection with designs etc.
The Tribunal also found that Saheb Dayal and Gurditta Mal 534 "were looking after the business of the assessee firm for a long time".
Thus, there can be no doubt that services were rendered by Saheb Dayal and Gurditta Mal to the asses see and for these services, besides Salary and bonus, com mission was paid to them, because, according to the asses see, during the relevant accounting year, there was consid erable enlargement in the turnover of the sales with consequent increase in the amount of overriding commis sion and the assessee felt, on grounds of commercial expediency, that a part of the overriding commission should be paid to the two employees who had worked so well and contributed to the prosperity of the assessee.
The question is whether this commission qualifies for deduction as an allowable expenditure under section 36, sub section (1), cause (ii).
The only ground on which the High Court negatived the ap plicability of section 36, sub section (1), clause (ii) was that during the relevant accounting year Saheb Dayal and Gurditta Mal rendered the same services which they were rendering in earlier years and no extra services were ren dered by them which could justify payment of commission in addition to salary and bonus.
The High Court appeared to take the view that there must be correlation between the payment of commission and the services rendered and since commission was paid by the assessee for the first time during the relevant accounting year, there must be some extra services rendered by Saheb Dayal and Gurditta Mal in that year over and above the usual services rendered by them in the earlier years.
Since, according to the High Court, there was no proof that any extra services were rendered by Saheb Dayal and Gurditta Mal, the High Court held that the payment of commission could not be said to be for services rendered within the meaning of section 36, sub section (1), clause (ii).
This view taken by the High Court is, in our opinion, plainly erroneous.
Section 36, sub section (1 ), clause (ii) does not postulate that there should be any extra services rendered by an employee before payment of commission to him can be justi fied as on allowable expenditure.
What it requires is only this, namely, that commission paid to an employee should be for services rendered by him.
For example, if an employ ee has not rendered any services at all during the relevant accounting year, no commission can be paid to him which would be an allowable expenditure.
There must be some services rendered by an employee and where commission is paid for the services so rendered, section 36 sub section (1), clause (ii) would apply and the commission to the extent to which it is found reasonable would be an allowable expenditure under that provision.
It is not necessary that the commission should be paid under a contractual obligation.
It may be purely voluntary.
But it must be for services rendered and here services were in fact rendered by Saheb Dayal and Gurditta Mal during the relevant accounting year.
It is true that the services rendered by these two employees during the relevant accounting year were in no way greater or more onerous than the services ren dered by them in the earlier years, but that is immaterial.
There is no such requirement and the argument based on it cannot be sustained.
It is not justified by the language of section 36 sub section (1), clause (ii) and indeed, if it were pushed to its logical extreme, it would be difficult to support even payment of bonus as a permissible deduction under that provision.
Of course the circumstance that no additional services are rendered 535 by an employee would undoubtedly be of some relevance in determining the reasonableness of the amount of commission but it would have to be considered along with other circum stances and the question whether commercial expediency justified the payment of commission would have to be judged in the light of all the circumstances existing at the mate rial time.
This was the view taken by the Gujarat High Court in Laxmandas Sejram vs Commissioner of Income Tax, Gujarat, (1) and we wholly accept that view.
It is, therefore, no answer to the applicability of section 36, sub section (1), clause (ii) to say that no extra services were rendered by Saheb Dayal and Gurditta Mal during the relevant accounting year.
The amount of commission having been paid for services admittedly rendered by them, the only question would be whether it was reasonable under section 36, sub section (1), clause (ii).
Turning to the provisions of section 36, sub section (1), clause (ii), we find that the proviso to that clause lays down three factors for the purpose of determining the reasonableness of the commission paid to an employee.
The question whether the amount of the commission is a reasona ble amount or not has to be determined with reference to these three factors.
Sometimes these three factors are loosely described as conditions but they are not really conditions on the fulfilment of which alone the amount of commission paid to an employee can be regarded as reasona ble.
They are merely factors to be taken into account by the Revenue authorities in determining the reasonable ness of the amount of commission.
It may be that one of these factors yields a negative response.
To take an exam ple, there may be no general practice in similar business or profession to give commission to an employee, but, yet, having regard to the other circumstances, the amount of commission paid to the employee may be regarded as reasonable.
What the proviso requires is merely that the reason ableness of the amount of commission shall be determined with reference to the three factors.
But it is well settled that these factors are to be considered from the point of view of a normal, prudent businessman.
The reasonableness of the payment with reference to those factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency.
Let us see whether the amount of commission paid to Saheb Dayal and Gurditta Mal in the present case can be said to be reasonable from this stand point.
It is clear from the order of the Tribunal that reliance was placed by the Tribunal mainly and substantially on the fact that the nature of the work done by Saheb Dayal and Gurditra Mal remained unchanged in the relevant accounting year and there was nothing to show that the increase in the turnover during the relevant accounting year was as a result of any extra efforts made by these two employees and hence it could not be said that there were any special circumstances which warranted the payment of commission to them.
But, as al ready pointed out above the commission aid to an employee cannot be branded as unreasonable merely because the employ ee has done m the relevant accounting year the same work which he was doing in the earlier years.
Even where the nature of the work has remained the same, commercial expedi ency may require payment of commission to an employee.
Here, Saheb Dayal and Gurditta (1) 536 Mal were each receiving a salary of Rs. 1000/ per month and besides this salary, there were admittedly no other perqui sites given to them.
They were the persons attending to the business of the assessee and in fact Gurditta Mal was an experienced and seasoned businessman and it was he who was advising OCM in regard to designs etc.and he and Saheb Dayal were primarily responsible for the flourishing state of the business.
The turnover of the sales of the assessee steadily rose from 1960 61 and in the relevant accounting year, it reached the exciting figure of Rs. 54.28 lacs.
So also the overriding commission which started with the modest figure of Rs. 35,964/ in the accounting year relevant to the assessment year 1960 61 went on steadily increasing from year to year until it reached the figure of Rs. 1,13,449/ in the relevant accounting year.
The assessee, therefore, felt that in view of the tremendous progress in the business which was largely the result of the services rendered by Saheb Dayal and Gurditta Mal, apart of the overriding commission should be paid to them, so than they may carry a sense of satisfaction that their efforts have been suitably rewarded and they may have an added incentive to work and may be spurred to greater efficiency in the future.
It may be noted that the overriding commission of the assessee during the relevant accounting year was Rs. 1,13,449/ and the total profit was Rs. 3,08,034/ and if out of this total profit of Rs. 3,08,034/ , an aggregate sum of Rs. 45,380/ was paid to Saheb Dayal and Gurditta Mal as commission, it is difficult to see how such payment could be regarded as unreasonable.
It is true that there was no obligation on the assessee to make payment of this commission to Saheb Dayal and Gurditta Mal, but it is now well settled that the mere fact that commission is paid ex gratia would not necessarily mean that it is unreasonable.
Commercial expediency does not mean that an employer should not make any payment to all employee unless the employee is entitled to it under a contract.
Even where there is no contract, an employer may pay commission to an employee if he thinks that it would be in the interest of his business to do so.
It is obvious that no business can prosper unless the employees engaged in it are satisfied and contented and they feel a sense of involvement and identifi cation and this can be best secured by giving them a stake in the business and allowing them to share in the profits.
It would indeed be a wise step on the part of an employer to offer incentive to his employees by sharing a part of his profits with them.
This would not only be good business but also good ethics.
It would be in consonance with Gandhian concept as also modern socialistic thought which, with its deeply rooted faith in social and economic democracy, regards; the employees as much as the employer as co sharers in the business.
If an employer earns profits to which the employees have necessarily contributed by putting in their labour, there is no reason why the employer should not share a part of these profits with the employees.
That is the demand of social justice today and it is high time that the administration of our tax law recog nised it and encouraged sharing of profits by employers with employees by adopting a progressive and liberal approach in the applicability of section 36, sub section (1), clause (ii) What is the requirement of commercial expediency must bejudged not in the light of the 19th Century laissez faire doctrine which regarded man as an economic being concerned only to protect and 537 advance his serf interest but in the context of current socio economithinking which places the general interest of the community above the personal interest of the individu al and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves etc,a part of it should in all fairness go to the employees.
