1. The Government of Andhra pradesh introduced a scheme to supply rice to poorer sections of the society, at the rate of Rs. 2/- per Kilogram and in the interest of that scheme, issued certain orders restricting the export of rice outside the state and also calling upon the rice-millers and dealers in the state to sell a certain quantity of foodgrains with them, to the Andhra pradesh state civil supplies corporation. These orders are questioned in these writ pwtitions. The points raised in the batch of writ petitions are common. Though the prayer in the writ petitions calls in question the valdiity of Cls. 4-A 4-B and 4-c of the Andhra pradesh Rice procurement (Levy) and restriction of sale order, 1967 (hereinafter referred to as the "Levy order), the said aspect was not urged before me. The arguments centred roung the interpretation of the various clauses, and the validity of the Government orders. In the light of the said Rules. For the sake of convenience I will set out the facts in W.P. No. 5445/83.


Sri Rama Krishna Rice & Groundnut ... vs State Of Andhra Pradesh And Ors. on 8 August, 1983

2. The petitioners in W.P. No. 5445 of 1983 are licensed foodgrain dealers millers in krishna district who purchase paddy and mill the same in their mills. Under Cl. 3 of the levy order, they are obliged to supply the specified percentage of rice. So derived by them by way of levy to the state at the notified price. Currently, the levy quota is 50% for all the districts in the state the petitioners say that the remaining 50% they are entitled to sell whereever they like and at whatever price they can get and that no restriction can be placed by the state thereon. Their case is that for the Kharif season 1982-83, they have satisfied the levy quota targets fixed for them and that when they applied for permits for transport and sale of the remaining 50% of rice, the appropriate authorities have been denying and deliberately delaying the issuance of permits purporting to Act under the instructions of the Government impugned herein which permit export of only half of levy-free rice outside the state and whih instructions provide further that permits for sale of rice outside the state shall be issued only after the rice meant for sale inside the state is released. It is submitted that the petitioners are entitled in law to sell the entire levy -free rice (remaining 50%) outside the state if they so wish and that as and when they apply for such permits, the respondents are bound to issue the same. It is submitted that the petitioners cannot be compelled to sell the whole of it or any portion thereof, within the state. It is complained that under the impugned orders to which I shall presently refer - the Government has been compelling them to sell half the levy-free rice within the state. And following the export of only the other half without any authority of law. It is complained further that they are being compelled to sell the levyfree rice to the A.P.


It is complained further that they are being compelled to sell the levyfree rice to the A.P. state civil supplies corporation at the price fixed by the Government which is resulting in huge losses to the petitioners. Even for the current Rabi season it is complained the authorities are compelling the rice-millers to deliver 2,50,000 tonnes over and above the levy quota and that such compulsion is equally unsustainable in law. This is short is the gravamen of the petitioners' complaint.


The legal aspect.
 3. The essential commodities Act has been enacted in the interest of general public for the control of production, supply and distribution of and trade and commerce in certain commodities, declared as essential commodities S. 3 (1) empowers the Central Government to provide by order for regulating or prohibiting the production, supply and distribution of any essential commodity and trade and commerce therein if in its opinion it is necessary or expedient so to do for maintainin or increasing or f or securing thier equality distribution and availability at fair prices. Subsec. (2) provides that without prejudice to the generality of the powers conferred by sub-sec (1) order made under S. 3 (1) may provide among others-
   (a)  to (c)  xx                                   xx                     xx


(d)   for  regulating by  licences  permits   or otherwise   the storage  transport distribudisposal  acquisition  use or consumption   of any essential  commodity:
 (e)              xx                        xx                    xx                                xx

 (f)  for  requiring  any person  holding    in stock  or engaged in the production  or in the   business of  buying  or selling  of any   essential  commodity:-

 (a)  to sell  the whole   or a  specified   part  of the quantity  held   in stock  or  produced  or recived by him  or

 (b)  in the case of any such   commodity  which is likely  to be   produced   or received  by him to sell the  whole or  a specified  part  of such commodity  when produced   or  received by him,

 To  the   Central  Government  or a state Government or to an officer or agent   of  such Government or to a corporation   owned   or controlled  by such   Government or to such other person or class of persons and in   such circumstances as may be specified  in the order".

 Clause (c)  of sub-sec. (2)  empowers  the  central   Government  to control  the price  at  which any  essential commodity  may  be bought  or sold.


4.  Section 5 of  the Act   empowers  the central  Government to direct  by a  notified  order that   the  power  to  make orders  or  issue notifications under S. 3 shall in relation  to such matter.  And  subject to such  conditions   if any  as  may be  specified  in the  direction  be exercisable  by  the state Government  among  other authorities.

   By  its  order  dated 24-7-1967  contained in G.S. R. 1111  published  in the Gazette of India, extraordinary, dated 24-7-1967  the central  Government  directed   that 'the  powers  conferred  on it  by sub-sec. (1)  of S. 3  of  the said  Act to make  orders  to provide  for   the matters specified    in Cls.  (A) (b) (c) (d) (e) (f) (h) (I) (ii)  and (j) of  sub sec.  (2) thereof shall, in  relation to food-stuffs  be exercisable  also  by a  state Government  subject to the conditions-

 '(1)  that such powers  shall be  exercised by a state  Government  subject to such directions if any as may be issued  by the  central  Government in this  behalf:  and


(2)  that before  making  an order relating to any matter  specified  in the said cls.  (A)  and (c)  or in regard  to regulation  of  transport  of any food-stuffs  under the said cl.  (D)  the state Government shall  also obtain the prior   concurrence of the central Government .........'

 Condition No. 2 was modified  by an  other order contained in G.s. r. 1508  dated 30-9-1967  condition  No. 2  substituted by this   order, reads:-


"(2) that before making an order relating to any matter specified in the said cls. (A) (c) or (f) or in regard to distribution or disposal of food-stuffs to places outside the state or in regard to regulation of transport of any foodstuff under the said cl. (D) the state Government shall also obtain the prior concurrence of the central Government". Yet another order has been issued in G.S. R. 800 dated 9-6-1978: but since the terms thereof in so far as they are relevant are identical with the earlier orders, it is not necessary to refer to the 1978 order.
 5. On 17-11-1967 the Government of Andhra pradesh made the "Andhra pradesh Rice procurement (Levy) and Restriction on sale order. 1967" which was published in the Gazette on 18th November 1967 This order purports to have been made under section 3 (2) (f) of the essential commodities Act read with sub-secs. (3) (3-B) and (5) of section 3, and the order of the Government of India contained in G. S. R. 1111 dated 24-7-1967 and also with the prior concurrence of the central Government clause 2 of this order defines certain expressions used in the order clause 3 provides for the levy. Sub-clauses (1) to (4) of Cl. 3, read as follows:-
 "3. Levy on rice: (1) Every miller carrying on rice milling operations shall sell to the agent or an officer duly authorised by the Government in this behalf at the notified price and at such percentage of the total quantity of each variety of rice produced or manufactured by him in his rice mill every day as is specified for each district in the schedule.


(2) Every dealer shall sell to the agent or an officer duly authorised by the Government in this behalf at the notified price and at such percentage of the total quantity of:
 (a) each variety of rice milled by him every day out of his stocks of paddy and


(b) each variety of rice purcahsed or otherwise acquired by him for the purpose of sale from persons other than millers or dealers as is specified for each district in the schedule I:
 (provisos omitted) (3) every miller or dealer in a district who holds stock of rice on behalf of any person shall deliver to the agent or an officer authorised by the Government in this behalf such percentage of each variety of rice specified for the district in schedule -I on behalf of the person on whose behalf the miller or dealer holds the stock.
 (4) any person whose stock of rice is delivered to the agent or officer authorised by the Government under subcl. (3) shall not be entitled to recover from the miller or dealer on account of value of the stock so delivered notwithstanding any contract or instrument to the contrary. He shall forthwith approach the agent and state why such rice should not be levied from him by Government at the notified price and in case of such levy he shall be entitled to receive the payment of the cost of the rice taken by Government at notified price.............."
 It is not necessary to refer to Cls 3-A and 3-b which deal with levy of paddy and the price to be paid to the producer/agriculturist. Clause 4 places certain restrictions upon the sale and movement of rice. It reads as follows:-
 "4. (1) No miller or delaer shall sell or agree to sell or otherwise dispose of the rice recovered by milling other than the quantity specified in Cl. 3 except in accordance with the permit issued by the collector or any officer authorised by the Government in this behalf.


(2) Save as otherwise provided in sub-cl. (1). No person shall transport rice for sale from the premises of any rice mill except in accordance with the permit issued by the collector or any officer authorised by the Government in this behalf".
 It is not necessary to refer to Cls. 4-A and 4-B which provide for certain restrictions on sale and movement of paddy and broken-rice.
 6. Clause 4-C empowers the Government to issue directions which shall govern the permits granted under cl. 4 and cl. 4-A It reads as follows:-
 "4-C. Permits issued shall be subject to directions of Government Any permit issued under cl. 4 or cl. 4-A shall however be subject to such directions as the Government may give in this behalf".
 It may be stated that Cl. 4-C was added by the state Government after obtaining the prior concurrence of the central Government in its telegram dated 6-10-1981.


