# \ ORIENTAL GAS CO. LTD. & ORS v. STATE OF WEST BENGAL

- **Citation:** [1979] 1 S.C.R. 617
- **Court:** Supreme Court of India
- **Decided:** 1978-09-12
- **Bench:** Y. V. Chandrachud, R. S. Sarkaria, N. L. Untwalia, 0. Chinnappa Reddy, A. P. Sen
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/oriental-gas-co-ltd-ors-v-state-of-west-bengal-7521
- **Pages:** 27

## Headnote

Oriental Gas Company Act, 1970-s. 8(1) (b) Capitalisation of net income
for determining compensation payable-Validity of-Principles for determining
compensation payable on acquisition of Public Utility Undertakings discussed.
In 1958, the Government of West Bengal, being of the view thM the appel·
B
!ant company which enjoyed a monopoly in the supply of gas in Calcutta
C
was negligent in looking after the interest of the consun1ers appointed a
Committee to enquire into the unsatisfactory condition of supply of gas in
Calcutta and to suggest remedial measures, including valuation of the Under·
taking for the purpose of taking it over. The Committee reported that the
distribution system was in a bad state of disrepair and that the maintenance
system \Vas in a very poor sta.te. It recommended that the distriblltioa system
should be taken over immediately under the management of the Government
D
to ensure and maintain supply of gas to consumers in CaJcutta.
On the basis of this recommendation, the Oriental Gas Company (West
Bengal Act XV of 1960) was paosed by the State Legislature. Section 3 of
the Act provided for the taking over for a limited period of the management
and control and subsequent acquisition of the Undertaking of the Company,
Section 7 provided for the acquisition of the Undertaking of the Company at
any time within a period of five years. Section S(l)(b) provided for payment
of compensation for the acquisition of the Unclertaking of the Company, by
the method of cost less depreciation or the method of capitalisation whichever
was less. Section. 9(2) provided that the compensation should be paid in
bonds carrying interest at 3 % p.a. from the date of issue and payable in 20
equal annual instalments. The Act wa.s amended in 1968. The amei\ded
Act provided for the determination of compensation on the basis of full marKet
value Of the Undertaking and payment of compensation in the shilpe of bonds
carrying interest from the date of enactment of the 1968 Act. In 1970 the
Act was aga.in amended. It provided for the determination of compensation
by the method of oo.pitalisation and payment of compensation in bonds carry·
ing interest from the date of acquisition.
Aggrieved by the method of determination of compensation the appellant
E
F
filed a writ petition under Art. 32 of the Constitution questioning the vires
G
of s. 8(1)(b) and s. 9(2) of the Act.
The petitioner contended that (1) the principle of capita-Hsing net profit
as the sole factor for determining compensation payable for the aCqulsitton
of a public utility undertaking was not a relevant principle because a public
utility concern was utider an obligation to provide services to the community
irrespective of whether its activities resulted in profit or loss; (2) the choice
of the period of five yea.rs immediately preceding the take over Of the manageR
ment and control of the company for the purpose of calculating the average
annual income was arbitrary;
(3) at the time when the Undertaking
was
618
SUPREME COURT REPORTS
[1979] 1 S.C.R.
A _ ocquired in 1962 the gilt edged securities were fetching 6% p.a. and therefore
a higher multiplier than eight should ha.ve been provided and ( 4) the metlic:id
of payment of compensation in the shape of bonds payable in twenty years 3.t
3% interest had the effect of reducing the compensation to less
than half
of what was determiaed.
B
c
D
E
F
G
H
Dismissing the petition,
HfilD : (I) (a) The principles specified by the law for determination ot
compensation are beyond the pale of challenge, if they are relevant to the
determination of compensation and are recognised principles applicable in the
determination of compensation for property compulsorily acquired and if the
principles are appropriate in determining the value of the class of property
sought to be acquired. The science of valuation of property recognised several
principles or methocj's for determining the value to be paid as compensation
to the owner for loss of his

## Text

_Characters 0–37,954 of 70,647. This is a partial read: ask again with offset=37954 for what follows._

\
ORIENTAL GAS CO. LTD. & ORS.
v.
