August 17 v. THE UNION OF INDIA

Shri Purshotta.m TrikumdaA, learned counsel for· the petitioner, ra.i~<.'d before UR the following conten tions: (1) under Art. l9(1)(g) of the Constitution the petitioner has a fundamental right to carry on the busincAs in shares and the notification dated August 31, 1957, and the subsequent notification dated Nonmber 30, 1957, imposed unreasonable restrictions on his said right; (2) the notification dated August 31, 1 S.C.R. SUPREME COURT REPORTS 199 1957, is void inasmuch as it is not sanctioned by the provisions of s. 4 of the Act ; and (3) the condition 2(i)(a) of the said notification classifying members of Amath:i.7 c:'ndhi the Indian Stock Exchange Limited as active mem- hers and members who were not active infringes the Tl« Union of fundamental right enshrined in Art. 14 of the Consti- tution and that as the said condition is not severable the entire notification is bad. Subba Ra9 J. M dh bh . India r96o v .. ' Learned Solicitor-General in addition to contro verting the said contentions pressed on us to hold that as the vfres of the Act was not questioned, the notifi cation issued thereunder could not be questioned by the petitioner on the ground that it contravened one or other of the said fundamental rights. It would be convenient to take first the contention of the learned Solicitor-General as it is in the nature of a preliminary point. He says that as the validity of the Act was not questioned the notification issued in the exercise of the power conferred thereunder cannot also be questioned. There is a fallacy underlying this contention. Under Art. 13(2) of the Constitution, · the Stat!e shall not make any law which takes away or abridges the rights conferred by Part III thereof; and "law" is defined under Art. 3(a) to include a notifica tion. Therefore, the validity of a notification issued by the State, it being law, is as much vulnerable to attack as that of the Act itself on the ground that it' infringes any of the funditmental rights. If an Act is a self-contained one and the notification issued there under only restates the provisions of the Act, the vali dity of the notification cannot obviously be questioned as the validity of its contents were accepted. But if the Act confers a power on the State in general terms and the notification issued thereunder infringes one or other of the fundamental rights, the validity of the Act cannot equally obviously prevent an attack on In the former case . the notification the notification. only reflects the provinions of a valid Act and in the latter it is the notification and not the Aot that infrin- ges the fundamental rights. Take an example of an Act imposing restrictic.ns on the freedom of speech. The Aot authorizes the, State to impose conditions on / 200 SUPREME COURT REPORTS [1961] / 1 60 9 "· India Madlmbha• · S11hba Rao J the said freedom in the interests of security of State. 1:he :'-ct is constitutionally valid .. But, if a notifica Amal/rn/al Gandf;i t10n issuer! under that Act imposes unreasonable rest- rictions infringing the said rights, it is liable to be Tiu Union of challenged on the ground of unconstitutionality. So too, in the instant case s: 4 of the Act empowers the Central Government to iBBue a notification recognising · a stock exchange subject to certain conditions express. ed in general terms. The general terms can compre hend both reasonable and unreasonable restrictions. If the notification imposes unreasonable restrictions-if the contention of the learned counsel for the petition er be accepted, the restrictions imposed would certain ly be unreasonable-it is liable to be set a.side. We cannot, therefore, accept this contention . . Re. (l): Article 19(l)(g) of the Constitution states that every citizen shall have the right to carry on any business; but the State in empowered under cl. (6) of the said Article to make any law i!"posing in the interest of the gen>!ral public reasonable restrictions on the exercise of the. said right. Briefly stated, the argument is that the combined effect of the two noti fications is that the petitioner is driven out of his business of stock exchange in as much as, it is said; they confer a. monopoly on the Stock Exchange, Bom bay, and the rules of the said Stock Exchange exclude any outsider from becoming its member without obtaining a nomination and that too only in the place of an existing member. To put it differently, the argument proceeds that under the rules of the Stock