judgement:
ivil Appeal No. 1349(NT) of 1974.
From the Judgment and Order dated 20th June, 1973 of the Gujarat High Court in Estate Duty Ref.
No. 3 of 1970.
S.C. Manchanda, K.P. Bhatnagar and Miss A. Subhashini for the Appellant.
48 S.T. Desai and S.C. Patel for the Respondent.
The Judgment of the Court was delivered by SABYASACHI MUKHARJI, J.
This is an appeal by certificate granted by the High Court of Gujarat by its order dated 2nd May, 1974 from the judgment and order dated 28th June, 1973 in Estate Duty Reference No. 3 of 1970 under section 65(1) of the (hereinafter called the 'Act ').
One Nareshchandra Kantilal died on 13th September, 1962.
He was a partner in the firm of Messrs G. Bhagwatiprasad & Co. having 28% share in the partnership.
The partnership was by the document of partnership which is dated 6th June, 1957.
On the death of the deceased, the accountable person filed necessary return under the Act.
The Assistant Controller of Estate Duty while valuing the estate of the deceased, came to the conclusion that the share of the deceased in the goodwill of the firm in which he was a partner was liable to be included in the principal value of his property.
This inclusion was resisted by the accountable person on the ground that the question of adding the value of the share of the deceased in the goodwill of the firm did not arise in view of clause (10) of the partnership deed.
Clause (10) was as follows: "The firm shall not stand dissolved on death of any of the partners and the partner dying shall have no right whatever in the goodwill of the firm".
The accountable person contended on the basis of this clause that on the death of the deceased, his heirs had no right in the goodwill of the firm, and as such the value of the said goodwill did not pass under the provisions of the Act and was, therefore, not liable to any estate duty.
The Assistant Controller, however, negatived the said contention.
He valued the goodwill at Rs.2,16,900.
The share of the deceased in the goodwill was worked out from this value at Rs.60,732.
The Assistant Controller also worked out the value of the interest which the deceased had in the partnership assets and added to the above referred amount of Rs.60,732 as the value of his share in the goodwill.
The accountable person, being aggrieved, preferred an appeal before the Appellate Controller of Estate Duty, Bombay.
He by and 49 large confirmed the order of the Assistant Controller and made only a slight reduction in the value of the goodwill.
The accountable person thereafter went up in appeal before the Appellate Tribunal.
She raised before the Tribunal two principal contentions, namely, (1) that the deceased had no interest in the assets of the firm and hence his share in the goodwill did not pass at all, and (2) as, according to the partnership agreement, the partnership was to continue on the death of any of the partners and as it was further stipulated that the deceased would have no interest in the goodwill of the firm on his death, his share in the goodwill did not pass and as such was not liable to the charge of estate duty.
The Tribunal rejected both these contentions.
It was contended on behalf of the accountable person before the Tribunal that when a partnership was a going concern there could not be any separate valuation of the goodwill which went with the running business.
The Tribunal noted that there was no question of valuing the goodwill separately because what was to be valued was the totality of interest of a partner in partnership assets including the value of the goodwill.
The Tribunal eventually decided the matter relying upon the decision of the Privy Council in Perpetual Executors and Trustees Association of Australia Ltd. vs Commissioner of Taxes, = 25 I.T.R. (ED) 47.
The Tribunal held that in spite of clause (10) of the partnership agreement, the value of the goodwill to the extent of the share of the deceased passed on the death of Nareshchandra Kantilal and it was liable to be charged estate duty.
Three questions of law were referred to the High Court.
These were: "1.
Whether, on the facts and in the circumstances of the case, the interest of the deceased in the firm of Messrs. G. Bhagwatiprasad & Co. of Ahmedabad was property within the meaning of the provisions of the ? 2.
If the answer to the above question is in the affirmative, whether, on the facts and in the circumstances of the case, having regard to the terms of the partnership deed dated June 6, 1957, the value of the interest of the deceased in the said partnership would include the goodwill of the partnership firm? 3.
Whether, on the facts and in the circumstances of the case, the value of the goodwill, if any, would be exempt under the provisions of section 26(1) of the Act?" 50 The last question was not pressed before the High Court.
The High Court, therefore, did not give any answer.
The first question, the High Court, answered in favour of the revenue and in the affirmative and the second question was answered in the negative.
As the first question was in favour of the revenue and there was no appeal by the accountable person this appeal is concerned only with the second question namely 'whether the value of the interest of the deceased in the said partnership would include the goodwill of the partnership firm '.
The High Court answered the question in the negative and in favour of the accountable person as mentioned hereinbefore.
The High Court noted that the primary object of every taxing statute was to recover a tax or duty in cash on the happening of a particular taxable event.
This event under the Act, is the actual or deemed passing of property on the death of a person.
Every taxing statute, according to the High Court, contemplated the levy of a tax or duty on the valuation date which has to be arrived at on the principles stated in the statute itself.
If the valuation principles stipulated in the Act could not be worked out with any precision in respect of any property it would follow as a necessary corollary that that property was not one which was intended to be subject to tax or duty contemplated by the statute.
This basic principle, according to the High Court, should be applied while construing sections 7 and 40 of the Act.
Section 7 of the Act, according to the High Court would apply only if two conditions were satisfied, namely (1) that there was a cesser of interest in the property on the death of a person, and (2) an accrual or arising of benefit to another as a result of the said cesser.
In order to assess the tax liability the value of the benefit had to be worked out and section 40 of the Act provides the basis for the valuation.
Section 40 clearly postulates that the property in which interest had ceased must be capable of yielding income.
If the 'benefit ' arising under section 7 on the cesser of an 'interest ' could not be measured under section 40, the cesser of such interest, according to the High Court did not attract payment of estate duty under section 7 of the Act.
A partner in a firm has a marketable interest in all the capital assets of the firm including the goodwill even during the subsistence of the partnership.
Interest in goodwill was property within the meaning of section 2(15) of the Act, according to the High Court.
But the goodwill of a firm, in the opinion of the High Court, standing by itself could not earn any income.
In a case where it was specially stipulated 51 that on the death of any of the partners, the partnership shall not stand dissolved and that the heirs of the deceased partner shall have no right whatsoever to claim any share in the goodwill of the firm, the benefit arising to the other partners on the cesser of interest in the goodwill, on the death of the partner could not be measured in terms of section 40.
The High Court, therefore, was of the view that such a benefit was not liable to estate duty under section 7 of the Act.
The High Court was, therefore, of the view that the facts of this case were not covered by either section 5 or section 7 and answered the question No. 2 in the negative.
In order to appreciate this controversy, it is necessary to refer first to section 2(15) of the .
Section 2(15) deals with 'property '.
It provides as follows: " 'property ' includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale and also includes any property converted from one species into another by any method.
" There are two explanations with which we are not presently concerned.
Section 2(16) deals with 'property passing on the death ' and is as follows: " 'Property passing on the death ' includes property passing either immediately on the death or after any interval, either certainly or contingently, and either originally or by way of substitutive limitation, and "on the death" includes "at a period ascertainable only by reference to the death" .
The imposition of estate duty is by sub section (1) of section 5.
It stipulates that in case of every person dying after the commencement of this Act, there shall, save as hereinafter expressly provided, be levied and paid upon the principal value ascertained as provided in the Act, all property, settled or not settled including agricultural land. ., which passes on the death of such person, a duty called 'estate duty ' at the rates fixed in accordance with section 35.
Section 6 of the Act deals with property which is deemed to pass 52 and provides that property which the deceased was at the time of his death competent to dispose of shall be deemed to pass on his death.
