civil appellate jurisdiction civil appeal number. 129 and
512 of 1 97.
appeals by special leave from the judgment and order
dated 19-6-1975 of the bombay high companyrt in gift tax
application number. 1 and 2 of 1975.
and
civil appeal number 755-756 of 1976
appeals by special leave from the judgment and order
dated 8-12-1975 of the bombay high companyrt in w.t.a. number
15/75. and
civll appeal number 1787 of 1977
appeal by special leave from the judgment and order
dated 18-12-1976 of the bombay high companyrt in w.t.a. number
24/76. and
civil appeals number. 1639-1645 of 1977
appeals by special leave from the judgment and order
dated 3 1976 of the bombay high companyrt in writ petition number. 16 1 and 21/76 and judgment and order dated 4-11-1976 in

t.a. number. 20 and 23/76. t. desai s. p. nayar and miss a. subhashini for the
appellants. a. palkhiwala s. p. mehta h. p. raina ravinder
narain mrs. a. k. verma talat ansari and a. n. haksar for
the respondents. the judgment of the companyrt was delivered by
bhagwati j. these appeals by special leave raise a
short question as to whether a reference should have been
called for by the high companyrt in each of these cases. some of
these cases are under the gift tax act while others under
the wealth tax act. they all relate to the valuation of the
ordinary shares of a private limited companypany called mafatlal
gagalbhai pvt. limited which is admittedly an investment
company. the assessee in these cases claimed in the companyrse
of assessment to gift tax or wealth tax as the case may be
that the value of the shares should be taken to be the
figure arrived at by m s. c. c. chokay company chartered
accountants by applying the profit earning method of
valuation of shares without making any adjustment in the
profits of the companypany. it is number necessary for the purpose
of these appeals to set out the different figures of
valuation given in the report of m s. c. c. chokay company and
claimed by the assessees as representing the companyrect value
of the shares on the material dates because the question
with which we are companycerned is one of principle and the
actual figures of valuation are number relevant. the gift tax
and the wealth tax officers did number accept the figures of
valuation given by the assessees on the basis of the profit
earning method and valued the shares at much higher figures
by applying the break-up method. this naturally involved the
assessees in higher tax liability and hence they preferred
appeals to the appellate assistant companymissioner. the
appellate assistant companymissioner applied what has been
described in
the record as rule of three and reduced the valuation of
the shares but the figure determined by the appellate
assistant companymissioner were still higher than those claimed
by the assessees. since the valuation of the shares made by
the gift tax and the wealth tax officers was reduced by the
appellate assistant companymissioner the revenue was
dissatisfied and it therefore preferred appeals against
the orders of the appellate assistant companymissioner to the
tribunal. the assessees were also unhappy with the valuation
made by the appellate assistant companymissioner since he did
number accept the valuation put forward on their behalf and
hence they too preferred cross objections in the appeals
filed by the revenue. the appeals and the cross objections
in the cases forming the subject matter of civil appeal number
129/76 ere heard together by the tribunal. the only
controversy before the tribunal was as to which method
should be followed for valuing the shares of the companypany. the revenue companytended that in the case of an investment
company like mafatlal gagalbhai pvt limited the proper method
of valuation would be to take the mean of two values one
arrived at by applying the profit earning method and the
other by applying the break-up method while the assessees
pleaded for adopting only the profit earning method since
in their submission that was the only method which companyld be
applied for valuation of shares of a going companycern the
tribunal by a companymon judgment accepted the companytention of the
assessees and adopted the valuation of the shares made by
m s. c. c. chokay and company by applying the profit earning
method and in the result rejected the appeals of the revenue
and allowed the cross objections of the assessees. we shall
discuss in some detail the reasons which weighed with the
tribunal in companying to this decision when we deal with the
arguments of the parties but suffice it to state for the
present that in taking this view the tribunal followed the
recent decision of this companyrt in companymissioner of wealth-tax

mahadeo jalan ors. similar orders were passed by the
tribunal in the appeals and cross-objections relating to the
other assessees. the revenue was obviously aggrieved by the
orders of the tribunal and therefore it made applications
to the tribunal for referring to the high companyrt the
following question of law namely
whether the tribunal is right in holding that
the shares of an investment companypany has to be valued
only on the basis of the yield without taking into
account the assets owned and reflected in the balance
sheet
could be said to arise out of the orders of the tribunal. the applications for reference were rejected by the
tribunal on the ground that numberreferable question of law
arose out of the orders of the tribunal. the revenue
thereupon made applications to the high companyrt for calling
for a reference but those applications also met with the
same fate. hence the revenue preferred petitions for special
leave to appeal in the case of all the assessees and special
leave having been granted in some of the petitions the
present appeals have companye up for hearing before us. the sole question that arises for determination in
these appeals is whether any question of law arises out of
the orders of the tribunal which needs to be referred to the
high companyrt. it is true that there must be a question of law
arising out of the order of the tribunal before a reference
can be made but it is number every question of law that is
required to be referred by the tribunal to the high companyrt. where the answer to the question of law is self-evident or
is companycluded by a decision of this companyrt it would be futile
to make a reference and in such a case the tribunal would be
justified in refusing to refer the question to the high
court vide c.i.t. v. chander bhan mathura prasad v. c.i.t.
and c.i.t. v. indian mica supply company limited number there can be
numberdoubt that in the present case the question as to which
method should bf ed for valuation of the shares of mafatlal
gagalbhai private limited a private limited companypany which was
an investment companypany and at all material times a going
concern-whether it should be the profit earning method or a
combination of the break-up method and the profit earning
method-is clearly a question of law. but the argument of the
assessees was that the determination of this question was
completely companyered by a recent decision of this companyrt in
commissioner of wealth tax v. mahadeo jalan others in
favour or the assessees and numberuseful purpose would be
served by calling for a reference. the revenue companyceded that
the decision in mahadeo jalans case did lay down certain
principles for valuation of shares in a limited companypany but
its companytention was that these principles were numbermore than
broad-guidelines and they did number eliminate the necessity of
finding out the appropriate method of valuation in each case
which came before the taxing authority and hence it was
necessary to make a reference so that the proper method for
valuation of the shares of mafatlal gagalbhai pvt. company limited
could be determined
by the high companyrt. the companytroversy between the parties thus
centered round the question is to what was decided by this
court in mahadeo jalans case and whether it laid down what
method should be applied for valuation of shares of a
private limited companypany which is an t investment companypany
carrying on business as a going companycern. if the method to be
applied in such case companyld be found to have been judicially
laid down by this companyrt in mahadeo jalans case all that
would be necessary to be done for arriving at the valuation
of the shares in mafatlal gagalbhai companypany private limited
would be to apply that method and it would be wholly
unnecessary to call for a reference. let us therefore
examine the decision in madhadeo jalans case and see
whether any principle of valuation of shares is laid down in
it which would be applicable in case of a companypany like
mafatlal gagalbhli private limited. the decision in mahadeo jalans case was rendered
under. the wealth-tax act and the question was as to what
was the appropriate method for valuation of shares of a
private limited companypany for the purpose of wealth tax. the
tribunal adopted the break-up method and arrived at the
valuation of the shares on that basis? but on a reference
the high companyrt took the view that in case of a companypany which
is a going companycern the only proper method of valuation of
shares is the yield value method and n lt the break-up
method. the revenue carried the matter in appeal to this
court and in a judgment delivered by jaganmohan reddy j.
this companyrt examined the question of valuation of shares in
depth and after referring to various decisions of the
english irish and australian companyrts laid clown the
following principles for valuation of shares in a limited
company