Exchange, Bombay, membership is not thrown open to the public. This leads us to. the consideration of the relevant provisions of the Stock Exchange Rules, Bye-laws and Regulations, 1957. Under r. 3 the membership of the Exchange shall consist of such number of members as the Exchange in genoral meet ing may from time to time determine. It is common case that the membership of the Exchange is not limited. U uder the heading " Election of I\ ew Mem bers", the Rules prescribe the conditions of eligibili ty for election as a member of the Exchange. These Rules adopt the provisions of. r. 8 of the Securities , 1 S.C.R. SUPREME COURT REPORTS 201 1 M v. k h z96o ,, . India bk . ad tu ai Subba Rao ]. Contracts (Regulation) Rules, 1957. The Rules do not contain any limitation on the eligibility of a per- son to be elected as a member such as that the person Amathalal r;andhi should be nominated in the ma, nner provided by the Rules or that he should come only in the vacancy The Union of caused by another member ceasing to be one in one of the ways mentioned thereunder. The words "no per- . son m r. 17 are comprehensive enoug to ta em any outsider seeking for election as a member. Rule 22 provides for an application for admission in the form prescribed 'in Appendix A to the Rules. This rule also does not impose any such limitation. The admis- sion application form in Appendix A is also general in terms and enables any person of India to apply for membership provided he agrees to abide by the con- In the form also there is no ditions imposed therein. such limitation. But it is contended that a fair read- ing of the provisions of rr. 20 and 21 makes it clear that a candidate for admission is confined only to two ca, tegories, viz., (1) a candidate nominated by a mem- ber or a legal representative of a deceased member seeking admission to membership in the place of the deceased ; and (2) a person recommended for admission to membership in the place of a member who has forfeited his right to membership. A careful scrutiny of the Rules does not bear out the contention ; nor do they enable us to cut down the wide amplitude of rr. 17 to 22. Rule 10 says: " vVhen a right of membership is forfeited to or vests in the Exchange under any Rule, Bye-law, or Regulation of the Exchange for the time being in force it shall belong absolutely to the Exchange free of all rights, claims or interest of such member or any per son claiming through such member and the Governing Body shall be entitled to deal with or dispose of such right of membership as it may think fit." Rule 54 is to the following effect: "A member's right of membership shall lapse to and vest in the Exchange immediately he is declared a defaulter." Rule 11 is as follows : 26 .... 202 SGPRE.ME COGRT REPORTS [1961] 196o b Am tho/al Gandh• e 1g1 e un or t ese u es .or a m1ss10n to mem "(a) A member of not less than seven years' standing who desires to resign may nominate a person l" "bl ,. rs 1p of the Exchange as a candidate for admission in his be h" Madhu "' R I d d · · v. • Thi Union of place. India (b) The !!'gal representatives of a deceased mem- ber or his heir8 or the persons mentioned in Appendix Swbb• Rao J. C to these Rules may with the sanction of the Govern ing Boa.rd nominate any person eligible under these Rules for admission to membership of the Exchange as a candidate for admission in tho place of tho dec eased member. In considering such nomination the Governing Board shall be guided so far as pra.ctica ble by the instructions Sl"t out in Appendix C to these Rules." Appendix B gives the nomination forms Nos. I and 2 to be filled by a member or a legal representative, as the ca.so may be, under r. 11 (a) and (b). Now it would be convenient to read rr. 20 and 21. They are as follows: · Rule 20 : " A candidate for admission except a candidate applying for a membership vesting in the Exchange must obtain a nomination in the manner provided in these Rules." Rule 21: "A candidate for admission must be recommended by two members none of whom should be a member of the Governing Boa.rd. The rcoommen ders must have such personal knowledge of the candi date and of his past and present circumstances as shall satisfy the Governing Boa.rd." The argument is that under r. 20 a candidate for a.d miBBion fa.Us under two categories, namely, (l) a candi date who must obtain a nomination in the manner provided in the Rules, i.e., r. ll (a) and (b); and (2) a. candidate applying for a membership vesting in the