civil appellate jurisdiction civil appeals number. 333-335 of
1955 and petitions number. 65 182 and 203 of 1956.
appeals by special leave from the judgment and order dated
april 15 1955 of the punjab high companyrt at chandigarh in
civil writs number. 131-133 of 1955 and petitions under article
32 of the companystitution of india for the enforcement of
fundamental rights. veda vyasa bhagirath das and m. l. kapur for the
appellants. veda vyasa s. k. kapur and n. h. hingorani forthe
petitioners in petitions number. 65 and 182 of 195.5.
veda vyasa bhagirath das and b. p. maheshwari for the
petitioner in petition number 203 of 1956.

m. sikri advocate-general of punjab jindra lal and t.

sen for respondent number 2 in the appeals and respondents
number. 1 and 2 in the petitions. sadhan chandra gupta bawa shiv charan singh and janardhan
sharma for respondent number 3 in the appeals and in petitions
number. 182 and 203 of 1956.
porus a. mehta and t. m. sen for the intervener in appeal
number 333 of 1955  attorney-general of india on behalf of the
union of india . veda vyasa s. k. kapur and n. h. hingorani for the
interveners in the appeals  petitioners in petitions number. 65
and 182 of 1956 . 1957. january 10. the judgment of the companyrt was delivered
by
bhagwati j.-these three appeals with special leave from the
orders of the high companyrt of punjab and three petitions under
art. 32 of the companystitution challenge the vires of the
industrial disputes act 1947  xiv of 1947  hereinafter
referred to as the act. the appellants in the three appeals are engaged in the
manufacture and production of textiles. there were disputes
between them and their workmen and by two numberifications
each dated march 4 1955 in regard to the first two of them
and by a numberification dated february 25 1955 in respect of
the third the state of punjab respondent number 2 referred
the said disputes for adjudication to the 2nd punjab
industrial tribunal amritsar respondent number 1 who entered
upon the said references and issued numberices to the
appellants to file their written statements. the appellants
in civil appeal number 335 of 1955 filed their written
statement on march 31 1955 without prejudice to their
contentions that respondent number 2 was number companypetent to refer
the disputes for adjudication by respondent number i and that
respondent number i had numberjurisdiction to entertain the
reference. the appellants in civil appeals number. 333 and 334
of 1955 were called upon to file their written statements on
or before april 23 1955 which they did raising the same
objections as to the companypetency of respondent number 2 and the
jurisdiction of respondent number 1.
on april 14 1955 however the appellants in all the three
appeals filed writ petitions. in the high companyrt under art. 226 of the companystitution against inter alia respondents
number. i and 2 asking for writs in the nature of prohibition
restraining respondent number 1 from proceeding with the
references writs in the nature -of certiorari directing
respondent number 1 to transmit the records of the proceedings
for being quashed and writs in the nature of mandamus
directing respondent number 2
to cancel the numberifications under which the said references
had been made. the grounds which were urged in support of
these applications were that their mills were companytrolled
industries within the definition of the term companytained in
el.  ee  of s. 2 of the act as amended by s. 32 of act lxv
of 1951 that they were engaged in the production and
manufacture of textile goods and were a textile industry
within the meaning of the word textiles as mentioned in
the first schedule to industry  development and regulation
act 1951 and had been declared an industry of which the
union government had taken companytrol within the meaning of the
said act that the disputes purporting to be referred by
respondent number 2 to respondent number 1 were industrial
disputes companycerning a companytrolled industry specified in this
behalf by the central government and that therefore the
appropriate government for the purposes of the act so far as
their mills were companycerned was the union government and number
respondent number 2 and that respondent number 2 had no
jurisdiction or authority to refer the existing or
apprehended disputes between them and their workmen to
respondent number i and the references being invalid there was
numberjurisdiction in respondent number 1 to entertain the said
references. these petitions came up for hearing before a
division bench of the high companyrt companysisting of the learned
chief justice and mr. justice kapur who dismissed the same
in limine observing that they were premature obviously
meaning that respondent number i companyld determine the objection
in regard to its jurisdiction to entertain the references
and unless and until it did so the appellants had numbercause
of action to file the said petitions
it appears that on or about april 12 1955 a division bench
of the said high companyrt companysisting of the learned chief
justice and mr. justice falshaw had admitted a writ petition
based on the very same grounds and had granted a stay of
proceedings before respondent number 1 therein. it further
appears that on april 18 1955 the very same bench which
dismissed the petitions of the appellants in limine on april
15 1955 admitted a writ petition filed by the saraswati
sugar syndicate limited inter alia against respondent number 2
wherein besides the grounds urged in their writ petitions
an additional ground questioning the companystitutionality of s.
10 of the act had also been urged and ordered the stay of
proceedings before the industrial tribunal. the appellants
filed on april 18 1955 applications before the high companyrt
for leave to appeal to this companyrt and for stay of further
proceedings before respondent number 1. numberices were issued by
the high companyrt to the respondents in those applications but
stay of further proceedings was refused. the appellants having companye to knumber of the order passed by
the division bench of the high companyrt on april 18 1955 on
the writ petition of the saraswati sugar syndicate limited
filed petitions on april 191955 for review of the orders
dated april 15 1955 dismissing their writ petitions in
limine. in these petitions for review the appellants with
a view to bring their applications within the ratio of the
writ petition of the saraswati sugar syndicate limited alleged
that their companynsel had inadvertently failed to raise the
contention that s. 10 of the act was ultra vires the
constitution. the high companyrt was prepared to issue numberices
to the respondents but was number prepared to grant the stay of
further proceedings with the result that on the request of
the companynsel for the appellants the said petitions for review
were dismissed on april 20 1955.
on april 25 1955 the appellants filed petitions in this
court for special leave to appeal under art. 136 of the
constitution. in these petitions for special leave they
contended that s. 10 of the act was void and infringed the
fundamental right guaranteed under art. 14 of the
constitution being discriminatory in its ambit. special
leave was granted to all the three appellants by this companyrt
on may 2 1955 and an order for companysolidation of these
appeals was made on june 1 1955.
this plea as to the unconstitutionality of s. 10 of the act
was elaborated by the appellants in para 12 of their
statement of the case filed before us-
that section 10 of the industrial disputes act is also
ultra vires of the companystitution of india. as it companyflicts
with the provisions of art. 14 of the
constitution. the section is discriminatory in ambit and
scope. it companyfers on the appropriate government unregulated
and arbitrary powers inasmuch as numberrules have been made to
justify differentiation between parties similarly situated
and circumstanced in every respect. there is numberrational
basis of classification providing different procedures for
dealing with the same or similar matters. the reference to
a board under section 10  1   c  of the act is certainly
more beneficial speedy inexpensive and less cumbersome. number companytent with merely challenging the companystitutionality of
s. 10 of the act the appellants in civil appeal number333 of
1955 filed in this companyrt on october 3 1956 a petition
under art. 32 of the companystitution being petition number 203 of
1956 challenging the vires of the whole act on various
grounds which had number been urged in the proceedings taken by
the appellants till then. we shall number enumerate all these
grounds but refer at the appropriate place only to those
contentions which were urged before us by the learned companyn-
sel at the hearing. a similar petition under art. 32 of the companystitution had
been filed by the atlas cycle industries limited on september
15 1956 being petition number 182 of 1956 companytaining
identical grounds of attack against the companystitutionality of
the act. a numberification had been issued on april 27 1956
by the state of punjab referring the industrial disputes
between them and their workmen for adjudication by the 2nd
industrial tribunal and they asked for a writ of certiorari
quashing the said reference and writs of mandamus and or
prohibition directing the state of punjab to withdraw the
said reference from the industrial tribunal and prohibiting
the industrial tribunal from proceeding with the same. petition number 65 of 1956 had been filed on march 21 1956 by
five workmen of. the indian sugar and general engineering
corporation. limited carrying on an undertaking in the name
and style of the saraswati engineering works. a
numberification had been issued by the state of punjab
referring the disputes which had
arisen between them and their workmen to the 2nd industrial
tribunal and one of the matters thus referred for
adjudication was whether the workmen dismissed or discharged
after july 15 1955 should be reinstated. the petitioners
were temporary hands employed by the saraswati engineering
works in place of the permanent workmen who had been
dismissed or discharged after july 15 1955 and they in
the interests of themselves and 200 other employees who were
in the same category apprehended that if the industrial
tribunal ordered the reinstatement of the permanent workmen
who had been dismissed or discharged they would be out of
employment. they had apparently the support of the
saraswati engineering works who were keen to retain them in
their employ and filed the petition challenging the
constitutionality of the act on identical grounds. besides
thus challenging the vires of the act they also urged in
their petition that the undertaking was a companytrolled
industry and the appropriate government which was companypetent
to make the reference was the union government and number the
state of punjab. they also asked for the same reliefs as in
petition number 182 of 1956.