We are, there fore, of the view that the sum of R.s. 45,380/ paid by the assessee to Saheb Dayal and Gurditta Mal by way of commission during the relevant accounting year was reasona ble having regard to all the circumstances of the case and it ought to have been allowed as a deductible expenditure under section 36, sub section (1), clause(ii).
We accordingly allow the appeal, set aside the judgment of the High Court and answer the question referred by the Tribunal in the affirmative in favour of the assessee.
The Commissioner will pay the costs of the appeal as also of the reference to the assessee.
S.R. Appeal allowed.

summary:
The appellants were the sole selling agents of the Oriental Carpet Manufacturers India Pvt. Ltd. in respect of yarn, cloth and blankets manufactured by them and for the sales effected by the appellants, as such sole selling agent 's commission was paid to them by OCM.
Since the appellants showed very satisfactory turnover from year to year, OCM started giving to them, in addition to the usual commission, over riding commission @ 21/2 per cent on the sales effected by the appellants.
Since the turnover of the sales reached the figure of Rs. 54.28 lacs and over riding commission increased to Rs. l,13,449/ during the previous year corresponding to the assessment year 1963 64, the appellants paid out of the over riding commission received by them a sum of Rs. 22,690/ (i.e. at the rate of 1/2% of the sales) each to two of their employees viz., Saheb Dayal and Gurditta Mall since they were primarily responsible for the increased prosperity of the appellants.
The commission so paid viz. Rs. 45,380/ was claimed by the appellants as a deductible expenditure in their assessment to income tax for the assessment year 1963 64.
The Income Tax Officer disallowed the claim on the ground that there was no evi dence to show that the increase in sales during the relevant accounting year was due to the efforts of Saheb Dayal and Gurditta Mal.
The Appellate Assistant Commissioner rejected the appeal preferred to him and held that since no evidence had been produced by the assessee to prove that the activi ties of Saheb Dayal and Gurditta Mal in the relevant account year were of a nature different from those: in the earlier years so that they put in any extra time or energy in the conduct of the business of the assessee so as to justify the payment of the commission, it could not be said that the commission was paid for services rendered by them.
The Tribunal, in further appeal took the same view and held that since there was no proof to show that any extra services were rendered by Saheb Dayal and Gurditta Mal for which payment of commission in addition to salary and bonus could be justified, commission could not be said to have been paid for services rendered so as to attract the applicability of section 36(1)(ii) of the Act.
The High Court was also of the same view and answered the reference made to it, in favour of the Revenue.
Allowing the appeal by special leave, the Court, HELD: (1) The sum of Rs. 45,380/ paid by the assessee to Saheb Dayal and Gurditta Mal by way of commission during the 'relevant accounting year was reasonable, having regard to all the circumstances of the case and it ought to have been allowed as a deductible expenditure section 36(1)(ii) of the Income Tax Act.
[537 B] (2) Section 36, sub section (1) clause (ii) does not postulate that there should be any extra services rendered by an employee before payment of commission to him can be justified as an allowable expenditure.
What it requires, is only this, namely, that commission paid to an employee should be for some services rendered by him.
It is not necessary that the commission should be paid under a con tractual obligation.
It may be purely voluntary.
(3) It is immaterial that the services rendered during the relevant accounting year were in no way greater or more onerous than the services rendered in the earlier years.
There is no such requirement under the section and it is not justified by the language of section 36, sub section(l), clause (ii) and indeed if it were pushed to its logical extreme, even payment of bonus cannot be treated as permissible deduction under that provision.
[534 G H] 530 (4) It is now well settled that the mere fact that commission is paid exgratia would not necessarily mean that it is unreasonable.
Commercial expediency does not mean that an employer should not make any payment to an employee unless the employee is entitled to it under a contract.
What is the requirement of commercial expediency must be judged not in the light of the 19th Century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self interest but in the context of current socio economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital depreciation, reserves etc., as part of it should in all fairness go to the employees.
[536 E G] (5) The question whether commercial expediency justified the payment of commission would have to be judged in the light of.
all the circumstances existing at the material time.
In the instant case, the assessee felt, on grounds of commercial expediency that a part of the over riding commis sion should be raid besides salary and bonus to its two employees who had worked so well and contributed to the prosperity of the assessee and did make the payment.
[525 AB] Laxmandas Sejram vs C.I.T. Gujarat approved.
(6) The question whether the amount of the commission is a reasonable amount or not has to be determined with refer ence to the three factors laid down in section 36(1)(ii).
Though described loosely as conditions, they are not really conditions on the fulfilment of which alone the amount of commission paid to an employee can be regarded as reasona ble.
The reasonableness of the amount of commission has to be considered from the point of view of a normal, prudent businessman, and not on any subjecting standard of the assessing authority.
[525 C D] Observation: It is high time that the administration of our tax law recognised the demand of social justice today viz., profit sharing by the employees and encouraged it by adopting a progressive and liberal approach in the applicability of section 36, subsection (1), clause (ii).
[536 H]


judgement:
Appeal No. 2022 of 1969.
Appeal,from the Judgment and Order dated 26.10.1968 of the Judicial Commissioner for Manipur in Civil Appln.
Case No. 23/67) R.K. Garg, S.C. Agarwal & V.J. Francis, for the Appel lant.
V.C. Mahajan & R.N. Sachthey, for Respondent Nos.
1 3 The Judgment of the Court was delivered by RAy,C.J.
This appeal is by certificate from the judg ment dated 26 October 1968 of the Judicial Commissioner for Manipur.
The appellant by a writ petition challenged the order of respondent No. 1 by which the appellant was compulsorily retired.
The Judicial Commissioner dismissed the writ petition of the appellant.
The appellant was born on 1 January 1911.
He joined the erstwhile State of ' Manipur as a junior clerk in 1935.
Though he was not a Law Graduate, he rose to become a permanent Puisne Judge in Manipur State Chief Court with effect from 5 October 1949.
After the Government of India took over the administration of Manipur the appellant was appointed as a Subordinate Judge with effect ' from 25 Janu ary 1950 on a temporary basis.
On the enactment of Manipur Courts Act 1955 the Court of Subordinate Judge was estab lished .on 1 March 1956.
The appellant was appointed as the Judge of that Subordinate Court from that date.
The appellant did not earn good reports from superior officers.
He was reverted to the post of subordinate Judge.
The appellant was served with a notice dated 30 June 1966 that he was required to retire from Government service with effect from 1 October 1966 in pursuance of the direc tions of the President in Paragraph 6 of the.
Government of India Decision No. 23 noted below Fundamental Rule 56.
The above Decision No. 23 was contained in the Memoran dum of the Government of India, Ministry of Home Affairs dated 30 November 1962.
The Decision came into force on 1 December 1962.
Under Paragraph 6 of the Decision the appointing authority was empowered to require a Government servant to retire after he had attained the age of 55 years on three months notice without assigning any reason.
This provision was really intended to retire an officer who had completed 30 years ' qualifying service.
The purpose of the provision was to weed out unsuitable employees after they attained the age of 55 years.
The Government Decision No. 23 below Fundamental Rule No. 56 which came into force on 1 December 1962 as aforesaid was substituted by new Rule .on 21 July 1965.
The new rule provided that 1024 if the appropriate authority is of, opinion that it is in public interest to do so, he has the absolute right to retire any Government servant after he attained the age of 55 years with notice of not less than three months.
The appellant on receiving the notice for retirement prayed for his being retained in service after the age of 55 years in public interest.
The representation of the appel lant was rejected.
It is in this background that the appel lant filed the writ petition.
The principal contention of the ,appellant was that the impugned order of compulsory retirement was null and void ab initio because the Fundamental Rule 56 at the material time contained no reservation, of any powers in the appointing authority to retire him without any reason on three months notice after the age of 55 years.
Emphasis was placed by counsel on the fact that the impugned order was made ex pressly under the authority of Government of India Decision No. 23 below Fundamental Rule 56 and this Decision was not subsisting at the time of the impugned notice.
It was also.
contended that the Government Decision was not incor porated in Fundamental Rule 56 and therefore it amounted to a mere executive instruction and not a rule within the meaning of Article 309.
