vil Appeal No 1442 NT of 1975
From the Judgment and Order dated 1431974 of the Allahabad High Court in ITR No 437 of 1971
EC Agarwala for the Appellant
SC Manchanda Ms A Subhashini and MB Rao for the Respondent
The Judgment of the Court was delivered by PATHAK CJ
This appeal by certificate granted by the Allahabad High Court is directed against a judgment of the High Court answering the following questions in favour of the Revenue and against the assessee in an income tax refer ence 1 Whether on the facts and in the circumstances of the case and on a correct interpretation of the leasedeed 799 dated 2281960 the Tribunal was fight in holding the profits of the Glass factory during the relevant accounting year accrued to the assessee company 2 If the answer to the question No 1 is in the affirmative whether the Tribunal was right in holding that the entire profits and not one half of the profits of the glass factory during the relevant accounting year accrued to the assessee company The assessee Messrs Vibhuti Glass Works is a public limited company
It has a glass factory and also carries on other business
The accounts of the glass factory are closed on 31 March each year while the assessee closes its ac counts on 30 September each year
We are concerned with the assessment year 1962 63
For several years the glass factory business had been suffering losses resulting in increasing debt
It took heavy loans from the Banaras State Bank Varanasi for which purpose its stocks and stores were hypothecated to the Bank
It also took loans from the Uttar Pradesh Government and the land buildings and machinery were mortgaged accordingly
The assessee found it difficult to emerge out of its finan cial embarrassment
It discovered also that it needed cer tain equipment in order to produce better quality goods and also required funds for its working capital and for repaying loans to other creditors
It approached the industrial Finance Corporation New Delhi and the State Finance Corpo ration for financial assistance and the Industrial Finance Corporation agreed to grant a loan of Rs20 lakhs on condi tion a that the State Government guaranteed repayment and b that the State Government postponed their charge under the mortgage deeds and the Industrial Financial Corporation was allowed to have the first charge
The State Government agreed to those conditions provided the assessee allowed the State Government to take over the running of the glass factory for a period of 20 years
The State Government also stipulated that if and when the profits of the business exceeded a prescribed limit a share of those profits would go to the State Government
The assessee agreed to this arrangement and executed a document dated 22 August 1960 incorporating the requisite conditions
For the relevant accounting period the glass factory business disclosed a profit of Rs92960 while the assessee suffered a loss of Rs347656 according to its separate profit and loss account
During 800 assessment proceedings for the assessment year 1962 63 it was contended by the assessee before the Income Tax Officer that the profit of Rs92960 earned by the glass factory business was not assessable in the hands of the assessee but in the hands of the Uttar Pradesh Government which had taken over the factory and was running the business
It was con tended that in any event only half of the profits could be included in the assessment of the assessee the remaining profit being assessable in the hands of the State Government which was entitled to 50 per cent of the profits under the Deed dated 22 August 1960
Both contentions were rejected by the Income Tax Officer who held that the assessee was liable to be assessed in respect of the entire profits earned by the glass factory
He set off the profit against the loss declared by the assessee and computed a net loss of Rs254785
The assessee appealed to the Appellate Assistant Commis sioner of Income Tax but without success
A second appeal by the assessee filed before the Income Tax Appellate Tribu nal was also dismissed
At the instance of the assessee the Appellate Tribunal referred the two questions of law set forth earlier to the High Court of Allahabad
The High Court considered the various provisions of the Deed dated 22 August 1960 and answered both the questions in favour of the Revenue and against the assessee
It is apparent that this appeal must be disposed of on a consideration of the terms of the Deed dated 22 August 1960
A perusal of the conditions set forth in that document discloses that the State Government was given the power to manage the glass factory business for a period of 20 years from the date it assumed possession
Although the Deed is described as a lease deed and it provides that the glass factory is demised to the State Government in substance possession of the glass factory was transferred to the State Government only for the purpose of enabling it to manage and run the business