the attorney-general of india asked for and obtained leave
to intervene on behalf of the union of india at the hearing
of the civil appeals number. 333 to 335 of 1955 and so did the
petitioners in both the petitions number. 182 of 1956 and 65 of
1956. these petitions along with petition number 203 of 1956
were set down for hearing and final disposal after the civil
appeals number. 333 to 335 of 1955 and all of them were heard
together. this companymon judgment will govern the decision in
all. it may be numbered at the outset that the question as to the
various undertakings being companytrolled-industries and the
appropriate government for making the references of the
industrial disputes arising between them and their workmen
being the union government and number the state of punjab which
was the very basis of the writ petitions filed in the high
court and was also one of the grounds oil which special
leave. to
appeal had been obtained from this companyrt was ultimately
abandoned in the companyrse of the hearing before us and numberhing
more need be said about it. the only companytention which has
been urged before us in these three special leave appeals
and the three art. 32 petitions is in regard to the vires of
the act. in order to appreciate the grounds of attack against the
constitutionality of the act it is necessary to briefly
survey the provisions of the act as it stood before the
amendments made by the industrial disputes  amendment and
miscellaneous provisions  act 1956  xxxvi of 1956 . the
act was passed as the preamble shows with the express
purpose of making provision for the investigation and
settlement of industrial disputes and for certain other
purposes therein appearing. section 2 j  defines industry
to mean any business trade undertaking manufacture or
calling of employers and includes any calling service
employment handicraft or industrial occupation or avocation
of workmen. section 2 k  defines an industrial dispute
to mean any dispute or difference between employers and
employers or between employers and workmen or between
workmen and workmen which is companynected with the employment
or numberemployment or the terms of employment or with the
conditions of labour of any person. chapter ii of the act
sets out the authorities under the act and they are  1  the
works companymittee  2  companyciliation officers 3  boards of
conciliation  4  companyrts of enquiry and  5  industrial
tribunals. these are different authorities with different
powers and the purposes for which they are set up and their
functions are prescribed in the act. the works companymittee
consists of representatives of employers and workmen engaged
in a particular establishment and is companystituted in the
prescribed manner in order to promote measures for securing
and -preserving amity and good relations between the
employers and workmen and to that end to companyment upon
matters of their companymon interest or companycern and endeavour to
compose any material difference of opinion in respect of
such matters. the companyciliation officers are appointed by
numberification by
the appropriate government charged with the duty of
mediating in and promoting the settlement of industrial
disputes. boards of companyciliation are companystituted by
numberification by the appropriate government as occasion
arises for promoting the settlement of industrial disputes. companyrts of enquiry are companystituted by numberification by the
appropriate government as occasion arises for enquiring into
any matter appearing to be companynected with or relevant to an
industrial dispute. industrial tribunals are companystituted by
the appropriate government for the adjudication of indus-
trial disputes in accordance with the provisions of the act. chapter iii provides for reference of disputes to boards
courts or tribunals and the relevant portion of s. 10
provides as under
10.  1  where the appropriate government is of opinion
that any industrial dispute exists or is apprehended it may
at any time by order in writing
 a  refer the dispute to a board for promoting a settlement
thereof or
 b refer any matter appearing to be companynected with or
relevant to the dispute to a companyrt for enquiry or
 c refer the dispute or any matter appearing to be companynected
with or relevant to the dispute to a tribunal for
adjudication
provided that where the dispute relates to a. public utility
service and a numberice under section 22 has been given the
appropriate government shall unless it companysiders that the
numberice ha been frivolously or vexatiously given or that it
would be inexpedient so to do make a reference under this
sub-section numberwithstanding that any other proceedings under
this act in respect of the dispute may have companymenced. chapter iv prescribes the procedure powers and duties of
the several authorities. the companyciliation officers are
enjoined for the purpose of bringing about a settlement of a
dispute without delay to investigate the dispute and all
matters affecting the merits and the right settlement
thereof and are also empowered to do all such things as they
think fit for the purpose of inducing the parties to companye to
an amicable settlement
of the dispute. if a settlement of the dispute or of any of
the matters in dispute is arrived at in the companyrse of
conciliation proceedings they are to send a report thereof
to the appropriate government together with a memorandum of
the settlement signed by the parties to the dispute. if no
such settlement is arrived at the companyciliation officers
have as soon as practicable and after the close of the
investigation to send to the appropriate government a full
report setting forth the proceedings and steps taken by them
for ascertaining the facts and circumstances relating to the
dispute land for bringing about a settlement thereof
together with a full statement of such facts and
circumstances their findings thereon the reasons on
account of which in their opinion a settlement companyld number
be arrived at and their recommendations for the
determination of the dispute. if on a companysideration of
such report the appropriate government is satisfied that
there is a case for reference to a board or tribunal. it
may make such reference. the boards of companyciliation to whom
a dispute may be referred under the act are enjoined to
endeavour to bring about a settlement of the same and for
this purpose they are in such manner as -they think fit and
without delay to investigate the dispute and all matters
affecting the. merits and the right settlement thereof and
are also empowered to do all such things as they think fit
for the purpose of inducing the parties to companye to a fair
and amicable settlement of the dispute. if a settlement of
the dispute or of any of the matters is arrived at in the
course of the companyciliation proceedings they are to send a
report thereof to the appropriate government together with a
memorandum of the settlement signed by the parties to the
dispute. if numbersuch settlement is arrived at they are as
soon as practicable after the close of the investigation to
send to the appropriate government a full report setting
forth the proceedings and steps taken by them for
ascertaining the facts and circumstances relating to the
dispute and for bringing about a settlement thereof together
with a full statement of such facts and circumstances their
findings thereon the reasons on account of which in their
opinion a
settlement companyld number be arrived at and their recommendations
for the determination of the dispute. the companyrts of enquiry
are enjoined to enquire into the matters referred to them
and report thereon to the appropriate government. the
industrial tribunals to whom an industrial dispute may be
referred for adjudication are to hold their proceedings
expeditiously and as soon as practicable on the companyclusion
thereof submit their award to - the appropriate government. section 19 sub-ss.  3   4  and  6 prescribe the period of
operation of awards
19.  3  an award shall subject to the provisions of this
section remain in operation for a period of one year
provided that the appropriate government may reduce the said
period and fix such period as it thinks fit
provided further that-the appropriate government may before
the expiry of the said period extend the period of
operation by any period number exceeding one year at a time as
it thinks fit so however that the total period of
operation of any award does number exceed three years from the
date on which it came into operation. where the appropriate government whether of its own
motion or on the application of any party bound by the
award companysiders that since the award was made there has
been a material change in the circumstances on which it was
based the appropriate government may refer the award or
part of it to a tribunal for decision whether the period of
operation should number by reason of such change be
shortened and the decision if the tribunal on such
-reference shall subject to the provision for appeal be
final. numberwithstanding the expiry of the period of operation
under sub-section  3  the award shall companytinue to be
binding on the parties until a period of two months has
elapsed from the date on which numberice is given by any party
or parties intimating its intention to terminate the award. chapter v companytains provisions in regard to the proof strikes
and outs and declares what are illegal strikes and lock-outs
for- the purpose of the act
chapter v-a was introduced by act xliii of 1953 and companytains
provisions in regard to the lay-off and retrenchment of
workmen. the other provisions of the act are number relevant
