PETITIONER: C.I.T. ANDHRA PRADESH Vs. RESPONDENT: M/S TAJ MAHAL HOTEL, SECUNDERABAD DATE OF JUDGMENT12/08/1971 BENCH: <NAME>, A.N. BENCH: <NAME>, A.N. CITATION: 1972 AIR 168 1971 SCC (3) 550 CITATOR INFO : R 1981 SC1274 (10) R 1985 SC 679 (32) RF 1986 SC 338 (7,11) RF 1987 SC1023 (31) RF 1988 SC1087 (8) R 1989 SC 335 (9) F 1989 SC 622 (4) RF 1991 SC 686 (16) RF 1991 SC 999 (14) F 1992 SC 129 (7) F 1992 SC1782 (10) ACT: Income-tax Act  s. 10(2) (vi) and (vi-b)- 'Plant', meaning of. HEADNOTE: During the assessment year 1960-61, the assessee, a registered firm running hotels, incurred expenditure in installing sanitary and pipeline fittings in its hotels. On the question whether such fittings in a building run as a hotel fell within the meaning of the word 'plant' in s. 10(2) (vi-b) of the Income-tax Act , 1922, and the assessee was therefore entitled to development rebate under that sub- section, <ORG>, in reference, answered in favour of the assessee. Dismissing the appeal to this Court, HELD: (1) Apart from the dictionary or literal meaning of the word 'plant', the context of the provisions of the Act shows that sanitary and pipe line fittings are 'plant' under s. 10(2) (vi-b) read with s. 10(5) . [173H; 174A-B] In computing the profits and gains of a business under s. 10(1) o the Act allowances by way of depreciation in respect of 'plant' under s. 10(2)(vi) and by way of development rebate in respect of 'plant' under s. 10(2) (vi-b) have to be made. Under s. 10(5) , 'plant' includes vehicles, books, scientific apparatus and surgical equipment purchased for the purpose of the,-business profession or vocation. Where a word is not defined in a statute, it must be construed in its popular sense, that is, that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it. The word 'includes' is generally used to enlarge the meaning of words or phrases used in the statute so that, words and phrases may be construed as comprehending not only such things as they signify according to their nature and import, but also these things which the interpretation clause declares that they shall include. The fact that even books have been included in 'plant' shows that the meaning given to 'plant' is wide. It should cover sanitary and pipe-line fittings. [170E-H; 171E-H, 173F] To have such fittings in a bath room is one of the essential amenities or conveniences which are normally provided in any good hotel, and the hotelier can reasonably expect to get more custom and earn a larger profit by charging higher rates. Therefore, the fittings in the present case, were not merely a part of the setting in which the hotel business was being carried on, but were required for the purpose of the hotel business. [173C- <CITATION> ., (1 970) 75 I.T.R. 533, approved. <NAME> (Inspector of Taxes) v. <ORG>, (1963) 1 W.L.R. 214, applied. 169 J. Lyons Co. Ltd. v. Attorney General,  1 Ch. 281 and Yar mouth v. France,  19 Q.B. 647, referred to. (2) The fact that the assessee while claiming depreciation allowance had included the fittings in question under the head 'furniture and fittings' and claimed higher depreciation allowance than what would be applicable to 'plant', would not detract from the meaning of the word 'plant' in s. 10(2) (vi-b). [174C-E] JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1369 of 1968. Appeal from the judgment and order dated August 1, 1967 of <ORG> in Case Referred No. 68 of 1964.

<NAME>, <NAME>, <NAME> and <NAME>, for the appellant.

<NAME> and <NAME>, for the respondent. The Judgment of the Court was delivered by <NAME>, J.--This is an appeal by certificate from the judgment of <ORG> in a case referred under s. 66(1) of the Income Tax Act, 1922 (hereinafter referred to as the Act).

The respondent who is the assessee is a registered firm running a hotel at Secunderabad with branches at Sultan Bazar and King Kothi in Hyderabad. During the previous year ending 30th September, 1959 relating to the assessment year 1960-61, the assessee incurred an expenditure of Rs. 57,154/- in installing sanitary fittings and of Rs. 1,370/- for pipe-line fittings. The assessee claimed development rebate on these two items at the rate of 25 per cent under S. 10(2)(vi-b) of the Act amounting in the aggregate to Rs. 14,629/-. The Income Tax Officer disallowed the claim. On appeal, the Appellate Assistant Commissioner upheld the disallowance. An appeal was taken to <ORG>. The <ORG> rejected the appeal holding that the definition of "plant" must necessarily be the same, whether it was for claiming depreciation under s. 10(2)(vi) or for development rebate under S. 10(2) (vi-b). Accordingly, it was held that the sanitary and pipe-line fittings did not fall within the meaning of the word "plant". On being moved under s. 66(1) of the Act, the following question was referred for the opinion of <ORG> :-

"Whether the sanitary fittings and pipelines, installed in the King Kothi branch of the <ORG>, constituted 'plant' within the meaning of sec. 10(5) of the Indian Income-tax Act and whether the assessee is entitled to develop- ment rebate in respect thereof under sec.

10(2) of the Act <ORG> answered the question in the affirmative and in favour of the assessee.

The only question that was argued before <ORG> and which has been debated before us is whether sanitary and pipe-line fittings in a building which is run as a hotel would fall within the meaning of the word "plant" in section 10(2) (vi-b) of the Act.

Section 10(1) of the Act provides that tax shall be payable by an assessee in respect of the profits and gains of any business profession or vocation. Sub-section (2) gives the allowances which have to be made in computation of such profits and gains. Clause (vi) of that sub-section relates to the depreciation in respect of "such buildings, machinery, plant or furniture being the property of the asses see".

Clause (vi-b) of S. 10(2) is as follows:-

"(vi-b) in respect of a new ship acquired or new machinery or plant installed after the 31st day of March, 1954, which is wholly used for the purposes of that business carried on by the assessee, a sum by way of development rebate in respect of the year of acquisition of the ship or of the installation of the machinery or plant, equivalent to...........

Section 10(5) provides inter alia that in sub-section (2) " plant" includes "vehicles, books, scientific apparatus and surgical equipment purchased for the purpose of the business, profession or vocation".

The main argument of the learned counsel for the Commissioner of Income Tax who is the appellant is that the word "plant" should not have been given a wide meaning and should have been interpreted according to the common understanding in commercial circles among persons who deal in plant and machinery. It is asserted that the development rebate cannot be claimed in respect of the items which have become a part of the building itself. It has also been pointed out that the assessee while claiming depreciation allowance has included the assets in question under the head "furniture and fittings" the rate claimed being 9 per cent which was duly allowed by the Income Tax Officer. This rate of 9 per cent was applicable under Rule 8 only to furniture and fittings used in hotels etc. If the assets were to be treated as plant, only the general rate of 7 per cent would be applicable. The definition of "plant" must necessarily, therefore, be the same whether it be for claiming depreciation under s. 10(2)(vi) or for development rebate under s. 10(2) (vi-b). It has also been suggested that the primary meaning of the word "plant" has connection with mechanical or industrial business or manufacture of finis hed goods from raw goods and that sanitary and pipe- line fittings could not possibly satisfy those conditions. Now it is well settled that where the definition of a word has not been given, it must be construed in its popular sense if it is a word of every day use. Popular sense means "that sense which people conversant, with the subject matter with which the statute is dealing, would attribute to it". In the present case, s. 10(5) enlarges the definition of the word "plant" by including in it the words which have already been mentioned before. The very fact that even books have been included shows that the meaning intended to be given to "plant" is wide. The word "includes" is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute." When it is so used, these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import but also those things which the interpretation clause declares that they shall include. The word "include" is also susceptible of other constructions which it is unnecessary to go into.

The case-<ORG> v. Attorney General (1) relied upon by the learned counsel for the appellant apart from being distinguishable hardly supports the contention of the appellant. In that case, it was I held that electric lamps and fittings in a tea shop were not part of the apparatus used for carrying on the business but were part of the setting in which the business was carried on, and, therefore, were not "plant", within the meaning of certain provisions of the War Damage Act, 1943. It was observed at page 286 "if these articles are plant, it can only be by reason that they are found on premises exclusively devoted to trade purposes. Trade plant alone need be considered".' The meaning of "plant" as given in <NAME> <NAME> v. France (2) was accepted as correct. According to that meaning "plant" includes whatever apparatus or instruments are used by a businessman in carrying on his business". In our judgment, the more apposite decision is that of <ORG> in <NAME> (Inspector of Taxes) v. <ORG> (3) There the nature of the assessee's business required that its office accommodation should be capable' of sub-division into a number of rooms varying in size etc. according to the requirements from time to time of the agencies which it carried on. The office accommodation consisted of a large open floor space in which partitions could be erected so as to subdivide the floor space into a number of rooms of any size. Certain partitions were made which were screwed to the floor and ceiling only and could be easily moved if it was desired to alter the size of number of the rooms. The question was whether these partitions were plant within sections 279 and 280 of the English Income Tax Act 1952, so as to entitle the company to allowances under those sections. There the material words in the statute were "where the person carrying on a trade in any year of assessment has incurred expenditure on the provision of machinery or plant for the purposes of the trade." It was held that the partitions were "plant" as they were used in the carrying out of the company's trade or business. <NAME>, L.J. held that the partitions were used to enable the trader to cope with the vicissitudes of (1) [1944] (1) Ch. 28 1. (2) [1887] (19) Q. B. 647. (3) [1963] (1) W.L.R. 214.

the business as it increased and diminished and relied on the finding of the commissioners that the flexibility of accommodation which the partitions provided was a commercial necessity for the company. Further illustrations were given of assets which would fall within the meaning of "plant". "The heating installation of a building may be passive in the sense that it involves no moving machinery, but few would deny it the name of plant". The same thing could, no doubt be said of many air conditioning and water softening installations".

