LAW FOR ALL

Wednesday, October 19, 2016

'M/s. Mangalore Ganesh Beedi Works', which was sold to three other partners, as a going concern, but after the dissolution of the partnership firm. Certain considerations received as a result thereof were treated as capital gains on which income tax was charged by the Assessing Officer. The case of the assessees was that it was a capital receipt in their hands, not exigible to income tax. The exact nature of the receipt, treated as capital gain by the Assessing Officer, shall be taken note of subsequently at the appropriate stage.=High Court deals how the business income/revenue income is to be treated/calculated, but the question of taxability at the hands of the assessees has not bee touched upon at all. The upshot of the aforesaid discussion would be to allow the appeals partly only to the extent that business income/revenue income in the Assessment Year in question is to be assessed at the hands of AOP-3, in terms of the orders of the High Court, as AOP-3 retained the tax amount from the consideration which was payable to the assessees herein and it is AOP-3 which was supposed to file the return in that behalf and pay tax on the said revenue income.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1234 OF 2012

|VATSALA SHENOY |.....APPELLANT(S) |
|VERSUS | |
|JOINT COMMISSIONER OF INCOME TAX | |
|(ASSESSMENT), MYSORE |.....RESPONDENT(S) |

W I T H
CIVIL APPEAL NO. 1235 OF 2012

CIVIL APPEAL NO. 1236 OF 2012

CIVIL APPEAL NO. 1237 OF 2012

CIVIL APPEAL NO. 1238 OF 2012

CIVIL APPEAL NO. 1239 OF 2012

CIVIL APPEAL NO. 1240 OF 2012

CIVIL APPEAL NO. 1241 OF 2012

CIVIL APPEAL NO. 1242 OF 2012

CIVIL APPEAL NO. 1243 OF 2012

CIVIL APPEAL NO. 1244 OF 2012

CIVIL APPEAL NO. 1245 OF 2012

CIVIL APPEAL NO. OF 2016
(ARISING OUT OF SLP (C) NO. OF 2016
@ SLP (C) NO.....CC 9101 OF 2014)

CIVIL APPEAL NO. OF 2016
(ARISING OUT OF SLP (C) NO. OF 2016
@ SLP (C) NO.....CC 10193 OF 2014)

A N D

CIVIL APPEAL NO. OF 2016
(ARISING OUT OF SLP (C) NO. 14812 OF 2014)

J U D G M E N T

A.K. SIKRI, J.
Delay condoned in Special Leave Petition (C) No.....CC
9101 and 10193 of 2014.

Leave granted.

All these appeals (except Civil Appeal No. 1245 of 2012 and Civil Appeals
arising out of SLP (C) No....CC Nos. 9101 and 10193 of 2014 and SLP (C) No.
14812 of 2014, which are filed by the Revenue) are preferred by the
assessees. The respondent in these appeals is the Joint Commissioner of
Income Tax (Assessment), Special Range, Mysore, who would be referred to as
the 'Revenue' hereinafter. It may also be mentioned that these appeals
arise out of a common judgment rendered by the High Court of Karnataka on
December 23, 2010 in the appeals filed under Section 260-A of the Income
Tax Act, 1961 (for short, the 'Act') challenging certain aspects of
assessments pertaining to the Assessment Year 1995-1996. In fact, as would
be noticed hereinafter, all these assessees were partners of a partnership
firm known as 'M/s. Mangalore Ganesh Beedi Works', which was sold to three
other partners, as a going concern, but after the dissolution of the
partnership firm. Certain considerations received as a result thereof were
treated as capital gains on which income tax was charged by the Assessing
Officer. The case of the assessees was that it was a capital receipt in
their hands, not exigible to income tax. The exact nature of the receipt,
treated as capital gain by the Assessing Officer, shall be taken note of
subsequently at the appropriate stage. Suffice it to state that the
assessees successive appeals to Commissioner of Income Tax (Appeals) and
then to the Income Tax Appellate Tribunal (ITAT) and thereafter to the High
Court have failed, thereby sustaining the order of the Assessing Officer.
With this brief background of the litigation, we advert to the events that
have taken place in some detail.

One S. Raghuram Prabhu started the business of manufacturing beedies in the
year 1939. His brother-in-law joined him in the year 1940 and this sole
proprietorship was converted into a partnership firm with the name 'M/s.
Mangalore Ganesha Beedi Works' (hereinafter referred to as the 'firm'). It
was reconstituted thereafter from time to time and lastly on June 30, 1982.
Partnership deed dated June 30, 1982 was entered between thirteen persons
with the same name. Duration of this firm was five years, which period
could be extended by six months. Thereafter, the affairs of the firm had
to be wound up as provided in Clause 16 of the Partnership Deed. The firm
was dissolved on December 06, 1987 by afflux of time after extending the
life of the firm by a period of six months, as per the terms stipulated in
the Partnership Deed. However, because of the difference of opinion among
the erstwhile partners, the affairs of the firm could not be wound up.
Therefore, two of the partners of the firm filed a petition before the High
Court under the provisions of Part X of the Companies Act, 1956 for winding
up of the affairs of the firm in terms of Section 583(4)(a) thereof. The
said petition was registered as Company Petition No. 1 of 1988.
Significantly, though the firm stood dissolved on December 06, 1987, and
thereafter Company Petition No. 1 of 1988 for the winding up proceedings
after dissolution was filed in the High Court, the business of the
partnership firm continued because of the interim order passed by the High
Court. This was because of the agreement of the partners, as stipulated in
the Partnership Deed itself, providing that on dissolution the firm was to
be sold as a continuing concern to that partner(s) who could give the
highest price therefor. The relevant clauses in the partnership firm
stipulating the aforesaid arrangement are clauses (3) and (16) which read
as under:

“3. The duration of the Partnership shall be five years in the first
instance; but by mutual agreement the parties hereto may extend the said
duration. If during the subsistence of this Partnership any of the
partners desire to retire from the partnership he or she can do so, if all
the other partners agree to the said retirement. However, if all the other
partners do not agree to the said retirement, the partner intending to
retire shall give six months' notice in writing of his or her intention to
retire and on expiration of the period of the said notice the said Partner
shall cease to be a Partner and subject to Para 14 infra from that date all
his or her liabilities and rights as a Partner of the firm shall come to an
end.

xx xx xx

16. If the Partnership is dissolved, the going concern carried on under
the name of the Firm MANGALORE GANESH BEEDI WORKS and all the trade marks
used in course of the said business by the said firm and under which the
business of the Partnership is carried on shall vest in and belong to the
Partner who offers and pays or two or more Partners who jointly offer and
pay the highest price therefor as a single group at a sale to be then held
as among the Partners shall be entitled to bid. The other Partners shall
execute and complete in favour of the purchasing Partner or Partners at
his/her or their expense all such deed, instruments and applications and
otherwise aid him/her or them for the registration his/her name or their
names of all the said trade marks and do all such deed, acts and
transactions as are incidental or necessary to the said transferee or
assignee Partner or Partners.”

In view of the aforesaid clauses, specific order dated November 05, 1988
was passed by the High Court permitting the group of partners, seven in
number, who had controlling interest, to continue the business as an
interim arrangement till the completion of winding up proceedings.
Ultimately, the orders dated June 14, 1991 were passed in the said company
petition for winding up the affairs of the firm by selling its assets as an
'ongoing concern'. Though this order was challenged by some of the partners
by filing special leave petition in this Court, the same was dismissed as
withdrawn in the year 1994. In this manner, orders dated June 14, 1991
became final, which had permitted the sale of the firm, as an ongoing
concern, to such of its partner(s), who makes an offer of highest price.
Reserve price of ?30 crores was also fixed thereby mandating that the price
cannot be less than ?30 crores. The successful bidder was also required to
accept further liability to pay interest @ 15% per annum towards the amount
of price payable to partners from December 06, 1987 till the date of
deposit. In the order dated June 14, 1991, it was also directed that the
successful bidder shall deposit the offer price together with interest with
the Official Liquidator within a period of sixty days of the date of
acceptance of the offer.

On the aforesaid terms, these partners individually or in groups offered
their bids. Bid of Association of Persons comprising three partners
(hereinafter referred to as 'AOP-3'), at ?92 crores, turned out to be the
highest and the same was accepted by the High Court vide order dated
September 21, 1994. AOP-3 deposited this amount of ?92 crores with the
Official Liquidator on November 17, 1994 and with the occurrence of this
event, assets of the firm were treated as having been sold to AOP-3 on
November 20, 1994. Even actual handing over of the business of the firm
along with its assets by the Official Liquidator to the said AOP-3 took
place on January 07, 1995.

From the aforesaid facts, following events which are relevant for the
purposes of these appeals, are recapitulated:

(i) Date of dissolution of the partnership firm is December 06, 1987.

(ii) Company Petition No. 1 of 1988 was filed in the High Court of
Karnataka for winding up of the firm. All steps and formalities for
winding up, thereafter, are taken pursuant to the orders passed by the High
Court from time to time.

(iii) Order dated November 05, 1988 is passed permitting the group of
partners (seven in number) to continue the business as an interim
arrangement till the completion of winding up proceedings.

(iv) Winding up order dated June 14, 1991 is passed fixing minimum price
of ?30 crores for the sale of the dissolved partnership firm as a going
concern to such of its partner(s) who makes the offer of highest price.

(v) The date of deposit of the bid amount of ?92 crores by AOP-3, being
the highest bid, is on November 17, 1994.

With the aforesaid background facts, we advert to the developments that
have taken place on the income tax front.

Since the firm stood dissolved with effect from December 06, 1987, upto
December 06, 1987, it is the firm which had filed the income tax returns in
respect of the income which it had earned, for payment of income tax
thereupon. However, as mentioned above, though the firm was dissolved, but
the business continued because of the orders passed by the High Court
keeping in view the provisions contained in the Partnership Deed. The
income that was earned from the date of dissolution till the date of
winding up and when the firm was sold to AOP-3 was assessed at the hands of
dominant partners controlling the business activities (seven in number) as
“Association of Persons” (AOP), meaning thereby, the income from the
business of the said firm December 06, 1987 till winding up was assessed as
an AOP. At the same time, these assessees were also filing their
individual returns as well.

