judgement:
ivil Appeal No. 1643 of 1984.
From the Judgment and Order dated 6.7.
1982 of the Allahabad High Court in Writ Petition No. 1499 of 1974 G.L. Sanghi, Mrs. section Dixit and Pradeep Misra for the Appel lants.
Kuldip Singh, Additional Solicitor General, Ashok K. Srivastava, C.V. Subba Rao, Mrs. Sushma Suri and A. Subba Rao for the Respondents.
The Judgment of the Court was delivered by DUTT, J.
This appeal by special leave is directed against the judgment of the Allahabad High Court dismissing the writ petition of the appellants whereby they challenged inter alia the validity of rule 328(2) of the Railway Estab lishment Code as amended by the Railway 82 Board by Advance Correction Slip No. 70.
The appellants were appointed Trade Apprentices in Locomotive Component Works (for short 'LCW ') in or about January, 1959.
There was a merger of LCW with Diesel Locomo tive Works, Varanasi, (for short 'DLW ') on August 1, 196 1, as a result of which, all the members of the staff of LCW were taken over by DLW.
On July 19, 1962, the appellants were appointed Skilled Artisans after successfully complet ing a training for three years and a half.
The regular channel of promotion to higher posts from the post of Skilled Artisan is in the following order: 1.
Skilled Artisan.
Highly Skilled Grade II.
Highly Skilled Grade I. 4.
Chargeman C. 5.
Chargeman B. 6.
Chargeman A. 7.
Assistant Foreman.
Foreman.
It is apparent from the above channel of promotion that the next higher post to which the appellants could be pro moted was the post of Highly Skilled Grade II.
In September, 1963, the appellants were, however, promoted to the post of Instructor C which is equivalent to the post of Chargeman C.
There is a controversy between the parties as to whether the post of Instructor C was an ex cadre post or not.
According to the appellants, it was an interchangeable post with Chargeman C.
We shall have occasion to consider the question later in this judgment.
It may be stated, however, that there is no dispute that the post of Instructor C is a selection post and the appellants were selected and promoted to existing vacancies in that post.
The next post to which the appellants were promoted on September 22, 1964 is the post of Chargeman B upon their selection by a constituted Selection Board on a regular basis.
Some of the respondents, who are direct recruits, also competed with the appellants for the post of Chargeman 83 B, but they could not qualify themselves in the written test.
To complete the narrative, it may be stated that the appellants have now been promoted to the post of Chargeman A.
On August 11, 1966, the General Manager of DLW prepared certain seniority lists including a seniority list of Chargeman B on the basis of the rules or guidelines framed by him.
The said seniority list was challenged by certain direct recruits by filing writ petitions before a learned Single Judge of the Allahabad High Court.
The learned Single Judge quashed the seniority list and also the guidelines or rules framed by the General Manager, DLW, on the basis of which the seniority list was prepared.
The principal ground on which the seniority list and the rules or guidelines framed by the General Meeting, DLW, were quashed by the learned Single Judge was that the General Manager, DLW, was not the General Manager of the Railway and, as such, he had no authority to frame rules or guidelines for the purpose of preparation of the seniority list.
Further, the learned Judge held that the said rules or guidelines dated August 11, 1966 were violative of Articles 14 and 16 of the Consti tution of India.
Several appeals were preferred against the judgment of the learned Single Judge including one preferred by the Railway Administration before the Division Bench of the High Court.
While upholding the finding of the learned Single Judge that the General Manager, DLW, was not competent to frame rules or guidelines, the Division Bench could not agree with the finding of the learned Single Judge that the said rules or guidelines were violative of Articles 14 and 16 of the Constitution.
It was observed that there would have been no objection if the General Manager, DLW, had utilised the relevant statutory rules in drawing up the seniority list but, admittedly, the rules in question were ignored.
Further, the Division Bench pointed out that all the concerned employees in the writ petition agreed before the learned Single Judge that the seniority list might be prepared on the basis of the relevant rules contained in the Railway Establishment Code and the Railway Establishment Manual.
The Division Bench also found that the DLW project was not a temporary project, but appeared to be a permanent project.
Upon the above findings, the Division Bench upheld the quashing of the seniority list and directed the General Manager, DLW, to prepare a fresh seniority list in the tight of the statutory provisions contained in the Railway Estab lishment Code and the Railway Establishment Manual.
After the aforesaid judgment of the Division Bench of the High 84 Court, what the Railway Board did before preparation of any seniority list by the General Manager, DLW, was to issue Advance Correction Slip No. 70 inserting rules 324 to 328 in the Railway Establishment Manual after rule 323 in Chapter III.
Of the rules, so inserted, that which vitally affected the appellants is rule 328(2) which provides as follows: "328(2).
Selection and promotions made in the Diesel Locomotive works from 1.8.1961 up to the date of notification of these rules shall not be valid.
" The Rules were amended by the Board by virtue of its power under rule 157 which provides that the Railway Board have full powers to make rules of general application to non gazetted railway servants under their control.
The date of notification of the amended Rules is March 11, 1973.
In view of rule 328(2), the promotions which were granted to the appellants from August 1, 1961 up to March 11, 1973 shall not be valid.
Needless to say, rule 328(2) has vitally affected the appellants by making invalid all the promotions given to them between the said period.
As a result, the appellants were reverted back to the position of Skilled Artisans.
The General Manager, DLW, by his circular dated December 7/8, 1973 directed the appellants to appear at the trade test.
it was further directed that if the staff concerned would fail to appear in the trade test, they would be passed over for fixation of seniority in the Highly Skilled Grade Il, although the appellants had in 1962 crossed the position of Highly Skilled Grade Il.
The appellants made a represen tation against the said circular to the General Manager, DLW, on December 12, 1973.
That representation was turned down by the General Manager on the ground that in view of the said rule 328(2), the claim for either higher positions or exemption from passing any trade test was not tenable.
It was also stated that if the appellants would fail to appear in the trade test, they would be passed over for fixation of seniority in the Highly Skilled Grade Il.
Being aggrieved by the introduction of the said rule 328(2) directly affecting the appellants and also the said circular of the General Manager, DLW, requiting the appel lants to appear at the trade test for the purpose of prepa ration of the seniority list in Highly Skilled Grade II, the appellants filed a writ petition before the High Court.
The High Court overruled the contention of the appellants that the new rules, which have been inserted in the Railway Establish 85 ment Manual including rule 328(2) by the Advance Correction Slip No. 70 by the Railway Board by virtue of its power under rule 157 of the Railway Establishment Code, were invalid.
The High Court held that the said rules were quite valid and were not arbitrary or discriminatory as contended on behalf of the appellants.
In regard to the promotions of the appellants.
The High Court took the view that they were only interim and provisional and not regular promotions under the normal rules, and that such provisional selection and promotions conferred no rights on the appellants to hold the posts to which they were promoted.
Upon the above find ings, the High Court dismissed the writ petition.
Hence this appeal by special leave.
Mr. Sanghi, learned Counsel appearing on behalf of the appellants, has challenged before us the validity of rule 328(2) as inserted in the Railway Establishment Manual by the Advance Correction Slip No. 70.
It has been already noticed that in view of the said rules, the promotions of the appellants up to the position of Chargeman A stand set aside and the appellants are reverted back to their original position of Skilled Artisan.
In other words, the length of service of the appellants for a period of about nine years has been completely wiped out by rule 328(2).
The High Court took the view that the promotions which were granted to the appellants were by way of interim meas ure and did not confer on them any title to the posts to which they were promoted.
In support of that view, the High Court has referred to the order of the General Manager, DLW, dated May 14/16, 1962 which reads as follows: "As an interim measure, all supervisory tech nical posts in the Mechanical Department will be treated as ex cadre posts and promotions will be regulated by selection.
" Before considering the question of the validity of rule 328(2), we may first of all examine whether the promotions of the appellants up to the post of Chargeman B were by way of interim measures, as found by the High Court, and/or whether such promotions are permissible by the Rules or not.
In this connection, we may refer to the circular of the Railway Board dated May 27, 1963 regarding the procedure to be followed for filling up selection posts (non gazetted).
The Board directed that if the requisite number of staff was not available in the grade next to the grade for which the selection was being held, the administration could go to the .lower grade in order to make up four 86 times the number required to be called up for selection but, in no case, can the eligibility be extended to staff in the grade lower than three times.
This circular of the Board is quite consistent with rule 2 16 of the Railway Establishment Manual.
Rule 216 also provides for a similar procedure.
The direction of the Board read with the provision of rule 2 16 clearly empowers the administration to select persons from two grades lower than the post to which promotion was to be made.
The next circular dated November 2, 1963 of the General Manager, DLW, regarding the formation of panel for promotion of mechanical supervisors and instructors is significant.
The said circular clearly provided that all staff in Mechan ical Department including instructoral staff under the Principal Technical Training School in two grades below the grade for which selection was going to be held, were eligi ble.
The Skilled Artisans having not less than one year 's service were permitted to apply for the post of Instructor in the grade of Rs.205 280 (AS) which is equivalent to that of Chargeman C.