It cannot be denied that the business of hotelier is carried on by adapting a building or premises in a suitable way to be used as a residential hotel where visitors come and stay and where there is arrangement for meals and other amenities are provided for their comfort and convenience. To have sanitary fittings etc. in a bath-room is one of the essential amenities or conveniences which are normally provided in any good hotel, in the present times. If the partitions in <NAME>'s case (supra) could be treated as having been used for the purpose of the business of the trader, it is incomprehensible how sanitary fittings can be said to have no connection with the business of the hotlier. He can reasonably expect to get more custom, and earn larger profit by charging higher rates for the use of rooms if the bath-rooms have sanitary fittings and similar amenities. We are unable to see how the sanitary fittings in the bath- rooms in a hotel will not be "plant" within s.10(2)(vi-b) read with Section 10(5) when it is quite clear that the intention of the <ORG> was to give it a wide meaning and that is why, articles like books and surgical instruments were expressly included in the definition of "plant". In decided cases, <ORG> have rightly understood the meaning of the term "Plant" in a wide sense. ( <CITATION> .). (1) If the dictionary meaning of the word "plant" were to be taken into consideration on the principle that the literal construction of a statue must be adhered to unless the context renders it plain that such a construction cannot be put on the words in question-this is what is stated in Webster's Third New International Dictionary:- (1)  (75) I.T.R. 533.

17 4 "Land, buildings, machinery, apparatus and fixtures employed in carrying on trade or other industrial business......

It is, however, unnecessary to dwell more on the dictionary meaning because looking to the provisions of Act, we are satisfied that the assets in question were required by the nature of the hotel business which the assessee was carrying on. They were not merely a part of the setting in which hotel business was being carried on.

<ORG> was right in not accepting the reasoning of the <ORG> based on the rates relating to depreciation under s.10(2)(vi) and the assessee having claimed that the sanitary and pipe-line fittings fell within the meaning of "furniture and fittings' in Rule 8(2) of the Rules. It has been rightly observed that the Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect. If the assessee had claimed higher depreciation allowance that would not detract from the meaning of the word plant in clause (vi-b) of S. 10(2) . In the result, this appeal fails and it is dismissed with costs.

<ORG> Appeal Dismissed.


PETITIONER: <ORG> Vs. RESPONDENT: SALES TAX OFFICER, BHOPAL DATE OF JUDGMENT14/04/1977 BENCH: <NAME>, SYED MURTAZA BENCH: <NAME>, SYED MURTAZA BHAGWATI, P.N. UNTWALIA, N.L. CITATION: 1977 AIR 1275 1977 SCR (3) 578 1977 SCC (3) 147 CITATOR INFO : F 1988 SC1250 (7) ACT: Sales Tax--Dealer consuming goods for his own purposes--If a sale exigible to tax. HEADNOTE: The appellant was a manufacturer of sugar. It also ran in the mill premises a petrol pump selling high speed diesel oil, petrol and other lubricant oils of <ORG>. A part of these oils was consumed by the appellant for its own trucks and other vehicles. The Sales tax authorities assessed to tax the petrol consumed by the appellant for its own use as well. On appeal the Commissioner of Sales Tax held that since the appellant was an agent of <ORG>, title to the property in the goods sold by it remained with the principal and as such that part of the petrol and other oils consumed by it was also a sale exigible to tax. Allowing the appellant's appeal HELD: The petrol consumed by the appellant for its own purposes was not a sale exigible to tax. A conspectus of the terms of the agreement showed that after taking deliv- ery, the appellant became the owner of the goods and if it consumed the same for its own purposes, it was doing so not as an agent but as owner. [592 E] 1(a) In a contract of sale title to property in the goods passes on to the buyer on delivery of the goods for a price paid or promised. Once this happens the buyer becomes owner of the property and the seller has novestige of title left in the property. Having regard to the complexities of modern times the concept of sale has undergone a change and made a departure from the old doctrine of laissez faire. Even if the seller, by an agreement, imposed a number of restrictions on the buyer, such for example as, fixing of price, submission of statement of accounts, area of sale and so 6n these restrictions would not per se convert a contract of sale into one of agency. [581 H] (b) A contract of agency differs from a contract of sale inasmuch as an agent, after taking delivery of the property, does not sell it as his own but sells it as the property of the principal under his instructions and directions. [582 B] (c) While interpreting the terms of an agreement, the Court has to look to the substance rather than the form of the agreement. Use of words like "agent" or "agency", "buyer" and "seller" is not sufficient to lead to the infer- ence that the parties did in fact intend that the said status would be conferred. In certain trades, the word "agent" is often used without any reference to the law of principal and agent. [582 <CITATION> . 21 STC 313, 316 followed. <NAME> and Sons v. <ORG> LR.  l KBD 710, 717, <CITATION> . ,4. <ORG>  Supp. SCR 1, 3-4 and <ORG> ( <CITATION> , 80 ITR 213 referred to. <NAME> v. <ORG>  2 K B D I, <ORG> v. <ORG> (in Liquidation),  2 Scots. L.T. 205, <ORG> v <ORG>.  2 All. F.R. 386, 579 Willcox & Gibbs Sewing Machine Company v. <NAME>, 35 U.S. Law. Ed. 882, 884 held inapplicable. In the instant case, the evidence furnished by the agreement was sufficient to conclude (a) that the goods were supplied not on consignment basis but by way of outright sale; (b) that the agreement was to sell petrol and other oils, after the dealer had bought the property from <ORG>, at prices fixed by that company; (c) that stipulation of sale price was to protect the company's goodwill and to ensure quality of goods to be distributed-in fact stipula- tion of price which is generally a common term in all agree- ments between monopolistic companies and their distributors did not detract from the freedom of contract of sale; (d) sale by the appellant to other customers did not disclose that the property belonged to <ORG>; (e) it was the appel- lant that bore losses due to leakage, driage and evaporation in storage and (f) reimbursement by the company of transport charges and handling expenses and also reimbursement of supplies made by the appellant to certain designated custom- ers showed that the agreement was a contract of sale and not of agency. Further, the term requiring the dealer to furnish state- ments of sales and other matters showed that the company wanted to keep itself fully informed of the proper conduct of the business in order to maintain its goodwill and to terminate the agreement in case it found that the appellant was misusing the privilege given to it. The term "commis- sion and allowances" indicated that certain special benefits were conferred by the company on its distributors. It did not show that it was an agency. Nor was the term requiring the appellant to furnish security for the due observance and performance of the stipulations an indication that the agreement was an agency. <CITATION> , AIR 1919 P.C. 166, 167 referred to. <CITATION> , AIR 1956 Cal. 188 ap- proved. JUDGMENT:

CIVIL APPELLATE JURISDICTlON: Civil Appeals Nos. 1135- 1138 of 1972.

Appeals by Special Leave from the Judgment and Order dated the 5th May, 1970 of the Commissioner of Sales Tax, Madhya Pradesh in Revision Case Nos. 2-5/RMS of 1968-1969 respectively.

<NAME>, (Mrs.) <NAME> and <NAME> for the Appellant.

<NAME>, H.S. Parihar and 1. N. Shroff for Re- spondent.

The Judgment of the Court was delivered by FAZAL ALl, J.--These appeals by special leave are di- rected against the order of the Commissioner of Sales Tax dated May 5, 1970 rejecting the revision filed by the appel- lant before him against the order or' the Appellate Assist- ant Commissioner, Sales Tax, imposing sales tax. The appellant filed an appeal against the order of the respondent-Sales Tax Officer--to <ORG> under the Madhya Pradesh Sales of Motor Spirit and Taxation Act , 1957 hereinafter referred to as 'the Act'--and pari pasu filed a petition under Art. 226 of the Constitution in <ORG> challenging the constitu- tionality of the Act and the assessments made in pursuance thereof. <ORG>, by its judgment dated January 25, 1961, dismissed the petition of the' appellant". The appellant. then approached this Court through a special leave petition and also a petition under Art. 32 of the Constitution but without any suc- cess. This Court by its judgment dated December 21, 1962, held that <ORG> had erred in assuming jurisdiction in deciding disputed questions involved in the petition and should have insisted on the appellant to move <ORG> provided under the Act. The petition under Art. 32 , however, .was allowed by this Court and a part of the definition of "sale" in s. 2(1) of the Act was declared ultra vires. In the instant case, however, we are not concerned with this aspect of the matter.

