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PETITIONER: DELHI CLOTH & GENERAL MILLS CO. LTD. & ANR.

       Vs.

RESPONDENT: STATE OF RAJASTHAN & ORS.

DATE OF JUDGMENT:       16/01/1996

BENCH: BHARUCHA S.P. (J) BENCH: BHARUCHA S.P. (J) VERMA, JAGDISH SARAN (J) VENKATASWAMI K. (J)

CITATION:  1996 SCC  (2) 449        JT 1996 (1)   390  1996 SCALE  (1)332

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T BHARUCHA, J.      These are appeals by special leave against the judgment and  order  of  a  Division  Bench  of  the  High  Court  of Rajasthan. The  Division Bench  reversed  the  judgment  and order of a learned single Judge, which, upon a writ petition filed by  the present  appellants, had  struck down the Kota Municipal Limits (Continued Existence) Validating Act, 1975.      The  appellants   established  a   fertilizer  unit  in villages called  Raipura and  Ummedganj of  District Kota in the State of Rajasthan in 1969.      On 1st  March, 1958,  the State  of Rajasthan  (the 1st respondent) issued  a notification under Section 7(1) of the Rajasthan  Town  Municipalities  Act,  1951,  informing  the public that,  in exercise  of powers  under Section  5(1) of that Act,  it proposed  to extend  the limits  of  the  Kota municipality so as to include therein the village of Raipura and it invited objections thereto. On 16th October, 1958, in exercise of  powers conferred  by Section  5(1) of  the 1951 Act, the  State Government  extended the  limits of the Kota municipality to  include therein  the village  of Ummedganj. This inclusion  was challenged  in  a  writ  petition  filed before  the  Rajasthan  High  Court.  Pending  the  decision thereof, on 2nd May, 1960, the State Government excluded the village of Ummedganj from the said municipal limits. On 17th August, 1960,  a Full Bench of the Rajasthan High Court held that Ummedganj was not validly included within the limits of the  Kota   town  municipality  inasmuch  as  the  mandatory provisions in that behalf had not been followed.      It appears  that the  villages of Raipura and Ummedganj were treated  as falling within the municipal limits of Kota and octroi  was collected from the appellants. Realizing, in April 1974,  that the  levy and realization of octroi by the Kota Municipality  (the 2nd  respondent)  was  illegal,  the

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appellants filed  a suit  in the court of the Munsiff, Kota, seeking  a   permanent  injunction   restraining  the   Kota Municipality from  levying or  collecting octroi from it. An injunction  was  granted  and  was  upheld  in  appeal.  The appellants also  filed a  suit in  the court of the District Judge, Kota,  for refund  of the  amount of Rs.10,85,365.32, being  the   amount  of   octroi  erroneously  paid  by  the appellants to  the Kota  Municipality during  the period  of three years prior to the filing of the suit.      On 7th  January, 1975,  the State Government issued the Kota  Municipal   Limits  (Continued  Existence)  Validating Ordinance, 1975.  It was  replaced  by  the  Kota  Municipal Limits (Continued  Existence)  Validating  Act,  1975)  (now called the  "Validating Act").  Upon the promulgation of the Ordinance, the  appellants filed a writ petition challenging its validity.  When the  Validating Act was passed, the writ petition  was  amended  to  challenge  the  same.  The  writ petition was  allowed by  a learned  single Judge.  Both the State Government and the Kota Municipality filed appeals. By the judgment  and order  under appeal,  the  Division  Bench allowed the  appeals and  set  aside  the  judgment  of  the learned single Judge.      The  1951   Act   was   replaced   by   the   Rajasthan Municipalities Act,  1959. The  provisions in  regard to the de-limitation of  municipalities and  the procedure  in that behalf was  substantially similar  to that  contained in the 1951  Act.   It  is  convenient  to  set  out  the  relevant provisions, which are contained in Section 4 and 6.      "4. Delimitation of Municipalities - (1)      Subject to  the provisions of sections 5      and 6,  the State  Government may,  from      time to  time, by  notification  in  the      official Gazette -      (c)  include or  exclude any  area in or      from any municipality;      6.   Procedure      preliminary       to      notification under  section 4  - (1) Not      less than two months before the issue of      any notification  under  section  4  the      State  Government   shall  cause  to  be      published in  the Official  Gazette, and      to be  posted in  conspicuous  spots  or      proclaimed by  beat of  drum in the area      concerned,  a   proclamation  announcing      that it  is proposed  to constitute such      local area  to be  a municipality, or to      include or  exclude it  in or  from  any      municipality, or  to alter the limits of      any municipality  in a  specified manner      or to declare that such local area shall      cease to  be a municipality, as the case      may be,  and requiring  all persons  who      entertain  any  objection  to  the  said      proposal  to   submit  the   same,  with      reasons therefore  in  writing,  to  the      State Government  within two months from      the date of the said proclamation.      (2)  No  notification  under  section  4      shall be issued by the State Government,      unless  the   objections,  if   any,  so      submitted are, in its opinion sufficient      or invalid." The relevant portion of the Statement of Objects and Reasons of the Validating Act reads thus :      "1. According  to the  provisions of the