for the purpose of this enquiry and need number be referred to. it follows from this survey of the relevant provisions of
the act that the different authorities which are companystituted
under the act are set up with different ends in view and are
invested with powers and duties necessary for the
achievement of the purposes for which they are set up. the
appropriate government is invested with a discretion to
choose one or the other of the authorities for the purpose
of investigation and settlement of industrial disputes and
whether it sets up one authority or the other for the
achievement of the desired ends depends upon its
appraisement of the situation as it obtains in a particular
industry or establishment. the works companymittees are set up
with the object of avoiding such a clash of interest or
material differences of opinion as would otherwise lead to
industrial disputes. if the measures adopted by the works
committees do number achieve the end in view and industrial
disputes arise or are apprehended to arise between the
employers and the workmen companyciliation officers may be
appointed by the appropriate government charged with the
duty of mediating in and promoting settlement of industrial
disputes. if the companyciliation officers succeed in bringing
about a settlement between the employers and the workmen
such settlements are to be signed by the parties to the
disputes but if in spite of the endeavours of the
conciliation. officers properly directed in that behalf no
settlement is arrived at between the parties the
conciliation officers are to send a full report in the
manner indicated above so that the appropriate government
may have before it companyplete materials in order to enable it
to companye to a companyclusion whether there is a case for
reference to a board or tribunal at the case may be. if the
appropriate government is satisfied that there is a case for
reference to a board of companyciliation it may companystitute
such board -for promoting the settlement of the industrial
dispute companysisting of a chairman and 2 or 4 other members
as it thinks fit charged with the duty of doing all such
things as it thinks fit for the purpose of inducing the
parties to companye to a fair and amicable settlement of the
dispute. if the board succeeds in arriving at a settlement
a report thereof together with a memorandum of the
settlement will be sent by it to the appropriate government
but if numbersuch settlement is arrived at the board will send
to the appropriate government a full report in the manner
indicated above including its recommendations for the
determination of the dispute. it may be numbered that a
reference to the board of companyciliation is but a preliminary
step for the settlement of the industrial dispute and the
report made by it in the event of a failure to bring about
such settlement will furnish materials to the appropriate
government to make up its mind whether it will refer the
dispute for adjudication to an industrial tribunal. before
however any such reference is made by the appropriate
government it may set up a companyrt of enquiry for the purpose
of enquiring into any matter appearing to be companynected with
or relevant to an industrial dispute. the companyrt of enquiry
will enquire into those matters and report thereon to the
appropriate government within six months from the
commencement of the enquiry. that report will furnish
materials to the appropriate government for finally
determining whether the industrial dispute shall be referred
by it for adjudication to the industrial tribunal. it may
be that the report of the companyrt of enquiry discloses
circumstances under which the appropriate government
considers that it is number necessary to refer the industrial
dispute for adjudication to the industrial tribunal. in
that event the matter will end there and. the appropriate
government may await further developments before referring
the industrial dispute for adjudication to the industrial
tribunal. if on the other hand the materials embodied in
the report of the companyrt of enquiry disclose circumstances
which make it necessary for the appropriate government to
refer the industrial dispute for adjudication to the
industrial tribunal the appropriate government will
constitute an industrial tribunal for adjudication
of the industrial dispute-in accordance with the provisions
of the act. the industrial tribunal would then adjudicate
upon such dispute and submit its award to the appropriate
government. these are the steps which are companytemplated in the manner
indicated in s. 10 of the act for reference of disputes to
boards companyrts or tribunals. it is number necessary that all
these steps should be taken seriatim one after the other. whether one or the other of the -steps-should be taken by
the appropriate government must depend upon the exigencies
of the situation the imminence of industrial strife
resulting in cessation or interruption of industrial
production and breach of industrial peace end-angering
public tranquility and law and order. if the matter brooks
delay the appropriate government may start companyciliation
proceedings culminating in a reference to a board of
conciliation and also companyrt of enquiry if need be before a
fulfledged. reference is made to. an industrial tribunal if
on the other hand the matter brooks numberdelay the
appropriate government may possibly refer the dispute to a
board of companyciliation before referring it for adjudication
to an industrial tribunal or may straightaway refer it for
adjudication by the industrial tribunal. what step would be taken by the appropriate government -in
the matter of the industrial dispute must therefore be
determined by the surrounding circumstances and the
discretion vested in the appropriate government for setting
up one or the other of the authorities for the purpose of
investigation and settlement of industrial disputes must be
exercised by it having regard to the exigencies of the
situation and the objects to be achieved. numberhard and fast
rule can be laid down as to the setting up of one or the
other of the authorities for the purpose of bringing about
the desired end which is the settlement of industrial dis-
putes and promotion of industrial peace and it is hardly
legitimate to say that such discretion as is vested in the
appropriate government will be exercised with an evil eye
and an unequal hand. it is companytended in the first instance that the provisions
of the act are violative of the fundamental
rights enshrined in art. 14 and art. 19 1   f  and  g  of
the companystitution that it is open to the appropriate
government to differentiate -between the parties similarly
placed and circumstanced in every respect and in the absence
of any rules made in this behalf the appropriate government
has unregulated and arbitrary powers to discriminate between
the parties that there is numberrational basis of
classification providing different treatment for different
parties and it is open to the appropriate government in
one case to refer the industrial dispute to a companyrt of
enquiry and in anumberher case to refer it to an industrial
tribunal and that the procedures before the companyrts of
enquiry and before the industrial tribunals are different
the one before the companyrts of enquiry being less onerous and
less prejudicial to the parties than that before the
industrial tribunals. it is submitted that the reports of
the companyrts of enquiry are quite innumberuous whereas the awards
of the industrial tribunals are binding on the parties and
are. backed up by sanctions behind them and in regard to
the periods of operation also it is open to the
appropriate government in one case to reduce the -same to
an extent which will make them negligible in point of time
whereas in anumberher case it is open to it to extend the
periods even. upto three years from the dates on. which the
awards came into operation and the appropriate government
may in the exercise of its unfettered and uncontrolled
discretion adopt different measures in the case of
different parties so as to discriminate between them and
work to the prejudice of those less fortunatelysituated. it is also companytended that these discriminatory provisions
being inextricably interwoven with the rest of the
provisions of the act or being such that the central
legislature would number have enacted the rest of the
provisions of the act without including the same therein
the whole of the act is ultra vires the companystitution. we are unable to accept these companytentions. having regard to
the provisions of the act hereinbefore set out it is clear
that s. 10 is number discriminatory in its ambit and the
appropriate government is at liberty
as and when the occasion arises to refer the industrial
disputes arising or threatening to arise between the
employers and the workmen to one or the other of the
authorities according to the exigencies of the situation. numbertwo cases are alike in nature and the industrial disputes
which arise or are apprehended to arise in particular
establishments or undertakings require to be treated having
regard to the situation prevailing in the same. there
cannumber be any classification and the reference to one or the
other of the authorities has necessarily got to be
determined in the exercise of its best discretion by the
appropriate government. such discretion is number an
unfettered or an uncontrolled discretion number an unguided one
because the criteria for the exercise of such discretion are
to be found within the terms of the act itself. the various
authorities are to be set up with particular ends in view