7. A reading of the above provisions makes the following position clear: section 3 of the Essential commodities Act empowers the central Government or its delegate to make orders for regulating the supply distribution trade and commerce in any essential commodity in the interest of maintaining or increasing the supply of such essential commodity or for securing its equitable distribution and availability at fair prices. Clause (d) of sub-sec. (2) empowers the central Government /State Government to make orders regulating, by permits inter alia, the disposal and acquisition of any essential commodity: while Cl. (F) empowers them to make an order directing any person holding instock any essential commodity to sell the same to the state or a state controlled corportation. The price at which such essential commodity is to be sold can also be fixed under an order made under Sec. 3 The levy order has been made under sec. 3 (2) (f) of the Act. When orginally made it did not contain Cl. 4 in the present form cl. 4 in the present form was introduced only in 1972 Cls. 4-A and 4-b were introduced in 1974 and Cl. 4-C in october 1981 Cl. 3 obliges every miller and dealer to deliver 50% of the rice milled by him or got milled by him on any day by way of levy to the state. The percentage of levy now in force is 50% cl. 4 restricts the sale and movement of levy-free rice, the heading of cl. 4 is relevant It is "restriction on sale and movement of rice". Cl. 4 expressly declared that no miller or dealer shall sell or agree to sell or otherwise dispose of the rice recovered by milling other than the quantity specified in Cl. 3 except in accordance with the permit issued by the collector or any officer authorised by the Government in this behalf", While


accordance with the permit issued by the collector or any officer authorised by the Government in this behalf", While subcl. (2) of Cl. 4 declares that "save asotherwise provided in sub-cl (1), no person shall transport rice for sale from the premises of any rice mill except in accordance with the permit issued by the collector or any officer authorised by the Government in this behalf." In disputably. Therefore even the sale of levy-free rice is not free at the volition of the miller/dealer but subject to regulation. It can be sold or disposed of only in accordance with the permits issued by the collector. Or other authorised officer. In this connection the following circumstances deserve notice: Clause 4 in the present form was introduced by G.O. Ms. 1533 F & A (C.S. 1) dated 30-10-1972 published in the rules suplement to part II (Extraordinary) page 1. Of the Andhra pradesh gazette dated 31-10-1972 the preamble to this amendment order does not refer or recite cl. (F) of sec. 3 (2) of the Act, as is done by the original order made in 1967. It purports to have been made in exercise of the powers conferred by section 3 of the essential commodities Act". In my opinion this was advisedly done for cl. 4 of the levy order is referable to cl. (D) in sec. 3 (2) secondly. I find that this amendment order has been issued with the prior concurrence of the central Government as recited in its preamble. Thus the requirement of G.s. R. 1508 dated 30-9-1967 and in particular of condition no. 2 thereof has also been satisfied Indeed the validity of cl. 4 was not challenged either in the writ petitions or in the arguments before me Now the avowed purpose of the


not challenged either in the writ petitions or in the arguments before me Now the avowed purpose of the amendment order is also found stated in the preamble. It reads Whereas the state Government is of the opinion that it is necessary and expedient so to do for maintaining supplies of rice produced in the state of Andhra pradesh and for securing equitable distribution and availability thereof at fair prices in the state of Andhra pradesh". It is thus clear that cl. (4) is neither a formal provision nor an empty one. It is made with a definite purpose and must be understood and interpreted accordingly. The sale of rice produced in this state is sought to be regulated by means of permits in the interest of maintenance of supplies for securing their equitable distribution and for ensuring their availability at fair prices in this state The Rule-making authority could not have made its intention clearer than this over and above this, Cl. 4-C expressly declares that the permits issued under Cl. 4 shall be subject to such directions as the Government may give it is of course that the directions that the Government can give under Cl. 4-C must be warranted by the levy order and must be meant for and designed to further and advance its objects (see Laker Airway's case (1977) 2 All ER 182).


The orders of the Government impugned:-
 8. Since cl. 3 of the levy order provides for collection of levy out of the rice milled or purchased every day by the millers/dealers the Government has for the sake of convenience of both the administration as well as the traders been following the practice of fixing a target for each district and the collector, in turn fixes the target for each rice-mill or dealer, as the case may be the Millers dealers are first required to fulfil the levy quota and only thereafter are they permitted to sell the levy-free rice. This system dispenses with the governmental supervision on every ricemiller's/dealer's business. Every day. The very fact that the millers/dealers never complained of such practice all these years is proof positive of the fact that the said practice is not in any way prejudicial to the interests of the millers/dealers Again for the sake of convenience the Government divides each year into two halves. Viz Kharif and Rabi the Kharif season begins with Ist of october and ends with the 31st of March while the Rabi season begins with 1st of April and ends with 30th of September the levy targets are fixed separately for both kharif and Rabi.


9. In the begining of the Kharif season, 1982-83. The collector. Krishna District. Issued proceedings dated 23-10-1982. Contained in Rc. No. A 341/82,in pursuance of the Government memo dated 8-10-1982 referred to therein fixing the target for each rice-mill for the Kharif season and also stating further that (5) millers and dealers delivering levy will be eligible to sell levy-free stocks in proportion to mill levy delivered. Since the percentage of levy is 50 the millers and dealers will be eligible to sell levyfree stocks at 1:1 ratio". This was of course, subject to revision if there are any changes in the policy of the Government


10. On 12-2-1983 the Government revised its procurement policy for 1982-83 in its circular No. P1/2896/83, wherein the state Government directed that with a view to ensure supplies to the people within the state and also to ensure against the rise in prices of rice the district administrations shall not allow any rice or paddy to go outside that state without the authority of the collector with a view to make the rice available to the people of this state in the first instance, the collectors of the surplus and deficit districts were directed to stop unauthorised movement of any kind across their districts. Among the instructions given the follwing instruction is relevant for the present purpose:-
 (1) In all the surplus districts not more that 50% of the levy-free rice only should be permitted to be transported outside the state. The other half shall be reserved for consumption within the state. Every collector shall make out a budget for releasing these permits for local sales in a controlled fashion till the end of November monthwise............In other words the levy-free eligibilty earned to the extent of 50% and which would be required in the open market will have to be released through permits in a controlled fashion taking care to release larger quantities in the lean months. This method is advocated so that we may not only ensure overall availability of rice but also help hold the price line......."


11. In pursuance of the above circular the commissioner of civil supplies issued instructions in his Memo dated 16-2-1983 by way of clarification stating that out of the levy free eligibility accrued the millers may be permitted to transport rice outside the state to the extent of hald of their eligibility the balance half has to be offered for sale in the domestic market as per the guidelines issued in the reference second cited; (circular dated 12-2-1983). Where such rice is not purchased for sale in the domestic market in a given month that also may be permitted to be sold outside the state as instructed in the reference second cited......Surplus district collectors are requested kindly to watch closely the price of paddy in this connection to ensure that prices of paddy do not go below suppor t price........under all circumstances paddy prices should be kept well above the notified prices. To this extent collectors should exercise their own discretion, but keep the commissioner informed immediately thereafter..........."
 12. Consequential instructions were issued to all the millers in Krishna district by the collector Krishna.
 13. Now coming to the Rabi season 1982-83. The Government announced its Rabi procurement policy in Government memo No. 19844/A/CSI/83, dated 25-4-1983. In this memo it was stated:-
 "The Rice Milling Industry shall pay an amount of not less than Rs. 20/- per quintal of paddy above the minimum support prices fixed by the Government of India during the Rabi season In other words the minimum price payable for Fair Average Quality paddy by the millers and dealers may be:-


(i)  common ......Rs.  142/- Quintal

 (ii)  fine..............Rs. 146/- Quintal

 (iii)  superfine....Rs.  150/-Quintal

 During  Rabi    1982-83  the mill levy   percentage shall be  50%   and the entire  levy  free eligibility  earned   by   the millers  or  dealers  can be sold  anywhere in the  country..........."

 It was further directed that the millers and dealers shall also make available and sell an aggregate quantity of 2.50 lakh tonnes of rice for internal consumption within the state during Rabi 1982-83, in the open market at a price not exceeding Rs. 265/- per quintal of fair average quality rice. The mill -wise apportionment of this aggregate quantity will be made by the collectors in pro portion to the levy procured from each mill....." Another direction related to the unutilized stock of kharif season it was in the following words:-
 "In respect of the Unutilized stocks of Kharif levy-free rice meant for sale within the state i.e, out of the 50% levy free eligibility of 1982-83 Kharif, and the 2.50 lakh tonnes of rice to be sold within the state by the millers during Rabi 1982-83 which comes to a total of 6,81.500 tonnes for the state as a whole, the month-wise budgeting of releases into the open market for the entire state shall be as follows:-
 April   1983             ..... 20,000 Tonnes

May   1983                    ..      70,0000  ,,

June  1983                  .....   1.10,000   ,,


June  1983                  .....   1.10,000   ,,

July,    1983               ......   1.10,000   ,,

August  1983              ....... 1,10,000   ,,

September 1983          ...... 1,10,000   ,,

October  1983              ......1,04.500   ,,

November  1983           .....   47.000   ,,

                                   _______________

                      Total      6.81.500  Tonnes

 .........These  quantities shall be sold by the millers at a price  not exceeding  Rs. 265/- per quintal. As had been  agreed  to by  them.   The entire  quantity  shall be  sold within the state  of andhra  pradesh  only  and  the collectors  shall ensure   this  by having  these stocks  lifted  as laid down  in the  circular  of the commissioner  (C.S.)  Ref.  P1/2896/ 82  dated 12-2-1983, fifth cited........."

 With    respect  to the export   of  rice  outside the state it was  stated:-


"Permits  for transport and sale  of rice eligible   to be sold    outside  the state  i.e,  the 25% levy  free eligibility   out  of the Kharif  levy   deliveries  and  the  quantity  of rice equal  to the levy   delivered in the Rabi   season  shall be issued only   after  the state's  internal    requirements  are released first.  This  shall be  done by  the  collectors, on a week  to week basis, where however  a miller would deliver his share of rice meant for internal consumption  within  the state of  andhra  pradesh in  full  he may  be given a permit for transport and sale outside the state ensuring  that the  ration  between  internal  sales  and  outside  the state by  him is not  disturbed".