STATE OF WEST BENGAL
September 12, 1978
617
[Y. V. CHANDRACHUD, C.J., R. S. SARKARIA, N. L. UNTWALIA,
0. CHINNAPPA REDDY AND A. P. SEN, JJ.]
Oriental Gas Company Act, 1970-s. 8(1) (b) Capitalisation of net income
for determining compensation payable-Validity of-Principles for determining
compensation payable on acquisition of Public Utility Undertakings discussed.
In 1958, the Government of West Bengal, being of the view thM the appel·
B
!ant company which enjoyed a monopoly in the supply of gas in Calcutta
C
was negligent in looking after the interest of the consun1ers appointed a
Committee to enquire into the unsatisfactory condition of supply of gas in
Calcutta and to suggest remedial measures, including valuation of the Under·
taking for the purpose of taking it over. The Committee reported that the
distribution system was in a bad state of disrepair and that the maintenance
system \Vas in a very poor sta.te. It recommended that the distriblltioa system
should be taken over immediately under the management of the Government
D
to ensure and maintain supply of gas to consumers in CaJcutta.
On the basis of this recommendation, the Oriental Gas Company (West
Bengal Act XV of 1960) was paosed by the State Legislature. Section 3 of
the Act provided for the taking over for a limited period of the management
and control and subsequent acquisition of the Undertaking of the Company,
Section 7 provided for the acquisition of the Undertaking of the Company at
any time within a period of five years. Section S(l)(b) provided for payment
of compensation for the acquisition of the Unclertaking of the Company, by
the method of cost less depreciation or the method of capitalisation whichever
was less. Section. 9(2) provided that the compensation should be paid in
bonds carrying interest at 3 % p.a. from the date of issue and payable in 20
equal annual instalments. The Act wa.s amended in 1968. The amei\ded
Act provided for the determination of compensation on the basis of full marKet
value Of the Undertaking and payment of compensation in the shilpe of bonds
carrying interest from the date of enactment of the 1968 Act. In 1970 the
Act was aga.in amended. It provided for the determination of compensation
by the method of oo.pitalisation and payment of compensation in bonds carry·
ing interest from the date of acquisition.
Aggrieved by the method of determination of compensation the appellant
E
F
filed a writ petition under Art. 32 of the Constitution questioning the vires
G
of s. 8(1)(b) and s. 9(2) of the Act.
The petitioner contended that (1) the principle of capita-Hsing net profit
as the sole factor for determining compensation payable for the aCqulsitton
of a public utility undertaking was not a relevant principle because a public
utility concern was utider an obligation to provide services to the community
irrespective of whether its activities resulted in profit or loss; (2) the choice
of the period of five yea.rs immediately preceding the take over Of the manageR
ment and control of the company for the purpose of calculating the average
annual income was arbitrary;
(3) at the time when the Undertaking
was
618
SUPREME COURT REPORTS
[1979] 1 S.C.R.
A _ ocquired in 1962 the gilt edged securities were fetching 6% p.a. and therefore
a higher multiplier than eight should ha.ve been provided and ( 4) the metlic:id
of payment of compensation in the shape of bonds payable in twenty years 3.t
3% interest had the effect of reducing the compensation to less
than half
of what was determiaed.
