TMI Blog1978 (9) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... tensive properties and became the owner of large plants, machinery, buildings, lands pipelines, stores etc. The total market value of the appellant's industrial undertaking was estimated by the appellant as on 22nd March, 1962, at ₹ 7,00,00,000/-. In 1958, the Government of West Bengal, being of the view that the Company which enjoyed a monopoly in the supply of Gas in Calcutta was negligent in looking after the interest of the consumers', appointed a Committee to inquire into the unsatisfactory condition of supply of gas in Calcutta and to suggest remedial measures including valuation of the undertaking for the purpose of taking over the gas supply undertaking. The Members of the Committee were : the Chief Secretary, the Sheriff of Calcutta, the Secretary, Commerce and Industries Department, the Administrator, Durgapur Project and the Director, Central Fuel Research Institute. The Committee was assisted by several experts. The Committee reported that the present Gas Works in Calcutta including the distributing system was in a bad state of disrepair and a very poor state of maintenance. The Committee recommended that the Gas Works and the distribution system should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been transferred to the State Government under Clause (a) of Section 4 for the purpose of management and control, whichever is less. Explanation-In this sub-section- (i) Purchase price of the undertaking of the company means the aggregate of the prices of the different parts of the undertaking of the company at the respective dates on which parts were purchased, acquired or constructed by the Company; (ii) net income of the undertaking of the Company means the difference between the amount of gross revenue, receipts and other general receipts, accountable in the assessment of Indian Income-tax arising from, and ancillary or incidental to, the business of the company and the amount of expenditure incurred on the following- (a) rents, rates and taxes, (b) interest on loans and security deposits, (c) maintenance and repair, (d) collection charges, (e) cost of management, including the remuneration of managing agents, if any, (f) other expenses admissible under the law for the time being in force in the assessment of Indian income-tax and arising from, and ancillary or incidental to, the business of the Company, and (g) such other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alcutta Gas Company (Proprietary) Ltd. v. The State of West Bengal and Ors. [1962] Supp. 3 S. 1. 6. As mentioned by us earlier, the undertaking of the Company was acquired on 22nd March, 1962, by a notification of that date. By further notifications issued under Section 8 of the Act a Tribunal was constituted for the purpose of determining the compensation payable in respect of the acquisition of the undertaking. In August 1965, the Oriental Gas Company Ltd. filed a petition under Article 226 of the Constitution challenging the provisions of the Act relating to compensation. The Writ Petition was, however, dismissed as withdrawn in May 1969 as the Oriental Gas Company Act, 1960 was amended in the meanwhile by the President's Act 15 of 1968; the Oriental Gas Company (Amendment) Act 1968. The Amending Act substituted a different provision for what was the original Section 8(1)(b). Section 8(1)(b) as amended by the President's Act 15 of 1968 was as follows : 8(1)(b) In the case of acquisition of the undertaking of the Company, the compensation payable by the State Government shall be determined in accordance with the principles specified in the Schedule. 7. The sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or acquired and such liabilities or obligations as were incurred in connection with such addition, investment or acquisition by the State Government during the period of management and control of the undertaking of the company. Paragraph IV :-The interest referred to in Paragraph I shall be on the amount mentioned in the said paragraph for the period commencing from the date of vesting of the undertaking of the Company under Sub-section (2) of Section 7 and ending with the date immediately before the date of enactment of the Oriental Gas Company (Amendment) Act, 1968, calculated at the average bank rate during the said period. It should also be mentioned here that Section 9(2) was also amended and it was provided that the Bonds should carry interest from the date of enactment of the amending Act and not from the date of issue. The main provisions of the amending Act relating to the determination and payment of compensation were, however, short lived. In 1970 the West Bengal Legislature passed the Oriental Gas Company (Amendment) Act, 1970 (West Bengal Act 6 of 1970) once again substituting a new Section 8(1)(b) and Section 9(2). The new Section 8(1)(b) was as follows : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this Court questioning the vires of Sections 8(1)(b) and 9(2) of the Act. 9. The submissions of Shri A.K. Sen, learned Counsel for the appellant were as follows : Article 31(2) of the Constitution as it stood on the date of the acquisition of the undertaking required the Legislature to specify the principles on which compensation, i.e. a 'just equivalent' of what the owner had been deprived of, had to be determined. The principles so specified had necessarily to be relevant to the determination of such compensation. The principle of capitalising net profit as a sole factor was not a relevant principle in determining the compensation payable for the acquisition of a public utility undertaking. It might be a relevant principle to determine the value of the intangible assets of a public utility undertaking but was wholly irrelevant to determine the value of the tangible assets of a public utility undertaking. Section 8(1)(b) of the Oriental Gas Company Act, as amended in 1970, therefore, offended Article 31(2) of the Constitution. The choice of the period of five years immediately preceding the take over for the purpose of calculating the average annual net profit was ina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the owner had been deprived of. It was said that the principles to be laid down by the legislature to determine the compensation were to be subject to the 'basic requirement of full indemnification of the expropriated owner'. If the principles did not take into account 'all the elements which make up the true value of the property appropriated' the legislation