In compliance with the orders of this Court, the appel- lant filed an appeal before the Appellate Assistant Commis- sioner of Sales Tax which was allowed by his order dated March 6, 1963, and the case was remanded to the Sales Tax Officer for fresh assessment after making necessary en- quiries. Thereafter the respondent Sales Tax Officer assessed the appellant afresh by his order dated October 20, 1963, and made similar assessments for the other periods. Against this order the appellant moved this Court again but ultimately withdrew the petition and filed 'a revision petition under s. 28 of the Act to the Commissioner of Sales Tax, Madhya Pradesh. The Commissioner, after hearing the arguments of both the parties, invited further documents and after making further queries upheld the order of the Appel- late Assistant Commissioner of Sales Tax holding that the appellant was liable to pay sales tax inasmuch as the con- tract which was entered into between the appellant and <ORG> was a pure and simple contract of agency and not a contract of sale. The Commissioner opined that as the contract was one of agency, the title to the property remained in the <ORG> and if the appellant used the petrol for its own purposes as agent, then such a user would amount to a sale of the property of the <ORG> by the agent to itself so as to he exigible to sales tax. It is against the order of the Commissioner dated May 5, 1970 that the appellant has come up to this Court after obtaining special leave.

We have heard counsel for the parties at very great length and we have also gone through the documents flied by the parties before the Commissioner and incorporated in the Paper Book. It seems to us that the only point for deci- sion lies within a very narrow compass. The short point to be decided is whether at the time when the appellant was consuming the high speed diesel oil and petrol for its own purposes, was it doing so as owner of these articles or merely as an agent of <ORG> ? In other words, if it is held that as a result of the agreement between <ORG> and the appellant and the transactions following thereupon the title to the diesel or petrol passed to the appellant by the delivery of these articles, then from that date the appel- lant became owner of these articles and was entitled to use them as he liked, because he had already paid the price of the diesel and petrol received by it. If this be the position, then it is manifestly clear that the user by the appellant for its own purposes may not amount to a sale which had already taken place at a point of time when the goods were delivered by the <ORG> to the appellant. On the other hand, if it is held that the appellant was a mere agent under the agreement and was selling the articles on behalf of its principal--the <ORG>--then any user of these articles or properties may amount to a sale so as to be exigible to sales tax. We may add that even then it was contended for the appellant that it would not amount to sale, but it did not press his contention later. The question, therefore, will have to be determined having regard to the terms and recitals of the agreement, the intention of the parties as may be spelt out from the terms of the documents and the surrounding circumstances and having regard to the course of dealings between the par- ties. In all the Sales Tax statutes as also the definition of "sale" in the Act in this case, the definition given in the Sale of Goods Act has been bodily lifted from that Act and inserted in the Tax Statutes. In the instant case under the Madhya Pradesh Sales of Motor Spirit Taxation Act, 1957, "sale". is defined thus:

" "sale" with all its grammatical variations and cognate expressions means transfer of motor spirit for cash or deferred payment or for other valuable consideration and includes transfer of motor spirit by a society or club or any association to its members, but does not include a mortgage hypothecation, charge or pledge;

Explanation l.---Consumption of motor spirit by a dealer himself or on his behalf shall be deemed to be a "sale";

Explanation II.---A sale of motor spirit deemed to be a sale inside the State within the meaning of sub-section (2) of section 4 of the Central Sales Tax Act, 1956 , shall also be deemed to be sale inside the State for the purposes of this clause;"

Thus it would appear that in order to satisfy the conditions of "sale" under the definition of the Act, the following conditions must be satisfied:

(i) that there should be a transfer of motor spirit from the seller to the buyer;

(ii) that the transfer must be for valu- able consideration which may be either cash or deferred payment; and

(iii) that the transfer must not be in the nature of a mortgage, hypothecation, charge or pledge.

Under Explanation I, consumption of motor spirit by a dealer himself or on his behalf shall be deemed to be a sale. But this Explanation has already been held to be ultra vires by this Court in the previous <ORG> case. Thus the essence of the matter is that in a contract of sale, title to the property passes on to the buyer on delivery of the goods for a price paid or promised. Once this happens the buyer becomes the owner of the property and the seller has no vestige of title left in the property. The concept of a sale has, however, undergone a revolution- ary change, having regard to the complexities of the modern times and the expanding needs of the society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale even though the seller may by virtue of an agreement impose a number of restrictions on the buyer, e.g. fixation of price, submission of accounts, selling in a particular area or territory and so on. These restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions the transaction would still be a sale and subject to all the incidents of a sale. A contract of agency, however, differs essentially from a contract of sale inasmuch as an agent after taking delivery of the property does not sell it as his own property but sells the same. as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyer--pure and simple. In <ORG>, Vol. 1, 4th Edn., in para 807 at p. 485, the following observations are made:

"The relation of principal and agent raises by implication a contract on the part of the principal to reimburse the agent in respect of all expenses, and to indemnify him against all liabilities, incurred in the reasonable per- formance of the agency, provided that such implication is not excluded by the express terms of the contract between them, and pro- vided that such expenses and liabllities are in fact occasioned by his employment."

We have mentioned this fact, particularly because under the agreement between <ORG> and the appellant the loss sustained by the buyer has to be borne by it after delivery of the goods and the seller is not responsible for the same. Such a special arrangement between the parties is a factor which taken along with other circumstances points towards the agreement being one of sale. It is well settled that while interpreting the terms of the agreement, the <ORG> has to look to the substance rather than the form of it. The mere fact that the word 'agent' or 'agency' is used or the words 'buyer' and 'sell- er' are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. Thus the mere formal description of a person as an agent or buyer is not conclusive, unless the context shows that the parties clearly intended 'to treat a buyer as a buyer and not as an agent. Learned counsel for the appel- lant relied on several circumstances to show that on a proper construction of the agreement it could not but be held to 'be a contract of sale. Learned counsel strongly relied on a decision Of this <ORG> in <CITATION> ,(1) where this <ORG> held the transaction to be a sale in almost similar circumstances. Speaking for the <ORG>, <NAME>, J., observed as follows: (1) 21 S.T.C. 313; 316 "As a matter of law there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid ; and not as agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and will therefore be liable to account for the sale proceeds."

It is clear from the observations made by this Court that the true relationship of the parties in Such a case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the said relationship. This Court relied on a decision in <NAME> v. <ORG> (1) where despite the fact that the buyer was designated as sole selling agent, the Court held that it was a contract of sale Lord <NAME>, with whom other Lords agreed, observed as follows:

"Now it is well known that in certain trades the word "agent" is often used without any reference to the law of principal and agent. The motor trade offers an obvious example, where persons described as "agents" are not agents in respect of any principal, but are purchasers who buy from manufacturers and sell independently of them; and many difficulties have arisen from this habit of describing a purchaser, sometimes a purchaser upon terms, as an agent."

In a earlier decision of this Court in <CITATION> . (2) it was observed thus:

"The essence of sale is the transfer of the title to the goods for price paid or to be paid. The transferee in such case becomes liable to the transferor of the goods as a debtor for the price to be paid and not as agent for the proceeds of the sale. On the other hand, the essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and who is therefore liable to account for the proceeds." <ORG> in <ORG> v.

Commissioner of Income-tax (Central) Bombay(3) had, in almost similar facts, held that even though there were restrictions on the assessee, the agreement being one of distribution was to be treated as a contract of sale and not an agreement of agency. It would thus appear that (1) L.R. [1932] I K.B.D. 710, 717.

(2) [1966] Supp. S.C.R. 1,34.

(3) 80 I.T.R. 213 even if a party is described as agent in the agreement he may not be an agent but a buyer though described as an agent. In fact we feel that there may be agreements which may contain some elements of agency but may be-contracts of sale in other respects.

Learned counsel for the respondent then relied on the decision in <NAME> v. <ORG>) This author- ity does not appear to be of any assistance to the respond- ent because in that case the court came to a finding of fact that there was no concluded contract at all and the agree- ment was merely an executory one and, therefore, the ques- tion of determining the relationship between the parties did not naturally arise.

Similarly reliance was placed on <ORG> v. <ORG> (in Liquidation).(2) Here also the question was decided on the peculiar terms of the agreement in question and this authority cannot be called into aid for the purpose of deciding the present case.

Learned counsel for the respondent also relied on <ORG> v. Stimson(3) but the facts in the aforesaid case appear to be quite different from the facts of the present case.

