1. Acquisition of a corporate undertaking under a special Act — Challenge to constitutional validity based on compensation principles under Article 31. (Para 1 , 2 )
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1966 Supreme(SC) 187
SUPREME COURT OF INDIA
K. SUBBA RAO, C.J.I. AND J.M. SHELAT, J.
Union of India, Appellant
Versus
The Metal Corporation of India Ltd. and another, Respondents.
Civil Appeal No. 1222 of 1966, dated 5-9-1966.
Advocates appeared
Mr. S. V. Gupte, Solicitor-General of India and Mr. N. S. Bindra, Senior Advocate, (M/s. R. H. Dhebar and B.R.G.K. Achar, Advocates, with them), for Appellant; M/s. M. C. Setalvad and B. C. Dutt, Senior Advocates, (M/s. Santosh Chatterjee and B. Parthasarathy, Advocates, and M/s. O. C. Mathur and Ravinder Narain, Advocates of M/s. J. B. Dadachanji and Co., with them), (for No. 1) and Mr. B. C. Dutta, Senior Advocate, (M/s. Santosh Chatterjee and Anand Prakash, Advocates and M/s. O. C. Mathur and Ravinder Narain, Advocates of M/s. J. B. Dadachanji and Co., with him) (for No. 2), for Respondents.
Advocates:
ANAND PARKASH, B.C.DATTA, B.C.DATTAA, B.PARTHASARTHY, B.R.G.K.Achar, J.B.DADACHAN, M.C.SETALVAD, N.S.BINDRA, O.C.MATHUR, R.H.Dhebar, RAVINDER NARAYAN, Ravindra Narayan, S.V.Gupta, SANTOSH CHATTERJI
ANAND PARKASH, B.C.DATTA, B.C.DATTAA, B.PARTHASARTHY, B.R.G.K.Achar, J.B.DADACHAN, M.C.SETALVAD, N.S.BINDRA, O.C.MATHUR, R.H.Dhebar, RAVINDER NARAYAN, Ravindra Narayan, S.V.Gupta, SANTOSH CHATTERJI
Compensation under Article 31(2) of the Constitution must be a "just equivalent." While the adequacy of the amount is not reviewable, the principles used to determine it must be relevant to the property's value at the time of acquisition and not arbitrary.
Headnote:(A) Constitution of India - Article 31(2) - Acquisition of Undertaking Act - Section 10 and Schedule - Compensation - Meaning of "compensation" - It must be a "just equivalent" of the property deprived. The principles prescribed for determining compensation must be relevant to the value of the property at or about the time of its acquisition. If the principles are irrelevant or arbitrary, the law is void as it fails to provide "compensation" within the meaning of the Constitution. (Paras 8, 9)
(B) Judicial Review - Adequacy of compensation - If the principles laid down for fixing compensation are relevant and not arbitrary, the adequacy of the resultant amount cannot be questioned in a court of law. However, the validity of the principles themselves is subject to judicial scrutiny. (Para 9)
(C) Valuation of Assets - Use of cost price for unused machinery and written-down value for used machinery - Cost price of machinery purchased years prior is irrelevant due to price inflation. Written-down value determined for tax purposes is a notional allowance and has no relation to the actual market value of the asset. Such principles are arbitrary and irrelevant for fixing compensation. (Para 7)
Facts of the case:
The government acquired an undertaking in the public interest through an Act. The Act provided for compensation to be determined based on principles in a Schedule. For machinery, the Act specified the actual cost for unused machinery in good condition and the written-down value for used machinery. The High Court held the Act void for contravening the constitutional guarantee of compensation.
Findings of Court:
The principles for valuing machinery were found to be irrelevant and arbitrary. The cost price of old machinery does not reflect its value at the time of acquisition, and tax-based depreciation does not determine actual market value. Since machinery was the most valuable part of the undertaking, the invalidity of these principles affected the totality of the compensation.
Issues: Whether the principles for determining compensation for machinery under the Act were relevant and non-arbitrary, and whether they satisfied the constitutional requirement of providing a "just equivalent" under Article 31(2).
Ratio Decidendi: The court held that for a law to be valid under Article 31(2), it must provide for a "just equivalent" or lay down relevant, non-arbitrary principles to reach that result. Principles that ignore market conditions or rely on notional tax values are irrelevant to the property's value at the time of acquisition. Such a failure to provide relevant principles constitutes a fraud on power, rendering the Act unconstitutional.