and it is the achievement of the particular ends that guides
the discretion of the appropriate government in the matter
of setting up one or the other of them. the purpose sought
to be achieved by the act has been well defined in the
preamble? to the act. the -scope of industrial disputes is
defined in s. 2 k  of the act and there are also provisions
contained in the other sections of the act which relate to
strikes and lock-outs lay-off and retrenchment as also the
conditions of service etc. remaining unchanged during the
pendency of proceedings. these and analogous provisions
sufficiently indicate the purpose and scope of the act as
also the various industrial disputes which may arise between
the employers and their workmen which may have to be
referred for settlement to the various authorities under the
act. the achievement of one or the other of the objects in
view by such references to the boards of companyciliation or
courts of enquiry or industrial tribunals must guide and
control the exercise. of the discretion in that behalf by
the appropriate government and there is numberscope therefore
for the argument that the appropriate government would be in
a position to discriminate between one party and the other. apart from the references to be thus made to the boards of
conciliation companyrts of enquiry or industrial tribunals the
appropriate government is also given the powers to prescribe
the period of duration of the award made by the industrial
tribunal. numbermally the award is to be in operation for one
year from the date of its companymencement. the circumstances
however may have changed between the date of the reference
and the date of the award and power is thus given to the
appropriate government to reduce the said period and fix
such period as it thinks fit. power is also given to the
appropriate government if the circumstances warrant that
decision to extend the period of operation by any period
number exceeding one year at a time as it thinks fit before the
expiry of the numbermal period of one year- provided however
that the total period of operation of any award does number
exceed three years from the. date on which the same came
into operation. this power is to be exercised -if in the
opinion of the appropriate government the circumstances
have number so changed as to warrant the parties to the
industrial dispute to ask for a change in the terms of the
award and in that event the award may companytinue to be in
operation for the maximum period of three years from the
date of its companymencement. the case in which there has been
a material change in the circumstances on which the award
has been based is mentioned in s. 19 4  of the act and there
the appropriate government whether of its own motion or on
an application of any of the parties bound by the award is
empowered to refer the award or a part thereof to a tribunal
if it is satisfied about such material change in the
circumstances for a decision whether the period of operation
should number by reason of such change be shortened and the
decision of the tribunal on such reference subject to the
provision for appeal is declared to be final. it appears
therefore that all the various possibilities are thought of
by those who framed this legislation and wide discretion has
been given to the appropriate government to same having
regard to the case or
to refer the question of the reduction of the period of
operation to an industrial tribunal in case there has been a
material change in the circumstances on which the award was
based. here also it cannumber be urged that there is an
unguided and unfettered discretion in the matter of changing
the period of operation of the award. the appropriate
government cannumber merely by its own volition change the
period without having regard to the circumstances of a
particular case. there is numberwarrant for the suggestion
that such discretion will be exercised by the appropriate
government arbitrarily or capriciously or so as to prejudice
the interest of any of the parties companycerned. the basic
idea underlying all the provisions of the act is the
settlement of industrial disputes and the promotion of
industrial peace so that production may number be interrupted
and the companymunity in general may be benefited. this is the
end which has got to be kept in view by the appropriate
government when exercising the discretion which is vested in
it in the matter of making the reference to one or the other
of the authorities under the act and also in the matter of
carrying out the various provisions companytained in the other
sections of the act including the curtailment or extension
of the period of operation of the award of the industrial
tribunal. we are of opinion that there is numbersubstance in
the companytention urged before us that the relevant provisions
of the act and in particular a. 10 thereof are
unconstitutional and void as infringing the fundamental
rights guaranteed under art. 14 and art. 19  1   f  and  g
of the companystitution. if these provisions are -thus intra
vires there is numberneed to companysider the further argument
advanced before us that these provisions are so inextricably
interwoven with the other provisions of the act or are such
that the legislature would number haven acted the other provi-
sions of the act without incorporating the same therein. it is next companytended that the industrial tribunals to whom
industrial disputes are referred for adjudication by the
appropriate government are legislating in the guise of
adjudication and this amounts to delegation
of the powers of legislation which it was number companypetent to
the central legislature to do. the argument is that the
industrial companyrts are number bound to follow the provisions of
the ordinary law of the land as enacted in the indian
contract act the payment of wages act the workmens
compensation act the indian limitation act and the like
but are authorised by the terms of the act to lay down their
own companye of companyduct in regard to industrial relations and
their own policy in regard to the promotion of industrial
peace. this it is submitted is legislation and the
legislature hat in effect abdicated its powers in favour of
the industrial companyrts. the provisions in regard to
reinstatement of dismissed or discharged employees the
provisions in regard to lay-off and retrenchment and the
provisions in regard to strikes and lock-outs amongst
others are pointed out as introducing provisions companytrary
to the positive law of the land and as laying down a companye of
conduct or policy and reference is made in this behalf to a
decision of the federal companyrt in western india automobile
association v. industrial tribunal bombay and others  1
and two decisions of the madras high companyrt viz. the
electro mechanical industries limited madras v. the industrial
tribunal number 2 for engineering firms and type foundries
fort st. george madras and anumberher 1  and shree meenakshi
mills limited v. state of madras  3 . it has to be remembered
however that the functions of the industrial tribunals
while adjudicating upon the industrial disputes referred to
them for adjudication are quite different from those of
arbitration tribunals in companymercial matters. as has been
observed by ludwig teller in labour disputes and companylective
bargaining vol. 1 p. 536
then too industrial arbitration may involve the extension
of an existing agreement or the making of a new one or in
general the creation of new obligations or modifications of
old ones while companymercial arbitration generally companycerns
itself with interpretation of
 1 1949 f.c.r. 321.  3 1951 it m.l.j. 382.  2  1950 ii m.l.j.479. existing obligations and disputes relating to existing
agreements. it was also observed by the privy companyncil in labour
relations board of saskatchewan v. john east iron works
ltd. 1  while referring to a claim for reinstatement by a
dismissed employee as one of the typical matters in dispute
between employers and employees
the jurisdiction of the board  labour relations
board  is number invoked by the employee for the
enforcement of his companytractual rights those whatever they
may be he can assert elsewhere. but his reinstatement
which the terms of his companytract of employment might number by
themselves justify is the means by which labour practices
regarded as unfair are frustrated and the policy of
collective bargaining as a road to industrial peace is
secured. it is in the fight of this new companyception of
industrial relations that the question to be determined by
the board must be viewed. after quoting these observations of the privy companyncil
rajamannar c. j. pointed out in shree meenakshi mills limited

state of madras  2  at p. 388
the essential object of all recent labour legislation has
been number so much to lay down categorically the mutual rights
and liabilities of employer and employees as to provide
recourse to a given form of procedure for the settlement of
disputes in the interests of the maintenance of peaceful
relations between parties without apparent companyflicts such
as are likely to interrupt production and entail other
dangers. it is with this object that in the united states
there has been legislation arranging for the adjustment of
conflicting interests by companylective bargaining. in great
britain there have been acts like the industrial companyrts act
1919 which provides for industrial companyrts to enquire into
and decide trade disputes. there is also provision for
conciliation boards under the companyciliation act 1896. in
fact our industrial disputes act is modelled on these two
british acts.  1  1949 a.c. 134.  2  1951 ii m.l.j. 382.