B
c
D
E
F
G
H
Dismissing the petition,
HfilD : (I) (a) The principles specified by the law for determination ot
compensation are beyond the pale of challenge, if they are relevant to the
determination of compensation and are recognised principles applicable in the
determination of compensation for property compulsorily acquired and if the
principles are appropriate in determining the value of the class of property
sought to be acquired. The science of valuation of property recognised several
principles or methocj's for determining the value to be paid as compensation
to the owner for loss of his property. If an appropriate method or principle
for determination of compensation was applied, the fact that by the application
-Of another principle which was also appropriate a different value was reached,
would not justify the Court in entertaining the contention that out of the two
appropriate methods, one more generous to the owner should have been applied
by the Legislature. If several principles were appropriate and one was selected
for determination of the value -of the property to be acquired, selection of that
principle to the exclusion of other principles was not open to challenge since
the selection to be left to the wisdom of the ParliMDent. [633 F-HJ
R. C. Cooper v. Union of India, [1970] 3 SCR 53() followed.
Case law discussed.
(b) It is well established that tangible and intangible property of a pu5lic
utility undertaking may not necessarily be valued separately and it is a sound
principle, to treat them as indivisible a11d value the undertaking as an integrated
whole. The authorities also treat capitalisation of net profit as one of the
recognised principles of valuation of Public Utility Undertakings, though it may
not be the best in the sense that it may not yield that result which is most
advantageous to the owner of the underta_.king.
Any purchaser will put himself
the question what profit does the undertaking make ? and ho\V much should
he invest to get the return. He may pay more if the prospects of better
income in the future are bright and if the plant, machinery and buildings
are in an excellent condition.
He may pay less if the future is not so bright
and if the pla·nt, machinery and buildings are in a poor state and require
replacement and repair.
He may pay more if the undertaking is possessed of
substantial, unencumbered properties.
He may pay less if the ]ease of land
on which the factory is located is about to expire. Thus the price may vary
depending on various factors but the basic consideration is bound to be the
profit-yielding capacity of the undertaking. [639 E, G-H]
In the instant case there is nothing in the writ petition to indiCate tbat
lands were purchased by \Vay of investment and not for the purpose of gas
\\'Orks or that the lands \Vere capable of being sold independently
of
the
Undertaking. The petitioner's assertions a·re not borne out by any statement
to that e·cect in the petition. Therefore, there would be no justification now
to allow the petitioner to amend the petition filed in 1971. Had there been
}
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ORIENTAL GAS co. v. WEST BENGAL (Chinnappa Reddy, J.) 619
any substance in this ass~on the petitioner would have mentioned it prominently Jn the petition itself. It would not have taken it so many years to
disOOver a circumstance claimed to be so very vital.
The case of the petitioner
right through had been that the principle of -capitalisation of income
was
irrelevant. [640 C-El
A
(2) (a). There is no force in the charge of arbitrariness. There is nothing
wrong with the choice of the period of five years preceding the take-over
B
for the purpose of calculating the average annual income. [640 F-G]
(b) If the legislature wnnted to be unfair to the company, the previous
year's profit could have been taken as criterion on the ground that the value
to be ascertained was the value on the date of take-over and not some hypotheticol ar.iterklr date, or instead of taking the average of the period of the proceeding five years the legislature could well have taken the average of the preceding three years. If either of these courses had been adopted compensation
would be much I ess. Instead, the legislature fairly adopted a five year period
for calculating the average annual iru:ome. It may be that in the hlstorical
P"'t the undertaking was making much profit
It may be that in the past
there were lean years. Neither a specially fat nor a specially lean period from
the past could properly be ta.ken into account as that would be irrelevant.
The legislature was concerned with the value of the undertaking on or about
the date of acquisition. It, therefore, very properly chose the period of five
years immediately preceding the take-0\er. [640 H; 641 A-Bl
Appleton Water Co. v. Railroad Commission, 154 Wis. 121, 14g, 142, N.W.
476, 47 L.R.A. (N.S.) 770 referred to.
Eminent Domain by Alfred Jahr, Valuation by Bright, Principles and Prilc~
tice of Ratinf! Valuation by Roger Emeny and Hector M. Wilks referred to.