 14.  On 25-5-1983  the Government issued  certain further orders  with respect to its   procurement policy  for rabi 1982-83  in this   memo  the Government  issued  the following   instructions:-

 "In order  to meet   the increasing demand for rice at Rs. 2/-  per  kg.,  from    the   green card  holders,  Government have decided to purchase through a.P.  state Civil   supplies corporation Limited levy-free  rice budgeted to be sold by  the  mills  in the months from April  1983   to November  1983  at the following  rates  as agreed to by  the  millers and distribute  the same  to  the  green   card  holders  at Rs. 2/-  per  Kg.

 Purchase rate  by  the
 ____________________

APSCSCL  from the Mills:


Purchase rate  by  the
 ____________________

APSCSCL  from the Mills:

(1)  All first crop  common  Varities:         Rs.  250/- per  Qtl.

(2)  All first crop  fine and superfine varieties :   Rs.   260/-   ,,

(3)   second  crop  fine varieties  eo. G. Hamsa:     Rs.   245/-   ,,

(4)   Second  crop   superfine  varities like  BPT 1235 etc. Rs.    255/-   ,,


The prices fixed above shall be forfair average quality rice. The A.P. State civil supplies corporation Ltd., shall purchase fair average quality rice from the levy free stocks available with the mills in the districts and move the stocks to the deficit districts as per the allotment made by the commissioner of civil supplies. The rice shall be delivered at the fair price shops at Rs. 200/- per quintal minus the retailer's margin as in the case of the Food corporation of India rice.
 Collectors shall issue permits for sale of levy free rice to the millers to enable them to sell the rice of the A.P. State civil cupplies corporation limited. Permits for movement outside the state shall be issued only after the stocks for sale within the state are released or an undertaking in writing is given to the effect that the concerned mills would release rice for local sales in full as and when it is demanded.
 The collectors shall ensure that the millers deliver to the maximum extent possible Kharif varieties towards Kharif eligibility.
 Collectors  shall issue  levy  free permits  against deliveries  made for  movement  outside  the state from  Rabi  crop  varieties  only  and no Kharif  variety  shall be  allowed    to move  outside  the state on levy  free  permits......."


15.  The  various   order  referred to  above disclose  the following   position:  In  the begining  of the kharif  season 1982-83, the only obligation of the millers/dealers  was to deliver 50%  of the levy  under Cl. 3 of the levy  order and then they were free to sell the levy-free  rice  whereever they liked  and the Government was to issue  permits  for  the sale of such levy-free  rice  at  the  request   of the Millers/dealers  who satisfied  the  levy    target  fixed    for them.  However  after the new   Government   came   into office in january   1983  this policy  underwent a change with a view to ensure   domestic supplies   and also to arrest  the rise in prices  the Government  directed  that  only   half the levy-free  rice  should  be allowed  to be transported   outside  the state which   means   that the remaining  half  should be sold only within   the state.  Further  with the same object in view  it was directed  that the permits  for sale to be issued    under  Cl. 4  of the Levy  order should be phased.  In other   words  permits  for  the  entire   levy-free  rice   would not be issued   at  once even it faked  for These   permits were to be issued  in a phased  manner   over  several  months.  This  was  undoubtedly  a policy. Change to the  prejudice  of the millers/  dealers  for the reason  that the prices  of  rice  outside the state are  far   higher   than the


the prices  of  rice  outside the state are  far   higher   than the   prices of rice prevailing  in this state.  Another  prejudice  to them was that they were not  to be issued permits for the entire levy-free  rice as  and when they asked  for  the   same but  that they   were to be issued  in a controlled fashion  the millers  complain that such a policy    has the effect of locking up   their capital    over   an unduly   long  period    the submission is that they  have  to raise substantial loans from their financiers  for purchasing  paddy  and  that  if they are not  allowed to sell the levy-free  rice also soon after satisfying   their levyquota  they will be obliged to pay   large amounts by way  of interest   to their  lenders  the submission  is that there  is  no legal authority  for  both these types   of restrictions viz  the restriction on sale of levy-free quota  outside  the state and also the  refusal  to issue  permits  for sale  of levy-free  quota   as and when asked   for .  it is  submitted  that by enforcing  these instructions the millers/  dealers  were disabled  and prevented   from selling  huge   quantities of levy-free  rice  of kharif  season   outside  the state,  and which quantity  is now  being  tagged  on to the  Rabi  quota.


16.  Now  coming to the Rabi  season  the policy  for this  season  is slightly   different from the  policy followed  for the kharif.  The  mill levy  is 50%   and the millers/dealers  are held entitled to sell the  levy  free rice any where   in the  country  but  subject  to their  making  available an aggregate quantity  of  2.5 lakhs  tonnes of rice for  internal  consumption  in the state at a price not exceeding  Rs.  265/-  per  quintal.  This  2.5  lakh  tonnes of  rice is added  to the held  over   stocks  of levy   free rice    meant for sale within  the state and the total quantity  of  6.81.510  tonnes  is proposed to be released into the market in specified quantities every  month    permits  for sale  out side  the state are to be issued    only    after   the  state's   internal  requirements are released first.  The  price  at which  the  A.P.  state  civil  supplies    corporation  was to purchase  levy-free  rice meant  for  domestic  market  from  the millers/ dealers  was fixed   at Rs.  250/-  per  quintal  for all first  crop  common  varieties,  and  Rs. 260/-  for  all  first  crop  fine  and duperfine  varities,  similarly  for  second  crop  the  prices  were  fixed  at Rs. 245/-  and Rs. 255/-  per  quintal respectively  the permits  for sale  of  levy  free  rice outside the states


respectively  the permits  for sale  of  levy  free  rice outside the states  were  to be  issued  only after the stocks  meant for sale  within the state are released  indeed in  its memo  dated  25-5-1983  the Government directed  that no  Kharif variety  shall be  allowed  to move  outside  the state  on  levy-free   permits".  The facility  given   in the circular  dated  12-2-1983  to sell the rice  remaining unsold   within the state in a given  month  outside  the  state was also  withdrawn.


17. The petitioner's complaint with respect to the Rabi procurement policy is that not only the millers/dealers are made liable to supply 2.5 lakh tonnes of rice for internal consumption over and above the levy-quota but that they are obliged to sell the same as also the held -over stocks from the Kharif season to the state (A.P. state civil supplies corporation) at certain fixed prices which are far below the market prices. The petitioners contend that there was no such agreement between the millers and the Government as is recited in the Government memo dated 25-5-1983 and that in any event. There was no such agreement between the dealers (I. E. Dealers who are not millers) and the Government the said price has not been fixed or determined under any order made under S. 3 (2) of the Essential commodities Act. The avowed policy of issuing export permits only after the quotas meant for internal sale are satisfied and the altogether banning of export of rice of the Kharif season is complained to be totally without any authority of law and arbitrary contentions:


18. The first question is whether the state Government is empowered in law to direct that the millers/dealers shall sell half the levy free rice shall be granted only with respect to half the quota of levy-free rice I have dicussed hereinbefore extensively the object and purpose behind cl. 4 of the levy Order and also pointed out that it primarily deals with sale and disposal of levyfree rice and not with mere movement or transport as such Sub-cl. (2) of cl. 4 No doubt deals with transport of rice but it is not every transport that is governed by it but only 'transport of rice for sale from the premises of any rice mill". In other words Cl. 4 of the the Levy order regulates the sale and disposal of rice in accordance with the permits issued by the collector or other officer authorised in that behalf as the case may be now, Cl. 4-C expressly declares that a permit issued under cl. 4 shall be subject to such directions as the Government may give in that behalf. Reading Cls. 4 and 4-c together. It is evident that the Government does have the undoubted power to regulate the sale and disposal of levy free rice for the purpose of maintainaing the supplies and securing equitable distribution and availability at fair prices, of essential commodites. Merely because the original levy order purports to have been made under section 3 (2) (f) of the Act, it does not mean that Cl. 4 is not referable to cl. (D) of S. 3 (2) as pointed out supra Cl. 4 as introduced in 1972 was made under S. 3 as such without specifying any particular clause in sub-sec (2) of S. 3 sub-sec (1) of S. 3 is very wide in its sweep and sub-section (2) of s ection 3 is merely and elucidation of sub-section (1)


(2) of s ection 3 is merely and elucidation of sub-section (1) of section 3. Therefore so long as the directions made or issued by the state Government under clause 4-c of the levy order are designed to achieve the objects asmentioned in sections 3 (1) of the Act and are underlying clause 4 of Levy order they would be perfectly waranted and unobjectionable in law.


19. The main thrust of the petitioners' argument is that the Levy order is made under section 3 (2) (f0 of the Act and is designed and meant for compelling the millers/dealers to sell as portion of rice towards levy and once that purpose is achieved ther is no further purpose to be served by the said order. This in my opinion is an unwarranted interpretation of the scope and sweep of the levy order. As its title itself suggests the said order provides not only for levy but also for restriction on sale and trasnport of rice In other words the entire rice produced or acquired by a Milller/dealer is subject to control. Helf of its has to be delivered as levy at the notified price and the remaining half has to be sold in accordance with the permits issued by the specified authorities which permits shall however be subject to such directions as the state Government may issue in the interests of maintaining the supplies and securring equitable distribution and control of price. The levy order has to be releated no only to clause (f) of section 3 (2), but also to clause (d) of section 3 (2), as stated above. In other words while clause 3 is relatable to sec. 3 (2) (f) Cl. 4 is relatable to section 3 (2) (d). Once this is so the Government power to regulate the disposal and sale of rice in the interests of matters stated in subsection (10 of section 3 of the Act is unquestionalbe.


20. The second question is whether the Government is empowered to direct that the permits for sale of levy-free rice shall be issued only in a phased and controlled manner In other words whether the petitioners are not entitled to permits for saleof levy-free rice as and when they ask for the same. This power to issue permits in a phased and controlled manner is again implicit in Cls. 4 and 4-c read together it is well known that one means of arresting the rise of prices is by regulating and maintaining the supplies at a sustained and certain level keeping in view the requirements of the populace. For this purpose; the state has been treated as a unit and it is so for the purpose of the levy order.