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    Rajasthan Municipalities  Act, 1959, the      village of Raipura was never included in      the limits  of the Kota Municipality and      though  the  village  of  Ummedganj  was      included therein  but it  was thereafter      excluded from these limits. However, the      Kota Municipality to all intents and for      all purposes  treated them  as  existing      within its  limits.  During  the  period      from 1958  to 1974  elections were  held      and taxes  were levied  in  relation  to      these villages  as existing  within  the      limits of  the Kota  Municipality. These      actions were  challenged in  law courts.      Doubts have, therefore, arisen as to the      validity of  the continued  existence of      these villages  within these  limits and      as to  the legality  of the action taken      or things  done, including  the levy and      collection of taxes within these limits.      2.   It  was,  therefore,  expedient  to      remove these  doubts and to validate the      continued existence  of  these  villages      within   the    limits   of   the   Kota      Municipality and the things done, action      taken, taxes  levied and  collected  and      other matters connected therewith."                          (Emphasis supplied.) Section 3  of  the  Validating  Act  is  its  most  relevant provision and it reads thus :      "3.   Validation    of   the   continued      existence of  certain limits of the Kota      Municipality  and   of   other   matters      connected  therewith  -  Notwithstanding      anything contained  in sections  4 to  7      both inclusive,  or any other section of      the Municipal  Act or  in any provisions      of the Panchayat Act or in any judgment,      decree, order  or direction of any court      -      (a)  the   villages    of   Raipur   and      Ummedganj in  Kota tehsil  in  the  Kota      district shall  be deemed always to have      continued to  exist and  shall hereafter      continue to  exist within  the limits of      the Municipality  at Kota to all intents      and for all purposes; and      (b)  all  persons   who  but   for   the      inclusion of the villages of Raipura and      Ummedganj  within   the  limits  of  the      municipality at  Kota were not liable to      pay any  tax due under the Municipal Act      shall,  upon   the  inclusion  of  these      villages within  the said limits or upon      the   validation    of   the   continued      existence of  these villages  within the      said limits, according to the provisions      of this  Act, be  liable  and  shall  be      deemed always to have been liable to pay      the taxes  due under  the Municipal  Act      and such  taxes shall  be levied  on and      collected from  them  according  to  the      provisions of the Municipal Act;      (c)  the    areas    constituting    the      aforesaid villages shall be deemed never