The appellant also contended that in substance, the compulsory retirement was removal under Article 311.
Compulsory retirement is not a punishment.
There is no stigma in compulsory retirement.
See Tara Singh etc.
vs State of Rajsthan and ors.(1) It is also the view of this Court that if power can be traced to a valid power the fact that the power is purported to have been exercised under non existing power does not invalidate the exercise of the power.
See L. Hazari Mal Kuthiala vs Income tax Officer, Special Circle Ambala Court and Anr.(2) and Hukumchand Mills Ltd. vs State of Madhya Bharath & anr.(3) The Government case is that the Chief Commissioner by reason of the order of the President contained in Government of India, Ministry of Home Affairs Memorandum No. 33/18/62 ESTS(A) dated 30 November 1962, followed by Fundamental (Sixth Amendment) Rules, 1965, had the power to retire the Government servant without assigning any reason if he was of opinion that it was in the public interest to do so.
The relevant Fundamental Rule 56(J) is as follows : "Notwithstanding anything contained in this Rule, the appropriate authority shall, if it is of the opinion that it is in the public interest to do so, have the absolute right to retire any Government servant after he has attained the age (1) (2) [1961] 1 S.C.R. 892.=41.I.T.R. 12.
(3) ; I.T.R. 583.
1025 of 55 years by giving him notice of not less than three months in writing".
The affidavit evidence is that the order of compulsory retirement was made in public interest.
The absence of recital in the order of compulsory retirement that it is made in public interest is not fatal as long as power to make compulsory retirement in public interest is there and the power in fact is shown in the. facts and circumstances of the case to have been exercised in public interest.
In R.L. Butail vs Union of India & Ors.(1) this Court considered Fundamental Rule 56(j) and the circumstances under which compulsory retirement can be made in public interest.
It is true that in Butail 's case (supra), the notice in terms of Fundamental Rule 56(j) was served, namely that the order of complusory retirement was made in public interest.
A comparision between Paragraph 6 of Decision No. 23 below Fundamental Rule 56 and Fundamental Rule 56(j) of amended F.R. 56 shows that the two deal with the identical matter of compulsory retirement.
The common features are that the Government servant may be asked to retire after the age of 55 years.
Second, such retirement is ordered to be made by giving the Government servant a notice of three months.
Third, the power to retire is an absolute right without assigning any reason.
Fourth, under the amended Fundamental Rule 56(j) the power is exercised only if the appropriate authority is of opinion that it is in public interest to do so.
The Government affidavit is that the Chief Commissioner made the order because he was of opinion that it was in public interest to do so.
Whether the order is correct or not is not to be gone into by the court.
See Union of India vs J. N. Sinha.(2) In the present case, Counsel for the appellant contended that it did not appear in the order that there was any application of mind that the order was being made in public interest.
In Butail 's ease (supra) it was said that the plea that the appropriate authority had not applied its mind failed there in view of the clear averments made in that regard in the affidavit and, no reason was adequately shown to discord those statements as untrue Or Otherwise unbeliev able.
In the present case, the affidavit evidence estab lishes that the Commissioner exercised his powers because he was of the opinion that it was in pub, lie interest to make the order of compulsory retirement.
The order in the ,present case is made bona fide and nothing is on the record to show that the affidavit is unbelievable.
the foregoing reasons the appeal fails and is dismissed with no order as to costs.
S.R. Appeal dismissed.
(1) (2) [1971] 1 S.C.R. 791.

dataset_name: IN-Abs

summary:
The appellant, a Sub ordinate Judge was compulsorily retired under the Government of India Decision No. 23.
below Fundamental Rule No. 56 though the said rule was later substituted as FR 56(j).
A writ petition assailing the order of compulsory retirement as in violation of Article 311 was dismissed by the Judicial Commissioner for Manipur.
On appeal by certificate the appellant contended that the impugned order of compulsory retirement was null and void ab initio because: (1) Fundamental Rule 56 at the material time contained no reservation of any power in the appointing authority to retire him without any reason on three month 's notice after the age of 55 years: (2) the impugned order was made expressly under a non subsisting authority viz., Gov ernment of India Decision No. 23 below Fundamental Rule 56, at the time ' of impugned notice and (3) the Government of India Decision not having been incorporated in Fundamental Rule 56, it amounted to a mere executive instruction and not a rule within the meaning of Article 309.
Dismissing the appeal, the Court HELD: (1) Compulsory retirement is not a punishment, there being no stigma in it.
[1024 D] Tara Singh etc.
vs State of Rajasthan and Ors. ; reiterated.
(2) If power can be traced to a valid power the fact that 1he power is purported to have been exercised under non existing power does not invalidate the exercise of the power.
In the .present case, the affidavit evidence estab lishes that the Commissioner exercised his powers and was of the opinion that it was in public interest to make the order of compulsory retirement.
[1024 E 1025 A] L. Hazari Mal Kuthiala vs Income tax Officer, special circle Ambala Cantt.
and Anr.
I.T.R. 12 and Hukumchand Mills Ltd. vs State of Madhya Bharath and Anr. ; I.T.R. 583 followed.
(3) The absence of recital in the order of compulsory retirement that it was made "in public interest" is not fatal as long as power to make compulsory retirement in public interest is there and the power, in fact, is shown in the facts and circumstances of the case, to have been exer cised in public interest.
Whether the, order is correct or not is not to be gone into by the Court.
In the instant case, the Government affidavit is that the Chief Commission er made the order because he was of the opinion.
that it was in public interest to do so.
The order is made bona fide and nothing us on the record to show that the affidavit is unbelievable.
[1025 A B, E G] Union of India vs J. N. Sinha [1971] 1 SCR 791 applied.
Butail vs Union of India & Ors.
referred to. 1023


judgement:
Civil Appeal No. 309 of 1976.
Appeal by Special Leave from the Judgment and Order dated the 22nd January, 1975 of the Bombay High Court in Appeal No. 106 of 1969 in Misc.
Petition No. 320 of 1964.
7 502 SCI/77 526 I. N. Shroff and H.S. Parihar for the Appellants.
M.N. Shroff for Respondents 1 and 2.
V.P. Ram an, Addl.
Genl, K.J. John and Shri Narain for Respondent No. 3.
The Judgment of the Court was delivered by GUPTA, J.
Ahmedabad Jupiter Spinning Weaving and Manu facturing Company Limited was the owner of 5900 Sq.
yds of land forming part of its mill premises at Lower Parel in Bombay which was sought to be acquired by the Maharashtra Government for a municipal school.
Notifications under sections 4 and 6 were issued on June 19, 1961 and May 29, 1964 respectively.
The company filed a petition in the Bombay High Court challenging the validity of the notifica tions on several grounds.
A single Judge of the High Court having dismissed the writ petition on August 11, 1969 the company preferred a. letters patent appeal.
During the pendency of the appeal, the management of the company was taken over by the Central Government on October 8, 1972 under the Industries (Development and Regulation) Act, 1951.
On September 21, 1974 an ordinance called the Sick Textile Undertakings (Nationalisation) Ordinance, 1974 was .promulgated by virtue of which the textile undertaking of the company the 'management of which had been taken over by the Central Government, vested absolutely in the Central Government with effect from the "appointed day", which was April 1, 1974, and immediately thereafter stood transferred and vested in the National Textile Corporation.
The Ordi nance was later replaced by the Sick Textile Undertakings (Nationalisation) Act, 1974 (hereinafter referred to as Sick Textile Act).
Sections 3 and 4 of the Act are as follows: Acquisition of rights of owners in respect of sick textile undertakings.
(1 ) On the appointed day every sick textile taking and the right title and interest of the owner in relation to every such sick textile undertakings shall stand transferred to, and shall vest absolutely in, the Central Government.
(2) Every sick textile undertaking which stands vested in the Central Government by virtue of sub Section (1 ) shall, immediately after it has so vested, stand transferred to, and vested in, the National Textile Corpora tion.
General effect of vesting 4.