Section 7(1) deals with interest ceasing on death and is as folllows: "(1) Subject to the provisions of this section, property in which the deceased or any other person had an interest ceasing on the death of the deceased shall be deemed to pass on the deceased 's death to the extent to which a benefit accrues or arises by the cesser of such interest, including, in particular, a coparcenary interest in the joint family property of a Hindu family governed by the Mitakshara, Marumakattayam or Allyasantana law.
The other sub sections of the section deal with special cases of different communities, the details of which need not be considered.
The other relevant provisions which need be considered deal with the value which is chargeable.
Sub section (1) of section 36 of the Act stipulates that the principal value of any property shall be estimated to be the price which, in the opinion of the Controller, it would fetch if sold in open market at the time of the deceased 's death.
Sub section (2) of the section stipulates that in estimating the principal value under this section the Controller shall fix the price of the property according to the market price at the time of the deceased 's death and shall not make any reduction in the estimate on account of the estimate being made on the assumption that the whole property is to be placed on the market at one and the same time, provided that where it is proved to the satisfaction of the Controller that the value of the property has depreciated by reason of the death of the deceased, the depreciation shall be taken into account in fixing the price.
Sections 37, 38 and 39 are provisions with which the present controversy is not directly concerned.
Section 40 deals with the valuation of benefits from interests ceasing on death.
This is relevant and is as follows: "The value of the benefit accruing or arising from the cesser of an interest ceasing on the death of the deceased shall (a) if the interest extended to the whole income of the property, be the principal value of that property; and 53 (b) if the interest extended to less than the whole income of the property, be the principal value of an addition to the property equal to the income to which the interest extended.
" The other provisions of the Act need not be considered for the present controversy.
Section 14 of The recognises that subject to contract between the partners, the property of the firm would include all the property and rights and interests in property originally brought into the stock of the firm or acquired by purchase or otherwise, by the firm or for the purpose or in the course of business of the firm and includes the goodwill of the business.
It further provides that unless contrary intention appears property and rights in the property acquired with money belonging to the firm are deemed to have been acquired for the firm.
Section 15 of the said Act provides that the property of the firm shall be held and used exclusively for the purpose of the firm.
In a partnership there is a community of interest in which all the partners take in the property of the firm.
But that does not mean that during the subsistence of the partnership a particular partner has any proprietary interest in the assets of the firm.
Every partner of the firm has right to get his share of profits till the firm subsists and he has also a right to see that all the assets of the partnership are applied to and used for the purpose of partnership business.
Section 29 of the said Act also shows that he can transfer his interest in the firm either absolutely or partially.
He has also the right to get the value of his share in the net asset of the firm after the accounts are settled on dissolution.
All these rights of a partner show that he has got a marketable interest in all the capital assets of the firm including the goodwill asset even during the subsistence of the partnership.
This interest is property within the meaning of section 2(15) of the Act as mentioned hereinbefore.
Our attention was drawn to the decision of the King 's Bench Division in the case of Attorney General vs Boden and Another, , in support of the contention on behalf of the revenue.
There the Court was concerned with section 1 of the Finance Act, 1894 of United Kingdom.
By the said provision, estate duty was, except as in the Act provided, payable upon the principal value of all property which passes on the death of every person dying after the 54 date therein mentioned.
By seation 2, sub section (1), property passing on the death of the deceased was deemed to include. .(b) property in which the deceased had an interest ceasing on the death of the deceased, to the extent to which a benefit accrues or arises by the cesser of such interest;. (c) property which would be required on the death of the deceased to be included in an account under section 38 of the Customs and Inland Revenue Act, 1881, as amended by section 11 of the Customs and Inland Revenue Act, 1889.
There, a father and his two sons carried on the business of lace or plain net manufacturers under a deed of partnership which included covenants (among others) to the following effect: Neither of the sons was, without the consent of the father, to be directly or indirectly engaged in any trade or business except on account and for the benefit of the partnership; both the sons were bound to give so much time and attention to the business as the proper conduct of its affairs required; the father was not bound to give more time or attention to the business then he should think fit; if the father should die his share was to accrue to the sons in equal shares subject only to their paying out to his representatives the value of his share and interest at his death as ascertained by an account to be made as on the day of his death with all proper valuations, but without any valuation of or allowance for goodwill, which goodwill was to accrue to the sons in equal shares.
The father died, the value of his share and interest at his death was ascertained by an account taken as directed by the deed of partnership without any valuation of or allowance for goodwill.
The share and interest so ascertained amounted to a large sum, and estate duty was paid on that sum.
The Crown claimed estate duty on the value of the father 's share in the goodwill on the ground that it was (1) property which passed on the death of the father within section 1 of the Finance Act, 1894, or (2) property in which the deceased had an interest ceasing on his death in which a benefit accrued or arose to the sons by the cesser of that interest within section 2, sub section 1(b) of the Act, or (3) property passing under a settlement by deed whereby an interest for life was reserved to the father, and therefore property which would be required on the death of the father to be included in an account under section 38 of the Customs and Inland Revenue Act, 1881, as amended by section 11 of the Customs and Inland Revenue Act, 1889, as further amended by and within the provision of section 2, sub section 1(c), of the Finance Act, 1894, or (4) an interest provided by the father in which a beneficial interest accrued or arose by survivorship on his death within section 2, sub section 1(d) of the Act.
55 The Court deciding on the evidence that the goodwill of the business was of small value held that, having regard to the obligation of the sons under the partnership deed, the share and interest of the father in the goodwill of the busines passed on the death of the father to the sons by reason only of a bona fide purchase for full consideration in money 's worth paid to the father for his own use and benefit, within the meaning of section 3, sub section(1) of the Act.
It was further held that the share and interest of the father in the goodwill of the business was not (1) property which passed on the death of the father within the meaning of section 1 of the Act, nor (2) an interest for life reserved to the father within the meaning of section 38, subsection 2(c) of the Customs and Inland Revenue Act, 1881, as amended by section 11 of the Customs and Inland Revenue Act, 1889.
It was further held that it was a benefit accruing or arising to the sons by the cesser of an interest which the father had in property and which ceased on his death within section 2 sub section 1(b) of the Act.
The High Court, on the analysis of this case which was placed before it, came to the conclusion that clause 10 of the present partnership deed with which we are concerned is entirely different.
In the partnership agreement in Boden 's case, the interest of the deceased passed to his legal representatives immediately after his death because his share was to accrue to his partnership who were his sons subject only to their paying to his legal representatives the value of their share as on the date of death ascertained by proper valuation.
This decision, in our opinion, must be understood in the light of the facts of that case and though there is a ring of similarity with the facts of the present case.
Though clause 10 of the present agreement is different on the aspect of section 7 of the Act, this decision certainly supports the revenue 's contentions.
In Perpetual Executors and Trustees Association of Australia Ltd. vs Commissioner of Taxes of the Commonwealth of Australia (supra) (E.D) the Privy Council had to deal with a case where the principal asset of a testator was his interest in a partnership pursuant to a deed of partnership which, inter alia, conferred option on the surviving partners to purchase the testator 's share in the capital on his death and further provide that "in computing the amount of purchase money payable on account of the exercise of any option, no sum shall be added or taken into account for the goodwill.
" It was held by the Privy Council that the whole of the testator 's interest including goodwill was assessable to duty.
In so far as the Boden 's case decided that the 56 goodwill did not pass was dissented from.
But the moot question is, what happens to the share of the partner in the goodwill of the firm.
Clause 10 of the partnership deed in the instant case states as indicated before that the firm shall not stand dissolved on the death of any of the partners.
Therefore death of any of the partners will not dissolve the partnership firm and so long as partnership firm exists, goodwill as an intangible asset will belong to all the partners.
What the clause says that on the death of the partner, the partner dying shall have no right whatsoever in the goodwill of the firm.
It is clear, there fore, that goodwill exists up to the death among the partners.