Strong reliance was also placed by Mr. Panjwani coun- sel for the respondent on <ORG> v. <NAME>) where the Court observed as follows ::

"And it is agreed and understood that this appointment or agency is not saleable or transferable by second party without obtaining the written consent of first party, but such consent is to be given providing the purchaser or other person is acceptable to said first party."

"There was some discussion at the bar as to whether <NAME> was, strictly, an agent of the company. We think he was. He was none the less an agent because of his appointment as "exclusive vendor" of the defendant's machines within a particular territory, or because of the peculiar privileges granted to or the peculiar restrictions imposed upon him"

It seems to us that the law on the subject has been stated by the <ORG> in a different context and, therefore, this case does not appear to us to be of any assistance in deter- mining the question at issue in the instant case. The '<ORG> in the aforesaid case had inferred agency from the mere fact that under the agreement the sale was to operate in a limited territory. This by itself, in our opinion, is not sufficient to lead to the inference that the agree- ment was one of agency. It is (1) [1934] 2K.B.D. 1.

(2) [1917] 2 Scots. L.T. 205.

(3) [1962] 3 All E.R. 386.

(4) 35 U.S. Law. Ed. 882,884.

always open to the buyer to purchase goods for a limited purpose and within the field of that limited purpose the buyer has absolute to the property once it is delivered to him by the seller.

Learned counsel for the respondent then relied on a deci- sion of <ORG> in <CITATION> - tax and Sales Tax, Trivandrum,(1). But that decision is contrary to the principles enunciated by this Court in <ORG> case (supra) and <ORG> case (Supra). Moreover, as pointed out by <ORG> in that case there were special terms and stipulations in the contract which persuaded the <ORG> to hold that it was a contract of agency. We would, therefore, like to confine the ratio of that case to the peculiar facts of that case. Further, it appears that while <ORG> had expressly dissented from a decision of <ORG> in <CITATION> (1) and did not accept the propositions laid down by the said Court, this Court had affirmed the aforesaid <ORG> decision in <CITATION> (3) where it was observed thus:

"We therefore agree with the view of <ORG> that clause 24 does not qualify the legal effect of the other important clauses of the agreement, and that the cement delivered, despatched or consigned by the manufacturing companies to <ORG> or to its orders or in accordance with its directions was sold by the manufac-

turing companies to <ORG> ...... "

In view of the observations of this Court, therefore, the <ORG> decision referred to above must be held to have been impliedly overruled.

Having discussed the law 'on the subject, we shall now analyse the agreement in the present case and interpret the same m accordance with the principles laid down by the various authorities referred to above. To begin with, clauses 1 and 2 express in absolutely categorical terms that the nature of the agreement is to sell the property in question and nothing else. Clause 2 runs thus:

"The Company shall sell to the dealer and the dealer shall buy from the Company the said products at the prices preestablished by the Company therefore and which are in effect on the date on which the Diesel Oil is des- patched/or delivered by the Company."

Clause 2 expressly states that Hispeedol was to be sold and the dealer was b in the property from the <ORG> at prices to be fixed by the <ORG>. The terms "buying" and "selling" have not been used by way of a routine or formal description of the status of the parties (1) 12 S.T.C. 464.

(2) 9 S.T.C. 248.

(3) 12 S.T.C. 615,622.

but appear to us to form an integral part of the contract clearly exhibiting an intention of the nature of transaction which the parties intended tiffs document to be, namely, that it is a contract for sale and nothing else. We must remember that the agreement in question is a contract for distribution of Hispeedol produced by <ORG> which has a monopoly for producing a particular type of oil which it sells. A common feature of any distribution agree- ment is that the seller insists on a particular price at which the property is to be sold and impose certain restric- tions in order to protect his goodwill and ensure the quali- ty of his goods to be distributed through sale. The chart filed by the appellant at p. 191 of the Paper Book would clearly show that the appellant paid the price of the bulk supplies almost within a month of the date of delivery of the goods. This chart runs thus:

"A. H. Bhiwandiwalla & <ORG>, Managing Agents, <ORG>, Sehore, Cash Debit voucher No.. 2011, dt. 1-7-1958.

"Please pay to. M/s. Caltex (India) Ltd., Account: Petrol Diesel Oil & lubricants.

In full payment of the following bills Rs .-np. No. 19232 dt. 9-4-58 for 1000 Gs. petrol Rs. 2920-00 No. 19283 dt. 8-5-58 for 1000 Gs. petrol Rs. 2920-00 No. 19321 dt. 29-5-58 for 1000 Gs. petrol Rs. 2920-00 8760-00 No. 17586 dt. 1-5-58 for 1000 Gs. Hispeedol Rs. 1770-00 No. 17593 dt. 7-5-58 for 1000 Gs. ,, Rs. 1770-00 No. 17610 dt. 14-5-58 for 1000 Gs. ,, Rs. 1770-00 No. 17621 dt. 18-5-58 for 860 Gs. ,, Rs. 1540-00 6850-00

Rupees fifteen thousand six hundred ten only. 15610-00

For the <ORG> Sd/- Illegible Manager. "

This chart also reveals a crucial fact, namely, that the supply of the products by the Company was made to the appel- lant not on consignment basis but by way of outright sale. It appears from the documents produced by the appellant before the Commissioner that on inquiries made from the seller, namely, <ORG>, they confirmed the fact that the goods were sent to the buyer on the basis of out- right sale. In this connection, the relevant portion of the letter read thus:

"We refer to 'the discussion your Mr. <NAME> had this forenoon with our M/s. <NAME> and <NAME> ......

In this connection we would like to confirm as under "1. Since the inception of your dealership, clause No. 4 of our Standard Petrol Dealer Agreement does not apply to you.

2. Supplies of Petroleum Products ex Bombay or ex our Depots in Madhya Pradesh have been made to you on the basis of outright sale."

This letter also shows that clause 4 of the Standard Petrol Dealer Agreement did not apply to the appellant. Similarly another letter at P. 167 of the Paper Book written by the Manager of the appellant to the Commissioner of <ORG> clarified the position that the appellant had purchased the goods on outright basis. The relevant portion of this letter may be extracted thus:

"<ORG> <ORG>, never supplied goods i.e. petrol & Hispeedol on consignment basis. We had always purchased the goods from them on out-right purchases against our orders placed with them from time to time. Sample copies of our correspondence relating to placement of orders in respect of petrol & hispeedol are enclosed herewith for your perusal."

The appellant had filed detailed correspondence to prove the facts clarified before the Commissioner. This aspect of the matter was further reiterated by the appellant in his letter to the Commissioner' dated November 7, 1969, the relevant portion of which may be extracted as follows:

"<ORG> supplied us petrol & hispeedol against our orders placed with them from time to time and they billed us immedi- ately thereafter at the bulk rates prevailing from time to time ....... Payments were also made to <ORG> on outright basis immediately after receipt of the goods .......

All books of account, all files contain- ing orders, bills, payment vouchers and correspondence are produced before you for your verification."

This letter further shows that all the vouchers, corre- spondence etc. had been produced 'by the appellant in proof of the recitals mentioned in the letter. It is, therefore, clear that the moment the appellant received the supplies of Hispeedol from the seller, the Hispeedol became the property of the appellant and the appellant was absolutely free to sell the Hispeedol and petrol to any one it liked at the prices fixed within the territory specified in the agreement. Thus the title to the property passed to the appellant the moment it took delivery of the same. It is, therefore, manifest that having taken delivery of the property if the appellant was using it for its own consump- tion it was using its own property in which the Company had no title at all and such a user therefore could not, by any stretch of imagination, be treated as a sale.

Another very important circumstance which clearly shows that the contract was one of sale and not of agency is the fact that after having taken delivery of the petrol and Hispeedol the appellant sold the same to its various custom- ers, not even mentioning that the property belonged to <ORG> but issued cash memos in its own name which clearly indicates that after taking delivery of the property the appellant became the absolute owner thereof and repre- sented itself to be the owner of the property and sold it not as the property of the <ORG> but as its own property. This fact is clearly proved, by the cash memos and credit vouchers produced by the appellant at pp. 195-197 of the Paper Book. The cash memo describes <ORG> as the owner of the goods and so does the credit voucher.- This, therefore, conclusively shows that the agreement could not have been an agreement of agency because the essential distinction between an agreement of sale and agreement of agency is that in the former case the property is sold by the seller as his own property and in the latter case the property is sold by the agent not as his own property but as the property of his principal and on his behalf.

Another important circumstance which indicates that the goods were sold to the appellant is that the appellant in his letters produced on further queries made by the Commis- sioner of sales Tax made a clear statement that the appel- lant had borne the losses due to leakage, driage, evapora- tion etc. during the course of storage at the pumps of the appellant and the seller <ORG> did not reimburse the appellant for such losses. The relevant portion of this letter may be extracted thus:

"As we had purchased petrol & hispeedol on out-right purchase and sale basis from <ORG>, we borne the entire losses arising out of entire expenses or handling at our receiving point. We also borne the losses due to leakages, driage and driage and/or evaporation during the course of storage at our pumps. <ORG>, did not reimburse us for any loss."

