judgement:
ORIGINAL JURISDICTION: Civil Appeal No. 900 of 1963.
Appeal by special leave from the judgment and order dated April 21, 1961 of the Andhra Pradesh High Court in C.M.P. No. 239 of 1950.
WITH Writ Petition No. 146 of 1961.
Petition under article 32 of the Constitution of India for the enforcement of the fundamental rights.
AND Civil Miscellaneous Petition No. 186 of 1962.
Appeal against the order of the Registrar dated November 21, 1961 refusing to receive the petitioner 's application for refund of Court fees.
The appellant appeared in person.
K.R. Chaudhuri and B.R.G.K. Achar, for the respondent (in C.A. No. 900/63 and W.P. No. 146/1961).
746 The Judgment of Subba Rao, Wanchoo, Hidayatullah and Sikri, JJ. was delivered by Hidayatullah, J. Shah, J. delivered a separate Opinion.
Hidayatullah, J. On January 11, 1960, the Advocate General applied to the High Court of Andhra Pradesh, Hyderabad for action against the appellant Prabhakar Rao H. Mawle under section 2 of the Vexatious Litigation (Prevention) Act 1949 (Madras Act VIII of 1949), on the allegation that Mawle had been "habitually" and without any reasonable ground instituting "vexatious proceedings" in the courts within the cities of Hyderabad and Secunderabad and also in the High Court and appearing in the cases in person; that he was responsible for a considerable amount of litigation or, in other words, that he was a vexatious and habitual litigant.
In support of the petition for the invocation of the punitive provisions of the Act, the Advocate General referred to the following cases: (1) In C.R.P. No. 176.5/58 Mawle described the judgment of the lower court as: " . . . shocking to the sense of justice, a grave dereliction of duty, flagrant abuse of fundamental principles of law and the natural justice, full with errors patent on the face, showing a gross manifest injustice done through the tyrannical arbitrary acts.
" It was stated that Mawle apologised to the High Court to escape proceedings for contempt of court.
(ii) He filed a writ petition No. 1369/18 after the above Civil Revision Petition was dismissed and then preferred an appeal CCCA 42/59. ' (iii) He filed a stay petition against an intended execution before steps were taken and when the petition was dismissed he filed an appeal C.M.A. 86/59 and obtained stay.
(iv) He filed an appeal against the dismissal of the writ petition 1369/58.
He was thus said to have asked for five remedies in one suit (O.S. 200 of 1958).
(v) In an appeal filed on 3 6 1959 he did not pay court fee of Rs. 995 as stamps were not available undertaking to pay the balance which he did not pay.
(vi) In S.R. 38516 and S.C.C.M.P. Mawle stated that as he had appeared in person "without any weightage to his submissions though of law, for in the ends of justice, as against the professional privileges claimed by both these veteran advocates (Mr. O.V. Subbanayadu and 747 Mr. Hari Narayanalal) even though they had taken the role of a party, sole witnesses, swearing false affidavits . . ".
(vii) In S.R. 12409/59 against decree in O.S. 109/1958, though himself the sole defendant, Mawle caused to be preferred an appeal in forma pauperis by his wife and children, getting the judgments under appeal privately printed and certifying them as true.
(viii) C.R.P. No. 1094/59 against the judgment in suit No. 198/2 dismissed against his tenant he filed a revision petition which was dismissed in limini.
(ix) C.R.P. No. 988/1959 filed against I.A. 230/58 in O.S. 99/2 of 1957 of the City Civil Court, Hyderabad was dismissed in limini.
(x) He has filed S.R. 31845/59 as L.P.A. against an order refusing to review C.R.P. against a Small Cause Suit and S.R. No. 27605/59 as a L.P.A. against an order in a petition refusing to condone the delay in filing a review petition in a C.R.P. (xi) C.R.P. 954/1959 filed against an order in L.R. petition in a Small Cause Suit, originally attempted to be filed as an appeal, C.M.P. 55 18 filed and stay ordered on condition that Mawle should deposit the decretal amount.
He then withdrew the C.M.P. (xii) Several criminal matters in High Court.
Complaint in Cr.
406/58 and Crl.
R.C. 506/59.
(xiii) C.M.P. 1858/57 for taking action against the respondent for alleged contempt of court.
(xiv) S.R. No. 43198/59, a L.P. Appeal.
The Advocate General claimed that though the Act was not extended to the area covered by the former Hyderabad State, it must be treated as the law in force there by reason of the .
Mawle was heard on notice and, as was to be expected from a litigant of his sort, flied a fairly long statement in reply denying each accusation and explaining his conduct.
He questioned the jurisdiction of the High Court of Andhra Pradesh to take action under the Act as its provisions were not extended to the area comprised in the former State of Hyderabad.
He challenged the Act as ultra vires and unconstitutional on the ground that it abridged the right of citizens to seek redress in a court of law.
He stated that he was a businessman and a landlord and owned considerable properties in the city of Hyderabad and other cities in the District and the State.
He produced a certificate from the District Magistrate.
He explained that owing to unpleasant experience he had L/P(D)5SCI 9 748 to take away his work from advocates and since 1952 he had started conducting his own cases.
He alleged that he had to recover a couple of lakhs of rupees from his clients/tenants etc.
and had, therefore to file a large number of cases.
He attempted an explanation of the cases to which the Advocate General had referred in his petition.
The High Court by its judgment dated April 21, 1961, now under appeal, held that the Act was both constitutional and intra vires, that the High Court had jurisdiction to make the order and that action under the Act was called for.
The High Court ordered that no proceeding, civil or criminal, should be instituted by Mawle in the City of Hyderabad without the leave of the High Court, in the city of Secunderabad, without the leave of the Chief City Civil Judge and elsewhere without the leave of the District and Sessions Judge concerned.
A copy of the order of the High Court was published in the Gazette of Andhra Pradesh as required by the Act.
Mawle sought a certificate under Articles 132, 133, or 134 of the Constitution but the certificate was refused on the ground that no substantial question of law as to the interpretation of the Constitution or otherwise was involved.
The petitioner then applied for and obtained special leave from this Court and filed the present appeal.
The Act with which we are concerned, though a copy substantially of 16 and 17 Vict.
30 (now replaced by section 51 of the Supreme Court of Judicature Consolidation Act, 1925:15 & 16 Geo V c. 49) is perhaps the only one of its kind in India.
Its provisions are extremely brief and they may be read here: "1.
Short title, extent and commencement.
(1) This Act may be called the Vexatious Litigation (Prevention) Act, 1949.
(2) It extends to the whole of the State of Madras.
(3) It shall come into force at once.
Leave of court necessary for vexatious litigant to institute proceedings.
(1) If, on an application made by the Advocate General, the High Court is satisfied that any person has habitually and without any reasonable ground instituted vexatious proceedings, civil or criminal, in any Court or Courts, the High Court may, after giving that person an opportunity of being heard.
order that no proceedings, civil or criminal, shall be instituted by him in any Court (i) in the Presidency town, without the leave of the High Court; and (ii) elsewhere, without the leave of the District and Sessions Judge.
749 (2) If it appears to the High Court that the person against whom an application is made under subsection (1) is unable, on account of poverty, to engage a pleader, the High Court may engage a pleader to appear for him.
Explanation For the purpose of this section 'pleader ' has the same meaning as in section 2, clause (15) of the Code of Civil Procedure, 1908.
Leave to be granted only if prima facie ground exits The leave referred to in section 2, sub sect=on (1), shall not be given in respect of any proceedings unless the High Court or, as the case may be, the District and Sessions Judge, is satisfied that there is prima facie ground for such proceedings.
Proceedings instituted without leave to be dismissed.
Any proceedings instituted by a person against whom an order under section 2, sub section (IL has been made, without obtaining the leave referred to in that sub section shall be dismissed: Provided that this section shall not apply to any proceedings instituted for the purpose of obtaining such leave.
(5) Publication of orders.
A copy of every order made under section 2, sub section (1) shall be published in the Fort St. George Gazette.
" The High Court of Andhra Pradesh has held that it enjoys all the jurisdiction of the former High Court of Madras and thus the provisions of the Act create a jurisdiction in the High Court capable of being exercised in Telangana area even though the Act as such, 'has not been extended to this part of the territory of the State.
The High Court also holds that the Act is perfectly valid.
In this appeal in addition to questioning the order on the above ground and also merits the appellant contends that the Madras Act itself was invalid inasmuch as it was not covered by any Entry in List II or III of the Government of India Act, 1935 and had not received the assent of the Governor General.