Result: Appeal dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether compensation determined by historical cost and written-down value for machinery constitutes a just equivalent or is arbitrary and irrelevant. (Para 5 , 6 )
3. Valuation based on historical cost or notional tax depreciation ignores market inflation and actual value, rendering the compensation principles arbitrary and irrelevant. (Para 7 )
4. Compensation under Article 31(2) must be a just equivalent; principles for determination must be relevant and non-arbitrary to be constitutionally valid. (Para 8 , 9 )
5. Appeal dismissed — Act declared unconstitutional and void for failing to provide valid compensation. (Para 10 )
6. What is the meaning of compensation under Article 31(2) of the Constitution?
Compensation means a just equivalent of the property acquired. While the adequacy of the resultant amount is not judicially reviewable, the principles used to determine that amount must be relevant and not arbitrary. (Para 8 , 9 )
7. Is the historical cost of an asset a relevant principle for determining compensation?
No. Using the cost price of assets purchased years prior is irrelevant for fixing compensation at the time of acquisition, as it fails to account for price inflation and current market conditions. (Para 7 )
8. Can written-down value under income-tax law be used to determine just compensation?
No. Written-down value under income-tax law is a notional allowance designed for tax relief and has no relation to the actual market value of the assets, making it an arbitrary basis for compensation. (Para 7 )
9. How does the invalidity of compensation principles for a major asset affect the overall acquisition Act?
If the principles for valuing the most valuable part of an undertaking are invalid, the totality of the compensation is affected, and the provisions are not severable, rendering the Act unconstitutional. (Para 10 )
Judgment
SUBBA RAO, CJI. : This appeal by certificate raises the question of the constitutional validity of the Metal Corporation of India (Acquisition of Undertaking) Act (No. XLIV of 1965), hereinafter called the Act.
2. The relevant facts lie in a small compass. The 1st respondent, The Metal Corporation of India Limited, hereinafter called the Corporation, was a limited company constituted under the Indian Companies Act, having for its objects, inter alia, the development of zinc and lead mines at Zawar in the State of Rajasthan and the construction of a zinc smelter and other connected works for producing electrolytic zinc and by-products. The Government was satisfied that it was necessary to acquire the said Corporation in public interest and on October 22, 1965, the President of India promulgated an Ordinance (No. 6 of 1965) providing for the acquisition of the Corporation by the Central Government. Pursuant to the said Ordinance, on or about October 23, 1965, the Central Government took over the possession, control and administration of the said Corporation. The Corporation, the 1st respondent and its Managing Director, the 2nd respondent filed a Writ Petition under Art. 226 of the Constitution in the High Court of Judicature for the State of Punjab, Circuit Bench at New Delhi, being Petition No. 631-D of 1965, challenging the validity of the said Ordinance. In the meantime, the Parliament passed the Act on the same terms as contained in Ordinance No. 6 of 1965: it received the assent of the President of India on December 12, 1965. The respondent filed another writ petition in the said High Court, being Writ Petition No. 832-D of 1965, for a declaration that the Act was ultra vires the Constitution. The said High Court held that the Ordinance and the Act contravened the relevant provisions of Art. 31 of the Constitution and. therefore, were constitutionally void. The present appeal is preferred against the said judgment of the High Court.
3. It will be convenient at this stage to, read the relevant provisions of the Act. The preamble and the relevant provisions of the Act read:
"Preamble.
An Act to provide for the acquisition of the undertaking of the Metal Corporation of India Limited for the purpose of enabling the Central Government in the public interest to exploit, to the fullest extent possible zinc and lead deposits in and around the Zawar area in the State of Rajasthan and to utilise those minerals in such manner as to subserve the common good.
Section 3. On the commencement of this Act, the undertaking of the company shall, by virtue of this Act, be transferred to, and vest in, the Central Government.
Section 10. (1) The Central Government shall pay compensation to the company for the acquisition of the undertaking of the company and such compensation shall be determined in accordance with the principles specified in the Schedule and in the manner hereinafter set out, that is to say,-
* * * * *
(2) Notwithstanding that separate valuations are calculated under the principles specified in the Schedule in respect of the several matters referred to therein, the amount of compensation to be given shall be deemed to be a single compensation to be given for the undertaking as a whole.
(3) * * * *"
THE SCHEDULE
Principles for determining compensation for acquisition of the undertaking
Paragraph I.-The compensation to be paid by the Central Government to the company in respect of the acquisition of the undertaking thereof shall be an amount equal to the sum total of the value of the properties and assets of the company on the date of commencement of this Act calculated in accordance with the provisions of Para. II less the sum total of the liabilities and obligations of the company as on the said date calculated in accordance with the provisions of Para. III.
Paragraph lI.-(a) The market value of any land or buildings;
(b) the actual cost incurred by the company in acquiring any plant, machinery or other equipment which has not been w