In the channel of promotion, which has already been noticed above, the feeder post for promotion to the post of Chargeman C is Highly Skilled Grade I but, in view of the said circular dated May 27, 1963 of the Board read with rule 2 16 of the Railway Establishment Manual, persons holding posts two grades below the post to which the promotion was to be made, that is, the post of Instructor which is equivalent to the post of Chargeman C, were allowed to apply for the same.
The reason for the said circular or the said rule is that at all times suitable candidates might not be available and just to avoid administrative inconven ience, the promotions are given from posts below the feeder post.
The said circular of the General Manager, DLW, dated November 2, 1963 does not show that the promotion to the posts of selection and/or promotion to the posts of Instruc tors would be by way of interim measure or ad hoc arrange ment.
In the absence of any such indication, it will not be unreasonable to presume that such promotions were anything other than by way of interim measure or ad hoc arrangement, as contended on behalf of the respondents.
In view of the said circular dated November 2, 1963, the appellants applied for the posts of Instructors and they were selected after the requisite tests.
In the office order No. 3421 dated December 30, 1963, appointing the appellants to the post of Instructor (Machinist Gr.
C), it is clearly stated that they are appointed to the post of Instructor (Machinist Gr.
C) against existing vacancies.
Again, a similar circular dated July 18, 1964 was issued from the office of the General Manager, DLW, with regard to the filling up of 87 the posts of Chargeman B in the scale of Rs.250 380 (AS).
It was clearly stated in the circular that the staff in the Mechanical Department in two grades below the grades for which the selections would be held, were eligible to apply.
The appellants applied for the post and had to appear at the written and viva voce examinations.
Some of the private respondents also appeared in the said examinations along with the appellants but they failed, while the appellants succeeded and were empanelled for appointment to the post of Chargeman (Machinist) B.
In view of such an empanelment, the appellants were appointed Chargemen B in the grade of Rs. 250 380 against existing vacancies sometime in February, 1965.
We may now refer to a very significant document which is office order No. 25 dated January 22, 1966.
In that order, it is stated that the staff mentioned therein will have their paper lien maintained in the Shops/Division as men tioned against each and will seek their promotions in their respective Division/Shops.
In the list annexed to the said order, the present designation of the first appellant has been mentioned as "Instructor B ' ' and his revised position or designation as "Chargeman B".
In the last column under the heading "placed where lien is kept", it is stated that his lien is kept under the production Engineer (PE).
The present and revised designation of the appellant Nos. 2 and 3 have been shown as Chargeman B. The place of lien of the appellant No. 2 has been stated to be under the Production Engineer, while that of the third appellant has been stated to be under the Works Manager (B).
It is urged on behalf of the respondents that the said officer order No. 25 does not show that the appellants have any lien on the posts of Chargeman B. It only mentions that they have a lien on certain places.
We are unable to accept this contention.
A person may have lien on a post and not a lien on a place.
And all that the said order means that they have lien on the post of Chargman B, but in certain places under either the Production Engineer or the Works Manager.
There can be no doubt that a person appointed to a post on an ad hoc basis cannot have any lien on the post.
It is only when a person appointed on a permanent basis, he can claim lien on the post to which he is so appointed.
It is, therefore, not correct to say that the appellants were appointed or promot ed to the post of Instructor C or Chargeman C on an ad hoc basis or by way of an interim measure, as held by the High Court in the impugned judgment.
If they were appointed on ad hoc or purely temporary basis, they could not have been promoted to the post of Chargeman B and the said order No. 25 dated January 22, 1966 would have been quite inconsistent with such ad hoc or temporary appointments.
88 At this stage, it will be pertinent to refer to the counter affidavit of the Railway Administration in the previous writ proceedings.
In paragraph 15 of the counter affidavit, it has been stated inter alia that the post of Junior Instructor carries the same scale of pay as Charge man 'C ' and that the two posts being of the same rank and scale, staff of the one post could be transferred to the other post and vice versa.
This statement in the counter affidavit of the Railway Administration clearly indicates that the post of Instructor C and Chargeman C are inter changeable posts.
Further, it is stated as follows: "Respondent Nos. 8 to 11 (which include the three appellants herein) in the first instance offered for the post of Instructors in grade Rs.205 280 (equivalent to Chargeman 'C ' grade) and they were selected by duly constituted Selection Board.
Subsequently they offered for the post of Chargeman B grade Rs.250 280 (AS) and were promoted as such after having been selected by a Selection Committee.
Respondents Nos.
8 to 11 were appointed to grade Rs.205 280 and subsequently to grade Rs.250 280 after having been selected by a duly constituted Selection Board ' . . . ." In the circumstances, we are of the view that the appel lants were not appointed on an ad hoc or a purely temporary basis by way of interim measure as held by the High Court, but they were appointed on a permanent basis in the post of Instructor or Chargeman Grade C, which are interchangeable posts and, thereafter, promoted to the post of Chargeman Grade B.
The appointment or promotion of the appellants to the post of Chargeman C from the post of Skilled Artisan or to Chargeman B were made in accordance with the circular of the Railway Board and/or in accordance with rules 216 of the Railway Establishment Manual.
It cannot, therefore, be said that the appellants were promoted to the post of Chargeman C illegally or in violation of any rule.
There is a controver sy between the parties as to whether the post of Instructor C is an ex cadre post or not.
It is submitted on behalf of the respondents that the post of Instructor C being an ex cadre post, the appellants could not be appoint ed or promoted to the post of Chargeman C.
This contention is unsound and is fit to be rejected.
It is the clear case of the Railway Administration, as pointed out above, that the posts of Instructor C and Chargeman C are interchange able posts.
Even assuming that the post of Instructor C is an ex cadre post, nothing turns out on that inasmuch as according to 89 the Railway Administration itself, the two posts being of the same rank and scale, the staff of one post could be transferred to the other post and vice versa.
The appellants might have been appointed to the post of Instructor C, but they were transferred to the post of Chargeman C and, there fore, there was no difficulty in promoting them to the post of Chargeman B.
Now, we may consider the question as to the propriety otherwise of rule 328(2) as inserted in the Railway Estab lishment Manual by the Railway Board in exercise of its power under rule 157 of the Railway Establishment Code.
It has already been noticed that in the previous writ proceed ings the Division Bench of the High Court quashed the sen iority list and directed the General Manager, DLW, to pre pare a fresh seniority list in the light of statutory provi sions contained in the Railway Establishment Code and the Railway Establishment Manual.
The Principal ground for quashing the seniority list was that the General Manager, DLW, had no authority to frame guidelines or rules for the purpose of preparing the seniority list.
It has also been noticed that while the learned Single Judge took the view that the guidelines or rules framed by the General Manager were violative of Articles 14 and 16 of the Constitution, the Division Bench took a contrary view and after consider ing the rules or guidelines in detail came to the finding that none of the guidelines or rules framed by the General Manager was contrary to the provisions of Articles 14 and 16 of the Constitution.
Indeed, the Division Bench was of the view that no objection could be taken to the said rules or guidelines, but it had to quash the seniority list framed on the basis of such guidelines or rules inasmuch as the Gener al Manager had no authority to frame such rules or guide lines.
Accordingly, the Division Bench directed the General Manager to prepare the seniority list in accordance with the existing statutory rules.
It is curious that instead of preparing the seniority list in accordance with the existing statutory rules, as directed by the High Court, the Railway Board amended the rules and inserted by the Advance Correction Slip No. 70, among others, rule 328(2) which has been extracted above.
That rule wipes out not only the promotion granted to the appellants up to the post of Chargeman Grade B, but also the length of service of the appellants for about nine years.
The appellants have been directed by the order dated decem ber 7/8, 1973 of the General Manager to appear in a trade test in respect of the post of Highly Skilled Artisan Grade Il, otherwise their seniority in the said post will be passed over.
In other words, the appellants are in a way 90 reverted to the post of Skilled Artisan which they were holding before their promotion to the post of Instructor/Chargeman C.
No reason appears to have been given for the introduction of rule 328(2) by the Advance Correc tion Slip No. 70.
It was not the case of the Railway Admin istration in the previous writ proceedings that the promo tions that were given to the appellants were purely on an ad hoc basis.
The High Court in the previous writ proceedings did not also find that the appellants ' promotion to the post of Instructor/Chargeman C or to the post of Chargeman B were on ad hoc basic.
We have, after considering the relevant facts, come to the finding that the appellants were regular ly promoted to the post of Chargeman C and, thereafter, to Chargeman B.
In the circumstances, we do not find any justi fication for the Railway Board to incorporate a new rule, that is, rule 328(2) to the serious prejudice of the appel lants.
The Railway Administration was to comply with the order of the High Court and in compliance with the order, it should have prepared the seniority lists in accordance with the existing rules.
It is not the case of the Railway Admin istration that under the existing rules the seniority list could not be prepared.
There is, therefore, no reasonable justification for the Railway Board to insert in the Railway Establishment Manual rule 328(2).