The High Court has given good reason for reaching that conclusion
Clause c of paragraph 7 of the Deed provides that if upon the expiration or sooner determination of this demise it is found that the working of the factory has shown prof its after meeting the entire liabilities of the company the balance profits after accounting for all charges and ex penses incurred by the State Government shall be divided between the company and the Governor in equal proportion
 It was contended by the assessee before the High Court that the 801 income was diverted through an overriding title before it reached the assessee
The High Court
in our opinion has rightly rejected the contention holding that there was no overriding title and in fact it was a case of mere applica tion of the income
The proper test to be applied in such a case has been laid down by this Court in Commissioner of Income tax Bombay City H vs Sitaldas Tirathdas and we are satisfied that the present case is one where the income accrued to the assessee directly and was merely applied upon such accrual to discharge an obligation of the assessee
The entire income earned during the year under consideration was the income of the assessee and was merely applied by the managing State Government for the payment of the assessee s debts
We are also in agreement with the High Court that the profits earned during the year under consideration were not sufficient for the State Government to enjoy a share in the profits in accordance with the terms of the Deed and no question therefore arises of any part of the profits being regarded as assessable in the hands of the State Government
In point of fact it appears that no part of the profits was actually taken by the State Government
In the result the appeal fails and is dismissed but in the circumstances there is no order as to costs
NPV Appeal dismissed


Summary:
Section 87 of the empow ered the Central Government to extend with such restric tions and modifications as it thought fit to the Union Territory of Chandigarh any enactment which was in force in a State at the date of the notification
Section 89 provided for adaptation and modification by the appropriate Govern ment of any law made before the appointed day whether by way of repeal or amendment for application in relation to the State of Punjab or Haryana or to the Union Territory of Himachal Pradesh or Chandigarh before the expiration of two years
The State of Punjab of which the Union Territory of Chandigarh originally formed part was then governed by the East Punjab Urban Rent Restriction Act 1949
Section 2j of that Act defined urban area  as any area administered by a municipal committee a cantonment board a town committee or a notified area committee or any area declared by the State Government by notification to be an urban area for the purposes of the Act
630 The Central Government had issued under section 89 of the Reorganisation Act the Punjab Reorganisation Chandigarh Adaptation of Laws on State and Concurrent Subjects Order 1968 with effect from 1st November 1966 Paragraph 4 of which directed that in all the existing laws in its appli cation to the Union Territory of Chandigarh any reference to the State of Punjab should be read as a reference to the Union Territory of Chandigarh
In exercise of the power conferred by section 2j of the Rent Act the Central Government had also issued on 13th October 1972 a notification declar ing the area comprising Chandigarh to be an urban area for the purpose of that Act
This notification was however quashed by the High Court in Harkishan Singh vs Union AIR 1975 P  H 160 on the ground that no notification had been issued prior to 1st November 1966 under section 2j declaring Chandigarh to be an urban area and there was no notification under section 87 making the 1949 Act operative in Chandigarh with the necessary adaptation
Thereupon Parliament enacted the East Punjab Urban Rent Restriction Extension to Chandigarh Act 1974
Section 3 of that Act extended to Chandigarh the 1949 Act subject to modifications specified in the schedule with retrospective effect from 4th November 1972 with a view to regularies all proceedings for eviction which might have been initiated during the interregnum
These included a modification of the definition of urban areas  as including the area comprising Chandigarh as defined in section 2 of the Capital of Punjab Development Regulation Act 1952 and such other areas comprised in the Union Territory of Chandi garh as the Central Government may by notification declare to be urban for the purposes of the Act
In 1982 Parliament passed the East Punjab Urban Rent Restriction Chandigarh Amendment Act 1982 effecting certain amendments in the 1949 Act in its application to Chandigarh