The assessees filed the return for the Assessment Year 1995-1996. It is in
this Assessment Year the assets of the firm were sold as ongoing concern to
AOP-3 on September 21, 1994. The Assessing Officer, while making the
assessments, bifurcated this Assessment Year into two periods. One period
from April 01, 1994 to November 20, 1994 (as AOP of the partners who had
continued the business in that capacity in previous years). Second period
from November 20, 1994 till March 31, 1995 (as the business was handed over
to AOP-3 and the assessment was treated as that of AOP-3). While doing so,
the Assessing Officer observed that the entire capital gains on the sale as
a going concern of the business of the firm as well as the proportionate
profits for the period April 01, 1994 to November 20, 1994, when the
controlling AOP was carrying on business as computed in accordance with the
order of the High Court in Company Petition No. 1 of 1988, on a notional
basis a sum of ?9,57,57,007 should be taxed in the hands of the firm.
However, according to the Assessing Officer, to protect interests of the
Revenue, the same amounts were included in the assessment of the AOP for
the first period. The income and tax computations were made separately for
the two periods in the order of assessment. The Assessing Officer
apportioned the consideration among the various assets comprised within the
business with further splitting between short term and long term capital
gains.

While the aforesaid treatment was given to the assessment of the income of
the firm, insofar as the assessees as individuals are concerned, on the
same date the Assessing Officer made assessment in their cases also by
including therein the proportionate share from out of ?92 crores (the
amount of auction bid) as capital gain at their hands and bifurcated the
same into long term and short term gain. The manner in which it is done
can be discerned from one such Assessment Order where the capital gain is
computed in the following manner:

|“INCOME AS RETURNED | | |Rs.29,40,680 |
| | | | | |
|II. Computation of capital gains on account of| |
|transfer of interest in partnership firm M/s. | |
|MGBW out of Rs. 92 crores | |
| | | | | |
|Share of assessee out of Rs. 92| |Rs. | |
|crores | |12,73,55,600 | |
| | | | | |
|A 1 | | | | |
|Goodwill u/s. 48 | | | | |
|r.w.s. 55(1) | | | | |
|76.6% of |Rs.9,75,54,3| | | |
|Rs.12,73,55,600 |90 | | | |
|(See Table 3) | | | | |
|less Cost of |nil | | | |
|acquisition | | |Rs. | |
|(See Table 3) | | |9,75,54,390 | |
|Net Taxable | | | | |
|Goodwill | | | | |
| | | | | |
|A 2 | | | | |
|Sale of Land | | | | |
|(See Table 3) | | | | |
|Market value @ 19% |Rs.12,73,55,| | | |
|of |600 | | | |
|less Cost of |Rs.2,41,97,5| | | |
|acquisition |64 | | | |
|(see Table 3) | | | | |
|13.843% of | | | | |
|Rs.1,53,45,025 | | | | |
| | | | | |
|Indexed Cost |21,24,212 x | | | |
| |259 | | | |
| |100 | | | |
| |55,01,710 | |Rs.1,86,95,85| |
| | | |4 | |
| | | | | |
|TOTAL LONG TERM CAPITAL GAINS (A1+A2) |Rs. |
| |11,62,50,244 |
| | | | | |
|III Short-term Capital gain on| | |
|transfer of | | |
|movable (depreciable asset) u/s. | | |
|50 | | |
| | | | | |
|4.4% of | | |Rs. 56,03,646| |
|Rs.12,73,55,600 | | | | |
| | | | | |
|Less Value / w.d.v. in the | | |
|beginning of | | |
|accounting year – 31.03.1994 |Rs.2,09,224 | |
|13.843% of Rs.15,11,404 | | |
| | | | | |
|SHORT TERM CAPITAL GAINS | |Rs. 53,94,422 |
| | | | | |
|IV Share of Notional/Proportionate Profit – |Rs. |
|revenue receipt |1,32,55,640 |
| | | | | |
|TOTAL INCOME (I + II + III + IV) | |Rs. |
| | |13,78,40,987 |
|TOTAL INCOME EXCLUDING LONGTERM CAPITAL-GAINS |Rs. |
| |2,15,90,743” |

As can be gathered from the above, the total proceeds of ?92 crores are
first apportioned among the assessees in the ratio in which they had
received the said amount. Thereafter, this amount is divided into long
term capital gains and short term capital gains. Two components of long
term capital gains are taken into consideration, namely goodwill and sale
of land. Likewise, short term capital gain is arrived at in respect of
transfer of movables which were depreciable assets. For the purposes of
calculation/ computation, figures were taken from Table II incorporated in
the Assessment Order itself mentioning the market value of these assets.
This Table II reads as under:

|S.No.|Asset |%age |Sales/Market|Amount in |
| | | |Value |assessee's |
| | | | |case |
|1. |Land as per H.S. |19.00 |17,47,90,000|2,41,97,564 |
| |Seshagiri – Registered| | | |
| |Valuer | | | |
|2. |Buildings as per H.S. |4.10 |3,80,00,000 |56,06,646 |
| |Seshagiri – Registered| | | |
| |Valuer | | | |
|3. |Plant & Machinery |0.30 |25,00,000 | |
| |estimated on the basis| | | |
| |of Swamy & Rao's | | | |
| |Report | | | |
|4. |Goodwill – being |76.60 |70,47,10,000|9,75,54,390 |
| |balancing figure | | | |
| |remaining out of total| | | |
| |figure of 92,00,00,000| | | |
| |also being almost same| | | |
| |figure if super profit| | | |
| |method is adopted | | | |
| |Total |100.00 |92,00,00,000|12,73,55,600 |

It becomes apparent that the approach adopted by the Assessing Officer was
to take into consideration market value of the assets of the firm, viz.
land, building and plant & machinery, which had already been evaluated by
the Registered Valuers as reflected in the Table above. The market value
of these three assets was ?21,52,90,000. Since total sale consideration at
which the firm was sold was ?92 crores, balance amount of ?70,47,10,000 was
treated as representing goodwill of the firm which was taxed as long term
gain. This mode of arriving at short term and long term capital gain and
taxing it accordingly by the Assessing Officer has received the stamp of
approval by the Commissioner of Income Tax (Appeals) and the Income Tax
Appellate Tribunal, as well as the High Court.

Mr. Ajay Vohra, learned senior counsel appearing for the assessees,
submitted, with great emphasis, that the aforesaid approach is incorrect,
invalid and impermissible in law. Two broad arguments, on the basis of
which he attacked the rationale of the aforesaid assessments, are the
following:

(i) After referring to the averments made in the winding up petition that
was filed in the Karnataka High Court, order of winding up and the final
order of confirmation of sale, Mr. Vohra pointed out that the firm was
admittedly sold as a going concern. Predicated on this fact, his submission
was that there could not have been any capital gain on the sale of ongoing
concern. For this purpose, he drew sustenance from the definition of
'capital asset' as contained in Section 2(14)(a) of the Act as well as
Section 45 of the Act. Section 2(14)(a) is to the following effect:
“2(14) “capital asset” means –

(a) property of any kind held by an assessee, whether or not connected with
his business or profession;

xx xx xx”

He submitted that the expression 'property of any kind' was of widest
amplitude, as held in Commissioner of Income Tax, Bombay City I v. Tata
Services Ltd.[1] Therefore, assets of the partnership were to be treated
as capital assets.

He, thus, argued that undertaking that was transferred as a going concern
was a capital asset. However, at that time, there was no provision as to
how the asset of the firm when wold is to be computed as a capital gain.
The learned counsel pointed out that such a provision was introduced for
the first time (vide Finance Act, 1999) by inserting Section 50B to the Act
with effect from April 01, 2000, laying down the mechanism for computation
of capital gains in case of slump sale. For, such slump sales prior to
April 01, 2000 were, therefore, not taxable, was the submission of the
learned counsel. It was argued that precisely this very issue had been
clinchingly determined by this Court in PNB Finance Limited v. Commissioner
of Income Tax I, New Delhi[2] in the following manner:
“16. In the case of Artex Manufacturing Co. this Court found that a valuer
was appointed, that valuer submitted his valuation report in which itemized
valuation was carried out and on that basis the consideration was fixed at
Rs.11,50,400. Therefore, the sale consideration had been arrived at after
taking into account the value of plant, machinery and dead stock as
computed by the valuer and, consequently, it was held that the surplus
arising on the sale was taxable under section 41(2) of the Act and not as
capital gains. In the circumstances, the judgment of this court in the
case of Artex Manufacturing Co. was not applicable to the present case.
Further, this court in the case of CIT v. Electric Control Gear Mfg. Co.
[1997] 227 ITR 278 has held that whether (sic) the business of the assessee
stood transferred as a going concern for slump sale price, in the absence
of evidence on record as to how the slump price stood arrived at, section
41(2) had no application. It is interesting to note that the judgment in
the case of Electric Control Gear Mfg. Co. is given by the same Bench which
decided the case of Artex Manufacturing Co. In fact, both the judgments
are reported on after other in 227 ITR at pages 260 and 278 respectively.
In the present case, as can be seen from the impugned judgment of the Delhi
High Court, the judgment of this court in Electric Control Gear Mfg. Co. is
missed out. That judgment has not been considered by the High Court. As
stated above, this court has clarified its judgment in Artex Manufacturing
Co. in its judgment in the case of Electric Control Gear Mfg. Co.
Therefore, section 41(2) has no application to the facts of the present
case.

17. As regards applicability of section 45 is concerned, three tests are
required to be applied. In this case, section 45 applies. There is no
dispute on that point. The first test is that the charging section and the
computation provisions are inextricably linked. The charging section and
the computation provisions together constituted an integrated code.
Therefore, where the computation provisions cannot apply, it is evident
that such a case was not intended to fall within the charging section,
which, in the present case, is section 45. That section contemplates that
any surplus accruing on transfer of capital assets is chargeable to tax in
the previous year in which transfer took place. In this case, transfer
took place on July 18, 1969. The second test which needs to be applied is
the test of allocation/attribution. This test is spelt out in the judgment
of this Court in Mugneeram Bangur and Co. (Land Department) [1965] 57 ITR
299. This test applies to a slump transaction. The object behind this
test is to find out whether the slump price was capable of being
attributable to individual assets, which is also known as item-wise
earmarking. The third test is that there is a conceptual difference
between an undertaking and its components. Plant, machinery and dead stock
are individual items of an undertaking. A business undertaking can consist
of not only tangible items but also intangible items like, goodwill, man
power, tenancy rights and value of banking licence. However, the cost of
such items (intangibles) is not determinable. In the case of CIT v. B.C.
Srinivasa Setty reported in [1981] 128 ITR 294, this court held that
section 45 charges the profits or gains arising from the transfer of a
capital asset to income-tax. In other words, it charges surplus which
arises on the transfer of a capital asset in terms of appreciation of
capital value of that asset. In the said judgment, this Court held that
the “asset” must be one which falls within the contemplation of section 45.
It is further held that, the charging section and the computation
provisions together constitute an integrated code and when in a case the
computation provisions cannot apply, such a case would not fall within
section 45. In the present case, the banking undertaking, inter alia,
included intangible assets like, goodwill, tenancy rights, man power and
value of banking licence. On the facts, we find that item-wise earmarking
was not possible. On the facts, we find that the compensation (sale
consideration) of Rs.10.20 crores was not allocable (sic) item-wise as was
the case in Artex Manufacturing Co.”