If it does, then the property in the goodwill will also exist in the partners.
After his death, the partner shall have no right.
It means to convey that as a result of inheritance, the heirs of the partners will not get any share but it cannot evaporate nor can the parties by agreement defeat the rights of the revenue.
The very moment life ceases, the right of the deceased in the asset ceases and at that moment the property shall pass and/or shall be deemed to pass on.
Jawaharlal Nehru in 'The Discovery of India ' quotes Aurobindo Ghose thus: "Aurobindo Ghosh writes comewhere of the present as 'the pure and virgin moment ' that razor 's edge of time and existence which divides the past from the future, and is, and yet, instantaneously is not.
The phrase is attractive and yet what does it mean? The virgin moment emerging from the veil of the future in all its naked purity, coming into contact with us, and immediately becoming the soiled and stale past.
Is it we that soil it and violate it? Or is the moment not so virgin after all, for it is bound up with all the harlotry of the past?" (1983 Impression p. 21) So therefore in that razor 's edge of time and existence which divides the past from the future, and is, and yet, instantaneously is not, the property indubitably passes on, to whom depends upon the facts and circumstances of a particular case.
If property exists, as it must as the clause does not and indeed cannot say that goodwill vanishes, then share of the partner exists.
If that is so then the title to that property cannot be in the vacuum.
The High Court at page 309 of the report has observed that interest of a dying partner automatically comes to an end on his death.
The High Court further stated that if an interest in any property came 57 to an end at a particular point of time, nothing survived which could be inherited by the heirs.
We are unable to accept this position.
The moment the life comes to an end, 'the razor ' edge of time and existence which divides the past from the future, and is, and yet, instantaneously is not, ' at that time property passes or is deemed to pass.
The goodwill of the firm after the death of the dying partner does not get diminished or extinguished.
Whoever has the benefit of that firm has the benefit of the value of that goodwill.
Therefore if by any arrangement, for instance, clause (10) of the partnership agreement in the instant case, the heirs do not get any share in the goodwill, the surviving partners who will have the benefit of the partnership will certainly have that benefit.
The High Court was right in observing at page 312 of the report that section 7 of the Act might apply to the facts of a given case if it could be shown that there was a cesser of any interest resulting in some form of benefit.
Indeed in this case whoever gets the partnership firm is the gainer.
Therefore, as a result of the death of the dying partner, there is cesser of interest as well as accrual or arising of benefit of the said cesser.
It is well settled that during the subsistence of the partnership, no partner can claim any specific share in any particular items of the partnership assets.
A partner 's interest in running partnership is not specific and is not confined to any specific item of partnership property but that does not mean that the partner has no interest in any individual asset of the firm.
His interest obviously extends to each and every item of firm 's asset.
See the observations in the case of Addanki Narayanappa & Anr.
vs Bhaskara Krishnappa and 13 Ors.; , 3 S.C.R. 400.
So the goodwill of the firm was an asset in which dying partner had a share.
It passed from the death of the dying partner and the beneficiary of such passing would be one who by virtue of the partnership agreement would be entitled to the value of that asset.
The question is how should such asset be valued? Under the Act, the levy of the estate duty is on every asset that will pass on the death of the deceased.
Part V of the Act deals with the valuation of assets that is chargeable to tax under the Act.
Sub section (1) of section 36 provides that the principal value of any property shall be estimated to be the price which, in the opinion of the Controller, it would fetch if sold in the open market at the time of the deceased 's death.
Subsection (2) of section 36 further stipulates that in estimating the principal value under this section the Controller shall fix the price of the property according to the market price at the time of the deceased 's 58 death and shall not make any reduction in the estimate on account of the estimate being made on certain assumptions.
Section 40 deals with the valuation of benefits from interests ceasing on death.
It has been canvassed before the High Court on behalf of the accountable person and it found favour with the High Court that clause (b) of section 40 of the Act which deals with the valuation of benefit of interest arising on death would be wholly inapplicable with the facts and circumstances of this case.
We are unable to accept this position.
Difficulties in making apportionment does not make a taxable item non taxable.
See in this connection the observations of this Court in Commissioner of Income tax, Madras.
vs Best and Co. (Private) Ltd., Reliance was placed on behalf of the accountable person on a decision of the Judicial Committee in Attorney General of Ceylon vs AR.
Arunachalam Chettiar and Others, 34 I.T.R. 20 E.D.
The facts of that case and the clauses with which the Judicial Committee was concerned there were entirely different.
There the son had merely a right to be maintained by the Karta out of the common fund to an extent in the Karta 's absolute discretion and there was no basis of valuation which in relation to such an 'interest ' would conform to the scheme prescribed under section 17(6) of the Ordinance with which the Judicial Committee was concerned.
A full bench of the Madras High Court in the case of Alladi Kuppuswami vs Controller of Estate Duty, Madras, , had to construe the effect of a Hindu Women 's Rights to Property Act, 1937 and to consider the nature of the right of the widow in the property.
It was found that at the death of the widow, there was no cesser of any interest she had in the joint family property and, in any case, her interest being entirely undefined, it lapsed on her death resulting in no change in the coparcenership as such and her interest could not properly be regarded as an interest in property within the meaning of section 7(1) of the Act.
Our attention was drawn to certain observations of Veeraswami, C.J. at page 507 of the report wherein it was observed that it was only property that passed in the sense of passing hands by way of inheritance, or other form of devolution which seemed to attract section 5.
Likewise, for purposes of section 6, it must be property which the deceased at the time of his death was competent 59 to dispose of.
So also, for the application of the first part of section 7(1), it should be such interest in property, as on its cesser the benefit that accrues or arises should be referable to the whole or less than the whole income of the property.
The Chief Justice had observed that the implication was that if that measure in terms of income of the property was not apposite to the cesser of an interest, it would not be an interest such as was contemplated by section 7(1) of the Act.
It is not necessary to examine this proposition in any greater detail because in our opinion under section 5 of the Act read with section 36, valuation can be made in the instant case.
The Madras High Court in Controller of Estate Duty, Madras vs Ibrahim Gulam Hussain Currimbhoy, , observed that the goodwill being an asset of the firm belonged to the firm, i.e., to all the partners, and the death of the deceased partner did not extinguish his share in the goodwill but resulted in the augmentation of the interest of the surviving partners in the goodwill in view of clause 14 of the partnership deed in that case.
Clause 14 was as follows: "The retiring partner or the legal representatives of the deceased partner shall not be entitled to the goodwill of the business as the surviving or continuing partners alone shall be entitled to the goodwill and to continue to carry on the business under the same name and style.
" And hence there was a passing of the deceased 's share in the goodwill even if there was no devolution of the deceased 's interest in the goodwill on the legal representatives.
The interest in the goodwill which the deceased possessed and could dispose of along with his entire interest in the firm at the time of his death came to devolve on the surviving partners and their share in the goodwill was augmented to the extent of the share of the deceased as per clause 14 of the partnership deed in that case and the Madras High Court held that section 5, of the Act applied.
Section 5, we have noted, is applicable in the instant case in the sense that property passed on the death of the deceased partner and if that is so, section 40 would not have any application in the valuation.
On this aspect, the Madras High Court was unable to agree with the Gujarat High Court 's decision under appeal.
The Madras High Court relied on the decision of this Court in Khushal Khemgar Saha vs Mrs. Khorsed Banu, [1970]3 S.C.R. 689.
Our attention was also drawn to a decision of the Madras High 60 Court in the case of Smt.
Surumbayi Ammal vs Controller of Estate Duty, Madras, But the question under controversy was different in that case and no useful purpose would be served by examining that case in detail.