This argument is without substance.
The Act had received the assent of the Governor General and the subject of the legislation was covered by Entries 2 of List II and 2 and 4 of List III of the Government of India Act, 1935.
The next argument of the appellant be fore us is that this Act is unconstitutional because it prevents some citizens from approaching the court and obtaining relief to which everyone is entitled in a State governed by Rule of Law.
This argument really invokes article 19 and article 14.
The latter Article is invoked because the Act, according to the appellant, seeks to create an unreasonable distinction between litigant and litigant.
This argument is also not acceptable to us because the litigants who are to 750 be prevented from approaching the court, without the sanction of the High Court etc., are in a class by themselves.
They are described in the Act as persons who 'habitually ' and 'without reasonable cause ' file vexatious actions, civil or criminal.
The Act is not intended to deprive such a person of his right to go to a court.
It only creates a check so that the court may examine the bona fides of any claim before the opposite party is harassed.
A similar Act, passed in England, has been applied in several cases to prevent an abuse of the process of court.
In its object the Act promotes public good because it cannot be claimed that it is an inviolable right of any citizen to bring vexatious actions without control, either legislative or administrative.
The Act subserves public interest and the restraint which it creates, is designed to promote public good.
The Act does not prevent a person declared to be habitual litigant from bringing genuine and bona fide actions.
It only seeks to cut short attempts to be vexatious.
In our judgment, the Act cannot be described as unconstitutional or offending either article 19 or article 14.
The next contention of the appellant is that the Act has not been extended to the area of the former State of Hyderabad and the High Court cannot exercise jurisdiction in that area.
This contention merits close scrutiny.
The High Court has given a history of the evolution of the State and of the High Court of Andhra Pradesh.
It is common knowledge that the High Court of Madras was rounded by Letters Patent of 1865 and exercised all original, appellate and other jurisdictions conferred by that Letters Patent.
The Act, which was passed by the Madras Provincial Legislature in 1949 conferred jurisdiction upon the Madras High Court to deal with cases of habitual litigants who were persistently filing vexatious actions and were guilty of an abuse of the process of court.
This jurisdiction belonged to the High Court of Madras by virtue of the Act and was not an inherent jurisdiction whether as a Court of Record or otherwise.
When the State of Andhra was formed in 1953 by the Andhra State Act of 1953, the High Court of Madras ceased to exercise jurisdiction over the territory of the State of Andhra.
This jurisdiction was then to be exercised by the High Court of Andhra from a date to be appointed by the President.
The jurisdiction of the Andhra High Court was to be the ' same as that of the Madras High Court.
Section 30 of the Andhra State Act read as follows: "30.
Jurisdiction of Andhra High Court.
The High Court of Andhra shall have, in respect of the territories for the time being included in the State of Andhra, all such original, appellate and other jurisdiction as, under the law in force immediately before the prescribed day, is exercisable in respect of the said territories or any part thereof by the High Court at Madras." 751 By virtue of this section the new High Court possessed the same powers and jurisdiction as the original Madras High Court in its territory.
But by section 53 of the Andhra Act no change was effected in the territorial extent of the laws and references in all laws to the State of Madras were to be adapted to refer to the new State in its application to the new State of Andhra.
In other words, the Act continued to be an Act in force in the Andhra State and the Andhra High Court possessed the same jurisdiction as the former Madras High Court.
So far no difficulty can be seen, but it is obvious that the original jurisdiction of the High Court of Madras in the Presidency Town could not be exercised at Guntur and did not follow the High Court.
The next change came in 1956 by the .
By that Act certain territories were amalgamated with the State of Andhra and prominent among those territories was the former Hyderabad State which for convenience may be referred to here as 'the Telangana Area '.
The city of Hyderabad and the city of Secunderabad are in that area.
The contained a special provision to limit the territorial extent of the laws in force in the different areas which were combined to form the State of Andhra Pradesh.
Section 119 of the provided as follows: " 119.
Territorial extent of laws.
The provisions of shall not be deemed to have effected any change in the territories to which any law in force immediately before the appointed day extends or applies.
and territorial reference in any such law to an existing State shall, until otherwise provided by a competent Legislature or other competent authority, be construed as meaning the territories within that State immediately before the appointed day.
" The appellant relies upon this provision to state that the area of operation of the Act can only be the former territories of the State of Andhra and the Act is not applicable in the territory comprised in the Telangana Area.
The other side contends that by virtue of section 65 the High Court of Andhra Pradesh acquires all the jurisdiction of the High Court of the State of Andhra and therefore it acquires the jurisdiction invested by the Act in the former Andhra High Court.
Section 65 of the reads as follows: "65.
High Court of Andhra Pradesh.
(1) As from the appointed day, (a) the jurisdiction of the High Court of the existing State of Andhra.
shall extend to the whole of the territories transferred to that State from the existing State of Hyderabad; 752 (b) the said High Court shall be known as the High Court of Andhra Pradesh; and The question that arises is whether the application of the Act in the Telangana area is made impossible by section 119 of the Act of 1956 or depends upon section 65 of that Act.
If the Act under which action is purported to be taken can be said to have operated territorially then it is obvious that the extent of territory in which it was to apply was not only not enlarged by the but under section 119 was kept rigid by limiting it to the territory of the former Andhra State.
If, however, that Act created a jurisdiction in the High Court to deal with a particular class of litigants, who were habitually bringing vexatious suits it may be then possible to contend that jurisdiction continues to vest in the High Court of Andhra Pradesh.
The High Court has viewed this matter from the latter angle and come to the conclusion that section 65 and not section 119 controls the matter.
The argument of the High Court is that the Act controls litigation and creates a new procedure in respect of persons who indulge habitually in vexatious litigation.
The Act confers a jurisdiction to put such persons under a procedural restraint and this jurisdiction, the High Court holds.
inhered in the former Madras High Court and later in the Madras and the Andhra High Courts separately and now it inheres in the Andhra Pradesh High Court.
In the opinion of the High Court, the jurisdiction can be exercised within all the territories subject to the Andhra Pradesh High Court including the Telangana Area, Mr. K.R. Choudhury in supplementing this reasoning points out that the High Court of Madras could take action against any person who acted in a manner to attract the provisions of the Act, irrespective of where the person came from.
He contends that a vexatious litigant from Bengal or Bombay could be visited with the punitive provisions of the Act and submits that there is no reason why the Andhra Pradesh High Court cannot control the practice and procedure in the courts of the Telangana area in the same way.
According to him, the Act must be treated as extended to the Telangana area as the Andhra Pradesh High Court continues to possess all the jurisdiction of the former Madras High Court.
This was also the original plea of the Advocate General in his petition in the High Court, though not apparently accepted by the High Court.
We do not accept the argument of Mr. Choudhury.
The Madras Act was applied by the legislature only to the Madras Presidency.
Suppose it had been applied to one district only.
Could the High Court have said that notwithstanding the limited application, it would take action in the other districts of the Madras Presidency? If it could not have extended the territorial limits of the 753 application of the Act in Madras Presidency, the position is not any different now, in view of the provisions of section 119 of the which clearly lay down that no law of one of the amalgamating States is to be extended to the area of the other amalgamating States except by a competent legislative or other competent authority and further that the law shall be construed as restricted to the territories within each State immediately before the Reorganisation.
The territorial area is thus not only not enlarged but is frozen.
We may now consider whether section 65 of the makes any difference to this position.
The Act was designed to control vexatious litigation and it created for the purpose, a new procedure which applied to persons whose visits to courts, as litigants, were not only frequent but were also habitually vexatious.
The Act enabled the Advocate General to apply to the High Court and the High Court on being satisfied that a person had been acting in this manner, could make an order that no proceeding there forward was to be filed by that person in the Presidency town without the leave of the High Court and elsewhere without the leave of the District & Sessions Judge.
The Act was intended to apply in the whole of the Presidency of Madras including the area carved away from the Presidency of Madras and made into the State of Andhra in 1953 and which is now a part of the State of Andhra Pradesh after 1956.
The Act was intended to operate territorially as indeed the clause dealing with the extent of application of the Act itself shows.
In its operative part also the order was to be made with a territorial distinction between the Presidency Town and the rest of the Presidency of Madras.
The order to be passed under the Act contemplated leave of the High Court before a suit was filed in the Presidency Town and the leave of the District & Sessions Judge elsewhere.
It is plain that on its terms the Act cannot apply in the State of Andhra Pradesh atleast in so far as the Presidency Town mentioned in section 2(1)(i) is concerned.