Mr. Vohra pointed out that in the instant case itself, insofar as AOP-3 is
concerned (who were the successful bidders and purchased the assets of the
firm), they were treated as purchasers of an ongoing concern by this Court
in the case of their assessment in Mangalore Ganesh Beedi Works v.
Commissioner of Income Tax, Mysore & Anr.[3]
In nutshell, his argument was that since it was a sale of an
ongoing concern, it had to be treated as a slump sale within the meaning of
Section 2(42C) of the Act and, therefore, it was not permissible for the
Assessing Officer to assign the amount of ?92 crores into different heads
of land, building and machinery and treating balance amount as goodwill.
It was a capital asset as an ongoing concern which was sold at ?92 crores
and in the absence of provisions relating to mode of computation and
deductions at the relevant time, which were inserted subsequently only with
effect from April 01, 2000, as per PNB Finance Limited, the consideration
was to be treated as capital receipt and no capital gain was payable
thereon.

Two incidental submissions were also made on this aspect, which are:

(a) Even if the provisions of capital gain were applicable and the amount
was to be taxed as the capital gain, valuation of goodwill, as done by the
Assessing Officer, was contrary to law. It was submitted that the manner
in which the goodwill was valued showed that cost of acquisition was
treated as 'Nil'. However, it could not be so having regard to the
provisions of Section 48. He contrasted the same with Section 55(2) which
was inserted with effect from April 01, 2002 and deals with 'cost of
acquisition' for the purposes of Sections 48 and 49 stipulating that
insofar as capital asset in relation to goodwill of a business is
concerned, cost of acquisition would be the cost at which it was purchased
from the previous owner. According to him, this yardstick could not have
been applied prior to April 01, 2002 in the absence of any statutory scheme
and the instant case needed to be covered by the law laid down by the
courts in this behalf in various judgments. The learned counsel referred
to the following judgments in support:
(i) CIT v. B.C. Srinivasa Setty[4]
(ii) Mangalore Ganesh Beedi Works
(iii) Areva T & D India Ltd. v. The Deputy Commissioner of Income Tax[5]
(iv) Commissioner of Income Tax & Anr. v. Associated Electronics &
Electricals Industries (Bangalore) (P) Ltd.[6]

(b) Without prejudice to the aforesaid contentions, his other submission
was that if at all the capital gain tax was payable, liability to pay the
same was that of the partnership firm and not the individual partners by
virtue of Section 45(4), which reads as under:
“45. Capital gains. – (1) Any profits or gains arising from the transfer
of a capital asset effected in the previous year shall, save as otherwise
provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be
chargeable to income-tax under the head “Capital gains”, and shall be
deemed to be the income of the previous year in which the transfer took
place.

xx xx xx

(4) The profits or gains arising from the transfer of a capital asset by
way of distribution of capital assets on the dissolution of a firm or other
association of persons or body of individuals (not being a company or a co-
operative society) or otherwise, shall be chargeable to tax as the income
of the firm, association or body, of the previous year in which the said
transfer takes place and, for the purposes of section 48, the fair market
value of the asset on the date of such transfer shall be deemed to be the
full value of the consideration received or accruing as a result of the
transfer.”

Second submission of the learned senior counsel for the assessees pertained
to the payment of tax on the income which the business earned from April
01, 1994 till November 20, 1994. The learned counsel argued that as per the
orders of the High Court in the winding up petition, 40% of this income was
retained by AOP-3 as a tax component because of the reason that for
business income of the earlier years, after the dissolution, the same was
taxed as an AOP. Therefore, the individual partners could not be taxed on
the said business income in the year in question, as held in M/s.
Radhasoami Satsang, Saomi Bagh, Agra v. Commissioner of Income Tax[7] and
Commissioner of Income Tax v. Excel Industries Ltd.[8] His related
submission was that in any case this amount was not received by the
assessees as it was retained by AOP-3 and, therefore, tax was not payable
by the assessees.

Coming to the first submission of the assessees, it can be seen that it is
founded on the premise that the assets of the firm were sold to AOP-3 as a
going concern with further premise that it was a slump sale. It is pointed
out that the firm was doing business even after the winding up petition was
filed and as a going concern, it was put to sale.

Mr. Radhakrishnan, learned senior counsel appearing for the Revenue, has
refuted the aforesaid premise of the argument by submitting that though it
was sold as a going concern, nevertheless, the assets were that of a
dissolved firm as the firm had come to an end on December 06, 1987 by
afflux of time. In order to establish this fact, learned counsel took us
through the record, including the winding up petition which was filed in
the High Court as well as the orders passed therein, which are relied upon
by the assessees themselves.

After going through the records, we find that the Revenue has been able to
substantiate the aforesaid submission. We have already noticed that the
firm was dissolved on December 06, 1987 by afflux of time. This event
happened as per the terms stipulated in the partnership deed itself. The
necessity for filing the petition under the Companies Act arose because of
differences between the erstwhile partners that had erupted, pertaining to
the affairs of the firm. No doubt, in the said petition interim order
dated November 05, 1988 was passed by the High Court permitting the group
of persons (seven in number), having controlling interest in the firm, to
continue the business. However, this was done as an interim arrangement
till the completion of winding up proceedings. Pertinently, insofar as the
firm is concerned, it did not carry on business thereafter as an existing
firm. On the contrary, few ex-partners with controlling interest were
allowed to continue the business activity in the interregnum as a stopgap
arrangement. Another important fact which needs a mention is that,
insofar as the firm is concerned, it did not file income tax returns after
the date of dissolution. Obviously so, as it stood dissolved and was no
more in existence. Precisely for this reason, the income that was
generated from the business, after the dissolution, was assessed by the
income tax authorities in the hands of such erstwhile partners as an AOP.
It is this AOP which was filing the returns and getting the same assessed
in that capacity and paying the income tax thereupon. Further, in the
orders passed by the High Court from time to time in the said petition,
insofar as the firm is concerned, it has always been described as 'the
dissolved partnership firm'. Thus, the assets which were sold ultimately
on November 20, 1994 were of a dissolved partnership firm, though as a
going concern.
Once we straighten the factual position in the manner stated
above, the whole legal edifice of the assessees case crumbles down.

At this stage, we would like to clarify one more factual aspect. During
the pendency of the winding up petition before the High Court, the High
Court had passed various orders which included an order for valuation of
the assets of the firm. This valuation was done to enable the Court to fix
the reserve price for the purpose of inter se bidding between the erstwhile
partners and/or association of erstwhile partners. The Chartered
Accountants had done the valuation and submitted reports on the basis of
which base price was fixed at ?30 crores taking into account the value of
various assets. These assets valued at ?30 crores are sold for ?92 crores.
Thereafter, AOP-3, the successful bidder, deposited the amount of bid in
respect of the share of nine other partners and a settlement was also
prepared recording the value of the assets of the firm after deducting the
liability of the said nine partners. The net value of the assets so
arrived at and distributed among the nine partners.

What follows from the aforesaid facts is that the firm stood dissolved with
effect from December 06, 1987; the company petition had to be filed by two
partners in view of eruption of disputes among the partners; the business
was carried on by the partners with controlling interest as an interim
arrangement; the income was assessed in their hands as AOP and not in the
hands of the firm which had already been dissolved; assets of the company
were put to sale in accordance with Clause 16 of the Partnership Deed of a
dissolved firm, though as a going concern; and outgoing partners (assessees
herein) received their net share of the value of the assets of the firm out
of the amount received by way of sale of the assets of the firm as per
Clause 16 of the Partnership Deed.
On the aforesaid facts, it becomes clear that asset of the firm
that was sold was the capital asset within the meaning of Section 2(14) of
the Act. It is not even disputed. Once it is held to be the “capital
asset”, gain therefrom is to be treated as capital gain within the meaning
of Section 45 of the Act.

The assessees, however, are attempting the wriggle out from payment of
capital gain tax on the ground that it was a “slump sale” within the
meaning of Section 2(42C) of the Act and there was no mechanism at that
time as to how the capital gain is to be computed in such circumstances,
which was provided for the first time by Section 50B of the Act with effect
from April 01, 2000. However, this argument fails in view of the fact that
the assets were put to sale after their valuation. There was a specific
and separate valuation for land as well as building and also machinery.
Such valuation has to be treated as that of a partnership firm which had
already stood dissolved.

Section 2(42)C defines 'slump sale' and reads as under:
“ “slump sale” means the transfer of one or more undertakings as a result
of the sale for a lump sum consideration without values being assigned to
the individual assets and liabilities in such sales.

Explanation 1. – For the purposes of this clause, “undertaking” shall have
the meaning assigned to it in Explanation 1 to clause (19AA).

Explanation 2. – For the removal of doubts, it is hereby declared that the
determination of the value of an asset or liability for the sole purpose of
payment of stamp duty, registration fees or other similar taxes or fees
shall not be regarded as assignment of values to individual assets or
liabilities.”

As per the aforesaid definition, sale in question could be
treated as slump sale only if there was no value assigned to the individual
assets and liabilities in such sale. This has obviously not happened. It
is stated at the cost of repetition that not only value was assigned to
individual assets, even the liabilities were taken care of when the amount
of sale was apportioned among the outgoing partners, i.e. the assessees
herein. Once we hold that the sale in question was not slump sale,
obviously Section 50B also does not get attracted as this section contains
special provision for computation of capital gains in case of slump sale.
As a fortiorari, the judgment in the case of PNB Finance Limited also would
not apply.

In the aforesaid scenario, when the Official Liquidator has distributed the
amount among the nine partners, including the assessees herein, after
deducting the liability of each of the partners, the High Court has rightly
held that the amount received by them is the value of net asset of the firm
which would attract capital gain. Scope of Section 45 of the Act was
explained in Commissioner of Income Tax, Faridabad v. Ghanshyam (HUF)[9]
and we would like to reproduce the following discussion from the said
judgment:
“16. The following conditions need to be satisfied for taxing a transaction
as capital gains viz. the subject-matter must be a capital asset, the
transaction must fall in the definition of “transfer”, there must be profit
or loss called “capital gains” and that the taxpayer has claimed exemption
in whole or in part by complying with legal provisions (like Section 54-F).