where the shares in a public limited companypany
quoted on the stock exchange and there are
dealings in them the price prevailing on the
valuation date is the value of the shares. where the shares arc of a public limited companypany
which are number quoted on a stock exchange or of a
private limited companypany the value is determined by
reference to the dividends if any reflecting the
profit earning capacity on a reasonable companymercial
basis. but where they do number then the amount of
yield on that basis will determine the value of
the shares. tn other words the profits which the
company has 11 been making and should be making
will ordinarily determine the value. the dividend
and earning method or yield method are number
mutually exclusive
both should help in ascertaining the profit
earning capacity as indicated above. if the
results of the two methods differ an intermediate
figure may have to be companyputed by adjustment of
unreasonable expenses and adopting a reasonable
proportion of profits. in the case of a private limited companypany also
where the expenses are incurred out of all
proportion to the companymercial venture they will be
added back to the profits of the companypany in
computing the yield in such companypanies the
restriction on share transfers will also be taken
into companysideration as earlier indicated in
arriving at a valuation. where the dividend yield and earning method break
down by reason of the companypanys inability-to earn
profits and declare dividends if the set-back is
temporary then it is perhaps possible to take the
estimate of the value of the shares before set-
back and discount it by a percentage companyresponding
to the proportionate fall in the price of quoted
shares of companypanies which have suffered similar
reverses. -

where the companypany is ripe for winding up then the
break-up value method determines what would be
realised by that process. as in attorney-general of ceylon v. mackie 1952
2 all. e.r. 775  p.c.  a valuation by reference
to the assets would be justified where as in that
case the fluctuations of profits and uncertainty
of the companyditions at the date of the valuation
prevented any reasonable estimation of prospective
profits and dividends. since the companypany involved in this case was a private
limited companypany which was a going companycern the companyrt
following the above principles negatived the applicability
of the break-up method for valuation of the shares and
upheld the view taken by the high companyrt that the yield
method was the proper method for arriving at the valuation
of the shares. it is clear from this decision that where the shares in
a public limited companypany are quoted on the stock exchange
and there are dealings in them the price prevailing on the
valuation date would represent the value of the shares. but
where the shares in a public
limited companypany are number quoted on the stock exchange or the
shares are in a private limited companypany the proper method of
valuation to be adopted would be the profit earning method. this method may be applied by taking the dividends as
reflecting the profit earning capacity of the companypany on
reasonable companymercial basis but if it is found that the
dividends do number companyrectly reflect the profit earning
capacity because only a small proportion of the profits is
distributed by way of dividends and a large amount of
profits is systematically accumulated in the form of
reserves the dividend method of valuation may be rejected
and the valuation may be made by reference to the profits. the profit-earning method takes into account the profits
which the companypany has been making and should be capable of
making and the valuation according to this method is based
on the average maintainable profits. of companyrse for the
purpose of such valuation the taxing authority is number bound
by the figure of profits shown in the profit and loss
account because it is possible that the amount of profits
may have suffered diminution on account of unreasonable
expenditure or the directors having chosen to take away a
part of the profits in the form of remuneration rather than
dividends. the figure of profits in such a case would have
to be adjusted in order to arrive at the real profit earning
capacity of the companypany. it would thus be seen that in the
case of a companypany which is a going companycern and whose shares
are number quoted on the stock exchange the profits which the
company has been making and should be capable of making or
in other words the profit-earning capacity of the companypany
would ordinarily determine the value of the shares. that is
why in mahadeo jalans case the companyrt quoted with approval
the following observations of williams j. in mccathie v.
federal companymissioner of taxation. the real value of
shares which a deceased person holds in a companypany on the
date of his death will depend more on the profits which the
company has been making and should be capable of making. having regard to the nature of its business than upon the
amounts which the shares would be likely to realise upon a
liquidation and stated. in numberuncertain terms that the
general principle of valuation in a going companycern is the
yield on the basis of average maintainable profits subject t
adjustment etc. which the circumstances of any particular
case may fall for. the break up method would number be
appropriate for valuation of shares of a companypany is a going
concern because as pointed out by the companyrt in mahadeo
jalans case among the factors which govern the
consideration of the buyer and the seller where the one
desires to purchase and the other
wishes to sell the factor or break-up value of a share as
on liquidation hardly enters into companysideration where the
shares are of a going companycern. it is only where a companypany
is ripe for winding up or the situation is such that the
fluctuations of profits and uncertainty of companyditions at the
date of valuation prevent any reasonable estimation of the
profit earning capacity of the companypany that the valuation
by the break-up method would be justified. the revenue
leaned heavily on the observation in mahadeo jalans case
that the factors likely to determine the valuation of a
share include in special cases such as investment
companies the asset-backing and urged on the strength of
this observation that in the case of an investment companypany
the asset-backing was a relevant companysideration and the
break- up method companyld number therefore be companysidered as
totally irrelevant. this companytention we are afraid is based
on a wrong reading of the observation of the companyrt. when the
court said that in case of an investment companypany the asset-
backing is a relevant factor in determination of the value
of he shares what the companyrt meant was in order to determine
the capacity of the companypany to maintain its profits the
asset-backing would be a relevant companysideration. the profit-
earning capacity of the companypany which would determine the
valuation of the shares would naturally have to take. into
account number only the profits which the companypany is actually
making but also the profits which the companypany should be
capable of making and in order to arrive at a proper
estimation of the latter the asset-backing would be a
relevant factor in case of an investment companypany. it would
number be right to read the observation of the companyrt as
suggesting that valuation of the assets would be a relevant
factor in determining the valuation of shares. the revenue
of companyrse did number plead for exclusive adoption of the
break-up method and wanted the mean of the values arrived at
by applying the break-up method and the profit earning
method to be taken as representing the valuation of the
shares but we do number see on what principle can a
combination of the two methods be justified. there is no
authority either in any judicial decision or in any standard
text book on valuation of shares which recognises the
validity of a companybination of the two methods though it may
sound acceptable as a companypromise formula. in fact adamson
has criticised this companybination of the two methods as
unscientific in his book on the valuation of companypany shares
and businesses  fourth edition  at page 55 where he has
said
the mere averaging of two results obtained by
quite different basis of approach can hardly be said to
represent any logical approach whatever its merit as a
compromise. despite its evident popularity in many quarters it has
number been given judicial recognition in decisions
involving the fixation of a value by the companyrt. the companybination of the two methods advocated on behalf
of the revenue has thus numbersanction of any judicial or
other authority and cannumber be accepted as a valid principle
of valuation of shares. the revenue than pointed out that the principles of
valuation set out by the companyrt in mahadeo jalans case were
merely broad guidelines and they did number obviate the
necessity of companysidering each case on its own facts and
circumstances and in support of this companytention the revenue
relied on the observation made by the companyrt that in setting
out these principles the companyrt had number tried to l. down
any hard and fast rule because ultimately the facts and
circumstances of each case the nature of the business the
prospects of profitability and such other companysiderations
will have to be taken into account as will be applicable to
the facts of each case. number it is true as observed by the
court that there cannumber be any hard and fast rule in the
matter of valuation of shares in a limited companypany and
ultimately the valuation must depend upon the facts and
circumstances of each case but that does number mean that
there are numberwell settled principles of valuation applicable
in specific fact-situations and whenever a question of
valuation of shares arises the taxing authority is in an
uncharted sea and it has to innumberate new methods of
valuation according to the facts and circumstances of each
case. the principles of valuation as formulated by the companyrt
are clear and well-defined and it is only in deciding which
particular principle must be applied in a given situation
that the facts and circumstances of the case become
material. it is significant to numbere that immediately after
making the above observation the companyrt hastened to make it
clear as if in answer to a possible argument which might be
advanced on behalf of the revenue on the basis of that
observation that the yield method is the generally
applicable cable method while the break up method is the one
resorted to in exceptional circumstances or where the
company is ripe for liquidation. here in the present case mafatlal gagalbhai company pvt. limited was a private limited companypany which was a going companycern
and it was neither ripe for liquidation number were there any
exceptional circumstances which should attract the
applicability of the break-up method. the profit earning
method was therefore the only method which
could properly be applied for arriving at the valuation of
the shares ill the companypany and the tribunal was right in
accepting the figures of valuation in the report of m s. c.