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    to have  been included  in any Panchayat      Circle  under  the  Panchayat  Act,  and      accordingly -      (i)  all  actions  taken,  things  done,      appointments  and   transfers  made  and      powers exercised by the State Government      or  by   any  officers   or  authorities      subordinate to  it or by or on behalf of      the Municipality at Kota, in relation to      the aforesaid  villages  of  Raipur  and      Ummedganj  treating   them  as  existing      within the limits of the Municipality at      Kota  shall   be  deemed  to  have  been      lawfully taken, done, made or exercised;      (ii) all taxes  levied and  collected in      exercise  of  the  statutory  powers  or      purported exercise  of such powers under      the Municipal  Act or  under any law for      the time  being in  force,  by  treating      these villages  as existing  within  the      limits  of  the  Municipality  at  Kota,      shall be  deemed  always  to  have  been      lawfully levied  and  collected  and  no      claim for  their refund  shall arise  or      shall be deemed ever to have arisen;      as if  the  said  villages  had  legally      existed  within   the  limits   of   the      Municipality at Kota. By reason  of Section  4, no  court is permitted to question the validity  of anything  done or  power exercised  on  the ground that  the villages  of Raipura and Ummedganj were not within the  municipal limits  of Kota. Sections 6 and 7 read thus :      "6. Cancellation  of notifications  with      retrospective  effect.  -  As  from  the      commencement   of    this    Act,    all      notifications from  time to  time issued      under the Municipal Act or the Panchayat      Act, providing  for the exclusion of the      villages of  Raipura and  Ummedganj from      the limits  of the  Municipality at Kota      or for  their inclusion in any Panchayat      Circle, shall  be deemed  to have ceased      to have  effect and  be cancelled  as if      they never came into force.      7.   Act to  have over-riding  effect. -      The provisions  of this  Act shall  have      effect     notwithstanding      anything      contained in  any law for the time being      in force." Mr. Shanti  Bhushan, learned  counsel  for  the  appellants, submitted that the Validating Act was bad in law inasmuch as the defects  which had  been pointed  out in the judgment of the Full  Bench of  the Rajasthan  High Court  had not  been removed by it. Reliance was placed upon the judgment of this Court in  Shri Prithvi Cotton Mills Ltd. and anr. vs. Broach Borough Municipality  and ors.,  1970-1 S.C.R. 388. The case of Prithvi Cotton Mills Ltd. is undoubtedly the leading case on the  subject of  validating statutes. Hidayatullah, C.J., speaking for a Constitution Bench, said :      "Before we  examine s.  3  to  find  out      whether it  is effective  in its purpose      or not  we may  say a  few  words  about      validating statutes  in general.  When a      legislature sets  out to  validate a tax

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    declared by  a  court  to  be  illegally      collected under  an  ineffective  or  an      invalid    law,     the    cause     for      ineffectiveness or  invalidity  must  be      removed before validation can be said to      take   place   effectively.   The   most      important condition,  of course, is that      the legislature  must possess  the power      to impose  the tax, for, if it does not,      the action  must ever remain ineffective      and   illegal.    Granted    legislative      competence,  it  is  not  sufficient  to      declare merely  that the decision of the      Court  shall   not  bind   for  that  is      tantamount to  reversing the decision in      exercise of  judicial  power  which  the      legislature   does    not   possess   or      exercise. A court’s decision must always      bind unless  the conditions  on which it      is based  are so  fundamentally  altered      that the  decision could  not have  been      given  in   the  altered  circumstances.      Ordinarily, a  court holds  a tax  to be      invalidly imposed  because the  power to      tax is  wanting or  the statute  or  the      rules or  both are  invalid  or  do  not      sufficiently  create  the  jurisdiction.      Validation of  a tax so declared illegal      may be  done  only  if  the  grounds  of      illegality or  invalidity are capable of      being removed  and are  in fact  removed      and the  tax thus  made legal. Sometimes      this   is    done   by   providing   for      jurisdiction where  jurisdiction had not      been properly invested before. Sometimes      this    is     done    by    re-enacting      retrospectively a valid and legal taxing      provision and then by fiction making the      tax already collected to stand under the      re-enacted    law.     Sometimes     the      legislature gives  its own  meaning  and      interpretation of  the law  under  which      the tax was collected and by legislative      fiat makes  the new meaning binding upon      courts. The  legislature may  follow any      one method  or all  of them and while it      does so  it may neutralize the effect of      the earlier  decision of the court which      becomes ineffective  after the change of      the law.  Whichever method is adopted it      must be  within the  competence  of  the      legislature and  legal and  adequate  to      attain the  object of validation. If the      legislature  has   the  power  over  the      subject-matter and  competence to make a      valid law,  it can at any time make such      a valid  law and make it retrospectively      so as  to bind  even past  transactions.      The  validity   of  a   Validating  law,      therefore,  depends   upon  whether  the      legislature  possesses   the  competence      which it  claims over the subject-matter      and whether  in making the validation it      removes the  defect which the courts had      found in  the  existing  law  and  makes