Exchange; and, therefore, these two categories ex haust the candidates for admission and that when under r. 21 the ea.me words, "a. candidate for admis sion", a.re used they must carry the ea.me meaning as ·· in r. 20, that is, they must be confined only to the two oa.tegories comprehended by r. 20. This argument ap~ars to be plausible and even incontrovertible, if 1 S.C.R. SUPREME COURT REPORTS 203 . v. '96° India M dh bh rr. 20 and 21 are taken out of their setting and cons- trued independently of other rules. But in the setting in which they appear they can bear only one meaning, Ama•h:la~ G:~dhi namely, that r. 20 provides for nomination only in the case of a candidate for admission who requires a Th• Union of nomination in the manner provided by the rule and r. 21 provides, for all the candidates for admission, that they should be recommended by two members Subba Rao f. who have personal knowledge of the candidates. To put it in other words, under the Rules candidates for admission fall under three groups, viz., (l) candidates falling under r. II, (a) and (b); (2) candidates apply- ing for membership vesting in the Exchange; and (3) other candidates. All the three categories of candi- dates must be recommended by two members. But the candidates belonging to the first category shall in addition be nominated in the manner provided by the Rules. We, therefore, hold that the Stock Exchange Rules do not operate as a bar against the petitioner becoming a member of the Stock Exchange subject to the rules governing such application. The petitioner has the right to do business in shares : in spite of the notifications he can still do business in spot delivery contracts. He can apply to become a member of the Stock Exchange subject to the conditions laid down by the Rules. The Act, the validity of which he has not chosen to question, enables the State to give or refuse recognition to any Stock Exchange and it has chosen to give recognition to the Stock Exchange, ·Bombay, subject to the conditions prescribed. The restric- tions, in our view, are not unreasonable, having regard to the importance of the business of a stock exchange in the country's national economy and having regard to the magnitude of the mischief sought to be remedied in the interest of the general public. At another place we have already dealt with the necessity for stringent rules governing this type of business. For the reasons mentioned we reject the first contention. Re. (2) : The second contention also has no merits. The criticism is that condition 2(i) (a) annexed to the notification cannot be supported on the basis of any 204 Sl'PRE:\IE COCHT REPORTS [ 1961] Amafluilal <;a11d/i1 1y60 "'"d"""'"" of the provisions of s. 4 of the Act. Condition 2 (i) reads as follow~: " 'I'h 111 b . em ers 0 . e xc a.nge Limited, Bombay, will be entitled to apply for ~Icm- Th• u"''" ,,f bership of the Stock Exchange, Bombay, provided they fulfil or comply with the following torms and conditions :- t c n 1a.n I toe k E h f h I d. InJ1a S v. Subba Nao _/. (a) they have beon active members of the Indian Stock Exchange Limited, for twelve months immedia tely preceding the 6th August, 1957. Explanation: ·"Active Members" for purpOHf' of this conditfon means members who have themselves transacted business regularly on tho floor of the Indian Stock Exchange Limited either on their own account or on account. of their clients. " To appreciate the argument it is also necessary to read the material pro\'ibions of"· 4 of the Act. Section 4: "(1) If the Central Government is satis fied, after making such inquiry as ma.y be necessary iu this bohalf and after obtaining such further in formation, if any, as it may requirc,- (a) that the rules and bye-laws of a stock ex change applying for registration are in conformity with such conditions as may be prescribed with a view to ensure fa.ir dealing and to protect investors; (b) that the stock e:rnhange is willing to comply with any other conditions (including condition~ as t-0 the number ofmemhers) which the Central Govern ment after consultation with the governing body of the stock exchange aud having regard to the aroa served by t.he AU>ck exchange and its standing and the nature of the securities dealt with by it, may impose for the purpose of carrying out the objects of this Act; and (c) that it would be in the interest of the trade and also in the public interest to grant recognition to the stock exchange; It may grant recognition tot.he stock exchange sub j<'ct to the conditions imposed upon it as aforesaid and in such form as may be prescribed. (2) The conditions which the Central Government 1 S.C.R. SUPREME COURT REPORTS 205 may prescribe under clause (a) of sub-section (1) for the grant of recognition to the stock exchanges may · 1 d ItlC u e, among ot er matters, con 1t1ons re at1ng Aniathalal Gandhi to,- . 