There can be no doubt that by virtue of rule 157 of the Railway Establishment Code, the Railway Board has the power to frame rules, but such rules must be framed with certain objects in view and must not be arbitrary.
The Court is always entitled to examine whether a particular rule which takes away the vested fight of a railway employee or seriously affects him with retrospective effect, has been made to meet the exigencies of circum stances or has been made arbitrarily without any real objec tive behind it.
In the instant case, we do not find any objective or purpose behind the framing of rule 328(2) to the serious prejudice of the appellants.
In other words, rule 328(2) is arbitrary and, therefore, cannot be allowed to be operative to the detriment of the appellants.
The only justification for rule 328(2) as advanced by the learned Counsel for the respondents is that as the appellants we.re promoted on ad hoc basis to the posts of Chargeman C and Chargeman B, they had no fight to hold these posts and, accordingly, they were to be reverted to the post of Skilled Artisan.
This contention of the respondents does not find support from the counter affidavit filed by the Railway Administration in the previous writ petition nor does it appear from any order or circular of the Railway Board or the Railway Administration in support of the same.
Moreover, we have on a conspectus of the facts and circumstances and the circulars of the Railway Administration come to the finding that the appellants were not promoted on an ad hoc basis.
For the reasons aforesaid, the appeal is allowed and the judgment of the High Court is set aside.
It is directed that the respondents Nos. 1 and 2 shall not give effect to rule 328(2) as inserted in the Railway Establishment Manual by the Advance Correction Slip No. 70 in the cases of the appellants and the respondents Nos.
3 to 6.
The impugned orders dated December 7/8, 1973 and January 7, 1974 are quashed.
The respondents Nos. 1 and 2 are further directed to fix the seniority of the appellants and the said respond ents Nos.
3 to 6 on the basis of their promotions to the posts of Instructor/Chargeman C and Chargeman B.
There will be no order as to costs.
N.V.K. Appeal allowed.

summary/full:
The appellants in the appeal were appointed in or about January, 1959 as Trade Apprentices in Locomotive Component Works.
In August, 1961 there was a merger of Locomotive Component Works with Diesel Locomotive Works, as a result of which all the members of the staff of LCW were taken over by DLW.
The appellants were appointed skilled artisans on July 19, 1962 after successfully completing the training period of 3 1/2 years.
The channel for promotion to higher posts was: (1) Skilled Artisan, (2) Highly Skilled Grade II, (3) Highly Skilled Grade I, (4) Chargeman C, (5) Chargeman B, (6) Chargeman A, (7) Assistant Foreman and (8) Foreman.
In September, 1963, the appellants were promoted to the post of Instructor C which was equivalent to the post of Charegman C.
The posts were inter changeable.
The appellants were further promoted on September 22, 1964 to the post of Chargeman B. Some of the respondents in the appeal who were direct Recruits also competed with the appellants for the post of Chargeman B, but could not qualify in the written test.
On August 11, 1966, the Genera1 Manager, DLW pre pared and issued a seniority list of Chargeman B.
This list was challenged by I certain direct recruits in a writ petition to the High Court.
A Single 79 Judge quashed the seniority list and also the guidelines/rules framed by the General Manager, DLW on the basis of which the seniority list was prepared, on the ground that the General Manager, DLW was not the General manager of the Railway, and as such he had no authority to frame the rules or the guidelines for the purpose of prepa ration of the seniority list.
It was further held that the guidelines/rules were violative of Articles 14 and 16 of the Constitution.
Several appeals were preferred, one of them being by the Railway Administration.
The Division Bench while upholding the finding of the Single Judge that the General Manager DLW was not competent to frame the rules/guidelines, disagreed with the finding that the rules/ guidelines were violative of Articles 14 and 16 of the Constitution.
Pursuant to the aforesaid judgment, the Railway Board issued an Advance Correction Slip No. 70 inserting Rules 324 to 328 in the Railway Establishment Manual after rule 323 in Chapter III.
Rule 328(2) provided that: 'selections and promotions made in the Diesel Locomotive Works from August 1, 1961 upto the date of the notification of the rules shall not be invalid '.
The amended rules came into effect from March 11, 1973.
The resultant situation was that Rule 328(2) vitally affected the appellants by making invalid all the promotions given to them during the period August 1, 1961 to March 11, 1973 and the appellants were reverted back as Skilled Arti sans.
The General Manager, DLW a Circular dated 7/8th Decem ber, 1973 directed appellants to appear at the Trade test and further informed that failure to do so would result in being passed over for fixation of seniority in the Highly Skilled Grade II.
The representation against this Circular was turned down.
Aggrieved by the introduction of Rule 328(2) and also the issuance of Circular by the General Manager DLW the appellants filed a writ petition in the High Court The High Court overruled the contention that the new rules inserted in the Railway Establishment Manual by the Advance Correc tion Slip No. 70, were invalid, and held that the rules were quite valied and were not arbitriary or discriminatory.
As regards promotion of the appellants,the High court took the view that they were only interim and professional and not regular and as such no right was confirmed on appellants to hold the posts to which they were promoted.
The high court accordingly dismissed the writ petition.
80 On behalf of the appellants in the appeal by special leave it was contended that Rule 328(2) as inserted in the Railway Establishment Manual by the Advance Correction Slip No. 70 was invalid, that the promotions of appellants up to the position of Chargeman A could not be set aside and appellants reverted back to their original position of Skilled Artisans, and that the length of service of the appellants for a period of about 9 years has been completely wiped out by the said Rule 328(2).
Allowing the appeal and setting aside the judgment of the High Court, HELD:1.
By virtue of Rule 157 of the Railway Establish ment Code, the Railway Board has the power to frame rules, but such rules must be framed with certain objects in view and must not be arbitrary.
[90E] 2.
The Court is always entitled to examine whether a particular rule which takes away the vested right of a railway employee or seriously affects him with retrospective effect, has been made to meet the exigencies of circum stances or has been made arbitrarily without any real objec tive behind it.
[90E F] 3.
The Railway Administration was to comply with the order of the High Court and in compliance with the order, it should have prepared the seniority lists in accordance with the existing rules.
[90C D] 4.
It is curious, that instead of preparing the seniori ty list in accordance with the existing statutory rules, as directed by the High Court, the Railway Board amended the rules and inserted by the Advance Correction Slip No. 70, among others, Rule 328(2).
That rule wipes out not only the promotions granted to the appellants up to the post of Chargeman Grade B, but also the length of service of the appellants for about nine years.
[89F G] 5.
This Court does not find any objective or purpose behind the framing of Rule 328(2) to the serious prejudice of the appellants.
The said Rule is arbitrary and therefore, cannot be allowed to be operative to the detriment of the appellants.
[90F] 6.
The appellants were regularly promoted to the post of Chargeman C and thereafter to Chargeman B.
In these circum stances, no justification is found for the Railway Board to incor 81 porate a new rule viz., Rule 328(2) to the serious prejudice of the appellants.
[90C] 7.
A person can have lien on a post and not a lien on a place.
There can be no doubt that a person appointed to a post on ad hoc basis cannot have any lien on the post.
It is only when a person is appointed on a permanent basis, he can claim lien on the post to which he is so appointed.
[87F G] 8.
It is not correct to say that the appellants were appointed or promoted to the post of Instructor C or Charge man C on an ad hoc basis or by way of an interim measure, as held by the High Court.
If they were appointed on ad hoc or purely temporary basis they could not have been promoted to the post of Chargeman B and Office Order No. 25 dated Janu ary 22, 1966 would have been quite inconsistent with such ad hoc or temporary appointments.
[87G H] 9.
Directed that Respondent Nos. 1 and 2 shall not give effect to Rule 328(2) as inserted in the Railway Establish ment Manual by the Advance Correction Slip No. 70 in the case of appellants and Respondent Nos.
3 to 6.
Orders dated December 7/8th, 1973 and January 7, 1974 are quashed.
Fur ther directed that Respondent Nos. 1 and 2 fix the seniority of appellants and respondents 3 to 6 on the basis of their promotions to posts of Instructor/Chargeman C and Chargeman B. [91B C]


judgement:
ivil Appeal No. 4159 of 1984.
From the Judgment and Order dated 20.1.
1984 of the Customs, Excise and Gold (Control) Appellate Tribunal, New Delhi in Appeal No. ED(SB)(T) 644/81 A (Order No. A29/84).
P.P. Rao, Rameshwar Nath, D.N. Mehta and Ravinder Nath for the Appellants.
V.C. Mahajan, Arun Madan and P. Parmeshwaran for the Respondent.
The Judgment of the Court was delivered by SABYASACHI MUKHARJI, J.
This is an appeal under section 35 L(b) of the Central Excises & Salt Act, 1944 (hereinafter referred to as 'the Act ') from the judgment and order of the Customs, Excise & Gold (Control) Appellate Tribunal (herein after referred to as 'the Tribunal ') dated the 20th January, 1984.
The appellants are the manufacturers of 'Supercem Water proof Cement Paint ', hereinafter called as the 'Product ', and other allied products in their factory at Madras.