21. The next complaint is that the policy of the Government not to issue permits for export until and unless the stocks for export until and unless the stocks of levy-free meant for in ternal consumption are released is arbitrary and incompetent it is contended that the millers have to raise huge sums by way of loans from financing agencies and that in the first instance they have to supply rice towards the levy quota; and if now they are required to sell half the levy-free quota within the state first and only thereafter to export it would result in subjecting the millers/ dealers to heavy financial burden and losses. It is complained that the held over Kharif quota (half the levy-free rice meant for sale within the state) is now directed to be sold to the A.P. state civil supplies corporation at a fixed price which is far below the price obtained outside the state. The learned Government pleader counters this arguments by saying that the price at which the held-over Kharif stocks are being asked to be sold to the A.P. state civil supplies corporation is still sufficiently remunerative to the millers /Dealers in the state though it may be that it is not as profitable as the pice obtained out side the state. It is contended that in the interest of maintaining the supplies and for preventing the price-rise within the state the Government orders in this behalf are perfectly competent and justified.


22. Now there can be little doubt about the proposition that every power, including a statutory power has to be exercised reasnably. It should not be oppressive in its application. The power to give directions under Cl. 4-C of the levy order is also subject tot he above rider. So long as the state's requirements are being met there will be no reason to impose any other or further restriction upon the dealers' right to sell rice outside the state. Now the Government has a rough estimate of the levy-freerice available with the millers/ dealers. The very fact that the Government memo dated 25-4-1983 says that 4.31.500 tonnes of levy-free stock, pertainin to Kharif season meant for internal consumption is still available shows that the Government has already worked out the quantity available with the millers dealers on account of levy-free quota also. Part of it had already been sold by 25-4-1983, and still 4,31,500 tonnes was remaining to be sold within the state. It is indeed only after the issuance of the said memo that the Government directed the A.P. state civil supplies corporation to come forward and make purchases of this quantity as well as the quantity of 2.5 lakhs tonnes agreed to be delivered to the millers/dealers for the Rabi season. This would also mean that large stocks of levy-free rice are lying with the millers/dealers which they propose to sell outside the state. So long as the export of rice from this state is not altogether banned. The millers/dealers must be permitted to sell half the levyfree quota outside the state. The interests of the public of this state which the state Government is seeking to safeguard will not be jeopardized if the state Government maintains a parity in the matter of issuance of permits for sale both within the state and outside the state. In other words if a miller/dealer supplied 10


within the state and outside the state. In other words if a miller/dealer supplied 10 tonnes of rice to the A.P. state civil supplies corporation or sells the said quantity within the state as the case may be he should be given permit for export of 10 tonnes of rice. Indeed the position today apppears to be that a fair proportion of the stock proposed to be procured by the state Government from the levyfree quota has already been procured. In the circumstances. The direction given herein shall operate only prospectively the proportion of 1:1 as between the sale within the state and sale outside the state shall be implemented with respect to the supplies made hereinafter and once the internal quota as stated in its memo dated 25-4-1983 is satisfied, export permits shall be issued freely.


23. Another major complaint appears to be about the price at which the held over stock of Kharif season and the 2.5 lakhs tonnes of Rabi season are directed to be sold to the A.P. state civil cupplies corporation as also the compulsion to sell to the A. P. State civil supplies corporation the complaint is that this price has not been fixed under any statutory order issued under the A.P. Paddy procurement (prices) order 1980 or any other order in that behalf. It is also denied that there is any agreement between the millers/dealers and the state Government as recited in the Government memo dated 25-4-1983, or Memo dated 25-5-1983 for that matter. Particularly, so far as the dealers are concerned it is contended, even the aforesaid memos do not recite that there is any such agreement between them and the state Government with respect to the price. It is also submitted that the direction to sell within the state does not mean and cannot empower the state Government to compel them to sell the rice to the A.P. state civil supplies corporation the further submission is that even if the Government does have the power to direct the millers/dealers to sell a particular quantity of rice within the state or to the A.P. State civil cupplies corporation they are entitled to be paid the market rate.


24. Now so far as the argument relating to compulsion being exercised upon the millers/dealers to sell half the levy-free rice to the A.P. State civil supplies corporation is concerned I am unable to see any such compulsion the only Government Memo that refers to purchases by the A.P. state civil supplies corporation is the one dated 25-5-1983 and this Memo puts it on the ground of an agreement by millers/ dealers. Obviously sufficinet number of purchasers within the state are not coming forward for purchasing the entire quota meant for internal consumption: this may be for various reasons which cannot be gone into herein. It was therefore agreed that the A.P. state Civil supplies corporation shall purchase those stocks at a particular price, which both the Government and the millers/dealers agreed was a fair price. This is really a matter of agreemetn and not a case of compulsion it is always open to the petitioners if they do not a case of compulsion. It is always open to the petitioners if they do not want to sell the stocks meant for internal consumption to the A.P. State civil supplies corporation to sell the same anywhere within the state and at such price as they can procure the fact remains that the levyfree rice meant for internal consumption has to be sold within the state only whether to the corporation or to others. The prices mentioned in the Government memo dated 25-5-1983 are only the prices at which the Government has directed the corporation to purchase: because the corporation cannot negotiate the price with each individual or each day As I said it is really a matter of agreement and not a matter of any statutory obligation or compulsion.


25. Now coming to the rabi season, the Government has agreed to permit the millers/dealers to sell rice in the proportion of 1:1 anywhere in the country. In other words if they deliver 10 tonnes of levy rice. They will be entitled to the issuance of sale permits for 10 tonnes anywhere in the country, they like but this is subject to their making available 2.5 lakhs tonnes of rice out of the levy-free rice for internal consumption In other words for the Rabi season the proportion of 50: 25: 25 applicable for Kharif season is not being followed it si 50:50 the latter 50 being subject to the supply of 2.5 lakhs tonnes for consumption within the state. Though the proportion is different essentially the position in law is the same. Instead of saying that they must supply half the levy-free rice fro sale within the state the state is now satisfied if the millers/dealers sell only 2.5 lakhs tonnes in this season withint he state and the A.P. state civil supplies corporation is prepared to purchase at the price said to have been agreed between the Government and the millers/dealers. The argument of compulsory purchase, or compulsory purchase at a fixed price is. Therefore equally untenable with respect to the Rabi season as well


26. So far as the petitioners' contention that there was no agreement between the millers/dealers and the Government at which the millers/ dealers should supply the held-over stock of Kharif season and 2.5 lakh tonnes of rabi season to the A.P. state civil supplies corporation is concerned the learned Government pleader has placed before me the relevant record. Though there does not appear to be any formal agreement to the above effect. I find a number of letters given by the president and other office-bearers of the Rice Millers' Associations agreeing to supply rice at the aforesaid rates. The learned Government pleader has indeed stated that a large part of the stock agreed to be sold to the corporation, his already been sold to it . be that as it may, it is not necessary fo me to pursue this enquiry further inasmuch as I have already clarified hereinbefore that such of the petitioners who say they are not bound by the said agreement are intitled to sell their rice any where within the state at such price as they can get.


27. Another contention of Mr. P. Ramachandra Reddy is that Cl. 4 of the levy order must be deemed to have been rescinded by virtue of the central Government order contained in S. O 696 (E) dated sept 30, 1977. The said order was issued by the central Government under S. 3 of the Essential commodities Act by the said order, the Central Government rescinded with effect from 1-10-1977, "(1) the orders issued by it as specified in schedule -a (2) the orders issued by the state Government as specified in schedule-b; and (3) any other order issued by ht e state Government and in force in relation to matters concerning regulation of or restriction/prohibition on movement or price of paddy, Neither the Levy order Nor Cl. 4 is mentioned either in Schedule A, or schedule-b. The contention is that it stands rescinded and repealed by virtue of cl. 3 of the said order. The reasoning in support as Cl. 4 concerns the regulation of and restriction on movement of rice it stands rescinded by virtue of Cl. 3 I am unable to agree I have repeatedly pointed out hereinbefore that Cl. 4 deals primarily no with the movement of rice, but with the sale of rice. Clause 4 regulates the sale of rice by permits as contemplated By S. 3 (2) (d) of the Essential commodities Act. Only sub-cl. (2) of Cl. 4 speaks of movement viz., transport but that too is not transport by itself, but transport of rice for sale from the premises of any ricemill. The real object or cl. 4 (2) is to regulate and restrict the transport of rice from the premises of any rice-mill for sale. It is therefore not possible to agree with Mr. Ramachandra Reddy that Cl. 4 of the Levy order stand s rescinded


Mr. Ramachandra Reddy that Cl. 4 of the Levy order stand s rescinded for the reasons suggested.


28. A contention is urged by Mr. P krishna Reddy that the fixing of target is not wattanted either by the Act or the Levy order. I have already dealt with the said argument and I need not repeat the same here.
 29. Mr. V. Rajagopal Reddy raised another contention that the circulars do not recite the power under which they are issued. And further that they are also not published in the Gazette as required by the Act. It is true that the circulars issued by the Government do not expressly recite that they are issued under clause 4-C of the Levy order but at the same time it cannot be denied that so long as the said circulars are referable to and can be sustained with reference to power vesting in the state Government they should be sustained. The learned Government pleader has clearly sought to sustain them with reference to clause 4-c, and I see no reason not to accede to the said argument.
 30. Now so far as the contention that the said circulars were not published in the Gazette is concerned there is no doubt about the desirability of such publication: but the question with which I am now concerned is whether such non-publication leads to the said circulars becoming un-enforceable. The expressions "notified order" and "order" are defined by clauses (c) and (cc) respectively in section 2 of the Act. The definitions read as follows:
 "(c) 'notified order' means an order notified in the official Gazette;
 (cc) order' includes a cirection issued thereunder".