(3) There is equally no force in the argument that the legislature should
have specified a· higher multiplier than 'eight' in fixing the compensation. If
the legislature thought that a return of 12t% in the case of a large industrial
undertaking such as the petitioner's was reasonable and on that basis adopted
the multiplier 'eight', it is not for this Court to sit in judgment over that
decision and attempt to determine a more appropriate multiplier. The use
c
D
E
of the term 'normal cases' used in Cooper's case where this Court pointed out
F
that capitalisation of the net annual value of the property at a rate equal
in norl1Ull cases to the return from gilt-edged securities
was
an
imoortant
method of determination of compensation, showed that it was not intended
to lay down any invariable rufe that whenever a method of capitalisation of
net profits was adopted, return from gilt-edged securities was to be the basis.
That should depend on a variety of circumstances such as the naoture of the
property, the normal return which could be expected on like investment, the
G
state of the copital market and several such factors. [641 G-H; 642 A]
ORIGINAL JURISDICTION : Writ Petition No. 343 of 1n2.
(Article 32 of the Constitution.)
A. K. Sen, Anil Bhatnagar, K. Khaita11, S. R. Aganval and Praveen
Kumar for the Petitioners.
A. P. Chatterjee, Govind Mukhoty and G. S. Chatter;ee for the
Respondent.
H
"
620
SUPREME COURT REPORTS
[1979] ! S.C.R.
A
The Judgment of the Court was delivered by
B
c
D
E
CHINNAPPA REDDY, J.
The old question "what is compensation"
is back again.
Fortunately, Constitutional Amendments and Judicial
precedents have narrowed the scope for controversy.
The question
has arisen this way :
The appellant, the Oriental Gas Company Ltd.
was originally
constituted in England by a deed of settlement in April 1853, as
the Oriental Gas Company for the purpose of manufacture, supply
distribution and sale of fuel gas in Calcutta.
It was
later incorporated in accordance with the provisions of the English
Joint
Stock Companies Act, 1862.
By a subsequent arrangement the control and management of the Company passed from British into Indian
hands.
Over the course of the years the Company acquired extensive
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 Rs. 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 experfs.
The Committee reF
ported 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 taken over immediately under the management of the State Govt. in order to ensure and maintain the supply of
gas to the con§umers in Calcutta.
After th~ report of the Committee
was received by the Government of West Bengal, the West Bengal
Legislature enacted the Oriental Gas Company Act (West Bengal Act
XV of 1960) providing for the taking over for a limited period, of
the management and control and the subsequent acquisition of the
undertaking of the Oriental Gas Co. Ltd.
The "undertaking of the
fl
Company" was defined to mean "the properties of the company, movable or immovable other than cash balances and reserve fynds bnt
includinig works, workshops, plants, machineries, furniture, equipments
and stores, and lands appertaining thereto, actually in use immediately
f
ORIENTAL GAS co. v. WEST BENGAL (Chinnappa Reddy, l.)
621
before the commencement of this Act, or intended to be used, in connection with the production of gas or supply thereof in Calcutta and
its environs;". Section 3 of the Act provided for the taking over of the
management and control of the undertaking of the Company for a
period of five years from the .date specified in a notification to be
issued.
Section 7 provided for the acquisition of the undertaking of
the Company at any time within the period of the said five years.
Section 8 (1 )(a) pmvided for the payment of annual compensation
during the period of the take over of the management and control of
the undertaking of the Company.
Section 8 (I )(b) provided for the
compensation payable for the acquisition of the undertaking of the
Company. In the present appeal we are concerned with the compensation payable for the acquisition of the undertaking of the Company,
that is, we are concerned with Section 8 ( 1) (b) only.