In 1985 the Legislature of the State of Punjab enacted East Punjab Urban Rent Restriction Amendment Act 1985 to make the 1949 Act more effective
This amendment came into force with effect from 16th November 1985
By a notification dated 15th December 1986 purportedly in exercise of its power under section 87 of the Reorganisation Act the Central Government extended to the Union Territory of Chandigarh the provisions of the 1985 Act as in force in the State of Punjab at the date of the notification and subject to the modifications mentioned therein with 631 the result that while the provisions of the 1949 Act had been brought into force with effect from 4th November 1972 by the Act of Parliament the provisions of the 1985 Act had been extended to the said territory by means of a Notifica tion of the Central Government issued under section 87
The High Court upheld the validity of the said notification
In these appeals by special leave and the writ petitions it was contended for the appellantspetitioners that in the purported exercise of its power under Article 2464 of the Constitution the Parliament could not delegate its legisla tive function in favour of an executive authority to such an extent as to amount to an abdication of its legislative function that by enacting section 87 Parliament instead of legislating for the Union Territory had left it to the Central Government to decide for all time to come what should be the law in force in that Territory whereas section 89 gives a limited transitory power to the Central Government to adapt existing laws within a period of two years that such adaptation could hold the field only until they were altered repealed or amended by a competent legislature or authority that section 87 confers on the executive government a wide power of choice for application to Chandigarh of not only one legislative enactment on any subject in operation in various parts of the country but also groups of provi sions from one or more of them and thus enforce a law which would be an amalgam of various statutory provisions that there was no legislative guidance as to the manner in which these choices should be exercised by the executive that section 87 enables extension by Government notification even of any legislation which might have come into force in any part of India at any time between 1966 and the date of the notifica tion that the effect therefore of section 87 could be that the entire legislation for the Union Territory in respect of any particular subject would entirely depend upon the fancy of the Central Government without any sort of legislative or parliamentary application of mind that a power to exercise such wide power could not be described as a ministerial power it is essential legislative power that these facets of section 87 clearly render it an instance of excessive delega tion by Parliament to executive amounting in effect to the total abdication of its legislative powers in regard to Chandigarh
It was further contended that section 87 on its proper construction permits the extension of the laws of another State to Chandigarh only so long as there is a vacuum of
laws on any particular subject that once Parliament itself steps in and assumes legislative responsibilities in respect of that subject a transplantation of laws from elsewhere by extension is neither necessary nor valid that as early as 1974 Parliament having applied its mind and legislated in respect of landlord 632 tenant matters for the Union Territory it was for Parlia ment and Parliament alone to legislate on the subject there after that by purporting to extend by an executive notifi cation under section 87 the provisions of the 1985 Act to Chandi garh what the Central Government had really done was to modify or amend an existing parliamentary law operating already in the State which was impermissible and that the notification dated 15th December 1986 having thus exceeded the purview of section 87 it was therefore ultra vires
Dismissing the appeals and the writ petitions HELD 11 Section 87 of the should be interpreted constructively so as to permit its object being achieved rather than in a manner that will detract from its efficacy or purpose
So construed its validity has to be upheld
683C 12 It is impossible to carry on the government of a modern State with its infinite complexities and ramifica tions without a large devolution of power and delegation of authority
While Parliament should therefore have ample and extensive powers of legislation these should include a power to entrust some of those functions and powers to another body or authority
Such entrustment however could not be so extensive as to amount to abdication or efface ment
The legislatures cannot wash their hands off their essential legislative function of laying down the legisla tive policy with sufficient clearness and enunciating the standards which are to be enacted into a rule of law