choksy company based on the application of the profit
earning method. the answer to the question of law relating
to the method to be adopted for valuation of shares in the
company was clearly companycluded by the decision in mahadeo
jalans case and the high companyrt was therefore justified in
refusing to call for a reference on this question. it is true that in the present appeals the question of
valuation arises number only under the wealth tax act but also
under the gift tax act but since the provision for
determining the value of an asset is the same in section 6
sub-section  1  of the gift tax act as it is in section 7
sub-section  1  of the wealth tax act the principles of
valuation laid down ill mahadeo jalans case must apply
equally i relation to valuation of shares to be made for the
purpose of the gift tax act. it was however companytended on
behalf of the revenue that there is a vital difference
between section sub-section  t  of the gift tax act and
section 7 sub-section  1  of the wealth tax act in as much
as section s sub-section   1   of the gift tax act is
subject inter alia to the provision of sub-section  3  of
that section and this latter sub-section provides that where
the value of any property cannumber be estimated under sub-
section   1   because it is number saleable in the open market
the value shall be determined in the prescribe manner and
rule 10 sub-rule  2  of the gift tax rules prescribes the
manner of valuation of shares in a private limited companypany
where the articles of association companytain restrictive
provision as to the alienation of shares by providing that
in such a case the value of the shares if number
ascertainable by reference to the value of the total assets
of the companypany shall be estimated to be what they would
fetch if on the date of gift they companyld be sold in the open
market on the terms of the purchaser being entitled to be
registered as holder subject to the articles but the fact
that a special buyer would for his own special reasons give
a higher price that the price in the open market shall be
disregarded. the argument of the revenue was that mafatlal gagalbhai
pvt limitedwas a private limited companypany and its articles of
association admittedly companytained restrictive provision as to
the alienation of shares and therefore rule 10 sub-rule
 2  was applicable and according to that sub-rule the value
of the shares was required to be 1 ascertained by reference
to the value of the total assets of the companypany and it was
only if the value was number so ascertainable that
it companyld be determined in any other manner. the break up
method was thus according to this sub-rule the primary
method to be applied for arriving at the valuation of the
shares and in the circumstances the tribunal was wrong ill
determining the value of the shares by applying the profit
earning method atleast so far as the valuation under the
gift ta act was companycerned. number it is difficult to see how the question whether the
valuation of the shares should have been made on the basis
of the break-up method by reason of rule 10 sub-rule  2  of
the gift tax rules can be required to be referred by the
tribunal to the high companyrt. it is well settled that no
question can be referred to the high companyrt unless it arises
out of the order of the tribunal and as pointed out by this
court in companymissioner of income-tax v. scindia steam
navigation company limited a question of law can be said to arise
out of the order of the tribunal only if it is dealt with by
the tribunal or is raised before though number decided by the
tribunal and a question of law number raised before the
tribunal and number dealt with by it in its order cannumber be
said to arise out of its order even if on the facts of the
case stated in the order the question fairly arises.


civil appellate jurisdiction civil appeal number 1277
of 1979.
from the judgment and decree dated 4.8.1977 of the
kerala high companyrt in a. s. number 640 of 1971.

viswanath lyer f.s. nariman k. parasaran

r. nambiar p. k. pillai s. balakrishnan s.
ganesh joy joseph mrs. a.k. verma s. sukumaran
for j.b.d. company baby krishnan and v.j
francis for the appearing parties. the judgment of the companyrt was delivered by
kuldip singh j. the dispute before us is
regarding the ownership rights over the timber clear-
felled from about 150 acres of jungle-area in kallar
valley and the right to transport the timber so
felled from the said area. the kallar valley area forms part of the tract of
land originally knumbern as kanan devan anchanatu mala
in the erstwhile travancore territory of kerala
state. this area is generally called the kanan devan
hills companycession  hereinafter called the
concession area  the poonjar rajs held free-hold
proprietary rights in the companycession area. originally
the raja was exercising sovereign rights but later on
he came under the suzerainty of travancore state. the poonjar rajsa by a deed dated july 11 1877
 hereinafter called first companycession  companyveyed the
concession area with all the hills and forests therein to
one j.d. munro for cash companysideration of rs.5000 and a
deferred perpetual annual payment of rs-3000 from 1884
onwards. thereafter on july 26 1879 a second document was
executed between the same parties  hereinafter called
second companycession . the terms of the first companycession
were reiterated enuring to munro his heirs successors and
assigns absolute right for ever to make all kinds of
cultivations and improvements on the companycession area. the grant of rights to munro by the first companycession
was ratified by the travancore government by a deed of
ratification dated numberember 28 1878. munro assigned the
concession area to the numberth travancore land planting and
agricultural society limited by a deed dated december 8
1879. thereafter an agreement was executed between the
travancore government and the society on august 2 1886.
by virtue of the agreement dated september 18 1889 between
the poonjar raja and the travancore government and
the proclamation of the maharaja of travancore dated
august 24 1899 the territory companyprising the kanan
devan hills including the companycession area was
declared part of the travancore state. there were
various transfers in respect of the companycession area but
finally by a deed dated july 16 1900 the companycession
area came to be vested in the kanan devan hills
produce companypany limited  hereinafter calledthe companypany . in and around may 1963 the companypany clear-felled
about 150 acres in the companycession area for cultivation. the companypany applied to the state government for grant of
free passes to transport the timber from the
concession area. the state government by an order
dated numberember 25 1966 informed the companypany that it
could number take away timber outside the limits of the
concession area except in accordance with the rules of
the forest department and on payment of levy in the
shape of kuttikanam. according to the government in
terms of the deeds of companyveyance ratification the
company was liable to pay kuttikanam in respect of the
timber taken out of the companycession area. the companypany filed a suit in the year 1968 in the companyrt
of subordinate judge kottayam against the state of kerala
and its officers. in the suit the companypany prayed for the
following reliefs

a declaration that the plaintiff-company has
full and unqualified ownership and title over
and right of removal of the said timber from the
concession area

declaration that the state has numberright to
claim seigniorage kuttikanam or any other payment
in respect of the said timber

a mandatory injunction directing the
defendants to grant the necessary free passes for
the free transit of the timber outside the
concession area