The full bench of Punjab and Haryana High Court in the case of State vs Prem Nath, , held that the goodwill of a firm was an asset of the firm, the share of the deceased partner in which, along with his share in the other assets of the firm, devolved for the purposes of estate duty, on his death, upon his legal representatives notwithstanding any clause in the deed of partnership to the effect that the death of a partner should not disolve the firm and that the surviving partners were entitled to carry on the business on the death of the partner.
The Punjab & Haryana High Court noted that the decision under appeal of the Gujarat High Court did not consider the question whether the devolution of the goodwill on the surviving partners on the death of the deceased partner was itself not sufficient to constitute passing of the property within the meaning of section 5 of the Act.
It noted that this view of the Gujarat High Court was contrary to the Privy Council 's decision referred to hereinbefore and that of the Madras High Court 's view noted earlier.
The Bombay High Court in the case of Controller of Estate Duty, Bombay City I vs Fakirchand Fatehchand Sachdev, , came to the conclusion that the charging provisions and the computation provisions in the constituted an integrated scheme, and if in a given case it was not possible to compute the value of a particular property passing on death, then that property did not become exigible to the charge of estate duty.
Where certain property was deemed to pass under section 7(1) of the Act, estate duty thereon would be chargeable under section 5, but the value of the benefit accruing or arising from the cesser of an interest ceasing on the death of the deceased would have to be computed under section 40 and if it could not be computed, then such a benefit was not liable to the charge of estate duty.
The goodwill of a firm was one of the properties or assets of a firm.
Merely because it was an intangible asset, it did not stand on a diferent footing from the tangible assets of the firm, but in making up the final accounts it had to be taken together with the other assets of the firm in arriving at the value of the total assets and for deducting therefrom the liabilities as provided by law and in paying to the partners their share in the balance so arrived at.
Where a partnership was dissolved by the death of a partner, his share in the firm 61 passed on his death to his legal representatives.
Where a partnership A was not dissolved on the death of a partner but the surviving partners became entitled to continue the partnership business, the deceased partner 's share passed to his surviving partners subject to their making payment to the legal representatives of the deceased partner of the amount of the value of his share in accordance with the provisions of the deed of partnership.
A partner did not have a defined share in the goodwill of the firm and the estate duty authorities could not regard it as a separate property by itself apart from the other assets and liabilities of the firm and include its value in the estate of a deceased partner under section section The Bombay High Court could not agree with the view of the Gujarat High Court under appeal.
In the case of Controller of Estate Duty vs Kanta Devi Taneja, , the Gauhati High Court held that passing of property was not a mere change of source or title but change of beneficial possession or enjoyment.
The interest of a partner in a partnership firm was property within the meaning of section 2(15) of the , and such interest extended to the share of the partnership including goodwill.
Therefore, on the death of a partner, his interest in the entire unit of the firm including goodwill passes, irrespective of the provisions of the partnership deed as to its final devolution.
The Calcutta High Court in the case of Controller of Estate Duty, West Bengal vs Annaraj Mehta and Deoraj Mehta, had occasion to consider this question and held that what passed on the death of a partner was his share in the firm, that is, his interest in the entire unit of the firm.
This had to include goodwill.
The fact that such interest might devolve not on the legal representatives but on a different group or category of persons or that from the goodwill of the legal representatives might be excluded would not make any difference for the purpose of assessment to estate duty.
The entirety of the the interest of the deceased partner that would pass, which necessarily included goodwill, would be includible in the estate.
The valuation of such entire interest had to be determined as provided under section 36 of the read with rule 7(c) of the Estate Duty Rules, 1953.
Goodwill as such could not be valued, according to the Calcutta High Court, for inclusion in the estate of the deceased for purposes of estate duty.
The High Court observed at page 552 of the report as follows: "We hold that the Tribunal 's finding that the goodwill in 62 the firm, Messrs. Ashok Foundary and Metal Works, did not pass on the death of the deceased is incorrect but the finding that the valuation of the goodwill as such could not be included in the estate of the deceased for the purpose of the estate duty is correct.
Goodwill being part of the entire assets of the firm, the entire share of the deceased therein has to be valued in accordance with law and this value has to be included in the estate for levy of estate duty." The Allahabad High Court in the case of Controller of Estate Duty vs Smt.
Ram Sumarni Devi, , followed the decision under appeal and was of the view that the goodwill could not be included in the value of the property passing on the death of a partner.
In P.T. Abdul Sattar vs Controller of Estate Duty, , the Kerala High Court came to the conclusion that under clause 15 of the deed it had to construe, provided that in the event of death or retirement of a partner, such deceased or retiring partner would not be entitled to any goodwill of the firm.
A had died in 1969 and the Asst.
Controller held that the interest of A in the goodwill of the firm passed on his death and this was upheld by the Tribunal.
It was held by the High Court that under clause 15, the interest of A in the goodwill of the firm automatically came to an end on his death.
Property in the goodwill did not, therefore, pass on his death.
We are, however, for the reasons we have indicated before, unable to accept this conclusion.
In the aforesaid view of the matter, we are of the opinion that the share of the deceased in the partnership did not evaporate or disappear.
It went together with the other assets and should be valued in the manner contemplated under rule 7(c) of the Estate Duty Rules as indicated in the judgment of the High Court of Calcutta in Controller of Estate Duty, West Bengal vs Annaraj Mehta and Deoraj Mehta (supra) .
The second question must, therefore, be answered in the affirmative and in favour of the revenue.
The appeal is, therefore, allowed.
In the facts and circumstances of the case, parties will pay and bear their own costs.
Consequential orders in accordance with law and in consonance of this decision should be passed by the Tribunal upon notice, to all necessary parties.
A.P.J .
Appeal allowed.

summary/full:
One N. Kanti Lal had 28% share in a partnership firm.
The Partnership Deed, by cl.
(10) provided that the firm shall not stand dissolved on death of any of the partners and the partner dying shall have no right whatever in the goodwill of the firm.
On his death, the respondent accountable person filed necessary return under the without including the value of the share of the deceased in the goodwill of the firm.
The Assistant Controller of Estate Duty, however, held that the share of the deceased in the goodwill of the firm was liable to be included in the principal value of his property and added the same to the value of the interest which the deceased had in the partnership assets.
The Appellate Controller of Estate Duty confirmed the aforesaid order in appeal.
The accountable person preferred appeal before the Appellate Tribunal contending: (1) that the deceased had no interest in the assets of the firm and hence his share in the goodwill did not pass at all; (2) that in view of cl.
(10) of the Partnership Deed the share of the deceased partner in the goodwill did not pass and as such was not liable to the charge of estate duty; and (3) that when a partnership was a going concern, there could not be any separate valuation of the goodwill which went with the running business.
The Tribunal rejected all the contentions and held that in spite of cl.
(10) of the partnership agreement, the value of the goodwill to the extent of the share of the deceased passed on his death and it was liable to be charged to estate duty.
46 On reference by the Tribunal, the High Court held: (i) that the interest of the deceased in the firm was property within the meaning of the provisions of the ; and (ii) that the value of the interest of the deceased in the partnership firm would not include the goodwill of the partnership firm.
This Court, on the question: 'Whether the value of the interest of the deceased in a partnership firm would include the goodwill of the partnership firm and liable to estate duty ', allowing the Appeal of the Revenue, ^ HELD: 1.
In a partnership there is a community of interest in which all the partners take in the property of the firm.
But that does not mean that during the subsistence of the partnership a particular partner has any proprietary interest in the assets of the firm.
Every partner of the firm has a right to get his share of profits till the firm subsists, and he has also a right to see that all the assets of the partnership are applied to and used for the purpose of the partnership business.
All these rights of a partner show that he has got a marketable interest in all the capital assets of the firm including the goodwill asset even during the subsistence of the partnership.