(1 ) The sick textile undertaking referred to in section 2 shall be deemed to include all assets, rights, leaseholds, powers, authorities and privileges and all property, movable and immovable, including lands, buildings, workshops, stores, instru ments, machinery and equipment, cash balances, cash on hand, reserve funds, investments and book debts and all other rights and interests in, or arising out of, such property as were immediately before the appointed 527 day in the ownership, possession, power or control of the owner of the sick textile undertaking, whether within or outside India, and all books of account, registers and all other documents of whatever nature relating thereto and shall also be deemed to include the liabilities and obligations speci fied in sub section (2) of section 5.
(2) All property as aforesaid which have vested in the Central Government under sub section (1) of section 3 shall, by force of such vesting, be freed and discharged from any trust, obligation, mortgage, charge, lien and all other incumbrances affecting it, and any attachment, injunction or decree or order of any court restricting the use of such property in any manner shall be deemed to have been withdrawn.
" The other sub sections of section 4 are not relevant for the present purpose.
The National Textile Corporation applied to the High Court for being substituted in place of the original appel lant in the letters patent appeal which was pending and the application was allowed.
The main contention on behalf of the substituted appellant in the High Court was that the two notifications under sections 4 and 6 of the Land Acqui sition Act must be held to have become ineffective in view of section 4(2) of the Sick Textile Act which provides that all property which vests in the Central Government under section 3(1) does so free from all "incumbrances affecting it.
" The High.
Court dismissed the appeal hold ing that the notifications under the Land Acquisition Act were not incumbrances within the meaning of section 4(2) of the Sick Textile Act.
In the appeal before us filed with special leave obtained from this Court, the National Textile Corporation questions the correctness of the view taken by the High Court.
Thus the only question for determination in the appeal is whether the notifications issued under the Land Acquisi tion Act are incumbrances within the meaning of the word as used in section 4(2} of the Sick Textile Act.
Section 3 and the first two sub sections of section 4 of the Sick Textile Act are the only provisions relevant in this context.
Section 3 provides that on the appointed day every sick textile undertaking shall vest absolutely in the Central Government, and then in the National Textile Corporation.
Subsection (1 ) of section 4 states that the undertakings vesting in the Central Government under section 3 shall be deemed to include all assets, rights and interests in the ownership, possession or control of the owners of such undertakings immediately before the appointed day.
Sub section (2) of section 4 provides that all property vesting in the Central Government under section 3 shall, "by force of such vesting, be freed and discharged from any trust, obligation, mortgage, charge, lien and all other incum brances affecting it, and any attachment, injunction or decree or order of any court restricting the use of such property in any manner shall be deemed to have been with drawn".
Counsel for the appellant argues that sub section (2) of section 4 is intended to vest the sick textile undertakings in the Central Govern 528 ment free from all fetters, and the notifications issued under the Land Acquisition Act which had the effect of freezing the price of the land were fetters falling in the category of "other incumbrances" mentioned in section 4(2) of the Sick Textile Act.
The term 'incumbrance ' has not been defined in the Act.
In Wharton 's Law lexicon incum brance is described as being a claim, lien or liability, attached to property.
This is the sense in which the term is ordinarily used.
An incumbrance in this sense ' has to be a liability "attached to property", it must be a burden or liability that runs with the land, as the High Court has held.
But a notification issued by the Government under the Land Acquisition Act is not a burden Or liability that is attached to the property.
The sovereign right of the State to take proceedings for the acquisition of any land for public purpose is similar to its right to impose a tax on the land which is paramount to the ownership over the land and outside it".
[see The Collector of Bombay vs Nusserwanji Rattanji Mistri & others ; (at 1323).
Under sub section (2) of section 4 of the Sick Tex tile Act all property which have vested in the Central Government under section 3 (1) shall be freed and discharged from any trust, obligation, mortgage, charge, lien and all other incumbrances affecting it, and any attachment, injunction or decree or order of any court restricting the use of such property shall be deemed to have been withdrawn.
Counsel for the respondent.
State of Maharashtra, submits that the term incumbrance should take colour from the dif ferent kinds of burden on the land specified in section 4(2) preceding the words all other incumbrances"it is argued that incumbrance in the context means ' Some burden or li ability that is attached to the property ,like mortgage, charge, lien That this is so would also appear from what follows the words "all other incumbrances affecting it".
Having said that the vesting will be free from trust, obligation, mortgage, charge, lien and all other incum brances affecting it.
sub section (2) goes on to add that "any attachment.
injunction or decree or order of any court restricting the use of such property in any manner shall be deemed to have been withdrawn" upon vesting.
If the appel lant 's construction of the provision were correct, and incumbrance meant any kind of fetter, any attachment, in junction or decree or order restricting the use of the property would be included in "all other incumbrances" and it would have been quite unnecessary to mention them sepa rately.
This makes it clear that fetters on the property like attachment, injunction or decree or order of any court restricting the use of the property which are deemed to have been withdrawn upon the property vesting in the Central Government are not really incumbrances within the meaning of the word as used in sub section (2) of section 4.
We therefore agree with the High Court that the notifica tions issued under sections 4 and 6 of the Land Acquisition Act are not incumbrances and cannot be held to have become inoperative on the land in question vesting in the Central Government.
The appeal is dismissed but in the circumstances of the case without any order as to cost.
P. B.R. Appeal dismissed.

summary:
The state Government issued two notifications under sections 4 and 6 of the Land Acquisition Act seeking to acquire certain land belonging to a textile mill.
When the Letters Patent Appeal of the 'Textile mill was pending before the High Court the mill was taken over by the Central Government and later the appellant was substituted for the original appellant.
By virtue of section 3 of the Sick Textile Undertakings (Nationalisation) Act, 1974 the management of every sick textile mill vested absolutely in the Central Government and later in the appellant.
Section 4(2) of the Act provides that all property which vested in the Central Government shall, by force of such vesting, be freed and discharged from trust, obligation, mortgage, charge, lien and all other incumbrances affecting it and any attachment, injunction or decree or order of any court restricting the use of such property in any manner shall be deemed to have been with drawn.
The appellants ' contention that by reason of ss.4(2)the two notifications must be held to have become ineffective because the section provides that all property vested in the Central Government shall be free from all incumbrances affecting it was rejected by the High Court.
Dismissing the appeal to this Court, HELD : The High Court was right in its view that the notifi cations issued under ss 4 and 6 of the Land Acquisition Act were not incumbrances and could not be held to have become inoperative on the land vesting in the Central Government.
[528 B] 1.The term "incumbrance" has not been defined in the Act, The dictionary meaning given to incumbrance is a claim, lien or liability attached to property.
An incum brance in this sense has to be a liability "attached to property".
a burden or liability that runs with the land.
The notifications issued under the Land Acquisition Act are not a burden or liability attached to the property.[528 B] 2.
"Incumbrance" in the context of section 4(2) means some burden or liability attached to the property ,like mortgage, charge, lien etc.
That this is so would appear from the words 'all other incumbrances affecting it".
Having said that the vesting will be free from trust etc.
, sub section
(2) goes on to add that "any attachment.
injunction or decree . shall be deemed to be withdrawn" upon vesting.
If "incumbrance" meant any kind of fetter, any attachment, injunction or decree or order restricting use of the proper ty would be included in "all other incumbrances" and it would have been quite unnecessary to mention them separate ly.
This means that fetters on the property like attach ment, injunction or decree or order of any court restricting the use of the property which are deemed to have been with drawn upon.
the property vesting in the Central Government are not really incumbrances within the meaning of the word as used in s.4(2) [528 E G]


judgement:
: Criminal Appeal No. 277 of 1971.
Appeal by Special Leave from the Judgment and Order dated the 23rd June, 1971 of the Calcutta High Court in Crl.
A. No. 45 of 1964.
P.K. Chatterjee and Rathin Das for the Appellants.
D.N. Mukherjee and G.S. Chatterjee for Respondents.
The Judgment of the Court was delivered by SHINGHAL, J.
This appeal by special leave is directed against the judgment of the Calcutta High Court dated June 23, 1971, upholding the conviction of the appellants for offences under sections 420 and 420/120B of the Penal Code but reducing their sentences.
The charge related to cheat ing the passport issuing authority of the Hooghly 522 district by dishonestly inducing him to issue passports on the basis of false representations.