This function cannot be delegated
What can be delegated is only the task of subordinate legislation which is by its very nature ancillary to the statute which delegates the power to make it and which must be within the policy and framework of the guidance provided by the legislature
668G H 669C D 13 Section 87 of the Reorganisation Act did not cross the line beyond which delegation amounts to abdication and self effacement
It was not the power to make laws that was delegated
The provision only conferred a power on the executive to determine having regard to the local condi tions prevalent in the Union Territory which one of several laws all approved by one or the other of the legislatures in the country would be the most suited to Chandigarh
The power given as such was more in the nature of ministerial than in the nature of legislative power because all that the Government had to do was to study the laws and make selec tion out of them
Thus viewed it was not really an unguided and arbitrary power
675F G 633 In re Delhi Laws Act  applied
Registrar of Cooperative Societies vs Kunhambu   R vs Burah 1878 51A 178 Jatindra Nath Gupta vs The Province of Bihar  Ors  Harishankar Bagla  Anr
vs The State of Madhya Pradesh  Rajnarain Singh vs The Chairman Patna Administration Committee Patna  Anr   Sardar Inder Singh vs The State of Rajasthan   Pandit Banarsi Das vs The State of Madhya Pradesh  Ors   The Edward Mills Co Ltd Beawar vs The State of Ajmer   The Western India Theatres Ltd vs Municipal Corporation of the City of Poona 1959 2 Supp
SCR 71 Hamdard Dawakhana Wakf Lal Kuan vs Union of India   Vasantlal Maganbhai San janwala vs The State of Bombay  Ors   Jyoti Pershad vs Administrator for the Union Territory of Delhi   Shama Rao vs The Union Territory of Pondichery   Mohammad Hussain Gulam Moham mad  Anr
vs The State Of Bombay  Anr
  Corporation of Calcutta  Anr
vs Liberty Cinema   Devi Das Gopal Krishan  Ors
vs State of Punjab  Ors
   Municipal Corporation of Delhi vs Birla Cotton Spinning  Weaving Mills Delhi  Anr   Sita Ram Bishambhar Dayal vs State of UP  Ors   Hira Lal Rattan Lal etc
vs State of UP  Anr
   Gwalior Rayon Silk Mfg Wvg Co Ltd vs The Ass
Commissioner of Sales Far  Ors   MK Papiah  Sons
vs The Excise Commissioner  Anr   Brii Sundar Kapoor vs First Additional District Judges 1980 I SCC 651 and Sprigg
vs Sigcau  referred to
21 Section 87 was quite valid even on the policy and guidelines theory
It is not necessary that the legislature should dot all the t s and cross all the t s of its poli cy
It is sufficient if it gives the broadest indication of a general policy of the legislature
673E F 22 The policy behind section 87 seems to be that it was necessitated by changes resulting In territories coming under the legislative jurisdiction of the Centre
These were territories situated In the midst of contiguous territories which had a proper legislature
They were small territories falling under the legislative jurisdiction of Parliament which had hardly sufficient time to look after the details of all their legislative needs and requirements
To require or expect Parliament to legislate 634 for them would have entailed a disproportionate pressure on its legislative schedule
It would also have meant the unnecessary utilisation of the time of a large number of members of Parliament for except the few members returned to Parliament from the Union Territory none else was likely to be interested in such legislation
In such a situation the most convenient course of legislating for them was the adaptation by extension of laws in force in other areas of the country
673F 674A B 23 There could have been no objection to the legisla tion if it had provided that the laws of one of the contigu ous States should be extended to Chandigarh
But such a provision would have been totally inadequate to meet the situation for two reasons
There might have been more than one law in force on a subject in the contiguous States say one in Punjab one in PEPSU and one in Himachal Pradesh etc and Parliament was anxious that Chandigarh should have the benefit of that one of them which would most adequately have met the needs of the situation in that territory
Or again there might have been no existing law on a particular subject in any of the continuous 3teas which was why the power had to include the power of extending the laws of any State of India
While in a very strict sense this might have involved a choice it was in fact and in general run of cases
only a decision on suitability for adaptation rather than choice of a policy
It was a delegation not of policy but of matters of detail for a meticulous appraisal of which Parliament had no time
