dedol-hf/india-case-legal-rag huggingface dataset:
the carrying on of the business": British Insulated & Helsby
Cables Ltd. v. Atherton(5); and
     (d) beyond that no hard and fast rule can be laid  down
to explain what is meant by the word "solely"
     A  case  somewhat similar to the present is  Farmer  v.
Scottish  North  American Trust Ltd. (6) where it  was  held
that  interest paid on an overdraft required for  purchasing
shares (the shares purchased being retained as security  for
the overdraft) was an outgoing which could be deducted  from
the  receipts  to ascertain the taxable  profits  and  gains
Which were earned by them. In our opinion, the present  case
falls within these principles.
(1) 1937 I.T.R. 270 P.C.          (2) 1937 I.T.R. 202 P.C.
(3) 6 Tax Cases 501.              (4) 1915 A.C. 433.
(5) 1926 A.C. 205 at 221 and 235. (6) 1912 A.C. 118.
599
    One  of  the  points which weighed  with  the  Incometax
Appellate  Tribunal and the High Court was that  though  the
conversion  did  not in any way disturb the holding  of  the
investments of the company or interfere with the earning  of
its  income,  it had the effect of diminishing  its  taxable
income. In our judgment, this is not a proper  consideration
when  the  transaction is not challenged on  the  ground  of
fraud.  In the present case there is not even an  allegation
of fraud.
    The next point on which some stress was placed was  that
there  was  complete identity of person between  the  person
whose  shares were sold and the person who took  the  deben-
tures  and  that the transaction  resulted  in  considerable
benefit to him. In the absence of a suggestion of fraud this
is  not relevant at all for giving effect to the  provisions
of  section  12(2)  of the Incometax  Act.  Most  commercial
transactions are entered into for the mutual benefit of both
sides, or at any rate each side hopes to gain something  for
itself.  The  test for present purposes is not  whether  the
other  party benefitted, nor indeed whether this was a  pru-
dent  transaction  which resulted in ultimate  gain  to  the
appellant, but whether it was properly entered into as apart
of  the  appellant's legitimate commercial  undertakings  in
order indirectly to facilitate the carrying on of its  busi-
ness.
    The High Court doubted whether the transaction could  be
brought  within the functions of an investment  company  and
found it difficult to reconcile it with the objects set  out
in the Memorandum of Association. But we see no such  diffi-
culty.   Clause  5 empowers a reduction of  capital  of  the
company  and clause 8(3) empowers the company to  borrow  or
raise money by the issue of debentures. The matter is clear-
ly  "writ in the bond". Moreover, we do not think that  this
inquiry  is relevant, for we are dealing with a question  of
income-tax and not judging the legality or propriety of  the
transaction  on an application to reduce the capital of  the
company.  The only question is whether this was done in  the
ordinary course of business for the purposes we have already
600
pointed out, however mistaken the directors and shareholders
of the company may have been.
  Therefore, as stated by the Income-tax Appellate    Tribu-
nal  in its statement of the case, the executors  of    Lord
Cable's estate needed money. In the next place, the transac-
tion  was brought about "at the instance of  the  holder  of
the  majority of ordinary shares", and also that the  shares
were  originally  held by Lord Cable and his  nominees.   It
seems evident therefore that Scott could have compelled  the
company  to pay him cash for the shares.  He seems  to  have
had the whip hand.  Instead of doing that he entered into an
arrangement  which, while giving him the  necessary  facili-
ties,  appears to have satisfied the company by allowing  it
to retain its investments without a precipitate  liquidation
of a large portion thereof.  It does not matter whether  the
company was right in this view or wrong, and in any event we
are in no position to judge of the soundness of its decision
because we have not all the materials before us.  It has  to
be  remembered  that considerations of this kind  go  deeper
than the apparent profit or loss on an isolated  transaction
standing by itself. It is not enough to say that the  50,000
shares  which  were cancelled earned in the  following  year
only  31/2 per cent. interest as against 5 per cent. on  the
debentures  because we do not know to what extent the  hold-
ings  of the company would have been disturbed if  this  had
not been done. What we do know is what the Income-tax Appel-
late Tribunal has stated, namely, that--
     "the  change brought about had been so  designed  that
the investments of the company were not to be disturbed  and
as  a  consequence the income accrued was in no  way  to  be
affected."
