Shri Ambalal M. Shah And Another vs Hathisingh Manufacturing Co., Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 285 of 1961

Decision Date: 21 August 1961

Coram: K.C. Das Gupta, K.N. Wanchoo, J.C. Shah, Raghubar Dayal

In this matter the parties were Shri Ambalal M. Shah and another as petitioners and Hathisingh Manufacturing Co., Ltd. as the respondent. The case was decided by the Supreme Court of India on 21 August 1961. The judgment was authored by Justice K.C. Das Gupta and the bench comprised Justices K.C. Das Gupta, K.N. Wanchoo, J.C. Shah and Raghubar Dayal. The reported citations are 1962 AIR 588 and 1962 SCR Supl. (3) 171, with subsequent citator references to 1973 SC 389, 1981 SC 818 and others. The statutory provision that formed the basis of the dispute was the Industries (Development and Regulation) Act, 1951, specifically sections 15 and 18A(1)(b).

The factual backdrop, as set out in the headnote, was that the Central Government held the view that the respondent company, an industrial undertaking engaged in the manufacture of cotton textiles, had experienced a substantial decline in its production volume. The Government considered that, given the prevailing economic conditions, there was no justification for such a decline. Consequently, under section 15 of the 1951 Act, the Government issued an order appointing a three‑member committee to conduct a full and complete investigation into the circumstances surrounding the decline. After the committee submitted its report, the Government concluded that the company was being managed in a manner highly detrimental to public interest. Acting on that conclusion, the Government made an order under section 18A of the Act authorising the first petitioner to take over the management of the entire undertaking.

The respondents contested the legality of the section 18A order, arguing that a proper construction of section 18A required that the Government could invoke that power only when the investigation under section 15 had been initiated on the basis of the opinion described in subsection 15(b). They maintained that, in the present case, the investigation had been ordered on an opinion falling under clause (a)(1) of section 15, and therefore the condition for invoking section 18A was not satisfied. The Court examined the language of section 18A(1)(b), which states that the power may be exercised “in respect of which an investigation has been made under section 15.” The Court held that this phrase could not be narrowed by adding the restricting words “based on an opinion that the industrial undertaking is being managed in a manner highly detrimental to the scheduled industry concerned or to public interest.” Accordingly, the Court concluded that the Government’s order under section 18A was valid. The provision empowers the Government to authorise a person to assume management of an industrial undertaking once an investigation under section 15 has been carried out, regardless of the specific opinion that led to the initiation of that investigation, provided the further condition that the Government is of the opinion that the undertaking is being managed detrimentally to the industry or public interest is also satisfied.

The Central Government expressed the view that the undertaking was being managed in a manner highly detrimental to the scheduled industry concerned or to public interest. The matter proceeded as Civil Appeal No. 285 of 1961, an appeal from the judgment and order dated 6 December 1960 of the Gujarat High Court in Special Civil Application No. 434 of 1960. Counsel for the appellants and counsel for the respondents were instructed, and the appeal was heard on 21 August 1961. The judgment was delivered by Justice Das Gupta. This appeal, granted by special leave, raised the question of the proper construction of certain words in section 18A(1)(b) of the Industries (Development and Regulation) Act, 1951. Under section 15 of that Act, the Central Government issued an order appointing a three‑person committee to conduct a full and complete investigation into the circumstances of the case because it was of the opinion that there had been, or was likely to be, a substantial decline in the volume of production of cotton textiles manufactured by the industrial undertaking known as Hathisingh Manufacturing Company Ltd., Ahmedabad, and that, given the prevailing economic conditions, no justification for such a decline existed. After the committee submitted its report, the Central Government, maintaining the opinion that the industrial undertaking was being managed in a manner highly detrimental to public interest, made an order under section 18A of the Act authorising Ambalal Shah, the first appellant, to take over the management of the whole of the said undertaking. In response to that order, the industrial undertaking and its proprietor, who are the two respondents in this appeal, filed a petition in the Gujarat High Court under Article 226 of the Constitution, seeking the issue of writs directing the authorised controller and the Union of India not to take over the management on the basis of the order issued under section 18A. The principal ground advanced in the petition was that, when section 18A(1)(b) is properly construed, the Central Government possesses the authority to make an order only where the investigation undertaken under section 15 was initiated on the basis of the opinion specified in section 15(b)—namely, that the industrial undertaking is being managed in a manner highly detrimental to the scheduled industry concerned or to public interest. It was further urged that, in fact, the committee appointed to investigate had not been directed to examine whether the industrial undertaking was being managed in the manner described above. Other grounds mentioned in the petition, which were abandoned at the time of hearing, included the allegation that the opinion expressed by the Government in the order under section 18A was unsupported by any material in the investigating committee’s report and was therefore arbitrary, capricious and mala fide. On behalf of the Government and the authorised controller it was urged that the question which one of the

The submission of the petitioners that five opinions referenced in section 15 formed the basis of the investigation under that provision was rejected as wholly immaterial. The petitioners also alleged that the committee appointed to investigate had failed to direct its inquiry into whether the undertaking was being managed in a manner highly detrimental to the scheduled industry concerned or to public interest. The Court dismissed this allegation as well, holding that the claim was unsupported and therefore denied.