was liable to be struck down. In other words what was to be given was full compensation on the basis of the market value of the property ? acquired. The decision was capable of creating great difficulty in the sense of discomfiting legislation for the taking over of big estates and the nationalisation of large industrial undertakings. In the words of Shah, J., in State of Gujarat v. Shri Shantilal Mangaldas and Ors.: [1969]3SCR341 , the decisions in Beta Banerjee's case and Subodh Gopal Bose's: [1954]1SCR587 case. ...were therefore likely to give rise to formidable problems, when the principles specified by the Legislature as well as the amounts determined by the application of those principles, were declared justiciable. By qualifying 'equivalent' by the adjective 'just', the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a law without providing for compensation so defined, it would have used other expressions like 'price' 'consideration' etc. 13. Having said that, Subba Rao, J., however, went on to say that the argument that because the word compensation meant 'just equivalent' for the property acquired, therefore, the Court could ascertain whether it was a 'just equivalent' would render the amendment of the Constitution nugatory. He observed that neither the principles prescribing the 'just equivalent' nor the 'just equivalent' could be questioned by the Court on the ground of the inadequacy of the compensation fixed or arrived at by the working of the principles. The matter was illustrated by the statement that the value of a house which was acquired could be fixed in many ways : estimate by an Engineer, value reflected by comparable sales, capitalisation of rent etc. The application of different principles might lead to different results. No one could insist that only that principle which yielded the highest result should be adopted. On the other hand the value of land acquired in 1950 could not be fixed on the basis of its value in 1930 or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... might have yielded results more favourable to the owner of the acquired property. 15. In the case of Metal Corporation of India and Anr., Subba Rao, C.J., observed : The law to justify itself has to provide for the payment of a 'just equivalent' to the land acquired or lay down principles which will lead to that result. If the principles laid down are relevant to the fixation of compensation and are not arbitrary, the adequacy of the resultant product cannot be called in question in a Court of law. The validity of the principles, judged by the above tests, falls within judicial scrutiny, and if they stand the tests, the adequacy of the product falls outside its jurisdiction . Judging by those tests, the two principles specified for the ward of compensation in the Act impugned in that case namely (i) compensation equated to the cost price in the case of unused machinery in good condition, and (ii) written down value as understood in the Income-tax law as the value of used machinery were held to be irrelevant to the fixation of the value of the machinery on the date of acquisition. 16. The case of Vajravelu and Metal Corporation of India and Anr. were both considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation is guaranteed : it does not mean however that something fixed or determined by the application of specified principles which is illusory or can in no sense be regarded as compensation must be upheld by the Courts, for, to do so, would be to grant a charter of arbitrariness, and permit a device to defeat the constitutional guarantee. But compensation fixed or determined on principles specified by the Legislature cannot be permitted to be challenged on the somewhat indefinite plea that it is not a just or fair equivalent. Principles may be challenged on the ground that they are irrelevant to the determination of compensation, but not on the plea that what is awarded as a result of the application of those principles is not just or fair compensation. A challenge to a statute that the principles specified by it do not award a just equivalent will be in clear violation of the constitutional declaration that inadequacy of compensation provided is not justiciable. 17. After Shantilal's case, the effect of the amendment of Article 31(2) by the Constitution 4th Amendment Act again fell to be considered by this Court in R.C. Cooper v. Union of India: [1970]3SCR530 a decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of compensation for properly compulsorily acquired and if the principles were appropriate in determining the value of the class of property sought to be acquired. The provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act 22 of 1969 were struck down on the ground that relevant principles were not specified for the determination of compensation. Instead of providing for valuing the entire undertaking as a unit, the Act provided for determining the value, reduced by the liabilities, of only some of the components which constituted the undertaking. It also provided for different methods of determining compensation in respect of different components. Since the undertaking was sought to be acquired as a going concern the goodwill and the value of the un-expired long term leases had also to be included in the assets of the banks. These important components' of the Undertakings were excluded. It was, therefore, held that the principles specified were irrelevant for the determination of compensation of Banking Companies. The Court, however, observed that the science of valuation of property recognised several principles or methods for determining the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the acquirer does not intend to use the property for which it is used at the time of acquisition and desires to demolish it or use it for other purposes is irrelevant; and (vi) the property to be acquired has ordinarily to be valued as a unit. Normally an aggregate of the value of different components will not be the value of the unit. These are, however, not the only methods. The method of determining the value of property by the application of an appropriate multiplier to the net annual income or profit is a satisfactory method of valuation of lands with buildings, only if the land is fully developed, i.e., it has been put to full use legally permissible and economically justifiable, and the income out of the property is the normal commercial and not a controlled return, or a return depreciated on account of special circumstances. If the property is not fully developed, or the return is not commercial the method may yield a misleading result. x x x But when an undertaking is acquired as a unit the principles for determination of compensation must be relevant and also appropriate to the acquisition of the entire undertaking. In determining the appropriate rate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognized principles, we need not dilate upon this matter further. 