      This  has  only to be stated to  show  the  commercial
nature of the transaction from the company's point of  view.
    The High Court considered that the capital of the compa-
ny could have been reduced in other ways. But that again  is
not the point. There are usually many
  601
ways in which a given thing can be brought about in business
circles but it is not for the Court to decide which of  them
should  have  been  employed when the Court  is  deciding  a
question under section 12(2) of the Income-tax Act.
     It  was argued on behalf of the respondent (basing  the
same  on paragraph 7 of the appellant's application  to  the
High  Court dated 5th April, 1947) that the company  had  at
the time sufficient liquid resources to effect the reduction
of capital desired and so it was not necessary to resort  to
this  process. But that again is not the point. The  company
chose to do it this way, and as there was not even a sugges-
tion  of  fraud, the only question is whether  it  was  gone
through as an ordinary commercial proposition. But we  doubt
if that is what paragraph 7 meant because in paragraph 4  of
the application to the High Court dated 11th February, 1944,
the  petitioner stated that the money on hand and  at  short
notice  was only Rs. 8,94,379. That is a good deal short  of
50 lacs. However, we need not enter into this in detail.
     On  a  full review of the facts it is clear  that  this
transaction was voluntarily entered into in order indirectly
to facilitate the carrying on of the business of the company
and  was  made on the ground of commercial  expediency.   It
therefore  falls within the purview of section 12(2) of  the
Income-tax Act, 1922 before its amendment in 1939.
    This  being an investment company, if it borrowed  money
and utilised the same for its investments on which it earned
income, the interest paid by it on the loans will clearly be
a  permissible deduction under section 12(2) of the  Income-
tax Act. Whether the loan is taken on an overdraft, or is  a
fixed deposit or on a debenture makes no difference in  law.
The  only argument urged against allowing this deduction  to
be  made is that the person who took the debentures was  the
party  who sold the ordinary shares.  It cannot be  disputed
that  if  the  debentures were held by a  third  party,  the
interest payable on the same would be an
602
allowable  deduction in calculating the total income of  the
assessee company. What difference does it make if the holder
of  the debentures is a shareholder ? There  appears  to  be
none  in principle in view of the fact that   no  suggestion
of  fraud  is made in respect of the  transaction  which  is
carried  out between the Company and the  Administrator  and
which  has been sanctioned by the Court. If  the  debentures
had  been paid for in cash by the same party,  no  objection
could have been taken to allowing the interest amount to  be
deducted.  In principle, there appears to us no  difference,
if instead of paying in cash the payment of the price is  in
the  shape  of giving over shares of the company,  when  the
transaction is not challenged on the ground of fraud and  is
approved by the Court in the re-organisation of the  capital
of  the  company. In our opinion, therefore, the  ground  on
which  the Income-tax Appellate Tribunal and the High  Court
disallowed the claim of the assessee is not sound.
In our opinion, the High Court has failed to  appreciate
the true position and the question submitted for its opinion
should be answered in the affirmative. The appeal is  there-
fore  allowed.  The  respondent will pay the  costs  of  the
appeal in this Court and of the reference in the High Court.
                                      Appeal allowed.
Agent for the appellant: P.K. Chatterjee.
Agent for respondent: P.A. Mehta.
  603
PETITIONER:
THE UNITED COMMERCIAL BANK LTD.
        Vs.
RESPONDENT:
THEIR WORKMEN(and other cases)UNION  OF INDIA--Intervener.