prohibitory injunction restraining the
defendants from taking any steps under the order
dated 25.11.1966.
the state government resisted the suit and companytroverted
the interpretation placed by the companypany on the deeds of
conveyance ratification. according to the state the
company was only a lessee of the companycession area and in
terms of the deeds of companyveyance ratification the state
government had the absolute right over the trees and
timber in the companycession area. the companypany only acquired
the right to use and remove the timber subject to the
restrictions imposed in the said documents. it was further
contended by the state government that the title and
ownership in the trees and timber in the companycession area
always remained with the state government and the companypany
could only take the timber outside the limits of the
concession area in accordance with the rules framed
by the state government and on payment of
kuttikanam. the trial companyrt in a detailed and well reasoned
judgment dismissed the suit of the companypany. the trial
court on the interpretation of first companycession  exhibit
p- 1  second companycession  exhibit p-2  deed of
ratification  exhibit p-62  and the government
agreement with the society dated august 2 1866
 exhibit p-64  came to the companyclusion that the companypany
did number acquire absolute proprietary rights over the
concession area or the trees and timber in the said
area. it was held that the poonjar chief had only
conveyed heritable and transferable possessory rights
over the companycession area to the grantee. it was also
held that absolute rights over the trees and timber in
the companycession area did number pass to the grantee and it had
only the right to use and remove timber subject to
the restrictions imposed in the deeds of
conveyance ratification. the companyrt further held that the
relevant rules framed under the travancore forest act
1952 for levy of kuttikanam were applicable to the
timber transported from the companycession area. the
contention of the companypany that it was entitled to free
passes for transportation of timber outside the
concession area under the transit rules was rejected. the suit of the companypany was thus dismissed with
costs. the companypany went up in appeal before the high
court. it was companytended that the trial companyrt
misinterpreted the documents p- 1 p-2 p-62 and p-64. it
was companytended that the poonjar raja had companyveyed absolute
possession to the grantee to be enjoyed perpetually with
heritable and transferable right and it ought to have been
held that the natural companysequence of such a companyveyance was
to grant the companypany absolute title to the trees standing on
the area so companyveyed. it was argued before the high companyrt
that the state government had numberright over the trees and
the timber within the companycession area. before adverting to the various companytentions raised by
the parties before it the high companyrt indicated the approach
it adopted to the questions involved in the case in the
following words
for resolving the real companytroversy in the case
we do number think there should be an enquiry into
the question whether the plaintiff-company is the
absolute owner of the companycession area as alleged
by them or the companypany is only a lessee as
contended by the defendants. number do we think any
decision is necessary here as to whether at the
time the agreement and proclamation of 1899 came
into existence the poonjar chief had vested in
him any proprietary rights over the companycession
area which he companyld pass to the government. we
also do number think we should make a general enquiry
as to the nature and extent of the rights companyveyed
and secured by the first poonjar companycession of
11.7.1877 and second poonjar companycession of
26.7.1879  exs. p 1 and p2 . we can well proceed
in the matter on the basis as stated by the companyrt
below that absolute rights over the companycession
area had number been companyveyed under exs. p-1 and p-
2 that by virtue of the transactions the
plaintiff had only absolute possession with
heritable and transferable interest and the right
to enjoy the land subject to the terms and
conditions declared and defined in the ratifica-
tion deed and agreement of modification namely
exs. p-62 and p-64. the question is what is the
plaintiffs right over the timber and tree-growth
in the area on the basis of the grant under exs. p- 1 and p-2 wherein it gets wide rights in
regard to the jungles and forest in the companycession
area-unqualified rights to clear the land and
improve the source. it is numberdoubt true that the
rights which the plaintiff has acquired as per the
grant of the poonjar raja are subject to the terms
and companyditions imposed by the sovereign power of
the maharaja under ex. p-62 and p-64. in short
the question for a decision in the appeal will
revolve round the interpretation of the relevant
clauses in these documents. the high companyrt then companysidered the companytents of the
documents p-62 and p-64 and came to the companyclusion that the
company had full rights over the timber clear-felled from
the companycession area and it had right of removal of the
timber with the necessary free passes issued under the
timber transit rules. it was further held that the state of
kerala had numberright or claim for the seigniorage or
kuttikanam or any other payment in respect of the said
timber. the high companyrt allowed the appeal of the companypany
and set aside the judgment and decree of the trial companyrt. this appeal via special leave petition is against the
judgment of the high companyrt. the high companyrt proceeded on the basis that absolute
rights over the companycession area had number been companyveyed
under the documents of companyveyance ratification and the
right to enjoy the land was subject to the terms and
conditions declared in the ratification deed p-62 and
the agreement of modification p-64. we agree with the
approach of the high companyrt. the question therefore
is what are the companypanys rights over the timber and
the tree-growth in the companycession area. this takes
us to clause 5 of p-62 and clause 7 of p-64 which are
relevant. clause fifth of the ratification dated numberember 28
1878 exhibit p-62 is as under
fifth the grantee can appropriate to his
own use within the limits of the grant all
timber except the following and such as may
hereafter be reserved viz. teak companyl-teak
black-wood aboney karinthali sandalwood. should he carry any timber without the limits
of the grant it will be subject to the
payment of kuttikanam or customs duty or
both as the case may be in the same way as
timber ordinarily felled. in the case of the
excepted timber the grantee is required to pay
seigniorage according to the undermentioned
scale the grantee is bound to deliver
to the poonjar chief to enable him to make over
to the sirkar all ivory cardamoms and other
royalties produced in the land and all
captured elephants and he will be paid by the
said chief according to agreement with him
the regulated price for the articles of produce
and the regulated reward for the elephants. clause 7 of the agreement dated august 2 1886
exhibit p-64 is as under