17. Section 45(1) of the 1961 Act speaks about capital gains arising out
of “transfer” of a capital asset. The definition of the expression
“transfer” is contained in Section 2(47) of the 1961 Act. It has very wide
meaning. What is taxable under Section 45(1) of the 1961 Act is “profits
and gains arising from a transfer of a capital asset” and the charge of
income tax on the capital gains is a charge on the income of the previous
year in which the transfer took place.

18. Capital gain(s) is an artificial income. It is created by the 1961
Act. Profit(s) arising from transfer of capital asset is made chargeable to
income tax under Section 45(1) of the 1961 Act. From the scheme of Section
45, it is clear that capital gains is not an income which accrues from day-
to-day during a specific period but it arises at a fixed point of time,
namely, on the date of the transfer. In short, Section 45 defines “capital
gains”, it makes them chargeable to tax and it allots the appropriate year
for such charge. It also enacts a deeming provision. Section 48 lays down
the mode of computation of capital gains and deductions therefrom.”

In para 45 of the judgment, the Court also stated that capital
gains under Section 45 of the Act are not income accruing from day to day.
It is deemed income which arises at a fixed point of time, viz. on the date
of transfer.

When we apply the said legal principle to the facts of the instant case, we
find that the partnership firm had dissolved and thereafter winding up
proceedings were taken up in the High Court. The result of those
proceedings was to sell the assets of the firm and distribute the share
thereof to the erstwhile partners. Thus, the 'transfer' of the assets
triggered the provisions of Section 45 of the Act and making the capital
gain subject to the payment of tax under the Act.

Insofar as argument of the assessees that tax, if at all, should have been
demanded from the partnership firm is concerned, we may only state that on
the facts of this case that may not be the situation where the firm had
dissolved much before the transfer of the assets of the firm and this
transfer took place few years after the dissolution, that too under the
orders of the High Court with clear stipulation that proceeds thereof shall
be distributed among the partners. Insofar as the firm is concerned, after
the dissolution on December 06, 1987, it had not filed any return as the
same had ceased to exist. Even in the interregnum, it is the AOP which had
been filing the return of income earned during the said period. The High
Court has touched upon this aspect in greater detail in para 30 of its
judgment. Since we agree with the same, we reproduce below the discussion
in the said para:
“30. In view of the provisions of Section 45 it is clear that in the
present case, the effect of the sale conducted by this court among partners
and under Clause 16 of the said Partnership Deed, is that once the
partnership is dissolved, the partners would become entitled to specific
share in the assets of the firm which is proportionate to their share in
sharing the profits of the firm and they are placed in the same position as
the tenants in common and for the purpose of dissolution and u/s 47 of the
Indian Partnership Act, 1932, it is clear that even after the dissolution
of the firm, the authority of each partner to bind the firm and the other
mutual rights and obligations of the partners continue notwithstanding the
dissolution so far as may be necessary to wind up the affair of the firm
and to complete transactions begun but unfinished at the time of the
dissolution. Therefore, for realisation of the assets, discharging the
liability of the firm and settling the accounts of the partners, etc., the
firm will continue to exist despite the dissolution and not for any other
purpose. The material on record in the instant case would clearly show
that after dissolution of the firm on 06.12.1987, the firm has never filed
any return and in view of the order of this court permitting the partners
to carry on the business in the interest of employees, return was filed by
AOP-13 consisting of erstwhile 13/12 partners for accounting profits and
seeking depreciation in the assets of the firm and continued to do business
in view of the order of this court that there was no agreement among the
partners to continue the business during the pendency of the winding up
proceedings. Further having regard to Clause 16 of the Partnership Deed of
the dissolved firm, it is clear that the partners intended that the assets
of the firm should not be sold to an outsider. It is well settled that
every act of the partner would be binding on the firm and also the partners
interse and Clause 16 of the Partnership Deed which has been culled out
supra clearly shows that if Partnership is dissolved, the going concern
carried on under the name of the Firm MANGALORE GANESH BEEDI WORKS and all
the trade marks used in course of the said business by the said firm and
under which the business of the Partnership is carried on shall vest in and
belong to the Partner who offers and pays or two or more Partners who
jointly offer and pay the highest price therefor as a single group at a
sale to be then held as among the Partners shall be entitled to bid. The
other Partners shall execute and complete in favour of the purchasing
Partner or Partners at his/her or their expense all such deed, instruments
and applications and otherwise aid him/her or them for the registration
his/her name or their names of all the said trade marks and do all such
deed, acts and transactions as are incidental or necessary to the said
transferee or assignee Partner or Partners. The final order passed by this
court to wind up the affairs of the firm would clearly show that the
property of the firm is purchased by the association of 3 partners who
submitted their highest bid and that other partners had to given an
undertaking that they may not interfere with the carrying on business which
is vested in the name of MGBW and all the trademarks used in the course of
said business and therefore it is clear that the appellants who are
erstwhile partners were not successful bidders for continuation of business
in the individual capacity of the MGBW and in view of Clause 16, all
tangible and intangible assets vested with Association of 3 partners whose
highest bid of Rs.92 crores was accepted and admittedly after the passing
of the order of this court on 20.11.1994, all the appellants herein and
other out-going partners have given requisite undertaking as per the order
of this court and the MGBW as a going concern under the name and style MGBW
and all trademarks used in the course of said business by the said firm and
all tangible and intangible assets of the firm vested with the purchasers
erstwhile 3 partners who paid the highest bid and the appellants have
received consideration of the conveyance and their respective share in the
sale of net assets of the firm after their undertaking that they cannot
interfere with the business of MGBW which is vested with all assets in
favour of 3 partners have received the value of their net asset which has
been distributed by the Official Liquidator and AOP 3 who have purchased
the business of the old firm, succeeded to it and constituted a new firm in
the same name (vide order defendant (sic - dated) 14.06.1991 in the Company
Petition) and therefore it is clear that the order passed by the Assessing
Authority confirmed in the first appeal and by the Income Tax Appellate
Tribunal (Special Bench) holding that the appellants as erstwhile partners
are liable to pay capital gain on the amount received by them towards the
value of their share in the net assets of the firm are liable for payment
of capital gains u/s 45 of the Act. The said finding is justified and
accordingly we answer the substantial question of law in favour of the
Revenue and against the assessee.”

In view of our aforesaid discussion, the arguments that valuation of
goodwill was wrongly done may also not survive. In any case, we find that
no such plea was taken by the assessees in the High Court or before the
Tribunal or lower authorities.

We now advert to the second argument.

It is argued that insofar as income of the firm in the Assessment Year in
question is concerned, it could not be taxed at the hands of the assessees.
We find merit in this submission.

First, and pertinently, it is an admitted case that 40% of the said income
was allowed by the High Court to be retained by the successful bidder (AOP-
3) precisely for this very purpose. This 40% represented the tax which was
to be paid on the income generated by the ongoing concern being run by the
Association of Persons, as authorised by the High Court. Secondly, in the
previous years, the Department had taxed the AOP and this procedure had to
continue in the Assessment Year in question as well {See - M/s. Radhasoami
Satsang, Saomi Bagh, Agra and Excel Industries Ltd.}
From the judgment of the High Court, we find that this aspect
has been dealt with very cursorily, without taking into consideration the
aforesaid aspects highlighted by us. The entire discussion on this issue
is contained in para 31, which reads as under:
“31. The concurrent finding on question of fact that value of profit
received during interregnum period for a period of 234 days is to be
treated as revenue income having regard to the reasons assigned that said
profit is calculated on the basis of notional profit calculated on two
years average profit and from this average 40% was to be deducted and the
net amount was to be paid, the finding is unassailable...”

The aforesaid discussion of the High Court deals how the
business income/revenue income is to be treated/calculated, but the
question of taxability at the hands of the assessees has not bee touched
upon at all.

The upshot of the aforesaid discussion would be to allow the appeals partly
only to the extent that business income/revenue income in the Assessment
Year in question is to be assessed at the hands of AOP-3, in terms of the
orders of the High Court, as AOP-3 retained the tax amount from the
consideration which was payable to the assessees herein and it is AOP-3
which was supposed to file the return in that behalf and pay tax on the
said revenue income.

Insofar as the appeals preferred by the Revenue are concerned, they arise
out of the protected assessment which was made at the hands of the
partnership firm. As we have upheld the order of the Assessing Officer in
respect of payment of capital gain tax by the assessees herein, these
appeals are rendered otiose and are disposed of as such.
There shall be no order as to costs.

.............................................J.
(A.K. SIKRI)

.............................................J.
(N.V. RAMANA)

NEW DELHI;
OCTOBER 18, 2016.
-----------------------
[1]
(1980) 122 ITR 594 (Bombay)
[2] (2008) 13 SCC 94 : 307 ITR 75
[3] (2016) 2 SCC 556 : (2015) 378 ITR 640
[4] (1981) 2 SCC 460 : 128 ITR 294
[5] (2012) 345 ITR 421 (Delhi High Court)
[6] (2016) 130 DTR 0222 (Kar)
[7] (1992) 1 SCC 659 : 193 ITR 321
[8] (2014) 13 SCC 459 : 358 ITR 295
[9] (2009) 8 SCC 412

construction workers are not covered by the Factories Act and, therefore, welfare measures specifically provided for such workers under the BOCW Act and Welfare Cess Act cannot be denied.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 6223 OF 2016

|LANCO ANPARA POWER LIMITED |.....APPELLANT(S) |
|VERSUS | |
|STATE OF UTTAR PRADESH & ORS. |.....RESPONDENT(S) |

W I T H

CIVIL APPEAL NO. OF 2016
(ARISING OUT OF SLP (C) NOS. 29105-29106 OF 2011)

W.P. (C) NO. 64 OF 2012

W.P. (C) NO. 848 OF 2013

W.P. (C) NO. 385 OF 2014

CIVIL APPEAL NO. 6569 OF 2014

T.P. (C) NO. 342 OF 2014

T.C. (C) NO. 29 OF 2015

W.P. (C) NO. 174 OF 2016

W.P. (C) NO. 311 OF 2016

CIVIL APPEAL NO. 6571 OF 2014

T.C. (C) NO. 38 OF 2016

CIVIL APPEAL NO. OF 2016
(ARISING OUT OF SLP (C) NO. 26363 OF 2016)

W.P. (C) NO. 698 OF 2016

AND

CIVIL APPEAL NO. OF 2016
(ARISING OUT OF SLP (C) NO. 26330 OF 2016)

J U D G M E N T

A.K. SIKRI, J.

