judgement:
Civil Appeal No 12 of 1965.
From the Judgment and Decree dated 29 4 1965 of the Rajasthan High Court in D. B. Civil Misc.
Case No. 67 of 1965.
B. D. Sharma for the Appellant.
section N. Kacker, Sol.
Genl., U. R. Lalit and Girish Chandra for Respondent No. l. section M. Jain for Respondent No. 2 The Judgment of the Court was delivered by KOSHAL, J.
The facts forming the background to this appeal by certificate granted by the High Court of Rajasthan against its judgment dated the 29th April 1968, in so far as they are undisputed, may be stated in some detail.
On the 28th February 1948, the Rulers of the erstwhile States of Alwar, Bharatpur, Dholpur and Karauli entered into a Covenant (hereinafter referred to as the Matsya Covenant) agreeing to merge their States into one State known as the United State of Matsya which was to come into being on the 1st of April 1948 with the Ruler of Dholpur as its Raj Pramukh.
Article VI of the Covenant provided that the Ruler of each Covenanting State shall, as soon as may be practicable and in any event not later than the 15th March, 1948, make over the administration of his State to the Raj Pramukh and that thereupon all rights, authority and jurisdiction belonging to such Ruler which appertained or were incidental to the Government of his State.
shall vest in the United State of Matsya.
65 Article Xl of the Covenant provided for the private properties of the Ruler and ran thus: "1.
The Ruler of each Convenanting State shall be entitled to the full ownership, use and enjoyment of all private, properties (as distinct from State properties) belonging to him on the date of his making over the administration of that State to the Raj Pramukh.
He shall furnish to the Raj Pramukh before the 1st May, 1948, an inventory of all the immovable properties, securities and cash balances held by him .16 such private property.
If any dispute arises as to whether any item of property is the private property of the Ruler or State property it shall be referred to such person as the Government of India may nominate and the decision of that person shall be final and binding on all parties concerned.
" The United State of Matsya came into being as stipulated in the Matsya Covenant on the 1st of April 1948 and during the same month the Ruler of Alwar, who is the appellant before us, furnished to the Raj Pramukh an inventory of all the immovable properties, securities and cash balances held and claimed by him as his private properties.
On the 11th of April 1948, the Rulers of ten States, namely, Banswara, Bundi, Dungarpur, Jhalawar, Kishengarh, Kotah, Mewar, Partabgarh, Shahpura and Tonk entered into a Covenant agreeing to merge them into one State named the United State of Rajasthan.
That Covenant was superseded by another dated the 10th of March 1949 (hereinafter called the Rajasthan Covenant) through which the United State of Rajasthan was to consist of the said ten States as also of four others, namely, Bikaner, Jaipur, Jaisalmer , and Jodhpur, with the Ruler of Jaipur as the Raj Pramukh.
Clause (c) of Article I of the Rajasthan Covenant defined the expression "new Covenanting State" to mean any of the said four States.
Article II of the Covenant last mentioned provided that the United State of Rajasthan would include any other State, the Ruler of which entered into an agreement with the Raj Pramukh, with the approval of the Government of India? to the integration of that State with the United State of Rajasthan Article XII of the Rajasthan Covenant provided: "(1) The Ruler of each Covenanting State shall be entitled to the full ownership, use and enjoyment of all private properties (as distinct from State properties), belonging to 66 him on the date of his making over the administration of that State to the Raj Pramukh of the former Rajasthan state or as the case may be, to the Raj Pramukh of the United State under this Covenant.
" (2) If any dispute arises as to whether any item of property is the private property of the Ruler of a Covenanting State other than a new Covenanting State, or is State pro perty, it shall be referred to such person as the Government of India may nominate in consultation with the Raj Pramukh, and the decision of that person shall be final and binding on all parties concerned: "Provided that no such dispute shall be so referable after the first day of May, 1949.
"(3) The private properties of the Ruler of each new Covenanting State shall be as agreed to between the Government of India in the States Ministry and the Ruler concerned, and the settlement of properties thus made shall be final.
" On the 1st of May 1949, the Rulers of the States of Alwar, Bharatpur, Dholpur and Karauli which were the constituent States of the United State of Matsya, entered into an agreement (hereinafter called the Amending Agreement) with the Raj Pramukh of the United State of Rajasthan merging with four States into it with effect from the 15th of May 1949 in abrogation of the Matsya Covenant.
While subscribing to the Amending Agreement the Ruler of Dholpur acted not only in his capacity as such but also as the Raj Pramukh of the United State of Matsya.
Article IV of that Agreement effected amendments in the Rajasthan Covenant so as to make it applicable to the said four States with effect from the date last mentioned.
No charge, however, was made in the provisions of clause (c) of Article I of Article XII of the Rajasthan Covenant.
On the 14th of September 1949, Mr. V. P. Menon of the Ministry of States, Government of India, wrote the following letter to the Ruler of Alwar: "My dear Maharaja Sahib, "Your Highness will recall that the inventory of immovable properties, securities and cash balances furnished by Your Highness in accordance with Article, XI of the Covenant for the formation of the United State of Matsya was discussed with Your Highness at New Delhi on the 9th and 10th April, 1949.
I now forward for Your Highness 's information a 67 copy of the final inventory of Your Highness 's private properties.
It has the approval of the Government of India in the Ministry of States.
The following claims of Your Highness and the counter claims of the former Matsya Government are still under consideration and the decision will be communicated to Your Highness as soon as possible.
(1) cash balance of the Alwar State treasury; (2) claim for Rs. 4,82,520 as arrears of Privy Purse of Your Highness for 6 years from 1936 37 to 1942 43.
Your Highness will appreciate that the settlement of the inventory is an integral part of an over all agreement in respect of all outstanding matters of dispute and does not stand by itself.
"With kind regards, "Yours sincerely, Sd/ "(V. P. Menon)" This letter was accompanied by a copy of the "final ' inventory which listed 32 items.
Reproduced below is the item at Serial No. 1 of that inventory: "section Description of property.
Decision of the State No Ministry.
City Palace including adjoining building.
Ancestral.
The portion of the building at present in use by the State for administrative purposes or for Museum and Imperial Bank will continue to be so used till such time as required.
The requirements of the State in future will not be of the same order as today and every effort will be made to release the accommodation at present occupied in the Zenana & Mardana Mahals at the earliest practicable date.
The State will bear the maintenance cost of the portions used by it.
Any addition or alteration in the portion used by the State will require the prior consent of His Highness and should be carried out at State expense.
" 68 Thereafter, correspondence went on between the Ministry of States and the Ruler of Alwar and on the 24th September 1952 the later received from the former a written communication dealing with 26 items of properties.
The opening clause of Para 2 of the letter stated: "2.
The Government of India have carefully considered all the outstanding questions in respect of your High Courts private properties, in consultation with the Rajasthan Government, and their decisions in respect thereof are as follows: " The description of each item covered by the letter was followed by the decision in respect thereof That part of the letter which deals with item 26 is set down below: "(26) City Palace including adjoining buildings: The City Palace with the adjoining buildings, comprising of the Jagir office, Central Record, lmperial Bank, Treasury, Gandhi National School etc.
will be your Highness 's ancestral property.
The secretariat building will however be State 1) property.