That Presidency Town was the city of Madras and therefore section 2(1)(i) of the Act cannot apply in Andhra Pradesh, because there is no Presidency Town in Andhra Pradesh to which section 2(1)(i) can now refer.
The distinction between the city of Hyderabad and other parts of the State of Andhra Pradesh has been artificially brought into existence by the High Court by making the order in respect of the city of Hyderabad as if it was a Presidency Town.
This is legislation pure and simple and it cannot be undertaken by the High Court.
Section 2(1)(i) of the Act can no longer apply without a proper amendment.
It may, however, be contended that section 2(1)(ii) can apply and the whole of the new State of Andhra Pradesh may be taken to be governed by sub cl.
It would, however, be somewhat strange to make the District & Sessions Judge decide whether a particular litigant should be allowed to move the High Court in appeal, revision or in an original proceeding.
The Act is unworkable in the State of Andhra Pradesh without substantial modifications to it.
754 This is not a question merely of procedural jurisdiction as the High Court has reasoned.
No doubt the Act as it stood, vested a jurisdiction in the High Court to deal with a particular type of litigant but the Act made the High Court to deal with the matter territorially.
It ,is because the territory has changed that the question arises whether the old jurisdiction of the High Court can now ' take in new territory.
All laws are intended to operate territorially and no Provincial Legislature in India possessed extra territorial jurisdiction.
That the Madras Legislature enacted was to operate in its own territory and it said so in the Act.
If new territories are to be governed by the Act it must be extended to the new territories and till it is extended the Act can only operate within the old territories and this is the obvious result of section 119 of the .
Thus there are two difficulties in the way of holding that this Act is operative in the TeIangana area of the new State of Andhra Pradesh.
To begin with it has not been extended to the area known as the TeIangana area and, till extended, section 119 of the expressly prohibits an extension to the Telangana area by judicial construction.
Secondly, there being no Presidency Town as such in the new State of Andhra Pradesh, section 2(1)(i) cannot now be made applicable to the new State of Andhra Pradesh, until some other town is substituted by the Legislature in its place.
The mention of the Presidency Town in section 2(1)(i) was not with a view to indicate the seat of the High Court but was so made because the High Court possessed original jurisdiction in that area.
The words 'Presidency Town ' might, of course, have been amended to read Hyderabad, the seat of the Andhra Pradesh High Court, but this has not been done.
No doubt the court under section 121 of the possesses a power to construe laws by adapting them in such a manner as to facilitate their application to the newly formed State, but the power which is exercisable is only a power of simple adaptation and not a power of legislation.
An increase in the territories in which an Act is to apply is dependent on legislation such as is contemplated by section 119 of the .
What the High Court has done is more than an adaptation.
It has not only substituted the city of Hyderabad for the Presidency town but it has also made the law applicable to Telangana courts contrary to the intendment of section 119 of the .
Formerly the seat of the High Court was different and the Act must, on the same reasoning have applied there, so that the words 'Presidency Town ' must have read as Guntur at first and now they read Hyderabad.
In our opinion, the High Court was in error in holding that the Act merely created a procedural jurisdiction in the High Court of Madras which on its division into two High Courts, inhered in both the High Courts and continues to inhere in the High Court of Andhra Pradesh even for purposes of areas to which the Act has not been extended.
In this 755 view of the matter the order made by the High Court cannot be sustained and it must be discharged.
We have not gone into the merits and there is much that justified action against Mawle.
He has filed dozens of cases and has flooded courts with litigation often by way of repeated petitions on the same matter.
As we find that the Act is not available against him we say nothing more.
We may place on record that Mawle expressed his willingness before us to be restrained in his litigation and we hope that he will now make amends for his past conduct.
We expect him to behave properly in future.
The appeal is allowed but in the circumstances of the case we make no order about costs.
Shah, J.
The Provincial Legislature of Madras exercising power under the Government of India Act, 1935 enacted the Vexatious Litigation (Prevention) Act 8 of 1949, The material provisions of the Act are: "2.
(1) If, on an application made by the Advocate General, the High Court is satisfied that any person has habitually and without any reasonable ground instituted vexatious proceedings civil or criminal, in any Court or Courts, the High Court may, after giving that person an opportunity of being heard, order that no proceedings, civil or criminal, shall be instituted by him in any Court (i) in the Presidency town, without the leave of the High Court; and (ii) elsewhere, without the leave of the District and Sessions Judge.
(2) * * * 3.
The leave referred to in section 2, sub section (1), shall not be given in respect of any proceedings unless the High Court or, as the case may be, the District and Sessions Judge, is satisfied that there is prima facie ground for such proceedings.
Any proceedings instituted by a person against whom an order under section 2, sub section (1), has been made, without obtaining the leave referred to in that subsection shall be dismissed: Provided that this section shall not apply to any proceedings instituted for the purpose of obtaining such leave.
A copy of every order made under section 2, subsection (1), shall be published in the Fort St. George Gazette.
" 756 By this Act the High Court of Madras was invested with power to place restrictions upon vexatious litigants.
The principle of this legislation, it appears, was borrowed from statute 16 & 17 Vict.
30 enacted by the British Parliament.
By article 225 of the Constitution, the jurisdiction of the High Court of Madras, subject to the provisions of the Constitution and to the provisions of any law of the appropriate Legislature remained the same as immediately before the commencement of the Constitution.
On September 14.
1953 the State of Andhra was carved out of the territories of the State of Madras by the Andhra State Act 30 of 1953.
Section 28 of that Act provided: "(1) As from the 1st day of January, 1956, or such earlier date as may be appointed under sub section (2) there shall be a separate High Court for the State of Andhra." The High Court of Andhra which was constituted by a notification issued by the President had by section 30, in respect of the territories included in the State of Andhra, all such original, appellate and other jurisdiction as under the law in force immediately before the prescribed day was exercisable in respect of the territories or any part thereof by the High Court at Madras.
The Andhra High Court was therefore a successor of the High Court of Madras and exercised all the powers and administered the same law which the Madras High Court exercised in the territories comprised in the Andhra State.
By section 2(1) of Act 8 of 1949 the High Court of Madras was competent to issue an order against any person that no proceedings, civil or criminal, shall be instituted by him in any Court (i) in the Presidency town without the leave of the High Court, and (ii) elsewhere, without the leave of the D:strict and Sessions Judge; and this power, by virtue of section 30 of Act 30 of 1953 became exercisable by the Andhra High Court.
The expression "Presidency town" means by the (section 3(44)).
the local limits of ordinary original jurisdiction of the High Court of Judicature at Calcutta, Madras or Bombay ,as the case may be, and there was no Presidency town within the area of the Andhra State as constituted by Act 30 of 1953.
The Parliament had.
however, with a view to meet anomalies of the present nature expressly provided by section 55 that "Notwithstanding that no provision or insufficient provision had been made under section 54 for the adaptation of a law made before the appointed day, any court, required or empowered to enforce such law may, for the purpose of facilitating its application in relation to the State of Andhra.
* * construe the law with such alterations not affecting the substance as may be necessary or proper to adapt it to the matter before the court * *.
" The expression "Presidency town" must in the context of the constitution of a separate High Court for Andhra, after the State of Andhra was formed, mean 757 the Capital town of the State in which the High Court was located Such an adaptation does not affect the substance of the Act, and it would facilitate application thereof to the changed circumstances.
The new State of Andhra Pradesh was constituted under the 37 of 1956 by incorporating certain areas specified in section 3 to the territory of the old State of Andhra.
By section 65(1)(a) from the appointed day i,e.
November 1, 1956 'the jurisdiction of the High Court of the existing State of Andhra was,, it was declared, to extend to the whole of the territories transferred to that State from the existing State of Hyderabad, the High Court was to be known as the High Court of Andhra Pradesh, and the principal seat of ' the High Court was to be at Hyderabad.
The jurisdiction of the High Court of Andhra was by the express provision made in section 65(1)(a) exercisable over the whole of the territory transferred to that State from the existing State of Hyderabad.
The phraseology used by the Legislature, in my judgment, authorises the new High Court of Andhra Pradesh to exercise all jurisdiction which the High Court of Andhra could exercise before the appointed day.
The High Court of Andhra Pradesh made an order against the appellant on April 21, 1961 that no proceedings, civil or criminal shall be instituted by the appellant in the city of Hyderabad without the leave of the High Court; in the city of Secunderabad without the leave of the Chief City Civil Judge; and elsewhere without the leave of the District and Sessions Judge concerned.
This was manifestly a personal direction 'which imposed restrictions upon the appellant.