If the appellant would have been agent of the <ORG> then under the law of agency the agent had an indefeasible right to be reimbursed or indemnified by the principal for the losses caused. But as the appellant bore the losses person- ally, this clearly indicates that the properties after being sold to it were its absolute properties and if any losses occurred they were borne by the appellant as owner and not by the seller.

Another important condition in the agreement was clause 23 at p. 130 of the Paper Book which runs thus:

"The dealer shall at any time, upon request of the <ORG> make from his stocks, deliveries of reasonable quantities of said products for account of the <ORG>, to con- sumers at such points within the territory as the <ORG> may designate. In consideration of his making such deliveries, the dealer shall be reimbursed in full for all transportation expenses, and receive in addi- tion thereto, such allowances for handling as may then currently be in effect under this agreement."

Under this clause the appellant was required to deliver reasonable quantities of products at the request of the <ORG> to consumers designated by the <ORG> at such points within the territory as may be specified. In consid- eration of complying with the request, the seller <ORG> agreed to reimburse the appellant in full for the supplies and the appellant was also entitled to be paid transporta- tion expenses and handling allowances as may have been incurred by it. This is another decisive factor which negatives the theory that the agreement could be one of agency. Indeed such a stipulation in the agreement is wholly inconsistent with the position of the appellant being an agent for in that case there was absolutely no scope for such a stipulation and the seller <ORG> as a principal of the agent could have instructed it to supply the goods or petrol to designated customers and there was no question of the agent being reimbursed, because the property supplied belonged to the principal and was delivered to certain persons on the instructions of the principal. This clause, therefore, is yet another important factor which shows that the agreement was intended to be a contract of sale rather than a contract of agency.

Furthermore, the agreement contains a clear and unequivocal declaration by the seller Company that the status of the appellant woUld not be that' of an agent. In this connection, clause 15 of the agreement runs thus:

"Nothing in this agreement contained shall in any way operate by implication or otherwise to constitute the dealer as agent of the <ORG> in any respect and for any purpose whatsoever, and the dealer shall have no right or authority to assume or create any obliga- tion of any kind express or implied on behalf of the <ORG> in any other respect whatsoev- er."

This clear declaration on the part of the parties leaves no" room for doubt that the agreement was intended to be a contract for sale and that the appellant was not only not regarded as an agent but was expressly excluded from the category of an agent.

The cumulative effect of the circumstances mentioned above leads to the inescapable conclusion that the <ORG> had been sold to the appellant and not held by it merely as an agent of <ORG>. The petrol agreement also which has been placed before us contains similar stipu- lations and it was not disputed by counsel for the respond- ent that if the <ORG> Agreement is held to be a con- tract of sale, then the same would have to be said of the Petrol Agreement also. Thus the principles which would make the contract of the purchase of <ORG> a contract of sale would apply mutatis mulandis to the Petrol Agreement also. Learned counsel for the respondent, as also the Commis- sioner, have relied on certain stipulations in the agreement which show that the 11--502 SCI/77 agreement was one of agency. The first circumstance relied in this connection was that under clause 12 of the agree- ment, the appellant was to maintain sale, service and other record as may be considered necessary and was to furnish the <ORG> when called upon statements of sales, financial and other matters as and when required by the <ORG>. Clause 12 runs thus:

"The dealer shall maintain sales, serv- ice, and other record as may be considered necessary by the <ORG> and shall furnish the <ORG> when called upon with all such sales, financial and other statements as may be required by and in forms satisfactory to the <ORG>."

In our opinion this clause does not at all conclusively show that the appellant was an agent of the Company. The object of inserting this clause in the agreement appears to be that during the term of the agreement the appellant undertook to maintain proper sales, service and other record so that the Company's reputation may not suffer and if any statement regarding the sales or other matter were required by the Company, they were not required because the appellant was the agent of the Company but it was because the Company wanted to keep itself fully informed of the proper conduct of the business by the appellant in order to maintain its goodwill. It is manifest that if during the period of the agreement there were serious complaints against the appellant regarding the misuse of the privileges given to it under the agreement, the Company could under the terms of the agreement terminate the agreement so as to 'save its reputation. Read as a whole, this stipulation does not amount to make the appellant liable to render regular accounts to the Company inasmuch as the statements called for were required only for a very limited purpose, viz., to prevent the appellant from misusing his privileges and thereby jeopardising or harming the reputation of <ORG>. In these circumstances, therefore, the argument based on this clause appears to be of no assistance to the counsel for the respondent.

Clause 8 of the agreement clearly shows that the appel- lant had been loaned properties belonging to the Company like petrol pumps and their accessories etc. and it was in respect of these properties which had been given to the dealer for working the petrol pumps that the statements of account were called for from the appellant. This ap- pears to be the modus operandi adopted by the seller Company in respect of all its distributors. There is no stipulation in the agreement which requires or enjoins on the appellant to submit accounts of the Hispeedol or petrol which he may have sold to various customers, after having taken deliv- ery of the same from the Company. In these circumstances, therefore, this argument of the learned counsel for the re- spondent must be overruled.

Another circumstance relied upon by the respondent was the fact that the appellant was under the terms of the agreement to sell the goods at a price fixed and not higher or lower than that. We have already indicated that when a <ORG> enters into a distribution agreement it always fixes a particular price in order to protect its goodwill and in order to control the market. Such fixation of the price by itself would not be a restriction which would take away the freedom of contract of sale. Such a stipulation is found in almost all the agreements entered into between the monopolist <ORG> and their distributors. The respondent would not, therefore, be justified in treating this circum- stance in order to show that the agreement was one of agency.

Similarly the argument that the appellant was to sell the goods in a territory fixed by the <ORG> does not show that the agreement was not of sale because this is also one of the common features of a distribution agreement. The question to be determined is not what was the territory fixed by the seller <ORG> but whether there was any limi- tation to sell to any particular person within the territory for which the properties were sold to the appellant. On this point there is absolutely no restriction. It was further contended that under clause 26 of the agreement the <ORG> agreed to pay a commission and certain allowances to the appellant which shows that the appellant was an agent The relevant portion of clause 26 runs thus:

"In consideration of the dealer under- taking faithfully, to carry out their part of the Agreement as set for the above, the <ORG> undertakes to pay the dealer such commission and allowances as the <ORG> in its sole discretion shall think fit. The rate of commission and allowances that are current at the time are setforth in the schedule attached hereto, but the <ORG> reserve the right to alter such corn. mission and allow- ances as and when they. think fit without any previous notice to the dealer and without assigning any reason therefore."

A perusal of this clause as a whole would show that the use of the words "commission and allowances" is not to indicate agency, but to indicate certain special benefits which the Company wanted to confer on its distributors. Furthermore, then payment of commission by itself is not conclusive to show that the agreement was one of agency. <CITATION> , (1) Lord <NAME> observed as follows:

"It comes to this, that all the documents show on the face of them a contract as between principals. The mere mention of commission in the contract as signed is not in any way, as pointed by the learned Judges of <ORG>, inconsistent with the relation being between principal and princi- pal."

This decision was followed by <ORG> in <CITATION> (2) and we find ourselves in complete agreement with the view taken by the Calcutta (1) A.I.R. (1919) P.C. 166, 167.

(2) A.I.R. (1956) Cal. 188 High Court. For these reasons, therefore, the argument by learned counsel for the respondent is not tenable in law. Finally, reliance was placed on clause 18 of the agree- ment appearing at p. 126 of the Paper Book which requires the dealer to furnish security for the due observance and performance of the stipulations contained therein. Such a stipulation also does not by itself show that the agreement was one of agency.

The present agreement undoubtedly contains some ele- ments of agency also, but the main question which has to be determined in this case is whether or not at the point of time when the appellant was consuming the Hispeedol or petrol for its own purposes it was acting as an owner of the goods or as agent of the seller Company. From the facts and circumstances discussed above,-we have shown that the appel- lant, after taking delivery of the goods, was the owner of the goods and if it consumed the same for its own purposes it was not doing so as agent but as owner which it was fully entitled to do. In this view of the matter, the quantities of petrol consumed by the appellant for its own purposes would not constitute a sale so as to be exigible to sales tax. We have carefully perused the order of the Commissioner and find that the Commissioner has taken an erroneous view of the law and has drawn legally wrong infer- ences from the various stipulations contained in the agree- ment. The Commissioner has also not given effect to well established legal principles in interpreting the agreement. For the reasons given above, we are unable to maintain the order of the Commissioner which suffers from manifest errors of law apparent on the face of the record. We, therefore, allow these appeals, set aside the order of the Commissioner dated May 5, 1970, and hold that the use of the Hispeedol and petrol by the appellant for its own purposes is not exigible to sales tax and the proceedings for impos- ing sales tax on the appellant are hereby quashed. The appellant will be entitled to its costs throughout.