This Court has limited the special leave to the question whether the passports were "property" within the meaning of section 420 of the Penal Code ? Speaking broadly, the allegation against the appellants was that there was a conspiracy between them as a result of which 1480 applications were filed for the issue of pass ports from July, 1956 to April, 1957, by Muslims and Chinese nationals.
These applications were alleged to have been made by suppressing the real facts about the nationality and addresses of the applicants, and by making false repre sentations in several other respects.
The prosecution alleged that hundreds of passports were thus issued and delivered to persons who were not entitled to them under the law.
Some of the appellants were alleged to be directly concerned with those applications, and it was further alleged that the orders of the Passport Authority were obtained by dishonest inducement and false representation.
A passport is a document which, by its nature and pur pose, is a political document for the benefit of its holder.
It recognises him as a citizen of the country granting it and is in the nature of a request to the other country for his free passage there.
Its importance was examined by this Court in Satwant Singh Sawhney vs D. Ramarathnam(1) with reference to the provisions of the Indian , (hereinafter referred to as the Act) and the Rules made thereunder which were in force at the time when the offences were said to have been committed in this case.
After referring to sections 3 and 4 of the Act, and rules 4 and 5 of the Rules, this Court observed as follows, " . possession of passport, whatever may be its meaning or legal effect, is a necessary requisite for leaving India for travelling abroad.
The argument that the Act .does not impose the taking of a passport as a condition of exit from India, therefore it does not interfere with the right of a person to leave India, if we may say so, is rather hypertechnical and ignores the reali ties of the situation.
Apart from the fact that possession of passport is a necessary condition of travel in the international community, the prohibition against entry indirectly prevents the person from leaving India.
The State in fact tells a person living in India 'you can leave India at your pleasure without a passport, but you would not be allowed by foreign countries to enter them without it and you cannot also come back to India without it. ' No person in India can possibly travel on those conditions.
Indeed it is impossible for him to do so.
That apart, even that theoretical possibility of exit is expressly restricted by executive instructions and by refusal of foreign ex change.
" ' There can therefore be no doubt that a passport is a docu ment of importance for travel abroad and is of considerable value to its holder.
(1) 523 The word "property" has been defined in the Century, Dictionary, which is an encyclopedic lexicon of the English language, as follows, "the right to the use or enjoyment or the beneficial fight of disposal of anything that can be the subject of ownership; owner ship; estate; especially, ownership of tangi ble things . .: anything that may be exclusively possessed and enjoyed; . . possessions.
" As has been stated, a passport provides the several bene fits mentioned above.
It is a tangible thing and is capable of ownership.
There can therefore be no doubt that it is "property".
It is property of the State so long as it is with the passport issuing authority and has not been issued to the person concerned and, after issue, it becomes the property of the person to whom it has.been granted.
Our attention has not been invited to any case where the question now before us arose for consideration on an earlier occasion.
But a somewhat similar question was considered by this Court in Abhayanand Mishra vs The State of Bihar (1).
The appellant there applied to the Patna University for permission to appear at .the
M.A. examination as a private candidate, representing that he was a graduate having ob tained the B.A. degree in 1951 and had been teaching in a school.
On that basis, an admission card was despatched for him to the Headmaster of the school.
It was however found that he was neither a graduate nor a teacher.
He was prose cuted for the offence 'under section 420 read with section 511 of the Penal Code.
He contended that his conviction was unsustainable because the admission card had no pecuniary value and was not property.
This Court repelled the conten tion and held that although the admission card as such had no pecuniary value, it had immense value to the candidate appearing in the examination for he could not have appeared at the examination without it, and that it was therefore property within the meaning of section 415 of the Penal Code.
While reaching that conclusion, this Court relied on Queen Empress vs Appasami (2) and Queen Empress vs Sashi Bhushan.(3) In Appasami 's case it was held that the ticket entitling the accused to enter the examination room was "property", and in Sashi Bhushan 's case it was held that the term "property" included a written certificate to the effect that the accused had attended a course of lectures and had paid up his fees.
On a parity of reasoning, we have no doubt that looking to the importance and characteristics of a passport, the High Court rightly held that it was property within the meaning of sections 415 and 420 of the Penal Code.
We may make a reference to Ishwarlal Girdharlal Parekh vs State of Maharashtra and others (4) also.
There the question for consideration was whether an order of assess ment was "property" within the (1) ; (2) Mad.
(3) All.
(4) ; 524 meaning of section 420 I.P.C.
The charge in that case was that the appellant dishonestly or fradulently induced the income tax authorities and obtainer an assessment order for less income tax than due.
It was held that .the order of assessment received by an assessee was "property", since it was of great importance to the assessee, as con taining a computation, of his total assessable income and, as containtion or his tax liability.
This Court also expressed the view that the word "property" did not necessarily expressed that the thing, of which delivery was dishonestly desired by the person who cheats, "must have a money value or a market value, in the hand of the person cheated".
It was held that "even if the thing has no money value, in the hand of the person cheated, but becomes a thing of value, in the hand of the person, who may get possession of it as a result of the cheating practised by him, it would still fall within the connotation of the term 'property ' in section 420 I.P.C." This decision also lends support to the view we have taken for, as has been stated, a passport is a valuable document.
Our attention has also been invited to In re Packiana than(1) and Local Government vs Gangaram.(2) The accused in Packianathan 's case was prosecuted for an offence under section 419 read with section 511 of the Penal Code.
He was going to Ceylon, and he used the permit which stood in the name of one Kumarswami, while his own name was J. Packiana than.
On seeing the permit the Health Officer issued a health certificate.
It was held that the health certificate was "property" within the meaning of section 415 of the Penal Code and that if a person dishonestly and fraudulently induced the Health Officer to deliver it to him, he was guilty of an offence under section 419 I.P.C. Local Govern ment vs Gangaram was a case where the accused obtained a certificate from the Deputy Inspector of Schools by stating untruly that he had passed the examination.
It was held that the certificate was 'property ' within the meaning of sections 415 and 420 I.P.C. and that the accused was guilty of an offence punishable under section 420 I.P.C.
In taking that view the Nagpur High Court relied on Queen Empress vs Appasami (supra) and Queen Empress vs Sashi Bhushan (supra) on which reliance was placed by this Court in Abhayanand Mishra vs The State of Bihar (Supra) referred to above.
So as passport was a tangible thing, and was a useful.document, and could be the subject of ownership or exclusive possession, it was "property" within the meaning of sections 415 and 420 I.P.C.
There is therefore nothing wrong with the view which has been taken by the High Court and the appeal is hereby dismissed.
The appellants who are on bail shall surrender to serve out the remaining sentence.
P.H.P. Appeal dismissed.
(1) A.I.R. 3920 Mad.
131 (1) (2) A.I.R. 1922 Nagpur 229.

summary:
The appellants were charged under section 420 read with section 120B of the Indian Penal Code on the ground that there was a conspiracy between them as a result of which hundreds of applications were filed for the issue of pass ports.
The applications were made by suppressing the real facts about the .nationality and addresses of the applicants and by making false representations in several other re spects.
The prosecution alleged that hundreds of passports were issued and delivered to persons who were not entitled to have them under the law.
Special Leave was granted limited to the question whether the passports were property within the meaning of section 420 of the Indian Penal code.
Dismissing the appeal, HELD: 1.
A passport is a document which by its nature and purpose is a political document for the benefit Of its holder.
It recognises him as a citizen of the country granting it and is in the nature of a request to the other country for his free passage there.
[522 C] Satwant Singh Sawhney vs
D. Ramarathnam refered to; Ahayanand Mishra vs The State of Bihar ; followed; Queen Empress vs Appasami Mad.
151 and Queen Empress vs Sashi Bhushan All.
210 approved; Ishwarlal Girdharilal Parekh vs State of Maharashtra and Other followed.
In re Packianathan A.I.R. 1920 Mad. 131(1) and Local Government vs Ganga Ram A.I.R. 1922 Nagpur 229 approved.
The word 'property ' is defined as the right to the use or enjoyment or the beneficial right of disposal of anything that can be the subject of ownership, specially ownership of tangible things.