Section 8 ( 1) (b)
as originally enacted was as follows :
"8(1) (b) in the case of acquisition of the undertaking of
the company, the total compensation payable shall be,-a
sum representing the purchase price of the undertaking of the
company reduced by such depreciation as may be allowed by
the Tribunal referred to in sub-section (2) after considering
the period and the nature of the use and the present condition of the properties concerned on the date of vesting in the
State Government under Section 7, or a sum representing
eight times the average net income of the undertaking of the
company over a period of five complete years preceding the
year in which the undertaking of the company has 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 -
A
B
c
D
E
F
(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 ComG
pany;
(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 assess·
men! of Indian Income-tax arising from, and ancillary or
incidental to, the business o1' the compapy and the amount
of expenditure incurred -0n the following -
H
A
B
c
622
SUPREME COURT REPORTS
(a) rents, rates and taxes,
(b) interest on Joans and security deposits,
( c) maintenance and repair,
( d) collection charges,
(1979] 1 s.c.R.
( 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) snch other expenses as may be prescribed by rules
made under this Act''.
Section 8(2) provided that the compensation was to be deterD
mined by a Tribunal to be appointed by the State Government. The
decision of the Tribunal was subject to an appeal to the High Conrt.
Section 9(2) provided that the amount of compensation was to be paid
by the State Government in bonds carrying interest at the rate of 3 %
per annum from the date of issue and payable in 20 equal annual
instalments.
E
F
G
H
Pursua11t to the provisions of the Oriental Gas Company Act, 1960,
a notification dated 3rd October, 1960, was issued to take over the
management and control of the undertaking for a period of five years.
Later by a notification dated 22nd March, 1962, the undertaking of the
Oriental Gas Company Ltd., was acquired by the Government pursuant
to the power vested in it by Section 7 of the Oriental Gas Company
Act. In the meanwhile the Company filed a petition under Article 226
of the Constitution before the Calcutta High Court challenging the vires
of the Act on various grounds.
The Calcutta High Court dismissed
the Writ Petition upholding the validity of the Act.
Ray, J. (as he then
was) held : (1) The appellant has no legal right to maintain the
petition (2) The appellant could not question the validity of the Act
on the ground that its provisions infringed its fundamental rights under
Articles 14, 19, and 31 in view of Article 31A(l) (b) of the Constitution; (3) The West Bengal Legislature had the legislative competence to pass the impugned Act by virtue of Entry 42 of List III of the
Seventh Schedule to the Constitution; ( 4) Entry 25 of List II also
conferred sufficient authority and power on the State Legislature to
make laws affecting gas and gas works; and (5) even if the Act inci-
) .
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ORIENTAL GAS co. v. WEST BENGAL (Chinnappa Reddy, J.)
623
dentally trenched upon any production aspect, the pith and substance
of the legislation was gas and gas-work within the meaning of entry
25 of List IL
A
The Company preferred an appeal to the Supreme Court.
The
question relating to fundamental rights was not raised
before the
Supreme Court. The Supreme Court, while upholding the locus standi
B
of the Company to file the Writ Petition, rejected the contention of
the Company relating to the co111petence of the West Bengal State
Legislature to pass the impugned Act.
The decision of the Supreme
Court was rendered on 5th February, 1962, and is reported in The
Calcutta Gas Company (Proprietary) Ltd. v. The State of West Bengal
and Others(').
C
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 detennining the compensation payable in
respect of the acquisition of the undertaking.
In August 1965, the
D
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 Qriental 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
E
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 determine<! in accordance with the
principles specified in the Schedule".
The schedule referred to in the amended Section 8 (1) (b) was
as follows :
"THE SCHEDULE
[See Section 8 (1) (b)]
Principles fifr determining compensation for acquisition of the under-
'
taking of the company.
Paragraph 1 :-The compensation to be paid by the State Govern
ment to the Company in respect of acquisition of the undertaking
thereof shall be an amount equal to the sum total of the value of the
(1)[1962] Suppl. 3 SC.R. 1.