They manufacture and market this product throughout India.
It is stated that the appellants are a small manufacturing firm with no branches and/or sales offices in any other State, city or town.
In these circumstances, an agreement for sale described as an 'agreement of sale ' dated 1st May, 1962 was entered into with Gillanders Arbuthnot & Co. Ltd., of Cal cutta, hereinafter called 'Gillanders '.
The said company has a very big sales organisation having its offices located at all important places in the territory of Union of India and they market goods of all types, not only of the appellants herein, but also of several other reputed manufacturers through their well staffed offices in all the States of India.
The appellants vide their letters dated 23rd April, 1979 and 15th May, 1980 to the Excise authorities, had claimed a refund of Rs.2,39,153.63 on account of excess excise duty paid on the assessable value on the basis of price at which the Gillanders had sold the products to its customers, during the period July, 1977 to March, 1979.
Both the Assistant Collector by his order dated 29th May, 1980 and the Collector by his order dated 24th March, 1981 re jected the contention of the appellants and held that the assessable value is the price at which Gillanders sold the goods.
786 The Tribunal in its order dated 20th January, 1984 referred to relevant clauses in the said agreement dated 1st May, 1962 and came to the conclusion that it was abundantly clear from the conditions that the title to and the owner ship in the goods consigned to Gillanders was not to pass to them.
According to the Tribunal a sine qua non of a sale is that the title should pass from the seller to the purchaser.
When once that were not so, according to the Tribunal, then it was futile to contend that it was an agreement for sale.
The Tribunal on an analysis of conditions of agreement, came to the conclusion that the true character of the agreement was that it was an agreement for sole selling agency and not an agreement for sale.
The Tribunal also referred to the expression 'a related person ' in the definition given by Sec.
4(4)(c) of the Act and held that Gillanders was a related person and, therefore, the assessable value of the goods for levy of excise duty must be on the basis of the price at which Gillanders ordinarily sold these in the course of wholesale trade less the transportation cost and other permissible deductions such as duty of excise and sales tax, if any, subject to proof.
Aggrieved thereby, the appellants have come up in this appeal to this Court.
The first question that was canvassed and which requires to be determined is whether the agreement dated 1st May, 1962 is an agreement for sale or is one for sole selling agency.
In the said agreement, the appellants have been de scribed as a partnership firm carrying on business at Madras and referred to as 'The Manufacturer ' and Gillanders of Calcutta described as 'The Selling Agents '.
The agreement, inter alia, stated that the selling agents had agreed to stock adequate quantities of the product for the purpose of sale thereafter.
The manufacturer however agreed to accept return of all stocks held by the selling agents for a period of more than two years and replace such stocks free of all charges, provided the lids of the containers were intact and sealed.
The agreement further stated that all consignments would be despatched by the manufacturer at Railway risk.
In case there was any damage or shortage in transit the selling agents would lodge a claim on the Railways, provided, howev er, that the manufacturer should take all suitable actions for recovery of the damages from the Railway authorities and should reimburse the selling agents all losses and damages that they might suffer in the premises.
It was further agreed that in consideration of the premises, the manufac turer should pay the selling agents a discount, namely, 17 1/2 % on the transfer prices of all materials supplied against the orders received from the selling agents 787 from its offices at Calcutta, Kanpur, Delhi and Bombay; 18% on the transfer prices of all materials supplied against the orders received from the selling agents from its Madras Office.
It also provided for an additional cash discount of 1 1/2 % on the net transfer price, that is to say, transfer price less the discount specified above provided the selling agents paid the price of the goods supplied by the manufac turer within 30 days from the date of the bills by the manufacturer in respect of orders placed by the selling agents from its offices at Calcutta, Bombay, Madras and Delhi and within 45 days from the date of the bill by the manufacturer in respect of orders placed by the selling agents from its Kanpur Office.
It also provided for an additional turnover discount of 1% on the transfer prices over and above the discount specified above provided the total sales calculated at the selling prices exceeded Rs. 4 lakhs per annum and 1 1/2% on the transfer prices on such amount exceeding Rs. 4 lakhs per annum.
In calculation of the turnover figure of Rs. 4 lakhs, the orders received by the manufacturer directly from the Government would not be taken into consideration.
The manufacturer would normally, the agreement provided, expect the selling agents to pay all bills within 60 days from the date of such bills to the selling agents.
The selling agents agreed to send to manu facturer the necessary 'C ' Declaration Forms under the Central Sales Tax Act as quickly as possible in respect of sales made directly to the selling agents.
The manufacturer further agreed to supply the selling agents with all neces sary publicity materials and to advertise at their own cost at regular intervals through the media of the daily press, trade journals, Government publications and cinema slides and in all such advertisements should mention that the selling agents were the sole selling agents of the products.
The manufacturer also agreed to supply the selling agents reasonable quantities of sample free of charge.
All expenses such as godown rent, transport charges, postal and telegram charges, bank commission, etc., connected with the sales of the products, it was stipulated, would be borne by the selling agents.
It was, inter alia, provided that the sell ing prices and transfer prices of the product would be mutually agreed to from time to time between the manufactur er and the selling agents.
Current selling prices and trans fer prices were set out in the schedule to the agreement.
It was stipulated also that the selling agents might allow any discount to any dealer at their discretion.
The manufacturer agreed to execute and despatch orders to all dealers outside the State of Madras, provided firm instructions were re ceived to that effect from the selling agents, to eliminate unnecessary handling charges.
The agreement provided that in such cases, the manufacturer would credit the selling agents with their usual commission after deducting therefrom any discounts which 788 might be allowed to the dealer on the specific instructions of the selling agents.
The manufacturer further agreed to execute such orders against the guarantee of the selling agents.
In the case of direct orders to dealers outside the State of Madras, the selling agents might quote either F.C).R. station of despatch or destination terms.
If the goods supplied by the manufacturer were found to be sub standard goods or inferior in quality the manufacturer should at his own cost take back the goods and replace the goods of satisfactory marketable quality at its own cost.
The manufacturer should not be responsible for failure to deliver or for any delay in delivery if such failure or delay was due to act of God or enemies of the State, wars, revolution, embargo, riots, civil or political disturbances, strikes, lockouts declared due to circumstances beyond the control of the manufacturer, shortage of labour, cut or failure of power supply or service, force majeure or any other cause beyond their control.
The agreement, it was stipulated by clause 19 thereof, would remain in force for one year from the date of the agreement.
But the parties had the fight to terminate the agreement by giving three months notice in writing to either side.
It was further stipulated that if the agreement was terminated whether by the manufac turer or by the selling agents, the manufacturer should accept return of all unsold stocks lying with the selling agents at their various branches and to reimburse the sell ing agents with the net value of such stocks at the transfer prices in force on the date of the termination of the agree ment.
There was arbitration clause and other clauses which are not material for the present purpose.
The Tribunal analysed the agreement and emphasised that Gillanders were described as sole selling agent of the product of the appellants throughout India.
It also noticed that the appellants were to supply to the Gillanders with advertisement material.
The Tribunal also noted the clause which provided that the stocks left over unsold beyond two years from their receipt with Gillanders could be returned to the appellants who were bound to replace these.
The Tribunal noticed that it was not the appellant who was to prefer claims for recovery of damages from the carriers.
The Tribunal referred to the clause which stipulated that Gil landers were to promote sales of the product throughout India and were not to handle sales of any other material likely to conflict with the sales of the appellants ' product.
It noted that any reduction in price during the currency of the agreement was to be duly reflected in the price of stock lying unsold with Gillanders.
Although, the appellants retained the right of sale directly to large Government consumers, Gillanders were to follow up such .
transactions and were to be paid an over riding commission of 2 1/2%.
789 Where, however, Gillanders tendered for Government supplies and followed it up, they were to be paid a commission of 5%.
In all other cases, they were to earn a commission, de scribed, however, as a discount and additional cash discount apart from total sales discount in case where total sales exceeded Rs. 4 lakhs, on the orders received from Gilland ers.
The Tribunal also referred to the clause which provided that on termination of the agreement by either party, unsold stocks lying with the Gillanders were to be returned to the appellants.
On an analysis of the aforesaid aspects of the clauses, the Tribunal came to the conclusion that the title to and ownership of goods, continued with the appellants and did not pass to the Gillanders.
In order to be sale, the title should pass from the seller to the purchaser for a price.
If it is not so, the Tribunal noted, then it was not sale.
The Tribunal came to the conclusion that it was an agreement for sole selling agency and not an agreement for sale.
The question is whether the Tribunal was right on this aspect.
On behalf of the appellants, Shri P.P. Rao contended that it has to be emphasised that there was no flow back of the profit to the manufacturer and that was absent in the instant case.
He also referred to the fact that there were two prices transfer price and selling price and there was good deal of difference between these prices.
He submitted that read in the proper perspective, there was no agency.
He emphasised that there was stipulation for payment of sales tax and these were separately specified one was described as selling agent and the second one the real purchaser.