(cc) order' includes a cirection issued thereunder".
 Now the circulars issued by the state Government are the directions issued under a notified order viz., under the Levy order and therefore there is no obligation to publich them in the official gazette. Moreover they are directions issued to the permit-issuing authorities. Of course, as I have stated above since the circulars are of general application the desirability of their publication in the gazette or by some other popular means is undeniable.


31. Mr. Vedula jagannadha rao raised yet another contention viz that so far as the kharif season is concerned, the ratio of 50:50 was prevaling until 12-2-1983 when the ratio of 50:25: 25 was introduced. He submits that in cases where the millers/dealers have already acquired eligibility for permits (for sale of levy-free rice) by virtue of their delivering the levy quota, they should be given permits for sale of the Levy-free rice outside the state inasmuch as the directions issued on 12-2-1983 do not and cannot have retrospective operation. It may firstly be seen that thought the restrictions were imposed on 12-2-1983 the petitioners have not chosen to question the same during the Kharif season, but have come forward only now i.e. in July 1983 raising the said contention. In the circumstances of the case. Where targets are fixed for each season. This delay certainly amounts to laches disentitling the petitioners to any relief. Secondly there is no question of any restrospective operation here inasmuch as the power under clause 4-C is the power to give directions which shall govern the permits issued on 12-2-1983 pertain to kharif season as such and are applicable to all the permits to be issued for that season. This is not a case of retrospective operation but one of a partial restriction being placed upon the sale of rice outside the state.


32. For above reasons the writ petitions fail and are accordingly. Dismissed subject to the following clarifications and directions that (I) those of the petitioners who do not wish to sell the levyfree rice at the prescribed price to the A.P. state civil supplies corporation, cannot be compelled to do so: but that they have to sell the same within the state: they are entitled to sell the same at such price as they can get: and (ii) that herafter the issuance of permits for sale of rice pertaining to Kharif season outside the state shall be in the ratio of 1:1 as between the levy-free rice sold within the state and the levy-free to be exported outside the state. It is directed herewith that if and when the millers/dealers apply for permission for export of rice in terms of this clarification, they shall be issued forthwith the state being satisfied (iii) so faras Rabi season is concerned, export permits will be issued as soon as the quota of 2.5 lakh tonnes prescribed by the state is satisfied and procured. There shall be no order as to costs. Advocates' fee: Rs. 150/- in each.
 33. Order accordingly.


T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971

JUDGMENT Kondaiah, J.
1. This is a reference made by the Income-tax Appellate Tribunal, Hyderabad Bench, at the instance of M/s. T, Venkata Krishnayya & Co., Guntur (hereinafter called " the assessee "), under Section 256(1) of the Income-tax Act, 1961 (hereinafter called " the Act"), for the opinion of this court on the following four questions :
 " (1) Whether, on the facts and in the circumstances of the case, the Income-tax Officer should be deemed to have granted extension of time for filing the return when he did not pass any orders on the assessee's application dated September 16, 1963 ?
 (2) Whether, on the facts and in the circumstances of the case, by the levy of interest calculated under Clause (iii) of the proviso to Section 139(1) of the Income-tax Act, 1961, the Income-tax Officer must be deemed to have condoned the delay in filing the return of income ?
 (3) Whether, on the facts and in the circumstances of the case, the Income-tax Officer had the power to levy a penalty under Section 271(1)(a) of the Act when he had already levied interest under Section 139 ? and (4) Whether, on the facts and in the circumstances of the case, the Income-tax Officer had jurisdiction to levy penalty under Section 271(1)(a) of the Act where a return was filed under Section 139(4) and penal interest was also levied under the provisions of this latter section ? "


2. In order to appreciate the scope of the questions it is necessary to refer briefly to the material facts that gave rise to them. For the assessment year 1963-64, relevant to the accounting year ending on December 31, 1962, the assessee, a registered firm of six partners carrying on business in tobacco, had to file its return of income under Section 139(1) of the Act oa or before June 30, 1963. As the assessee did not file its return before the due date, a notice under Sub-section (2) of Section 139 issued by the Income-tax Officer was served on the assessee on August 16, 1963, calling upon it to file the return of its income for that year on or before September 16, 1963. No return of income was filed before September 16, 1963, but however an application for extension of time for the filing of the return till October 16, 1963, was filed before the Income-tax Officer on that day. That application was in fact received by the Income-tax Officer on September 18, 1963. No order thereon either rejecting or granting the extension prayed for by the assessee was passed by the Income-tax Officer. Nor had the assessee filed the return of its income on October 16, 1963, up to which date the extension was prayed for, in its application dated September 16, 1963. In fact the return of the assessee's income for the assessment year 1963-64 was filed only on August 3, 1964. The Income-tax Officer completed the assessment by his order dated September 15, 1964, under Section 143(3) of the Act determining its net income at Rs. 1,24,580. In the order of assessment, a sum of Rs. 3,908.48 towards interest under Section,


order of assessment, a sum of Rs. 3,908.48 towards interest under Section, 139 of the Act was added to the total demand raised thereon.


3. After the completion of the assessment a notice under Section 274 read with Section 271 of the Act to show cause as to why a penalty for the default committed by the assessee-firm in tiling its return should not be levied, was issued by the Income-tax Officer. In response to the aforesaid penalty notice, the assessee by its letter, dated October 7, 1964, informed the Income-tax Officer that due to the illness of its accountant the return of income could not be filed within time. As the explanation submitted by the assessee was not found to be acceptable by the Income-tax Officer, a specific opportunity for personal appearance to explain the circumstances was afforded to the asses see. The authorised representative of the assessee appeared before the Income-tax Officer and stated that there was nothing more to be added to the original explanation already submitted in writing by the assessee. The explanation of the asses see that its accountant was ill was found to be not convincing, as, if that were the sole reason for not filing the return, it could have applied for extension of time. As it did not request for extension of time within the time required under Section 139(1), the Income-tax Officer was of the view that the assessee's explanation that the accountant was sick was only an after-thought. In any event, the Act had allowed a sufficient margin of time (six months) to enable the assessee to get the statements prepared and file returns of income within the time prescribed by law ; and it is for the assessee to make proper and appropriate arrangements to comply with the statutory provisions of Section 139. The fact that the assessee-firm had the assistance of a chartered accountant also was one of the factors taken into consideration by the Income-tax Officer to arrive at the conclusion that the assessee has without reasonable and sufficient cause failed to file the return of income within the prescribed time and levied a penalty of Rs.


cause failed to file the return of income within the prescribed time and levied a penalty of Rs. 20,222 under Section 271(1)(a) of the Act. On appeal to the Appellate Assistant Commissioner against the order of penalty passed by the Income-tax Officer, it was contended that the failure on the part of the assessee to furnish the return within the time was due to illness of its accountant, that the previous record of the firm was very good, that the Income-tax Officer must be presumed to have granted extension of time when no order had been passed by him on its application dated September 16, 1963, that the Income-tax Officer must be presumed to have condoned the delay in filing the return when he levied penal interest under Clause (iii) of the proviso to Section 139(1) and the rebate in respect of exported goods to which the assessee-firm was entitled should have been taken into account by the Income-tax Officer in computing the penalty. None of the pleas raised by the assessee did find favour with the Appellate Assistant Commissioner. But, however, he was of the view that the assessee should be deemed to be in default only from October 16, 1963, as the Income-tax Officer had not rejected the application of the assessee filed for extension of time till September 16, 1963. He also took into account the reduction in tax demand which was made in the assessment appeal and directed the Income-tax Officer to reduce the penalty accordingly. Both the assessee and the department being aggrieved by the order of the Appellate Assistant Commissioner, preferred appeals to the Income-tax Appellate Tribunal. The finding of the Appellate Assistant Commissioner that the default should be deemed to, have occurred only from October 16, 1963, but not from July 1, 1963, as held by the Income-tax Officer was challenged by the department whereas the assessee


1963, as held by the Income-tax Officer was challenged by the department whereas the assessee questioned the very levy of penalty reiterating its grounds raised before the Appellate Assistant Commissioner. The Income-tax Appellate Tribunal, on a consideration of the entire facts and circumstances, came to the conclusion that the explanation offered by the assessee for the delay in filing its return was not acceptable. It found that the assessee was not prevented by any reasonable or sufficient cause from filing its return within the time permissible under Section 139(1). The contention of the assessee that by the issuance of the notice under Section 139(2) the Income-tax Officer must be deemed to have condoned the delay in filing its return of income under Section 139(1) and that by the omission on the part of the Income-tax Officer in not passing any orders on its application for extension of time by one month, it must be deemed that the extension of time as prayed for was granted did not find favour with the Tribunal. The Appellate Tribunal rejected the assessee's contention that the Income-tax Officer by the levy of penal interest must be deemed to have condoned the delay in filing the return of income. The other findings of the Tribunal not relevant to this reference need not be stated. Hence, this reference at the instance of the assessee.