This decision was reiterated in an office Memorandum issued by the Government of Rajasthan in the Political Department on the 30th of December 1952.
Through a letter dated the 14th of October 1959 proceeding from his Private Secretary and addressed to the Chief Secretary, Ministry of Home Affairs, Government of India.
the Ruler of Alwar claimed rent for three properties known as the Secretariat building, Daulat Khana building and Indra Viman Station adjoining the City Palace and the bungalow at Sariska, which were in the occupation of the Rajasthan Government.
The claim was made on the ground that all the four properties had been declared to be the private properties of the Ruler in the inventory appended to the letter dated the 14th September 1949 mentiond above.
The claim was rejected by the Ministry of Home Affairs which asserted in its letter dated the 24th of December 1959 that the four properties in question had not been recognized as the private properties of the Ruler.
The claim was reiterated by the Ruler through a letter issued by Shri Gopesh Kumar Ojha, his Legal & Financial Adviser, but the name was again turned down by the Ministry of Home Affairs through their letter dated the 6th/8th of December 1960 in which the position taken was: "The Statement regarding the extent of your Private Property rights in the City Palace area made in our letter dated 24 12 59 are based upon the decision reached in March 1952 after discussion with your Highness and we regret that they cannot now be reopened." 69 2.
It was in the above background that the Ruler of Alwar filed two suits, being suits Nos. 4 and 5 of 1963, in the court of the District Judge, Alwar.
In Suit No. 5 the prayer made was that the three properties known as the Secretariat building, Daulat Khana building and Indra Viman Station be declared to be the private properties of the plaintiff and that the State of Rajasthan be ejected therefrom, or, in the alternative, be ordered to pay rent at a specified rate.
A decree for 36,000% was also claimed for mesne profits.
In suit No. 4 of 1963, the Claim was that the plaintiff was entitled to rent or mesne profits in respect of a building forming part of the Mardana Palace.
Both suits were resisted by the Union of India and the State of Rajasthan who were joined as the two defendants to each of them and it was claimed inter alia that the provisions of article 363 of the Constitution of India were a complete bar to their maintainability.
The two suits were transferred by me High Court of Rajasthan to itself and the question of their maintainability was mooted before it with reference to the provisions of article 363 of the Constitution 1 which states: (1) Notwithstanding anything in this Constitution but subject to the provisions of article 143, neither the Supreme Court nor any other court shall have jurisdiction in any dispute arising out of any provision of a treaty, agreement, covenant, engagement, sanad or other similar instrument which was entered into or executed before the commencement of this Constitution by any Ruler of Indian State and to which the Government or the Dominion of India or any of its predecessor Governments was a party and which has or has been continued in operation after such commencement, or in any dispute in respect of any right accruing under or any liability or obligation arising out of any of the provisions of this Constitution relating to any such treaty, agreement, covenant, engagement, sanad or other similar instrument.
(2) In this article (a) "Indian State" means any territory recognised before the commencement of this Constitution by His Majesty or the Government of the Dominion of India as being such a State; and (b) "Ruler" includes the Prince, Chief or other per son recognised before such commencement by 70 His Majesty or the Government of the Dominion of India as the Ruler of any Indian State.
The High Court proceeded to determine whether the dispute in suit No. 5 of 1963 was one arising out of an agreement such as fell within the ambit of article 363 (as was contended by the defendants) or was merely a one sided decision of the Government of India and, therefore, outside the purview of the article as was asserted by the plaintiff.
It held that the "decisions" contained in the latter dated the 14th of September 1949 had really resulted from an agreement between the Ministry of States and the plaintiff, that the extent of the building adjoining the City Palace was not to be found with precision in the inventory appended to the said letter, that consequently there was a real dispute between the parties whether the suit property was included in the expression "adjoining building" and that the adjudication of such a dispute was barred by the provision of article 363 of the Constitution.
Suit No. 5 of 1963 was, therefore, dismissed, but with no order as to costs.
In regard to suit No. 4 of 1963, however, the High Court held that the property in dispute was clearly a part of the City Palace itself as it was comprised in the Mardana Mahal that the dispute was altogether illusory in view of the fact that right up to the 8th of December 1960, the Government of India had been taking the stand that the disputed property was the private property of the plaintiff, that the dispute was consequently not barred by the provisions of article 363 of the Constitution, and that the suit, there fore, deserved to be decided by the District Judge on merits.
In the result, suit No. 4 of 1963 was remitted to the trial court for decision according to law.
It is the judgment of the High Court in suit No. S of 1963 alone that is challenged in this appeal.
Mr. B. D. Sharma, learned Counsel for the appellant Ruler, has vehemently contended that the letter dated the 14th December 1949 was not the result of an agreement between the plaintiff and the Government of India and that, on the other hand, it was a decision arrived at in pursuance of clause (3) of Article XI of the Matsya Covenant.
In support of this contention it was pointed out that the letter was issued as a sequel to the inventory furnished by the plaintiff under clause (2) of that Article and that the operative part of the inventory appended to the letter is headed "decision of the States Ministry" which, according to learned Counsel, clearly negatives an agreement.
It was further urged that even the Rajasthan Covenant did not envisaged any agreement in so far as the plaintiff was concern cd because he was not the Ruler of a "new Covenanting State" with 71 in the meaning of that expression as used in clauses (2) and (3) of Article XII thereof, that it was clause (2) of that Article which governed him and which again provided for a decision being given on disputes relating to properties and that the letter dated 14th September 1949 must still be construed as a decision if the Matsya Covenant was held to be inapplicable.
A careful examination of the material on the record, however, clearly makes out that the contention is without substance as we shall presently show.
It is no doubt true that the plaintiff had furnished the inventory of the properties held by him in accordance with Article XI of the Matsya Covenant as is stated in the opening paragraph of the letter dated the 14th of September 1949.
It further cannot be gain said that the third column of the inventory to that letter was headed "decision of the State Ministry".
These two factors, without more, might have gone a long way to support the case propounded on behalf of the plaintiff, but they are sought to be used out of context as is clear from a perusal of the entire letter from which it can be safely spelt out that the so called "decision" was nothing but an agreement arrived at between the Government of India and the plaintiff.
It is pertinent that the letter mentions that the inventory furnished by the plaintiff was discussed with him at New Delhi on the 9th and 10th of April 1949 and then states that a copy of the final inventory of the plaintiff 's private properties, which had the approval of the Government of India in the Ministry of States, was forwarded to him.
Now, under clause (3) of Article XI of the Matsya Covenant as also clause (2) of Article XII of the Rajasthan Covenant no approval of the Ministry of States was called for.
In fact, what each of those clauses provided was that if any dispute arose as to whether any item of property was the private property of the Ruler concerned or of his erstwhile State, it was to be referred to such person as the Government of India might nominate, and the decision of that person was to be final and binding on all parties concerned.
Now, it is not the case of the plaintiff that the Government of India nominated a person to whom the dispute was to be referred; nor is it claimed by him that such a person gave any decision.
The contents of the letter, therefore, are not at all relateable to those of either of the two clauses just above mentioned.
On the other hand, they clearly indicate that the so called "decisions" of the Sates Ministry contained in the inventory appended to the letter formed really the record of the agreement arrived at between the Ministry of States and the plaintiff as a result of negotiations held on the 9th and 10th of April 1949.