1 1 A O< hubha< J . d" . I96° h v. The Unwn of India Subba Rao ]. (i) the qualifications for membership of stock ex- changes; f d d d (ii) the manner in which contracts shall be enter- into an en orce as between members; (iii) the representation of the Central Government on each of the stock exchanges by such number of per sons not exceeding three as the Central Government may nomina.te in this behalf; and (iv) the maintenance of accounts of members and their audit by chartered accountants when ever such audit is required by the Central Government. " The argument proceeds that condition 2(i)(a) enables only the active members of the Indian Stock Ex change Limited to apply for membership of the Stock Exchange, Bombay and that such a conditfon can be imposed only if it amounts to a qualification of mem bership within the meaning of sub-s. (2) of s. 4, as the other conditions in that sub-section are obviously in applicable. It is further pointed out that sub-s. (2) refers back to sub-s. (i)(a) and under that clause the condition imposed must only be that prescribed by the Rules made under the Act and that the condition im posed by the notification is not a condition so pres cribed. There is force in this argument; but, the acceptauce of this contention does not advance the case of the petitioner, for, if the condition is not cover ed by cl. (a) of s. 4(1), it falls under cl. (b) thereof. Under that clause, the Central Government may grant recognition to a stock exchange if the said stock ex change is willing to comply with "any other condi It is said that the other conditions in s. 4 tions". (l)(b) must only be conditions relating to the area served by the stock exchange, its standing and the nature of the securities dealt with by it. This is not what cl. (b) of s. 4(1) says. The conditions under cl. (b) of s. 4(1) no doubt shall he such as may be impose<l by the Government, having regard to the aforesaid three consi<lerations, but they need not necessarily be 206 SUPRE:\fE COURT REPORTS .[1961] 1 1"drn Sflll,a Rao J 1 960 11 -;;; v. The 1:,,;o., of confined only to the said considerations. The Govern- , ment may impose a.ny conditions, no doubt germane Am~/},:1~;"~:;,dh• to the recognition of a stock exchange, after consulta- tion with its governing boa.rd, and having regard to the said considerations. It cannot be said that con- dition 2(i)(a) imposed on the St-0ck Exchange is not a condition germane to its recognition. The record · discloses that the Central Government in recognising the Stock Exchange sought to avoid the consequential hardship on the members of the rival stock exohange and therefore imposed the said condition on tho Stock Exchange, Bombay, as a condition for its recognition. The condition is germane to recognition of the Stock l<;xchangc and is, therefore, a condition within the meaning of "any other conditions" in cl. (b) of sub-s. (I) of s. 4 of tho Act. J Re. (3): Learned counsel for the petitioner advanced a forcible argument questioning the validity of con dition 2(i)(a) of the notification on the ground that it infringed Art. 14 of the Constitution. Elaborating his argument, tho learned counsel stated that the said condition classified members of the Indian Stock Ex change Limited into two groups, one active members and the other who were not active members, and that that olassification was arbitrary and had no reason able relation to the object sought t-0 be achieved by the notification. He fort her pointed out that the defining of active members as those who had themselves trans- 11.cted business regularly on the floor of the Indian Stock Exchange Limited either on their own account or on account of their clients for 12 months immedi ately preceding August 6, 1957, was not only arbitrary a.nd vague but also, if analysed, would lead t-0 anoma lies destructive of any standard of reasonableness. It is alleged in the affidavit filed by the petitioner that from the inception of the Indian Stock Exchange Limited, l!l!l members of the said Stock Exchange were actually trading on the floor of the said Exchange' from time to time but for some reason or the other were not trading during the period of 12 months immediately preceding August 6, 1957; that there were 34 mem bers of the said Stock Exchange who were reguliuly 1 S.C.R. SUPREME COURT REPORTS 207 v. I960 India Subba. Rao J. transacting business on the floor of the said Stock Exchange prior to August 6, 1956, and for some time after August 6, 1956, but not during the entire period Ani;~;.