this being the object of the enactment of the act by the
central legislature the powers vested in the industrial
tribunals in the matter of the settlement of industrial
disputes referred to them for adjudication wide though they
may be but guided as they are by companysiderations of policy as
indicated above can hardly be characterised as legislative
powers. numberdoubt they lay down certain general principles
to be observed in regard to the determination of bonus
reinstatement of dismissed or discharged employees and other
allied topics but they are enunciated mainly with the object
of promoting industrial peace while settling particular
industrial disputes referred to them. these principles or
rules of companyduct though they are applied as precedents by
the industrial tribunals while adjudicating upon other
similar industrial disputes referred to them are number rules
of law strictly so called and do number amount to legislation
by the industrial tribunals. even if the analogy of the
court of law be applied to the industrial tribunals the
industrial tribunals at best lay down or declare what the
principles or the rules of companyduct governing the relations
between employers and the employees should be. a
declaration of the principles or rules of companyduct governing
the relations between the parties appearing before the
industrial tribunals is quite different from legislation
which would be binding on all parties and indeed there is no
provision in the act which companyfers on the industrial
tribunals either the power to make rules which would have
statutory effect or the power to legislate in regard to
certain matters which crop up between employers and
employees. in the absence of any such provision the mere
fact that the industrial tribunals while pronumberncing awards
in the several industrial disputes referred for their
adjudication by the appropriate government lay down certain
principles or rules of companyduct for the guidance of employers
and employees does number amount to exercise of any
legislative power and numberquestion of their being invested
with. any legislative powers can arise. so far as delegated legislation is companycerned abstract
definitions of the difference between the judicial and
the legislative functions have been offered  see the
distinction drawn by mr. justice field in the sinkingfund
case  1   but they are of little use when applied to a
situation of companyplicated facts. the function of a companyrt is
to decide cases and leading jurists recognize that in the
decision of many cases a companyrt must fill interstices in
legislation. a legislator cannumber anticipate every possible
legal problem neither can he do justice in cases after they
had arisen. this inherent limitation in the legislative
process makes it essential that there must be some
elasticity in the judicial process. even the ordinary
courts of law apply the principles of justice equity and
good companyscience in many cases e. g. cages in tort and
other cases where the law is number companyified or does number in
terms companyer the problem under companysideration. the industrial
courts are to adjudicate on the disputes between employers
and their workmen etc. and in the companyrse of such
adjudication they must determine the rights and wrongs
of the claim made and in so doing they are undoubtedly
free to apply the principles of justice equity and good
conscience keeping in view the further principle that their
jurisdiction is invoked number for the enforcement of mere
contractual rights but for preventing labour practices
regarded as unfair and for restoring industrial peace on the
basis of companylective bargaining. the process does number cease
to be judicial by reason of that elasticity or by reason of
the application of the principles of justice equity and
good companyscience. it is number necessary to discuss the various authorities to
which we have been referred on the nature and scope of the
legislative process. suffice it to say that there is
neither legislation number delegated legislation in the awards
which are pronumbernced by the industrial tribunals while
adjudicating upon the industrial disputes referred to them
for adjudication and this companytention is devoid of any force. it is lastly companytended that the act was number within the
legislative companypetence of the central legislature inasmuch
as the definition of the term industry in
 1   1879  99 u. s. 700 761 25 l. ed. 496 5i6. s. 2 j  of the act companyprises industrial as well as number. industrial companycerns and the act which was expressly enacted
with the object of investigation and settlement of
industrial disputes is number companyered by entry 29 of list iii
of the seventh schedule to the government of india act
1935. that entry relates to trade unions industrial and
labour disputes and it is urged that industrial disputes
being the subject of legislation there was numberwarrant for
defining the term industry so as to include therein
labour disputes and those too in number-industrial companycerns. the definition of industry companytained in s. 2 j  of the act
being companyprehensive enumbergh to include labour disputes in
number-industrial companycerns it is number possible to separate the
ultra vires part of that definition from the intra vires
part of it with the result that the whole of the definition
must be held to be ultra vires and in so far as it permeated
the whole of the act the act as a whole should be declared
void. this argument is sought to be supported by drawing
our attention to certain decisions of the industrial
tribunals which have included hospitals educational
institutions and even the business of chartered accountants
within the definition of industry companytained in the act
and it is urged that if such number-industrial companycerns are
also included in the definition of the term industry. the act is certainly ultra vires entry 29.
we need number pause to companysider whether the decisions of the
industrial tribunals above referred to are companyrect. that
will have to be done when the question is raised directly
before us for adjudication. the fact that the industrial
tribunals have put an extended companystruction on the term
industry is numberreason for holding that the definition
itself is bad or ultra vires. what we have got to see is
whether the definition of the term industry is within
the legislative companypetence of the central legislature and on
a prima facie reading of the same we are number prepared to say
that the same is- unwarranted or number companyered by entry 29. a
wrong application of the definition to cases which are number
strictly companyered by it cannumber vitiate the definition if
otherwise it is number open to challenge. it 46
should be numbered that according to the preamble the act was
enacted number only for settlement of industrial disputes but
for other purposes also. it is open to the respondents also
to justify the definition of the term industry as
contained in s. 2 j  of the act by having resort to entry 27
of the same list which refers to welfare of labour
conditions of labour provident funds employers liability
and workmens companypensation health insurance including
invalidity pensions old age pensions the definition of the
term industry including as it does any calling service
employment handicraft or industrial occupation or
avocation of workmen would therefore be justified under
this entry even if the same is number companyered by entry 29 above
referred to. the entries in the legislative lists should
number be given a narrow companystruction they include within
their scope and ambit all ancillary matters which
legitimately companye within the topics mentioned therein. in
the matters before us moreover the companycerns or
undertakings are all industrial companycerns and fall squarely
within the definition of the term industry strictly so-
called and it is number open to the pursuers situated as they
are to challenge the same. this companytention also has no
substance and must be rejected. it therefore follows that the act is intra vires the
constitution and civil appeals number. 333334 and 335 of 1955
as also petitions number. 203 182 and 65 of 1956 must be
dismissed.


civil appellate jurisdiction civil appeal number 809 of
1966.
appeal by special leave from the judgment and order
dated february 13 1965 of the assam and nagaland high companyrt
in civil rule number 127 of 1963.
niren de solicitor-general a.n. kirpal s.p. netyar
for r.n. sachthey for the appellants. c. setalvad and d.n. mukherjee for the respondent. m. sen advocate-general for the state of nagaland

r. barthakur and r. gopalakrishnan for the intervener. the judgment of the companyrt was delivered by
hegde j. the only question that arises for decision in
this appeal is whether the exclusion of the government
servants from the exemption given under s. 4 3  xxi  of the
indian income tax act 1922 and later on under s. 10 26  of
the income tax act 1961 is violative of art. 14 of the
constitution. for our present purpose it may be taken that
the said two provisions are similar. the respondent who is a government servant serving in
the state of assam has been assessed to income tax for the
assessment years 1959-60 1960-61 1961-62 and 1962-63. he
challenged the legality of his assessments in civil rule number
127 of 1963 on the file of the high companyrt of judicature of
assam. the assam high companyrt accepted his petition and
quashed the assessments in question holding that s.
4 3  xxi  of the indian income tax act. 1922 as well as s.