6-549 SCI/78
F
G
H
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A
B
c
D
E
624
SUPREME COURT REPORTS
(1979] 1 S.C.R.
properties and assets of the Company as on the date of acquisition
of the undertaking of the Company calculated in. accordance with
the provisions of paragraph II Jess the sum total of the liabilities and
obligations of the Company as on that date calculated in accordance
with the provisions of paragraph III, together with the interest on such
amount calculated in accordance with the provisions of paragraph IV.
Paragraph II :-(a) The market value on the date of acquisition
of the undertaking of the company;
(i) of any land or buildings;
(ii) of any plant, machinery or other equipment;
(iii) of any shares, securities, or other investments held
by the Company;
(b) the total amount of the premiums paid by the Company up
to the date of acquisition of the undertaking of the Company in respect of all leasehold properties reduced in the case of each such
premiums by an amount which bears to such premium the same proportion as the expired term of the lease in respect of which such
premium shall have been paid bears to the total term of the lease;
( c) the amount of debts due to the Company on the date of
acquisition of the undertaking of the Company, whether secured or
unsecured, to the extent to which they are reasonably considered to
be recoverable;
(d) the amount of cash held by the. Company on the date of
acquisition of the undertaking of the company, whether in deposit with
a Bank or otherwise;
F
( e) the market value on the date of acquisition of the undertaking
of the company of all tangible assets and properties other than those
falling within any of the preceding clauses.
Paragraph III :-The total amount of liabilities and obligations incurred by the Company in connection with the
G
fomrntion, management and administration of the
undertaking of the Company and subsisting immediately before the
date of acquisition of the undertaking of the company;
II
Provided that any of the properties, assets, liabilities or
obligations of the Company as on the date of acquisition of
the undertaking of the Company shall not include such properties or assets as were added, invested or acquired and such
liabilities or obligations as were incurred in connection with
.....
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<JRIENTAL GAS co. v. WEST BENGAL (Chinnappa Reddy,!.)
625
such addition, investment or acqui;ition by-the-state-Gov:
ernmcnt during the period of management and control of the
undertaking of the company.
·
Paragraph IV :-The interest referred to in Paragraph I
~hall be on the amount mentioned in the said paragraph for
the period commencing from the date of v~sting 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 Berigal 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 Sci:tibn 9(2). The
new
Section 8 (I) ( b) was as follows :
"8(1) (b) In the case of acquisition of the undertaking
of the Company, the compensation payable by the State Government s_hall _be a snm representing eight times the average
net income of the undertaking of th~ Company over a period
of five. complete years preceding the year in which the under-
·taking of the Company has been transferred to the State Gove
ernmen l under clause (a) of Section 4 for the purpose of
management and control.
Explanation :-In this sub-section, "net-annual 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 incidenfal 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, incjuding the remuneration of
Managing Agents, if Jiny,
.
·
· (f) other expenses admissible under the law' for the time
A
B
c
D
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E
F
G
H
A
8
c
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E
F
G
626
SUP~EME COURT REPORTS
[1979] 1 S.C.R.
being in force in the assessment of Indian income-tax
and arising from, and ancillary or incidental to, the
business of the Company".
The amended Section 9(2) provided foT interest on the bonds from the
date of vesting of the Undertaking of the Company under Section 7.
It is thus seen that the provisions of the Oriental Gas Company
Act as originally enacted in 1960 provided for the determination of
compensation by the method of cost less depreciation, or the met11od
of capitalisation and directed the' payment of whichever was less, in the
shape of bonds carrying interest at 3 % from the date of issue of the
bonds.
The Act as amended in 1968 provided for the determination
of compensation on the basis of the full market value of the undertaking and the payment of the compensation in the sh.ape of bonds
carrying interest from the date of the enactment of the Amendment
Act of 1968 i.e. 7th May, 1968. The Act as finally amended in
1970 aud as it now stands provides for the determination of the
compensation by the method of capitalisation and the payment of the
compensation in bonds carrying interest from the date of the acquisition.