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    adequate provisions  in  the  Validating      law for a valid imposition of the tax."                          (Emphasis supplied.) Mr.  S.J.   Sorabjee,   learned   counsel   for   the   Kota Municipality, submitted that Section 3 of the Validating Act required the  court to  deem the  villages  of  Raipura  and Ummedganj always  to have  been within  the  Kota  municipal limits to  all intents and for all purposes. All corollaries for such  assumption had,  therefore, necessarily to follow. Accordingly, the  court had  to assume  that the  procedural requirements of  Sections 4  to 7  of the  1959 Act had been satisfied. The  use of  the non-obstante clause in Section 3 of the Validating Act fortified the submission.      Mr.  Sorabjee   cited  the  following  passage  in  the judgment in  The  State  of  Bombay  vs.  Pandurang  Vinayak Chaphalkar & Ors., 1953 S.C.R. 773 :      "When a  statute enacts  that  something      shall be deemed to have been done, which      in fact  and truth  was  not  done,  the      court is entitled and bound to ascertain      for  what   purposes  and  between  what      persons the  statutory fiction  is to be      resorted to  and  full  effect  must  be      given to  the statutory  fiction and  it      should  be   carried  to   its   logical      conclusion. (Vide  Lord Justice James in      Ex  parte   Walton  :  In  re  Levy  [17      Ch.D.746 at p. 756]." He brought  to our  attention the oft-quoted observations of Lord Asquith  in East  End Dwellings  Co. Ltd.  vs. Finsbury Borough Council, 1952 A.C. 109, cited therein :      "If you are bidden to treat an imaginary      state  of  affairs  as  real,  you  must      surely, unless prohibited from doing so,      also imagine  as real  the  consequences      and incidents  which,  if  the  putative      state of  affairs had  in fact  existed,      must  inevitably  have  flowed  from  or      accompanied it......... The statute says      that you must imagine a certain state of      affairs; it  does not  say  that  having      done so,  you must  cause or permit your      imagination to  boggle when  it comes to      the inevitable corollaries of that state      of affairs." The judgment  in M.  Venugopal vs.  Divisional Manager, Life Insurance Corporation  of India, Machilipatnam, A.P. & Anr., (1994) 2  S.C.C. 323,  also cites Lord Asquith and says that the legislature  can introduce  a statutory  fiction and the courts have  to proceed  upon the assumption that that state of affairs existed on the relevant date. Reliance was placed by Mr.  Sorabjee upon J.K. Cotton Spinning and Weaving Mills Ltd &  anr. vs.  Union of India & ors., (1988) 1 S.C.R. 700. The Explanations  to Rules  9 and  49 of  the Central Excise Rules, 1944,  had provided  that excisable goods produced or manufactured in  any place  or premises  at an  intermediate stage and  consumed  or  utilised  for  the  manufacture  of another commodity in a continuous process would be deemed to have been  removed from  such place  or premises immediately before such consumption or utilisation. This court said that it  was  well  settled  that  a  deeming  provision  was  an admission  of   the  non-existence   of  the   fact  deemed. Therefore, in  view  of  the  deeming  provision  under  the Explanations, although  the goods  which  were  produced  or manufactured  at  an  intermediate  stage  and,  thereafter,