It is well settled that in a situation like this, wheth er there was an agreement for sale or an agreement of agen cy, must depend upon the facts and the circumstances and the terms of each case.
Such facts and terms must be judged in the background of the totality of the circumstances.
All the terms and conditions should be properly appreciated.
It is also correct that though the appellants described the Gil landers as selling agent, but that is not conclusive.
And it is also correct to state that the difference of the prices between the transfer and the selling prices is suggestive of an outright sale.
In W.T. Lamb and Sons vs Goring Brick Company Ltd., , by an agreement in writing certain manufacturers of bricks and other building materials appointed a firm of builders ' merchants "sole selling agents of all bricks and other materials manufactured at their works".
The agreement was expressed to be for three years and afterwards continuous subject to twelve months ' notice by either party.
While the agreement was in force, the manufacturers informed the merchants that they 790 intended in the future to sell their goods themselves with out the intervention of any agent, and thereafter they effected sales to customers directly.
In an action by the merchants against the manufacturers for breach of the agree ment, it was held both by Justice Wright in the Trial Court and on appeal by the Court of Appeal, that the effect of the agreement was to confer on the plaintiffs the sole right of selling the goods manufactured by the defendants at their works, so that neither the defendants themselves nor any agent appointed by them, other than the plaintiffs, should have the right of selling such goods.
In those circum stances, it was held that the agreement was one of vendor and purchaser and not of principal and agent.
Lord Justice Scrutton was of the view that in certain trades the word "agent" is often used without any reference to the law of principal and agent.
Lord Justice Scrutton was of the view that the words "sole selling agent" in the contract had a distinct meaning implying that the manufacturers were to sell to no one but the merchants who paid them the fixed price, and the merchants sold, and they were the only per sons to sell, to various builders and contractors.
Lord Justice Slesser was of the view that the agreement in the present case was somewhat difficult to understand, because in one and the same document the same parties were described as "merchants" and as "sole selling agents," the first being a correct, but the second one an incorrect description, according to the Lord Justice.
It was held that the agree ment was one of vendor and purchaser.
Referring to some of the contract terms in the instant case, Shri Rao submitted that in this case also, the terms referred to by the Tribu nal and emphasised before us by Shri Mahajan, learned coun sel for the respondent, were merely indicative of the fact that the parties described a 'purchase upon terms ' as "sole selling agent".
It was an agreement whereby the purchaser upon terms was described as "sole selling agent," submitted Shri Rao.
This Court had occasion to consider this aspect in Gordon Woodroffe & Co. vs Sheikh M.A. Majid & Co., In that case, the respondent was a trader in hides and skins and the appellant was an exporter.
During the period January to August, 1949, there were several contracts between them.
The contracts mentioned that the appellant was buying the goods for resale in U.K.
The price quoted was C.I.F. less 2 1/2%.
The contracts also provided that time should be the essence of the contract, that the sales tax was on respondent 's account, that the respondent was answerable for weight as well as quality, that there should be a lien on the goods for moneys advanced by the appellant, and that any dispute regarding quality should be settled by arbitration according to the customs of the trade 791 in the U.K.
The course of dealing between them showed that before the goods were shipped these were subjected to a process of trimming and reassortment in the godowns of the appellant with a view to make these conforming to London standards, that the goods were marked with the respondent 's mark and that premiums were paid to the respondent in case the goods supplied were of special quality.
The respondent filed a suit on the original side of the High Court praying that an account should be taken of the dealings between himself and the appellant on the ground that the appellant was his agent.
The appellant 's case was that there was an outright purchase of the respondent 's goods and that the appellant was not an agent of the respondent.
The trial Judge dismissed the suit.
On appeal, the High Court held that the appellant acted as a del credere agent of the respondent and directed the taking of accounts.
In appeal to this Court, it was contended by the appellant that the terms of the contracts and the course of dealing between the parties showed that the appellant was not the agent of the respondent but was an outright purchaser of the goods and that there was a settled account between the parties which the respondent could not reopen.
This Court held that the appellant was the purchaser of the respondent 's goods under the several contracts and not his agent for sale, and there fore, the view taken by the High Court was not correct.
It was reiterated that the essence of sale is the transfer of the title to the goods for price paid, or to be paid, where as the essence of the agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods, and the agent would be liable to account for the proceeds.
On the terms of the contract and the course of dealing between the parties, the contract was not one of agency for sale but was an agreement of sale.
The appellant purchased the goods from the respondent at 2 1/2 % less and sold them to the London purchasers at the full price so that the 2 iii % was its margin of profit and not its agency commission.
This point was emphasised by Shri Rao as a point similar to the instant case.
This Court held therein that the fact that the goods were sent with the respondent 's mark, that the premium was paid outside the terms of the contract, that the appellant considered it fair and just to pay the whole of the premium to the respondent or to share it with him, and that additional burden with respect to weight and quality was thrown on the respondent, had no significance in deciding the nature of the contract.
This Court was also of the opinion that the clause with regard to lien was consistent with the transaction being an outright sale, because the appellant was acting as creditor of the respondent and charged interest on advances only till the date of shipment of the goods when it became 792 the purchaser of the goods from the respondent.
It was held that an agent could become a purchaser when the agent paid the price to the principal on his own responsibility.
This was another aspect which was emphasised in the facts of the present case by Shri Rao.
In that case, however, before the goods were shipped to London, these were subjected to a process of trimming and reassortment in the godown of the appellant with a view to make them conform to London stand ards.
In that process, the defendants often called upon the plaintiff to replace the pieces found defective.
If the defendants were merely acting as agents, this Court ob served, the process of trimming and reassorting in the godowns to make the goods conform to London standards and specifications would be unnecessary, for in that case the defendants were merely bound to ship the goods as these were delivered to them.
Another important feature of the transac tion was that in several contracts, time was fixed for delivery of the goods.
This Court found that the defendants were acting only as the agents for the sale, there was no reason why there should be a stipulation that time should be the essence of the contract.
On behalf of the plaintiff, reference was also made to the fact that the contract pro vided for a lien on all the goods covered by the contracts for all moneys advanced by the defendants, including ex penses incurred and interest thereon.
But it was emphasised that in making such advances, the defendants were only acting as creditors of the plaintiff and were therefore entitled to charge interest on such advances till they actually purchased the goods from the plaintiffs.
The Court found that the primary object of the contract was that there was a purchase by the defendants from the plaintiff of the goods for resale in the U.K. and in keeping with that ob ject, the buyer stipulated with the seller for delivery of the goods abroad and for that purpose adopted a c.i.f. form of sale.
This Court referred to the principle that an agent could become a purchaser when an agent paid the price to the principal on his own responsibility.
Reference was made to the passage from Blackwood Wright, 'Principal and Agent ', Second Edn., page 5, at page 10 of the Report, where it was stated that in commercial matters, where the real relation ship was that of vendor and purchaser, persons were some times called agents when, as a matter of fact, their rela tions were not those of principal and agent at all, but those of vendor and purchaser.
If the person called an 'agent ' was entitled to alter the goods, manipulate them, to sell them at any price that he thought fit after these had been so manipulated, and was still only liable to pay them at a price fixed beforehand, without any reference to the price at which he sold them, it was impossible to say that the produce of the goods so sold was the money of the con signors, or that the relation of principal and agent 793 existed, according to this Court in that case.
Reliance was also placed on Tirumala Venkateswara Timber and Bamboo Firm vs Commercial Tax Officer, Rajahmundry, ; , where the concept of 'sale ' in the back ground of the Andhra Pradesh General Sales Tax Act, 1957 was considered.
At page 480 of the report, this Court observed that as a matter of law, there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal and make over either the sale proceeds or the goods to the principal.
The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid.
The transferee in such a case is liable to the trans feror as a debtor for the price to be paid and not as agent for the proceeds of the sale.
The essence of agency to sell is the delivery of the goods to a person who is to sell these, not as his own property but as the property of the principal who continues to be the owner of the goods and will therefore be liable to account for the sale proceeds.
The true relationship of the parties in each case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the legal relationship.
Shri Mahajan, learned counsel appearing for the respondent, drew our attention to Section 182 of the , and submitted and in the circumstances of this case, the clauses emphasised by the Tribunal clearly established that this was an agreement of agency and not a sale.
As mentioned hereinbefore, it depends on the facts and circumstances of each case to determine the true nature of the dealings between the parties.
In the instant case the most important fact suggesting agency was the clause which enjoined that the stocks left over unsold beyond two years from their receipt could be returned to the appellants who were bound to replace these.
Shri Rao, however, suggested that the appellants were manufacturing paint which was liable to loose its efficacy and quality after lapse of time and as the appellants were keen for its reputation, such a clause was inserted to ensure that the bad quality goods or stale goods did not, through Gillanders, go to the market and damage the reputation of the appellants.
This should be considered with the fact that the appellants were to prefer all claims for recovery of damages from the carriers and any reduction in price during the currency of the agreement was to be duly reflected in the price of stock lying unsold with Gillanders and the obligation that on the termination of the contract by either the appellant or Gillanders, unsold stocks lying with the latter were to be returned to the former.