The appellant Company is aggrieved by the method of determination of compensation under the Act as amended in 1970 arid has
filed the present Writ Petition in this Court questioning the vires of
Sections 8(1) (b) and 9(2) of the Act.
....
:)~'
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 undertakin_g 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 rumual net
profit was inappropriate as it did not reflect the true earning capacity
of the undertaking. · There were special reasons why the profits were
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ORIENTAL GAS co. v. WEST BENGAL (Chinnappa Reddy, J.) 6 27
low during the two or three years immediately preceding the takeover.
The choice of the multiplier of eight was also not based on any relevant principle. The provision for payment in bonds payable in twenty
years and carrying interest at 3 % per annum at once had the effect of
reducing the compensation in such a manner as not to approximate
to what was determined.
This too was violative of Article 31 (2).
Shri Sen relied upon the decision of this Court in Rust om Cavas jee
Cooper v. Union of India(') and passages from Alfred Jahr's Eminent
Domain, Valuation and Procedure, American Jurisprudence Vol. 27
and American Law Reports 2nd series, Vol. 68.
A resume of Constitutional history and the story of the ding-dong
legal battles that were fought may not be out of place here. It may
help us to understand and, perhaps ev~ to solve the problem before
us.
It will enable us to appreciate the relevance or irrelevance of
the principle specified for determining compensation.
Clauses ( 1)
and (2) of Article 31 of the Constitution, as they stood originally,
were as follows :
"31. Compulsory acquisition of property.-
( 1) No person shall be deprived of his property save by
authority of law.
(2) No property, movable or immovable, including any
interest in, or in any company owning, any commercial or
industrial undertaking, shall be taken possession of or acquired
for public purposes under any law authorising the taking of
such possession or such acquisition, unless the law provides
for compensation for the property taken possession of or
acquired and either fixes the amount of the compensation,
or specifies the principles on whieh, and the manner in which,
the compensation is to be determined and given".
The word 'compensation' occurring in Article 31 (2) was not qualified
by any adjective such as 'just' or 'fair' unlike Section 51 of the Commonwealth of Australia Constitution Act and the 5th Amendment to
the Constitution of America, in both of which provisions, the qualifying
adjective 'just' is used.
Even, so, in Bela Banerjee's case(')
t11e
Supreme Court introduced the concept of a 'just equivalent' and held
that compensation meant 'a just equivalent of what the owner had
(I) [1970] 3 S.C.R. 530.
(2) [1954]
S.C.R. 558.
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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 e1'propriated owner'.
If the principles did not t~e 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
11cquired.
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 Shanti/al Mangaldas & Ors.('),
the decisions in Bela Banerjee's case and Subodh Gopal Bose's(') 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 enquiry was made more
controversial; and apart from the practical difficulties, the
law declared by this Court also placed serious obstacles in
giving effect to the directive principles of State policy incorporated in Art. 39".
So it was that Article 31 was amended by the Constitution 4th AmendE
ment Act in 1955. The second clause of Article 31 as amended by
G
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the Constitution 4th Amendment Act was as follows :
"No property shall be compulsorily acquired or requisitioned save for a puplic purpose and save by authority of a
law which provides for compensation for the property so
acquired or requisitioned and either fixes the amount of the
compensation or specifies the principles on which, and the
manner in which, the compensation is to be determined and
given; and no such law shall be called in question in any
court on the ground that the compensation provided hy that
law is not adequate."
The true effect of the amendment was that the adequacy of the
compensation provided by the law was made non-justiciable.
Again
in the words of Shah, J., in Shanti/al'.< case, "A challenge to a statute
that the principles specified by it do not '.!Ward a just equivalent will
be in clear violation of the Constitutional declaration that the inadequacy
of the compensation provided is not justiciable". The intended effect
(1) [1969] 3 S.C.R. 341.
(2) [1954] S.C.R. 587.
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ORIENTAL GAS co. v. WEST BENGAL (Chinnappa Reddy, J.)