4. The answers to the questions turn upon the scope of the provisions of Section 271(1)(a) and Sub-sections (1), (2) and (4) of Section 139 read with other material provisions of the Act which we shall presently consider and their application to the facts of the present case. Chapter IV comprising of Sections 139 to 158 deals with the procedure for assessment. Section 139 prescribes the procedures for the filing of a return of total assessable income and the consequences of the failure or omission to file the same within the time allowed thereunder. Unlike the corresponding Section 22 of the Indian Income-tax Act, 1922, Sub-section (1) to Section, 139 does not provide for the issuance of the general or public notice. It expressly requires every person to furnish voluntarily a return of his total income or the income of any other person in respect of which he is assessable under the Act. If the income of any previous year exceeded the maximum amount exigible to tax, the return must be in the prescribed form and verified in the prescribed manner and shall furnish the requisite material particulars relating to income. The assessee under the present Act has a statutory duty and obligation to furnish a voluntary return of his total income on or before the 30th July or 31st December, as the case may be. However, the proviso to Sub-section (1) to Section 139 empowers the Income-tax Officer to extend the date for furnishing the return of income if an application thereof has been made in the prescribed manner by the assessee. The aforesaid power vested in the Income-tax Officer is discretionary. He is, therefore, not bound to exercise his discretion invariably in favour of the assessee as the word used is " may " but not " shall". In cases falling within Clauses (i) and (ii) of the proviso to Sub-section (1) to Section 139, the


and (ii) of the proviso to Sub-section (1) to Section 139, the Income-tax Officer is empowered to extend the time for filing the return without charging any interest; but where the Income-tax Officer extends the time up to any period falling beyond the dates specified in Clauses (i) and (ii) referred to above, interest shall be payable from the 1st day of October or the 1st day of January of the assessment year to the date of the furnishing of the return. The rate of interest payable under this proviso was only 6% prior to October 1, 1967, and, thereafter, it has been enhanced to 9% per annum. In the case of a registered firm or an unregistered firm assessed under Clause (b) of Section 183 interest must be calculated on the basis of the amount of tax which would have been payable if the firm had been assessed in the status of an unregistered firm and, in any other case, on the amount of tax payable on the total income. By virtue of the provision of Sub-section (1A) inserted by Section 8 of the Finance Act, 1963, with retrospective effect from the commencement of the Act, the interest imposed by the Income-tax Officer shall be reduced in accordance with the reduction of the amount of tax as a result of an order under Section 154 or Section 155 or Section 250 or Section 254 or Section 260 or Section 262 or Section 264 of the Act and the excess interest paid, if any, shall be refunded to the assessee.


5. Under Sub-section (2) to Section 139, the Income-tax Officer may before the end of the relevant assessment year serve a notice upon any person whose total income is in his opinion assessable to tax requiring him to furnish within 60 days from the date of service of such notice a return of his total income. The proviso to Sub-section (2) also empowers the Income-tax Officer to extend the date for the furnishing of the return if the same, whether fixed originally or on extension, falls beyond the 30th day of September or the 31st day of December, as the case may be, of the assessment year on payment of interest as per the provisions of Clause (iii) of the proviso to Sub-section (1). Sub-section (4) provides for the furnishing of a return by an assessee who failed to file the same within the time allowed to him under Sub-section (1) or Sub-section (2) but he must do so before the completion of the assessment. In such a case the provisions of Clause (iii) of the proviso to Sub-section (1) empowering the Income-tax Officer to levy interest are attracted. Sub-section (5) provides for the furnishing, of a revised return by the assessee at any time before the assessment is made. Sub-section (8) has invested the Income-tax Officer with a power to reduce or waive the interest payable by any person under any provision of Section 139 in such cases and under such circumstances as may be prescribed therefor. Hence, it admits of no doubt that the Income-tax Officer is competent to waive or reduce the interest payable by any assessee under any provision of Section 139 in proper and appropriate cases. This power has been invested in the Income-tax Officer notwithstanding the provisions of Clause (iii) of the proviso to Sub-section (1).


6. We shall now advert to the intendment and purpose of Clause (iii) of the proviso to Sub-section (1) to sec'tion 139 and its applicability to cases falling under the proviso to Sub-section (2) and Sub-section (4) of Section 139. It is pertinent to notice that the expression used is " interest " but not penal interest. It is chargeable on the basis of the amount of tax which would have been payable by the assessee. The period for which such interest is exigible is from the 1st day of October or the 1st day of January, as the case may be, of the assessment year to the actual date of furnishing the return, It may be noted that the rate of interest payable under the aforesaid provision has been enhanced from 6% to 9% per annum from October 1, 1967. It is pertinent to notice that Section 140A provides for self-assessment whereas Section 141 provides for provisional assessment. Under Section 140A the assessee is obliged statutorily to pay the tax payable on the basis of the return of income furnished by him under Section 139 within 30 days thereafter. The amount of tax paid under self-assessment shall be taken into account when the provisional assessment under Section 141 or regular assessment under Section 144 will be made. Sub-section (3) to Section 140A makes every assessee who fails to pay the tax or any part thereof in accordance with the provisions of Sub-section (1) liable to pay penalty as directed by the Income-tax Officer although it (penalty) shall not exceed 50% of the amount of such tax or part, as the case may be. No doubt, the penalty referred to above shall be levied only after affording a reasonable opportunity of being heard to the assessee. Therefore, interest payable under Clause (iii) of the proviso to Sub-section


the assessee. Therefore, interest payable under Clause (iii) of the proviso to Sub-section (1) to Section 139 is nothing but simple interest or compensation that could accrue or would have accrued to the State, if the assessee had filed his return as required by Section 139 and paid the tax as per the provisions of Section 140A. It is not, therefore, correct to state that the interest so payable is penal in character. Nor does it amount to penalty of any kind levied under the Act. The very intendment and purpose of this provision to levy interest on the amount of tax payable by the assessee is to make the assessees feel their responsibility and statutory obligation to furnish the return of their incomes within the time provided under Section 139 of the Act. To put it differently, the assessees will not gain in any way by their failure in, or postponement of, furnishing the returns of their income with the hope that they can postpone the payment of tax to a later date and have the advantage of utility of such amount of tax during such period as they are made to pay interest on such tax demands.


7. We shall now advert to Section 271 comprised in Chapter XXI dealing with penalties imposable under the Act. Section 271 empowers the Income-tax Officer and the Appellate Assistant Commissioner to impose penalty on such of the assessees if the conditions specified in Clause (a) or Clause (b) or Clause (c) thereof have been satisfied. Under Clause (a) of Sub-section (1) to Section 271 the Income-tax Officer or the Appellate Assistant Commissioner is competent to levy a penalty of a sum equal to 2% of the tax for every month during which the default continued. The aforesaid sum of penalty is in addition to the amount of tax payable by the assessee. However, the penalty so imposable shall not exceed in the aggregate 50% of the tax. In order to attract the provisions of Section 271(1)(a) the Income-tax Officer or the Appellate Assistant Commissioner must be satisfied that the assessee has without reasonable cause failed to furnish his return of income voluntarily within the time prescribed under subsection (1) to Section 139 or by notice given under Sub-section (2) to Section 139 or Section 148. The satisfaction of the Income-tax Officer or the Appellate Assistant Commissioner that the assessee has failed to furnish the return as required by the provisions of the Section must be in the course of the proceedings under the Act. Where any person failed to furnish his return within the time allowed under Sub-section (1) to Section 139 and in the manner required by a notice under Sub-section (2) to Section 139 he is liable to pay penalty under this Act. In other words the provisions of Section 271(1)(a) will be attracted if without reasonable cause a person fails to furnish a return voluntarily or as required by the notice under Section 139(2) if it was not filed within the time allowed and in the manner required by the


if it was not filed within the time allowed and in the manner required by the aforesaid provisions. The return filed must be in the prescribed manner furnishing the requisite particulars. Reasonable cause must be construed as sufficient cause. Clause (b) of Sub-section (1) of Section 271 is attracted when there is a failure without any reasonable cause on the part of any person to comply with a notice under Sub-section (1) of Section 142 or Sub-section (2) of Section 143. Where Clause (b) is attracted the minimum sum of penalty is 10% and the maximum is 50% of the amount of tax sought to be avoided by the assessee. Clause (c) is attracted in a case where the Income-tax Officer or the Appellate Assistant Commissioner is satisfied that any person concealed the particulars of his income or deliberately furnished inaccurate particulars of his income. This being a more serious one, the minimum penalty exigible is 20% and the maximum is one and a half times the amount of tax sought to be avoided. Section 272 provides for the levy of penalty on any person who fails to give notice of discontinuance of his business, whereas Section 273 provides for the levy of penalty for false estimate of or failure to pay advance tax. The penalty imposable under Chapter XXI cannot be made unless the assessee has been given a reasonable opportunity of being heard. Section 275 bars the income-tax authorities from imposing a penalty under Chapter XXI after the expiration of two years from the date of completion of the proceedings in the course of which the proceedings for the imposition of penalty have been commenced. Unlike under the 1922 Act, Section 275 of the present Act provides for the limitation of two years from the date of the completion of the proceedings in the course of which the proceedings for the imposition of penalty have been commenced for passing the order of penalty. Under Section 28 of the old Act, there was no time limit


passing the order of penalty. Under Section 28 of the old Act, there was no time limit to pass the order of penalty, if the Income-tax Officer or the Appellate Assistant Commissioner was satisfied in the course of any proceedings under the Act that the requisite conditions of Clause (a), (b) or (c) thereof have been established.


8. The provisions of Sections 276 to 280 comprised in Chapter XXII provide for prosecutions and offences. The making of a false statement in a declaration under the Act is punishable under Section 277 with rigorous imprisonment for a period of not less than 6 months but which may extend up to two years. The persons who are liable to the imposition of penalty under Section 271 may also at the same time be liable to prosecution for any of the offences specified in Chapter XXII. Under the present Act if the levy of penalty exceeds Rs. 1,000 it is the Inspecting Assistant Commissioner that is empowered to complete the penalty proceedings but not the Income-tax Officer. However we may add that it is the Income-tax Officer who is competent to issue a notice under Section 274(1) as to why penalty should not be levied; and after receipt of the explanation or on a consideration of the facts and circumstances, if the Income-tax Officer prima facie finds that the minimum penalty exigible in any given case is Rs. 1,000 or more the file shall be transferred to the Inspecting Assistant Commissioner who shall deal with the case according to the provisions of the Act and complete it. The penal provisions have been provided to deal with contumacious or fraudulent assessees. The purpose and object of Clause (iii) of the proviso to Sub-section (1) to Section 139 is to provide for levy of interest on the amount of tax payable by the assessee for his failure to furnish the return of his income as provided in Section 139. Such interest can, under no stretch of reasoning, be held to be penalty or penal interest as the same is being charged because the State could or would have earned so much of amount, profit or interest on the amount of tax payable by the assessee if the return was filed as required under Section 139 and tax paid thereon as per the provisions of Section 140A. The purpose, intendment or


tax paid thereon as per the provisions of Section 140A. The purpose, intendment or object of levying interest under Clause (iii) of the proviso to Sub-section (1) of Section 139 is undoubtedly different from the levy of penalty under Section 271(1)(a), (b) or (c). Those provisions were made by the sovereign Parliament to meet with different situations and protect the interests of the revenue and at the same time make the defaulting or fraudulent assessees realise that they will not only not gain any advantage but also make themselves liable for penalty for their default or failure without reasonable cause to file the returns of income within the time prescribed under Section 139 or concealment of their incomes or deliberately furnishing inaccurate particulars of their incomes.