This interest is 'property ' within the meaning of section 2(15) of the .
[53 D F] 2.
The goodwill of the firm is an asset in which the dying partner has a share.
It passes on the death of the dying partner and the beneficiary of such passing would be one who by virtue of the partnership agreement would be entitled to the value of that asset.
The fact that such interest might devolve not on the legal representatives but on a different group or category of persons or that from the goodwill the legal representatives might be excluded, would not make any difference for the purpose of assessment of estate duty.
The entirety of the interest of the deceased partner that would pass, which necessarily included goodwill, would be includible in the estate.
The valuation of such entire interest has to be determined as provided under section 36 of the read with Rule 7(2) of the Estate Duty Rules, 1953.
[61 E G] 3.
The share of the deceased in the partnership did not evaporate or disappear.
It went together with the other assets and should be valued in the manner contemplated under Rule 7(c) of the Estate Duty Rules.
The goodwill of the firm after the death of the dying partner does not get diminished or extinguished.
Whoever has the benefit of that firm has the benefit of the value of that goodwill.
Therefore, if by any 47 arrangement, for instance, clause (10) of the partnership agreement in the instant case, heirs do not get any share in the good will, the surviving partners who will have the benefit of the partnership will certainly have that benefit.
Therefore, as a result of the death of the dying partner, there is cesser of interest as well as accrual or arising of benefit of the said cesser.
B D] 4.
Difficulties in making apportionment do not make a taxable item non taxable.[58 C] Perpetual Executors and Trustees Association of Australia Ltd. vs Commissioner of Taxes, = 25 I.T.R. (ED) 47, Attorney General vs Boden and Another, 1912 (I) K.B. 539, Addanki Narayanappa & Anr.
vs Bhashara Krishnappa and 13 ors.
, A.I.R. 1966 S.C. 1330=[1966] 3 SCR 400, Commission of Income tax, Madras vs Best and Co. (Private) Ltd., 60 I.T.R.11 and Khushal Khemgar Shah vs Mrs. Khorshed Banu; , relied upon.
Controller of Estate Duty, Madras vs Ibrahim Gulam Hussain Currimbhoy, , State vs Prem Nath, , Controller of Estate Duty, Bombay City I vs Fakirchand Fatchchand Sachdev, , Controller of Estate Duty vs Kanta Devi Taneja, and Controller of Estate Duty, West Bengal vs Annaraj Mehta and Deoraj Mehta, , approved.
Attorney General of Ceylon vs AR.
Arunachalam Chettiar and Others, E.D., Alladi Kuppuswami vs Controller of Estate Duty, Madras, and Smt.
Surumbayi Ammal vs
Controller of Estate Duty, Madras, , distinguished.
Controller of Estate Duty vs Smt.
Ram Sumarni Devi, and P. Abdul Sattar vs Controller of Estate Duty, , overruled.


judgement:
ION: Civil Appeal No. 824 of 1986 From the Judgement and order dated 10.
1.1986 of the Bombay High Court in W.P. No. 5327 of 1985.
S.N. Kacker.
Rani Chhabra and Swatanter Kumar for the Appellant.
V.S. Desai, C.V. Subba Rao, A.S. Bhasme and A.M. Khanwilkar for the Respondents.
The Judgment of the Court was delivered by R.B. MISRA, J.
The present appeal by special leave is directed against the judgment and order dated January 10, 1986 of the High Court of Judicature at Bombay dismissing the petition under Article 226 of the Constitution filed by the appellant.
The appellant is carrying on the business of bulk supply of milk, 66 products and milk cream etc.
The appellant is well known in the said field and has a plant of pasteurization in Pune and has been carrying on the said business for more than twenty years.
The appellant installed a plant for pasteurization at a heavy cost to the tune of rupees three lakhs.
The appellant has been supplying large quantities of milk and milk products pasteurized or otherwise to various companies, Government Departments including respondents Nos. 2 and 3.
The appellant as a registered contractor has been supplying fresh buffaloes and cows milk to respondent Nos. 2 and 3 as per the requirements for the last twenty years.
The appellant is on their approved list for the same period and his supplies and work were always appreciated and accepted by the respondents for all these periods.
The appellant is also capable of supplying any quantity of pasteurized milk and, indeed, he had been supplying to various organisations the milk and milk products and also pasteurized milk.
Later on Respondent No. 2, the officer incharge of the Military Farms, Pimpri, directed that the local purchase of milk be stopped and regular supply under a contract by inviting tenders be effected.
Accordingly, the appellant 's contract for supply of fresh buffalo and cow milk ended in 1984 The Military Farm had its own plant for pasteurization and for all these years respondents Nos. 2 and 3 had been making purchases of only fresh buffalo milk and used to pasteurize the milk for their own purposes in their own plant.
The plant of respondents 2 and 3 is very much in operation till to day and also on the date of inviting tenders in question .
Respondent No. 2 issued on or about July 16, 1985 tender notices for the supply of fresh buffalo or cow milk.
The said tender notice was published in the Indian Express on July 29, 1985.
The tender notice was also sent to the appellant by Respondent No. 2 by registered post acknowledgement due which was received by the appellant in July 1985.
By the said tender notice, the respondent had invited tenders for supply of fresh buffalo or cow milk at Military Farms of Pimpri, Pune.
The appellant being eligible and already on the approved list of the respondents submitted a tender for supply of fresh buffalo milk to respondents 2 and 3 as per the requirements stated in the tender notice.
The appellant had offered the milk at the rate of Rs.4.21 per litre having 6 per cent fat and specific gravity of 1.030 as required in the tender notice, thus, giving a rate of Rs.421 for each 100 litres.
67 Respondent No. 4, General Manager, Government Milk Scheme, A Pune, also submitted a tender but the tender of respondent No. 4 related not to the item asked for in the tender notice viz. fresh buffalo or cow milk but related to the supply of pasteurized milk.
While the cow milk asked for in the tender provided for 4 per cent fat with a specific gravity of 1.029, respondent No. 4 agreed to supply pasteurized milk for Rs.4 per litre, that is Rs.400 per 100 litres.
It appears that after the submission of the tender, the appellant received a notice dated October 30, 1985 from respondent Nos. 2 and 3 requesting the appellant to extend the validity period of tender up to November 30, 1985 on the same terms and conditions as mentioned in the tender submitted by the appellant.
The appellant acceded to the request and extended the validity period till November 30, 1985 in view of the long standing business and his good relations with respondents 2 and 3.
During this period respondents 2 and 3 kept on receiving sup plies of fresh buffalo milk to the satisfaction till the appellant was asked to stop the supply from November 20, 1985 vide letter dated October 30, 1985, although the appellant had been requested earlier to continue the supply at least up to December 1, 1985 vide letter dated October 30, 1985.
The appellant thus had to suffer a huge loss on account of the abrupt stoppage of the supply.
Tenders were opened on August 23, 1985.
The appellant was the lowest bidder.
The rates given by the appellant in the tender for supply of fresh buffalo milk was lower and tender of respondent No. 4 could be of no consequence as it was for a different item not contemplated by the tender notice.
The tender given by Respondent No. 4 was however accepted on November 19 20, 1985 and the tender of the appellant was rejected although it was lower than that of respondent No. 4.
The concerned officer had made a report to the higher authorities about the two tenders, one from the appellant and the other from respondent No. 4, vide letter dated August 23, 1985.
It will be appreciated at this stage to refer to the advice given by the officer concerned which is as follow: "CONCLUSION OF CONTRACT FOR SUPPLY OF MILK AT PR MF KIRKEE / PIMPRI.
Reference discussion DDME and ADMP of date.