Leave granted in SLP (C) Nos. 29105-29106 of 2011, SLP (C) No. 26363 of
2016 and SLP (C) No. 26330 of 2016. Since pure question of law is
involved, we allow the transfer petition and transfer cases and also take
up, along with these appeals, the writ petitions which were filed before
the respective High Courts.

These appeals are filed by the appellants challenging the orders passed by
different High Courts i.e. High Court of Allahabad, High Court of Orissa,
High Court of Madhya Pradesh and High Court of Karnataka. These High
Courts, however, are unanimous in their approach and have reached the same
conclusion. In all these cases, appellants were issued show cause notices
by the concerned authorities under the provisions of the Building And Other
Construction Workers (Regulation of Employment and Conditions of Service)
Act, 1996 (hereinafter referred to as 'BOCW Act') and Buildings And Other
Construction Workers Welfare Cess Act, 1996 (hereinafter referred to as
'Welfare Cess Act'). They had challenged those notices by filing writ
petitions in the High Courts on the ground that the provisions of BOCW Act
or Welfare Cess Act were not applicable to them because of the reason that
they were registered under the Factories Act, 1948. It may be mentioned
that at the relevant time no manufacturing operation had commenced by the
appellants. In fact, all these appellants were in the process of
construction of civil works/factory buildings etc. wherein they had planned
to set up their factories. As the process of construction of civil works
was undertaken by the appellants wherein construction workers were
engaged, the respondent authorities took the view that the provisions of
the aforesaid Acts which were meant for construction workers became
applicable and the appellants were supposed to pay the cess for the welfare
of the said workers engaged in the construction work. The appellants had
submitted that Section 2(d) of the BOCW Act which defines 'building or
other construction work' specifically states that it does not include any
building or construction work to which the provision of the Factories Act,
1948 or the Mines Act, 1952 apply. Since the appellants stood registered
under the Factories Act, they were not covered by the definition of
building or other construction work as contained in Section 2(d) of the Act
and, therefore, said Act was not applicable to them by virtue of Section
1(4) thereof. All the High Courts have negated the aforesaid plea of the
appellants on the ground that the appellants would not be covered by the
definition of factory defined under Section 2(m) of the Factories Act in
the absence of any operations/ manufacturing process and, therefore, mere
obtaining a licence under Section 6 of the Factories Act would not suffice
and rescue them from their liability to pay cess under the Welfare Cess
Act. This is, in nutshell, the subject matter of all these appeals.
However, in order to understand the full implication of the issue involved
and to answer the said issue, it would be apt to take note of certain facts
from one of these appeals. This factual canvass is suitably available in
the events that have occurred leading to the filing of Civil Appeal No.
6223/2016.

In this appeal, the appellant proposed to set up a 2X600 Megawatt capacity
coal-based thermal power project namely “Anpara C” at Anpara in District
Sonebhadra, Uttar Pradesh (“the Project”), pursuant to being selected in a
tariff-based competitive bidding initiated by the Uttar Pradesh Rajya
Vidyut Utpadan Nigam Ltd. (UPRVUNL) on behalf of the Uttar Pradesh Power
Corporation Ltd. (UPPCL). The project consists of two Steam Turbine
Generators (STG) each having capacity of 600 MW and two pulverised coal
fired steam generators and the balance of plant. The appellant, in respect
of the aforesaid project, made an application to the Director of Factories,
Uttar Pradesh, submitting the layout/drawings of the proposed plants and
requesting for registration of the project as a factory under the
provisions of the Factories Act, 1948 and the Uttar Pradesh Factories
Rules, 1950. The appellant was granted registration and licence under
Section 6 of the Factories Act, 1948 read with Uttar Pradesh Factories
Rules, 1950 for the said Project, as a factory. Respondent No. 1 notified
the Uttar Pradesh Building and other Construction Workers (Regulation of
Employment and Conditions of Service) Rules, 2009 (for short 'BOCW Rules')
on 04.02.2009. Immediately thereafter, the appellant received a notice of
even date issued by respondent No. 2, intimating that the Chief Secretary,
Government of Uttar Pradesh had directed that “establishments” engaged in
construction activities were required to get themselves registered under
the provisions of the BOCW Act and the BOCW Rules. Simultaneously, a
letter of even date was also received from the District Collector,
Sonebhadra, Uttar Pradesh, calling upon the appellant to get itself/its
contractors registered under the provisions of the BOCW Act and the BOCW
Rules. The appellant, vide its letter of even date, replied to the
aforesaid communication dated 19.04.2010 of the District Collector,
Sonebhadra, stating that the appellant was undertaking the construction
activity of the Project under the provisions of the Factories Act and as
such, in view of Section 2(1)(d) of the BOCW Act, the Project was exempted
from the application of the BOCW Act, and consequently the Welfare Cess Act
and BOCW Rules inasmuch as the provisions of the Factories Act apply to the
Project.

The respondents were not satisfied with the aforesaid stand taken by the
appellant. Thus, show cause notice dated 17.02.2011 was issued by
respondent No. 2 as to why action be not taken against the appellant for
failing to get itself registered under BOCW Act. It was followed by another
notice of even date stating that the appellant had not furnished requisite
information relating to construction activities undertaken by it as
required under Section 4 of the Welfare Cess Act read with Rule 6 of the
Welfare Cess Rules. Some more notices were issued to the similar effect
with regard to the construction activities in respect of the township in
Anpara, undertaken by the appellant. Insofar as township is concerned,
appellant got itself registered through its principal contractors under
Welfare Cess Act and started paying the cess. However, in respect of
construction activity and factory premises, the appellant reiterated its
stand that by virtue of Section 2(1)(d) of the BOCW Act, it was excluded
from the coverage thereof. The contention of the appellant was rejected by
the respondents which led to issuance of further notices demanding cess.

At this juncture, the appellant filed the writ petition in the High Court
of Judicature at Allahabad challenging the validity of notices dated
14.03.2011 and 02.04.2011 demanding payment of cess, on the following
grounds:

(i) That the appellant is not amenable to assessment of liability under
the Welfare Cess Act inasmuch as the Factories Act is applicable to the
Project, and the Project is as such, exempt from the applicability of the
said Act by virtue of the exclusionary cause contained in Section 2(1)(d)
of the BOCW Act.

(ii) That respondent No. 2, vide impugned notice dated 02.04.2011,
was proceeding to calculate the alleged cess payable by the appellant on
the basis of the cost of the Project, and not on the cost of construction
of the said Project, whereas under the scheme of the Cess Act, cess is
payable only on the cost of construction incurred annually, and not on the
entire project cost, which includes several other components apart from
civil construction works.

The respondents filed their counter affidavit contesting the petition.
After hearing, the writ petition has been dismissed by the High Court vide
judgment dated 28.04.2015, gist whereof has already been taken note of
above.

Emphatic submissions were made by Mr. Sundaram, learned senior counsel
appearing in some of these appeals, questioning the approach and conclusion
reached by the High Court. Other senior counsel Mr. Gaurab Banerji and Mr.
Akhil Sibal supplemented those submissions lending their candour thereto.
These submissions were further supplemented by M/s. Prashant Shukla,
Arunabh Chowdhury and K. Raghava Charyulu, Advocates. It may not be
necessary to take note of individual submissions made by these counsel.
Instead, for the sake of brevity, we are reproducing the submissions of
these counsel in consolidated form hereinafter.

These counsel have led two prong attacks on the demands raised by the
respondents for payment of cess under BOCW Act read with Welfare Cess Act,
which is as under:

i) In the first instance, it is argued that BOCW Act does not apply to
those undertakings which are registered under the Factories Act. To
support this submission, emphasis was laid on the definition of “building
or other construction work” as contained in Section 2(1)(d) of BOCW Act,
which reads as under:
“Section 2(1)(d) : “building or other construction work” means the
construction, alternation, repairs, maintenance or demolition of or, in
relation to, buildings, streets, roads, railways, tramways, airfields,
irrigation, drainage, embankment and navigation works, flood control works
(including storm water drainage works), generation, transmission and
distribution of power, water works (including channels for distribution of
water), oil and gas installations, electric lines, wireless, radio,
television, telephone, telegraph and overseas communication dams, canals,
reservoirs, watercourses, tunnels, bridges, viaducts, aquaducts, pipelines,
towers, cooling towers, transmission towers and such other work as may be
specified in this behalf by the appropriate Government, by notification but
does not include any building or other construction work to which the
provisions of the Factories Act, 1948 (63 of 1948), or the Mines Act, 1952
(35 of 1952), apply.
(emphasis added)”

(ii) Second submission, which in fact flows from first submission noted
above, was that the approach of the High Court in dealing with the matter
was contrary to law. In this behalf, it was pointed out that the High
Court has rejected the case of the appellants herein on the ground that
even if the appellants had obtained a licence under the Factories Act for
registration to work a factory, the appellants were still not excluded from
the provisions of Welfare Cess Act as no manufacturing process or factory
operation had started by the appellants and, therefore, appellants did not
answer the description of 'factory' within the meaning of Factories Act.
As per the High Court, since the appellants had only undertaken the process
of construction of premises which are to be ultimately used as factories,
and since such power project has not started and there was no operation for
which the licence was obtained under the Factories Act till the production
commences, it could not be said that “factory” has come into existence and,
therefore, the appellants were not entitled to take advantage of mere
registration under the Factories Act.
Dubbing the aforesaid approach as erroneous, it was the argument of
the appellants that the High Court ignored the pertinent aspect that even
when the building was under construction, the establishments which were
covered by the Factories Act stood excluded by virtue of definition
contained in Section 2(d) of BOCW Act which pertained to construction of
building and, therefore, specifically covered the stage of construction
itself. It was argued that matter should have been seen from that angle.
Advancing this argument further, it was also submitted that the Legislature
is alive to the fact that the factory is not running at the stage when
building or other construction work is going on. However, it still chose
to exclude those buildings or other construction work to which the
provisions of Factories Act apply.

Expanding the aforesaid submissions, the appellants even gave the rationale
in couching the definition of Section 2(d) of the BOCW Act in that specific
manner by submitting that once the provisions of Factories Act apply, all
the benefits which are admissible to the workers under the BOCW Act and
Welfare Cess Act are granted under the Factories Act as well. This
submission was buttressed by pointing out the provisions/conditions
stipulated while granting the permission under the Factories Act. It was
submitted that the safety measures and facilities which the appellants were
obligated under those conditions were the same as stipulated in BOCW Act.