In this connection, reference may pointedly be made to paragraph 3 of the letter which bears repetition: 72 "3.
Your Highness will appreciate that the settlement of the inventory is an integral part of an overall agreement in respect of all outstanding matters of dispute and does not stand by itself." This paragraph talks of "the settlement of the inventory" which was to be an integral part of an "over all agreement in respect of all outstanding matters of dispute" and was not to stand by itself.
In our opinion, the paragraph is a clincher against the plaintiff and indicates without any shadow of doubt that what the letter said was that all the disputes regarding the property of the Ruler were to be settled by an over all agreement, that the contents of the inventory appended to the letter merely recorded the settlement between the plaintiff and the Ministry of States and that even those contents were not to be regarded as a final settlement of the matters dealt with therein unless they formed part of an agreement embracing all items of property.
It may be noted here that the Matsya Covenant had been abrogated with effect from the 15th May 1949 by the Rajasthan Covenant as modified by the Amending Agreement and there was thus no question of any decision being given after that date under clause 3 of Article XI of the Matsya Covenant and that the only surviving provision under which disputes regarding property owned by the plaintiff could be determined after the 15th of May 1949, was Article XII of the Rajasthan Covenant.
It is true that the expression "new Covenanting State" as defined in clause (c) of Article I of that Covenant meant only any of the four States of Bikaner, Jaipur, Jaisalmer and Jodhpur, that the definition was not amended by any provision of the Amending Agreement, so that the State of Alwar could not be regarded as a "new Covenanting Stat.
_" for the purpose of clause (3) of Article XII of the Rajasthan Covenant and that the clause of that Article in accordance with which disputes relating to property claimed by tho Ruler of Alwar as his private property were to be determined was clause (2) which provided for their decision by a person nominated by the Government of India in that behalf.
The fact remains, however, that no such person was ever nominated and that the letter dated the 14th September, 1949, cannot be construed (for reasons already stated by us) as laying down a decision of any such person.
What appears to have happened is that instead of following the course indicated in clause (2) last mentioned and having the disputes referred for decision to a person nominated by the Government of India, the parties (the Government of India and the appellant) decided to adopt the method of mutual agreement to settle those disputes a method which always remained open to them, notwithstanding the Matsya 73 Covenant and the Rajasthan Covenant.
Such mutual agreement could, by no stretch of imagination be regarded as a decision by a person nominated by the Government of India either under clause (3) of Article XI of the Matsya Covenant or clause (2) of Article XII of the Rajasthan Covenant and must be deemed to be nothing more or less than an agreement simpliciter even though it was labelled as a "decision of the States Ministry" in the inventory appended to the letter dated the 14th September, 1949.
Another contention raised by Mr. Sharma was that even if the letter dated the 14th September, 1949 was held to evidence an agreement, it was not hit by the provisions of article 363 of the Constitution inasmuch as it was an agreement resulting from the Rajasthan Covenant which alone according to him, was the agreement covered by the article.
This contention is also without substance.
Article 363 of the Constitution bars the jurisdiction of all courts in any dispute arising out of any agreement which was entered into or executed before the commencement of the Constitution by any Ruler of an Indian State to which the Government of India was a party.
The operation of the article is not limited to any "parent" Covenant and every agreement whether it is primary or one entered into in pursuance of the provisions of a preceding agreement would fall within the ambit of the article.
Thus the fact that the agreement contained in the letter dated the 14th September 1949 had resulted from action taken under the provisions of the Rajasthan Covenant, is no answer to the plea raised on behalf of the respondents that article 363 of the Constitution is a bar to the maintainability of the two suits, although we may add, that agreement did not flow directly from the Rajasthan Covenant but was entered into by ignoring and departing from the provisions of clause (2) of Article XII thereof.
The only other contention put forward by Mr. Sharma was based on the contents of column 3 of Item 1 of the inventory appended to the letter dated the 14th September 1949.
He drew our attention to the mention in that column of the portions of the adjoining building being occupied by the State for administrative purposes or for Museum and Imperial Bank and also comprising the Zenana and Mardana Mahals.
According to him, this meant that the entire building adjoining the City Palace was held to be the private property of the plaintiff, which finally vested in the plaintiff as from the date of the letter and of which the plaintiff could not be divested by any subsequent decision of the Ministry of States.
In this connection, Mr. Sharma urged that the Ministry of States had no power of reviewing a settlement once arrived at and argued that if it was claimed that such 6 817 SCI/78 74 a power existed, the determination by a court of the limited question of the power of review would be barred by the provisions of article 363 of the Constitution.
This contention also is of no avail to him.
As held above, the agreement dated the 14th September 1949 was not to stand by itself but was to be a part and parcel of an overall agreement embracing all outstanding matters of dispute.
It follows that the terms of the agreement contained in the letter were liable to change till a final agreement was reached, and in this view of the matter no finality could be said to attach to those terms until all the disputes became the subject matter of an agreed settlement.
The terms of the inventory attached to the letter were thus merely tentative, the process of settlement being a continuous one till all the disputes were finally resolved.
And the ultimate decision of the Ministry of Home Affairs conveyed in its letter of the 24th of December 1959, not to treat the Secretariat building, Daulat Khana building and Indra Viman Station adjoining the City Palace to be the private property of the plaintiff, was based upon a mutual agreement between the parties which was reached after discussion in March 1952, as part of an over all agreement as is evident from the letter of the Ministry of Home Affairs dated the 6th/8th of December 1960.
In view of the conclusions arrived at above, we hold that the ` 'decision" sought to be enforced by the plaintiff is an agreement hit by article 363 of the Constitution and that the High Court was right in dismissing suit No. 5 of 1963 as being not maintainable.
The appeal, therefore, fails and is dismissed, but with no order as to costs.
N.V.K. Appeal dismissed.

summary/full:
The appellant who was the Ruler of a princely state entered into a covenant agreeing to merge his state into a union called the United States of Matsya.
The Matsya Covenant, by article Xl Cl.
(2) provided that the ruler of each state shall furnish to the Raj Pramukh an inventory of all the inn movable properties, securities and cash balances held by him as private property and cl.
(3) provided that if any dispute arose as to whether any item of property was the private property of the ruler or the state property it shall be referred to such person as the Government of India may nominate in the decision of that person shall be final and binding on all parties.
The appellant furnished an inventory of all properties claimed to be his private "property.
Sometime later the rulers of the constituent States of Matsya entered into a Covenant with the Rajpramukh of the United State of Rajasthan for merger of their States into the State of Rajasthan in abrogation of the Matsya Covenant.
The Rajasthan Covenant by article XII, Cl.
(2) provided for the settlement of any dispute as to whether the property was private property or state property by reference to such person as the Government of India may nominate in consultation with the Rajpramukh and that the decision of such person shall be final and binding on the parties.
The Ministry of States, Government of India wrote on 14th September, 1949 to the appellant that the settlement of the inventory was an integral part of an overall agreement in respect of all outstanding matters of dispute and did not stand by itself.
After correspondence with the Government of India the appellant received a written communication intimating the decision of the Government of India in respect of 25 items of the property.
The appellant claimed that four buildings which were in occupation of the State Government had been declared as his private properties in the inventory appended to the letter of the Government of India and that the State Govern 63 ment should pay rent to him in respect of those buildings.