The power to impose a ban under section 2, it may be noticed, vests only in the High Court: the power to remove the ban in specific cases is exercisable by the High Court, or a Judge of the District and Sessions Court according as the proceeding is to be instituted in a Court in the capital of the State where the High Court is located, or in any Court in the mofussil.
There can therefore be no question of conflict of jurisdiction between the High Court and the District Court.
Once the High Court pronounces an order under section 2, it may be removed in appropriate cases only by the High Court where the proceeding is to be instituted in any Court in the Capital town in which the High Court is located and elsewhere by order of the District and Sessions COurt.
The Act confers jurisdiction upon the High Court and does not as a condition of its exercise require that the person to be restrained must be residing or have a domicile in any area within the jurisdiction of the Court invested with jurisdiction.
Nor has the order contemplated to be passed any direct territorial operation: it is issued against a person individually and restrains him from instituting proceedings without leave of the Court specified in that behalf.
A person wherever residing or domiciled may ' therefore be restrained ,by an order under section 2.
758 But it is said that notwithstanding the comprehensive phraseology used by the Legislature in section 65, because of section 119 of the 37 of 1956 a somewhat anomalous situation has resulted.
It is claimed that the power with which the High Court is invested to prevent a litigant from instituting proceedings which are vexatious may be exercised in respect of proceedings to be instituted in courts within the limits of the former State of Andhra or which arise from proceedings decided by Courts in that area.
The upshot of the argument is that a litigant may be treated as vexatious only in respect of proceedings to be instituted by him in the Courts of the Districts within the former State of Andhra and in respect of proceedings sought to be brought before the High Court in exercise of its appellate, revisional or superintending jurisdiction from orders made by Courts within the territory of the former State of Andhra: he 'may therefore be subjected to a disability in respect of proceedings to be instituted in some districts in the State and also in respect of proceedings reaching the High Court from cases instituted in those districts, and not in respect of the rest.
What the effect of such a view may be upon the exercise of the High Court 's jurisdiction under articles 226 and 227 of the Constitution.
or the original jurisdiction, for instance, under the Companies Act or the Banking Companies Act, the appellant who has argued his case personally did not attempt to tackle.
Section 119 of the provides: "The provisions of shall not be deemed to have effected any change in the territories to which any law in force immediately before the appointed day extends or applies, and territorial references in any such law to an existing State shall, until otherwise provided by a competent Legislature or other competent authority, be construed as meaning the territories within that State immediately before the appointed day.
" By that section the territorial extent of the laws in operation prior to the appointed day, until amended by a competent Legislature or other competent authority, continues.
But section 119 must be read harmoniously with section 65(1)(a).
The latter clause declares in unambiguous terms that the jurisdiction of the High Court of the existing State of Andhra shall extend to the whole of the territories transferred to that State from the existing State of Hyderabad.
If it be granted that the High Court of the State of Andhra had jurisdiction to pass orders under the Vexatious Litigation (Prevention) Act, it would be difficult to hold that section 119 of Act 37 of 1956 still restricts the exercise of the power by the High Court to prevent a vexatious litigant from instituting proceedings in certain areas in the mofussil and not in others or from instituting proceedings by way of appeals or revisions from orders and decrees in proceedings instituted in the Courts in the area within the former State of Andhra and not elsewhere.
The Parliament having by Act 30 of 1953 invested the 759 High Court of Andhra with authority to exercise all jurisdiction which the High Court of Madras possessed within the territories of the State of Andhra as constituted and thereafter having by section 65(1)(a) of Act 37 of 1956 extended the exercise of that authority over the entire territory of Andhra Pradesh, and in my judgment, it would be impossible to accept the argument that in respect of the jurisdiction conferred by the Vexatious Litigation (Prevent;on), Act 8 of 1949 the High Court was incompetent to pass the order which it did against the appellant.
I need not add anything to what Hidayatullah, J., has said in upholding the constitutionality of the provisions of the Act, for 1 agree with him that the Act is not unconstitutional as offending either article 19 or article 14 of the Constitution.
On the merits, however, I am of the opinion that the cases which the appellant had instituted in the various Courts did not justify a drastic order of the nature passed against him.
The appellant claims that he is the owner of a large estate in the city of Hyderabad, and that is not denied: he also carries on an extensive business and in the course of carrying on his business and managing his estate, he has often to seek recourse to courts of law.
The appellant says that because of certain reasons (which need not be set out) he conducts his litigation before the Courts without any professional assistance.
Assuming that the appellant has in instituting and prosecuting cases which he had instituted shown less objectivity and more enthusiasm than a lawyer may in similar cases show, and had attempted to obtain benefit of what he thought were lacunas in the law, imposition of a blanket restriction against him of the nature imposed by the High Court may not seem to be warranted.
I am unable to agree having carefully considered the nature of the Various cases filed by the appellant or from the general progress of those cases as set out in the list of cases filed in this Court and the orders passed therein that those proceedings are vexatious or frivolous.
I would therefore allow the appeal, but not on the grounds which are set out by Hidayatullah, J. Appeal allowed.

summary/full:
By section 2(1) of the Madras Vexatious Litigation (Prevention) Act 1949, the High Court of Madras was competent to issue an order against any person that no proceedings shall be instituted by him in any court (i) in the Presidency town without the leave of the High Court, and (ii) 'elsewhere without the leave of the District and Sessions Judge.
On the application of the Advocate General of Andhra Pradesh the High Court of Andhra Pradesh ordered that no proceeding should be instituted by the appellant in the City of Hyderabad without leave of the High Court, in the City of Secunderabad without leave of the Chief City Civil ;Judge and elsewhere, without leave of the concerned District and Sessions Judge.
In his appeal to this Court, the appellant contended that: (i) the High Court had no jurisdiction to take action under the Act as its provisions were not extended to the Telangana area of the State, which formed part of the former State of Hyderabad; and (ii) the Act was unconstitutional because it prevented some citizens from approaching the Court, which everyone is entitled to in a State governed by the rule of law.
HELD: (i) (Per K. Subba Rao, K.N. Wanchoo, M. Hidayatullah and S.M. Sikri, J5.) The High Court was in error in holding that the Act merely created a procedural jurisdiction to put persons who indulge habitually in vexatious litigation under a procedural restraint in the former High Court of Madras, which jurisdiction, on its division into the two High Courts of Madras and Andhra Pradesh inhered in both the High Courts and continued to inhere in the High Court of Andhra Pradesh even for the purposes of those areas to which the Act had not been extended.
[752 D F] The Act was passed by the Madras Provincial Legislature,and conferred jurisdiction upon the Madras High Court to deal with habitual litigants indulging in vexatious litigation.
It was not an inherent jurisdiction of the Madras High Court.
By sections 30 and 53 of the Andhra State Act, 1953, the Vexatious Litigation (Prevention) Act continued to be in force in the Andhra State, and the Andhra High Court possessed the same jurisdiction as the former Madras High Court.
But the Act is unworkable in the State of Andhra Pradesh which is formed under the , by adding the Telangana area of the former Hyderabad State to the State of Andhra; and section 65 of the does not alter the position.
[753 H] 744 All laws are intended to operate territorially and no Provincial Legislature in India, possesses extra territorial jurisdiction.
What the Madras Legislature enacted was to operate in its own territory and it said so in the Vexatious Litigation (Prevention) Act.
In its operative part also, the order under the Act was to be made with a territorial distinction between the Presidency town and the rest of the Presidency of Madras.
The Act vested a jurisdiction in the High Court to deal with a particular type of litigant, but the Act made the High Court deal with the matter territorially and if new territories we 're to be governed by it had to be extended to the new territories and till so extended, the Act can only operate within the old territories.
Under section 119 of the , no law of one of the amalgamating States is to be extended to the area of the other amalgamating States, except by a competent legislative or other competent authority, and further, the law shall be construed as restricted to the territories within each State immediately before the reorganisation.
Since the Act has not been extended to the Telangana area, the application of the Act in that area is made impossible by section 119, and it cannot be extended by judicial construction.
No doubt, the Court possesses a power, under section 121 of the , to construe laws by adapting them in such a manner as to facilitate their application to the newly formed State, but the power is of adaptation and not legislation.
An increase in the territories in which an Act is to apply is dependent on legislation such as is contemplated by section 119.
[753 F H; 754 A C] Moreover, there being no Presidency town in the State of Andhra Pradesh, section 2(1)(i) of the Act is inapplicable in the State of Andhra Pradesh.