DATE OF JUDGMENT:
09/04/1951
BENCH:
KANIA, HIRALAL J. (CJ)
BENCH:
KANIA, HIRALAL J. (CJ)
FAZAL ALI, SAIYID
SASTRI, M. PATANJALI
MAHAJAN, MEHR CHAND
DAS, SUDHI RANJAN
BOSE, VIVIAN
MUKHERJEA, B.K.
CITATION:
 1951 AIR  230            1951 SCR  380
 CITATOR INFO :
 F          1956 SC 746  (4)
 D          1989 SC1899  (27)
ACT:
Industrial  Disputes  Act (XIV of 1947), ss. 7,  8,  12,
16--Rules  under the Act, R. 5--Constitution of Tribunal  of
three  members-Absence  of  one of three  members  on  other
duty--Absent  member rejoining after some time--Validity  of
awards made during his absence by the two remaining members,
and  by  all  of them alter  he  rejoined--Construction  and
effect of ss. 7, 8, 12 and Rule 5.
HEADNOTE:
    The Central Government constituted an Industrial  Tribu-
nal  under the Industrial Disputes Act, 1947, consisting  of
A, B, and C
381
for deciding certain disputes and the Tribunal commenced its
sittings  in September, 1949.  On the 23rd  November,  1949,
the services of C were placed at the disposal of the  Minis-
try  of  External Affairs as a member of  the  Indo-Pakistan
Boundary  Disputes Tribunal, and the two remaining  members,
after an objection raised by one side, continued to sit  and
hear  the disputes. On the 20th February, 1950,  C  returned
from the Boundary Disputes Tribunal  and began  to sit again
with the other two members and  hear the further proceedings
in  the  case  of disputes which were part  heard  and   not
finally  decided on that date.  On the 20th May,  1950,  the
Government issued a notification that C had" resumed  charge
of his duties as a member of the All India Industrial Tribu-
nal".   Some  awards were made by A and B  before  the  20th
February, 1950, and some awards were made after that date by
A, B and C together.
Held, per KANIA, C.J., MEHR CHAND MAHAJAN, DAS and
Bose JJ. (FAZL ALI and PATANJALI SASTRI JJ. dissenting) :--
    (i)  when  C was appointed as a member of  the  Boundary
Disputes Tribunal, his services "ceased to be available" and
there arose "a vacancy" within the meaning of Sec. 8 of  the
Industrial Disputes Act;
    (ii)  under  the said section read with Rule  5  of  the
Industrial  Disputes Rules, when a vacancy occurred  it  was
obligatory  on the Government to notify its decision  as  to
whether  it intended to fill up the vacancy or not,  and  if
the Government decided not to fill up the vacancy, a notifi-
cation  under Sec. 7 of the Act was essential to  constitute
the  remaining members a Tribunal inasmuch as a Tribunal  of
three  members  is a different Tribunal  altogether  from  a
Tribunal consisting of two of them only;
    (iii)  neither the fact that C began to sit again  along
with  the two other members from the 20th.  February,  1950,
nor  the notification of the 20th May, 1950, stating that  C
had  "resumed  charge  of his duties as a  member"  of  that
Tribunal  could be treated as an appointment to the  vacancy
created  on  C's  appointment as a member  of  the  Boundary
Disputes Tribunal;
    (iv)  awards  made by A and B after the  services  of  C
ceased  to  be  available, and awards made  after  the  20th
February,  1950, by A, B and C were not made by  a  Tribunal
duly constituted under the Act and were void;
    (v)  since  the two remaining members were  not  a  duly
constituted Tribunal and the duty to work and decide was the
joint responsibility of all the three members who originally
constituted  the Tribunal, the matter was one 01 absence  of
jurisdiction  and not a mere irregularity in the conduct  of
proceedings,  and the defect could not be cured by  acquies-
cence or estoppel.
