Full Judgment Text
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PETITIONER:
UNION OF INDIA
Vs.
RESPONDENT:
THE METAL CORPORATION OF INDIA LTD. & ANR.
DATE OF JUDGMENT:
05/09/1966
BENCH:
RAO, K. SUBBA (CJ)
BENCH:
RAO, K. SUBBA (CJ)
SHELAT, J.M.
CITATION:
1967 AIR 637 1967 SCR (1) 255
CITATOR INFO :
R 1968 SC1138 (60)
O 1969 SC 634 (1,18,30,49,50)
RF 1970 SC 564 (97,202)
RF 1973 SC1461 (601,709,1175,1756,1979,1980,2
E&R 1978 SC 215 (15)
RF 1979 SC 248 (10,13,14)
RF 1980 SC1955 (29)
RF 1986 SC 468 (28,30)
ACT:
Constitution of India, 1950, Art. 31(2)-Law for compulsory
acquisition laying down Principles of compensation-Test for
constitutional validity-Metal Corporation of India
(Acquisition of Undertaking) Act (44 of 1965)-If ultra
vires.
HEADNOTE:
The Metal Corporation of India (Acquisition of Undertaking)
Act, 1965, was enacted for acquiring in the public interest,
the undertaking of the Metal Corporation of India. The Act
provided that the Corp-oration was to vest in the Central
Government on the commencement of the Act; and that in the
absence of an agreement between the Government and the
Corporation, the compensation payable to the Corporation was
to be an amount equal to the sum total of the value of the
properties and assets of the Corporation on the date of the
commencement of the Act calculated in accordance with the
provisions of Paragraph 11 of the Schedule to the Act, less
the liabilities on -the said date, calculated in accordance
with the provisions of Paragraph III of the Schedule. One
of the clauses laying down principles of compensation, viz.,
clause (b) of para 11 is in two parts. The first part
provides for the valuation of plant, machinery or other
equipment which has not been worked or used and is in good
condition, and the second part provides for the valuation of
any other plant, machinery or equipment. The former have to
be valued at the actual curt incurred by the Corporation in
acquiring them ’and the latter, at the writtendown value
determined in accordance with the provisions of the Income-
of the constitutional validity of the Act.
HELD : The Act contravened Art. 31(2) of the Constitution
and was therefore void. [265 C]
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Under Art. 31(2), no property shaft be compulsorily acquired
except under -a law which provides for compensation and
either fixes the amount of compensation or specifies the
principles on which and the manner in which the compensation
is to be determined and given. If the compensation is
illusory or if the principles prescribed are irrelevant to
the value of the property at or about the time of its
acquisition, the law is bad. The law, to justify itself,
has to provide for the payment of a "just equivalent" to the
property acquired, or lay down principles which are not
arbitrary but which are relevant to the fixation of
compensation. It is only when the principles stand this
test, that the adequacy of the resultant compensation falls
outside judicial scrutiny under the second limb of Art.
31(2). In the instant case, the two principles laid down in
cl. (b) of Para 11 of the Schedule are irrelevant to the
fixation of the value of the machinery as on the date of
acquisition. In the case of unused machinery, if it was
Purchased in 1950 for Rs. 100 and, for some reason, had not
been used in the working of the Undertaking but had been
maintained in good condition, it may cost Rs. 1000 in 1965.
A compensation of Rs. 100 for that machinery could not be
said to be -a "just equivalent" of it. Similarly, in the
case of used machinery, if it was purchased in 1950 for Rs.
1000,
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the aggregate of all the depreciation allowances made year
after year may exhaust the sum of Rs. 1000 in ten years,
with the result that, under the Income-tax Act, the assessee
will not be entitled to any depreciation after the tenth
year. It could not, however, be said that after the tenth
year, the machinery had no value and that the owner was not
to be given any compensation. Indeed, such a machinery,
because of subsequent rise in prices, may be sold in 1965
for Rs. 10,000. Further the constitutional invalidity of
cl. (b) of Para II of the Schedule affect& -the totality of
the compensation payable; for, machinery is the major part
of the undertaking, the entire Undertaking is acquired as a
unit, and, in the context of compensation for the entire
Undertaking, the clauses of Para H of the Schedule to the
Act are not severable. Therefore, the mere fact that in
regard to some parts of the Undertaking, the principles laid
down in Para H provide for compensation does no affect the
question, especially when it has not been shown that the
working out of any one or more of the principles would give
a higher compensation to some parts of the Undertaking so
that the excess paid under one head would offset the
deficiency under another head. [261 F-H; 262 B; 264 B-C, F-
H; 265 A-El
Vajravelu v. Special Deputy Collector, [1965] 1 S.C.R. 614
and Jeejeebhoy v. Assistant Collector, [1965] 1 S.C.R. 636,
followed.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1222 of
1966.