This claim of the appellant having been rejected, he filed a suit in the district court for a declaration that the properties were his private properties and that the respondents should be ordered to pay rent to him.
The suit was transferred by the High Court to itself, The High Court dismissed the suit on the ground that adjudication of the dispute was barred by article 363 of the Constitution.
In appeal to this Court it was contended that the letter of 14th September, 1949 was the result of a decision arrived at in pursuance of cl.
(3) of article XI of Matsya Covenant and cl.
(2) of article XII of the Rajasthan Covenant and must be construed as a decision of the Government of India.
Dismissing the appeal, ^ HELD: 1.
The decision sought to be enforced is an agreement hit by article 363 of the Constitution and the High Court was right in dismissing the suit.
[74H] 2.
The so called decision was nothing but an agreement between the Government of India and the appellant.
The letter clearly stated that the inventory furnished by the plaintiff was discussed with him at New Delhi and that a copy of the final inventory of the appellant 's private properties, which had the approval of the Government of India in the Ministry of States, Was forwarded to him.
Under clause (3) article XI of the Matsya Covenant as also clause (2) of article XII of the Rajasthan Covenant, no approval of the Ministry of States was called for.
What each of these clauses provided was that if any dispute arose as to whether any item of property was the private property of the ruler concerned or of his erstwhile state, it was to be referred to such a person as the Government of India might nominate, and the decision of that person was to be final and binding on all parties concerned.
Neither the Government of India nominated a person to whom the dispute was to be referred; nor did any such person give a decision on the point.
The contents of the letter, are not at all relatable to those of either of the two clauses.
On the other hand, they clearly indicate that the so called "decisions" of the States Ministry contained in the inventory appended to the letter formed really the record of the agreement arrived at between the Ministry of States and the plaintiff as a result of negotiations.
[71D H] 3.
Paragraph three of the letter talks of the "settlement of the inventory '.
which was tc.
be an integral part of an "overall agreement in respect of all outstanding matters of dispute" and was not to stand by itself.
What the said was that all the disputes regarding the property of the Ruler were to be settled by an overall agreement that the contents of the inventory appended to the letter merely recorded the settlement between the appellant and the Ministry and that even those contents were not to be regarded as final settlement of the matters dealt with therein unless they formed part of an agreement embracing all items of property.
[72B C] 4.
In the instant case instead of having the disputes referred for decision to a person nominated by the parties they decided to adopt the method of mutual agreement to settle those disputes.
Such mutual agreement could not 64 be regarded as a decision by a person nominated by the Government of India either under clause (3) of article of Matsya Covenant or clause (2) of article Xll of Rajasthan Covenant.
It must be deemed to be nothing more nor less than an agreement simpliciter even though it was labelled as a decision of the States Ministry.
[72H 73B] 5.
Article 363 of the Constitution bars the jurisdiction of all courts in any dispute arising out of any agreement which was entered into or executed before the commencement of the Constitution by any Ruler of an Indian Sate to which the Government of India was party.
The operation of the Article is not limited to any "parent" Covenant and every agreement whether it was primary or one entered into in pursuance of the provisions of a preceding agreement would fall within the ambit of the Article.
The fact that the agreement contained in the letter dated the 14th September, 1949 had resulted from action taken under the provisions of the Rajasthan Covenant, is no answer to the plea raised on behalf of the respondents that article 363 of the Constitution is a bar to the maintainability of the two suits, although that agreement did not flow directly from the Rajasthan Covenant but was entered into by ignoring and departing from the provisions of clause (2) of article XII thereof.
[73D E]


judgement:
Civil Appeals Nos. 171, 171A 171D of 1969.
From the Judgment and decree dated 10 12 1963 of the Allahabad High Court in First Appeal No. 511/55.
Lal Narain Sinha, P. P. Singh, J. B. Dadachanji, K. John and J. Sinha for the Appellants.
G. N. Dikshit and M. V. Goswami for the Respondent.
The Judgment of the Court was delivered by JASWANT SINGH, J.
These five appeals by certificates under Article 133(1)(c) of the Constitution granted by the High Court of Judicature at Allahabad shall be disposed of by this judgment as they raise a common question relating to the interpretation of section 39(1) (e) of the U.P. Zamindari Abolition and Land Reforms Act, 1950 (Act No. 1 of 1951) (hereinafter referred to as 'the Act ').
As the facts giving rise to these appeals are identical, it shall suffice to narrate the facts of the case culminating in Appeal No. 171 of 1969.
The predecessor in interest of the appellants, the late Jodha Mal, owned several private forests in the State of U.P. including the one consisting of three compartments comprising a total area of 484.57 acres in village Rajiwala Attick Farm, Mahal Sansar in District Dehradun.
On the vesting of the said forest in the State of U.P. by virtue of section 4 of the Act, the question arose about the assessment and payment of compensation therefor to the heirs of the intermediary.
On service of draft compensation roll prepared under section 40 of the Act, each one of the appellants, filed separate objections in regard thereto before the Compensation officer, Dehradun, who disposed of the same by his order dated August 31, 1953 holding that the average annual income for the said forest which could be taken into consideration while computing its compensation was Rs. 4,551/ as disclosed by the appellants ' accounts for a period of 22 years preceding the date of vesting in terms of clause (i) of section 39(1)(e) of the Act and Rs. 450/ was its annual yield on the date of vesting as per terms of clause (ii) of section 39(1) (e) of the Act.
Dividing the sum total of these two figures by 2, the Compensation officer held that Rs. 5,001/ was the annual income from the aforesaid forest to the intermediaries.
Aggrieved by the computation of compensation, the respondent preferred an appeal to the High Court of Judicature at Allahabad under section SO of the Act.
The appellant 's also filed cross appeals claiming that the average annual income as assessed by the Compensation officer was too low.
Being of the view that while com 30 puting the average annual income from the forest, both the results arrived at by working both the clauses of section 39(1)(e) of the Act had to be looked into and considered and it had to be objectively decided as to what the average annual income from the forest would be, the High Court held that Rs. 2,000/ and not Rs. 450/ was the income under clause (ii) of section 39(1)(e) of the Act.
On the aforesaid basis, the High Court came to the conclusion that Rs. 3,000/ and not Rs. 5,001/ was the average annual income on the basis of which gross assets had to be calculated in computation of compensation in respect of the aforesaid forest.
The High Court by its judgment and decree dated December 10, 1963, disposed of the appeal and the cross appeal in the manner indicated above.
Aggrieved by the judgment and decree of the High Court, the appellants have come up in appeal to this Court.
The respondent has also filed objections with regard to the item of Rs. 2,000/ .
Mr. Lalnarayan Sinha appearing on behalf of the appellants has raised a very short point.
Assailing the method adopted by the High Court in computing the compensation, he has urged that the High Court has missed the real purport and meaning of the provisions relating to the computation of compensation and that the relevant portion of section 39 of the Act did not authorise the High Court to calculate the compensation by taking a mean of the aforesaid two figures.
He has further urged that having worked out the average annual income according to the method indicated in clause (i) of section 39(1)(e) of the Act, the High Court was not required to work out the annual yield of the forest on the date of vesting.
We regret, we cannot accede to this contention.