the society its successors and assigns
may use and appropriate to its own use within
the limits of the said tract of land all
timber except the following and such as may
hereafter be reserved viz. teak companyk-teak
black-wood aboney karinthali and sandalwood. but such society its successors and assigns
shall number fell any timber beyond what is
necessary for clearing the ground for
cultivation and for building furniture and
machinery within the limits of the grant. no
unworked timber or articles manufactured
therefrom shall be carried outside the limits
of the grant except in companyformity with the rules
of the forest and
customs department for the time being in force. in
the case of the excepted timber the society for
itself its successors and assigns agrees to pay
seigniorage according to the undermentioned
scale the society for itself its
successors and assigns agrees to deliver to the
said poonjar raja or chief to enable him to make
over the same to the government of travancore all
ivory and cardamoms and other royalties
captured elephants
mr. parasaran learned companynsel appearing for the
respondent-company companytended that in p-62 it was provided
that the grantee companyld number carry timber beyond the limits of
the grant without payment of kuttikanam but by the time the
agreement p-64 was executed in the year 1886 kuttikanam had
been abolished and as such there was numberprovision for the
payment of kuttikanam in the document p-64. clause 7 of p-64 reproduced above makes it clear that
the respondent-company may use and appropriate to its own
use within the limits of the companycession area all timber
except to the extent mentioned therein. it was further
provided that society its successors and assigns
shall number fell any timber beyond what is necessary for
clearing the ground for cultivation and for building
furniture and machinery within the limits of the grant. no
unworked timber or articles manufactured therefrom shall be
carried outside the limits of the grant except in companyformity
with the rules of the forest and customs department for the
time being in force. it is thus clear that the companypany has
numberright under the said clause to carry the unworked timber
beyond the limits of the grant. the companypany companyld number fell
timber beyond what was necessary for clearing the ground for
cultivation and for building furniture and machinery within
the limits of the grant. clause 7 clearly indicates that the
grantee has numberabsolute right of ownership over the tree-
growth and the timber within the companycession area. the
ownership remains with the government and the grantee has
been given the right to fell the trees for clearing the
ground for cultivation and to use the timber for specified
purposes within the limits of the grant. an identical
clause in anumberher grant entered into by the travancore
government came for companysideration before a full bench of the
kerala high companyrt in george a leslie v. state of kerala
1969 k. l.t. 378. k. k. mathew j.  as the learned judge
then was  interpreted the clause as under
we think that if title to the reserved trees
passed to the grantees a provision of this nature
would have been
quite unnecessary. there was numberpurpose in
stating that the grantees will be free to
appropriate the reserved trees for companysumption
within the limits of the grant if title to
the trees passed to the grantees the provision is
a clear indication that the grantees were
allowed to cut and appropriate the reserved
trees for companysumption within the limits of the
grant as a matter of companycession. we agree with the interpretation given to the
clause by mathew j. and hold that the respondent-
company did number acquire absolute proprietary rights
over the companycession area or the trees and the
timber therein. the companypany acquired the right to fell
the trees and use the timber subject to the restrictions
imposed in clause 7 of p-64. since the respondent-
company has numberright to remove the timber
beyond the limits of the companycession area the state
government was justified in refusing to permit free
transportation of timber from the said area. we do number agree with mr. parasaran that
kuttikanam having been abolished in the year 1884
the respondent-company was number liable to pay
kuttikanam while transporting the timber from within
the companycession area. in leslie v. state of kerala
 supra  the term kuttikanam was explained as under
in the malayalam and english dictionary by
rev. h. gundert d. ph. page 278 kuttikanam
is defined as meaning the price of timber
fee cliambable by the owner for every tree
cut down by the renter. in the manual
of malabar law by kadaloor ramachandra
lyer chapter vii page 44 it is stated
kuttikanam is a mortgage of forests by
which the landlord assigns on mortgage a
tract of forest land receiving a
stipulated fee for every trees felled by
the mortgagee the entire number of the
trees to be cut down and the period
within which they are to be felled
being expressly fixed in the karar entered
into between the parties
in the glossary attached to the land revenue
manual  1916  vol. iv at page 883 the word
kutti kanam is said to mean a fee paid to the
sirkar for felling trees other than royal trees
and tax-paying trees. in the
glossary of administrative terms english-
malayalam by the official language companymittee at
page 302 seigniorage is defined as
meaning
we do number think that kuttikanam is either a
fee or tax. a tax or fee is levied in the
exercise of sovereign power. we think that in the
context kuttikanam means the governments share
of the value of the reserved trees. it was further held by mathew j. that
kuttikanam being the governments share of the value
of the trees owned by the government it has the
power to fix the value of the trees. we agree with
the reasoning and companyclusions reached by mathew j.
since the ownership companyer the tree-growth and timber
in companycession area vests with the government it has a
right to impose kuttikanam on the removal of the
trees from within the companycession area. we may examine the justification for levying
kuttikanam from anumberher angle. clause 7 of p-64
states that numberunworked timber or articles
manufactured therefrom shall be carried outside the
limits of the grant except in companyformity with the rules
of the forest department for the time being in force. the government of kerala in exercise of its rule
making power under section 93 of the travancore-
cochin forest act 1951 framed rules regulating the
levy of kuttikanam on trees standing on government
land by a numberification dated july 9 1958. the said
rules are reproduced hereinafter. travancore-cochin forest act 1951  111 of 1952
rules regulating the levy of kuttikanam on trees
in government lands.  section 93 2  d  dd  and  e
numberification number 14824/58-3/agri. f. b  3 dated
9th july 1958 published in the gazette dated 15th
july 1958 part 1 page 2189.
in exercise of the powers companyferred by sub-
section  2  d  dd  and  e  of section 93 of the
travancore-cochin forest act 1951  act ill of
1952  the government of kerala hereby make the
following rules regulating the levy of kuttikanam
on trees standing on government lands namely

all trees standing on land temporarily or
permanently assigned the right of government
over which has been expressly reserved in
the deed of grant or assignment of such
land shall be the absolute property of
government. it shall number be lawful to fell lop cut
or maim or otherwise maltreat any tree which
is the property of government without
proper sanction in writing granted by an
officer of the forest department number below the
rank of an assistant companyservator
provided that in cases where the holder of
the land is allowed under the title deed to lop
or fell any such tree such lopping or
felling may be done by such holder in the
manner and subject to such companyditions and
payment as may be specified in the title deed in
that behalf. any lopping or felling of such
trees otherwise than in accordance with the
conditions and limitation specified in the
deed of grant shall be unlawful. government may in the absence of any
provision to the companytrary in the title deed
sanction the sale of timber which is the
property of government to the holder of the
land on which such timber is standing on
payment of kuttikanam or seigniorage or such
other rates as may be specified by government in
each individual case. in cases where the title
deed specified the rate at which the timber will
be sold to the holder of the land such rates only
will be levied. explanation kuttikanam means the seigniorage
rate that may be in force in the forest
department from time to time and numberified by
government. the companylector of each district shall forward
to the chief companyservator of forests a statement
showing the full details of the trees
standing on such lands at the disposal of
government as may hereafter be granted for
permanent cultivation under the land assignment
act and the rules framed thereunder. on receipt
of such statement the chief companyservator of
forests will take appropriate action for the
disposal of such tree growth within the period
allowed under section 99 of the forest act. the travancore-cochin forest act 1951 was repealed by
the kerala forest act 1961 but section 85 3  of the said
act saves the rules framed under the repealed act. it is
thus obvious that the rules reproduced above were holding
the field at the relevant time. the trial judge primarily
relied on these rules for holding that the government was
justified in demanding kuttikanam from the respondent-
company. the high companyrt however did number take into
consideration these rules while interpreting clause 7 of
exhibit p-64. we agree with the findings of the trial companyrt
to the effect that the above quoted rules read with clause 7
of exhibit p-64 empowers the state government to levy and
demand kuttikanam from the respondent companypany in respect of
timber taken out of the limits of the companycession area. mr. parasaran invited our attention to a letter dated
may 21 1932  exhibit p-4  from chief secretary to
government to the general manager of the respondent-company. the letter reads as under
with reference to your letter dated the 25th
january 1928 regarding the payment of seigniorage
on reserved trees felled from the k.d.h.p-
companys companycession area i have the honumberr to
inform you that government accept your view that
numberseigniorage is due from the companypany on trees
other than the royal trees specifically mentioned
in clause 7 of the agreement and sanction
accordingly. mr. parasan companytended that the state government
interpreted clause 7 of p-64 to mean that numberseigniorage
 kuttikanam  was due from the companypany on trees other than
the royal trees specified in the said clause. he argued
that in the face of the government decision in the above
letter the government companyld number demand kuttikanam from the
respondent-company in respect of the number-royal trees removed
from within the limits of the companycession area. we do number
agree with the companytention of the learned companynsel. the
letter re-produced above refers to the letter dated january
25 1928  exhibit p-3  written by the general manager of the
company to the government. the letter p--l states as
under
the question arose through the forest department
claiming seigniorage on certain species of timber
used by this companypany within the companycession area
for building purposes and which have been
reserved under the forest regulation. the letter also states as under
 i think it advisable that the whole
question of timber rights in the companycession
should be companysidered and settled if possible. it is numberdoubt companyrect that while focusing the
controversy in respect of the timber used by the
company within the companycession area the general manager
dealt with the larger question of timber rights in the
concession area but reading the two letters p-3 and
p-4 together the only companyclusion which companyld be reached is
that the letter p-4 was with respect to the use of timber
by the companypany within the companycession area. the letter
p-4 cannumber be read to mean that numberkuttikanam was
leviable on the timber removed by the respondent-
company outside the companycession area. in any case the
wording of clause 7 of p-64 is clear and unambiguous.


civil appellate jurisdiction civil appeal number 205 of 1953.
appeal from the judgment and order dated the 24th february
1953 of the high companyrt of judicature at calcutta in appeal
from original order number 19 of 1952 arising out of the order
dated the 23rd day of august 1951 of the high companyrt of
calcutta in its ordinary original civil jurisdiction matter
number 157 of 1951.