The High Court, however, arrived at a different conclusion after analysing the proper construction of section 18A(1)(b). It held that, before any order could be issued under that clause, the investigation must have been commenced on the basis of the opinion expressed in section 15(b) of the Act. The Court further accepted the petitioners’ contention that, in fact, no investigation had ever been carried out into the question of whether the undertaking was being managed in a manner highly detrimental to public interest. Consequently, the High Court issued an order setting aside the Central Government’s order dated 28 July 1960 and directing the respondents not to interfere with or take over the management of the first petitioner’s undertaking, namely “Hathisingh Mills”, either by virtue of or in pursuance of that earlier order.

The present appeal was filed against the High Court’s decision. The central issue before the appellate Court was whether the High Court’s view on the construction of section 18A was correct. To frame the dispute, the Court reproduced the relevant portion of section 18A(1), which reads: “If the Central Government is of opinion that— (a) … (b) an industrial undertaking in respect of which an investigation has been made under section 15 (whether or not any directions have been issued to the undertaking in pursuance of section 16), is being managed in a manner highly detrimental to the scheduled industry concerned or to public interest, the Central Government may, by notified order, authorise any person or body of persons to take over the management of the whole or any part of the undertaking or to exercise, in respect of the whole or any part of the undertaking, such functions of control as may be specified in the order ….” The dispute therefore centred on the meaning of the words “an investigation has been made under section 15”.

For the purpose of interpreting that phrase, the Court quoted the language of section 15 itself. Section 15 states: “Where the Central Government is of the opinion that— (a) in respect of any scheduled industry or industrial undertaking or undertakings— (i) there has been, or is likely to be, a substantial fall in the volume of production in respect of any article or class of articles relating to that industry, or manufactured or produced in the industrial undertaking or undertakings, as the case may be, for which, having regard to the economic conditions prevailing, there is no justification; or (ii) there has been, or is likely to be, a marked deterioration in the quality of any article or class of articles relating to that industry or manufactured or produced in the industrial undertaking or undertakings, as the case may be, which could have been or can be avoided; or (iii) there has been, or is likely to be, a rise…” The continuation of this provision was set out in the subsequent portion of the judgment, but the present excerpt stops at the reference to a possible rise, which formed the basis for the discussion of the statutory construction.

Section 15(b) provided that if there was an increase in the price of an article or class of articles belonging to the scheduled industry, or manufactured or produced in the industrial undertaking, and if that increase lacked justification, the Central Government could consider taking action under the Chapter for the purpose of conserving resources of national importance that were used in the industry or in the undertaking, as the case might be. It also authorised the Government, when it perceived that an industrial undertaking was being managed in a manner highly detrimental to the scheduled industry or to the public interest, to order a full and complete investigation into the circumstances of the case by any person or body of persons that it might appoint for that purpose.

The Court observed that subsection 15(b) as originally drafted had been amended in 1955, and it was only after that amendment that the wording described above came into force. The Court further noted that section 16, though mentioned only in passing, allowed the Central Government, once an investigation under section 15 had been commenced or completed, to issue directions to the industrial undertaking concerned in respect of various matters, if the Government deemed such directions desirable.

The Court recorded that section 17 of the original Act had been repealed by Act 26 of 1953. The same amending Act introduced two new chapters, namely Chapter III A and Chapter III B. In Chapter III A, section 18A made provision for an order by the Central Government authorising any person or body of persons to take over the whole or any part of the management of an undertaking. The Court pointed out that the provisions of section 18A had taken the place of the provisions that previously existed in the now‑repealed section 17(1).

The now‑repealed section 17(1) had empowered the Central Government to authorise any person, development council or other body of persons to assume management of an undertaking or to exercise, with respect thereto, such functions of control as might be provided by the order. That power could be exercised only in one class of cases, namely where, after a direction had been issued pursuant to section 16, the Central Government was of the opinion that the direction had not been complied with and that the undertaking was being managed in a manner highly detrimental to the scheduled industry or to the public interest.

The Court explained that the present provision, identified as section 18A, empowered the Government to authorise any person or persons to take over management or to exercise such functions of control as may be specified, in two distinct classes of cases. The first class, set out in clause (a) of section 18A(1), covered situations where the Central Government was of the opinion that directions issued under section 16 had not been complied with by an industrial undertaking. The second class, which was the subject of the present dispute, was described in clause (b) of section 18A(1), and it related to cases where the Central Government was of the opinion that an industrial undertaking was being managed in a manner highly detrimental to the scheduled industry concerned or to the public interest.