P.B.R. Appeal allowed. ?593


PETITIONER: <NAME>, ETC. Vs. RESPONDENT: STATE OF UTTAR PRADESH AND ORS. DATE OF JUDGMENT28/07/1995 BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) SEN, S.C. (J) CITATION: 1995 SCC (5) 173 JT 1995 (5) 505 1995 SCALE (4)573 ACT: HEADNOTE: JUDGMENT:

J U D G M E N T B.P. JEEVAN REDDY.J.

These writ petitions highlight the faulty manner in which reservations have been provided and implemented by <ORG> and its authorities in the matter of admission to medical courses for the year 1994-95. Though the dispute pertains to the academic year 1994-95, we are told that the admissions have been made only in June- July, 1995 and are yet to be finalised in respect of certain courses.

The story begins with the announcement of policy of reservation in the matter of admission to medical courses issued by the <ORG> on May 17, 1994. According to this notification, sixty five percent of seats were reserved in favour of various classes/categories leaving only thirty five percent for open competition (O.C.) category. The reservations provided were to the following effect:

1. Backward Class 27% 2. Hill Region 3% 3. Uttarakhand Region 3% 4. Scheduled Caste 21% 5. Scheduled Tribe 2%

6. Real dependents of freedom fighters 5%

7. Son/daughter of soldier died in war/handicapped solders 2%

8. For Handicapped Candidates 2%

A further reservation in favour of women was also provided to the extent of thirty percent in each of the above categories. The reservations so provided were challenged by way of a writ petition in this Court under Article 32 of the Constitution-Civil Writ Petition No.777 of 1994 ( <CITATION> .). The contention of the petitioner was that reservation of sixty five percent of seats was contrary to the decision of this Court in <CITATION> . (1992 Suppl. (3) S.C.C. 217) and, therefore, void. Pending the said writ petition, the Government issued a notification on December 17, 1994 modifying the reservation policy contained in the notification of May 17, 1994. It would be appropriate to set out the notification dated December 17, 1994 in its entirety:

No. 6550/Sec-14/V-111/93 From: <NAME>, Sachiv, Uttar Pradesh Shasan To: Director General, Medical Education, Training, U.P.Lucknow Medical Section-14 Lucknow dated 17.12.94 Sub: Reservation in seats of M.B.B.S./B.D.S./B.H.M.S. /B.A.M.S./B.U.M.S. Courses to be filled through C.P.M.T. in State Allopathic Medical Colleges/K.G.

<ORG>, Lucknow/All State Homeopathic/Ayurvedic/Unani <ORG>s.

Sir, In continuation of G<ORG>O<ORG>No<ORG> 2697/Sec-14/V- 94/111/93 dated 17<ORG>5<ORG>94, on the above subject, I am directed to say clarifying the <ORG><ORG> policy that horizontal reservation be granted in all medical colleges on total seats of all the courses to be filled through combined Pre-Medical Test (CPMT) 1994 as given below:

1. Real dependents of freedom fighters 5%

2. Sons/daughters of deceased/disabled soldiers 2%

3. Physically handicapped candidates 2%

4. Candidates belonging to hill areas 3%

5. Candidates belong to Uttaranchal areas 3%

2. The above reservation would be horizontal and the candidates of the above categories, selected on the basis of merit, would be kept under the categories of Scheduled Castes/Scheduled Tribes/Other Backward Classes/ General to which they belong. For example, if a candidate dependent on a Freedom Fighter selected on the basis of reservation belongs to reserved for scheduled caste, (he will be adjusted against the seat reserved for S.C.?) Similarly, if a physically handicapped candidate selected on the basis of reservation belongs to other backward class or general category, he would be adjusted against the seats reserved for other backward classes or general category.

3. I am also directed to say that vertical reservation shall be granted in all medical colleges on total seats of all courses to be filled through C.P.M.T. 1994 as given below:

a) Scheduled Caste Candidates-21%} 30 seats

b) Scheduled Tribe Candidates-21%} in each

c) Other Backward Class } category candidates -27%} reserved } for ladies

4. 'Other Backward Classes' mean the classes mentioned in Annexure-1 of Notification No. 488/XVII-V-1-1(Ka) 8-1994 dated 23.3.94 notified by Vidhiyaka Anubhag, Uttar Pradesh Adhiniyam No.4/1994. The candidates of backward classes mentioned in Annexure-II of the aforesaid Adhiniyam would not be entitled for the reservation.

5. I am also directed to clarify that if a candidate of reserved category, mentioned in para 3 above, is selected alongwith general category candidates on the basis of merit, he shall not be adjusted against reserved seats, as G.O. in this regard has already been issued. So, 50% seats of general category shall be filled on the basis of merit prior to filling of reserve seats mentioned in para 3 above.

Please ensure strict compliance of these orders.

Yours faithfully, sd/-

<NAME>"

This revised notification was brought to the notice of this Court at the hearing of the aforesaid writ petition. After noticing both the aforesaid notifications this Court (the Bench comprising <NAME>, J. and one of us, <NAME>,J.) observed as follows:

"2. Reservation of 65% resulting in reducing the general category of 35% was undoubtedly violative of Article 16. Further by reserving 30% of the general seats for ladies the general category shrank to 5%. But these glaring infirmities have been rectified by the amended circular. Reservation of 30% for ladies has now been confined to para 3 of the amended circular. Dr. <NAME>, learned Senior Counsel appearing for the <ORG> clarified that he has instructions to make a statement on the amended circular that now there is no reservation for ladies in the general category.

3. Similarly, the other defect in the circular reserving 35% seats for general category has been removed. The vertical reservation is now 50% for general category and 50% for Scheduled Castes, Scheduled Tribes and Backward Classes.

Reservation of 15% for various categories mentioned in the earlier circular which reduced the general category to 35% due to vertical reservation has now been made horizontal in the amended circular extending it to all seats. The reservation is no more in general category. The amended circular divides all the seats in <ORG> into two categories - one, general and other reserved. Both have been allocated 50%. Para 2 of the circular explains that candidates who are selected on merit and happen to be of the category mentioned in para 1 would be liable to be adjusted in general or reserved category depending on to which category they belong, such reservation is not contrary to what was said by this <ORG> in <NAME>. Whether the reservation for such persons should have been made or not was not challenged, therefore, this <ORG> is not required to examine it.

4. In the result this petition is disposed of by directing that in view of the circular issued by the Government on 17-12-1994 clarified by para 2 the grievance of the petitioner cannot be said to have been survived. The interim order passed by this Court staying the declaration of results is discharged." This decision was rendered on February 2, 1995. On February 14, 1995 the Government issued a clarification stating:

"I have been directed to say that partly modifying the G.O.No.6550-Sec.14- V/111/93 dt.17.12.94 on the above subject, clause para 3 of the said G.O. shall be read as under:

3. I am also directed to say that vertical reservations shall be granted in all Medical Colleges on total seats of all Courses to be filled through C.P.M.T. 1994.

i) Scheduled Caste Candidates 21%

ii) Scheduled Tribes Candidates 2%

iii) Other Backward Class Candidates 27% The effect of this clarification is that reservation in favour of women has been removed from all the reserved categories.

<ORG> had issued a notification calling for applications for admissions to medical courses in the State in accordance with the notification of May 17, 1994. After the decision of this Court in <NAME> and in the light of the revised notification by the <ORG>, as also the clarification issued on February 14, 1995, the University issued a corrigendum stating that the reservation in favour of five categories, viz., (1) actual dependents of freedom fighters - 5%, (2) sons/daughters of soldiers/deceased/disabled in war - 2%, (3) physically handicapped - 2%, (4) candidates of hill area - 3%, and (5) candidates of Uttarakhand area - 3% (hereinafter referred to as in this judgment as "Special Categories") shall be horizontal reservations and not vertical reservations. The corrigendum stated:

".....following Horizontal reservation has been provided on the total seats of all the courses of every Medical College to be filled on the basis of Combined Pre-Medical Test, 1994:

1) Actual dependents of freedom fighters 5%

2)Sons/daughters of Soldiers/deceased/disabled inwar 2%

3) Physically handicapped 2%

4) Candidates of Hill Area 3%

5) Candidates of Uttarakhand Area 3%

2. The above reservation will be horizontal and the candidates of above categories, selected on the basis of merit, would be kept under the categories of Schedule Caste/Schedule Tribe/Other Backward Class/General to which they belong.