p. khaitan  s. n. mukherjea and rajinder narain with
him  for the appellant. c. setalvad attorney- general for india  a. n. sen

s. sawhney and s. p. varma with him  for the
respondents. 1954. numberember 1. the judgment of the companyrt was delivered
by
mukherjea j.-this appeal is directed against a judgment of
an appellate bench of the calcutta high companyrt dated the
24th february 1953 reversing on appeal the judgment and
order of a single judge sitting on the original side of that
court passed on an application under section 34 of the
arbitration act. the material facts are number in companytroversy
and may be shortly stated as follows
on the 7th of july 1950 the respondent moran and companypany
limited passed two bought numberes to the appellant companypany
couched in identical terms under which the appellant
purchased 1200000 yards of hessian cloth 600000 yards
under each companytract on certain terms and companyditions stated
therein. the delivery was to be made every month from
january 1951 at the rate of 100000 yards per month under
each of these numberes and payments were to be made in cash on
delivery each delivery being treated as a separate and
distinct companytract. the bought numberes companymenced thus
dear sirs
we have this day bought by your order and on your account
from our principals. the particulars of the goods the price the time of
delivery and other terms of the companytract are then set out
and amongst the terms is an arbitration clause worded as
follows
all matters questions disputes differences and or
claims arising out of and or companycerning and or in companynection
with and or in companysequence of or relating to this companytract
whether or number the obligations of either or both parties
under this companytract be subsisting at the time of such
dispute and whether or number this companytract has been
terminated or purported to be terminated or companypleted shall
be referred to the arbitration of the bengal chamber of
commerce -under the rules of its tribunal of arbitration for
the time being in force and according to such rules the
arbitration shall be companyducted. the numberes were signed by the respondent moran and companypany
describing themselves as brokers. it is admitted that the goods companyered by the bought numberes
were delivered to the appellant in all the months from
january to june 1951 with the exception of the goods due
to be delivered for the month of march 1951. the appellant
required from the respondent delivery of goods in respect of
the month of march but the latter informed -the appellant
by a letter dated the 27th march 1951 that its principals
disowned a liability in this respect as there was default on
the part of the appellant in number giving shipping
instructions for the said goods within the time mentioned in
the companytracts. the appellant denied any default on its part
and did number also accept the position that the respondent had
any principal and on the 27th of april 1951 it sent its
bills to the respondent claiming rs. 113042-3-0 as damages
for number-delivery of the
goods. as the respondent did number companyply with this demand
the appellant companytemplated referring the matter in dispute
to the arbitration of the bengal chamber of companymerce as
provided in the companytracts and while it was preparing to take
steps in that direction the respondent on the 11th of
june 1951 filed a suit against the appellant in the
original side of the calcutta high companyrt  being suit number
2516 of 1951  and it is in respect of this suit that the
application under section 34 of the arbitration act has been
made. it was alleged in the plaint that the plaintiff acted
merely as broker and in that capacity brought about the two
contracts of sale and purchase evidenced by the two bought
numberes mentioned above that the real seller was a firm knumbern
as gowarchand danchand and that the plaintiff number being a
party to the companytract companyld number incur any liability under
its terms. there were prayers in the plaint for a
declaration that the plaint. off was number a party to the said
contracts and that it had numberliability under the same. there was a further prayer for an injunction restraining the
respondent from claiming any damages in respect of the said
contracts
the writ of summons was served on the appellant on the 23rd
of june 1951. on the 19th july 1951 it filed an
application under section 34 of the arbitration act praying
that the proceedings in the suit may be stayed in order that
the matter in dispute between the parties may be dealt with
under the arbitration clause companytained in the companytracts. the application was heard by das gupta j. who allowed the
prayer of the applicant and stayed further proceedings in
the suit. in the opinion of the learned judge the dispute
in this case was number whether there was any companytract entered
into by and between the appellant and the respondent but
whether the respondent who admittedly passed the two bought
numberes to the appellant companyld be made liable under the
contract by reason of the fact that it described itself as
broker. the answer to this question depended according to
the learned judge upon the interpretation of the companytract
itself and the dispute arising as. it did out of or
concerning or relating to the
contracts would companye within the purview of the arbitration
clause. against this judgment the respondent took an appeal to the
appellate division of the high companyrt and the appeal was
heard by a bench companysisting of chakravartti c.j. and sarkar

by two separate judgments which companycurred in the result
the chief justice and the other learned judge allowed the
appeal and vacated the order for stay. it is against this
judgment that the appellant has companye to this companyrt on the
strength of a certificate under article 133 1  a  of the
constitution. the short point for our companysideration is
whether on the facts of this case the appellant is entitled
to an order under section 34 of the arbitration act staying
the proceedings of the suit companymenced by the respondent. section 34 of the arbitration act is in these terms
where any party to an arbitration agreement or any person
claiming under him companymences any legal proceedings against
any other party to the agreement or any person claiming
under him in respect of any matter agreed to be referred
any party to such legal proceedings may at any time before
filing a written statement or taking any other steps in the
proceedings apply to the judicial authority before which
the proceedings are pending to stay the proceedings and if
satisfied that there is numbersufficient reason why the matter
should number be referred in accordance with the arbitration
agreement and that the applicant was at the time when the
proceedings were companymenced and still remains ready and
willing to do all things necessary to the proper companyduct of
the arbitration such authority may make an order staying
the proceedings. thus in order that a stay may be granted under this section
it is necessary that the following companyditions should be
fulfilled-

the proceeding must have been companymenced by a party to an
arbitration agreement against any other party to the
agreement
 2 the legal proceeding which is sought to be. stayed must
be in respect of a matter agreed to be referred
 3 the applicant for stay must be a party to the legal
proceeding and he must have taken numberstep in the proceeding
after appearance. it is also necessary that he should
satisfy the companyrt number only that he is but also was at the
commencement of the proceedings ready and willing to do
everything necessary for the proper companyduct of the
arbitration and
 4 the companyrt must be satisfied that there is numbersufficient
reason why the matter should number be referred to an
arbitration in accordance with the arbitration agreement. the third companydition can be taken to have been fulfilled on
the facts of the present case and the fourth is one which
is exclusively for the determination of the companyrt. the
controversy between the parties centres round the other two
conditions namely companyditions  1  and  2  and unless the
applicant for stay succeeds in establishing that the
respondent is a party to an arbitration agreement and that
the subject-matter of dispute in the suit is a matter companying
within the scope of such agreement it cannumber possibly ask
the companyrt to order a stay of the proceedings under section
34 of the arbitration act. the learned judges of the
appellate bench of the high companyrt have taken the view that
the only matter in dispute between the parties to the suit
is whether the plaintiff was a party to the companytract. it
was definitely alleged by the plaintiff that the companytract
was number between it and the appellant but was one between the
appellant and a third party and since the arbitration
agreement is companytained in the companytract it is an agreement
between those parties only which companyld number bind or affect
the plaintiff in any way. the dispute it is said which is
the subject-matter of the suit does number arise under the
contract and does number relate to it it is outside the
contract altogether and does number companye within the scope of
the arbitration agreement. the decision in the appeal
therefore rests entirely on the finding of the learned
judges that the matter in dispute between the parties to the
suit does number companye within the ambit of the arbitration
clause. in view of this decision the learned judges did number
consider it necessary to go into the first point as to
whether in fact
there was a binding arbitration agreement between the
parties to the suit. the learned chief justice numberdoubt did
in a manner companysider that point also but he refrained from
pronumberncing any decision upon it being of opinion that a
decision on this question which was the only issue in the
suit itself might prejudice the parties and create a bar of
res judicata against one or the other. we think that on the facts of this case it was necessary for
the learned judges of the appellate bench to decide the
question as to whether or number the plaintiff in the suit
which the applicant wants to stay was a party to the
arbitration agreement. this would have a material bearing
on the decision of the other question upon which the learned
judges rested their judgments. the first and essential pre-requisite to making an order of
stay under section 34 of the arbitration act is that there
is a binding arbitration agreement between the parties to
the suit which is sought to be stayed. the question whether
the dispute in the suit falls within the arbitration clause
really pre-supposes that there is such agreement and
involves companysideration of two matters viz.  1  what is the
dispute in the suit and  2  what disputes the arbitration
clause companyers? 1 . the companytention raised by the plaintiff
in the present suit is that the companytract was really between
the appellant and anumberher party and number between it and the
appellant and companysequently it was number bound by the companytract
and companyld number be made liable for any damages in terms
thereof. in substance therefore the companytroversy between the
parties in the suit is whether the plaintiff did incur any
liability in terms of the companytracts evidenced by the two
bought numberes to which it was a signatory numbermatter in
whatever capacity. the question whether the plaintiff was a
party to the agreement at all is undoubtedly one which
cannumber go before the arbitrators and with that question they
cannumber possibly deal. but as lord porter pointed out in
heyman v. darwins  2  this does number mean that in every
instance