In 794 the aforesaid light we are of the opinion that the Tribunal was right in considering this agreement as the agreement for sole selling agency and not as an outright sale.
If that is the position then the first ground, in our opinion, taken by the Tribunal cannot be assailed.
Shri Rao had contended that the Tribunal was wrong in holding that Gillanders were related persons in terms of Section 4(4)(c) of the Act.
He submitted that the concept of 'having interest directly or indirectly in the business of each other ' has to be judged independently of the transac tion in question.
He drew our attention to the various authorities for the proposition that the purpose of intro duction of definition of 'a related person by the Central Excises and Salt (Amendment) Act, 1973 to contend that the distributors have to be related and that such relationship ought to be found out independently of the transaction in question.
Our attention was drawn to the observations of this Court in A.K. Roy vs Voltas Ltd., ; , where at page 1093 of the report, this Court noted that the appellants had contended that the agreements with the whole sale dealers conferred certain extra commercial advantages upon them, and so, the sales to them were not sales to independent purchasers.
Our attention was also drawn to the observations of this Court that decisions cited before this Court in the above case were correct in so far as these held that the price of sales to wholesale dealers would not represent the 'wholesale cash price ' for the purpose of section 4(a) of the Act merely because the manufacturer had entered into agreement with them stipulating for commercial advan tages.
It was laid down that if a manufacturer were to enter into agreements with dealers for wholesale sales of the articles manufactured on certain terms and conditions, it would not follow from that alone that the price for those sales would not be the 'wholesale cash price ' for the pur pose of section 4(a) of the Act if.
the agreements were made at arms length and in the usual course of business.
This, however, Mr. Rao related only in explaining the state of law before the Amendment Act 22 of 1973.
Our attention was also drawn to the observations of this Court in Union of India & Ors.
vs Bombay Tyre International Ltd., ; where this Court explained the pur pose of the introduction of 'related person ' in the new 'section 4(4)(c) and the transactions of related person covered under section 4(4)(c) of the Act after amendment.
In that context, it was contended that where there was such rela tionship independent of the transaction in question which conferred certain additional or extra commercial advantages only on the persons involved in such relationship could be considered to be related persons.
It 795 was submitted that in the instant case that was not so.
Our attention was drawn to the observations of this Court in Union of India and others vs Atic Industries Limited, ; , at page 937 of the report, where this Court held that on a proper interpretation of the definition of 'relat ed person ' in section 4(4)(c), the words "relative and a distributor of the assessee" did not refer to any distribu tor but they were limited only to a distributor who was a relative of the assessee within the meaning of the .
So read, the definition of "related person" was not unduly wide and did not suffer from any constitutional infirmity.
This Court explained the nature of relationship required by the persons to have 'interest directly or indi rectly in the business of each other ' under section 4(4)(c) of the Act.
Our attention was also drawn to the observations of this Court in Collector of Central Excise, Madras vs T.I. Millers Ltd. Madras & T.I Diamond Chain, Madras, ; Having regard however to the fact that we have come to the conclusion that the Tribunal was right in holding that the transaction with the Gillanders was not a transaction of sale but an agreement for agency, there was, therefore, no sale in favour of Gillanders as contended for the appel lants.
If that is the position, then the first sale was by the Gillanders to the customers of the market.
Then the price of that sale would be the assessable value under section 4 in this case.
The decision of the Tribunal is, therefore, right in any view of the matter, and this other aspect of the matter referred to by the Tribunal is not necessary for us to determine to dispose of this appeal.
In that view of the matter, the decision of the Tribunal must be upheld.
Shri Rao, however, further submitted that there were certain other claims like cost of transportation and other permissible deductions such as duty of excise and sales tax, which should have been deducted from the value subject to proof by the appellants.
Shri Rao submitted that apart from this, there were other permissible deductions as envisaged by this Court in Asstt.
Collector of Central Excise & Oth ers, etc.
vs Madras Rubber Factory Ltd.; , It may be observed that apart from cost of transportation, excise duty and sales tax, other charges were not sought to be deducted by the appellants in the appeal and were not canvassed before the Tribunal too nor in the grounds of appeal, there was any such claim.
Shri Rao, however, submit ted that in view of the decision of this Court in Madras Rubber Factory 's case (supra), the appellants should not be denied the benefit of these deductions, if they are other wise entitled to.
Though, strictly speaking that is beyond the scope of the appeal in view of the conten 796 tions raised in the appeal before the Tribunal and in view of the grounds of appeal taken by the appellants before us, but in the interest of justice, we permit the appellants to have these benefits as finally settled by this Court in Madras Rubber Factory 's case (supra).
We are informed that the said decision of Madras Rubber Factory is under review in this Court.
Therefore, we are of the opinion that subject to the order passed in that review matter, such deductions, as may ultimately be held to be deductible be permitted to the appellants upon proof.
With these observations, the appeal fails and is accordingly dismissed with no order as to costs.
P.S.S. Appeal dismissed.

dataset_name: IN-Abs

summary/full:
The assessee appellants, a partnership firm carrying on manufacturing business in Madras entered into an agreement with a company based in Calcutta for sale of their product through the latter 's sales organisation in all the States of India.
In the said agreement the assessee was referred to as the 'manufacturer ' and the company as the 'sole selling agents ' of the product.
The agreement itself was described as an 'agreement of sale '.
It provided inter alia that the stocks left over unsold beyond two years from their receipt with the selling agents could be returned to the appellants who were bound to replace them, that the appellants should take all suitable action for recovery of damages from the carriers, that they would supply the selling agents with all the necessary publicity material and also advertise at their cost through the media, that the selling prices and transfer prices of the product would be mutually agreed from time to time between them and the selling agents, that any reduction in price during the currency of the agreement was to be duly reflected in the price of stock lying unsold with the sell ing agents, and that on termination of the contract either by the assessee or by the selling agents, the unused stock lying with the latter was to be returned to the former.
The appellants were assessed to excise duty under the for the period July, 1977 to March, 1979 on the basis of the price at which the sell ing agents had sold the goods to their customers in the course of the wholesale trade.
They however, claimed that the assessable value should be the price at which the ex cisable goods were sold by them to the selling agents and sought refund of 783 the excess excise duty thus paid.
The Assistant Collector of Excise and the Collector rejected the said claim.
The TribUnal took the view that a sine qua non of a sale was that the title to the goods should pass from the seller to the purchaser.
When once that were not so, then it could not be said that it was an agreement for sale.
On an analy sis of the conditions of the agreement in the instant case it found that the title to and the ownership in the goods consigned to the selling agents continued with the appel lants.
It, therefore, concluded that the true character of the agreement was that it was an agreement for sole selling agency and not an agreement for sale.
It further held that the selling agents were 'a related person ' as understood under section 4(4)(c) of the Act and, therefore, the assessable value of the goods for levy of excise duty must be on the basis of price at which the selling agents ordinarily sold these in the course of wholesale trade less the transporta tion cost and other permissible deductions such as duty of excise and sales tax, if any, subject to proof.
In this appeal under section 35 L(b) of the Act it was con tended for the appellants, that there were two prices 'transfer price ' and 'selling price ' and there was good deal of difference between these prices which was suggestive of an outright sale, that the terms referred to by the Tribunal were merely indicative of the fact that it was an agreement whereby the purchaser upon terms was de scribed as 'sole selling agents ', that the appellants were manufacturing a product which was liable to lose its effica cy and quality after lapse of time and as such a replacement clause was inserted to ensure that the bad quality goods did not go to the market and damage their reputation, that the selling agents were not 'related persons ' in terms of section 4(4)(c) of the Act, as there was nothing in common between them and the appellants, and that claims like cost of trans portation and other permissible deductions such as duty of excise and sales tax to which they were otherwise entitled to should have been deducted from the 'value ' subject to proof by the appellants.
Dismissing the appeal, HELD: 1.1 Whether there was an agreement for sale or an agreement of agency to sell must depend upon the facts and the circumstances and the terms of each case.
Such facts and terms must be judged in the background of the totality of the circumstances.
All the terms and conditions should be properly appreciated.
The terminology used by the parties is not decisive of the legal relationship.
[789F, 793D] 784 1.2 The essence of a contract of sale is the transfer of the title to the goods for a price paid or promised to be paid.
The transferee in such a case is liable to the trans feror as a debtor for the price to be paid.
The essence of the agency to sell is the delivery of the goods to a person who is to sell these not as his own property but as the property of the principal, who continues to be the owner of the goods, and make over the sale proceeds to the principal.
An agent.
however, could become a purchaser when he paid the price to the principal on his own responsibility.
[793C, 792A] 1.3 In the instant case, the most important fact sug gesting agency was the clause which enjoined that the stocks left over unsold beyond two years from their receipt could be returned to the appellants who were bound to replace these.