The mention of the Presidency town in the sub section was not with a view to indicate the seat of the High Court, but because the Madras High Court, possessed original jurisdiction in the Presidency town.
Therefore, the distinction between the City of Hyderabad and other parts of Andhra Pradesh, drawn by the High Court as if the City of Hyderabad was a Presidency town, was an artificial distinction which should not have been drawn by the High Court.
Section 2(1)(ii) is also inapplicable because, the contention that the entire State may be taken to be governed by that sub clause would lead to the strange result that the District and Sessions Judge would decide whether a particular litigant should be allowed to move the High Court in, appeal, revision or in an original proceeding.
[754 E H] Per Shah, J. (Dissenting): Parliament having by the Andhra State Act invested the High Court of Andhra with authority to exercise all jurisdiction which the High Court of Madras possessed, within the territories of the State of Andhra, and thereafter, having by section 65(1)(a) of the extended the exercise of that authority over the entire territory of Andhra Pradesh, it would be impossible to accept the argument that in respect of the jurisdiction conferred by the Vexatious Litigation (Prevention) Act, the High Court of Andhra Pradesh was incompetent to pass the order which it did against the appellant.
[759 A C] The Andhra High Court was a successor of the Madras High Court and exercised all the powers and administered the same law which the latter exercised in the territories comprised in the Andhra State.
Since Parliament expressly provided by section 55 of the Andhra State Act, that a court may construe a law which it has to enforce, with such alterations not affecting the substance as may be necessary or proper to adapt it to the matter before the court, the expression "Presidency town" must, in the context of the constitution of a separate Andhra High Court, mean the town of the State in which the 745 High Court was located.
If it be granted that the High Court of: Andhra had jurisdiction to pass orders under the Vexatious Litigation (Prevention) Act, it would be difficult to hold that section 119 of the restricts the exercise of the power by the High Court of Andhra Pradesh to prevent a vexatious litigant from instituting proceedings in 'and from Certain areas of the Andhra Pradesh and not elsewhere.
Section 65(1) of the which must be read harmoniously with section 119 authoring the High Court of Andhra Pradesh to exercise all jurisdiction, which the High Court of Andhra could exercise, over all the territories transferred to the State of Andhra Pradesh from the existing State of Hyderabad.
The Vexatious Litigation (Prevention) Act, does not require that the person to be restrained must be residing in or have a domicile within the jurisdiction of the Court, nor has the order contemplated to be passed, any direct territorial operation.
It is a personal direction which imposes restrictions upon the person restrained.
Once the High Court pronounces an order, it may be removed in appropriate cases only by the High Court, where the proceeding is to be instituted in any court in the town in which the High Court is located, and elsewhere, by order of the District and Sessions Court; and so, there is no conflict of jurisdiction between the High Court and the District Court.
[756 D H] z (ii) (By Full Court): The Act is not unconstitutional.
The litigants who are prevented from approaching the court without proper sanction are persons who habitually file vexatious actions.
Even they are not deprived of their right to go to a court in genuine and bona fide actions, but the Act only creates a check.
The object of the Act is to promote public good, because, it cannot be claimed that it is an inviolable right of any citizen to bring vexatious actions without control.


judgement:
vil Appeal No. 215 of 1964.
Appeal from the judgment and order dated August 24, 1961 of the Madras High Court in Case referred No. 102 of 1957.
Niren De, Additional Solicitor General, R. Ganapathy Iyer and R.N. Sachthey, for the appellant.
R. Thiagarajan, for the respondent.
The Judgment of the Court was delivered by Shah, J.
The respondent is a private limited Company.
It carried on business in hides and skins, minerals, tobacco and other commodities, and also acted as managing agents for the Nellor Power and Light Company Ltd. and for two other Companies.
T.M. Ayyadurai, T.M. Rangachari and P.C. Chakrabarti were directors of the Company.
Each director was paid a fixed remuneration of Rs. 4,800/ per annum for attending to the business of the Company.
On June 21, 1951 the respondent was appointed by the Central Government as its agent for buying, checking, weighing, leaf drying.
storing.
transporting, retaining and reselling tobacco under and in accordance with the directions issued from time to time.
The Central Government agreed to pay to the respondent price of the tobacco purchased, charge at the rate of one anna per lb.
for tobacco not redried, and at the rate of two annas per lb.
for tobacco redried.
and commission on all purchases.
On June 22, 1951 the respondent passed a resolution placing T.M. Ayyadurai in "special charge" for arranging purchases of tobacco on credit, 694 inspecting tobacco at Guntur and at Madras Port, and for supervising shipment of tobacco, and agreed to pay him 30 per cent of the net profit as remuneration.
Under the contract with the Government of India Rs. 1,38,454/ became due to the respondent as commission in the account year ending March 31.
After providing Rs. 41,473/ for expenses, 30 per cent of the balance being Rs. 29,094/ was paid to T.M. Ayyadurai as commission and was claimed in the assessment year 1952 53 as a permissible deduction under section 10(2)(xv) of the Indian Income tax Act, 1922.
The Income tax Officer allowed only 10 per cent of the net profit for the services rendered by T.M. Ayyadurai in the contract for tobacco purchase and sale.
and disallowed Rs. 19,796/ out of the amount claimed by the respondent.
The managing agency agreement of the respondent with the Nellore Power and Light Company Ltd., was terminated with effect from September 28, 1951 when the Government of the State of Madras in exercise of the powers conferred upon it by the Electrical Undertakings Acquisition Act, 1949 compulsorily ac quired the undertaking of that Company, and the respondent was paid Rs. 17,346/ as compensation for premature termination of its agency.
This amount was taken into account by the Income tax Officer in computing the income of the respondent in the assessment year ending March 31. 1952.
Appeals against the order passed by the Income tax Officer to the Appellate Assistant Commissioner and to the Tribunal challenging the disallowance of part of the commission and inclusion of compensation for termination of the managing agency agreement were unsuccessful.
The Tribunal thereafter being directed by the High Court of Judicature, Madras under section 66(2) of the Indian Income tax Act, drew up a statement of the case and referred the following two questions to the High Court: "(1) Whether on the facts and in the circumstances of the case the disallowance of a sum of Rs. 19,796/ out of the remuneration paid to Mr. T.M. Ayyadurai is justifiable; and (2) Whether a sum of Rs. 17,346/ which represented compensation received by the assessee for the loss of the managing agency of the Nellore Power and Light Company Ltd. is income liable to tax?" The High Court answered both the questions in the negative.
Allowance in respect of the amount covered by the first question was sought by the respondent under section 10(2)(xv) of the Income tax Act, 1922, which provided: "any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive.
and 695 not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.
" The question whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of such business, profession or vocation has to be decided on the facts and in the light of circumstances of each case.
But as observed by this Court in Eastern Investments Ltd. vs Commissioner of Income tax, West Bengal(1) the final conclusion on the admissibility of an allowance claimed is one of law.
The High Court had therefore power to call upon the Tribunal to submit a statement of the case under section 66(2) of the Indian Income tax Act.
In considering whether the expenditure to remunerate a person for services rendered is allowable under section 10(2)(xv) the Income tax Officer must have regard to all the circumstances, such as, nature and special character of the service, practice if any in the trade for payment of a percentage of profit to an employee in similar circumstances, qualifications of the employee for rendering the service, amount if any paid by the assessee to another person for rendering similar service, normalcy of the allowance having regard to the practice in the trade, existence of any other extraordinary and abnormal circumstances in the arrangement or special reasons or circumstances which may suggest that the transaction was abnormal, and the like.
The normal business of the respondent was in hides and skins, minerals and tobacco.
It does not appear, however, that the turnover of the Company was large.
The contract to purchase tobacco on behalf of the Government of India was apparently out of the way of the normal business of the respondent and demanded the setting up of a special organisation.
Under the terms of the contract the respondent was to be the agent of the Central Government for buying, checking, weighing, leaf drying, storing, transporting, retaining and reselling tobacco under and in accordance with the directions given to it from time to time by the Government.
The respondent agreed to buy tobacco within the ceiling price fixed as and when directed by the Government, and was responsible for buying proper grades of tobacco, for correctly checking the weights, for taking delivery from the sellers, for redrying it whenever so directed, for securing proper packing for transport by rail road or sea so as to conform to standards of packing usually employed in the export of tobacco or standards to the satisfaction of the purchaser, and for getting the tobacco inspected by the Tobacco Grading Inspectorate of the Indian Central Tobacco Committee according to the AGMARK standards.
The respondent had to place a go down at the disposal of the Government within their premises at Guntur.