382
    Per  FAZL ALI and PATANJALI SASTRI  JJ.  (contra)--There
was a 'vacancy' within the meaning of Sec. 8 of the Act when
the services of C were placed at the disposal of the  Bound-
ary  Disputes Tribunal, which provided an occasion  for  the
Government  to  exercise the discretion vested in  it  under
Sec.  8 of the Act to fill up the vacancy or not.  The  fact
that  the  Government decided not to fill  up  the  vacancy,
could  not  render the Tribunal an  imperfectly  constituted
Tribunal,  and  the proceedings could validly  be  continued
before the Tribunal in spite of the vacancy. Further,  since
the vacancy was a temporary one and was not filled up, C did
not cease to be a member of the Tribunal and could therefore
rejoin it as soon as he was free from the duties of his  new
office. Even if it be assumed that it was necessary for  the
Government  to  make an appointment under Sec.  8  (1),  the
requirements  of  that section were complied  with,  when  C
joined under the orders of the Government and that fact  was
also notified by the Government on the 20th May, 1950.  Rule
5  of  the  Industrial Disputes Rules applies  only  when  a
Tribunal  is  initially constituted.  It does not  apply  to
appointments to fill vacancies.
Per MUKHERJEA J.--An Industrial Tribunal can be  consti-
tuted  only in accordance with the provisions of Sec.  7  of
the Industrial Disputes Act and unless a Tribunal is proper-
ly  constituted, it cannot be invested with jurisdiction  to
adjudicate  on industrial disputes.  Under sub-sec.  (2)  of
Sec. 7, the number of members constituting the Tribunal  has
to be determined by the appropriate Government and a  change
in  the  number of members could be made therefore  only  in
pursuance  of the provision contained in  that  sub-section.
As Sec. 8 does not lay down that, in case the services of a.
member of the Tribunal cease to be available and the Govern-
ment does not choose to make a new appointment in his place,
the remaining members should continue to form the 'tribunal,
the constitution or reconstitution of the remaining  members
as a Tribunal could be made only under Sec. 7 of the Act and
as  there was n9 notification by the appropriate  Government
under Sec. 7 constituting the two remaining members a Tribu-
nal  under the Act during the absence of C, the  proceedings
before  these two members and the awards made and signed  by
them  only during C's absence were void.  But, there was  no
necessity for a fresh notification and a fresh  constitution
of  the  Tribunal  when the absent member  returned  as  the
original notification was still there unaltered and unamend-
ed,  and  by virtue of this notification  alone,  the  three
members  would  be competent to sit as a Tribunal  and  dis-
charge  its  duties.   The Tribunal  was  thefore,  properly
constituted  from  the 20th February, 1950, and  the  awards
made by all the three members after that date were not  void
for want of jurisdiction in the Tribunal.
JUDGMENT:
CIVIL   APPELLATE  JURISDICTION:   Appeals  by  special
leave against an Award dated 31st July, 1950,
383
of the All India Industrial Tribunal (Bank Disputes):  Civil
Appeals  Nos. 35 to 50 of 1951.  The facts of the  case  and
the arguments of Counsel appear in the judgment.
    C.K. Daphtary (R. J. Kolah, with him)for the  appellants
in Civil Appeals Nos. 35, 36 and 37.
    Jamshedji  Kanga (R. J. Kolah  with him) for the  appel-
lant in Civil Appeal No. 38.
S. Chaudhuri (G. C. Mathur, with him) for the appellants
in Civil Appeals Nos. 41, 43, 44, 45, 46 and 49.
    S.  Chaudhuri (S.N. Mukherjee, with him) for the  appel-
lants in Civil Appeals Nos. 48 and 50.
    R.J. Kolah, for the appellants in Civil Appeals Nos. 39,
40 and 42.
    Ram Lal Anand (Charan Das Puri, with him) for the appel-
lant in Civil Appeal No. 47.