Taking support of interpretative tools to support the aforesaid twin
submissions, it was submitted by the counsel for the appellants that
Section 2(d) had to be given literal meaning, in the absence of any
ambiguity in the said provision and number of judgments were cited in this
behalf. Some of those judgments are as under:

i) In Punjab Land Development and Reclamation Corporation Ltd., Chandigarh
v. Presiding Officer, Labour Court, Chandigarh and Others[1], this Court
while interpreting the word 'means' observed that if the definition has
used the word 'means', it shall include certain things or acts and the
definition has used the word 'means', it shall include certain things or
acts and the definition is a hard-and-fast definition and no other meaning
can be assigned to the expression than is put down in definition. This
Court further observed that if the words of the statute are in themselves
precise and unambiguous, then no more can be necessary than to expound
those words in their natural and ordinary sense. The words themselves
alone do, in such case, best declare the intention of the law. This Court
after making reference to its judgment in B.N. Mutto v. T.K. Nandi[2]
observed that “the Court has to determine the intention as expressed by the
words used. If the words of a statute are themselves precise and
unambiguous, then no more can be necessary than to expound those words in
their ordinary and natural sense”. It was further observed that “the
cardinal rule of construction of statute is to read statutes literally,
that is, by giving to the words their ordinary, natural and grammatical
meaning.”

ii) In Shri Hariprasad Shivshanker Shukla and another v. Shri A.D.
Divelkar and others[3], it was held that “there is no doubt that when the
Act itself provides a dictionary for the words used, we must look into that
dictionary first for an interpretation of the words used in the statute.
We are not concerned with any presumed intention of the legislature; our
task is to get at the intention as expressed in the statute”.

iii) In Regional Director, Employees State Insurance Corporation, Trichur
v. Ramanuja Match Industries[4], the Court pointed out that “there is no
doubt that beneficial legislations should have liberal construction with a
view to implementing the legislative intent but where such beneficial
legislation has a scheme of its own there is no warrant for the Court to
travel beyond the scheme and extend the scope of the statute on the pretext
of extending the statutory benefit to those who are not covered by the
scheme”.

iv) In Dadi Jagannadham v. Jammulu Ramulu and Others[5], this
Court, while interpreting the provisions that fell for consideration, made
the following observations in paragraph 13:
“13. …. The settled principles of interpretation are that the court must
proceed on the assumption that the legislature did not make a mistake and
that it did what it intended to do. The court must, as far as possible,
adopt a construction which will carry out the obvious intention of the
legislature. Undoubtedly if there is a defect or an omission in the words
used by the legislature, the court would not go to its aid to correct or
make up the deficiency. The court could not add words to a statute or read
words into it which are not there, especially when the literal reading
produces an intelligible result. The court cannot aid the legislature's
defective phrasing of an Act, or add and mend, and, by construction, make
up deficiencies which are there.”

v) In Shyam Sunder and others v. Ram Kumar and another[6], this Court
explained as to how to interpret the provisions of an enactment in the
following words:
“... when the words used in a statute are capable of only one meaning. In
such a situation, the courts have been hesitant to apply the rule of
benevolent construction. But if it is found that the words used in the
statute give rise to more than one meaning, in such circumstances, the
courts are not precluded from applying such rule of construction. The third
situation is when there is no ambiguity in a provision of a statute so
construed. If the provision of a statute is plain, unambiguous and does not
give rise to any doubt, in such circumstances the rule of benevolent
construction has no application.”

vi) Similarly in Grasim Industries Ltd. v. Collector of Customs,
Bombay[7], the Constitution Bench of this Court explained the principle of
literal interpretation as under:
“10. No words or expressions used in any statute can be said to be
redundant or superfluous. In matters of interpretation one should not
concentrate too much on one word and pay too little attention to other
words. No provision in the statute and no word in any section can be
construed in isolation. Every provision and every word must be looked at
generally and in the context in which it is used. It is said that every
statute is an edict of the legislature. The elementary principle of
interpreting any word while considering a statute is to gather the mens or
sententia legis of the legislature. Where the words are clear and there is
no obscurity, and there is no ambiguity and the intention of the
legislature is clearly conveyed, there is no scope for the court to take
upon itself the task of amending or alternating (sic altering) the
statutory provisions. Wherever the language is clear the intention of the
legislature is to be gathered from the language used. While doing so, what
has been said in the statute as also what has not been said has to be
noted. The construction which requires for its support addition or
substitution of words or which results in rejection of words has to be
avoided. As stated by the Privy Council in Crawford v. Spooner [(1846) 6
Moore PC 1 : 4 MIA 179] “we cannot aid the legislature's defective phrasing
of an Act, we cannot add or mend and, by construction make up deficiencies
which are left there”. In case of an ordinary word there should be no
attempt to substitute or paraphrase of general application. Attention
should be confined to what is necessary for deciding the particular case.
This principle is too well settled and reference to a few decisions of this
Court would suffice. (See: Gwalior Rayons Silk Mfg. (Wvg.) Co. Ltd. v.
Custodian of Vested Forests [1990 Supp SCC 785 : AIR 1990 SC 1747], Union
of India v. Deoki Nandan Aggarwal [1992 Supp (1) SCC 323 : 1992 SCC (L&S)
248 : (1992) 19 ATC 219 : AIR 1992 SC 96] ,Institute of Chartered
Accountants of India v. Price Waterhouse [(1997) 6 SCC 312] and Harbhajan
Singh v. Press Council of India [(2002) 3 SCC 722 : JT (2002) 3 SC 21])”

vii) In Deepal Girishbhai Soni and Others v. United India Insurance Co.
Ltd., Baroda[8], while interpreting the provisions that fell for
consideration, the principle was applied even in the context of beneficial
legislation, when the language was plain, depicting clear intention of the
legislature, in the following terms:
“53. Although the Act is a beneficial one and, thus, deserves liberal
construction with a view to implementing the legislative intent but it is
trite that where such beneficial legislation has a scheme of its own and
there is no vagueness or doubt therein, the court would not travel beyond
the same and extend the scope of the statute on the pretext of extending
the statutory benefit to those who are not covered thereby. (See Regional
Director, ESI Corpn. v. Ramanuja Match Industries [(1985) 1 SCC 218 : 1985
SCC (L&S) 213 : AIR 1985 SC 278]).”

Relying upon all the aforesaid judgments, the forceful
exhortation was to follow this literal construction while interpreting
Section 2(d) of BOCW Act in the manner appellants suggested to us.

Mr. Rana and Mr. Srivastava countered the aforesaid submissions giving
equally salubrious response. Their fervent plea was that the view taken by
the High Court while interpreting the provisions of Section 2(d) of BOCW
Act was perfectly justified and any other interpretation as suggested by
the appellants would defeat the very purpose of these Acts. It was argued
that mere registration under the Factories Act would be of no consequence
inasmuch as definition of 'factory' contained in Section 2(m) of the Act
unambiguously suggest that the provisions of the said Act would apply only
when manufacturing process is actually carried on. It was further
submitted that the definition of 'worker' under the Factories Act does not
include construction workers and, therefore, construction workers would not
be entitled to various benefits which are contained in different provisions
of the Factories Act. It is for this reason at the stage of construction
of the building, which is to be ultimately used as a factory, the
provisions of BOCW Act would be applied. It was also emphasised that while
interpreting the provisions of these two Acts, “superior purpose” behind
therein had to be kept in mind and this enactment which is for the welfare
of the weaker section, i.e. workers of unorganised sector, had to be
liberally construed by giving that construction which accords them the
benefit eschewing the other approach which would preclude them from getting
the benefit under the Acts. In this hue, the learned counsel strongly
urged upon this Court to invoke the principle of purposive interpretation,
which is in vogue, to do complete justice in the matter. It was also
argued that exclusion provision contained in Section 2(d) of BOCW Act had
to be construed narrowly as per the settled proposition of law.

We have bestowed our due and serious consideration to the submissions made
of both sides, which these submissions deserve. The central issue is the
meaning that is to be assigned to the language of Section 2(d) of the Act,
particularly that part which is exclusionary in nature, i.e. which excludes
such building and construction work to which the provisions of Factories
Act apply. Before coming to the grip of this central issue, we deem it
appropriate to refer to the objectives with which the Factories Act and
BOCW Act were enacted, as that would be the guiding path to answer the core
issue delineated above.

Insofar as Factories Act is concerned, its Preamble mentions that it is an
Act to consolidate and amend the law regulating labour in factories. It is
enacted primarily with the object of protecting workers employed in
factories against industrial and occupational hazards. For that purpose it
seeks to impose upon the owners or occupiers certain obligations to protect
workers unwary as well as negligent and to secure for them employment in
conditions conducive to their health and safety. This Act also requires
that the workers should work in healthy and sanitary conditions and for
that purpose it provides that precautions should be taken for the safety of
workers and prevention of accidents. Incidental provisions in Factories
Act are made for securing information necessary to ensure that the objects
are carried out and the State Governments are empowered to appoint
Inspectors, to call for reports and to inspect the prescribed registers
with a view to maintain effective supervision. The duty of the employer
under this Act is to secure the health and safety of workers and extends to
providing adequate plant, machinery and appliances, supervision over
workers, healthy and safe premises, proper system of working and extends to
giving reasonable restrictions. Detailed provisions are, therefore, made
in diverse chapters of the Act imposing obligations upon the owners of the
factories to maintain inspecting staff and for maintenance of health,
cleanliness, prevention of overcrowding and provision for amenities such as
lighting, drinking water, etc. Provisions are also made for safety of
workers and their welfare, such as restrictions on working hours and on the
employment of young persons and females, and grant of annual leave with
wages. In Bhikusa Yamasa Kshatriya (P) Ltd. v. Union of India and
another[9], this Court highlighted the necessity and rationale behind
legislating this Act and the objectives which it sought to achieve, in the
following manner:
“9. The Factories Act, as the preamble recites, is an Act to consolidate
and amend the law regulating labour in factories. The Act is enacted
primarily with the object of protecting workers employed in factories
against industrial and occupational hazards. For that purpose it seeks to
impose upon the owners or the occupiers certain obligations to protect
workers unwary as well as negligent and to secure for them employment in
conditions conducive to their health and safety. The Act requires that the
workers should work in healthy and sanitary conditions and for that purpose
it provides that precautions should be taken for the safety of workers and
prevention of accidents. Incidental provisions are made for securing
information necessary to ensure that the objects are carried out and the
State Governments are empowered to appoint Inspectors, to call for reports
and to inspect the prescribed registers with a view to maintain effective
supervision. The duty of the employer is to secure the health and safety of
workers and extends to providing adequate plant, machinery and appliances,
supervision over workers, healthy and safe premises, proper system of
working and extends to giving reasonable instructions. Detailed provisions
are therefore made in diverse chapters of the Act imposing obligations upon
the owners of the factories to maintain inspecting staff and for
maintenance of health, cleanliness, prevention of overcrowding and
provision for amenities such as lighting, drinking water, etc. etc.
Provisions are also made for safety of workers and their welfare, such as
restrictions on working hours and on the employment of young persons and
females, and grant of annual leave with wages. Employment in a
manufacturing process was at one time regarded as a matter of contract
between the employer and the employee and the State was not concerned to
impose any duties upon the employer. It is however now recognised that the
State has a vital concern in preventing exploitation of labour and in
insisting upon proper safeguards for the health and safety of the workers.
The Factories Act undoubtedly imposes numerous restrictions upon the
employers to secure to the workers adequate safeguards for their health and
physical well-being. But imposition of such restrictions is not and cannot
be regarded, in the context of the modem outlook on industrial relations,
as unreasonable....”