Even if it be assumed that this involved a choice of policy the restriction of such policy to one that was approved by Parliament or a State Legisla ture constituted a sufficient declaration of guideline within the meaning of the policy guideline theory 675G H 676A C In re Delhi Laws Act  referred to
Once it is held that the delegation of a power to extend a present existing law is justified a power to extend future laws is a necessary corollary
If Parliament had no time to apply its mind to the existing law initially to be adapted it could have hardly found time to consider the amendments from time to time engrafted on it in the State of its origin
It would then seem only natural as a necessary corollary that the executive should be permitted to extend future amendments to those laws as well
676D E In re Delhi Laws Act  referred to
41 The concept of vacuum is as much relevant to a case where there is absence of a particular provision in an existing law as to a case 635 where there is no existing law at all in the Union Territory on a subject
For instance if Parliament had not enacted the 1974 Act but had only enacted an extension of the Trans fer of Property Act to Chandigarh it could not have been said that a subsequent notification cannot extend the provi sions of the 1949 Act to Chandigarh simply because the subject of leases was governed by the Transfer of Property Act which had been already extended and there was there fore no vacuum left which could be filled in by such extension
Again suppose initially a Rent Act was extend ed by Parliament which did not contain a provision regarding one of the grounds on which a landlord could seek eviction say one enabling the owner to get back his house for reoc cupation and then the Government thought that another enact ment containing such a provision also be extended it could not perhaps be said that the latter was a matter on which there was no legislation enacted in the Territory and that the extension of the latter enactment only filled up a void or vacancy
Again suppose the provisions of a general code like
say the Code of Civil Procedure were extended to the Union Territory
In that case s87 could not be construed so as to preclude the extension of a later amendment to one of the rules to one of the orders of the CPC merely on the ground that it will have the effect of varying or amending an existing law
There is no warrant to thus unduly restrict the scope of a provision like section 87
682D H 42 The extension of an enactment which makes additions to the existing law would thus also be permissible under section 87 of the Reorganisation Act so long as it does not ex pressly or impliedly repeal or conflict with or is not repugnant to an already existing law
683A B In the instant case the extension of the East Punjab Urban Rent Restriction Amendment Act 1985 to the Union Territory of Chandigarh only added provisions in respect of aspects not covered by the East Punjab Urban Rent Restric tion Extension to Chandigarh Act 1974 and in a manner not inconsistant therewith
683F Lachmi Narain vs Union of India and Hari Shankar Bagla vs State of Madhya Pradesh referred to
A notification while extending a law can make only such modifications and restrictions in the law extended as are of an incidental ancillary or subservient nature and as do not involve substantial deviations therefrom
In the instant case the 1985 Act has been extended as 636 it is with only very minor modifications
The notification dated 15th December
1986 was therefore quite valid and not liable to be struck down
684E F Lachmi Narain vs Union of India   referred to and Kewal Singh vs Lajwanti   distinguished 6
Any addition however small does amend or vary the existing law but so long as it does not really detract from or conflict with it there is no reason why it should not stand alongside the existing law
In the instant case the modifications introduced by the 1985 Act in the 1949 Act as were reenacted by the 1974 Act were minor modifications and restrictions
They do not incorporate substantial changes in the scheme of the pre existing law
Both sets of provisions can stand together and effectively supplement each other
684F H Hari Shankar Bagla vs State of Madhya Pradesh and Lachmi Narain vs Union of India referred to 7
There is a very crucial difference between section 87 and 89 in as much as within the period of two years mentioned in section 89 the Central Government could while adapting pre existing laws make any changes by way of repeal or amend ment
But section 87 though capable of enforcement indefinitely confers a more limited power
It can be invoked only to extend laws already in existence to the Union Territory and cannot make any substantial changes therein
The power under section 89 is limited in time but extensive in scope while under section 87 the power is indefinite in point of duration but very much more restricted in its scope
Therefore resort to section 87 did not render section 89 redundant
686E F