Appeal from the judgment and order dated March 14 1966
Appeal of the Punjab High Court (Circuit Bench), at Delhi in
Civil Writ No. 832-D of 1965.
S. V. Gupte, Solicitor-General, N. S. Bindra, R. H. Dhebar
and B. R. G. K. Achar, for the appellant.
M. C. Setalvad, B. C. Dutt, Santosh Chatterjee, B. Partha-
sarathy, 0. C. Mathur, and Ravinder Narain, for respondent
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No. 1.
B. C. Dutt, Santosh Chatterjee, Anand Prakash, 0. C.
Mathur -and Ravinder Narain, for respondent No. 2.
The Judgment of the Court was delivered by
Subba Rao, C. J. 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.
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
257
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.
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,
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(2) Notwithstanding that separate valuations
are calculated under the principles specified
in the Schedule in respect of the several
matters referred to therein, the
258
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 paragraph 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 paragraph 111.
Paragraph II.-(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 worked or used
and is in good condition and the written-down
value (determined in accordance with the
provisions of the Income-tax Act, 1961 (XLIII
of 1961), of any other plant, machinery or
equipment;
(c) the market value of any shares,
securities or other investments held by the
company;
(d) the total amount of the premium paid by
the company in respect of all leasehold
properties reduced in the case of each such
premium 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;
(e) the amount of debts due to the company,
whether secured or unsecured, to the extent to
which they are reasonably considered to be
recoverable.
(f) the amount of cash held by the company,
whether in deposit with a bank or otherwise;
(g) the value of all tangible assets and
properties other than those failing within any
of the preceding clauses.
Paragraph III.-The total amount of liabilities
and obligations incurred by the company in
connection with
259
the formation, management and administration
of the undertaking and subsisting immediately
before the commencement of this Act."
The gist of the said provisions may be given thus. The Act
was made to acquire in public interest the undertaking of
the Corporation, On the commencement of the Act, the
undertaking was transferred and vested in the Central
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Government. Under s. 10 of the Act, the Government shall
pay compensation to the undertaking as a whole: but, in the
absence of an agreement between the Government and the
Corporation, the compensation payable to the Corporation has
to be ascertained under the principles specified in the
Schedule in respect of the several matters referred to
therein. Paragraph 1 of the Schedule lays down the manner
in which the compensation to be paid to the Corporation for
the acquisition of the undertaking is to be ascertained.
The said compensation shall be an amount equal to the sum
total of the value of the properties and assets of the
Corporation on the date of the commencement of the Act
calculated in accordance with the provisions of paragraph It
less the liabilities on the said date calculated in
accordance with the provisions of paragraph III of the
Schedule. Broadly, the said paragraph lays down the
principles for ascertaining the value of lands, buildings,
machinery and equipment, amounts due to the undertaking and
other tangible assets and properties. The different clauses
of the paragraph adopt different principles for valuation.
But what is important for the present purpose is the
principle embodied in cl. (b) of para II. It is in two
parts: the first provides for the valuation of plant,
machinery or other equipment which has not been worked or
used and is in good condition, and the second provides for
the valuation of any other plant, machinery or equipment.
The former has to be valued at the actual cost incurred by
the Corporation in -acquiring the same and the latter at the
writtendown value determined in accordance with the
provisions of the Indian Income-tax Act, 1961.
The High Court held, on a construction of the said
provisions, that the principle contained in cl. (b) of
paragraph 11 of the Schedule to the Act in respect of
machinery etc. "cannot be called relevant to the
determination of ’just equivalent’, as it takes no notice of
the notorious fact that prices have been steadily rising
during the past several years, particularly of imported
machinery and plant". It also held, "that depreciation rule
does not even pretend to determine the actual depreciation
in a particular case and it is obvious that such
depreciation has no real relationship with the actual value
of any machinery at any particular point of time". On that
reasoning, it came to the conclusion, having regard to the
decision of this Court in Vajravelu v. Special Deputy
Collector(1) that the said provision in respect of machinery
did.