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consumed or  utilised in  the  integrated  process  for  the manufacture of  another commodity were not actually removed, they had to be regarded as having been removed.      It is to be noted that what is to be deemed is a matter of fact;  there is  a "deeming  fiction". It  is also  to be noted that when a fact is to be deemed, its consequences and incidents are  also to  be deemed;  that  is  to  say,  what follows from the deemed fact is also to be deemed.      Mr. Sorabjee relied upon the judgment in R.L. Arora vs. State of  Uttar Pradesh  and Ors., (1964) 6 S.C.R. 784. This Court in R.L. Arora vs. State of U.P., (1962) Supp. 2 S.C.R. 149, had  considered the  provisions of  Section 40(1)(b) of the Land  Acquisition Act,  1894, read  with clause  (5)  of Section 41  thereof and  had held  that  valid  acquisitions thereunder could  only be  for work  that would  be directly useful to  the public  and  the  relevant  agreement  should contain a  term setting  out that  the public  would have  a right to  use the work directly. Acquisitions that failed to comply  with   this  requirement  fell  through.  Parliament thereupon   enacted   the   Land   Acquisition   (Amendment) Ordinance, 1962,  which was replaced by the Land Acquisition (Amendment) Act,  1962. Thereby,  amendments to  Sections 40 and 41  of the  principal Act  were  made  and  acquisitions invalidated  by   reason  of   the  earlier   judgment  were validated. Section 40 was amended to include the acquisition for a  company which  was engaged  or was  taking steps  for engaging in  any industry  or work  which was  for a  public purpose. Section  41 was  amended to  include clause 4(A) to cover  agreements  which  provided  for  such  acquisitions. Section  7   of  the  Amendment  Act,  1962,  validated  the acquisitions invalidated  by reason  of the earlier judgment by stating  that such  acquisitions should be deemed to have been made for the purpose and in accordance with Sections 40 and 41 of the principal Act, as amended, as if these amended provisions were  in force  at all material times. This Court held that  the deeming provision in Section 7 laid down that where the  acquisition did not fall within the provisions as they existed  before the  Amendment  Act,  1962,  came  into force, it should be deemed to come within the amendment made thereby, provided,  of course,  that it  was of  a kind that could so come. Reliance was placed by Mr. Sorabjee also upon Udai Ram  Sharma &  Ors. etc.  vs. Union  of India  &  ors., (1968) 3  S.C.R. In  the case of State of Madhya Pradesh vs. V.P. Sharma,  (1966) 3  S.C.R. 557, this Court had held that once a  declaration under  Section 6 of the Land Acquisition Act, 1894,  had been  made, the  notification under  Section 4(1) of  the  Act  was  exhausted  and  there  could  be  no successive notifications  under Section  6 with  respect  to land specified  in one  notification under  Section 4(1).  A validating ordinance was promulgated, to be succeeded by the Land Acquisition  (Amendment and  Validation) Act, 1967. The Amendment and  Validation Act,  1967, amended Section 5-A of the principal  Act to  allow for the making of more than one report in  respect of  land which  had been  notified  under Section 4(1).  It also  amended Section  6 so that different declarations made  from time to time in respect of different parcels of  land covered  by  the  same  notification  under Section 4(1)  were permissible. The Amendment and Validation Act, 1967,  also validated  all acquisitions  which had been rendered invalid  by reason of the judgment in V.P. Sharma’s case.  The   Amendment  and   Validation  Act,   1967,   was challenged. This Court rejected the challenge. It observed :      "All these  decisions lay  down that the      power  to   legislate   for   validating      actions taken  under statute  which were