Coming to BOCW Act, its Statement of Objects and Reasons, depicting the
legislative intent, reads as under:
“(1) It is estimated that about 8.5 million workers in the country are
engaged in building and other construction works. Building and other
construction workers are one of the most numerous and vulnerable segments
of the unorganised labour in India. The building and other construction
works are characterized by their inherent risk to the life and limb of the
workers. The work is also characterised by its casual nature, temporary
relationship between employer and employee, uncertain working hours, lack
of basic amenities and inadequacy of welfare facilities. In the absence of
adequate statutory provisions, the requisite information regarding the
number and nature of accidents is also not forthcoming. In the absence of
such information, it is difficult to fix responsibility or to take any
corrective action.

(2) Although the provisions of certain Central Acts are applicable to the
building and other construction workers yet a need has been felt for a
comprehensive Central Legislation for regulating their safety, health,
welfare and other conditions of service. It had been considered necessary
to levy a cess on the cost of construction incurred by the employers on the
building and other construction works for ensuring sufficient funds for the
Welfare Boards to undertake the social security schemes and welfare
measures.”

In the Statement of Objects and Reasons of this Act itself, it was
considered necessary to levy a cess on the cost of construction incurred by
the employers while constructing building etc. This led to passing of
Welfare Cess Act. The Statement of Objects and Reasons behind this Act was
to provide for the levy and collection of a cess on the cost of
construction incurred by the employers for augmenting the resources of the
Building, and Other Construction Workers' Welfare Boards constituted by the
State Governments under the Building and Other Construction Workers'
(Regulation of Employment and Conditions of Service) Ordinance, 1995.

Scheme of BOCW Act came up for consideration by this Court in the Dewan
Chand Builders and Contractors v. Union of India and Others[10].
Recognising that the noble purpose behind the said Act is to ensure welfare
of the building and construction workers in order to provide basic human
dignity enshrined in Article 21 of the Constitution, the Court observed as
under:
“10. It is thus clear from the scheme of the BOCW Act that its sole aim is
the welfare of building and construction workers, directly relatable to
their constitutionally recognised right to live with basic human dignity,
enshrined in Article 21 of the Constitution of India. It envisages a
network of authorities at the Central and State levels to ensure that the
benefit of the legislation is made available 'to every building and
construction worker, by constituting Welfare Boards and clothing them with
sufficient powers to ensure enforcement of the primary purpose of the BOCW
Act. The means of generating revenues for making effective the welfare
provisions of the BOCW Act is through the Cess Act, which is questioned in
these appeals as unconstitutional.

xx xx xx

17. It is manifest from the overarching schemes of the BOCW Act, the Cess
Act and the Rules made thereunder that their sole object is to regulate the
employment and conditions of service of building and other construction
workers, traditionally exploited sections in the society and to provide for
their safety, health and other welfare measures. The BOCW Act and the Cess
Act break new ground in that, the liability to pay cess falls not only on
the owner of a building or establishment, but under Section 2(1)(i)(iii) of
the BOCW Act

“in relation to a building or other construction work carried on by or
through a contractor, or by the employment of building workers supplied by
a contractor, the contractor”;

The extension of the liability on to the contractor is with a view to
ensure that, if for any reason it is not possible to collect cess from the
owner of the building at a stage subsequent to the completion of the
construction, it can be recovered from the contractor. The Cess Act and
the Cess Rules ensure that the cess is collected at source from the bills
of the contractors to whom payments are made by the owner. In short, the
burden of cess is passed on from the owner to the contractor.”
(emphasis supplied)

Keeping in view the aforesaid objective of the respective Acts, we now deal
with the scope and ambit of Section 2(d) of BOCW Act. As noticed above, one
of the submissions of the appellants is that literal interpretation needs
to be given to the said provision as it categorically excludes those
building or construction work to which Factories Act apply. In this very
hue, it is argued that as the benefit under the Factories Act are already
given to the construction workers who are involved in the construction
work, there is no need for covering the construction workers who are
engaged in building or construction work of the appellants under BOCW Act
or Welfare Cess Act.

Before dealing with the argument predicated on literal construction, we
would like to deal with the second aspect as the answer to that would
facilitate the answer to this aspect as well. Section 2(m) of the
Factories Act defines 'factory' in the following manner:
“(m) "factory" means any premises including the precincts thereof-

(i) whereon ten or more workers are working, or were working on any day of
the preceding twelve months, and in any part of which a manufacturing
process is being carried on with the aid of power, or is ordinarily so
carried on, or

(ii) Whereon twenty or more workers are working, or were working on any
day of the preceding twelve months, and in any part of which a
manufacturing process is being carried on without the aid of power, or is
ordinarily so carried on,-

but does not include a mine subject to the operation of [the Mines Act,
1952 (35 of 1952)] or [a mobile unit belonging to the armed forces of the
Union, a railway running shed or a hotel, restaurant or eating place].

[Explanation [I] - For computing the number of workers for the purposes of
this clause all the workers in [different groups and relays] in a day shall
be taken into account;]

[Explanation II - For the purposes of this clause, the mere fact that an
Electronic Data Processing Unit or a Computer Unit is installed in any
premises or part thereof, shall not be construed to make it a factory if no
manufacturing process is being carried on in such premises or part
thereof;]...”

Section 2(k) of the Factories Act defines 'manufacturing process' in the
following manner:
(k) "manufacturing process" means any process for-

(i) making, altering, repairing, ornamenting, finishing, packing, oiling,
washing, cleaning, breaking up, demolishing, or otherwise treating or
adapting any article or substance with a view to its use, sale, transport,
delivery or disposal, or

[pumping oil, water, sewage or any other substance; or]

generating, transforming or transmitting power; or

[composing types for printing, printing by letter press, lithography,
photogravure or other similar process or book binding;] [or]

constructing, reconstructing, repairing, refitting, finishing or breaking
up ships or vessels;[or]

(vi) [preserving or storing any article in cold storage;]

It is also necessary to take note of the definition of 'worker', which is
contained in Section 2(l) of the Factories Act. It reads as under:
"worker" means a person 8[employed, directly or by or through any agency
(including a contractor) with or without the knowledge of the principal
employer, whether for remuneration or not], in any manufacturing process,
or in cleaning any part of the machinery or premises used for a
manufacturing process, or in any other kind of work incidental to, or
connected with, the manufacturing process, or the subject of the
manufacturing process 7[but does not include any member of the armed forces
of the Union];

On the conjoint reading of the aforesaid provisions, it becomes clear that
“factory” is that establishment where manufacturing process is carried on
with or without the aid of power. Carrying on this manufacturing process
or manufacturing activity is thus a prerequisite. It is equally pertinent
to note that it covers only those workers who are engaged in the said
manufacturing process. Insofar as these appellants are concerned,
construction of building is not their business activity or manufacturing
process. In fact, the building is being constructed for carrying out the
particular manufacturing process, which, in most of these appeals, is
generation, transmission and distribution of power. Obviously, the workers
who are engaged in construction of the building also do not fall within the
definition of 'worker' under the Factories Act. On these two aspects there
is no cleavage and both parties are at ad idem. What follows is that these
construction workers are not covered by the provisions of the Factories
Act.

Having regard to the above, if the contention of the appellants is
accepted, the construction workers engaged in the construction of building
undertaken by the appellants which is to be used ultimately as factory,
would stand excluded from the provisions of BOCW Act and Welfare Cess Act
as well. Could this be the intention while providing the definition of
'building and other construction work' in Section 2(d) of BOCW Act? Clear
answer to this has to be in the negative.

We may mention at this stage that High Court is right in observing that
merely because the appellants have obtained a licence under Section 6 of
the Factories Act for registration to work a factory, it would not follow
therefrom that they answer the description of the “factory” within the
meaning of the Factories Act. We have reproduced the definition of
'factory' and a bare reading thereof makes it abundantly clear that before
this stage, when construction of the project is completed and the
manufacturing process starts, 'factory' within the meaning of Section 2(m)
of the Factories Act does not come into existence so as to be covered by
the said Act.

We now advert to the core issue touching upon the construction of Section
2(d) of the BOCW Act. The argument of the appellants is that language
thereof is unambiguous and literal construction is to be accorded to find
the legislative intent. To our mind, this submission is of no avail.
Section 2(d) of the BOCW Act dealing with the building or construction work
is in three parts. In the first part, different activities are mentioned
which are to be covered by the said expression, namely, construction,
alterations, repairs, maintenance or demolition. Second part of the
definition is aimed at those buildings or works in relation to which the
aforesaid activities are carried out. The third part of the definition
contains exclusion clause by stipulating that it does not include 'any
building or other construction work to which the provisions of the
Factories Act, 1948 (63 of 1948), or the Mines Act, 1952 (35 of 1952),
applies'. Thus, first part of the definition contains the nature of
activity; second part contains the subject matter in relation to which the
activity is carried out and third part excludes those building or other
construction work to which the provisions of Factories Act or Mines Act
apply.