The information required is given below: (a) The cost of blended milk and standard milk taking the buff milk rate of Rs.421 for 100 litres works out to: i) Blended Milk (Taking Rs.3.59per lit of BMP Rs.28 per kg.) 10% price preference Rs.0.36 ii) Standard Milk (Taking cost of Rs.3.48 per litre separated milk Rs.2.30 per litre) 10% price preference Rs.0.35 Rs.3.83 (b) If contract for purchase of cow milk is concluded, farm will lose 41 paise per litre on blended milk and 52 paise on standard milk per litre.
Taking a daily purchase of 3000 litres of cows milk for which tender has been called for it will amount to a loss of Rs.4.48 lakhs in terms of blended milk and Rs.5.69 lakhs in terms of standard milk during the period of contract of one year.
In so far as pasteurization is concerned, milk has to be repasteurized as delivery timings of units in the station are different.
Moreover, even if Milk Scheme delivers the milk just before one hour of sending out the delivery rounds, it will only save on electricity charges which will be negligible.
The 7,500 litres of cows milk being produced daily at Pimpri has to be pasteurized for which the daily section will continue to work as it is at present.
The collection charges under farm arrangement works out to Rs.0.10 per litres.
The details are enclosed at Appendix 'A '.
Though collection charges will be less by 10 paise but it will cause lot of inconvenience to the dairy staff because milk is already being collected three times a day from Pimpri and lot of difficulties are being experienced in route.
If Milk Scheme delivers the Milk at MP Dairy that arrangement will be the best.
" From the above report it is obvious that the respondents will be put to substantial loss to the tune of about Rupees ten lakhs by accept 69 ing the tender of respondent No. 4 but all the same the tender of respondent No. 4 was accepted in preference to the tender made by the appellant.
Respondents 2 and 3 would have gained by accepting the tender of the appellant which is strictly in terms of the tender notice because the respondent could further increase the quantity of milk by diluting the same to bring to fat and gravity standard.
From the terms and conditions inviting the tender, the Government suppliers were given exemption from depositing the earnest money and tender form fee but no other concession to the Government supplies was indicated in the tender notice yet 10 per cent price preference was given to respondent No. 4 without any basis and in violation of the terms of notice inviting the tender.
All the same the price of the appellant quoted in the tender was lower than that of respondent No. 4 and there was absolutely no justification whatsoever for not accepting the tender of the appellant.
To start with the appellant had made an offer of Rupees four hundred fifty per hundred litres but para 16 of the tender notice provided for negotiations by respondents 2 and 3 with the contractors on rates or otherwise.
As a result of subsequent negotiations between the appellant and the respondents, the offer of Rs.450 was reduced to Rs.421 per hundred litres.
If the tender notice had indicated for the supply of pasteurized milk there was no difficulty for the appellant to have done so.
But in the absence of any such indication in the tender notice and in the absence of any subsequent negotiations between the appellant and the respondents under para 16 of the tender notice, the appellant offered to supply the buffaloes or cows fresh milk.
Feeling aggrieved by the rejection of his tender, the appellant challenged the order of the authority concerned by a Writ Petition in the High Court.
The Writ Petition was, however, dismissed in limine by a cryptic order as under: "Heard both sides.
The Writ Petition involves Questions relating to contractual obligations.
Even otherwise, we do not find that there is anything wrong or unfair in accepting the milk from the Government Milk Scheme.
The policy decision cannot be termed as unfair or arbitrary.
Hence W.P. rejected.
" The appellant has now come to challenge the judgment and order of the High Court dated 10.1.1986 by special leave.
Shri S.N. Kacker, learned counsel appearing for the appellant has reiterated the same contentions as had been raised before the High Court.
70 The main contention is that the authorities concerned had acted contrary to the principles of law, unfairly, arbitrarily and discriminately.
The appellant being the lowest bidder his tender ought to have been accepted by the Panel officers and there was absolutely no reason or justification for the respondents to reject the same.
It was further contended that the tender submitted by respondent No. 4 was not in consonance with the requirements of the tender form and, therefore, that should have been ignored.
The tender notice demanded supply of fresh buffaloes or cows milk hut respondent No. 4 had submitted for pasteurized milk.
In any case, if the respondents wished to alter the invitation of the tender it was obligatory and mandatory for the respondents to call the appellant for negotiations before rejecting his tender and accepting the tender of respondent No. 4.
There was a clear provision for negotiation in the tender notice and it was open to respondent No. 4 to have negotiated with appellant and asked him to tender for the supplying pasteurized milk.
In any case, on the own admission of the respondents, that the pasteurized milk supplied by respondent No. 4 would have to be re pasteurized and secondly the cost of 5() paise had to be added even to the price of respondent No. 4 as the same was being added to the price given by the appellant.
The action of the respondent is completely arbitrary and discriminatory inasmuch as respondent No. 4 merely being the Government organisation had been given preference over the appellant while respondent No. 4 had no better quality or standard for effecting the supplies asked for under the contract and even tor the pasteurized milk.
Even in the matter of contract, the Government has to act fairly and justly and the failure of the Government to do so given a right to the citizen to approach the court for justice.
The respondents have made a wrongful exercise of their power in rejecting the tender of the appellant.
It was contended for the appellant that he being the lowest bid der, the authorities concerned acted arbitrarily in accepting the bid of respondent No. 4 which was higher than that of the appellant.
We find considerable force in this contention.
In Ramana Dayaram Shetty vs The International Airport Authority of India and Ors., ; , this Court laid down the law in this respect in the following words: "Where the Government is dealing with the public, whether by way of giving jobs or entering into contracts or issuing quotas or licences or granting other forms of largess, the Government cannot act arbitrarily at its sweet 71 will and, like a private individual, deal with any person it pleases, but its action must be in conformity with standard or norms which is not arbitrary, irrational or irrelevant.
The power or discretion of the Government in the matter of grant of largess must be confined and structured by rational, relevant and non discriminatory standard or norm and if the Government departs from such standard or norm in any particular case or cases, the action of the Government would be liable to be struck down unless it can be shown by the Government that the departure was not arbitrary but was based on some valid principle which in itself was not irrational, unreasonable or discriminatory.
" On August 23, 1985, the officer of the Military Department submitted a report to the Higher Authority stating therein that the appellant was not only the lowest bidder but also the purchase of milk from the appellant could be profitable while the purchase of milk from respondent No. 4 would result in serious losses to the extent of Rupees ten lakhs or so.
The report further indicates that respondents would have to re pasteurize the milk for its supply to its various units without any profit because the minimum fat standard of 4 per cent with the gravity of 1.029 has to be maintained.
As such the entire labour would be deployed without any fruitful result or benefit to the respondent while on the other hand, if the respondent wished, by pasteurizing the fresh milk supply of the appellant they could otherwise earn profits extracting fat while maintaining the fat and the gravity standard.
In spite of the report of the Military Officer, the higher bid of respondent No. 4 in preference to the lower bid of the appellant was accepted.
It clearly indicates that the action of the respondent authority was arbitrary and fanciful.
The terms contained in the tender notice have been detailed in the notice itself and it is not necessary to refer to all the terms but we would refer to paras 2, 16 and 19.
Para 2 of the tender notice provides that tenders will be invited for the supply of pure fresh buffaloes milk testing not less than 6.0% butter fat and 1.030 specific gravity or pure fresh cows milk testing not less than 4% butter fat and 1.029 specific gravity daily at Military farms/depots as mentioned in Appendix `A '.
Para 16 provides that as per orders of Army Headquarters, Military Farms contracts are to be concluded through a panel of officers which may hold negotiations with the contractor where necessary and recommend the reasonable rates to the higher authorities.
72 Para 19 provides that the Central Government/State Governments are purely governments concerns need not pay tender form fees and earnest money.