~:~b~:~dhi of 12 months from August 6, 1956 to August 6, 1957; and that there were 24 members of the said Stock The Unfon of Exchange who started transacting business regularly on the floor of the said Stock Exchange some time after August 6, 1956 ansJ. continued to transact busi- ness right upto and after August 6, 1957. It was asked what was the reasonable basis for confining the definition of active · members to those who were carrying orr business during the period of 12 months from August 6, 1956 to August 6, 1957, while exclud- ing the aforesaid thre~ categories who were equally active members and indeed more active than those included in the definition. It was further asked what was the justification for excluding a. member who was an active member for yea.rs before the crucial year and irregularly conducted business on the floor of the Stock Exchange during the crucial year while includ- ing a member who might have been a newcomer or who might have been earlier a nominal member but began to do business regularly only during the said · year. Emphasis was also laid upon the alleged elastic · and indefinite content of the word " regular " and it was suggested that the said word could not possibly afford a precise standard. These are all weighty con siderations and we must confess that there is force in them. But there is the other side of the picture. It is well-settled that a classification must have reason able relation to the object sought to be achieved. The standard of reasonableness is inextricably conditioned by the extent and nature of the evil and the urgency for eradicating the same. The object of the notifica tion is twofold. The main object is to carry out the -purpdse of the Act, namely, to prevent undesirable transactions in securities by regulating the business in them. The subsidiary object is to assuage the hardship that .recognition of only one stock exchange would cause to the members of the other association. Te achieve this twin objeot the classification is ma.do !.et. ween active members and inactive members. While J 208 SlJPRK\lE COCRT. REPORTS [1961] v. · · 1· · ... · · I i96u . . Indw 'l'h 1 J S•thba Ua(l b om ay. on the one. hand the Government found it necessary to exclude the nominal members who would add their Am~:":;~~~~i!-~<.:1;ut1n dead\\·cigl.it. to the recognised associatiou and bring down it.8 efficiency and affect its di:iciplined conduct nc c"'"" of of business, on the other hand it ga>c opportunity to persons who were actively iuterested in the business to b"come regular members of the Stock Exchange, 13 · ere is every JUHt1!wat.zon or exc.u< ing members who had not. beeu taking active interest. in the business, for, as we have already pointed out, the efficient carrying out of the business of the Stock Exchange depends upon the moral stature, high calibre, and genuine and active internst evinced by the members. The active members justified themselves to the preferential treatment by their sustained llltercst in the business whereas the membns who were not acti\·e showed their continued indifference to th.i.t line of business. But the crux of the question i8, what. is the justification for fixing twelve months immcuw.tely preceding August. (i, I957, as the standard for active membership? The Under Secretary to the Govern ment of India, Ministry of Finance, filed an affidavit describing the circumstances whereunder this classifi. It discloses that the ·notification cation wa8 made. was issued after taking into consideration the r"pre. sentations made on behalf of both the Sl-0ck Ex· changes and also the facts pertaining to the course of business conducted by the Indian St.ock Exchange Limited. It also gives the vicissitudes through '-';hich the said Stock Exchange passed from the date of its formation and the circumstance8 under which the membership of that Exchange was divided into full members and associate membern. It points out that the Indian Stock Exchange Limited became moribund in a few v<>ars and to revive its activities it allowed the mcmbe.rs of the East India Chamber of Commerce, by relaxing it.s entrance fee