Added to it was the fact that the appellants were to prefer all claims for recovery of damages from the carriers and any reduction in price during the currency of the agree ment was to be duly reflected in the price of stock lying unsold with the selling agents, and the obligation that on the termination of the contract by either the appellants or the selling agents, unsold stocks lying with the latter were to be returned to the former.
[793F, GH] 1.4 The Tribunal was, therefore, right in holding that the transaction with the selling agents was not a transac tion of sale but an agreement for agency.
If that be so, then the first sale was by the selling agents to the custom ers of the market.
The price of that sale would thus be the assessable value under section 4 of the Act.
In that view of the matter it was not necessary to determine the question wheth er the selling agents were 'related persons ' in terms of section 4(4)(c) of the Act.
[795DE] W.T. Lamb & Sons vs Goring Brick Company Ltd., ; Gordon Woodroffe & Co. vs Sheikh M.A. Majid & Co., and Tirumala Venkateswara Timber & Bamboo Firm vs Commercial Tax Officer, Rajahmundry., ; referred to.
Though apart from cost of transportation, excise duty and sales tax.
other charges were not sought to be deducted by the appellants in the appeal and were not canvassed before the Tribunal too, nor in the grounds of appeal there was any such claim, in the interest of justice they are permitted to have the benefit of other deductions envisaged in Assistant Collector of Central Excise & Ors.
vs Madras Rubber Factory Ltd.; , subject to the order passed in the review matter.
[795G, 796AB] 785


judgement:
vil Appeals Nos.
1358 61 of 1979.
From the Judgment and Order dated 6.9.78 of the Allaha bad High Court in I.T.R. No. 114/78.
Ahuja, K.C. Dua and Miss. A. Subhashini for the appel lants.
842 S.C. Manchanda, Mrs. A.K. Verma and Joel Pares for the respondent.
The Judgment of the Court was delivered by PATHAK, CJ.
These appeals by special leave are directed against the judgment of the High Court at Allahabad dispos ing of an Income tax Reference in favour of the assessee and against the Revenue.
The assessee is a co operative society running a sugar mill.
For the assessment year 1968 69 it claimed payment of interest amounting to Rs. 1,81,7 16.
This was interest paid to the accounts of its members, who had deposited certain amounts with the assessee in accordance with Bye law No. 50 and it was debited by the assessee to its profit and loss account.
In the initial years of the working of the Society, certain partly paid shares were allotted to its farmer members.
With a view to inducing these members to make further contribution to the capital of the Society, bye law No. 50 was incorporated in the Bye laws of the Society.
The bye law as amended provides: "50.
There shall be established a 'Loss Equalisation & Capital Redemption Reserve Fund ' in the society.
Every producer shareholder shall deposit every year a sum not less than 0.32 paise and not more than 0.48 paise per quintal of the sugarcane supplied by him to the society, as may be determined by the Board until the shares to be subscribed by the members are fully paid up.
The amount standing to the credit of this fund presently or to be credited in future, shall be used for making the partly paid shares fully paid up.
The balance of the said amount shall be refunded to the members soon after the present loan from the Industrial Corporation of India is repaid, whereafter the fund shall cease to exist.
" The money available in the 'Loss Equalisation and Capi tal Redemption Reserve Fund ' was utilised by the assessee for the purpose of its business.
A part of the amount was also utilised for converting the partly paid up shares into fully paid up shares.
On 8 September, 1967 the Board of Directors of the Society decided in their meeting to pay interest at 6% on the balance available in the aforesaid Fund to its various members to whom the balance money be longed.
It was on this account that the Society claimed an amount of Rs. 1,18,716 for the assessment year 1968 69.
843 The claim was rejected by the Income Tax Officer.
He took the view that the amounts deposited by the members of the Society in the 'Loss Equalisation and Capital Redemption Reserve Fund ' did not represent loans taken by the assessee but constituted a contribution by the members to convert partly paid up shares into fully paid up shares and they could not be considered as capital borrowed for the purpose of its business.
He held that section 36(1)(iii) of the Income tax Act did not apply to such interest and that it was not admissible as a deduction in computing the total income of the assessee.
For the assessment years 1969 70 to 1972 73 the claim to deduction on this account was as follows: 1969 70 .
Rs. 1,34,609 1970 71 .
Rs. 1,34,609 1971 72 .
Rs. 1,34,609 1972 73 .
Rs. 1,34,609 The Income Tax Officer took the same view for these assess ment years as he did for the assessment year 1968 69.
In appeals preferred by the assessee the Appellate Assistant Commissioner of Income tax confirmed the disallow ance for the assessment year 1968 69 on the ground that Bye law No. 50 did not provide for the refund of the amount standing to the credit of the members at any time before the payment of the loan to the Industrial Finance Corporation of India, that the loan was still outstanding on 30 June 1967, the last day of the previous year relevant to the assessment year 1968 69, and moreover the Bye law did not provide for payment of interest at all.
He observed that the Directors could not pay any interest unless the Bye law was amended by the members of the assessee.
He observed that the interest paid must be regarded as an exgratia payment to the producer members of the society who had contributed to the Fund, and that it was not made for the purpose of the business of the assessee or on the ground of commercial expediency.
The same order was passed by the Appellate ASsistant Commissioner on the appeals for the remaining years.
In second appeals filed by the assessee for all the assessment years the Income Tax Appellate Tribunal held that the amount standing to the credit of the 'Loss Equalisation and Capital Redemption Reserve Fund ' which was utilised by the assessee for the purpose of its business represented moneys borrowed for the purpose of its business and that interest paid on such moneys was eligible for deduction under 844 section 36(1)(iii) of the Income tax Act, 1961.
The Appellate Tribunal negatived the contention of the Revenue that only such deposits could constitute 'capital borrowed ' within the meaning of section 36(1)(iii) of the Act which were initially borrowed with the stipulation to pay interest thereon.
The Appellate Tribunal observed that the expression 'capital borrowed ' had not been defined in the Income tax Act and that its ordinary meaning would have to be gathered in construing the meaning of section 36(1)(iii).
It said that it was not necessary that borrowing must contain an element of payment of interest and that even if a deposit was made by the members of the society which was utilised for the pur poses of the business of the assessee, the funds represented by such deposit would be 'capital borrowed ' for the purposes of section 36(1)(iii) of the Act.
The Appellate Tribunal also recorded that it was not disputed that the deposits were taken for the purposes of the business.
In the circum stances, the Appellate Tribunal held that when the Board of Directors of the assessee considered it proper to pay inter est on those deposits, such interest was admissible under section 36(1)(iii) of the Act.
During the heating of the appeals for the assessment years 197071 and 197 1 72, it was pointed out by the Revenue that the auditors of the assessee had observed in their audit report that the payment of interest on the 'Loss Equalisation and Capital Redemption Reserve Fund ' should not have been made by the assessee in view of section 57 of the Uttar Pradesh Co operative Societies ' Act, which reads: "Fund not to be divided: Except as otherwise specifically provided in this Act, no part of the Funds other than the net profits of a co operative society shall be paid by way of bonus or dividend or otherwise distributed among its members: Provided that a member may be paid remuneration on such scale as may be laid down in the bye laws for any services rendered by him to the co operative society." The Appellate Tribunal held that section 57 was not relevant as the payment of interest to the shareholders, on the amounts deposited by them, did not represent any payment by the Society by way of bonus or dividend or otherwise, of any part of its funds other than its net profits.
The Appellate Tribunal also observed that the interest paid by the asses see to the 'Loss Equalisation and Capital Redemption Reserve Fund ' was met from out of the net profits of the assessee.
It was found that the assessee had sufficient income out of which the interest 845 could be paid by it.
For these reasons, it held that the payment of interest was not affected by section 57 of the Uttar Pradesh Co operative Societies Act.
At the instance of the Revenue the following two ques tions in respect of the five assessment years were referred by the Appellate Tribunal to the High Court at Allahabad for its opinion.
Whether the credit balances in the Loss Equalisation and Capital Redemption Reserve Fund which were actually used by the assessee for the purposes of its business represented capital borrowed by the assessee for the purpose of its business within the meaning of section 36(1)(iii) of the Act? 2.
Whether the Tribunal was right in law in allowing inter est on such balances standing to the credit of the Loss Equalisation and Capital Redemption Reserve Fund as a deduc tion in computing the total income of the assessee?" A further question common to the assessment years 1969 70 to 1972 73 was also flamed.
It reads: "Whether the Tribunal was right in law in holding that the impugned payments of interest did not contravene the provi sions of section 57 of the Uttar Pradesh Co operative Societies Act, 1965?" The High Court agreed with the view taken by the Appel late Tribunal and answered the questions in favour of the assessee and against the Revenue.
Before us, the parties have confined themselves to the first two questions and it is requested that we need not consider the third question.
In these appeals the question is whether the claim to deduction under section 36(1)(iii) of the Income tax Act can be allowed.
Section 36(1)(iii) of the Act provides that in computing the income chargeable under the head 'profits and gains of business or profession ' a deduction shall be al lowed of the amount of interest paid in respect of capital borrowed for the purposes of the business or profession.