Section 39(1) (e) of the Act provides as follows: "39.Gross assets of a mahal. (1) Gross assets as respects a mahal shall be the aggregate gross income of the land or estate comprised in the mahal and such income shall comprise . . . (e)average annual income from forests, which shall be computed (i) on the basis of the income for a period of twenty to forty agricultural years immediately preceding the date of vesting as the Compensation officer may consider reasonable, and (ii) on the appraisement of the annual yield of the forest on the date of vesting.
" 31 It will be noticed that the opening words of the above quoted section which is couched in very emphatic terms govern not only clause (i) but also clause (ii ) of section 39 ( 1 ) (e) of the Act.
Consequently neither of the two factors mentioned in section 39(1)(e) of the Act can be ignored while computing the average annual income.
Now so far as the connotation of the word 'average ' is concerned, it does not admit of any doubt.
According to shorter oxford English Dictionary, the word 'average ' means arithmetical mean to estimate by dividing the aggregate of a series by the number of its units '.
The same is the connotation of the word 'average ' according to the Random House Dictionary of the English Language where the total receipt has been stated to mean the total receipt from sales divided by the number of the units sold.
On a true construction of section 39(1)(e) of the, Act, it appears to us that the legislature cast an obligation on the Compensation officer to work out the compensation by computing the average annual income giving due weight to both the factors mentioned in the aforesaid clauses (i) and (ii).
Accordingly, we are of the view that the High Court was correct in computing the average income by adding up to two figures i.e. Of Rs. 4,551/ and Rs. 2,000/ and arriving at a mean on that basis.
The position is also not res integra as in Smt.
Durgi Devi & Ors.
vs State of U.P.(l) this Court held that the average annual income has to be arrived at by taking into consideration not only the income referred to in clause (i) of section 39(1) (e) but also the estimated annual yield of the forest on the date of vesting.
The following observations made therein are apposite.
"A plain reading of clause (e) of section 39(1) shows that its sub clauses (i) and (ii) do not provide for two alter native methods of calculating the average annual income of the forest.
The conjunction 'and ' at the end of sub clause (i) cannot be read as "or".
It conjoins the two sub clauses, and in effect, read in the context of "shall" in the opening part of clause (e), mandates the compensation officer to take both the factors into consideration in assessing the average annual income from the forest.
The reason why the legislature has made compliance with the requirement of this sub clause (ii), also, obligatory, appears to be to ensure that the compensation assessed has a reasonable nexus and proportion to the actual and potential value of the forest as on the date of vesting.
If a forest has been repeatedly, wholly and indiscriminately exploited within forty years or less imme (1) ; 3 S.C.C. 101.
32 diately before the vesting, its actual and potential value as a forest on the date of the vesting might be far less than the one calculated on the basis of its average annual income of the preceding 20 to 40 years as the case may be.
In such a case, average annual income calculated merely on the basis of the income for a period of 20 to 40 years preceding the vesting, may cause fortuitous inflation in the assessment of compensation.
Conversely, if a forest has been very little exploited in the preceding forty years and is well preserved and well developed on the date of vesting than calculation of its average annual income on the basis of sub clause (i) alone, without taking into account its potential yield on the date of the vesting, will make the compensation assessed wholly illusory, having no relation whatever to the value of the forests as at the date of vesting.
Entry of the appraised annual yield of the forest on the date of vesting, into computation under clause (e), operates as a counterpoise against fortuitous inflation or deflation in the assessment.
" Again in Ganga Devi vs State of Uttar Pradesh(1) it was pointed out by this Court that in computing the average annual income under clause (e) of section 39(1), the compensation officer has to refer to both these sub clauses (i) and (ii).
He cannot adopt either of these sub clauses.
It was also pointed out that under sub clause (ii) the annual yield on the date of vesting is to be appraised by taking into consideration, inter alia the number and age of the trees, the area under forest and the produce.
For the foregoing reasons, we find no merit in these appeals which are dismissed with costs.
S.R. Appeals dismissed.

dataset_name: IN-Abs

summary/full:
on the vesting of the forests belonging to the appellants in the State of U.P. by virtue of Section 4 of the U.P. Zamindari Abolition and Land Reforms Act, 1950 (Act 1 of 1951), the question arose about the assessment and payment of compensation therefor to the heirs of the intermediary.
The compensation officer held that the average annual income from the said forests which could be taken into consideration while computing its compensation was Rs. 4551/ as disclosed by the appellants ' accounts for a period of 22 years preceding the date of vesting in terms of clause (i) of Section 39(1)(e) of the Act and Rs. 450/ was its annual yield on the date of vesting as per terms of clause (ii) of Section 39(1)(e) of the Act.
The compensation officer held that Rs. 5001/ was the annual income from the aforesaid forest to the intermediaries.
The High Court in appeal held that Rs. 2000/ and not Rs. 450/ was the income under clause (ii) of Section 39(1)(e) of the Act and therefore came to the conclusion that Rs. 3000/ was the average annual income on the basis of which gross assets had to be calculated in computation of compensation in respect of the said forest.
Dismissing the appeals by certificate the Court, ^ HELD: 1.
The opening words of Section 39(1)(e) of the U.P. Zamindari Abolition Act, 1950 which is couched in very emphatic terms govern not only clause (1), but also clause (ii) of the Section.
Consequently neither of the two factors mentioned in Section 39(1)(e) of the Act can be ignored while computing the average annual income.
The connotation of the word 'average ' does not admit of any doubt.
[31A B] (ii) On a true construction of Section 39(1)(e) of the Act, it is clear that the Legislature cast an obligation on the compensation officer to work out the compensation by computing the average annual income giving due weight to both the factors mentioned in the aforesaid clauses (i).
and (ii).
He cannot adopt either of these sub clauses.
Under sub clause (ii) the annual yield on the date of vesting is to be appraised by taking into consideration, inter alia, the number and age of the trees, the area under forest and the produce.
[31C, 32E] Durgi Devi and Ors.
vs State of U.P. [1978] 3 SCR p. 595, Ganga Devi vs State of U.P., ; applied. 29


judgement:
Civil Appeal Nos. 1701 1703 of 1974.
Appeal by Special Leave from the Judgment and order dated 26 9 73 of the Punjab & Haryana High Court in Income Tax Reference Nos. 38/72, 2/73, 3/73.
section T. Desai and Ramesh Chand for the Appellant.
P. G. Gokhale and Miss A. Subhashini for the Respondent.
The Judgment of the Court was delivered by TULZAPURKAR, J.
The short question raised in these appeals by special leave is whether the cost of materials supplied by the Government (M.E.S. Department) for being used in the execution of works is liable to be taken into consideration while estimating the profits of a contractor and the question has assumed general importance as it affects the entire class of contractors who undertake works on behalf of the Government and in view of a conflict of decisions on the point among different High Courts.
The facts in all the three appeals are substantially the same though the assessees are different.
In Civil Appeal No. 1701 of 1974 the material facts are these: The assessee (M/s. Brij Bhushan Lal Praduman Kumar of Ambala Cantonment), a registered firm, is a Military Engineering Services (M.E.S.) contractor and as such carries on the business of executing contracts and works on behalf of the Government.