9. In the light of the foregoing discussion we shall now examine the contention of the assessee that the Income-tax Officer must be deemed to have granted extension of time for filing the return when he did not pass any order on its application dated September 16, 1963. As pointed out earlier the application though dated September 16, 1963, was in fact received by the Income-tax Officer only on September 18, 1963. As the application for extension of time was not received by the Income-tax Officer on or before September 16, 1963, within which time the assessee was required as per the notice under Sub-section (2) to Section 139 to file his return, the Income-tax Officer was not bound under the provisions of the Act or any rules made thereunder to pass any order thereon. It is not open to the assessee to file an application beyond the period within which it was required to file its return as per the notice under Section 139, and, thereafter, make no effort to know what happened to its application. The assessee should not assume or presume that any application filed by it for extension of time to file the return of income would automatically be granted. It is the duty of the assessee to file in advance an application for extension of time and obtain the extension on or before the date on which it is required to furnish its return of income. It admits of no doubt that whether to grant or refuse to grant extension of time for filing the return of any person is within the discretion of the Income-tax Officer. This view of ours gains support from the very use of the words " in his discretion " in the proviso to Sub-section (1) to Section 139. This discretion vested in the Income-tax Officer, being a statutory one, must be exercised fairly, reasonably and objectively but not arbitrarily or with malice or caprice. There is no provision in the Act or the rules made thereunder which


malice or caprice. There is no provision in the Act or the rules made thereunder which requires the Income-tax Officer to pass an order on an application filed by an assessee subsequent to the time given to him for filing his return pursuant to a notice under Sub-section (2) to Section 139. The Income-tax Officer has to apply his mind to the facts and circumstances of each case and decide whether it was a fit case to grant extension of time or not. There is no hard and fast rule of universal application. We may add that there is no scope for presuming or assuming that an application filed by an assessee for extension of time must have been granted in its favour when no order has been passed on its application by the Income-tax Officer. There is no scope for such a presumption or deeming provision in a taxing statute. The Income-tax Act is a self-contained code. The provisions of the Act and the Rules made thereunder must specifically provide for such a deeming provision. Otherwise, the assessee cannot claim any advantage or derive benefit when the Income-tax Officer did not pass any order on its application filed beyond the time within which it was required to furnish its return. In any event we are clear in our minds that the assessee herein cannot compel the Income-tax Officer either to pass an order extending the time for furnishing the return or give reasons for refusal of the request. On the application of the aforesaid principles, the contention of the assessee that it must be deemed that the extension of time was granted when the Income-tax Officer did not pass any orders on its application merits rejection. We may add that the assessee did not even file its return on October 16, 1963, as prayed for in its application. The return was filed only on August 3, 1964, and it did not take any interest or steps to know what had happened to its application for extension of time by one month. For all these


steps to know what had happened to its application for extension of time by one month. For all these reasons, our answer, therefore, to question No. 1 must be in the negative and against the assessee.


10. We shall now turn to questions Nos. 2 and 3. The contention of Sri Ramachandra Rao that the Income-tax Officer having levied interest under Clause (iii) of the proviso to Sub-section (1) of Section 139 must be deemed to have condoned the delay in filing the return of income of his client cannot be given effect to for reasons more than one. The Income-tax Officer is no doubt elnpowered to extend the time for furnishing the return of any person on his application in the prescribed manner beyond the dates within which he has to file the same. In cases falling under Clauses (i) and (it) of the said proviso, the officer may extend the time without charging any interest. However, where the case falls under Clause (iii) he shall levy interest as provided therein. The levy of interest, as stated earlier, does not ipso facto make the filing of the return by the assessee within the prescribed time. The Income-tax Officer, in his discretion, is competent to extend the date for furnishing the return up to any period falling beyond the dates mentioned in Clauses (i) and (ii) in which case interest at 6% for the assessment year 1963-64 shall be payable from October 1, 1963, to August 3, 1964. The intendment and purpose of levy of interest under Clause (iii) of the proviso to Section 139(1) is only to collect interest on the amount of tax due and payable by the assessee as per the provisions of the Act. It can by no stretch of reasoning be stated that the Income-tax Officer by the imposition of interest must be deemed to have condoned the delay in filing the return of income. This provision must be construed as a concession shown by the authors of the Act to the assessee to file their returns of income on payment of some interest; but nowhere it is stated either


assessee to file their returns of income on payment of some interest; but nowhere it is stated either in Section 139 or Section 271(1)(a) or any other provision of the Act or the rules made thereunder that there was no failure without reasonable cause on the part of the assessee to file the return as required by Section 139. No provision of the Act or the rules has been brought to our notice by Mr. Ramachandra Rao in support of his contention that the Income-tax Officer, by his levying interest, must be deemed to have condoned the delay in filing the return of income. The taxing provisions have to be construed strictly. Hence, we are unable to agree with the submission of Mr. Ramachandra Rao. The sovereign Parliament is competent to levy interest under Clause (iii) of the proviso to Section 139(1) while extending time for any assessee to furnish his return of income and also penalty for failure without reasonable cause to file the return within the time prescribed under Section 139. There is no prohibition under the Constitution for Parliament to provide for charge of interest, levy of penalty and institution of prosecution for certain commissions or omissions or defaults on the part of the assessees. Where the Act has specifically provided for charge of interest as well as levy of penalty, the courts have to give effect to the same. We may notice in this context the following observations of the learned judge/Grover J., who spoke for the court, in Jain Brothers v. Union of India, wherein the imposition of double taxation was justified :


" It is not disputed that there can be double taxation if the legislature has distinctly enacted it.    It is only when there are general words of taxation and they have to be interpreted, they cannot be so interpreted as to tax the subject twice over to the same tax ..... The Constitution does
not contain any prohibition against double taxation even if it be assumed that such a taxation is involved in the case of a firm and its partners after the amendment of Section 23(5) by the  Act of  1956.    Nor  is there any other enactment which interdicts  such taxation ...... If any double
taxation is involved the legislature itself has, in express words, sanctioned it. It is not open to any one thereafter to invoke the general principles that the subject cannot be taxed twice over."


11. It is profitable to refer in this context to N. A. Malbary and Brothers v. Commissioner of Income-tax,  wherein it has been held that the jurisdiction of the Income-tax Officer to pass a second order of penalty was not lost because he had omitted to recall the earlier order even though both the orders could not be enforced simultaneously.

12. In the light of the foregoing discussion, we express our inability to agree with Mr. Ramachandra Rao, counsel appearing for the assessee, that the Income-tax Officer is not empowered to levy penalty under Section 271(1)(a) when once he has levied interest under the provisions of Clause (iii) of the proviso to Sub-section (1) to Section 139. The decision of a Division Bench


of this court in writ petition No. 1934/68 Kishan Lal Haricharan v. Income-tax Officer, dated March 5, 1970, relied upon by the assessee does not advance its plea as the facts of that case are distinguishable from those of the case on hand. As interest has been added by the Income-tax Officer, the assessee has raised this contention on the assumption that the Income-tax Officer must be deemed to have condoned the delay and extended the time for furnishing the return. The use of the word " or" in Section 271(1)(a) makes it abundantly clear that any one of the ingredients specified therein would attract the penal provisions thereof. In the instant case admittedly the assessee has without reasonable cause failed to furnish the return of its total income on or before June 30, 1963, as required by Sub-section (1) to Section 139. This one circumstance itself is sufficient to attract the provisions of Section 271(1)(a). We are conscious of the fact that the reference relates to the levy of penalty under Section 271(1)(a). We are not flow concerned in this reference with the validity or otherwise of the addition of interest under Clause (iii) of the proviso to Section 139(1) as the assesseee did not challenge the same either before the Appellate Assistant Commissioner or the Tribunal. We have therefore to confine in this reference to the question whether the Income-tax Officer is competent in law to levy the penalty under Section 271(1)(a) on the facts and in the circumstances of the case. As observed earlier the assessee has a statutory duty and obligation to furnish its return of income without any notice by or action on the part of the Income-tax Officer. In the present case no return has been filed by the assessee on or before June 30, 1963, as required by Section


filed by the assessee on or before June 30, 1963, as required by Section 139(1) of the Act. Indisputably, the provisions of Clause (a) of Sub-section (1) to Section 271 are attracted as the aforesaid fact which is not in dispute is itself sufficient to attract the same. This view of ours gains support from the decision of a Division Bench of the Madras High Court in C. V. Govindarajulu Iyer v. Commissioner of Income-tax, [1948] 16 I.T.R. 391 (Mad.). Therein the assessee failed to furnish a return of his total income as required by a general notice issued under Section 22(1) of the Indian Income-tax Act, 1922. No notice under Section 22(2) was issued by the Income-tax Officer within the year of assessment. Pursuant to the notice under Section 34, a return of income was filed by the assessee within the time given by the officer. However, after completing the reassessment, the Income-tax Officer levied penalty under Section 28(1)(a) corresponding to Section 271(1)(a) of the present Act for failure without reasonable cause to furnish a return pursuant to the notice under Section 22(1). The contention advanced on behalf of the assessee that as there was no notice under Section 22(2) and no action was taken by the Income-tax Officer during the year of assessment, the general notice under Section 22(1) and the default committed by him in not filing the return lapsed by the end of the year and hence no penalty could be levied under Section 28(1)(a) in the course of the reassessment proceedings, was rejected by the High Court. It was held therein that the assessment proceedings commenced with the general notice issued under Section 22(1) and where no order of assessment


proceedings commenced with the general notice issued under Section 22(1) and where no order of assessment or an order declaring that no assessment could be made was made the proceedings initiated under Section 34 must be deemed to relate to the proceedings which commenced with the public notice under Section 22(1). The penalty in those circumstances was sustained for the failure of the assessee to file its return as required by the notice under Section 22(1) even though the assessee had furnished his return within the time given by the notice under Section 34.