The respondent had to use its best (1) 20 I.T.R. I. 696 endeavour to buy as cheaply as possible within the ceilings prescribed and to sell it for such maximum price as may be obtainable, not being below the price prescribed by the Government, to re sell tobacco which the Government may direct it to sell by instructions in writing, in such manner and at such price as may be specified by the Government, and to finance the entire transaction of purchasing tobacco in the first instance out of its own funds.
The respondcat was to take all necessary steps to safeguard the stocks and to maintain fire fighting services.
Goods purchased by the respondent if not of the grade or quality were liable to be rejected by order of the Tobacco Grading Inspector.
Performance of the contract evidently required expert knowledge of the practical side of the business of purchasing tobacco, getting it redried if it was raw, and of packing, storing, transporting and shipping it.
The respondent had entered into a profitable contract, but any negligence in purchasing, storing, packing, transporting and shipping the goods might have resulted in serious losses to the respondent.
The Income tax Officer accepted that the expenditure for payment of remuneration for attending to the contract was laid out for the purpose of the business of the respondent, but reduced the stipulated rate to 10 per cent on two grounds: that T.M. Ayyadurai was the brother of T.M. Rangachari, and that he was, as a director of the Company, bound to attend to all the activities of the Company including the contract.
There is no evidence that the agreement was motivated by considerations other than strictly business considerations.
There is also no evidence that as a director T.M. Ayyadurai was bound to attend to all the activities of the Company including the special contract with the Central Government.
The duties which the director was bound to perform for earning the remuneration of Rs. 400/ per month are not on the record, but even in the opinion of the taxing authorities the duties of T.M. Ayyadurai as director did not cover attendance to the contract with the Government.
T.M. Ayyadurai and T.M. Rangachari are brothers, but that by itself is not sufficient to justify an inference that unreasonable or excessive remuneration was agreed to be paid.
The person who was called upon to attend to a contract of this magnitude was required to have expert knowledge of the business, apply his time exclusively thereto, travel from time to time, maintain supervision and control at the stage of purchase, redrying, packing, transport and loading for shipment.
Presumably T.M. Ayyadurai was such a person, and that is why he was selected for earning for the respondent a large amount of commission by duly performing the contract.
The Appellate Assistant Commissioner merely paraphrased the decision of the Income tax Officer and regarded 10 per cent of the net profits as reasonable.
The Appellate Tribunal observed that the Appellate Assistant Commissioner had given "clear and 697 convincing reasons in support of the disallowance" to which they had nothing more to add.
An analysis of the reasons given by the Income tax Officer discloses no grounds to support the view that remuneration at a rate exceeding 10 per cent of the net profit was excessive or unreasonable.
We are of the view that the contract with the Government was for the respondent an important contract requiring constant and vigilant application and supervision by a person well acquainted with the practical details of the business.
If the management of the respondent as prudent businessmen for advancing the interest of the respondent bona fide regarded 30 per cent of the net profits as reasonable remuneration, the revenue authorities were not justified in reviewing their opinion and reducing the rate of remuneration.
It is true that if on a consideration of the relevant materials, the Appellate Tribunal is of the opinion that a particular remuneration stipulated to be paid is not bona fide, or is unreasonable, the High Court in exercising its advisory jurisdiction has no power to interfere with that opinion.
But the material circumstances relating to the nature of the contract, the services to be performed and the nature of the duties by the employee were not at all taken into account by the Tribunal and the income tax authorities.
We therefore agree with the High Court that the first question should be answered in the negative.
The contract under which the respondent Company was appointed managing agent for the Nellore Power and Light Company Ltd., was to ensure till 1960, but it had to be prematurely terminated because the Government of Madras exercising its powers under the Madras Electrical Undertakings Acquisition Act, 1949 had compulsorily acquired the electricity undertaking.
With the acquisition of that undertaking the right of the respondent as managing agent ceased.
Under section 15 of the Electrical Undertakings Acquisition Act, the Government was bound to pay compensation which would include compensation for termination of the managing agency agreement.
The respondent received Rs. 17,346/as compensation for termination of the agency, computed in the manner laid down in section 15 of that Act.
Prima facie, such a receipt being in lieu of extinction of an asset of the assessee, is a capital receipt.
It was urged, however, on behalf of the revenue that the respondent was carrying on business of taking up managing agencies and that by the extinction of one of the managing agencies, the business structure of the respondent was not impaired.
In a recent judgment delivered by this Court in Kettlewell Bullen and Company Ltd., vs Commissioner of Income tax, Calcutta(1).
it was pointed out that: "It may be broadly stated that what is received for loss of capital is a capital receipt: what is received as profit in a trading transaction is taxable income.
But the (1) 698 difficulty arises in ascertainting whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction.
" The Court further observed: "It cannot be said as a general rule.
that what is determinative of the nature of the receipt is extinction or compulsory cessation of an agency or office.
Nor can it be said that compensation received for extinction of an agency may always be equated with price received on sale of goodwill of a business.
The test applicable to contracts for termination of agencies is: what has the assessee parted with in lieu of money or money 's worth received by him which is sought to be taxed? If compensation is paid for cancellation of a contract of agency.
which does not affect the trading structure of the business of the recipient, or involve loss of an enduring asset, leaving the taxpayer free to carry on his trade released from the contract which is cancelled, the receipt will be a trading receipt: where the cancellation of a contract of agency impairs the trading structure, or involves loss of an enduring asset, the amount paid for compensating the loss is capital.
" Turning to the facts of the present ease, it must in the first instance be observed that it is for the revenue to establish that a particular receipt is income liable to tax, and beyond stating that the respondent was the managing agent of the Nellore Power and Light Company Ltd. and of two other Companies, there is no other evidence about the nature of the business of the two other Companies of which the respondent was the managing agent.
about their relative importance qua the managing agency of the Nellore Power and Light Company Ltd., and whether by reason of the extinction of the managing agency of the Nellore Power and Light Company Ltd., any enduring asset was lost to the respondent, or its trading organisation was adversely affected.
The Income tax Officer observed that the "Company 's business of Managing Agency as such had not come to an end", the Company still continues as "managing agents of other companies".
Even after surrender of one of the agencies, the Company carries on business as before, its structure not being affected" and therefore "the receipt is to be considered as revenue, in accordance with the decision in Kelsal Parsons and Company vs
C.I.R. 21 T.C. No. 608.", and with that view the Appellate Assistant Commissioner and the Tribunal agreed.
But in the absence of evidence as to what effect the determination of the managing agency of the Nellore Power and Light Company Ltd., had upon the business of the respondent, the mere circumstance that the respondent had managing agencies of two other companies without more will not bring the ease within Kelsal Parsons and Company vs Commissioners of Inland Reve 699 nue(1).
In Kettlewell Bullen and Company 's case(2) this Court pointed out that ordinarily compensation for loss of office or agency is regarded as a capital receipt, but the rule is subject to an exception that payment received even for termination of an agency agreement, where the agency is one of many which the assessee holds, and the termination of the agency does not impair the profit making structure of the assessee, but is within the framework of the business, it being a necessary incident of the business.
that existing agencies may be terminated, and fresh agencies may be taken, is revenue and not capital.
Kelsal Parsons and Company 's case(1) falls within the exception to the ordinary rule, and circumstances which brought the case of the respondent within the exception must be clearly established.
The High Court was of the opinion that compensation received for taking over the Nellore Power and Light Company Ltd., was a capital receipt not liable to be taxed, and on the materials placed before us, we are unable to disagree with the High Court on this question.
The appeal therefore fails and is dismissed with costs.
Appeal dismissed, (1) 21T.C. 608.

dataset_name: IN-Abs

summary/full:
Managing Agency Compensation for termination of Circumstances in which such compensation is revenue.
The respondent, a private limited company, carried on business in tobacco and other commodities and also acted as managing agents for the N company and for two other companies.
It had three directors, all of whom were paid a fixed remuneration for attending to the business of the company.
On June, 21, 1951, the respondent company was appointed an agent of the Central Government for buying, checking, leaf drying, and retaining and reselling tobacco under, and in accordance with, directions issued from time to time.
On June 22 1951 the respondent passed a resolution placing one of the directors, A, in "special charge" of all the work under the contract with the Central Government and agreed to pay him 30 per cent of the net profits from the contract.
Under this arrangement, for the year ended 31st March 1952, commission at 30 per cent was calculated and paid to A and was claimed in the assessment year 1952 53 as a permissible deduction under section 10(2)(xv) of the Income tax Act, 1922.