3. It is also informed that on total number of seats of every course in every Medical College through C.P.M.T. 1994. The following vertical reservations have been provided:

(1) Scheduled Caste Candidates 21% (2) Scheduled Tribe Candidates 2% (3) Other Backward Class Candidates 27% 4. It is also clarified that if any candidate belonging to Schedule Caste/Schedule Tribe/Other Backward Class categories is selected in open

competition on the basis of merit, then he will not be adjusted in the seats reserved for concerned categories. Therefore after filling the seats on the basis of horizontal reservation, the unreaserved seats will be filled on the basis of merits and thereafter reserved seats for Schedule Caste/schedule tribe/Other Backward Class will be filled.

5. As per above mentioned provisions the provisions for reservations in application form and important guidlines for C.P.M.T.1994 issued earlier will deemed to be modified accordingly.

6. Therefore, it is desired from the candidates falling under horizontal reservations that if they belong to Scheduled Caste, Scheduled Tribe or Other Backward Class Category, then they should send Caste Certificate on the following proforma giving his Roll number and examination details to the Registrar, <ORG> by 28.2.95. If Caste Certificate is not receivedwithin the prescribed period, then it will be deemed that concerned candidates belongs to the General Category. Once a Caste Certificate is furnished same cannot be changed subsequently. The prescribed proforma of Caste Certificate is being sent to the concerned candidates falling under Horizontal reservation through UPC for necessary action as aforesaid. In case proforma of Caste Certificate is not received by post, then same can be obtained by contacting Registrar, <ORG>."

In accordance with the procedure aforesaid, admissions have been made which are questioned in the present two writ petitions.

At the outset, we may mention a glaring illegality which has unfortunately not been raised in these writ petitions but is self-evident from the decisions of this Court. Under the revised notification dated December 17, 1994, three percent of the seats have been reserved for candidates belonging to hill areas and another three percent in favour of candidates belonging to Uttaranchal areas. These two reservations along with the reservations in favour of physically handicapped, children of deceased/disabled soldiers and dependents of freedom fighters are treated as horizontal reservations. In other words, the reservations in favour of hill areas and Uttaranchal areas are understood and treated as reservations relatable to Article 15(1) of the Constitution and not as reservations in favour of "socially and educationally backward classes of citizens or for the Scheduled Castes and Scheduled Tribes" within the meaning of Article 15(4) of the Constitution. It has been held by this Court in <CITATION> (1975 (1) S.C.C.267) that the reservation of seats in favour of candidates belonging to hill areas and Uttarakhand areas are reservations within the meaning of Article 15(4) of the Constitution, i.e., they are reservations in favour of socially and educationally backward classes of citizens. This Court found that "the <ORG> has established that the people in hill and Uttarakhand areas are socially and educationally backward classes of citizens". It, therefore, follows that a separate horizontal reservation of six percent of the seats in favour of candidates from hill areas and Uttaranchal apart from and in addition to twenty seven percent reservation in favour of other backward class candidates is clearly illegal. Though this contention has not been specifically raised in these writ petitions we must yet take notice of this circumstance while making the appropriate directions in these matters. It isindeed surprising that the <ORG> of Uttar Pradesh which is a party to the above decision has failed to bear it in mind. The said decision has also been referred to approvingly in <NAME>. The <ORG> of Uttar Pradesh shall keep this in mind for future selections as also in respect of those which may be now under way and make necessary corrections.

We may now turn to the contentions raised in the writ petition.

In the initial notification calling for applications, the fifteen percent special reservations were treated as vertical reservations along with reservations in favour of Other Backward Classes, Scheduled Castes and Scheduled Tribes. Applications were accordingly received. But with the issuance of the revised notification of December 17, 1994, the decision of this Court in <NAME> and the clarification contained in the letter dated February 14, 1995, these special reservations became horizontal reservations. Accordingly, a corrigendum was issued by <ORG> calling upon the candidates belonging to these special categories to specify to which social reservation category they belong. In other words, the candidates who had applied under any of the said special reservations were asked to specify whether they belong to Scheduled Tribes, Scheduled Castes, Other Backward Classes or to open competition category, as the case may be. It is stated that the candidates did indicate the same. According to the counter-affidavit now filed on behalf of the respondents, it appears that out of 2130 candidates who had applied against the five special reservation categories only nine stated that they belong to Other Backward Classes. None stated that they belong to Scheduled Tribes or Scheduled Castes which meant that but for nine candidates, all the rest applying under the aforesaid special categories were from the general/non-reserved category. As we shall indicate presently, 110 out of 112 special reservation candidates have been accommodated only in O.C. category and none in the O.B.C., S.C. or S.T. category.

Now, coming to the manner in which the said two-way reservations, viz., social reservations (vertical reservations) and special reservations (horizontal reservations) have been implemented, a few facts may be noticed. In the Counter-affidavit filed by the respondent (sworn-to by Sri <NAME>) it is stated that the total number of seats available in M.B.B.S, course in the government colleges in Uttar Pradesh is 746. Fifteen percent of the said number comes to 112 seats. In Para 16, it is stated:

"16. That in C.P.M.T. 1994 out of this 112 seats 101 students were selected and all of them belong to the General Category. The replying respondent filled up unreserved seats first and while doing so, 101 students selected on the basis of horizontal reservation since they belong to General Category, hence they have to be adjusted against unreserved seats. 9 belonging to Other Backward ClassesCategory has secured equivalent marks as General Candidates and thus were selected on merits. These candidates have been adjusted against unreserved category. The Roll number, names and total marks out of 1200 of these candidates are as follows:

1. 33936 <NAME> S/o J.P.Gupta 974/1200

2. 16678 <NAME> s/o B.S. Yadava 971/1200

3. 28415 <NAME> S/o S.C.S. Yadava 957/1200

4. 10506 <NAME> S/o O.P.Yadava 950/1200

5. 60497 <NAME> 947/1200

6. 47946 Vishal Singh S/o Y. Singh 947/1200

7. 47684 <NAME> S/o V.S. Yadava 1003/1200

8. 15633 <NAME> S/o S.K. Yadava 954/1200

9. 57620 <NAME> 944/1200 The remaining 263 seats were filled through General Candidates and last candidate selected has secured 891 marks out of 1200 marks. 201 candidates of Other Backward Classes were selected against reserved seats 157 against seats reserved for Scheduled Castes and 15 against seats reserved for Schedule Tribe. Similarly same procedure was applied in all the categories. Therefore, the contention of the petitioner that only 36% seats are filled with General Candidates is wrong. A photostat copy of tabulated result is being filed herewith and marked as Annexure R-IV to to this affidavit."

A reading of Para 16 makes it clear that the authorities in-charge of making admissions first took up the special category reservations and filled them up. Of the 112 candidates, 101 were from what may be called for the sake of convenience, `unreserved category' while nine candidates belonged to Other Backward Class category. But it appears that inasmuch as the said nine candidates belonging to Other Backward Classes had secured equal marks with the general candidates and were accordingly selected on merit in the O.C. quota, they were treated as Open competition candidates. The result was that out of 112 seats reserved for special categories, 110 seats were taken away from the Open competition (O.C.) category, thus leaving only 263 seats for the general candidates, i.e., O.C. candidates not belonging to any of the special reservations. It is the above method of filling of seats that has been challenged in these writ petitions.

The contention of the learned counsel for the petitioners is two fold: (i) by virtue of the revised notification of December 17, 1994, the decision of this Court in <NAME> and the corrigendum notification issued by <ORG>, it is clear that the special reservation seats are to be distributed and allocated proportionately among the social, i.e., vertical reservation categories. Had it been so done, only fifty six candidates belonging to special reservation categories could be accommodated in the O.C. category. But, the respondents have accommodated 110 special reservation candidates in the O.C. category, an excess of fifty four seats. These fifty four seats must be taken away from the special reservation categories and allotted to O.C. candidates not belonging to any special reservation category. (ii) The procedure prescribed in the aforesaid revised notification for filling up the vacancies is equally illegal which has also resulted in the dimunition of seats available for O.C. category. The admissions should be re-done thoroughly to rectify the said error.

On the other hand, the learned counsel for the respondents justify the procedure prescribed in the revised notification for making the admissions. With respect to the first contention of the learned counsel for the petitioners, the submission of the learned counsel for <ORG> and the State of Uttar Pradesh is that the fifteen percent reservation in favour of special categories (special reservation) is an overall reservation and not a compartmentalised reservation. They submit that these special reservations are not divided proportionately among the vertical (social) reservation categories and, therefore, these special reservation candidates have to be provided fifteen percent of the total seats (i.e., 112 seats) overall, whether by adjusting them against any of the social/vertical reservations or otherwise.

The question is which of the above interpretations is the correct one having regard to the language employed in the concerned notifications?