13. It was held by a Division Bench of this court in K. P. Reddi v. Commissioner of Income-tax, [1968] 68 I.T.R. 638,645. 646 (A.P.) that the provisions of Section 28(1)(a) of the Indian Income-tax Act, 1922, are attracted where no return within the prescribed period has been filed by the assessee and such an assessee is liable for penalty in any proceedings the Income-tax Officer may initiate to assess his income be they on a notice under Section 28(2) or under Section 34. The learned judge, Jaganmohan Reddy C.J. (as he then was), who spoke for the court, observed thus :
 " If a return has been filed, not in compliance with a notice under Section 22(1) but after the expiry of the period prescribed in that notice, the mere fact that the return has not been accepted or that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, does not preclude the Income-tax Officer from taking action under Section 28(1)(a), if he so chooses."


14. In the present case it is found as a fact that the assessee did not furnish its return within the time given by the Income-tax Officer in his notice under Section 139(2). That apart, the request of the assessee for extension of time in its application dated September 16, 1963, and received by the Income-tax Officer on September 18, 1963, was only up to October 16, 1963. No return was filed until August 3, 1964. Judged from any angle we are clear in our minds that the provisions of Section 271(1)(a) are attracted in the instant case and the penalty has been rightly levied by the departmental authorities. On a careful examination of the provisions of Section 271(1)(a) read with the material provisions of Section 139, we are of the firm view that the Income-tax Officer was competent to levy a penalty under Section 271(1)(a) although he had levied interest under Clause (iii) of the proviso to Sub-section (1) of Section 139 as the intendment and purpose of both the imposts are different and distinct and they have been provided to meet different situations and contingencies. In our considered judgment both the penalty under Section 271(1)(a) and the interest under Clause (iii) of the proviso to Sub-section (1) of Section 139 are exigible and there is no illegality or unconstitutionality in the same. 'For all the reasons, our answer to question No. 2 is in the negative and to question No. 3 in the affirmative and against the assessee.


15. We shall now advert to question No. 4. Section 139(4) permits any person to furnish the return of his income for any previous year at any time before the assessment is made but, however, he is made liable to pay interest from the date on which the return ought to have been filed under Section 139(1) to the actual date of the furnishing of the return. The mere fact that a return is permitted to be filed before the assessment is made or a revised return under Sub-section (5) of Section 139 could be filed at any time before the assessment is made, will not absolve such an assessee from the levy of penalty under Clause (a) of Sub-section (1) to Section 271. Section 271(1)(a) is attracted the moment the ingredients of that provision are established. The very provisions of Sub-section (4) will come into play only when no return has been furnished by the assessee within the time permitted under Sub-section (1) or within the time granted to him under Sub-section (2) of Section 139. If no return was fifed as required under Sub-section (1) of Section 139 or within the time permitted by notice under Sub-section (2) to Section 139 or Section 148, penalty can be levied by the Income-tax Officer under Section 271(1)(a). On a reading of the provisions of Section 271(1)(a) and Sub-section (4) of Section 139, we are satisfied that the assessee cannot claim that it is not open to the assessee to contend that there was no default in furnishing the return of its income as required by Sub-section (1) to Section 139 or by notice given under subsection (2) to Section 139. This question has been decided in R.C. No. 71 of 1968, Poorna Biscuit Factory v. Commissioner of


No. 71 of 1968, Poorna Biscuit Factory v. Commissioner of Income-tax (Unreported.) dated February 19, 1971, by a Division Bench of this court of which one of us (myself) was a party. Therein it was observed thus :


" The mere fact that the law gives him a further chance to file a return under Section 139(4) does not absolve him from his liability to be penalised under Section 271(1)(a) for the defaults he has already committed. The penalty is for failure without reasonable cause to file the return or for filing it beyond the time allowed under Section 139(1) or 139(2) of the Act. The penal interest is, however, levied as compensation to the Government for the interest that it would have earned had the return been filed in time and the assessment made on the basis of that return,"
16. For all the reasons stated, our answer to question No. 4 is in the affirmative and in favour of the Government.
17. The assessee shall pay the costs of this reference. Advocate's fee, Rs. 300.


Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987

JUDGMENT K. Ramaswamy, J.
 1. The Revenue sought reference under section 256(1) of the Income-tax Act, 1961 (43 of 1961), for short, "the Act", of six questions of law as follows :
 "(1) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 17,056 spent by the assessee for hosting dinners to foreign delegation members in order to entertain them in an appropriate and befitting manner is not disallowable under section 37(2B) of the Income-tax Act, 1961, though it may be for purposes of business ?
 (2) Whether, on the facts and in the circumstances of the case the amount of Rs. 2,668 spent by Delhi branch of the assessee for providing lunch and dinners to customers is not to be treated as entertainment expenditure and disallowed under section 37(2B) of the Income-tax Act 1961 ?
 (3) Whether, on the facts and in the circumstances of the case, a sum of Rs. 1,79,155 debited under the head "Business promotion expenses" was not rightly disallowable as expenditure in the nature of entertainment expenditure and also partly as expenditure for maintenance of a guest house, for the stay of foreign guests (and not meant as holiday home for low-paid employees of assessee), under section 37(2B) and under section 37(4) of the Income-tax Act ?
 (4) Whether, on the facts and in the circumstances of this case, the expenditure of RS. 893 paid to various clubs by the assessee for the purpose of entertaining foreign guests is not to be disallowed under section 37(2B) of the Act ?


(5) Whether, on the facts and in the circumstances of the case, the amount of Rs. 22,722 debited by the assessee under the head "Entertainment expenditure" spent by it for providing coffee, tea and snacks to customers is not to be treated as expenditure in the nature of entertainment expenditure and disallowed under section 37(2B) of the Act ?
 (6) Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,49,965 spent on agmark charges, Rs. 2,14,860 spent on export licences fee and inspection charges, Rs. 1,09,587 paid as premium for export credit guarantee insurance, RS. 11,746 paid as subscription to export promotion council and trade associations, and Rs. 1,732 spent on translation charges are to be treated as items of expenditure eligible for weighted deduction either under sub-clause (ii) or sub-clause (vi) or, sub-clause(vii) of section 35B(l) (b) and the assessee held to be eligible for weighted deduction on these amounts particularly on account of the fact that the services were performed by the payees in India and not outside India ?"


2. The material facts, relating thereto, are as follows : The assessee, Navabharat Enterprises (Private) Limited, for short "the Company", is having its head office at Hyderabad and branches at Guntur, New Delhi, Bombay, Calcutta and Cochin, and submitted its return for the assessment year 1973-74, ending the accounting year with June 30, 1972, of an income of Rs. 53,04,333 from ready-business and Rs. 8,060 from forward business. The Income-tax Officer found that a sum of Rs. 17,056 was incurred on account of "special dinners arranged for trade delegations from U.S.S.R. and G.D.R." and disallowed it on the ground that it represented entertainment expenditure, disallowable under section 37(2B) of the Act. On appeal by the company, the Appellate Assistant Commissioner held that the expenditure did not partake of the character of business expenditure, so he confirmed the disallowance. On second appeal, the Appellate Tribunal held that trade delegations had come to India from G.D.R. and U.S.S.R., that the company had close business relationship with those countries and that with a view to promote the business interests of the company, it had incurred the expenditure only to entertain the delegates in an "appropriate and befitting manner". Therefore, it is business expenditure allowable under section 37(1) of the Act.


3. The Income-tax Officer found that a sum of Rs. 2,668 incurred by the Delhi branch was in connection with arranging of lunch and dinner to "trade customers" which represented entertainment expenditure. Therefore, he disallowed the entire sum and the disallowance was confirmed on appeal by the Appellate Assistant Commissioner. On second appeal, the Appellate Tribunal found that there was nothing on record to show that the expenditure was "extravagant or lavish". It was incurred only for providing normal lunch and dinner to various "trade constituents". So, it allowed the entire claim of Rs. 2,668.
 4. In respect of the Guntur branch office, the company claimed a sum of Rs. 72,887 towards mess expenditure and Rs. 50,691 mess expenditure at the Madras guest house, totalling Rs. 1,23,578. The Income-tax Officer disallowed the entire claim. On appeal before the Appellate Assistant Commissioner, it was contended that the accommodation maintained is not in the nature of guest house but it is only a transit accommodation for the purpose of accommodating the employees and business associates while, at the above two places (Madras and Guntur) for the purpose of the appellant's business. Therefore, it cannot be said that it is maintained as a matter of hospitality and it should be taken as one maintained wholly and exclusively for the purpose of business and it is not covered by section 37(4). In support thereof, reliance was placed on a decision of the Income-tax Appellate Tribunal, Ahmedabad Bench, in Navasari v. A. D. P. P. Billimoria (ITA No. 48 (Ahd) /75-76 dated 30-1-1976). While acceding to this contention, the Appellate Assistant Commissioner held thus :