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    not sufficiently  comprehensive for  the      purpose is  only ancillary or subsidiary      to legislate  on any  subject within the      competence of  the legislature  and such      Validating Acts  cannot be  struck  down      merely  because   courts  of   law  have      declared actions  taken  earlier  to  be      invalid for want of jurisdiction. Nor is      there any  reason to  hold that in order      to validate  action without  legislative      support the  Validating Act  must  enact      provisions to  cure the  defect for  the      future and also provide that all actions      taken or  notifications issued  must  be      deemed to  have  been  taken  or  issued      under the  new provisions so as to given      them full retrospective effect. It is  to be noted that in each of these two cases under the Land  Acquisition   Act,   that   Act   was   amended   with retrospective   effect.   Under   the   amended   Act,   the acquisitions that  had  been  rendered  invalid  by  earlier judgments became  valid and  the validation  was effected on the strength of such amendment.      In the  case of  the village  of Raipura  there  was  a preliminary  notification  calling  for  objections  to  the extension of  the limits of the Kota municipality to include it, but  it was not followed by a final notification. In the case of  the village  of Ummedganj  there was a notification extending the limits of the Kota municipality to include it, but it  had not been preceded by a notification inviting the objections   of   the   public   thereto.   Later,   another notification was  published whereby the village of Ummedganj was excluded  from the  limits of the Kota municipality. The provisions of  Sections 4  to 7  of the  1959  Act  and  the earlier provisions  of the 1951 Act in the same behalf were, therefore, not  met in  the case  of either  the village  of Raipura or  the village  of Ummedganj. The Full Bench of the Rajasthan High  Court has  held that  these provisions  were mandatory and that judgment has become final.      The  Validating   Act  provides  that,  notwithstanding anything contained  in Sections 4 to 7 of the 1959 Act or in any judgment,  decree, order  or direction of any court, the villages of Raipura and Ummedganj should be deemed always to have continued  to exist  and they  continue to exist within the limits  of the Kota municipality, to all intents and for all purposes.  This provision  requires the  deeming of  the legal position  that the  villages of  Raipura and Ummedganj fall within  the limits  of the  Kota municipality,  not the deeming of  facts from  which this  legal consequence  would flow. A  legal consequence  cannot be deemed nor, therefrom, can the  events that  should have  preceded it. Facts may be deemed and, therefrom, the legal consequences that follow.      Sections 4  to 7 remained on the statute book unamended when the  Validating Act  was passed.  Their provisions were mandatory. They had admittedly not been followed. The defect of not  following these  mandatory provisions in the case of the villages  of Raipur  and Ummedganj  was not cured by the Validating Act.  The curing  of the  defect was an essential requirement for  the passing  of a valid validating statute, as held  by the  Constitution Bench  in the  case of Prithvi Cotton Mills  Ltd.. It  must, therefore,  be held  that  the Validating Act is bad in law and it must be struck down.      It must  be made  clear  that  in  the  suit  that  the appellants have  filed in  the court  of the District Judge, Kota, for refund of the amount of octroi paid by them to the

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Kota municipality,  which is  stated to be pending, it shall be open to the defendants to take every defence available to them other than that concluded by this judgment.      At the  stage when special leave to appeal was granted, no stay  was ordered except for the year 1974-75. Counsel on behalf of  the Kota  municipality agreed that if the appeals were allowed  and the  Kota  municipality  was  required  to refund the  amount paid  by the  appellants by way of octroi duty, it  would refund the same with interest at the rate of 8 per cent per annum. The time within which the refund would have to  be made  was left  to be  determined when the court heard and  disposed of the appeals. The Kota municipality is now directed  to refund  to the  appellants the  amounts  of octroi duty  paid by  the appellants to it subsequent to the year 1974-75  with interest  at the  rate of  8 per cent per annum from  the dates of payment till refund or realisation. Such refund shall be made on or before 15th July, 1996.      The appeals  are allowed.  The judgment and order under appeal is  set aside.  The Kota  Municipal Limits (Continued Existence) Validating  Act, 1975, is declared to be invalid. Refund of  octroi duty  by  the  Kota  municipality  to  the appellants shall be made as aforestated.      The Kota  Municipality shall  pay to the appellants the costs of its appeal, quantified in the sum of Rs.15,000/-.