    A.C. Gupta (M.M. Sen and R.K. Banerji, with him) for the
respondents in Civil Appeals Nos. 35, 36, 40, 41, 42, 43 and
44,
M.M.  Sen for the respondents in Civil Appeals Nos.  37,
39, 45 and 46.
    Niren  De (B.K. Chaudhary with him) for the  respondents
in Civil Appeals Nos. 38 and 50.
    T.R. Bhasin for the respondents in Civil Appeals Nos. 48
and 49.
    M.C.  Setalvad, Attorney-General for India. Sikri,  with
him) for the Intervener (Union of India) in Civil Appeal No.
as.
    1951.  April 9.  The judgment of Kania C.J,  Mehr  Chand
Mahajan, S.R. Das and Vivian Bose JJ. was delivered by Kania
C.J., Fazl Ali, Patanjali Sastri and Mukherjea JJ. delivered
separate judgment s,
    KANIA  C.J.--In these appeals the question  whether  the
Industrial Tribunal (Bank Disputes) had jurisdiction to make
the  awards has been directed by the Court to be tried as  a
preliminary  issue.  'the decision depends on the true  con-
struction  of  sections 7, 8, 15 and 16  of  the  Industrial
Disputes Act.  On
384
this question, the agreed statement of facts shows that by a
notification of the Government of India dated the 13th June,
1949,  the  Central  Government  constituted  an  Industrial
Tribunal  'for the adjudication  of industrial  disputes  in
banking companies consisting of  Mr. K.C. Sen, chairman, Mr.
S.P.  Varma  and Mr. J.N. Mazumdar.  A  second  notification
dated   the  24th  August, 1949, was  thereafter  issued  as
follows :"In exercise of the powers conferred by sub-section
(1) of section 8 of the Industrial Disputes Act, the Central
Government  was  pleased to appoint  Mr.  N.  Chandrasekhara
Aiyar as a member of the Industrial Tribunal constituted  by
the notifications of the Government of India in the Ministry
of  Labour  dated the lath June, 1949, in the place  of  Mr.
S.P. Varma whose services have ceased to be available."  The
Tribunal  commenced its regular sittings at Bombay from  the
12th  to the 16th of September, 1949. It thereafter  sat  at
Delhi  and Patna between the 19th September, 1949,  and  3rd
April,  1950. Further sittings were held, at some  of  which
Mr. Mazumdar was absent on various dates and Mr. Chandrasek-
hara  Aiyar  was absent from the 23rd November, 1949, to the
20th  of February, 1950, as his services were placed at  the
disposal of the Ministry of External Affairs as a member  of
the Indo-Pakistan Boundary  Disputes  Tribunal.  Between the
23rd November, 1949, and 20th February 1950, Mr. Sen and Mr.
Mazumdar  together  sat at several places and  made  certain
awards.  Those awards have been accepted by  the  Government
under section 15 of the  Act and published in the Gazette as
the awards of the Tribunal.  The Tribunal held its  sittings
in  Bombay  to hear general issues from  the  16th  January,
1950,  and  concluded them on the 3rd April, 1950.   In  the
agreed statement of facts, it is stated that the services of
Mr. Chandrasekhara Aiyar were not available to the  Tribunal
from  the afternoon of 23rd November, 1949, to the  forenoon
of 20th February, 1950.   From the 16th January, 1950, up to
20th February, 1950, several matters, particularly including
15 items  covering, inter alia,  Issues 1, 2, 3, 4, 15,  23,
27, 28, 33, 34, 37
385
and  dealing  with the question of the jurisdiction  of  the
Tribunal  in  respect  of officers  regarding  banks  having
branches in more than one Province and banks in liquidation,
question  of retrospective effect to be given to the  award,
question relating to provident and guarantee fund and allow-
ances  to special categories of workmen, were dealt with  by
the  Tribunal.   From the notes of the  proceedings  of  the
Tribunal it appears that as numerous banks and workmen  were
parties  to the proceedings, some workmen who had not  found
it  convenient to attend throughout appeared and  put  forth
their views in respect of the aforesaid issues and questions
after  Mr.  Chandrasekhara Aiyar started his work  from  the
afternoon of the 20th February, 1950, again by sitting  with
Mr. Sen and Mr. Mazumdar.