The Income tax Officer allowed only 10 per cent of the net profit for the services rendered by A and disallowed the balance :amount claimed by the respondent.
The managing agency agreement of the respondent with the N Company was terminated in September 1 '951, when the State Government acquired the undertaking of that company, and the respondent was paid Rs. 17,346 as compensation for premature termination of its agency.
This amount was taken into account by the Income tax Officer in computing the respondent 's income for the year ended March 31, 1952.
Appeals against the order of the Income tax Officer to the Appellate Assistant Commissioner and to the Tribunal challenging the disallowance of part of the commission and inclusion of the compensation for termination of the managing agency were unsuccessful.
On a reference on both these points, the High Court decided them in the respondent 's favour.
HELD: (i) The contract with the Government was, for the respondent, an important contract requiring special attention by a person well acquainted with the practical details of the business.
If for such special services the management as prudent business men for advancing the interest of respondent bona fide regarded 30 per cent of the net profits as reasonable remuneration, the revenue authorities were not justified in reviewing that opinion and reducing the rate of remuneration.
[697B, C] 693 Where, on a consideration of the relevant materials the Appellate Tribunal is of the opinion that a particular remuneration is not bona fide, or is unreasonable, the High Court, in exercising its advisory jurisdiction, has no power to interfere with that opinion; but in the present case, material circumstances relating to the nature of the contract and the special services to be performed were not at all taken into account by the revenue authorities.
[697C E] (ii) Ordinarily, compensation for loss of office or agency.
is regarded as a capital receipt; but this rule is subject to an exception that payment received even for termination of an agency agreement, where the agency is one of many which the assessee bolds, and the termination of the agency does not impair the profit making structure of the assessee, but is within the frame work of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken, is revenue and not capital.
However, in the absence of evidence as to what effect the determination of the managing agency of the N company had upon the business of the respondent, the mere circumstance that the respondent had managing agencies of two other companies without more would not bring the present case within the exception [698H; 699 A c] Kelsal Parsons & Co. vs Commissioners of Inland Revenue, 21T.C. and Kettlewell Bullen & Co.
C.I.T. Calcutta, explained and distinguished.


judgement:
ivil Appeals Nos.
96 to 98 of 1964.
Appeals by special leave from the judgments and orders dated September 22, 1960, and December 6, 1960 of the Punjab High Court in Income tax References Nos.
19 of 1958 and 6 of 1959 respectively.
S.V. Gupte, Solicitor General, R. Ganapathy Iyer and R.N. Sachthey, for the appellant.
Deva Singh Randhawa and Harbans Singh, for the respondent.
The Judgment of the Court was delivered by Shah, J.
On April 10, 1953 the estate of the joint Hindu family of which the respondent was a member was partitioned, and the respondent was allotted, besides other properties, 400shares of the Simbhaoli Sugar Mills Private Ltd., and was made liable to pay a business debt amounting to Rs. 3,91,875/ due by the family to R.B. Seth Jessa Ram Fateh Chand of Delhi.
On April 14, 1953 the respondent executed a deed of trust in respect of 300 out of the shares of the Simbhaoli Sugar Mills which fell of to his share.
The following are the material provisions of the deed of trust. "AND WHEREAS on partition, the author was allotted amongst other properties, four hundred shares of the Simbhaoli Sugar Mills Ltd., and fixed with liability for discharge of certain debts of the Joint Hindu Family AND WHEREAS for discharge of the debts detailed in the schedule appearing hereafter, the author now as absolute owner of the said shares has decided to settle on trust three hundred shares numbering 1 to 300 both inclusive, out of the said shares for the benefit of his creditors and other beneficiaries named hereafter and for the objects mentioned hereafter.
The author as holder of 300 shares out of the capital of Simbhaoli Sugar Mills Ltd. divesting himself of all proprietary rights in the said shares.
hereby declares that the said shares shall from this day be irrevocably held on Trust by the Trustees to be used by them for all or any of the purposes following, that is to say : (a) To pay off the debts as detailed in Schedule 'A ' attached hereto: These debts were incurred for the benefit of the Joint Hindu Family of the author and on disruption of the Joint Hindu Family and partition of properties among its members, made payable by the author.
686 And after his debts are paid off.
(b) To provide for the maintenance and education of the children and grand children of the author.
(c) To open and run Hospitals and Nursing Homes.
(d) To open and run School or SchooLs for the education of boys or girls in scientific and technical subjects.
To open and maintain a reading room and a lending library.
(f) To provide for the maintenance and education of orphans, widows and poor people and for that to give scholarships for inland and overseas studies to found orphanage.
widow houses and poor houses and to do all other things that the trustees may deem fit for carrying out the objects of the Trust.
" By el.
3 four persons including the respondent were appointed trustees, and the respondent was to hold the office of Chairman of the Trust during his lifetime.
The trust deed then provided: "In the books of the Company, the shares will stand in the name of the Chairman for the time being, who will have the power to operate the Bank accounts of the Trust, to preside at the meetings, exercise the right of th e vote in respect of the shares of the Trust.
" Clause 5 provided: "It is hereby declared that the trustees shall have the following powers in addition to the powers and the authorities hereinfore contained: (i) The trustees shall not be entitled to sell the shares except as provided hereafter but they can mortgage or pledge the same for raising funds as they may feel necessary for paying off the debts of the author, provided (ii) . . (iii) . . . (iv) . .
Clause 6 provided: "That in carrying out the objects of the trust the trustees shall keep in mind and abide by the following directions: (i) The payment of the debts of the author as detailed in Schedule 'A ' referred to above shall receive the topmost priority and the trustees shall not spend any money out of the trust property or its income 687 in any direction till they have paid off all the debts of the author, provided always if the trustees are unable to pay off the debts, out of the income i.e. dividends, bonuses etc.
of the shares within a period of ten years they shall be entitled to sell the same or part of it and thus pay off the debts that may be due at that time.
(ii) After debts are discharged the trustees shall spend the income of the trust property.
remaining in their hands after full discharge of the debts, on the maintenance of the children and grand children of the author and the remaining 20% on all or any of the other objects of the trust as the Trustees may think best.
(iii) . .
The respondent claimed before the Income tax Officer, Eward.
Amritsar that the dividend received by the trustees in respect of 300 shares of the Simbhaoli Sugar Mills was the income of the Trust and that he had no concern with that income as he had "divested himself irrevocably of the ownership of the shares" and that in any event Rs. 19,856/ being the amount due as interest to R. B. Seth Jessa Ram Fateh Chand should be allowed as a permissible deduction in computing the net income from dividend of the shares.
The Income tax Officer rejected the contentions of the respondent, holding that the Trust was a "fictitious transaction".
The Appellate Assistant Commissioner held that the respondent had not "irrevocably transferred the 300 shares of the Simbhaoli Sugar Mills" and therefore by virtue of section 16(1)(c) proviso one the respondent could not escape liability to pay tax on the dividend from the share.
The respondent appealed to the Income tax Appellate Tribunal.
but without success.
At the instance of the respondent the Tribunal drew up a statement of the case and referred the following questions to the High Court at Chandigarh: "(1) Whether the dividend income of 300 shares of the Simbhaoli Sugar Mills, Private Ltd. transferred by the assessee to section Raghbir Singh Trust was the income of the assessee liable to tax? (2)Whether the assessee was entitled to claim deduction of Rs. 19,856/ paid as interest to R.B. Seth Jessa Ram Fateh Chand against the dividend income of the aforesaid 300 shares?" The High Court answered the first question in the negative and declined to answer the second question.
With special leave.
the Commissioner of Income tax has appealed to this Court.
Section 2 sub section
(15) defines "total income" as meaning total amount of income, profits and gains referred to in sub section
(1) of section 4 688 computed in the manner laid down in the Act.
Section 16 of the Income tax Act enumerates the exemptions and exclusions admissible in the computation of total income in certain specified cases.
The material part of cl.
(c) of sub section
(1) of section 16 is as follows: "In computing the total income of the assessee (c) all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor: Provided that for the purposes of this clause a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly of the income or assets to the settlor, disponer or transferor, or in any way gives the settler, disponer or transferor a right to reassume power directly or indirectly over the income or assets: Provided further that the expression 'settlement or disposition ' shall for the purposes of this clause include any disposition, trust, covenant, agreement or arrangement, and the expression 'settlor or disponer ' in relation to a settlement or disposition shall include any person by whom the settlement or disposition was made: Provided further that this clause shall not apply to any income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor or disponer derives no direct or indirect benefit but that the settlor shall be liable to be assessed.
on the said income as and when the power to revoke arises to him." Clause (c) was intended, while seeking to protect a genuine settlement by which the tax payer intends to part with control over property and its income.
to circumvent attempts made by him to reduce his liability to pay income tax by the expedient of so arranging a settlement or disposition of property that the income does not accrue to him, but he reserves a power over or interest in the property settled or disposed of, or in the income thereof.