Passport is a tangible thing and is capa ble of ownership.
It is the property of the State so long as it is with the passport issuing authority and has not been issued to the person concerned, and after issue it becomes the property of the person to whom it has been granted.
Passport can be the subject of ownership or exclu sive possession and is therefore property within the meaning of sections 415 and 420 I.P.C. [523 A C, 524 G]


judgement:
Appeal No. 1174 of 1974.
(From the Judgment and Order dated the 4 4 1974 of the Delhi High Court in Wealth Tax Ref.
No. 5 of 1972).
R.M. Mehta and, P.L. Juneja, for the appellant.
G.C. Sharma, M.L. Khanna, Anup Sharma, Miss Jaswal K.K. and K.R. Jagaraja and D.K. Jain, for the respondent.
The Judgment of the, Court was delivered by BHAGWATI, J.
This appeal raises a rather difficult but interesting question of law relating to valuation for the purpose of the Wealth Tax Act, 1957 of leasehold interest in land, when, there is, a covenant in the lease that the lessee shall not be entitled to assign the leasehold inter est without obtaining the prior approval in writing of the lesson and the lessor shall be entitled to, claim and recov er from the, lessee a certain specified proportion of the unearned increase in the value of the land at the time of the assignment.
13 436SCI/77 420 The controversy in this appeal, relates to the assess ment year 1968 69, the relevant valuation date being 31st December, 1967.
The assessee is assessed to wealth tax as an individual.
His net wealth on the valuation date included a property situate on plot No. 12, Block 39, Kauti lya Marg, Chanakyapuri.
the property consisted of leasehold interest in the land together with a house built upon it.
The land belonged to the President of India and it was leased by the President of India to one Vashesharan Devi on the terms and conditions set out in an agreement of lease dated 30th December, 1954 and the leasehold interest was acquired from Vashesharan Devi by the assessee.
The premium for the grant of the lease was Rs. 24,400/ and the annual rent was fixed at Rs. 610/ , subject to certain variations.
The terms and conditions of the lease are a little important and, so far material, they may be reproduced as follows: "13.the lessee shall before any assign ment or transfer of the said premises hereby demised or any part thereof obtain from the lessor or such officer or body as the lessor may authorise in this behalf approval in writing of the said assignment or transfer and all such assignees and transferees and the heirs of the lessee shall be bound by all the covenants and conditions herein contained and the answerable in all respect therefore.
Provided also that the lessor be enti tled to claim and recover a portion of the unearned increase (i.e. the difference between the premium already paid and current market value) in the value of land at the time of transfer (whether such transfer is an entire site or only a part thereof), the amount to be recovered being 50 per cent of the unearned increase.
The Lessor shall have a pre emptive right to the property after deducting 50 per cent of the unearned (torn) said.
" The assessee constructed a large building on the land and the question arose as to how the leasehold interest of the assessee in the land together with the building should be valued.
This property had been valued in the past assess ment years at Rs. 6,00,000/ and the assessee had accepted this valuation and not challenged it.
But in the assessment for the assessment year.
1968 69 the assessee valued this property in its return of net wealth at Rs. 4,52,000/ on the.
basis of a certificate obtained from M/s Anand Apte and Jhabvala, Architects who, are approved valuers recog nised by the Department.
The Architects estimated the value of the property at Rs. 5,82,268/and from this figure, they deducted a sum of Rs. 1,30,000/ representing 50 per cent of the: unearned increase in the value of the land, which under the terms and conditions of the lease.
belonged to the lessor and arrived at the value of Rs. 4,52,000/ .
The Wealth Tax Officer did not accept the estimate of the valua tion made by the Architects and taking the annual rent of Rs. 30,000/ fetched by the property as the basis, computed the net annual rent at Rs. 82,956/ 421 and arrived at the figure of Rs. 8,29,560/ as the value of the property by applying the multiple of ten.
to the annual rental value of Rs. 82,956/ .
The Wealth Tax Officer rejected the claim of the assessee to deduct from the value of the property 50 per cent of the unearned increase in the value of the land on the ground that this claim was based "merely on hypothetical presumptions" but reduced the value off the property from Rs. 8,29,560/ to Rs. 6,00,000/ , since that was the figure accepted by the Revenue in the past assessment years.
The assessee challenged the valua tion made by the Wealth Tax Officer in an appeal preferred before the Appellate Assistant Commissioner, but the appeal was unsuccessful as the Appellate Assistant Commis sioner took the same view as the Wealth Tax Officer.
The Tribunal also, in further appeal, affirmed the same view holding that "the fact that the assessee might have to Pay 50 per cent of the unearned increase to the lessor does not affect the valuation of the property under section 7 of the Wealth 'Tax Act" and the words used in that section "make it clear that the estimate which should be made by the Wealth Tax Officer is of the gross price" and hence no, part of the unearned increase was deductible in computing the value of the property for the purpose of the Wealth 'fax Act.
The Tribunal also upheld the rental method of valuation of the property and finding that the valuation of Rs. 6,00,000/ adopted by the Wealth Tax Officer was even less than eight times the annual rental value of Rs. 82,956/ , the Tribunal declined to interfere with the valuation made by the Wealth Tax Officer.
The assessee thereupon applied to the Tribunal for making a reference to the High Court and on the application of the assessee, the following question of law was referred by the Tribunal for the opinion of the High Court: "Whether on the facts and in the circum stances of the case, the Tribunal was justi fied in law in taking the view that 50% of the unearned increase payable to the lessor of the land formed part of, and was not deducti ble out of, the valuation of the property for the purposes of Wealth tax Act ?"
The High Court took the view that the liability to pay 50 per cent of the unearned increase in the value Of the land to the lessor at the time of the assignment was a disadvan tage attached to the leasehold interest in the land and hence its value was liable to be deducted from the value of the property in arriving at the net wealth of the assessee and on this view, it answered the question in the negative in favour of the assessee.
This led to the filing of the present appeal by the 'Revenue after obtaining a certificate of fitness from the High Court.
It would be convenient ' at the outset to refer to the relevant provisions of the Wealth Tax Act, 1957 before we .address ourselves to the question which arises for determination in the appeal, The Wealth Tax Act, 1957 was passed by the Parliament in exercise of the legislative power conferred under Entry 86 of List I of, the Seventh Schedule to the ' Constitution and, as pointed out by Shah, J., ih Sudhir 422 Chandra Nawa vs Wealth Tax Officer, Calcutta,(1) wealth tax "is a tax imposed ' on the capital value of the assets of individuals and companies on the valuation date . it is imposed on the total assets which the assessee owns" and it is levied on the value of those assets.
Section 3 is the charging section and it provides that, subject to the other provisions contained in the Act, there shah be charged for every assessment year commencing on and from the 1st day of April, 1957 a tax_in respect of the net wealth on the corre sponding valuation date of every individual, Hindu Undivided Family and company at the rate or rates specified in the Schedule.
Thus, wealth tax is a tax on the net wealth of the assessee on the valuation date.
Net wealth is de fined in section 2(m) to mean "the amount by which the aggregate value, computed in accordance with the provisions of this Act, of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included ' in his net wealth as on that date under this Act, is in excess of the aggregate value of all the, debts owed by the assessee on the valuation date" other than debts failing within certain specified categories.
The word 'asset ' used in section 2(m) is of the widest Signifi cation and under section 2(e), it includes property of every description, movable or immovable, barring certain excep tions which are not material for our purpose.
What is, therefore, necessary for the purpose of determining the net wealth of the assessee is., first to compute the aggregate value of all assets belonging to the assessee in accordance with the provisions of the Act and then to deduct from it the aggregate value of all the debts, and the resultant which is obtained would be the net wealth assessable to tax.
section 7, sub section (1) lays down the mode of determination of the value of an asset for the purposes of the Act and it says that, subject to any rules made in this behalf, the value of any asset other than cash "shall be estimated to be the price which, in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date".
Now, plainly one of the assets belonging to the assessee in the present case was the lease hold ' interest in the land together with the building upon it and for the purpose of computing the net wealth of the assessee, it was necessary to determine the value of this asset.
The question which must, therefore, be asked in terms of section 7( 1 ) is: what would be the price which this asset would fetch if sold in the open market on the valuation date ?