They are, however, requested to inimate the period of supply for which they desire to tender their rates to enable the undersigned to send them the required tender form.
It is contended for the appellant that the tender submitted by respondent No. 4 did not satisfy the requirement of para 2 of the tender notice.
The tenders had been invited for the supply of pure fresh buffaloes milk or fresh cows milk but the respondent had submitted tender for supplying pasteurized milk, and therefore, the tender submitted by respondent No. 4 being not in conformity with the tender notice should not have been accepted by the authorities.
In any case, if the tender of respondent No. 4 regarding supply of pasteurized milk was accepted and the original terms of the tender notice were changed, the appellant should have been given an opportunity to submit his tender in conformity with the changed terms but this was not done which has caused serious prejudice to the appellant.
If the tender forms submitted by any party is not in conformity with the conditions of the tender notice the same should not have been accepted but the authorities concerned arbitrarily and in a fanciful manner accepted the tender of respondent No. 4.
The State of its instrumentality has to act in accordance with the conditions laid down in the tender notice.
In any case if the authorities chose to accept the tender of respondent No. 4 for supplying pasteurized milk, the appellant should also have been given an opportunity to change its tender.
The authorities have, however, given preference to the tender of respondent No. 4 for offering to supply pasteurized milk contrary to the terms contained in para 2 of the tender notice.
We find considerable force in this contention of the appellant.
It was next contended that the conditions contained in the tender notice did not contemplate of giving 10 per cent price preference to Government undertakings yet 10 per cent price preference was given to the Government illegally and the policy of the Government to give 10 per cent price preference to Government undertaking was discriminatory and violative of Articles 14 and 16 of the constitution.
The State policy places respondent No. 4 above the appellant without any basis or reasonable classification.
In the absence of any such stipulation in the contract such price preference was unjustified.
If the terms and conditions of the tender have been incorporated 73 in the tender notice itself and that did not indicate any preference to the Government undertakings of giving 10 per cent price preference to Government undertaking, the authority concerned acted arbitrarily in allowing 10% price preference to respondent No. 4.
The only facility provided to the Government undertakings was provided in paragraph 19 which contemplates that the Central or State Government Departments are purely Government concerns need not pay tender forms fees and earnest money.
This was the only concession available to the Central/State Government or to the purely Government concerns, and no other concession or benefit was contemplated under the terms of the tender notice.
If the appellant had known that 10 per cent price preferene to Government undertaking was to be given to respondent No. 4 the appellant would have taken every precaution while submitting the tender.
In support of his contentions, Shri S.N. Kacker, appearing for the appellant strongly relied upon Ramana Dayaram Shetty vs The International Airport Authority of India and Ors.
(supra).
In that case, the first respondent by a public notice invited tenders for putting up and running a Second Class Restaurant and Two Snack Bars at the International Airport at Bombay.
The notice, inter alia, stated in paragraph 1 that sealed tenders in the prescribed form were invited from Registered Second Class Hoteliers having at least five years experience for putting up and running a Second Class Restaurant and two Snack Bars at the Bombay Airport for a period of three years.
Paragraph 8 stated that the acceptance of the tender would rest with the Airport Director who does not bind himself to accept any tender and reserve to himself the right to accept or reject any tender received without assigning any reason therefor.
Out of the six tenders received only the tender of the 4th Respondent was complete and offered the highest amount as licence fee.
All the other tenders were rejected because they were incomplete.
As the 4th respondent did not satisfy the description of a Registered Second Class Hotelier having at least five years experience prescirbed in paragraph (1) of the tender notice, the first respondent called upon the 4th respondent to produce documentary evidence whether they were registered second class hoteliers having at least five years experience.
The Fourth Respondent stated once again that they had considerable experience of catering for various reputed commercial houses, clubs, messes and banks and that they held on Eating House Catering Establishment (Centeen) Licence.
On being satisfied by the information given by the 4th respondent, the first respondent accepted the tender on the terms and conditions set out in its letter.
74 The appellant challenged the decision of the first respondent in accepting the tender of the 4th respondent.
This Court held that the action of the first Respondent in accepting the tender of the 4th respondent who did not satisfy the standard or norms was clearly discriminatory since it exlcuded other persons similarly situated from tendering for the contract and it was arbitrary and without reason.
The acceptance of tender was invalid as being violative of the equality clause of the Constitution as also the administrative law for its arbitrary actions.
This Court also did not justify the action of the first respondent on the ground that it could have achieved the same result by rejecting all the tenders and entering into direct negotiations with the 4th respondent.
This Court observed: "It is true that there was no statutory or administrative rule requiring the 1st respondent to give a contract only by inviting tenders and hence the 1st respondent was entitled to reject all the tenders and, subject to the constitutional norm laid down in Article 14, negotiate directly for entering into a contract.
Paragraph (8) of the notice also made it clear that the 1st respondent was not bound to accept any tender and could reject all the tenders received by it.
But here the 1st respondent did not reject the tenders outright and enter into direct negotiations with the 4th respondents for awarding the contract.
The process of awarding a contract by inviting tenders was not terminated or abandoned by the 1st respondent by rejecting all the tenders but in furtherance of the process, the tender of the 4th respondents was accepted by the 1st respondent.
The contract was not given to the 4th respondents as a result of direct negotiations.
Tenders were invited and out of the tenders received, the one submitted by the 4th respondents was accepted and the contract was given to them." This Court quoted with approval the following observations of Mathew J., in V. Punnan Thomas vs State of Kerala, AIR 1969 Kerala 81: "The Government is not and should not be as free as an individual in selecting the recipients for its largess.
Whatever its activity, the Government is still the Government and will be subject to restraints, inherent in its position in a democratic society.
A democratic Government cannot lay 75 down arbitrary and capricious standards for the choice of persons with whom alone it will deal." Shri Anil Dev Singh, appearing for the respondents, has contended that respondent No. 4 being the State Government agency was rightly awarded the contract as per the policy of the Government of India as laid down in Letter No. 12(1)/1/85/D/(QS) dated August 13, 1985.
The policy adopted by said letter dated August 13, 1985 came in after the 16th July, 1985 when respondent No. 2 issued tender notice for the supply of fresh buffalo or cow milk.
As such the notification dated August 13, 1985 is of no avail to the respondent in so far as the acceptance of the tender of respondent No. 4 is concerned.
Acceptance or rejection of tender made by the appellant or the respondent No. 4 will depend upon the compliance of the terms of tender notice.
It is true that the Government may enter into a contract with any person but in so doing the State or its instrumentalities cannot act arbitrarily.
In the instant case, tenders were invited and the appellant and respondent No. 4 submitted their tenders.
The tenders were to be adjudged on their own intrinsic merits in accordnace with the terms and conditions of the tender notice.
The learned counsel, however, placed reliance on C.K. Achuthan vs State of Kerala, [1959] Suppl.
1 SCR 787 where Hidayathullah, J., as he then was, held that a contract which is held from Government stands on no different footing from the contract held by a private party and when one person is chosen rather than another, the aggrieved party cannot claim protection of Article 14.
The wide observation made by Hidayatullah, J., was explained in Ramana Dayaram Shetty (Supra).
Bhagwati J. as he then was, speaking for the Court observed: "Though the language in which this observation is couched is rather wide, we do not think that in making this observation, the Court intended to lay down any absolute proposition permitting the State to act arbitrarily in the matter of entering into contract with third parties.
We have no doubt that the Court could not have intended to lay down such a proposition because Hidayatullah J. who delivered the judgment of the Court in this case was also a party to the judgment in Rashbihari Panda v State of Orissa (Supra) which was also a decision of the Constitution Bench, where it was held in so many terms that the State cannot act arbitrarily in selecting persons with whom to enter into 76 contracts.