(1) [1965] 1 S.C.R. 614.
260
not lay down a principle for fixing compensation i. e., a
just equivalent to the machinery acquired.
The reasoning of the High Court was attacked by the learned
Additional Solicitor-General on the ground that it did not
appreciate the true scope of the said decision of this Court
and that, in any view, it went wrong in applying the
principle of the said decision to the provisions of the Act.
He contended that the Act laid down the broad principle that
compensation shall be paid for the entire undertaking as a
unit, but provided different modes for the ascertainment of
the value of different parts thereof in such a way that the
deficiency in the valuation of one part was offset by the
liberal valuation of the other part. In that view, he
contended, the Act embodied a principle relevant to the
ascertainment of compensation for the undertaking acquired
and, therefore, the product worked out under the said
principle pertained only to the realm ,of adequacy which was
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beyond the ken of judicial review. He added that
compensation in Art. 31 of the Constitution meant that
cornpensation which was regarded as just in the context of
public acquisitions and that test was satisfied in the
present case.
Mr. M. C. Setalvad, learned counsel for the respondents,
contended that though under the Act compensation was to be
given to the undertaking as one unit, the Act laid down
principles for arriving at the valuation of the parts to
arrive at the valuation of the whole and that, therefore,
every such principle should stand the test laid down by this
Court. So judged, the argument proceeded, both the
principles laid down in cl. (b) of para 11 of the Schedule
had no nexus to the ascertainment of compensation for the
machinery acquired, for in the case of unused machinery, its
cost price was the guide and in the case of used machinery
its written-down value was the criterion and that both the
methods were arbitrary.
We find it difficult to appreciate the arguments of the
learned Solicitor-General. It is true that under s. 10 of
the Act the Central ,Government shall pay compensation for
the acquisition of the undertaking to the Corporation and
the said compensation arrived at in the manner prescribed in
the Schedule to the Act shall be ,deemed to be a single
compensation to be given to the undertaking as a whole. But
it will be noticed that though a single compensation for the
undertaking is given, the said compensation shall be deter-
mined in accordance with the principles specified in the
Schedule. Under the Schedule, the compensation for the
entire undertaking shall be the amount equal to the sum
total of the value of the properties and assets of the
Corporation calculated in accordance with the provisions of
para II of the Schedule. Under the said para 11, different
principles are laid down for ascertaining the value of
different parts of the undertaking. If all the said
principles laid ,down in para 11 of the Schedule do not
provide for the just equivalent
261
of all the parts of the undertaking mentioned therein, the
sum total also cannot obviously be a just equivalent of the
undertaking. So too, if some of them do not provide for a
just equivalent and others do so, the sum total cannot
equally be a just equivalent to the undertaking. In the
case of the undertaking in question, the machinery is the
most valuable part of the undertaking. Apropos the unused
machinery in good condition, how can the price for which the
said machinery was purchased years ago possibly represent
its price at the time of its acquisition? A simple
illustration will disclose the irrelevance of the principle.
Suppose in 1950 a machinery was purchased for Rs. 100 and,
for some reasons, the same has not been used in the working
of the undertaking but has been maintained in good
condition. That machinery has not become obsolescent and
still can be used effectively. If purchased in open market
it will cost the owner Rs. 1,000. A compensation of Rs. 100
for that machinery cannot be said to be a just equivalent of
it. It is common knowledge that there has been an upward
spiral in prices of the machinery in recent years. The cost
price of a machinery purchased about ten years ago is a
consideration not relevant for fixing compensation for its
acquisition in 1965. The principle must be such as to
enable the ascertainment of its price at or about the time
of its acquisition. Nor the doctrine of written-down value
accepted in the Income-tax law can afford any guide for
ascertaining the compensation for the used machinery
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acquired under the Act. Under the general scheme of the
Income-tax Act, the income is to be charged regardless of
the diminution in the value of the capital. But the rigor
of this hard principle is mitigated by the Act granting
allowances in respect of depreciation in the value of
certain assets such as machinery, buildings, plant,
furniture etc. These allowances are worked out on a
notional basis for giving relief to the income-tax assessee.
This artificial rule of depreciation evolved for income-tax
purposes has no relation to the value of the said assets.