    The jurisdiction of the Tribunal of the aforesaid  three
persons  to make the award is disputed on two  grounds:  (1)
That when Mr. Chandrasekhara Aiyar's  services ceased to  be
available,  as mentioned in the agreed statement  of  facts,
the remaining two members had to be re-appointed to  consti-
tute  a  Tribunal. (2) That when  Mr.  Chandrasekhara  Aiyar
began  to sit again with Mr. Sen and Mr. Mazumdar  from  the
forenoon of 20th February, 1950, it was imperative to  issue
a  notification constituting a Tribunal under section  7  of
the  Industrial Disputes Act.  The argument is that  in  the
absence  of Mr. Chandrasekhara Aiyar the two members had  no
jurisdiction to hear anything at all without the appropriate
notification  and that Mr. Chandrasekhara  Aiyar's  services
having ceased to be available on the 23rd of November, 1949.
he  cannot sit again with the other two members to form  the
Tribunal in the absence of a notification under section 7.
    In  order  to  appreciate the correct  position,  it  is
necessary to consider the scheme of the Industrial  Disputes
Act. It envisages the establishment of a Conciliation Board,
a  Court of Inquiry and a Tribunal for adjudication.   Rele-
vant  portions of sections 5, 6, 7, 8, 15 and 16 of the  Act
which  only are material for the present discussion  run  as
follows: --
50
386
     5.   (1) "The appropriate Government  may  as  occasion
arises by notification in the official Gazette constitute  a
Board  of  Conciliation for promoting the settlement  of  an
industrial dispute.
    (2) A Board shall consist of a chairman and two or  four
other members, as the appropriate Government
thinks fit.
     (3) The chairman shall be an independent person and the
other members shall be persons appointed in equal numbers to
represent the parties to the dispute and any person appoint-
ed to represent a party shall be appointed on the  recommen-
dation of that party:
                     *    *    *
     (4)  A  Board, having the prescribed  quorum,  may  act
notwithstanding  the absence of the  chairman or any of  its
members or any vacancy in ifs number.
    Provided that if the appropriate Government notifies the
Board that the services of the chairman or any other  member
have ceased to be available, the Board shall not act until a
new  chairman  or member, as the case may be, has  been  ap-
pointed."
    6.   (1)  "The appropriate Government may   as  occasion
arises by notification in the official Gazette constitute  a
Court of Inquiry for inquiring into any matter appearing  to
be connected with or relevant to an industrial dispute.
    (2) A Court may consist of one independent person or  of
such  number  of  independent persons   as  the  appropriate
Government  may think fit and where a Court consists of  two
or  more  members,  one of them shall be  appointed  as  the
chairman.
    (3)  A  Court,  having the prescribed  quorum,  may  act
notwithstanding  the absence of the chairman or any  of  its
members or any vacancy in its number.
     Provided   that,  if the appropriate  Government  noti-
fies the Court that the services of the chairman have ceased
to be available, the Court shall not act until a new  chair-
man has been appointed."
     7.  (1) "The appropriate Government may constitute  one
or more Industrial  Tribunals  for the
387
adjudication  of industrial disputes in accordance with  the
provisions of this Act.
    (2)  A Tribunal shall consist of such number of  members
as the appropriate Government thinks fit. Where the Tribunal
consists  of two or more members, one of them shall  be  ap-
pointed as the chairman.
    (3) Every member of the Tribunal shall be an independent
person,
    (a)  who  is or has been a Judge of a High  Court  or  a
District Judge, or
    (b)  is qualified for appointment as a Judge of  a  High
Court:
    Provided  that  the  appointment to a  Tribunal  of  any
person not qualified under part (a) shall be made in consul-