This question cannot be satisfactorily answered, unless we first determine what is the nature of this asset: what is the interest in property, qualitative as well as quantitative, which this asset represents ? The asset consists of leasehold interest of the asses see in the land together with the building constructed upon it.
The building, of ' course, belongs to the assessee having been constructed by him and the determination of its value should not present any difficulty, because there are recognised methods of valuation of buildings.
The diffi culty, however, arises in regard to valuation of the leasehold interest in the land.
The leasehold interest is held by the assessee under a lease deed executed by the President of India and apart from (1) 423 clause (13), which we have reproduced above, it is an ordi nary leasedeed of the usual kind.
Clause (13 ) of the lease deed provides that the assessee shall not be entitled to assign the leasehold interest in the land without obtain ing the prior approval in writing of the lessor and 50 per cent of the unearned in.crease in the value of the land at the time of the assignment shall be claimable by the lessor, and moreover, if the lessor so desires, he shall have pre emptive right to purchase the property after deducting 50 per cent of the unearned increase in the value of the land.
Does this covenant merely impose a personal obligation on the lessee which ,arises on assignment of the leasehold interest or it is a covenant running with the land ? That is a question which has a direct bearing on the valuation of the leasehold, interest.
Now, the last portion of the first paragraph of clause (13) provides that "all such assignees and transferees . shall be bound by all the covenants and conditions herein contained and be answerable in respect therefore".
This means that whenever an assign ment of the leasehold interest is made by the lessee, the assignee would be bound by all the covenants contained in the lease deed and these would indisputably include the covenant in clause (13 ).
Clause (13 ) would equally bind the assignee and if the assignee in his turn wants to assign his leasehold interest in the land, he would have to obtain the prior approval in writing of the lessor to such assignment and the lessor would be entitled to claim 50 per cent of the unearned increase in the Value of the land.
This indeed was not disputed on behalf of the Revenue.
The covenant in clause (13) is, therefore, clearly a cove nant running with the land and it would bind whosoever is the holder of the leasehold interest for the time being.
It is a Constituent part of the rights and liabilities and advantages and disadvantages which go to make up the lease hold interest and it is an incident which is in the nature of burden on the leasehold interest.
Plainly and indis putably it has the effect of depressing the value which the leasehold interest would fetch if were free from this burden or disadvantage.
Therefore, when the leasehold inter est in the land has to be valued, this burden or disadvan tage attaching to the leasehold interest must be duly dis counted in estimating the price which the leasehold interest would fetch.
To value the leasehold interest on the basis that this burden or disadvantage were to be ignored would be to value an asset different in content and quality from that actually owned by the assessee.
This was the principle applied by the Judicial Committee in Corrie vs MacDemott,(1) an appeal from Australia, where the question arose as to how certain land granted by the Government of Queensland to the trustees of the Acclimatisation Society of Queensland to be used only for the purpose of the Society should be valued on resumption by the Government.
The trustees had no general power of sale but they were by statute authorised to sell any part of the land to the local authority and to the National Agricultural and Industrial Association.
It was held by the judicial Committe that in view of this restric tion on the nature of the interest of the trustees in the land, the trustees were not entitled, upon resumption of the land by the Government, to be paid unrestricted.
free hold value of (1) 424 the land but only the value of the land to the trustees under the conditions upon which they held it.
The Judicial Committee pointed out that if the owner holds the property subject to restrictions, "it is a necessary point of enquiry how far these restrictions affect the value" and the proper ty cannot be valued as if it were "unrestricted in any way".
The burden or limitation attaching to the leasehold interest in the present case must, therefore, be taken into account in arriving at the value of the leasehold interest and it cannot be valued ignoring the burden or limitation.
This problem can also be looked at from a slightly different angle and this approach too would throw some light on the true nature of the leasehold interest required to be valued.
Let us approach the question from the point of view of the lessor.
What is the nature of the lessor 's interest in the land ? The lessor has undoubtedly the reversion, but coupled with it is also the right to 50 per cent .of the unearned increase in the value of the land at the time of assignment of the leasehold interest by the lessee as also the pre emptive right to the land after deducting 50 per cent of the unearned increase from the price obtainable by the lessee.
This is the asset of the lessor which would have to be valued when the lessor is sought to be assessed to wealth tax.
The right to 50 per cent of the unearned 'increase on assignment of the leasehold interest would certainly add to the value which the reversion would other wise fetch in the open market.
Now, once it is granted that under the lease deed the lessor has a bundle of rights, which includes 'something ' more than the reversion, that 'something ' would necessarily be subtracted from the inter est of the lessee and to that extent, the interest of the 'lessee would stand reduced.
The interest of the lessee would be the leasehold interest minus that 'something '.
What goes to augment the interest of the lessor would corre spondingly reduce the interest of the lessee and it Cannot be taxed as the wealth of both the lessor and the lessee.
It would be includable in the net wealth of the lessor and hence it cannot at the same time form part of the wealth of the lessee and must be subtracted in determining the nature and extent of the interest of the lessee.
That takes us to the question as to how the leasehold interest of the assessee with the burden or limitation attaching under clause (13) of the lease deed should be valued.
It is clear from the language of section 7, sub sectiOn (1 ) that what the Revenue is required to do for the purpose of determining the value of an asset is to assume that the asset which is to be valued is being sold in the open market and to fix its value for the purpose of wealth tax upon that hypothesis.
Now, whenever the value of an asset has to be determined on the basis of a hypothetical_ sale, the court has necessarily to embark upon speculations which may be quite difficult and in 'some cases, even arti ficial.
Here the asset to be valued is the leasehold inter est in the land with the burden or restriction contained in clause (13) of the lease deed and the inquiry has, there fore, to be directed to the question as to what is the price which this asset would fetch if sold in the open market.
What would be the realisable value of this asset ? It would indeed be difficult to speculate as to what 425 the leasehold interest in the land would fetch in the open marker when it is affected by the burden or restriction contained in clause (13) of the lease deed.
If the lease hold interest were free from this burden or restriction, it ' would be comparatively easy to determine its market value, for there are recognised methods of valuation of leasehold interest, but where the leasehold interest is cut down by this burden or restriction and some right of interest is abstracted from it, the problem of valuation becomes a difficult one and some method has to be evolved for resolv ing it.
The only way it can be done in a case of this kind is by taking the market value of the leasehold interest as if it were unencumbered or unaffected by the burden or restriction of clause (13) and deducting from it, 50 per cent of the unearned increase in the value of the land on the basis of the hypothetical sale, as representing the value of such 'burden or restriction.
There is also one other consideration which reinforces the adoption of this method of valuation.
When, for the purpose of valuation of the leasehold interest, it is as sumed that the leasehold interest is sold in the open market, the price received does not in its entirety belong to the assessee.
Fifty per cent of the unearned increase in the value of the land is diverted to the lessor by virtue of the paramount title contained in clause (13) and when re ceived by the assessee, it belongs to the lessor.
It is in truth and substance collected by the assessee on behalf of the lessor.
What is received by the assessee on his own account is only the price less 50 per cent of the unearned increase in the value of the land and that represents the net realisable worth of the asset in the hands of the asses see.
The Revenue contended that payment of 50 per cent of the unearned increase in the value of the land to the lessor is really an instance of application of the price received by the assessee and not diversion of a part of the price by paramount title and hence the whole of the price must be taken as the measure of the wealth of the assessee.
But this contention is, in our opinion, not well founded and cannot be sustained.
The true test for determining whether a payment made by an assessee out of an amount received by him is an application of part of the amount which belongs to him or it is payment of an amount which is diverted before it reaches the assessee so that at the time of receipt, it belongs to the payee and not to the assessee, has been explained by Hidayatullah, J., in C. 1. Sitadas Tirath das(1) in the following words: "In our opinion, the true test is wheth er the amount sought to be deducted, in truth, never reached the assessee as hi 's income.
Obligations, no doubt, there are in every case but it is the nature of the. obli gation which is the decisive fact.
There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee.
Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is re quired to be applied to discharge an obliga tion after such income reaches the 426 assessee, the same consequence, in law, does not follow.