By cl. 689 c) income arising to any person by virtue of a settlement or disposition whether revocable or not is deemed to be income of the settlor or disponer if the assets remain the property of the latter.
Again income arising to any person by virtue of a revocable transfer of assets is deemed to be the income of the transferor.
The first proviso then deems a settlement statutorily revocable, if it contains any provision for retransfer directly or indirectly of the income or assets settled, to the settlor, or where it gives to the settlor a right to reassume power directly or indirectly over the income or assets.
By the second proviso the expression "settlement or disposition" includes a disposition, trust, covenant, agreement or arrangement the Legislature has thereby sought to bring within the net, transactions similar to though not strictly within the description of settlements and dispositions.
The third proviso carves out from the amplitude of cl.
(c) as expounded by the first and the second provisos income arising to any person from a settlement which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor derives no benefit direct or indirect.
It was observed in a recent judgment of this Court: Commis sioner of Income tax, Bihar and Orissa vs Rani Bhuwanesliwari Kuer(1) that: "By the first proviso, settlements, dispositions or transfers of the character described therein, are deemed revocable for the purpose of the principal clause.
The function of proviso I and proviso 2 is plainly explanatory.
The second proviso in terms says that the expression settlement or disposition" is to include any disposition, trust, covenant, agreement or arrangement, and the expression "settlor or disponer" is to include any person by whom the settlement or disposition was made.
Similarly the first proviso states that settlements, dispositions or transfers, if they are of the character described, shall for the purpose of the principal clause be revocable transfers.
" The terms of section 16(1)(c) first proviso are reasonably plain.
A settlement or disposition is deemed to be statutorily revocable if there is a provision therein for retransfer of the income or assets or which confers a right to reassume power over the income or assets.
The provision may even be for retransfer indirectly or for conferring power to reassume indirectly over the income or the assets.
But the actual retransfer or exercise of the power to reasume is not necessary; if there be a provision of the nature con templated, the proviso operates.
The terms of the deed may now be examined.
The shares were settled upon trust, and four trustees one of whom was the respondent were appointed.
Genuineness of the trust is no longer (1) ,202.
690 in dispute.
The direction that the shares are to stand in the name of the Chairman for the time being appears to have been necessitated by section 33 of the Indian Companies Act, 1913 which prevented notice of any trust, expressed, implied or constructive to be entered on the register.
The deed recites that the shares are to be held on trust irrevocably by the trustees for all or any of the purposes mentioned therein.
The purpose for which the shares are to be held in the first instance is to pay off the debt due to R.B. Seth Jessa Ram Fatch Chand, and it is only after the debt is paid off that the directions in cls.
(b) to (f) of cl. 2 come into operation.
The deed is in terms expressly irrevocable, but on that account the operation of the first proviso is not excluded.
If by the direction for application of the income for satisfaction of the debts due by the respondent, it could be said in law that there is a provision for retransfer directly or indirectly of the income or a right to reassume directly or indirectly power over the income, the settlement would be deemed revocable, recital that it is irrevocable notwithstanding.
But the income from the shares since the execution of the deed of settlement arises to the trustees and it is liable to be applied for the purposes mentioned in the deed.
The income has to be applied for satisfaction of debts which the settlor was under a obligation to discharge.
but that is not to say that there is a provision for retransfer of the income or assets to the settlor, or that the settlor is invested with power to reassume the income or assets.
The assets and the income are unmistakably impressed with the obligations arising out of the deed of trust.
The settlor it is true obtains benefit from the trust consequent upon satisfaction of his liability, but on that account the first proviso is not attracted.
We are unable to accept the argument of counsel for the revenue that by the use of the expression "indirectly" in the first proviso the Legislature sought to bring within the purview of el.
(c) cases where the settler was under the guise of a trust seeking to discharge his own liability.
The proviso contemplates cases in which there is a provision for retransfer of the income or assets and such provision is for retransfer directly or indirectly.
It also contemplates cases where there is a provision which confers a right upon the settlor to reassume power over the income or assets directly or indirectly.
It is the provision for retransfer directly or indirectly of income or assets or for reassumption of power directly or indirectly over income or assets which brings the case within the first proviso.
Cases in which there is a settlement, but there is no provision in the settlement for retransfer or right to reassume power do not fail within the proviso, even if as a result of the settlement, the settler obtains a benefit.
It has been held in two cases decided by the High Court of Bombay that a person under an obligation arising out of his status 691 may execute a trust to discharge his own obligation without attracting the operation of section 15(1)(c).
In Ramji Keshavji vs Commissioner of Income tax, Bombay(1) under a consent decree.
the assessee executed a deed of trust conveying certain properties for the benefit of his wife.
to the trustees.
The deed provided that the net income from the properties shall be paid to the assessee 's wife during her lifetime and that she shall maintain her minor children by the assessee anal "run the household".
It was held by the High Court that the income derived from the trust property and payable to the assessee 's wife during her lifetime could not be deemed to be the assessee 's income, for the direction in the deed did not amount to a provision for retransfer of the income or assets or for reassumption of power directly or indirectly over income or assets within the meaning of the first proviso to section 16(1)(c).
In D.R. Shahapure vs Commissioner of Income tax, Bombay(2) the assessee with the object of making a provision for his wife made an entry in his business books of account crediting Rs. 20,000/ , and endorsed against the entry.
"The capital supplied to you will remain entirely mine but you will get the income over it up to the end of your life.
This capital I will not take back up to the end of your life but I will do business for you on this capital and see that you get Rs. 600 per annum for you".
No specific assets were set apart to.
meet the sum of Rs. 20,000/ and there were no other entries in the books with regard to it.
The High Court held that the entry was an irrevocable covenant to pay the income accruing on Rs. 20,000/ with a guarantee that it shall be Rs. 600 a year, and therefore the case was covered by the third proviso to section 16(1) (c) of the Act and the income which was paid to the wife under the covenant could not be deemed to be the income of the assessee under the first part of section 16(1)(c).
In our view these cases were correctly decided.
The appeals fail and are dismissed with costs.
One hearing fee.
Appeals dismissed.
(1) (1945)13 I.T.R.105.

summary/full:
The respondent executed a deed of trust in respect of certain shares owned by him in a company.
The deed directed the trustees to apply the income and property of the trust in the first instance for paying off the settlor 's debts, and thereafter for other purposes of the trust.
In proceedings under the Indian Income tax Act, 1922 it was held by the Income tax Officer that the trust was a fictitious transaction.
The Appellate Assistant Commissioner held that the transfer of the shares for the purpose of the trust was not irrevocable and therefore under the proviso to section 16(1)(c) the respondent could not escape liability.
The Tribunal upheld the order of the Assistant Commissioner but referred to the High Court, inter alia, the question whether the income from the trust property could be taxed in the hands of the assessee.
The High Court answered the question in the negative.
The Commissioner of Income tax, appealed to this Court.
HELD: After the execution of the deed of settlement the income from the shares arose to the trustees and was liable to be applied for the purposes mentioned in the de.ed.
The income had first to be applied for satisfaction of debts which the settlor was under an obligation to pay, but this did not amount to a re transfer of the income or assets to the settlor, nor did it invest the settlor with a power to re assume the income or assets.
The assests and the income were unmistakably impressed with the obligations arising out of the trust.
The settlor certainly obtained a benefit from the trust consequent upon the satisfaction of his liability but on that account the first proviso to section 16(1) was not attracted.
[690D F] The proviso contemplates cases in which there is a provision for retransfer of the income or assets and such provision is for retransfer directly or indirectly.
It also contemplates cases where there is a provision which confers a right upon the settler to reassume power over the income or assets directly or indirectly.
It is the provision for retransfer directly or indirectly of income or assets or for reassumption of power directly, or indirectly over income or assets which brings the case within the proviso.
Cases in which there is a settlement, but there is no provision in the settlement for retransfer or right to reassume power do not fall within the proviso, even if as a result of the settlement, the settler obtains some benefit.
1[690G, H] Ramji, Keshavji vs C.I.T. Bombay, and D.R. Shahapura vs C.I.T., Bombay approved.