Can it be said that the credit balance in the 'Loss Equalisation and Capital Redemp 846 tion Reserve Fund ' represents capital borrowed by the asses see for the purposes of its business? What is 'borrowed money ' has been construed by the Courts in England in a number of cases.
In Port of London Authority vs Commissioner of Inland Revenue, Lord Stemdale, M.R. observed that in order that there be borrowed money there must be a borrower and a lender, and later, when the Revenue took the case in appeal to the House of Lords, the House of Lords laid down in Commissioners of Inland Revenue vs Port of London Authority, that to constitute bor rowed money there must be "a real borrowing and a real lending".
Again in Inland Revenue Commissioners vs Rowntree & Co. Ltd., , the Court of Appeal considered the meaning of the words 'borrowed money ' and observed that the words should not be given a strained meaning and that it should be considered whether in ordinary commercial usage the relationship was that of a borrower and a lender and the transactions were loan transactions.
These cases were relied upon by the Gujarat High Court in Commis sioner of Incometax, Gujarat Iv.
Rajkot Seeds, Oil & Bullion Merchants Association Ltd., in support of the conclusion that on the facts of the case before the High Court there was no relationship of borrower and lender between the Rajkot Seeds and Oil and Bullion Merchants Association and its members in so far as deposits by the members were concerned.
It was held that the amounts were deposited by way of security taken for the due performance of the, obligation of a member under the Rules of the Asso ciation for the discharge of his obligations to the Associa tion and to the other members of the Association.
There was no loan or borrowing at all.
This question had in fact been considered by the Calcutta High Court as long ago as Commis sioner of Excess Profits Tax, Central, Calcutta vs Bhartia Electric Steel Co. Ltd., in the context of the third proviso to Rule 5A of Schedule I to the Excess Profits Tax Act, 1940.
The money in question in that case had been obtained by the issue of shares, and it was held that it could not possibly be said that the persons who had taken up the deferred shares had ever intended to grant a loan or that the Company which had obtained money on the shares had ever intended to borrow.
This Court in Bombay Steam Navigation Co. (1953) Private Ltd. vs Commissioner of Income tax Bombay, , was dealing with a claim to deduction under section 10(2)(iii) of the Indian Income tax Act 1922 in a case where under an agreement certain assets were to be taken over by the assessee from the Scindia Steam Navigation Company Ltd., and part of the consideration was paid by the assessee while the balance remained unpaid.
For agreeing to deferred payment of the balance of the consideration, the Scindias 847 were to be paid interest.
This Court observed: "An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan.
A loan of money undoubtedly results in a debt, but every debt does not involve a loan.
Liability to pay a debt may arise from diverse sources, and a loan is only one of such sources.
Every creditor who is entitled to receive a debt cannot be regarded as a lender.
If the requisite amount of considera tion had been borrowed from a stranger, interest paid there on for the purpose of carrying on the business would have been regarded as a permissible allowance, but that is wholly irrelevant in considering the applicability of clause (iii) of sub section (2) to the problem arising in this case.
The legislature has under clause (iii) permitted as an allowance interest paid on capital borrowed for the purposes of the business: if interest be paid, but not on capital borrowed, clause (iii) will have no application .
" The point was also discussed by this Court in Madhav Prasad Jatia vs Commissioner of Income tax, U.P., ; where the question was whether the interest claimed under section 10(2)(iii) of the Indian Income tax Act, 1922 related to borrowing for the purpose of the business.
In the present case, Bye law No. 50 indicates that deposits were to be made by the producer members in the 'Loss Equalisation and Capital Redemption Reserve Fund ' for the purpose of making the partly paid shares fully paid up, and it was understood that the balance of the amount would be applied to the loan taken from the Industrial Finance Corporation of India and thereafter whatever remained would be refunded to the depositing members resulting in the extinction of the Fund.
It is apparent that the deposits made by the members cannot be regarded as loans advanced by the members to the assessee.
The moneys deposited represent ed contribution by the members for converting the partly paid up shares into fully paid up shares and thereafter for delaying the loan taken from the Industrial Finance Corpora tion of India.
Any balance remaining was to be refunded to the members.
The circumstances that there was no certainty that any balance would remain for refund to the members would in itself indicate that the deposits could not be regarded as loans.
A loan necessarily supposes a return of the money loaned.
Even under the original Bye law No. 50, which provided for deposits by the members to the 848 'Loss Equalisation and Capital Redemption Reserve Fund ', it was contemplated that the deposits would be accumulated and be utilised for repayment of the initial loan taken from the Industrial Finance Corporation of India and thereafter for redeeming the 'Government share ', and the balance of the deposit after meeting losses would be converted into share capital and each producer member would be issued shares of the assessee.
There was never any intention between the assessee and its members to treat the deposits made by the members as loans and that the relationship between the assessee and the members should be that of borrower and lender.
The High Court erred in holding that the claim to deduction on account of interest paid by the assessee to its members was admissible under section 36(1)(iii) of the Act.
It is urged by learned counsel for the assessee that if the claim to deduction cannot be rested on section 36(1)(iii) of the Act, it should be regarded as admissible under section 37 of the Act.
We are not satisfied that all the facts necessary for considering a claim for deduction under section 37 are before us.
It will be noticed in Madhay Prasad Jatia (supra) that the question of law expressly took in the claim to deduction not only with reference to section 10(1)(iii) but alternatively with reference to section 10(2)(xv) of the Indian Income tax Act, 1922.
Whether or not it is still open to the assessee to raise that question before the Appellate Tribunal when the case goes back to it for disposing it of in conformity with the opinion expressed by this Court in these appeals is a question on which we propose to express no view at this stage.
In the result the appeals are allowed, the impugned judgment of the High Court in all these cases is set aside and the first and the second questions framed by the Appel late Tribunal are answered in the negative, in favour of the Revenue and against the assessee.
There is no order as to costs.
R.S.S. Appeals allowed.

summary/full:
The respondent assessee is a co operative society run ning a sugar mill.
With a view to inducing its members to make further contribution to its capital it incorporated a bye law which provided for the establishment of a 'Loss Equalisation & Capital Redemption Reserve Fund '.
Every producer shareholder was required to deposit every year an amount to this fund which was to be utilised for the purpose of making the partly paid shares fully paid, and after defraying the loan taken from the Industrial Finance Corpo ration the balance was to be refunded to the members.
The money available in the Fund was utilised by the society for the purpose of its business.
A part of the amount was even tually utilised for converting the partly paid shares into fully paid shares.
It was then decided by the society to pay interest on the balance available in the Fund.
The interest thus paid to its members was sought to be claimed as deduc tion in computing the income of the assessee.
The Income Tax Officer rejected the claim holding that the amount did not represent loans taken by the assessee .or capital borrowed for the purpose of its business.
The Appel late Assistant Commissioner confirmed the disallowance.
The Income Tax Appellate Tribunal accepted the second appeal of the assessee and held that it was not necessary that borrow ing must contain an element of payment of interest and that even if a deposit was made by the members of the society which waS utilised for the purpose of the business of the assessee, the funds represented by such deposit would be 'capital borrowed ' for the purpose of section 36(1)(iii) of the Income Tax Act, 1961.
The High Court agreed with the view taken by the Appellate Tribunal and answered the questions referred to it in favour of the assessee and against the Revenue.
While allowing the appeals and answering the questions in the negative in favour of the Revenue, this Court.
841 HELD: (1) Section 36(1)(iii) of the Income Tax Act, 1961 provides that in computing the income chargeable under the head 'profits and gains of business or profession ' a deduc tion shall be allowed of the amount of interest paid in respect of capital borrowed for the purposes of the business or profession.
[845G,H] (2) The words 'borrowed money ' should not be given a strained meaning and it should be considered whether in ordinary commercial usage the relationship was that of a borrower and lender and the transactions 'were loan transac tions.
To constitute borrowed money there must be a real borrowing and a real lending.
[846B,D] (3) It is apparent that the deposits made by the members cannot be regarded as loans advanced by the members to the assessee.
There was never any intention between the assessee and its members to treat the deposits made by the members as loans and that the relationship between the assessee and the members should be that of borrower and lender.
, [847F,G] Port of London Authority vs Commissioner of Inland Revenue, ; Commissioner of Inland Reve nue vs Port of London Authority, ; Inland Revenue Commissioner vs Rowntree & Co. Ltd., ; Commissioner of Income tax, Gujarat vs Rajkot Seeds, Oil & Bullion Merchants Association Ltd., ; Commissioner of Excess Profits Tax, Central Calcut ta vs Bhartia Electric Steel Co. Ltd., ; Bombay Steam Navigation Co. [1953]; Private Ltd. vs Commis sioner of Income tax Bombay, and Madhav Prasad Jatia vs Commissioner of Income tax Uttar Pradesh, ; , referred to.
(4) A loan necessarily supposes a return of the money loaned.
The circumstance that there was no certainty that any balance would remain for refund to the members would in itself indicate that the deposits could not be regarded as loans.
[847G,H]