It is the first kind of payment which can truly be excused and not the second.
The second payment is merely an.obligation to pay another a portion of one 's own income, which has been received and is since applied.
The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his in come, but for and on ,behalf of the person to whom it is payable.
In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own.
The case is one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector ' of another 's income."
It is clear on the application of this test that in the present case, 50 per cent of the unearned increase iii the value of the land would be diverted to the lessor before it reaches the hands of the assessee as part of the price.
The assessee holds the leasehold interest on condition that if he assigns it, 50 per cent of the unearned increase in the value of the land will be payable to the lessor.
That is the condition on which he has acquired the leasehold inter est arid hence 50 per cent of the unearned increase in the value of the land must be held to belong to the lessor at the time when it is received by the assessee and it would not be part of the net realisable worth of the leasehold interest in the hands of the assessee.
If a question is asked as to what is the real wealth of the assessee in terms of money so far as the leasehold interest is concerned, the answer would inevitably be that it is the price less 50 per cent of the unearned increase in the value of the land.
It is difficult to see how 50 per cent of the unearned increase in the value of the land which belongs to the lessor can be regarded as part of the wealth of the asses.see.
The posi tion would undoubtedly be different where a payment is made by an assessee which is an application of a part of the price received by him.
Where such is the case, the whole of the price would represent the net realisable worth of the asset in the hands of the assessee and what is paid out by the assessee would be merely a disbursement made after the price reaches the assessee as his own property.
That was the position in Pardit Lakshi Kant Jha vs Commissioner of Wealth Tax, Bihar(1) where the question arose whether the expenditure in connection with brokerage, commission or other expenses which would be liable to be incurred by the assessee in effectuating a sale would be deductible from the market value of the shares in determining their value for the purpose of assessment to wealth tax.
This Court held that in computing the value of the shares, the assessee is not entitled to deduction of brokerage and commission from the valuation of the shares as given in,the Stock Exchange quotations or quotations furnished by well known brokers.
It was pointed out by this Court that: (1) 427 "It is not the amount which the vendor would receive after deduction of this expense, but the price which the asset would fetch when sold in the open market which would constitute the value of the asset for the purpose of section 7(1) of the Act".
Obviously, this view 'was taken because the entire price, when received, would belong to the asses see and payment of brokerage and commission would be merely application of part of the price in meeting expenditure necessary for effectuating the sale and hence it would not be deductible in ascertaining the net realisable worth of the shares in the bands of the assessee.
We are, therefore, of the view that the question re ferred by the Tribunal must be answered in the negative and it must be held that in determining the value of the lease hold interest of the assessee in the land for the purpose of assessment to wealth tax, the price which the leasehold interest would fetch in the open market were it not encum bered or affected by the burden or restriction contained in clause (13) of the lease deed, would have to be reduced by 50 per cent of the unearned increase in the value of the land on the basis of the hypothetical sale on the valuation date.
The appeal accordingly Fails and must be dismissed with costs.
section R. Appeal dismissed.

summary:
The respondent an assessee to wealth tax as an individual, in the assessment for the assessment year 1968 69, valued his property situate on plot No. 12, Block 39 Kautilya Marg, Chanakyapuri in his return of net wealth @ Rs. 4,52,000 as against the value of Rs. 6,00,000 shown by him in the previ ous years.
The property consisted of leasehold interest in the land together with a house built on it.
The land be longed to the President of India and it was leased by the President of India to one Vashesharan Devi on the terms and conditions set out in an agreement of lease dated 30th December, 1954 and the leasehold interest was acquired from Vashesharan Devi by the assessee.
Clause (13) of the lease deed provided that the assessee shall not be entitled to assign the leasehold interest in the land without obtain ing the prior approval in writing of the lessor and 50 per cent of the unearned increase in the value of the land at the time of assignment shall be claimable by the lessor and moreover, if the lessor so desires, he shall have pre emp tive right to purchase the property after deducting 50% of the unearned increase in the value of the land.
It further provided that "all such assignees and transferees . . shall be bound by all the covenants and conditions herein contained and be answerable in respect therefor".
In accordance with this clause, the Architects who are approved valuers estimated the value of the property @ Rs. 5,82,268 and from this ' figure, they deducted a sum of Rs. 1,30,000 representing 50 per cent of the unearned in crease in the value of the land, which belonged to the lessor and arrived at the value of Rs. 4,52,268/ .
The Wealth Tax Officer did not accept the estimate of the valuation and taking the annual rental value of Rs. 1,32,000/ fetched by the property as the basis, computed the net annual rent at Rs. 82,956/ and arrived at the figure of Rs. 8,29,560/ as the value of the property by applying the multiple of ten to the net annual rental value of Rs. 82,956/ .
The claim of the assessee to deduct from the value of the property 50 per cent of the unearned in crease in the value of the land was rejected on the ground that this claim was based "merely on hypothetical presump tions".
The value of the property was, however, reduced from Rs. 8,29,560/ to Rs. 6,00,000/ since that was the figure accepted by the Revenue in the past assessment years.
The appeals before the Appellate Assistant Commissioner and the Tribunal failed.
On a reference, the High Court took the view that the liability to pay 50 per cent of the un earned increase in the value of the land to the lessor at the time of the assignment was a disadvantage attached to the leasehold interest in the land and hence its value was liable to be deducted from the value of the property in arriving at the net wealth.
Dismissing the appeals, the Court, HELD: (1) In determining the value of the leasehold interest of the assessee in the land for the purpose of assessment to wealth tax the price which the leasehold interest would fetch in the open market, were it not encumbered or affected by the burden of the restriction contained in clause (13) of the leasedeed, would have to be reduced by 50 per cent of the unearned increase in the value of the land on the basis of the hypothetical sale on the valuation date.
[427 C D] (2) The only way in which in a. case of this kind the valuation section 7(1) of the Wealth Tax Act can be done is by taking the market value of the leasehold interest as if it were unencumbered or unaffected by the burden or restriction contained in clause (13) and deducting from it, 50 per cent of the unearned 419 increase in the value of the land on the basis of the hypo thetical sale as representing the value of such burden or restriction.
[425 A C] (3) The true test for determining the matter of payment made by an assessee out of an amount received by him wheth er it is an application of part of the amount which belongs to him or it is payment of an amount which is diverted before it reaches the assessee so that at the time of re ceipt, it belongs to the 'payee and not to the assessee.
In the present case 50 per cent of the unearned increase in the value of the land would be diverted to the lessor before it reaches the hands of the assessee as part of the price.
[425 E F] C.I.T.v.
Sitaldas Tirathdas SC; applied.
Pandit Lakshmi Kant Jha vs Commissioner of Wealth Tax, Bihar , explained.
(4) The burden or limitation attaching to the leasehold interest must be taken into account in arriving at the value of the leasehold interest and it can not be value ignoring the burden or limitation The covnaent in clause (13) is clearly a covenant running with the land and it would bind whosoever is the holder of the leasehold interest for the time being.
It is a constituent part of the rights and liabilities and advantages and disadvantages which go to make up the leasehold interest and it is an incident which is in the nature of burden, on the leasehold interest.
Plainly and indisputably, it has the affect of depressing the value which the leasehold interest would fetch if it were free from this burden or disadvantage.
When the lease hold interest in the land has to be valued this burden or disadvantage attaching to the leasehold interest must be duly discounted in estimated the price which the leasehold interest would fetch.
To value the leasehold interest on the basis that this burden or disadvantage were to be ignored would be to value an asset different in content and quality from that actually owned by the assessee.
[424 B, 423 D H] Corrie vs MecDermott , quoted with approval.
(5) When under the lease deed the lessor has a bundle of rights which includes "something" more than the reversion, that "something" would necessarily be subtracted from the interest of the lessee and to that extent, the interest of the lessee would be the leasehold interest minus that "something".
What goes to augment the interest of the lessor would correspondingly reduce the interest of the lessee and it cannot be taxed as the wealth of both the lessor and the lessee.
It would be includible in the net wealth of the lessor and hence it cannot at the same time form part of the wealth of the lessee and must be subtracted in determining the nature and extent of the interest of the lessee.
[424 E F]