and· security de posit requirements in l!l50.5l and created a new class of Associate J\Iembcrs, which facilitated tho enrolment of hundreds of Associate Membcr8 on payment of & nominal entrance fee ·of Its. 100. The Governmont on a consideration of the necessary data and presumably • l S.C.R. SUPREME COURT REPORTS 209 having regard' to the record of the activities of the various members fixed the activities in the crucial year· l956-57 as the standard of activity for member- Am::,,:~:~b~::dhi ship. r96o There is. a presumption in favour of the State that The Union of· · v. . . India • Subba Rao·]: there is a reasonable basis for the classification. · _Except the mere allegations in the affidavit which are not admitted, the petitioner has not placed before us . any materials to ascertain that any .other members,;. who were regularly doing business on the floor · of the. · Indian Stock Exchange Limited before August 6, 1956, temporarily suspend~d their business for one reason or other over which they had no control. No statement from the accounts has been produced ·to enable us to evaluate the activities of the members before the cr.ucial date so a.s to enable us to form a view ,that really active members. were excluded by the fixing of this period. Nor are we in a position to verify w he ther any of the members excluded were regularly doing business duri_ng a part of the year in continua tion of their business in the earlier period~ We cannot also say that the words "carrying on business regu, larly " are so vague that the parties did not under stand their connotation, for it is admitted that some of the regular members applied for membership of the Stock Exchange, Bombay and most of them were admitted; There is also the "fact that though ~hree years hl!-ve elapsed since the date of the notification no· other member ef th!J Indian Stock Exchange· Limited thought fit to question the notification on the ground that the period fixed was unreasonable and that really active members were excluded f(om membership of .. the Stock Exchange, Bombay. So far as the petitioner · is concerned, he was admittedly not an active member, though he now pretends that he. was doing business is also no ma.tee through other rial-placed before us to support the said assertion. If the ·classification, between'active members and others who were, not, is justifiable-we hold it is..:...th~ ·Government has to draw a line somewhere and to fix a period of activity reasonable in its opinion as a .members. There •7· 210 SL'.PIU~;\fE COURT REPORTS [Hl61] A t • '960 ""Ghai dh the validity of the classification to show " M;ad 1 1 111a11a a v. standard to satisfy the test of" active member". The burden which lies upon the petitio1wr who impoaches that it violates tho guarantee of equal protcctwn has not been n, Fua,;u of discharged. On the material placed before us we can- not say that the p<'riod fixed by the Govornme111. as the standard fur ascertaining tho active mcmberohip n e must ma e it c ear that this finding must be confined only to tho validity of the impugned uotification dated August 31, 1956. · is ar 1trary or·unn•asOIHL e. Suil,a Rao J IHd•a b. 1 k • . August 17. ' I The petition accordingly fails and is di"sruissed with costs. Petition dismissed. :\1/S. ZORASTER AKD CO. v. THE CO:\IMISSlONER OF INCOME TAX, DELHI, AJMEH, RAJASTHAN A~D MADHYA BHARAT (NOW) MADHYA PltADESH. (S. K. DAs, M. HrnAYATULLAn AND .r. C. SHAII, JJ.) Income-lax - Reference -- l'cr.vcr of High Courl tu call for supplemental stalemetit of case-·- Indian Jnco~-tax Act, 1922 (I I of 1922), S. 66(4). The appellant entered into contract with Government for the supply of goods, and in the assessment year 1942-43 Rs. 10.~0.653 and in the assessment year 1943-44. Rs. 17.4),336 were assessed as its income by the lnco1ne-tax Officer. 1'hc sup plies to Govcrnn1ent were made f. o. r. Jaipur by the appellant, and payment \\'as by cheques \vhich \\'ere received at Jaipur. The contention of the appellant v.·as that this income \\'as l'his received at Jaipur outside the then taxable territories. contention was not accepted by the Income-tax Appellate Tri bunal, Delhi. The appellant then applied for a reference to the High Court under s. 66(1) of the Indian Income-tax Act, and by its order dated December 10, 1952, the Tribunal referred the following question for the decision of the High Court. "Whether on the facts and circumstances of the case the profits and gains in res~ct of the sales made to the Government