It is not in dispute that construction of the projects of the appellants is
covered by the definition of “building or other construction work” as it
satisfies first two elements of the definition pointed out above. In order
to see whether exclusion clause applies, we need to interpret the words
'but does not include any building or other construction work to which the
provisions of the Factories Act …......... apply'. The question is as to
whether the provisions of the Factories Act apply to the construction of
building/project of the appellants. We are of the firm opinion that they
do not apply. The provisions of the Factories Act would “apply” only when
the manufacturing process starts for which the building/project is being
constructed and not to the activity of construction of the project. That
is how the exclusion clause is to be interpreted and that would be the
plain meaning of the said clause. This meaning to the exclusion clause
ascribed by us is in tune with the approach adopted by this Court in Organo
Chemical Industries v. Union of India[11]. Two separate, but concurring,
opinions were given by Justice V.R. Krishna Iyer and Justice A.P. Sen, and
we reproduce here below some excerpts from both opinions:
“Justice A.P. Sen (para 23)

Each word, phrase or sentence is to be considered in the light of general
purpose of the Act itself. A bare mechanical interpretation of the words
'devoid of concept or purpose' will reduce much of legislation to futility.
It is a salutary rule, well established, that the intention of the
legislature must be found by reading the statute as a whole.

Justice V.R. Krishna Iyer (para 241)

A policy-oriented interpretation, when a welfare legislation falls for
determination, especially in the context of a developing country, is
sanctioned by principle and precedent and is implicit in Article 37 of the
Constitution since the judicial branch is, in a sense, part of the State.
So it is reasonable to assign to 'damages' a larger, fulfilling meaning.”

The aforesaid meaning attributed to the exclusion clause of the definition
is also in consonance with the objective and purpose which is sought to be
achieved by the enactment of BOCW Act and Welfare Cess Act. As pointed out
above, if the construction of this provision as suggested by the appellants
is accepted, the construction workers who are engaged in the construction
of buildings/projects will neither get the benefit of the Factories Act nor
of BOCW Act/Welfare Cess Act. That could not have been the intention of
the Legislature. BOCW Act and Welfare Cess Act are pieces of social
security legislation to provide for certain benefits to the construction
workers.

Purposive interpretation in a social amelioration legislation is an
imperative, irrespective of anything else. This is so eloquently brought
out in the following passage in the case of Atma Ram Mittal v. Ishwar Singh
Punia[12]:
“9. Judicial time and energy is more often than not consumed in finding
what is the intention of Parliament or in other words, the will of the
people. Blackstone tells us that the fairest and most rational method to
interpret the will of the legislator is by exploring his intentions at the
time when the law was made, by signs most natural and probable. And these
signs are either the words, the context, the subject-matter, the effects
and consequence, or the spirit and reason of the law. (emphasis by the
court) See Commentaries on the Laws of England (facsimile of 1st Edn. of
1765, University of Chicago Press, 1979, Vol. 1, p. 59). Mukherjea, J. as
the learned Chief Justice then was, in Poppatlal Shah v. State of Madras
[AIR 1953 SC 274 : 1953 SCR 677 : 1953 Cri LJ 1105: (1953) 4 STC 188] said
that each word, phrase or sentence was to be construed in the light of
purpose of the Act itself. But words must be construed with imagination of
purpose behind them said Judge Learned Hand, a long time ago. It appears,
therefore, that though we are concerned with seeking of intention, we are
rather looking to the meaning of the words that the legislature has used
and the true meaning of what words [Ed.: Lord Reid in the aforecited case
had observed: (All ER p. 814) “We often say that we are looking for the
intention of Parliament, but this is not quite accurate. We are seeking the
meaning of the words which Parliament used. We are seeking not what
Parliament meant but the true meaning of what they said.”] as was said by
Lord Reid in Black-Clawson International Ltd. v. Papierwerke Waldhof-
Aschaffenburg A.G [1975 AC 591, 613 : (1975) 1 All ER 810: (1975) 2 WLR
513] . We are clearly of the opinion that having regard to the language we
must find the reason and the spirit of the law.”

How labour legislations are to be interpreted has been stated and restated
by this Court time and again. In M.P. Mineral Industry Association v.
Regional Labour Commr. (Central)[13], this Court while dealing with the
provisions of the Minimum Wages Act, 1948, observed that this Act is
intended to achieve the object of doing social justice to workmen employed
the scheduled employments by prescribing minimum rates of wages for them,
and so in construing the said provisions the court should adopt what is
sometimes described as a beneficent rule of construction. In Surendra
Kumar Verma v. The Central Government Industrial Tribunal[14], this Court
reminded that semantic luxuries are misplaced in the interpretation of
'bread and butter' statutes. Welfare statutes must, of necessity, receive
a broad interpretation. Where legislation is designed to give relief
against certain kinds of mischief, the Court is not to make inroads by
making etymological excursions.

We would also like to reproduce a passage from Workmen of American Express
v. Management of American Express[15], which provides complete answer to
the argument of the appellants based on literal construction:
“4. The principles of statutory construction are well settled. Words
occurring in statutes of liberal import such as social welfare legislation
and human rights' legislation are not to be put in Procrustean beds or
shrunk to Liliputian dimensions. In construing these legislations the
imposture of literal construction must be avoided and the prodigality of
its misapplication must be recognised and reduced. Judges ought to be more
concerned with the “colour”, the “content” and the “context” of such
statutes (we have borrowed the words from Lord Wilberforce's opinion in
Prenn v. Simmonds [(1971) 3 All ER 237] ). In the same opinion Lord
Wilberforce pointed out that law is not to be left behind in some island of
literal interpretation but is to enquire beyond the language, unisolated
from the matrix of facts in which they are set; the law is not to be
interpreted purely on internal linguistic considerations...”

In equal measure is the message contained in Carew and Co. Ltd. v. Union of
India[16]:
“21. The law is not “a brooding omnipotence in the sky” but a pragmatic
instrument of social order. It is an operational art controlling economic
life, and interpretative effort must be imbued with the statutory purpose.
No doubt, grammar is a good guide to meaning but a bad master to
dictate...”

The sentiments were echoed in Bombay Anand Bhavan Restaurant v. Deputy
Director, Employees' State Insurance Corporation & Anr. [17] in the
following words:
“20. The Employees' State Insurance Act is a beneficial legislation. The
main purpose of the enactment as the Preamble suggests, is to provide for
certain benefits to employees of a factory in case of sickness, maternity
and employment injury and to make provision for certain other matters in
relation thereto. The Employees' State Insurance Act is a social security
legislation and the canons of interpreting a social legislation are
different from the canons of interpretation of taxation law. The courts
must not countenance any subterfuge which would defeat the provisions of
social legislation and the courts must even, if necessary, strain the
language of the Act in order to achieve the purpose which the legislature
had in placing this legislation on the statute book. The Act, therefore,
must receive a liberal construction so as to promote its objects.

In taking the aforesaid view, we also agree with the learned counsel for
the respondents that 'superior purpose' contained in BOCW Act and Welfare
Cess Act has to be kept in mind when two enactments – the Factories Act on
the one hand and BOCW Act/Welfare Cess Act on the other hand, are involved,
both of which are welfare legislations. (See Allahabad Bank v. Canara
Bank[18], which has been followed in Pegasus Assets Reconstruction P. Ltd.
v. M/s. Haryana Concast Limited & Anr.[19] in the context of Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 and Companies Act, 1956. Here the concept of 'felt necessity'
would get triggered and as per the Statement of Objects and Reasons
contained in BOCW Act, since the purpose of this Act is to take care of a
particular necessity i.e. welfare of unorganised labour class involved in
construction activity, that needs to be achieved and not to be discarded.
Here the doctrine of Purposive Interpretation also gets attracted which is
explained in recent judgments of this Court in Richa Mishra v. State of
Chhattisgarh and Others[20] and Shailesh Dhairyawan v. Mohan Balkrishna
Lulla[21].

We are left to deal with the argument of the appellants that while granting
permission under the Factories Act, various conditions are imposed which
the appellants are required to fulfill and these conditions are almost the
same which are contained in BOCW Act. We are not convinced with this
submission either. It is already held that provisions of Factories Act are
not applicable to these construction workers. Registration under the
Factories Act becomes necessary in view of provisions contained in Section
6 of the said Act as this Section requires taking of approval and
registration of factories even at preparatory stage i.e. at the stage when
the premises where factory is to operate has to ensure that construction
will be done in such a manner that it takes care of safety measures etc.
which are provided in the Factories Act. This means to ensure that
construction is carried out in such a manner that provisions in the
Factories Act to ensure health, safety and provisions relating to hazardous
process as well as welfare measures are taken care of. It is for this
reason that even after the building is completed before it is occupied,
notice under Section 7 is to be given by the occupier to the Chief
Inspector of Factories so that a necessary inspection is carried out to
verify that all such measures are in place. Therefore, when the
permissions for construction of factories is given, the purpose is
altogether different.

It is stated at the cost of repetition that construction workers are not
covered by the Factories Act and, therefore, welfare measures specifically
provided for such workers under the BOCW Act and Welfare Cess Act cannot be
denied.

We, thus, hold that all these appeals are bereft of any merit. Accordingly,
these appeals, along with the writ petitions filed before this Court as
also those which are the subject matter of the transfer petition and
transfer cases, are dismissed with cost. We, however, make it clear that
insofar as objection to the calculation of cess as contained in the show
cause notices is concerned, it would be open to the appellants to agitate
the same before the adjudicating authorities.
No costs.

.............................................J.
(A.K. SIKRI)

.............................................J.
(N.V. RAMANA)

NEW DELHI;
OCTOBER 18, 2016
-----------------------
[1]
(1990) 3 SCC 682
[2] (1979) 1 SCC 361
[3] 1957 SCR 121
[4] (1985) 1 SCC 218
[5] (2001) 7 SCC 71
[6] (2001) 8 SCC 24
[7] (2002) 4 SCC 297
[8] (2004) 5 SCC 385
[9] 1964 SCR (1) 860
[10] (2012) 1 SCC 101
[11] (1979) 4 SCC 573
[12] (1988) 4 SCC 284
[13] AIR 1960 SC 1068
[14] (1980) 4 SCC 443
[15] (1985) 4 SCC 71
[16] (1975) 2 SCC 791
[17] (2009) 9 SCC 61
[18] (2000) 4 SCC 406
[19] 2016 (1) SCALE 1
[20] (2016) 4 SCC 179 at Page No. 197
[21] (2016) 3 SCC 619 – Para 31

LAW FOR ALL

LawforAll

advocatemmmohan

Just for legal information but not form as legal opinion

Wednesday, October 19, 2016

construction workers are not covered by the Factories Act and, therefore, welfare measures specifically provided for such workers under the BOCW Act and Welfare Cess Act cannot be denied.