21. We may now examine the submissions of Shri A.K. Sen in the light of the principles enunciated in Cooper's case without confusing ourselves with imported expressions like 'just compensation' or 'just equivalent'. Shri A.K. Sen's primary submission was that the principle of capitalising net profit as the sole factor for determining the compensation payable for the acquisition of a Public Utility Undertaking was not a relevant principle. According to him a Public Utility Undertaking was under an obligation to provide services to the community irrespective of whether its activities resulted in profit or loss. It was subject to a rigid price control. It did not have the freedom to extend or curtail its activities based on consideration of profit. An Undertaking like the appellant's, he said, was bound to render services even in unprofitable lines of supply and areas. Therefore, the method of capitalising income was not relevant to determine the compensation payable to a Public Utility Undertaking. It might be relevant to assess the value of the intangible assets of the Public Utility Unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses that there probably is none . After remarking that valuation of a going concern based on capitalisation of net earnings assumes too many contingencies, the author refers to the case of Appleton Water Co. v. Railroad Commission 154 Wis. 121, 142, N.W. 476L.R.A. (N.S.) 770, where the Court said that the fundamental difficulty with an attempt to set a definite sum as representing going concern value is that it is an attempt to divide a thing which is in its nature practically indivisible. The value of the plant and business is an indivisible gross amount. It is not obtained by adding up a number of separate items, but by taking a comprehensive view of each and all of the elements of property, tangible and intangible, including property rights, and considering them all, not as separate things, but as inseparable parts of one harmonious entity . 23. Bright in his 'Valuation', deals with the question under the heading 'Capitalized Earning Power v. So-Called Physical value as a measure of just compensation'. After referring to various difficulties in arriving at the just compensation on the basis of the method of capitalisation, the author ends the statement : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e simple reason that market value is dependent upon earning capacity and fluctuates with that capacity; consequently in determining what earning capacity is just, the market value of the investment which is a result of earning capacity cannot be utilised as a basis for the determination of what constitutes the reasonable or just earning capacity of the plant . 26. We may also refer to Principles and Practice of Rating Valuation by Roger Emeny and Hector M, Wilks. At page 197 of the 3rd edn., public utility undertakings are considered and it is said : 'Public Utility Undertakings were prior to 1950 valued by the profits method. This method was used because public utility undertakings were not generally speaking let, added to which they enjoyed some element of monopoly...insofar that there are public utility undertakings or quasi public utility undertakings which are not covered by a formula, and in the absence of rental evidence, it is probable that the profits method of valuation would be applicable. There is no shortage of case law to help the valuer when using the profits method for public utility undertakings. 27. It is thus clear from the very authorities cited b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sen is not borne out by any statement to that effect in the Writ Petition. Shri Sen suggested that the petitioner might be given an opportunity to amend the Writ Petition. We do not think we can do that. The acquisition was made in 1962. The impugned Act was passed in 1970. The Writ Petition was filed in 1971 and has been pending in this Court for seven years. If there was any substance in the present assertion, the petitioner would surely have mentioned it prominently in the Writ Petition. It would not have taken the petitioner so many years to discover a circumstance claimed by his Counsel to be so very vital. We do not think we will be justified in permitting any amendment at this stage. The case of the petitioner right through has been that the principle of capitalisation of income was irrelevant. With that submission we emphatically do not agree. 28. Shri Sen's next submission was that the choice of the period of five years immediately preceding the take over of the management and control of the Company for the purpose of calculating the average annual income was arbitrary as those five years were particularly lean years for the Company because of some special circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period chosen is fair to the Company. 29. The next target of Mr. Sen's attack was the choice of the multiplier. He submitted that in the year 1962 gilt-edged securities were fetching no more than six per cent per annum and therefore, not eight, but some other higher multiplier should have been specified. 30. The argument of Shri Sen is based on the observation of Shah, J., in Cooper's case that 'capitalisation of the net annual value of the property at a rate equal in normal cases to the return from gilt edged securities' was an important method of determination of compensation. The very use of the word normal by Shah, J., indicates that it was not intended to lay down any invariable rule that whenever a method of capitalisation of net profit was adopted, the return from gilt edged securities was to be the basis. That should depend on a variety of circumstances such as the nature of the property, the normal return which may be expected on like investment, the state of the capital market and several such factOrs. For example, it is well known that a large investment yields a higher return than a smaller investment and similarly a long term investment yie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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