For the execution of the works undertaken by the assessee certain material such as cement, coal, items of steel etc. is supplied at the fixed rates specified in Schedule to the contract by the Government for being used in the works.
Such material though in custody of the contractor always remains the property of the Government and if any surpluses is left at the completion of the contract, the contractor (assessee) has to account for it at the same rates at which the supply was made to him (wear and tear excepted) and return the same to the Government.
The assessment year involved was 1966 67 for which the accounting year commenced on 1 10 1964 and ended on September 19 30, 1965.
The assessee firm had taken two contracts, one at Delhi A and the other at Ambala.
For the said assessment year it filed its return of income declaring income of Rs. 44,462 being 10% of the total cash payments of Rs. 4,44,622 received from the military authorities.
The assessee, however, did not furnish any figures about the stores (material) received by it from the M.E.S. The Income tax officer called upon the assessee to produce the relevant certificates in respect of such stores but the assessee failed to do so on the ground that the Departments were not cooperating with it.
The Income tax officer, therefore, estimated the cost of such material at 50% of the cash payments, namely, at Rs. 2,22,311 and by adding this figure to the net cash receipts of Rs. 4,44,622 he arrived at total receipts (including the cost of material) of Rs. 6,66,933 and after rejecting the book results applied a flat rate of 10% and worked out net income or profits at Rs. 66,693 which was rounded upto Rs. 66,690 and on that basis the tax was levied after allocating the said profits among the three partners of the firm.
The assessee preferred an appeal to the Appellate Assistant Commissioner contending that the addition of the cost of material supplied by the Government to the figure of cash receipts received by it during the year for applying the Hat rate of 10% was erroneous and in any case the estimate of the value of such stores at 50% of the cash payments was excessive.
The Appellate Assistant Commissioner rejected the first contention but reduced the estimate of the value of the stores supplied by the Government to 25% and con fined the addition to Rs. 1,11,155.
Aggrieved by that order the assessee preferred further appeal to the Income Tax Appellate Tribunal and the Tribunal accepted the contention of the assessee that the cost of the stores or material supplied by the Government to the assessee could not be added to the figure of cash payments received by the assessee on the ground that the stores (material) supplied by the Government F were 'never sold ' to the contractor, that the same always remained the property of the Government and that no profit could be said to have arisen to the assessee when such stores (material) was merely handled and manipulated by the assessee in the execution of the works under the contract.
The Tribunal followed the decision of the Kerala High Court in M.P. Alexander & Co. vs Commissioner of Income tax(l) where that Court has taken the view that the cost of such material supplied by the Government was not to be included while estimating the profits of a contractor.
The Revenue sought a reference to the Punjab & Haryana High Court on the question whether on the facts and circumstances of the case, the Tribunal was justified in holding that the cost of the material supplied by the Government was not to be (1) 20 included while estimating the profits of a contractor and the High Court in Reference No. 38 of 1972 answered the question against the assessee and in favour of the Department and restored the view of the taxing authorities by its order dated September 26, 1973 and in doing so the yearly income tax paid by them is Rs. 70 to Rs. 80 only.
There is Bhushan Lal vs Commissioner of Income Tax, Delhi(l) where it had held that the cost of the materials supplied by the military authorities was liable tc be included before applying the flat fate to the assessees rceipts.
Civil Appeals Nos 1702 & 1703 of 1974 relate to the assessments of M/s. Brij Bhushan Lal Ramesh Kumar for the assessment years 1965 66 and 1966 67, the relevant accounting years being the ones which ended on March 31, 1965 and March 31, 1966 respectively.
The assessee firm, a M.E.S. Contractor, carried on the business of executing works on behalf of the Government under similar M.E.S. contracts wherein stores/materials are supplied by the military authorities to the firm on identical terms.
For the assessment year 1965 66 the assessee filed its return declaring an income of Rs. 18,684 and disclosing net cash receipts from the Government at Rs. 2,63,853.
Though this income was based on books of accounts maintained by the firm, the assessee during the course of assessment proceedings offered that a flat rate of 9% on the cash receipts of Rs. 2,66,853 may be applied.
The Income Tax officer did not accept the offer but applied a flat rate of 10% on Rs. 3,07,605 which included the value of the stores supplied by the Department to the assessee with the.
result that the profits were assessed at Rs. 3,07,60 and after allowing deprecation of Rs. 5107 the net taxable income was determined at Rs. 25,653 which was rounded up to Rs. 25,650.
For the assessment year 1966 67 the firm declared an income of Rs. 62414 calculated by adopting the flat rate of 10% on the cash receipts of Rs. 6,24,144.
The firm had received stores/material of the value of Rs. 1,36,520 from the military authorities and the Income Tax Officer after adding the value of the stores to the cash receipts arrived at a total receipt of Rs. 7,60,664 and by applying the flat rate of 10% determined the taxable income at Rs. 76,070.
The assessee 's appeals for both the years to the Appellate Assistant Commissioner were unsuccessful but in further appeals the Appellate Tribunal by its order dated October 31, 1970 accepted the assessee 's contention and held that the cost or the value of the stores/material supplied by Government to the contractor was not liable to he included while estimating the profits or income of the contractor.
In coming to this conclusion, as in the other case, the Tribunal followed the Kerala High Court 's decision in M. P. Alexander 's case (supra).
(1) 21 At the instance of the Revenue two references (being Income Tax References Nos. 2 and 3 of 1973) were made to the Punjab & Haryana High Court and the High Court following its earlier decision in Brij Bhushan Lal 's case (supra) answered the questions referred to it in the negative i.e. in favour of the Department and against the assessee.
Both the assessees have come up to this Court by special leave challenging the view taken by the High Court.
In support of these appeals counsel for the appellants has contended that it was well settled that even while making a best judgment assessment the Income Tax officer must make an honest and fair estimate of the income of the assessee and that having regard to the terms and conditions of the contract (a specimen whereof was produced during the hearing before us) and particularly the terms on which the stores/materials were supplied by the military authorities to the assessee for being used in the works undertaken by the firm, it was clear that no element of profit was embedded led in such stores/materials that were made available to the contractor for being used in the works entrusted lo the contractor and as such the cost or value of such stores/material could not be added to the total cash payments received by the contractor from the Department under the contract for the purpose of estimating the income or profits derived by the contractor from such contract.
He pointed out that under the terms and conditions of the contract such stores/material were never 'sold ' by the Department to the contractor but the same always remained the property of the Department and the 15 contractor had merely handled, manipulated or used the same in the works completed by him and the surplus of such stores/material, if any, that remained was required to be and was actually returned by the contractor to the Department and this being the true nature of the supply of such stores/material, the cost or the value thereof could not be included or added to the total cash payment received by the contractor under the contract for computing his income or profits From the said contract.
In support of his contention reliance was placed upon M.P.Alexander 's case (supra), Madras High Court 's decision in Commissioner of Income tax Madras vs K. section Guruswami Gounder & K. section Krishanaraju(l); Gujarat High Court 's decision in Trilokchand Chunilal vs Commissioner of Income Tax, Gujarat(2) and Full Bench decision of the Andhra Pradesh High Court in Additional Commissioner of Income tax vs Trikamji Punia & Sons(2).
on the other hand, counsel for the Revenue contended that not only the cash payments received by the assessee under the contract but (1) (2) (3) 22 also the cost of the store material supplied by the Department to the contractor both together represented the real value of the contract to the contractor and as such, since the book results were rejected, the Taxing Authorities and the High Court were right in coming to the conclusion that the income or profits derived by the contractor from such contracts was liable to be determined by applying the flat rate to the entire value of the contract.