To illustrate: a machinery was purchased in the year 1950
for Rs. 1,000. The aggregate of all the depreciation
allowances made year after year for ten years may exhaust
the sum of Rs. 1,000 with the result, after the tenth year,
the assessee will not be entitled to any depreciation. From
this it cannot be said that after the tenth year the
machinery has no value. Indeed, a machinery purchased for
Rs, 1,000 in 1950, because of subsequent rise in. prices may
be sold in 1965 for Rs. 10,000. But the application of the
principle laid down in cl. (b) of para 11 of the Schedule to
the Act in regard to used machinery gives the owner no
compensation at all. Yet, the Government takes the
machinery worth Rs. 10,000 gratis. This illustration
exposes the extreme arbitrariness of the principle. It is,
therefore, manifest that the two principles of valuation
embodied in cl. (b) of para II of the Schedule to the Act
are not relevant to the fixing of compensation for the
machinery at. the time of its acquisition under the Act.
The argument, of the
262
learned Additional Solicitor-General that the working out of
all the principles in respect of different parts of the
undertaking would result in a product which would fairly
represent, in the context of public acquisitions, the "just
equivalent" to the undertaking acquired is purely based on a
surmise for, it is not shown that the working out of any one
or more of the principles would give a higher compensation
to some parts of the undertaking so that the excess paid
under one head would offset the deficiency under another
head. Nor can the doctrine of inherent worth of a machinery
has any relevance in the matter of giving compensation for
its acquisition at a particular point of time, for the
simple reason that the worth of an article depends upon the
market conditions obtaining at the time of its acquisition.
It is impossible to predicate, irrespective of such
conditions, that a particular machinery has a fixed value.
for all times.
Four decisions of this Court laid down the principles
applicable to the present case. Indeed, but for the said
decisions, we would have posted this case before a
Constitution Bench of five Judges. But, as this appeal
involves only the application of the construction put upon
Art. 31 of the Constitution by this Court in the said
decisions, we did not resort to that course. The first of
them is The State of West Bengal v. Mrs. Bela Banerjee (1).
There, the validity of the West Bengal Land Development and
Planning Act, 1948 was under scrutiny. Section 8 thereof
provided that compensation to be awarded for compulsory
acquisition to owners of land was not to exceed the market
value as on December 31, 1946. This Court held that the
said Act was ultra vires the Constitution and void under
Art. 32(2) thereof. In that context, Patanjali Sastri,
C.J., observed:
"Turning now to the provisions relating to
compensation under the impugned Act, it will
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be seen that the latter part of the proviso to
section 8 limits the amount of compensation so
as not to exceed the market value of the land
on December 31, 1946, no matter when the land
is acquired. Considering that the impugned
Act is a permanent enactment and lands may be
acquired under it many years after it came
into force, the fixing of the market value on
December 31, 1946, as -the ceiling on
compensation, without reference. to the value
of the land at the time of the acquisition is
arbitrary and cannot be regarded as due
compliance in letter and spirit with the
requirement of article 31(2)."
The above decision was followed by this Court in State of
Madras v. D. Namasivaya Mudaliar(2). There the respondents
were owners of certain lands which were to be compulsorily
acquired under
(1) [1954] S.C.R. 558, 564.
(2) [1964] 6 S.C.R. 936, 945
2 63
Madras Lignite (Acquisition of Land) Act, 1953. The Act
came into force on August 20, 1953, before Art. 31 of the
Constitution was amended by the Constitution (Fourth
Amendment) Act, 1955. By the said Act compensation for the
acquisition of lignite-bearing bands under the Land
Acquisition Act was to be assessed on the market value of
the land prevailing on August 28, 1947, and not on he date
on which the notification was issued under s. 4(1) of the
-and Acquisition Act. It also provided that in awarding
compensation, the value of non-agricultural improvements
commenced since April 28, 1.947 would not be taken into
consideration. This Court held that the said Act was bad,
because it contravened Art. 31(2) of the Constitution, as it
stood before the Constitution (Fourth Amendment) Act, 1955.
This Court, speaking through Shah, J., observed:
"Assuming that in appropriate cases, fixation
of a date anterior to the publication of the
notification under s. 4(1) for ascertainment
of market value of the land to be acquired,
may not always be regarded as a violation of
the constitutional guarantee, in the absence
of evidence that compensation assessed on the
basis of market value on such anterior date,
awards to the expropriated owner a just
monetary value of his property at the date on
which his interest is extinguished, the
provisions of the Act arbitrarily fixing
compensation based on the market value at a
date many years before the notification under
s. 4(1) was issued, cannot be regarded as
valid."