6 29
of the amendment had, however been previously nullified to a large
extent by the decisions in P. Vajravelu Mudaliar v. Special Deputy
Collector, Madras & Anr.(') (p. 614) and the Union of India v. The
Metal Corporation of India Ltd. & Anr.(2) where it was reiterated that
the word 'compensation' signified a. 'just equivalent' of what the owner
has been deprived of.
In Vajravelu's case it was observed (at p. 626)
"The fact that Parliament used the same
expressions,
namely, "compensation" and "principles" as were found in
Art. 31 before the Amendment is a clear indication that it
accepted the meaning given by this Court to those expression&
in Mrs. Bela Banerjee's case.
It follows that a Legislature
in making a law of acquisition or requisition shall provide for
a just equivalent of what the owner bas been deprived of or
specify the principles for the purpose of ascertaining the
'just tquivalent' of what the owner has been deprived of. If
Parliament intended to enable a Legislature to make such a
law without providing for compensation so defined, it would
have used other expressions like 'price' 'consideration' etc."
Having said that, Subba R~o, 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 hy 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 he. 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 though 100
acres \I/ere acquired compensation would be given orily for 50 acres.
Principles so fixing the compensation would be irrelevant.
Subba
Rao, J., summarised the position thus (at p. 629)
"If the Legislature makes a law for acquiring a property
by providing for an illusory compensation or by indicating
the principles for ascertaining the compensation which do not
(1) [1965] I S. C. R. 614.
(2) [1967) 1 S. C. R. 255.
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relate to the property acquired or to the value of such property at or within a reasonable proximity of the date of
:icquisition or the principles are so designed and so arbitrary
that they do no't provide for compensation at all, one can
easily hold that the Legislature made the law in fraud of its
powers.
Briefly stated the legal position is as follows :
If the question pertains to the adequacy of compensation, it
is not justiciable; if the compensation fixed or the principles
evolved for fixing it disclose that the legislature made the
law in fraud of powers in the sense we have explained, the
question is within the jurisdiction of the Court".
In Vajravelu' s case. the compensation to be paid was the value of
the land at the date of the publication of the notification under
the
Land Acquisition Act or an amount equal to the average market value
of the land during the five years immediately preceding such date,
whichever was less.
It was also provided that compensatior. was to
be determined on the basis of the use to which the land was actually
put on the date of publication of the n_otification and not on the basis
of any potential value of the acquired land.
This Court held that
in the context of continuous rise of land prices owing to abnormal circumstances it could not be said that the fixatioo of average price
during the preceding five years was not a relevant principle for ascertaining the value of the land on or about the date of acquisition. It
was also held that though the potential value of the acquired land
was generally an element to be considered in valuing land, the exclusion of such an element from consideration merely related to the inade--
quacy of the compensation and did not constitute a fraud on power
so as to invalidate the provision. The decision amounted to this
that while the principles specified should aim at the ascertainment of
a just cqu'valent, the principles so aimed could not be said to
be
irrelevant merely because the application of some other principles
might have yielded results more favourable to the owner of the acquired property.
G
In the case of Metal Corporation of India & Anr., Subba Rao,
C. J., observed : "The law to justify itself has to provide for the payment of a 'just equh:alent' 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 questioo in a Court of law.
B
The valiu1ty of the principles, judged by the above tests, fall~ within
judicial scrutiny, and if they stand the tests, the adequacy of the product falls outside its jurisdiction". Judging by those tests, the two
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ORIENTAL GAS co. v. WEST BENGAL (Chinnappa Reddy, J.)
631
principles specified for the ward of compensation in the Act impugned
in that case, namely "(i) compelnsation equated to the cost price in
the case of unused machinery in good condition, and (ii) written down
value as understood in the Incometa'{ law as the value of used machinery" were held to be irrelevant to the fixation of the vnlue of
the
machinery on the date of acquisition.
The case of Vajravelu and Metal Corporation of India & Anr.