Obviously what the Court meant to say was that merely because one person is chosen in preference to another, it does not follow that there is a violation of Article 14, because the Government must necessarily be entitled to make a choice.
But that does not mean that the choice be arbitrary or fanciful.
The choice must be dictated by public interest and must not be unreasoned or unprincipled.
" Next reliance was placed on Viklad Coal Merchants, Patiala, etc. etc.
vs Union of India & others, AIR 1984 SC 95.
In that case this Court had to construe section 27A and 28 of the Railways Act and the Court observed: "Section 28 forbids discrimination by giving undue or unreasonable preference or advantage in respect of any particular traffic to any particular person or any railway administration but this general prohibition against discrmination is subject to the overriding power conferred on Central Government under section 27A.
If while giving effect to the orders of the Central Government issued under Section 27A, priority is accorded in the matter of transport of goods consigned to Central or State Government or class of goods specified in the general or special order issued in this behalf, the action of the railway administration in complying with such special or general order could not be said as tentamounting to giving undue or unreasonable preference or advantage to or in favour of any particular person or railway administration.
What section 28 forbids is discrimination in the matter of transport of goods against a class but this is subject to the permissible classification that would be introduced by a special or general order issued by the Central Government in exercise of the power conferred by Section 27A. It may be recalled that the Preferential Traffic Schedule according to Priority `C ' to transport of coal by those mentioned therein has been issued in exercise of the power conferred by Section 27A.
Therefore, the submission that petitioners in the matter of transport of coal are similarly situated with the Central or State Government or transporters given priority by general or special order issued under Section 27A cannot be entertained.
" 77 This case is not of much help in the present case.
The facts were materially different in that case.
In that case, the railway authority had to comply with the directions given by the Central Government which was in the public interest.
Lastly, the counsel relied upon Madhya Pradesh Ration Vikareta Sangh Society & Ors.
etc etc.
vs State of Madhya Pradesh & Anr. ; In that case the question for consideration was whether the Fair Price Shops in the State under the Government Scheme should be directly run by the Government through the instrumentalities of the Consumers Co operative Societies as its agents or by retail dealers to be appointed by the Collector.
This Court took the view that essentially this was a matter of policy to which the Court is not concerned.
This case also is not of much help in the present case.
In the instant case, the instrumentalities of the State invited tenders for the supply of fresh buffaloes and cows milk and, therefore, this case has to be decided on the basis of bid by the tenderers.
There was no question of any policy in this case.
It is open to the State to adpot a policy different from the one in question.
But if the authority or the State Government chooses to invite tenders then it must abide by the result of the tender and cannot arbitrarily and capriciously accept the bid of respondent No. 4 although it was much higher and to the detriment of the State.
The High Court, in our opinion, was not justified in dismissing the writ petition in limine by saying that the question relates to the contractual obligation and the policy decision cannot be termed as unfair or arbitrary.
There was no question of any policy decision in the instant case.
The contract of supply of milk was to be given to the lowest bidder under the terms of the tender notice and the appellant being the lowest bidder he should have been granted the contract to supply, especially, when he has been doing so for the last so many years.
In the result, the appeal must succeed.
It is accordingly allowed and the judgment and order of the High Court dated January 10, 1986 is set aside and the Writ Petition is allowed and the order of the authorities rejecting the tender of the appellant and accepting the tender of respondent No. 4 is quashed.
The respondents authorities are directed to accept the tender of the appellant.
There is, however, no order as to costs.
P.S.S. Appeal allowed.

dataset_name: IN-Abs

summary/full:
The appellant is carrying on the business of bulk supply of milk and milk products for the last twenty years.
He has a plant for pasteurization at Pune.
On July 16, 1985 the officer in charge of the Military Farms respondent No. 2, issued tender notice for the supply of pure fresh buffalo and cow milk.
The appellant being eligible and already on the approved list of the respondent authority, submitted a tender offering fresh buffalo milk of the specified fat content and gravity giving a rate of R.S. 421 per 100 litres.
The General Manager, Government Milk Scheme, Pune respondent No. 4, also submitted a tender for the supply of pasteurized milk, an item not contemplated by the tender notice, at Rs.400 per 100 litres.
Tenders were opened on August 23, 1985 and the appellant was found the lowest bidder.
The Military officer concerned submitted a report to the higher authority stating that the appellant was not only the lowest 'bidder but also that the purchase of milk from him would be profitable, while the purchase of milk from respondent No. 4 would result in serious loss to the extent of rupees ten lakhs or so.
But all the same, the respondent authority accepted the higher bid of respondent No. 4, in preference to the lower bid of the appellant contrary to the terms of the notice inviting tender.
Feeling aggrieved by the rejection of his tender, the appellant challenged the order by filing a writ petition in the High Court which was dismissed in limine.
In this appeal by special leave on behalf of the appellant it was 64 contended that even in the matter of contracts, the Government has to act fairly and justly and the failure of the Government to do so gives a right to the citizen to approach the court for justice, that the authority concerned in rejecting his tender had acted contrary to the principles of law, unfairly, arbitrarily and discriminately, that the tender submitted by respondent No. 4 was not in consonance with the tender notice and it should have been ignored, and that if the authority wished to alter the conditions of the tender notice it was obligatory and mandatory for it to call him for negotiation.
It was further contended that the 10 per cent price preference given to respondent No. 4 contrary to the terms of the tender notice was illegal and discriminatory.
On behalf of the respondents it was contended that respondent No. 4 being the Government agency was rightly awarded the contract as per the policy of the Government of India laid down in notification dated August 13, 1385.
Allowing the appeal, the Court, ^ HELD: 1.
The Government may enter into a contract with any person but in so doing the State or its instrumentalities cannot act arbitrarily.
It is open to the State to adopt a policy different from the one in question, but once the authority or the State Government chooses to invite tenders then it must abide by the result of the tender.
[75 C D; 77 D E] 2.
The High Court was not justified in dismissing the writ petition in limine by saying that the question relates to the contractual obligation and the policy decision cannot be termed as unfair or arbitrary.
[77 E] There was no question of any policy decision in the instant case.
The notification dated August 13, 1985 laying down the policy came in after July 16, 1985 when respondent No. 2 issued tender notice.
The instrumentalities of the State having invited tenders for the supply of fresh buffalo and cow milk, these were to be adjudged on their intrinsic merits in accordance with the terms and conditions of the tender notice.
The contract for the supply of milk was to be given to the lowest bidder under the terms of the tender notice and the appellant being the lowest bidder, it should have been granted to him.
The authority acted capriciously in accepting a bid which was much higher and to the detriment of the State.
[75 B D; 77 D F] 3.
Where the tender form submitted by any party is not in con 65 formity with the conditions of the tender notice the same should not be A accepted.
So also, where the original terms of the tender notice are changed the parties should be given an opportunity to submit their tenders in conformity with the changed terms.
[72 C E] 4.
The authority acted arbitrarily in allowing 10 per cent price preference to respondent No. 4.
The terms and conditions of the tender had been incorporated in the tender notice itself and that did not indicate any such price preference to government undertakings.
The only concession available to Central/State Government or to the purely government concerns was under para 13 of the notice, that is, that they need not pay tender form fee and earnest money.
No other concession or benefit was contemplated under the terms of the tender notice.
[73 A C ] Ramana Dayaram Shetty vs The International Airport Authority of India & Ors., ; ; V. Punnan Thomas vs State of Kerala, AIR 1969 Kerala 81; C.K. Achuthan vs State of Kerala [1359] Suppl.
1 SCR 787; Viklad Coal Merchants, Patiala etc.
vs Union of India & Ors.
AIR 1984 SC 95; and Madhya Pradesh Ration Vikreta Sangh Society SCR 750, referred to.