In other words, it was contended by him that the cost of the stores/material supplied by the Government to the contractor was liable to be taken into account while estimating the income or profits of the contractor under such contract and in that behalf he pressed for our acceptance the view of the Punjab & Haryana High Court in Brij Bhushan Lal 's case (supra).
At the out set it may be stated that in the case of both the assessees their returns and book results were rejected on the ground that proper and reliable books of account had not been maintained and the Income tax officer was required to make the assessments on "best judgement" basis.
However, the principles to be followed by the lncome tax officer while making a best judgment assessment have been clearly laid down by the Privy Council as also by this Court in a number of decisions.
In commissioner of Income Tax vs Laxminarain Badri das(1), their Lordships of the Privy Council observed as follows: "The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information.
He must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter.
He must make what he honestly believes to be a fair estimate of the proper figure of assessment, an(l for this purpose he must, their Lordships think, be able lo take into consideration local knowledge and repute in regard to the assessee 's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guesswork.
In that sense, too, the assessment must be to some extent arbitrary".
Since the law relating to "best judgment assessment" is the same both in the case of income tax assessment and the sales tax assessment and the following observations of this Court in Raghubar Mandal Harinder Mandal vs State of Bihar,(2) a case under the Bihar Sales Tax Act, would be material: (1) (1937) S I.T.R. 170 (PC).
(2) (1957) 7 STC 770 at p. 778.
23 "No doubt it is true that when the returns and the books of account are rejected, the assessing officer must make an estimate, and to that extent he must make a guess: but the estimate must be related to some evidence or material and it must be something more than mere suspicion." Again in State of Kerala vs C. Velukutty,(l) which was a case 1 under the Travancore Cochin General Sales Tax Act, Subba Rao, J. (as he then was), speaking for this Court observed at page 244 of the report thus: "The limits of the power are implicit in the expression 'best of his judgment '.
Judgment is a faculty to decide matters with wisdom truly and legally.
Judgment does not depend upon the arbitrary caprice of a judge, but on settled and invariable principle, of justice.
Though there is an element of guesswork in a 'best judgment assessment. ' it shall not be a wild one, but shall have a reasonable nexus to the available material and the circumstances of each case.
" It will appear clear from what has been said above that the authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such estimate the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case.
It is with reference to these principles that the question raised before us will have to be considered and looking at it from that point of view the real question is whether the turnover represented by the cost of the stores/material supplied by the M.E.S. Department involves any element of profit having regard to the terms and conditions on which such supply is made ? If it does then cost of such stores/material will have to be taken into account but if it does not such cost will have to be excluded.
In order to decide the aforesaid question it will be necessary to advert to the terms and condition of the works contracts undertaken by the two assessee firms, which as stated earlier, are common.
The assessee firms in both the cases are M.E.S. Works Contractor tendering and obtaining from the M.E.S. Department what are known as ' 'Lump sum contracts which arc governed by the General Conditions of contracts I.A.F.W. 2249 (1963 print).
In addition to the general conditions the particular work undertaken by the contractor is also governed by special terms contained in the Acceptance of Tender, and the specification and Schedules annexed thereto. ' 'In Lump (1) 24 Sum Contracts" of M.E.S. Department two salient features are always present, namely, (l) there is a Schedule 'B ' which specifies the items of stores/material to be supplied by the Department to 'he contractor solely for being used, fixed or incorporated in the works together with the fixed rates at which the same will be supplied and such supply is governed by General Conditions Nos. 10 and 33: apart from the stores/material specified in Schedule 'B ' the contractor also brings his own stores/material on site for the purposes of the works which is also governed by some Paragraphs of General Conditions Nos. 10 and 33: and (2) the final financial liability of the Government is fixed on completion of the contract on the basis of the actual measurements and on the basis of the rates which are already standardised; a detailed measurement is undertaken at the end of the work at which the Garrison Engineer and the assessee 's representative remain present and the measurements are entered in Measurement Books and after the measurements.
final bills are prepared as per the M.E.S. Schedule and payments are made after making adjustments for the advances already made.
With regard to stores/material Condition Nos. 10 and 33 of the General Conditions are material.
Condition No. 10 so far as is material runs thus: "Condition 10 Stores and Materials The Contractor shall at his own expense, supply all stores and materials required for the Contract, other than those listed in Schedule 'B ' which are to be provided by the Government by the rates detailed therein.
. . . . . . . . . . . . .
All stores and materials to be supplied by the Contractor shall be the best of the respective kinds described in the Specifications and the Contractor shall upon the request of the Engineer in Charge furnish him with proof to his satisfaction that the stores and materials so comply. . . . . . . . . .
In the case of stores provided under Schedule 'B ', the Contractor shall bear the cost of loading, transporting to site, unloading, storing under cover as required, assembling and jointing the several parts together as necessary and incorporating and fixing these stores and materials in the Works, including all preparatory work of whatever description as may 25 be required, and of closing, preparing, loading and returning empty cases or containers to the place of issue without any extra charge." condition No. 33 SO far as is material runs thus: "Condition 33 Stores and Materials on site Stores and materials required for the Works are to be deposited by the Contractor only in places to be indicated by the Engineer in Charge.
. . . . . . . . . . . . .
All stores and materials brought to the site shall become and remain the property of Government and shall not be removed off the site without the prior written approval of the G.E.
But whenever the Works are finally completed the Contractor shall at his own expense forthwith remove from the site all surplus stores and materials originally supplied by him and upon such removal, the same shall revest in and become the property of the Contractor.
All Government stores and materials Issued to the Contractor for incorporation or fixing in the Works and which, making due allowance tor reasonable wear and tear and or waste, have not on completion of the Works been so incorporated or fixed shall be returned by the Contractor at his own expenses to the place of issue.
Surplus stores and/or materials returned by the Contractor will be credited to him at a price not exceeding that at which the said stores and materials were originally issued to him but due consideration shall be given to and allowance claimed by Government in respect of ally depreciation or damage suffered by the Stores and/or materials whilst in the custody of the Contractor " From the tender documents that are made available to contractor and the aforesaid terms and conditions of the "Lump Sum Contracts" two or three aspects emerge very clearly.
In the first place the contractor becomes aware that certain specified stores/materials will be supplied to him by the Department at fixed rates for being used in the works to be undertaken by him for which he has not to pay from his pocket and it is on that footing that he submits his tender quoting a particular figure for the entire work; secondly, such stores/material so supplied by the M.E.S. Department has to be used, fixed or incorporat 3 817 SCI/78 26 ed by the contractor in the works undertaken by him and the surplus, if any, that would remain after the completion of the work is to be returned to the Department; thirdly, since for accounting purposes the initial supply is debited to the contractor at the specified fixed rates, credit for the balance of the stores/materials so returned is also given at the same rates, some adjustment being made in respect of the wear and tear of such stores/material but in regard to the stores/material out of such supply as is actually used, fixed or incorporated in the works, no accounting is done vis a vis the contract payment that is made to the contractor.