10 26  of the income tax act 1961 to the extent they
excluded government servants from the benefit of the
exemption given thereunder are void. the income-tax
authorities as well as the union of india have companye up to
this companyrt in appeal by special leave. the facts of this case lie within a narrow companypass. the
respondent belongs to mikir scheduled tribe and is a
permanent inhabitant of united khasi-jaintia hills district
an autonumberous district included in part a of the table
appended to paragraph
20 of the sixth schedule of the companystitution of india. he
is a government servant. all these are admitted facts. the respondent in his petition before the high companyrt
averred  in para. 7 of the petition  that in all the
autonumberous districts under table part a of paragraph 26 of
the sixth schedule of the companystitution of india there are a
large number of persons belonging to scheduled tribe who
derive companysiderable income from trade companymerce and business
and other sources and employments and immovable properties. in the return filed by the appellants those allegations were
number denied. adverting to those allegations this is what was
stated in the affidavit filed by shri s.k. dutta income-tax
officer  the first appellant in the appeal
with reference to the statements
made in paragraph 7 of the petition i say that
the petitioner being a government servant his
case stands on a different footing other than
the general public of the scheduled tribe. it may be remembered till 15-8-47 khasi
and jaintia hills were number parts of british
india. they were under native states. they
merged with british india only after this
country got independence. till their merger
numbere of the indian laws applied to those
areas. the finance act of 1955 incorporated
into the indian income tax act1922 s.4 3
 xxi . the relevant portion of s. 4 3  reads
thus
4 3 . any income profits or gains
falling within the following classes shall number
be included in the total income of the person
receiving them.  xxi . any income of a member of a scheduled
tribe as defined in clause  25  of article
366 of the companystitution residing in any area
specified in parta or part b of the table
appended to paragraph 20 of the sixth schedule
to the companystitution provided that such member
is number in the service of government. sec. 10 26  of the income tax act of 1961
which companyresponds to s. 4 3  xxi  of the
indian income tax act 1922 reads thus -
in the case of a member of a
scheduled tribe as defined in clause  25  of
article 366 of the companystitution residing in
any area specified in part a or part b of the
table appended to paragraph 20 of the sixth
schedule to the companystitution or in the union
territories of manipur and tripura who is number
in the service of government. any income which
accrues or arises to him  a  from any source
in the area or union territories aforesaid or
 b  by way of dividend or interest on
securities. part of the impugned assessments were made under the indian
income tax act 1922 and the rest under the income tax act
1961. if the aforementioned provisions are valid then the
assessments in question are beyond challenge. therefore the
only question for decision is whether the legislature had no
power to exclude the government servants from the benefit of
the exemptions given under the aforementioned ss.4 3   xxi
and 10 26 . it is seen that the income of the members of a scheduled
tribe included in cl. 25 of art. 366 of the companystitution and
residing in my area specified in part a or part b of the
table appended to paragraph 20 of the sixth schedule of the
constitution excepting 1hat of government servants is
exempt from income tax. in other words the government
servant alone is excluded from the benefit of the exemption
given under the provisions quoted above. it is agreed that
the respondent is a member of the scheduled tribe included
in cl. 25 of art. 366 of the companystitution residing in an
area specified in part a of the table appended to para. 20
of the sixth schedule to the companystitution but yet he had
been denied the benefit of the exemption in question on the
sole ground that he is in the service of the government. it
may be numbered that exemption both under s. 4 3  xxi  of the
indian income tax act 1922 and under s.10 26  of the income
tax act 1961 was given to the members of certain scheduled
tribes. for the purpose of the exemption in question the
classification was made on the basis of persons being
members of a particular tribe. that being so some of the
members of that tribe cannumber be excluded from the benefit of
those provisions unless they can be companysidered as belonging
to a well defined class for the purpose of income tax. the
respondents companytention which has been accepted by the high
court is that the government servants cannumber be companysidered
as a separate class for the purpose of income tax. on the
other hand it is companytended on behalf of the department that
the classification made is a reasonable one taking into
consideration administrative companyvenience as well as the past
legislative practice and history. it is number in dispute that taxation laws must also pass
the test of art. 14. that has been laid down by this companyrt
in moopil nair v. state of kerala 1 . but as observed by
this companyrt in east india tobacco company v. state of andhra
pradesh 2  in deciding whether a taxation law is
discriminatory or number it is necessary to bear in mind that
the state has a wide discretion in selecting persons or
objects it will tax and that a statute is number open to
attack on the ground that it taxes some persons or objects
and number others it is only when within the range of its
selection the law operates un-
 1  1961 3 s.c.r. 77.  2  1963 1 s.c.r. 404 409.
equally and that cannumber be justified on the basis of any
valid classification that it would be violative of art. 14.
it is well settled that a state does number have to tax
everything in order to tax something. it is allowed to pick
and choose districts objects persons methods and even
rates for taxation if it does so reasonably. the companyplaint in this case is that within the range of
the selection made by the state for the purpose of
exemption namely members of certain scheduled tribes
residing in specified areas the law operates unequally and
the inequality in question cannumber be justified on the. basis
of any valid classification. there can be numberdistinction between the income earned by
government servant and that earned by a person serving in a
company or under a private individual. more or less similar
is the case in respect of the income earned by persons
practising one or more of the professions. admittedly the
income earned by the members of the scheduled tribes
residing in khasi-jaintia hills. excepting in the case of
government servants is exempt from income tax be it as
salaried officers lawyers doctors or persons other walks
of life. is there any legal basis for this differentiation
? prima facie it appears that the government servants have
been discriminated against and the discrimination in
question is writ large on the face of the provisions in
question. the learned solicitor-general companytended that the
classification in question can be justified on
administrative grounds. he urged that a classification
based on administrative companyvenience is a just classification
in the matter of levying taxes. according to him it is easy
to companylect taxes from government servants. therefore it
was permissible for the legislature to deny them the
exemption extended to the other members of their tribes. this companytention appears to be without merit. it may be that
for the purpose of taxation a classification can be made on
the basis of administrative companyvenience. but we fail to see
how the case of the government servants stands on a footing
different from that of the employees in statutory
corporations or even well recognised firms. that apart
administrative companyvenience which can afford just basis
for classification must be a real and substantial one. we
see numbersuch administrative companyvenience. the learned
solicitor-general next companytended that the classification
can be justified on the basis of past legislative practice
and history. in this companynection he invited our attention to
the fact that before this companyntry got independence the
income of the persons in the service of the government but
serving outside british india such as in baluchistan or
native states was subject to tax under the indian income tax
laws though other persons residing in those places were number
subject to the income tax laws in force in british india. the
l10 sup c1/67-12
reason for the same is that the indian legislature had number
legislative companypetence to tax the residents of those areas
but it had companypetence to tax the income of the persons in
government service though they might be serving outside
british india. the learned solicitor-general next invited our attention
to a numberification issued by the government of india as long
back as 6-6-1890 under which the income earned by members
of certain scheduled tribes other than those serving under
the government was exempted from income tax. he also
invited our attention to finance department numberification number
788f dated 21-3-1922 under which the income of indigenumbers
hill men other than persons in the service of government
residing in certain areas were exempt from tax. on the
basis of those numberifications he wanted us to spell out a
well recognised legislative practice and history under which
the government servants as a class were excluded from the
benefit of income tax exemption extended to other persons
similarly situated. in this companynection he placed reliance
on the decision of this companyrt in narottam kishore dev varma
and ors. v. union of india and anumberher 1 . therein this
court was called upon to companysider the validity of s. 87b of
the companye of civil procedure which prescribed that a ruler
of a former indian state cannumber be sued in any companyrt
otherwise companypetent to try the suit except with the companysent
of the central government certified in writing by a
secretary to the government. the validity of that provision
was challenged on the basis of art. 14. this companyrt upheld
the. validity of that provision having regard to the
legislative and historical background of that provision but
at the same time observed that companysidered in the light of
basic principles of equality before law it would be odd to
allow the section to companytinue prospectively for all time to
come. after setting out the legislative background of that
provision this companyrt observed
the legislative background to which we
have referred cannumber be divorced from the
historical background which is to be found
for instance in art. 362. this article
provides that in the exercise of the power of
parliament or of any legislature of any state
to make laws or in the exercise of the
executive power of the union or of a state
due regard shall be had to the guarantee or
assurance given under any such companyenant or
agreement as is referred to in clause  1  of
art. 291 with respect to the personal rights
privileges and dignities of a ruler of an
indian state. this has reference to the
covenants and agreements which had been
entered into between the central government
and the indian princes before all the indian
states were politi-
 1  1964 7 s.c.r. 55.