vide per viscount simon in heyman v. darwins 1942 a
c. 356 at 360.  2  1942 a.c. 356 393.
in which it is claimed that the arbitrator has numberjuris-
diction the companyrt will refuse to stay an action. if this
were the case such a claim would always defeat an agreement
to submit disputes to arbitration at any rate until the
question of jurisdiction had been decided. the companyrt to
which an application for stay is made is put in possession
of the facts and arguments and must in such a case make up
its mind whether the arbitrator has jurisdiction or number as
best it can on the evidence before it. indeed the
application for stay gives an opportunity for putting these
and other companysiderations before the companyrt that it may
determine whether the action shall be stayed or number. section 34 of the arbitration act as is well knumbern is a
virtual reproduction of section 4 of the english arbitration
act of 1889. the observations quoted above were approved of
by mr. justice s. r. das in the case of khusiram v. hanutmal
 1  and it was held by the learned judge that where on an
application made under section 34 of the arbitration act for
stay of a suit an issue is raised as to the formation
existence or validity of the company. tract companytaining the
arbitration clause the companyrt is number bound to refuse a stay
but may in its discretion on the application for stay
decide the issue as to the existence or validity of the
arbitration agreement even though it may involve
incidentally a decision as to the validity or existence of
the parent companytract. we are in entire agreement with the view enunciated above. as we have said already it is incumbent upon the companyrt when
invited to stay a suit under section 34 of the arbitration
act to decide first of all whether there is a binding
agreement for arbitration between the parties to the suit. so far as the present case is companycerned if it is held that
the arbitration agreement and the companytract companytaining it
were between the parties to the suit the dispute in the
present suit would be one relating to the rights and
liabilities of the parties on the basis of the companytract
itself and would companye within the purview of the arbitration
clause worded as it is in the widest of terms in accordance
with the principle enunciated by this companyrt in a. m. nair
and
 1   1948  53 c.w.n. 505 at 518.
company v. gordhandass  1 . if on the other hand it is held
that the plaintiff was number a party to the agreement the
application for stay must necessarily be dismissed. the appellate judges of the high companyrt in our opinion held
rightly that the decision in a. m. mair and companypany v.
gordhandass  1  was number in any sense companyclusive in the
present case on the question of the dispute in the suit
being included in the arbitration agreement. the report
shows that the dispute in that case was whether the
appellants had made the companytract in their own right as
principals or on behalf of the bengal jute mill companypany as
agents of the latter. the decision -of this question was
held to turn upon a true companystruction of the companytract and
consequently it was a dispute under or arising out of or
concerning the companytract. the judgment proceeds on the
footing that there was in fact a companytract between the
parties and the only dispute was in which character they
were parties to it the respondents companytending that the
appellants were number bound as principals while the latter
said that they were. mr. justice fazl ali in delivering the
judgment pointed out that the error into which the learned
judges of the appellate bench of the high companyrt appeared to
have fallen was their regarding the dispute raised by the
respondent in respect of the position of the appellants
under the companytract as having the same companysequence as a
dispute as to the companytract never having been entered into. in this case it is certainly number admitted that the
respondent was a party to the companytract. in fact that is the
subject-matter of companytroversy in the suit itself. but as
has been said already the question having been raised  in
this application under section 34 of the arbitration act
the companyrt has undoubted jurisdiction to decide it for the
purpose of finding as to whether or number there is a binding
arbitration agreement between the parties to the suit. it
has been said by chakravartti c.j. and in our opinion
rightly that if the person whose companycern with the agreement
is in question is a signatory tothe companytract and formally a
 1  1950 s.c.r. 792.
contracting party that will be sufficient to enable the
court to hold for purposes of section 34 that he is a party
to the agreement. it was the companytention of the respondent
in the companyrt below that this test was number fulfilled in the
present case. the point has been canvassed before us also
by mr. sen and it has been argued on the authority of
several decided cases that in cases of this description the
bought numbere is a mere intimation to the buyer that the
orders of the latter have been carried out and purchases
have been made from other persons and number from them. the
writer does number thereby become a party to the companytract of
purchase and sale even as an agent. he remains a mere
broker or intermediary and the provision of section 230 2
of the companytract act cannumber be invoked against him. mr.
khaitan on the other hand argues that the english law being
quite different from the indian law regarding the liability
of an agent companytracting on behalf of an undisclosed
principal the english authorities are numberguide to a
solution of the problem. it is said that the case of
patiram banerjee v. kanknarrah company limited 1  upon which the
respondent relies was wrongly decided being based upon
english authorities which have numberapplication to india. the
respondent here it is pointed out signed an elaborate
document setting out in full every particular of the
contract entered into and it is impossible to say that he
was number an agent executing a companytract on behalf of anumberher
whose identity he did number disclose but was a mere
intermediary companyveying an information to the buyer. in our
opinion the point is number free from doubt and requires
careful companysideration and as it was number decided by the
learned judges of the high companyrt and we have number the
advantage of having their views upon it the proper companyrse
for us to follow would be to send the case back for a
hearing of and decision on this point. we therefore allow
the appeal and set aside the judgments of both the companyrts
below. the matter will go back to the appellate bench of
the calcutta high companyrt which will decide as an issue in the
proceeding under section 34 of the arbitration act the
question whether the respondent was or was number a party
 1   1915  i.l.r. 42 cal. i050. to the arbitration agreement.


criminal appellate. jurisdiction criminal appeal number 135
of 1968.
appeal by special leave from the judgment and order dated
may 1 1968 of the madhya praesh high companyrt gwalior
bench .in criminal appeal number 143 of 1966.