In other words, in substance and in reality such stores/material always remains the property of the Department and the contractor has merely the custody of it and he fixes or incorporates the same into the works.
It seems to us clear that in such circumstances and having regard to the terms and conditions on which much supply of store/materials is made there is not even a theoretical possibility of any element of profit being involved in the turnover represented by the cost of such stores/material.
It is conceiveable that when the contractor himself purchases materials in the open market and supplies the same to the Department by using, fixing or incorporating the same in the works, as in the case of materials other than specified in Schedule 'B ' some profit element would be embedded in the turnover represented by the cost of such material but when stores/material is supplied by the Government Department at fixed rates for being used, fixed or incorporated in the work on terms indicated above there would be no element of profit involved in the turnover represented by the cost of such material.
It is true that ordinarily when a works contract is put through or completed by a contractor the income or profits derived by the contractor from such contract is determined on the value of the contract as a whole and cannot be determined by considering several items that go to form such value of the contract but in our view where certain stores/material is supplied at fixed rates by the Department to the Contractor solely for being used or fixed or incorporated in the works undertaken on terms and conditions mentioned above, the real total value of the entire contract would be the value minus the cost of such stores/material so supplied.
Therefore, since no element of profit was involved in the turnover represented by the cost of stores/material supplied by the M.E.S. to the assessee firms, the income or profits derived by the assessee firms from such contracts will have to be determined on the basis of the value of the contracts represented by the cash payments received by the assessee firms from the M.E.S. Department exclusive of the cost of the material/stores received for being used, fixed or incorporated in the works undertaken by them.
27 Having regard to our aforesaid conclusion the view taken by the Punjab and Haryana High Court in Brij Bhushan Lal 's case (supra) must be regarded as erroneous and we approve the view taken by the Kerala High Court (M. P. Alexander & Co. case), Madras High Court (K.S. Guruswami Gounder 'case).
Gujrat high Court (Trilokchand Chunilal 's case) and Andhra Pradesh High Court (Trikamji Punia 's case).
In the result the appeals are allowed, the impugned orders of the High Court are set aside and those of the Appellate Tribunal are restored.
The Revenue will pay the costs of the appeals to the assessee firms.
S.R. Appeals allowed.

summary/full:
The appellant assessees are Military Engineering Services ' contractors and as such carry on business of executing contracts and work on behalf of the Government.
Their contracts are "Lumpsum contracts" where the department supplies the materials at fixed rates.
The revenue was of the opinion that the cost of the materials supplied by the military authorities was liable to be included before applying the flat rate to the assessee 's receipts and estimating the profits for the purposes of tax liability.
The High Court of Punjab and Haryana on a reference at the instance of the Revenue confirmed it following its own earlier Judgments in the case of Brij Bhushan Lal vs C.I.T. Delhi, ( 1971 ) Allowing the appeals by special leave, the Court, ^ HELD: l.
The law relating to 'best judgment assessment ' is same both in the case of income tax assessment and the sales tax assessment.
The authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such estimate the same must not be capricious, but should have a reasonable nexus to the available material and the circumstances of the case.
[22G H, 23D E] Commissioner of Income Tax vs Laxminarain Badridas, (1937) S I.T.R. 170 (PC), Raghubar Mandal Harihar Mandal vs State of Bihar, (1957) 7 S.T.C. 770 at p. 778 and State of Kerala vs C. Velukutty, ; referred to.
Ordinarily when a works contract is put through or completed by a contractor the income or profits derived by the contractor from such contract is determined on the value of the contract as a whole and cannot be determined by considering several items that go to form such value of the contract but where certain stores/material is supplied at fixed rates by the Department to the Contractor solely for being used for fixed or incorporated in the works undertaken on terms and conditions mentioned in the contract, the real total value of the entire contract would be the value minus the cost of such stores/matrial so supplied.
Therefore, since no element of profit was involved in the turnover represented by the cost of stores/material supplied by The M.E.S. to the assessee firms, the income or profits derived by the assessee firms from such contracts will have to be determined on the basis of the value of the contracts represented by the cash payments received by the assessee 17 firms from the M.E.S. Department exclusive of the cost of the material/stores received for being used, fixed or incorporated in the works undertaken by them.
[26E H] In Lumpsum contracts of` M.E.S. Department two salient features are always present namely, ( 1 ) there is a Schedule 'B ' which specifies the items of stores/material to be supplied by the Department to the contractor solely for being used, fixed or incorporated in the works together with the fixed rates R at which the same will be supplied and such supply is governed by General Conditions Nos. 10 and 33; apart from the stores/material specified in Schedule 'B ' the contractor also brings his own stores/material on site for the purposes of the works which is also governed by some Paragraphs of General Conditions Nos. 10 and 33; and (2) the final financial liability of the Government is fixed on completion of the contract on the basis of the actual measurements and on the basis of the rates which are already standardised; a detailed measurement is undertaken at the end of the work at which the Garrison Engineer and the Assessee 's representative remain present and the measurements, are entered in Measurement Books and after the measurements final bills are prepared as per the M.E.S. Schedule and payments are made after making adjustments for the advances already made.
[24A D] From the tender documents that are made available to contractor and the aforesaid terms and conditions of the "Lump Sum Contracts" two or three aspects emerge very clearly.
In the first place the contractor becomes aware that certain specified stores/materials will be supplied to him by the Department at fixed rates for being used in the works to be undertaken by him for which he has not to pay from his pocket and it is on that footing that he submits his tender quoting a particular figure for the entire work; Secondly, such stores/material so supplied by the M.E.S. Department has to be used, fixed or incorporated by the contractor in the works undertaken by him and the surplus, if any, that would remain after the completion of the work is to be returned to the Department; thirdly, since for accounting purposes the initial supply is debited to the contractor at the specified fixed rates, credit for the balance of tho stores/materials so returned is also given at the same rates, some adjustment being made in respect of the wear and tear of such stores/material but in regard to the stores material out of such supply as is actually used, fixed or incorporated into the works, no accounting is done viz a viz the contract payment that is made to the contractor.
In other words, in substance and in reality such stores/material always remains the property of the Department and the contractor has merely the custody of it and he files or incorporates the same into the works.
In such circumstances having regard to the terms and conditions on which such supply of stores/materials is made there is not even a theoretical possibility of any element of profit being involved in the turnover represented by the cost of such stores/materials.
It is conceivable that when the contractor himself purchases materials in the open market and supplies the same to the Department by using fixing or incorporating the same in the works.
as in the case of materials other than specified in Schedule 'B ' some profit element would be embedded in the turnover represented by the cost of such martial but when stores/material is supplied by the Government Department at fixed rates for being used, fixed or incorporated in the work on terms indicated above there would be no element of profit involved in the turnover represented by the cost of such material.
[25G H, 26A E] 18 Brij Bhushan Lal vs Commissioner of Income Tax, Delhi, and Haryana); overruled.
M. P. Alexander and Co. vs Commissioner of Income Tax ; Commissioner of Income Tax, Madras vs K. section Guruswami Gounder and K section Krishnaraju ; Trilokchand Chunilal vs Commissioner of Income Tax Gujarat , Additional Commissioner of Income Tax vs Trikamji Punia and Sons, [AP (F.B.)]; approved.