On a careful consideration of the revised notification of December 17, 1994 and the aforementioned corrigendum issued by <ORG>, we are of the opinion that in view of the ambiguous language employed therein, it is not possible to give a definite answer to the question whether the horizontal reservations are overall reservations or compartmentalised reservations. We may explain these two expressions. Where the seats reserved for horizontal reservations are proportionately divided among the vertical (social) reservations and are not inter-transferable, it would be a case of compartmentalised reservations. We may illustrate what we say: Take this very case; out of the total 746 seats, 112 seats (representing fifteen percent) should be filled by special reservation candidates; at the same time, the social reservation in favour of Other Backward Classes is 27% which means 201 seats for O.B.Cs.; if the 112 special reservation seats are also divided proportionately as between O.C.,O.B.C.,S.C. and S.T., 30 seats would be allocated to the O.B.C. category; in other words, thirty special category students can be accommodated in the O.B.C. category; but say only ten special reservation candidates belonging to O.B.C. are available, then these ten candidates will, of course, be allocated among O.B.C. quota but the remaining twenty seats cannot be transferred to O.C. category (they will be available for O.B.C. candidates only) or for that matter, to any other category; this would be so whether requisite number of special reservation candidates (56 out of 373) are available in O.C. category or not; the special reservation would be a water tight compartment in each of the vertical reservation classes (O.C.,O.B.C.,S.C. and S.T.). As against this, what happens in the over-all reservation is that while allocating the special reservation students to their respective social reservation category, the over-all reservation in favour of special reservation categories has yet to be honoured. This means that in the above illustration, the twenty remaining seats would be transferred to O.C. category which means that the number of special reservation candidates in O.C. category would be 56+20=76. Further, if no special reservation candidate belonging to S.C. and S.T. is available then the proportionate number of seats meant for special reservation candidates in S.C. and S.T. also get transferred to O.C. category. The result would be that 102 special reservation candidates have to be accommodated in the O.C. category to complete their quota of 112. The converse may also happen, which will prejudice the candidates in the reserved categories. It is, of course, obvious that the inter se quota between O.C., O.B.C., S.C. and S.T. will not be altered.

Now coming to the revised notification of December 17, 1994, it says that "horizontal reservation be granted in all medical colleges on total seats of all the courses....". These words are being interpreted in two different ways by the parties; one says it is over-all reservation while other says it is compartmentalised. Paragraph 2 says that the candidates selected under the aforesaid special categories "would be kept under the categories of Scheduled Castes/Scheduled Tribes/Other Backward Classes/General to which they belong. For example, if a candidate dependent on a freedom fighter selected on the basis of reservation belongs to Scheduled Castes, he will be adjusted against the seat reserved for Scheduled Castes". This is sought to be read by the petitioners as affirming that it is a case of compartmentalised reservation. May be or may not be. It appears that while issuing the said notification, the Government was not conscious of the distinction between overall horizontal reservation and compartmentalised horizontal reservation. At any rate, it may not have had in its contemplation the situation like the one which has arisen now. This is probably the reason that this aspect has not been stated in clear terms.

It would have been better - and the respondents may note this for their future guidance - that while providing horizontal reservations, they should specify whether the horizontal reservation is a compartmental one or an overall one. As a matter of fact, it may not be totally correct to presume that <ORG> was not aware of this distinction between "overall horizontal reservation", since it appears from the judgment in <NAME> that in the first notification issued by <ORG> on May 17, 1994, the thirty percent reservation for ladies was split up into each of the other reservations. For example, it was stated against backward classes that the percentage of reservation in their favour was twenty seven percent but at the same time it was stated that thirty percent of those seats were reserved for ladies. Against every vertical reservation, a similar provision was made, which meant that the said horizontal reservation in favour of ladies was to be a "compartmentalised horizontal reservation". We are of the opinion that in the interest of avoiding any complications and intractable problems, it would be better that in future the horizontal reservations are comparmentalised in the sense explained above. In other words, the notification inviting applications should itself state not only the percentage of horizontal reservation(s) but should also specify the number of seats reserved for them in each of the social reservation categories, viz., S.T., S.C., <ORG> and O.C. If this is not done there is always a possibility of one or the other vertical reservation category suffering prejudice as has happened in this case. As pointed out hereinabove, 110 seats out of 112 seats meant for special reservations have been taken away from the O.C. category alone - and none from the <ORG> or for that matter, from S.C. or S.T. It can well happen the other way also in a given year.

Now, coming to the correctness of the procedure prescribed by the revised notification for filling up the seats, it was wrong to direct the fifteen percent special reservation seats to be filled up first and then take up the O.C. (merit) quota (followed by filling of O.B.C., S.C. and S.T. quotas). The proper and correct course is to first fill up the O.C. quota (50%) on the basis of merit: then fill up each of the social reservation quotas, i.e., S.C., S.T. and B.C; the third step would be to find out how many candidates belonging to special reservations have been selected on the above basis. If the quota fixed for horizontal reservations is already satisfied - in case it is an over-all horizontal reservation - no further question arises. But if it is not so satisfied, the requisite number of special rreservation candidates shall have to be taken and adjusted/accommodated against their respective social reservation categories by deleting the corresponding number of candidates therefrom. (If, however, it is a case of compartmentalised horizontal reservation, then the process of verification and adjustment/accommodation as stated above should be applied separately to each of the vertical reservations. In such a case, the reservation of fifteen percent in favour of special categories, overall, may be satisfied or may not be satisfied.) Because the revised notification provided for a different method of filling the seats, it has contributed partly to the unfortunate situation where the entire special reservation quota has been allocated and adjusted almost exclusively against the O.C. quota.

In this connection, we must reiterate what this Court has said in <NAME>. While holding that what may be called "horizontal reservation" can be provided under clause (1) of Article 16 , the majority judgment administered the following caution in para 744: "(B)ut at the same time, one thing is clear. It is in very exceptional situation - and not for all and sundry reasons - that any further reservations of whatever kind, should be provided under clause (1). In such cases, the <ORG> has to satisfy, if called upon, that making such a provision was necessary (in public interest) to redress the specific situation. The very presence of clause (4) should act as a damper upon the propensity to create further classes deserving special treatment. The reason for saying so is very simply. If reservations are made both under clause (4) as well as under (1), the vacancies available for free competition as well as reserved categories would be correspondingly whittled down and that is not a reasonable thing to do". Though the said observations were made with reference to clauses (1) and (4) of Article 16 , the same apply with equal force to clauses (1) and (4) of Article 15 as well. In this case, the reservation of fifteen percent of seats for special categories was on very high side. As pointed out above, two categories out of them representing six percent out of fifteen percent are really reservations under Article 15(4 ), wrongly treated as reservations under Article 15(1). Even otherwise, the special reservation would be nine percent. The respondents would be well advised to keep in mind the admonition administered by this Court and ensure that the special reservations (horizontal reservations) are kept at the minimum.

Having pointed out the errors in the rule of reservation and its implementation, the question arises what should be done now? Should we interfere with the admissions already finalised? We think it inadvisable to do so. It may be remembered that the admissions now finalised (in June- July, 1995) are really the admissions which ought to have been finalised one year back. The delay has occured on account of the first faulty notification (issued on May 17, 1994). When a writ petition was filed in this court - probably some writ petitions in <ORG> also - the Government realised its mistake and issued the revised notification on December 17, 1994. It dropped the reservation in favour of women in stages. The <ORG> had then to issue a corrigendum asking the special category candidates to indicate their social status. This was a delayed exercise which ought to have been undertaken at the beginning itself. Even the manner in which the seats have been filled up, as indicated above, is faulty. What we have laid down herein is more for the purpose of future guidance for the respondents. At the same time, we have to rectify the injustice done to the open competition candidates in the admissions in question, to the extend feasible. Accordingly, we direct that in the matter of admissions made pursuant to C.P.M.T.1994, while the admissions already finalised shall not be disturbed, <ORG> shall create thirty four additional seats in the M.B.B.S. couse and admit thirty four students from the O.C. category against those seats. If any seats are vacant as on today, they shall also be filled from the O.C. category alone. (It is made clear that O.C. category means the merit list and no distinction shall be made among the candidates in the O.C. list on the basis of their social status because it is well settled that even a S.T./S.C./O.B.C. candidate is entitled to obtain a seat in the O.C. category on the basis of his merit.) The counsel for the petitioners complain that fifty four students belonging to O.C. category have been deprived on account of respondents' faulty actions and that it should be directed to be made up. We cannot agree. The factual basis of this submission is debatable in view of the ambiguity mentioned hereinbefore. We have directed creation of thirty four seats (making a total of 780 seats this year) having regard to all the facts and circumstances of the case. This creation of additional seats is restricted to current admissions only and shall not be a permanent feature. The Uttar Pradesh Government/concerned authorities shall allocate the said thirty four additional seats appropriately among the government medical colleges and make admissions thereto as early as possible.

We hope and trust that the respondents will ensure that a similar situation does not arise for the ensuing admissions.

The writ petitions are disposed of with the above terms. No costs.

A copy of this judgment shall be communicated to the Chief Secretary, <ORG> and the Secretary, <ORG>, <ORG> eo nomine (i.e., by their designation) for their attention and implementation.