l. kohli and j. c. talwar for the appellant. n. shroff for the respondent. the judgment of the companyrt was delivered by
sikri j. this appeal by special leave is directed a aginst
the judgment of the high companyrt of madhya pradesh gwalior
bench allowing the appeal of the state and companyvicting the
appellant for having companymitted an offence punishable under
s. 435 indian penal companye and sentencing him to undergo
imprisonment for one year. the only point involved in the
present appeal is whether the appellant was a person of
unsound mind within s. 84 of the indian penal companye at the
time of the incident. the magistrate held that he was number
liable to punishment as he was insane at that time and did
number knumber that he was doing anything wrong or anything
contrary to law. the high companyrt on the other hand came to
the companyclusion that the case of the appellant did number fall
within the exception created by s. 84 i.p.c. it is number well-settled that the crucial point of time at
which unsoundness of mind should be established is the time
when the .crime is actually companymitted and the burden of
proving this lies of on the accused.  see state of madhya
pradesh v. ahmadullah   1 . in d. c. thakker v. state of
gujarat 2  it was laid down that there is a rebuttable presu
mption that the accused was number insane when he
committed the crime in the sense laid down by s. 84 of the
indian penal companye the accused may rebut it by placing
before the companyrt all the relevant evidence al documentary
or circumstantial but the burden of proof upon him is no
higher than that which rests upon a party to civil pro-
cedings. it was further observed
the crucial point of time for ascertaining
the state of mind of the accused is the time
when the offence was circumstances which
preceded attended and followed the mind as to
be entitled to the benefit of s. 84 of the
indian penal companye can only be established from
the circumstances which preceded attended and
followed the crime. the learned companynsel companytends that if regard is had to the
circumstances which preceded attended and followed the
crime it would be clear that the accused is entitled to the
benefit of s. 84 of the indian penal companye.  1  1961 3s.c.r.583.  2  1964 7s.c.r.361. the prosecution case is that on january 22 1965 the appel-
lant set fire to the grass lying in the khalyan of nemichand
at the time of the setting of the sun. he was caught at
the spot while setting fire. on being asked why he did it
the accused said i burnt it and do whatever you want. the
accused was arrested on january 23 1965 and he remained in
police custody till february 2 1965 when it was found
that the accused needed medical examination and accordingly
the district magistrate ordered that he be medically
examined. numberexplanation has been given why he was kept in
police custody all that time. there is numberevidence either
to indicate as to his companydition from the time of his arrest
to the time when his case was referred for medical
examination. these facts were within the knumberledge of the
police and we should have expected that the prosecution
would lead evidence regarding his companydition during this
time. further the police made it impossible for the
appellant to prove his mental companydition at the time of the
incident by keeping him in their custody from january 23 to
february 2 1965 number having him examined and number sending
him to judicial custody earlier where he would have been
examined by the jail doctor. on february 20 1965 v. s. vaidya assistant surgeon. civil hospital vidisha reported to the jailor sub jail
vidisha as follows
subject in ref. to your letter number 295 dated
8-2-1965. sir
ratanlal prisoner was kept under observation
as indoor patient during this time. he was
keeping silent he never used to reply any
question so in my opinion he should be refd. to some specialist for further investigation
and needful. on february 22 1965 y. d. kamran civil
surgeon vidisha. reported as follows
shri ratanlal undertrial was examined by
me. he does number appear to be deaf or dumb but
is mentally retarded. he should be referred
to stiperintendent mental hospital gwalior
for expert opinion. on march 29 1965 dr. b. shah. psychiatrist
and superintendentmental hospital gwalior
reported as follows
this is to certify that shri ratanlal s o
kishanlal who has been kept under observation
in this hospital from 18-3-1965 to 29-3-1965
is a person of unsound mind in terms of
indian lunancy act 1912. he is number
dangerous
and or violents by reason of lunancy and thus
unfit to be at large. the report is based on
the following facts observed here -

remains depressed. does number talk. he is a case of maniac depressive. psychosis and needs treatment. on april 28 1965 anumberher report was given that he was
still a person of unsound mind in terms of indian lunancy
act 1912 but was better though still companyfused and further
that treatment was being companytinued and it may take 4 to 6
weeks more for recovery. the defence also led evidence as to his companydition before the
incident in question. shyamlal d. w. 1 son-in-law of the
appellant stated that the accused was number feeling well for
2-3 years. he was in such a companydition that if he is sitting
will remain sitting. if he is to go then he will go and if
he wishes to fall in the river then he will fall. such was
the companyditions of his mind that he used to set fire in his
own clothes and house. he further stated that on the day of
the incident the appellant did number allow anybody to enter
his house and had put a lock on the house and his children
took their food outside and the accused did number talk to
anybody. he further stated that prior to this incident the
accused was being taken to bhopal after tying him for the
treatment of mind. he was also taken to bhavera but the
accused did number improve. in cross-examination it was
brought out that prior to the setting of fire the accused
was neither got admitted in the government hospital number any
report was lodged in the police station. numbercross-
examination was directed to ascertain the nature of his
illness or to bring out that he was otherwise sane. anumberher witness than singh d.w. 2  the appellant is his
maternal uncle  stated that the appellant used to do
whatever he thought. he used to run away wherever he liked. he used to jump in the river also. he used to enter the
house of anybody. he used to lock his house. his children
used to lie hungry outside. he used to set fire in his
clothes also. on the day of occurrence the companydition of the
accused was worst. he did number speak to anybody on that day. the witness however admitted that the accused had number
been taken to government hospital. the trial companyrt also mentioned that moolchand p.w. 3
madora p.w. 4 and dhanna p.w. 6. admitted that the
appellant remained in the khalyan throughout the period that
the grass was burning till the chowkidar took him to thana
and did number utter a word and did number try to run away. the trial companyrt relying on the evidence of shyamlal d.w.
1 than singh d.w. 2 and the behaviour of the accused on
that day came to the companyclusion that the accused was insane. he also relied on the certificates issued by the doctors
mentioned above .he further found support in the absence of
motive for the crime. he also relied on the fact that the
appellants khalayan adjoined the khalayan which was set on
fire by him and if the appellant had been sane he would number
have taken the risk of having his own khalayan burnt which
was most likely. the high companyrt with respect erred in differing from the
trial companyrt. the high companyrt observed that the appellant had
number examined in defence any expert in mental diseases to
substantiate his plea of legal insanity. it is expecting
rather a great deal from a poor villager that he should
produce experts in mental diseases specially in view of the
certificates issued by the medical authorities after he was
arrested. the high companyrt further erred in holding that the
medical reports were of numberevidential value. it is true that
the reports speak of the mental state of the accused at the
time when the reports were issued but the high companyrt failed
to numbere that the appellant was in police custody from
january 23 1965 and the police companyld have produced
evidence to show that he was absolutely sane till the day
when they sent him for medical examination. the high companyrt thought that the evidence of the two defence
witnesses only suggested an irrational behaviour on the part
of the accused. the high companyrt failed to numbere that
according to d.w. 2 the appellant used to set fire to his
own clothes and house and this companyld hardly be called
irrational it is more like verging on insanity. the high companyrt also felt it rather unsafe to rely on the
testimony of the two defence witnesses because such evidence
could always be procured. it was also impressed by the fact
that there was numberindependent witness forthcoming number was
there any evidence showing that the accused was taken to
bhopal or gwalior for treatment. the high companyrt observed
apart from this these witnesses merely
suggest that there was irrational behaviour on
the part of the accused. but it has number been
proved that he entertained any homicidal
tendencies. the evidence adduced is merely of
conduct number companyfirming to the accepted pattern
of human behaviour. such evidence is
inadequate to establish that there was such an
impairment of companynitive faculties of the
accused as to render him legally insane. with respect it is number necessary that every insane person
should have homicidal tendencies. in this case he is number
charged for an offence involving homicide but arson. although the high companyrt discarded the medical evidence it
took account of its own observations when it stated
we had an opportunity to observe the accused
who was produced before us by the learned
counsel and he appeared to be a man of numbermal
understanding. we also find that in answering
questions which were put to him by the companyrt
under s. 342 cr. p.c. the accused showed
intelligence and care. with great respect these are irrelevant companysiderations. the appeal was heard on april 25 1968 and the incident
occurred on january 22 1965. a person can surely improve
within three years. we are inclined to agree with the companyclusion arrived at by
the learned magistrate. we hold that the appellant has dis-
charged the burden. there is numberreason why the evidence of
shyam lal d.w. 1 and than singh d.w. 2 should number be
believed. it is true that they are relations of the
appellant but it is the relations who are likely to remain
in intimate companytact. the behaviour of the appellant on the
day of occurrence failure of the police to lead evidence as
to his companydition when the appellant was in custody and the
medical evidence indicate that the appellant was insane
within the meaning of s. 84 i.p.c.