Then the learned Judge proceeded to state:
"To deny to the owner of the land compensation
at rates which justly indemnify him for his
loss by awarding him compensation at rates
prevailing ten years before the date on which
the notification under s. 4(1) was issued
amounts in the circumstances to a flagrant
infringement of the fundamental right of the
owner of the land under Art. 31(2) as it stood
when the Act was enacted."
These two decisions turned upon the construction of Art.
31(2) of the Constitution before the Constitution (Fourth
Amendment) Act, 1955. These cases laid down two
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propositions: (1) "Compensation" under Art. 31(2) of the
Constitution means a "just equivalent" of what the owner has
been deprived of ; and (2) the value of land at an anterior
date is presumed to be no compensation within the meaning of
the said Article. After the Constitution (Fourth Amendment)
Act, 1955, this Court had to construe in two decisions he
amended provision of Art. 31(2) vis-a-vis the expression
"compensation" found therein. The first decision is that in
Vajravelu
264
v. Special Deputy Collector(1). There, this Court
observed at p. 625-626:
"A scrutiny of the amended Article discloses
that it accepted the meaning of the
expressions "compensation" and "principles" as
defined by this Court in Mrs. Bela Banerjee’s
case(2)."
.lm0
And it held that, if the compensation is
illusory or if the principles prescribed are
irrelevant to the value of the property at or
about the time of its acquisition, it can be
said that the Legislature committed a fraud on
power and, therefore, the law is bad. One of
the illustrations given at p. 627 is relevant
to the present enquiry and that is as follows
:
if a law lays down principles which are not
relevant’ to the property acquired or to the
value of the property at or about the time it
is acquired, it may be said that they are not
principles contemplated by Art. 31(2) of the
Constitution. If a law says............ that
though it (house) is acquired in 1960 its
value in 1930 should be given....... the
principles do not pertain to the domain of
adequacy but are principles unconnected to the
value of the property acquired."
Applying these principles, this Court in Jeejeebhoy v.
Assistant Collector(3), held that the fixation of an
anterior date for the ascertainment of the value of the
property acquired without reference to any relevant
considerations which necessitated the fixing of an earlier
date for the purpose of ascertaining the real value is
arbitrary. On that ground this Court held that the Land
Acquisition (Bombay Amendment) Act, 1948, did not provide
for payment of just equivalent of what the owner was
deprived of, as it provided for the ascertainment of
compensation on the basis of the value of lands acquired as
on January 1, 1948 and not as on the date on which the
s. 4 notification under the 1894 Act was issued.
The relevant aspect of the legal position evolved by the
said decisions may be stated thus: Under Art. 31(2) of the
Constitution, no property shall be compulsorily acquired
except under a law which provides for compensation for the
property acquired and either fixes the amount of
compensation or specifies the principles on which and the
manner in which compensation is to be determined and given.
The second limb of the provision says that no such law shall
be called in question in any court on the ground that the
compensation provided by the law is not adequate. If the
two concepts, namely, "compensation" and the jurisdiction of
the court are kept apart, the meaning of the provisions is
clear. The law to
(1)[1965] 1 S.C.R. 614.
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(2) [1954] S.C.R. 558.
(3) [1965] 1 S.C.R. 63 6.
265
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
questioned 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. Judged by the said
tests, it is manifest that the two principles laid down in
cl. (b) of Para 11 of the Schedule to the Act, 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, are irrelevant to the fixation of the value of
the said machinery as on the date of acquisition. It
follows that the impugned Act has not provided for
"compensation" within the meaning of Art. 31(2) of the
Constitution and, therefore, it is void.
The mere fact that in regard to some parts of the
undertakings the principles provide for compensation does
not affect the real question, for, machinery is the major
part of the undertaking and,, as the entire undertaking is
acquired as a unit, the constitutional invalidity of cl. (b)
of Para 11 of the Schedule to the Act affects the totality
of the compensation payable to the entire undertaking. In
the context of compensation for the entire undertaking, the
clauses of Para 11 of the Schedule to the Act are not
severable. In the result, the Act, not having provided for
compensation, is unconstitutional and the conclusion arrived
at by the High Court is, correct.
The. appeal fails and is dismissed with costs.
V.P.S.
Appeal dismissed.
266