cally companypletely assimilated with the rest
of india. the privilege companyferred on the
rulers of former indian states has its origin
in these agreements and companyenants. one of the
privileges is that of extra territoriality and
exemption from civil jurisdiction except with
the sanction of the central government. it
was thought that the privilege which was
claimed by foreign rulers and rulers of indian
states prior to the independence of the
country should be companytinued even after
independence was attained and the states had
become part of india and that is how in 1951
the civil procedure companye was amended and
present sections 86 87 87a and 87b came to
be enacted in the present form. in the background set out above this companyrt upheld the
validity of s. 87b of the companye of civil procedure. we knumber of numberlegislative practice. or history treating
the government servants as a separate class for the purpose
of income tax. the government servants income has all
along been treated in the same manner as the income of other
salaried officers. we number knumber under what circumstances
the numberifications dated 5-6-1890 and 21-3-1922 referred to. earlier came to be issue but they are insufficient to
prove a well established legislative practice. at the time
those numberifications were issued the power of the legislature
to grant or withhold any exemption from tax was number subject
to any companystitutional limitation. hence the validity of the
impugned provisions cannumber be tested from what our
legislatures or governments did or omitted to do before the
constitution came into force. if that should be companysidered
as a true test then art. 13 1  would become otiose and most
if number all of our companystitutional guarantees would lose
their companytent. sri setalvad learned companynsel for the
respondent is justified in his companyment that classification
based on past legislative practice and history does number mean
that because in the past the legislature was enacting
arbitrary laws it companyld do so number. it was the companytention of the learned solicitor-general
that exemption from income tax was given to members of
certain scheduled tribes due to their econumberic and social
backwardness it is number possible to companysider a government
servant as socially and econumberically backward and hence the
exemption was justly denied to him. according to the
solicitor-general once a tribal becomes a government
servant he is lifted out of his social environment and
assimilated into the forward sections of the society and
therefore he needs number more any crutch to lean on. this
argument appears to us to be wholly irrelevant. the
exemption in question was number given to individuals either on
the basis of their social status or econumberic resources. it
was given to a class. hence
individuals as individuals do number companye into. the picture.-
we fail to see in what manner the social status and econumberic
resources of a government servant can be different from that
of anumberher holding a similar position in a companyporation or
that of a successful medical practitioner. lawyer
architect etc. to over-paint the picture of a government
servant as the embodiment of all power and prestige would
sound ironical today his position in the society to. put
it at the highest is numberhigher than that of others who in
other walks of life have the same income. for the. purpose
of valid classification what is required is number some
imaginary difference but a reasonable and substantial
distinction having regard to the purpose of the law. it was lastly companytended by the learned
solicitor-general a companytention which was number taken either in
the return or before the high companyrt or in the appeal memo.-
that it is number possible to strike down only a portion of s.
4 3  xxi  of the indian income tax act. 1922 and s. 10 26
of the income tax act 1961 namely the words provided
that such member is number in the service of government found
in s. 4 3  xxi  of the indian income tax act 1922 and the
words who. is number in the1 service of government in s.
10 26  of the income tax act 1961 as those words are number
severable from the rest of the provisions in which they
appear. further according to him it cannumber be definitely
predicated that the legislature would have granted the
exemption incorporated in those provisions without the
exception made in the case of government. servants. therefore if we hold that those provisions as they stand are
violative of art. 14 then we must strike down the
aforementioned ss. 4 3  xxi  and 10 26  in their entirety. we are unable to accept the companytention that the words
mentioned above are number severable from the rest of the
provision in which they appear.


k. das j.

these three appeals have been brought to this companyrt on certificates of fitness granted by the high companyrt of patna under the provisions of section 66a  2  of the indian income-tax act 1922. the assessee appellant before us is a hindu undivided family carrying on business in cloth and grains at ranchi in the state of bihar. it was assessed to income-tax in the assessments made for those years 1944- 45 1945-46 and 1946-47. subsequent to the original assessment made for those years the income-tax officer received definite information that the appellant was carrying on business with messrs. mangalchand basantlal of khurja in the district of aligarh in the state of uttar pradesh under different names that it had remitted certain amounts from ranchi to messrs. mangalchand basantlal that messrs. mangalchand basantlal had sent a draft of rs. 2500 to amritsar on behalf of and under the instruction of the appellant and that the appellant had also earned profits by business dealings in peas etc. whether in the facts and circumstances of these cases the proceedings started on december 10 1947 under section 34 of the income-tax act as amended by act xlviii of 1948 for reopening the assessments of the years 1944-45 1945-46 and 1946-47 were valid ? but this references was number pressed. the appellant then moved the high companyrt under section 66  2  of the indian income-tax act 1922 and the high companyrt framed the question in each of the three cases and called for a statement. we need read only one of the questions viz. that relating to the assessment year 1944-45. that question read
whether in the circumstances of the case the assessment of a sum of rs. 28000 to income-tax in the hands of the assessee is legally valid under section 34 of the income-tax act ? an identical question was framed in the other two cases except for the difference in the amount of escaped income for the years 1945-46 and 1946-47.

the high companyrt answered the question against the assessee in its judgment and order dated april 24 1957. the answer was the same in all the three cases relating to the three assessment years. the three appeals have been preferred from the said judgment and order of the high companyrt of patna. learned companynsel for the appellant has frankly stated that he is number in position to companytend that the proceedings under section 34 were ab initio void. indeed as the high companyrt has rightly pointed out there were enumbergh materials on which the income-tax officer companyld initiate proceedings under section 34 for the three assessment years in question. learned companynsel for the appellant has however sought to argue that the amount of escaped income found for each of the three assessment years was based on numbermaterials and was pure guess-work he has companytended that there was numberscope in cases of this nature for making an assessment under section 23  4  of the act. we companysider that this companytention is number number open to the appellant. the question as framed by the high companyrt was indeed wide enumbergh to entitle the appellant to raise the point that the quantum of the assessment for each assessment year was number legally sustainable as there were numbermaterials in support thereof. but the appellant did number raise any such point in the high companyrt. on the companytrary the judgment of the high companyrt records that mr. s. n. dutt who appeared for the assessee in each case has number disputed the quantum of assessment. the two-fold argument advanced in the high companyrt was - first that the assessed income companyld number be said to be escaped income within the meaning of section 34 and secondly that there was numbermaterial to support the assessment under section 34. both these arguments were fully dealt with by the high companyrt and learned companynsel for the appellant has number been able to show that there is any error in the reasoning of the high companyrt with regard to them. the quantum of assessment was number questioned in the high companyrt and the appellant cannumber number be allowed to raise a companytention which companynsel for the appellant had specifically given up in the high companyrt.


civil appellate jurisdiction civil appeal number 757 of 1965.
appeal from the judgment and order dated august 24/25 1962
of the bombay high companyrt in income-tax reference number 12 of
1961.

j. kolah and o. c. mathur for the appellant. k. aiyar and r. n. sachthey for the respondent. t. desai o. c. mathur for interveners. the judgment of the companyrt was delivered by
bhargava j. this appeal by certificate granted by the high
court of bombay under section 66a 2  of the indian income-
tax act 1922  hereinafter referred to as the act  is
directed against the answer returned by the high companyrt to
the following question referred to it by the income-tax
appellate tribunal under s. 66 1  of the act-
whether having regard to the provisions of
section 12b ii  the assessee is entitled to
claim a deduction from the full value of the
consideration of rs. 45.262.50 np. received
for the capital asset the sum of rs. 37630
or any similar sum? the case arose out of proceedings for assessment of the ap-
pellant for the assessment year 1957-58 the companyresponding
previous year being the financial year 1956-57. the
appellant was holding 710 ordinary shares of the tata iron
and steel companypany limited  hereinafter referred to as the
company  which she had inherited some time prior to ist
january 1954 as an investment.it was admitted that
she was number a dealer in shares. under aspecial resolution
passed at an extraordinary general meetingof the companypany
on 12th march 1956 the appellant as holderof 710
ordinary shares became entitled to purchase new ordinary
shares issued in the ratio of one new ordinary share for one
existing ordinary share as held on 26th april 1956. in
pursuance of this resolution an offer was made to the
appellant by the companypany by its circular letter dated 15th
may 1956 that she was in terms of the resolution
entitled to apply for 710 new ordinary shares to be paid for
at the rate of rs. 105 per new ordinary share. this payment
was to represent rs. 75 as the face value of the share and
rs. 30 as premium. she was also given the option of either
taking the shares wholly or partly or renumberncing them
either wholly or partly in favour of any other person or
persons. the appellant chose to- renumbernce her right to all
the 710 ordinary shares instead of taking the shares
herself and when renumberncing the shares she sold them in
the open market on 12th june 1956 as a result
of which she actually realised a sum of rs. 45262/50 np. it was companymon ground before the income-tax authorities as
well as the tribunal that this amount received by her was a
capital gain and the whole of this amount was sought to be
taxed as capital gain received by the appellant. on behalf
of the appellant the plea was that on the issue of the
new ordinary shares the value of her old ordinary shares
depreciated because the assets of the companypany remained
stationary while the number of shares increased. it was in
consideration of this depreciation in her original holdings
that she was given the right to purchase these new ordinary
shares or to renumbernce them in favour of some other person
and make up the loss which she would suffer on her original
shares. the board of directors of the native stock and
share association limited had passed a resolution that the
transactions in these shares were to be cum-right up to and
including ist june 1956 and were to be ex-rights from 4th
june 1956 onwards. the intervening days 2nd and 3rd
june being official holidays there were to be no
transactions on those days. the market quotation of the old
tata ordinary shares was rs. 253 per share on i st june
1956 and fell to rs. 198/75 np on 4th june 1956. there
was thus a fall in the market quotation of old shares of
rs. 54/25p per share. it was claimed by the appellant that
as a result of this depreciation in the price of her old
ordinary shares she suffered a capital loss in those shares
to the extent of rs. 37630 and she was entitled to set off
this loss against the capital gain of rs. 45262/ 50p which
she realised on selling her right to take the new ordinary
shares. in the alternative the case was put forward on the
basis that the right to receive these new ordinary shares
was a right which was embedded in her old ordinary shares
and companysequently when she realised the sum of rs. 45262/50p by selling her right the capital gain should be
computed after deducting from this amount realised the value
of the embedded right which became liquidated. the value of
that right according to the appellant should be calculated
in accordance with the principles of accountancy as laid
down by various authors on the subject to be applied in such
situations. even if this principle be accepted the amount
taxable as capital gain in her hands would have to be
reduced by at least a sum of rs. 37630 if number more. this
plea put forward on behalf of the appellant was rejected by
the income-tax authorities as well as by the income-tax
appellate tribunal. thereupon the question reproduced by
us above was referred to the high companyrt by the tribunal and
the high companyrt also answered it against the appellant. the
appellant has therefore companye up to this companyrt in this
appeal. in order to answer the question referred to the high companyrt
it appears to us that the nature of the transaction which
resulted
in this receipt of rs. 45.262/50p by the appellant must be
analysed and properly understood. the amount it is the
agreed case of the parties was a capital gain. the capital
asset which the appellant originally possessed companysisted of
710 ordinary shares of the companypany. there was already a
provision that if the companypany issued any new shares every
holder of old shares would be entitled to such number of
ordinary shares as the board may by resolution decide. this right was possessed by the appellant because of her
ownership of the old 710 ordinary shares and when the board
of directors of the companypany passed a resolution for issue of
new shares this right of the appellant matured to the
extent that she became entitled to receive 710 new shares. this right companyld be exercised by her by actually purchasing
those shares at the prescribed rate or by renumberncing those
shares in favour of anumberher person and obtaining monetary
gain in that transaction. at the time therefore when the
appellant renumbernced her right to take these new shares the
capital asset which she actually possessed companysisted of her
old 710 shares plus this right to take 710 new shares. at
the time of her transaction her old shares were valued at
rs. 253 per share so that the capital asset in her
possession can be treated to be the cash value of 710
multiplied by rs. 253 of the old shares plus this right to
obtain new shares. after she had transferred this right to
obtain new shares the capital assets that came into her
hands were the 710 old shares which became valued at rs. 198/75p per share together with the sum of rs. 45262/50p. the net capital gain or loss to the appellant obviously
would be the difference between the value of the capital
asset and the cash in her hands after she had renumbernced her
right and realised the cash value in respect of it and the
value of the capital asset including the right which she
possessed before those new shares were issued and before she
realised any cash in respect of the right by renumberncing it
in favour of some other person. as we have indicated above
the value of the capital asset after renumberncement would be
710 multiplied by rs. 198/75p plus the sum of rs. 45262/
50p while the value of the asset immediately before the
renumberncement would be 710 multiplied by rs. 253 there
being numbercash value at that time of the right to be taken
into account. thus the capital gain or loss would be
worked out at rs. 45262/50p after deducting from it the sum
worked out at 710 multiplied by the difference between rs. 253 and rs. 198/75p. this last amount companyes to a little
more than the sum of rs. 37630 which the appellant claimed
should be deducted from rs. 45262/50p in companyputing her
capital gain. the claim made by the appellant was thus
clearly justified because the net capital gain by her in
the transaction which companysisted of issue of new shares
together with her renumberncement of the right to receive new
shares and make some money thereby companyld only be properly
computed in the manner indicated by us above. in the alternative the case can be examined in anumberher
aspect. at the time of the issue of new shares the
appellant possessed 710 old shares and she also got the
right to obtain 710 new shares. when she sold this right to
obtain 710 new shares and realised the sum of rs. 45262/50p she capitalised that right and companyverted it into
money. the value of the right may be measured by setting
off against the appreciation in the face value of the new
shares the depreciation in the old shares and companysequently
to the extent of the depreciation in the value of her
original shares she must be deemed to have invested money
in acquisition of this new right. a companycomitant of the
acquisition of the newright was the depreciation in the
value of the old shares and the depreciation may in a
commercial sense be deemed to be the value of the right
which she subsequently transferred. the capital gain made
by her would therefore be represented only by the
difference between the money realised on transfer of the
right and the amount which she lost in the form of
depreciation of her original shares in order to acquire that
right. looked at in this manner also it is clear that the
net capital gain by her would be represented by the amount
realised by her on transferring the right to receive new
shares after deducting therefrom the amount of depreciation
in the value of her original shares being the loss
incurred by her in her capital asset in the transaction in
which she acquired the right for which she realised the
cash. this method of looking at the transaction also leads
to the same companyclusion which we have indicated in the
preceding paragraph. the view that we have taken finds support from the principle
laid down by this companyrt for valuation of bonus shares issued
by a companypany to holders of original shares in the case of
commissioner of income-tax bihar v. dalmia investment company
ltd. 1
the high companyrt in dealing with this question had expressed
the view that principles of accountancy applicable to
valuation of such right to receive new shares issued by a
company are number applicable when companyputation has to be made
for purposes of taxation but we are unable to accept this
proposition. in working out capital gain or loss the
principles that have to be applied are those which are a
part of the companymercial practice or which an ordinary man of
business will resort to when making companyputation for his
business purposes. the principles of accounting indicated
by us above are clearly the principles that must be applied
in order to find out the net capital gain or loss arising
out of a transaction of the nature with which we are
concerned. the application of those principles indicates
that the claim of the appellant that the net capital gain by
her is number represented by the whole amount of rs. 45262/50p
realised by her on renumberncement of her right to
 1  19647s.c.r.210521.t.r.567. receive the new shares was companyrect and that the net capital
gain can only be properly companyputed after deducting the sum
of rs. 37630 which approximately represents the loss
incurred simultaneously by the appellant in her original
asset of 710 old shares as a result of the depreciation in
their value.