In this case, the Court examined the language of clause (b) of section 18A(1) of the Industrial Development (Authority) Act. That clause provides that the Central Government may authorise a person or persons to take over the management of an industrial undertaking or to exercise such specified functions of control as may be listed, if two conditions are satisfied. The first condition is that an investigation has been made under section 15 with respect to that undertaking. The second condition is that the Central Government is of the opinion that the undertaking is being managed in a manner highly detrimental to the scheduled industry concerned or to the public interest. The Court observed that the expression “an investigation has been made under section 15” is not qualified by any reference to the specific opinions set out in section 15(a)(i), 15(a)(ii), 15(a)(iii), 15(a)(iv) or 15(b). In other words, the statute does not tie the power in clause (b) to the particular grounds on which an investigation may be initiated under section 15. Accordingly, the language of the provision simply requires that an investigation under section 15 exist, irrespective of which of the five opinions listed in section 15 prompted that investigation, and that the Government subsequently hold the view that the management of the undertaking is highly detrimental to the scheduled industry or to public interest.

The respondents submitted, and the High Court had accepted, the contention that the phrase “an investigation has been made under section 15” should be read as meaning “an investigation has been made under section 15 based on an opinion of the Central Government that the industrial undertaking is being managed in a manner highly detrimental to the scheduled industry concerned or to public interest.” The respondents argued that the legislature, had it intended to require that additional qualification, would have expressly inserted those words, and that the qualification is nonetheless implied within clause (b). Counsel for the respondents advanced two principal arguments. The first argument asserted that only where the investigation under section 15 is initiated on the opinion enumerated in section 15(b)—that is, where the undertaking is already considered to be managed in a highly detrimental manner—can the investigative report provide the Government with material on which to form the requisite opinion of detrimental management. The Court found no support for this proposition, noting that the statute does not limit the power to cases where the investigation originates from the specific opinion in section 15(b). Thus, the Court rejected the respondents’ interpretation and held that the statutory language of section 18A(1)(b) operates independently of the particular opinion that gave rise to the investigation under section 15.

Section 15(a) of the statute listed four separate opinions that could justify initiating an investigation into an industrial undertaking. The first opinion concerned an unjustified fall in the volume of production, where the economic circumstances did not warrant such a decline. The second opinion related to a deterioration in the quality of any article that could have been avoided. The third opinion addressed an unjustified increase in the price of any article. The fourth opinion involved the necessity of taking action to conserve resources of national importance. The Court observed that, irrespective of which of these opinions prompted the investigation, the inquiry had to examine the quality of the undertaking’s management in the same manner as it would when the investigation was started on the ground that the undertaking was being managed in a manner highly detrimental to the scheduled industry or to public interest. Consequently, a complete investigation could not be limited merely to the specific economic or technical factors named in the sub‑clauses; it also required a thorough assessment of how the management’s conduct contributed to the situation identified under any of the four opinions.

The Court further explained that an investigator, once tasked by the Government under any of the opinions in Section 15(a), was required to address three distinct matters. First, the investigator had to determine whether the Government’s opinion was correct. Second, the investigator needed to identify the causes of the undesirable condition, whether it was an unjustified fall in production, quality deterioration, price rise, or the need to conserve resources, and to ascertain the extent to which the quality of management was responsible for those causes. Third, the investigator was to propose appropriate remedial measures. In exploring the second matter, the investigator might conclude that management bore no responsibility, that another cause was solely responsible, or that management shared responsibility with other factors. The Court found it difficult to understand how an investigator could avoid scrutinising management quality when the investigation was ordered on any of the opinions in Section 15(a). Counsel for the respondent argued that the phrase “for which, having regard to the economic conditions prevailing, there is no justification” in sub‑clause (i) limited the scope of the enquiry to economic conditions alone, and that the investigator should only assess whether the economic conditions justified the production decline and, if necessary, recommend changes to those conditions. The Court rejected this narrow construction, stating that such an interpretation would miss the overall scheme of the legislation, which intended to empower the Government to take suitable action to remedy the undesirable state of affairs identified in the various clauses of Section 15.

In this case, the Court observed that to say otherwise would overlook the entire purpose of the legislation that provides for investigation and subsequent action. The purpose of the legislation is clearly to enable the Central Government to take appropriate measures to remedy the undesirable situation described in the various clauses of section 15. To furnish the Government with the proper material needed to decide what action is required, the legislature authorized the Government to conduct “a full and complete investigation.” Section 18 empowers the person or body appointed to make the investigation to engage one or more individuals possessing special knowledge to assist, and it further confers on the investigating committee all the powers of a civil court under the Code of Civil Procedure for the purpose of taking evidence on oath, enforcing the attendance of witnesses, and compelling the production of documents and other material objects. The Court stressed that the whole scheme would be defeated unless the investigation could be full and complete. An investigation that fails to examine the quality of management of the industrial undertaking cannot be described as full or complete. It was further argued that the phrase “circumstances of the case” limits the investigation to the matter about which the Government has formed an opinion and excludes any other inquiry. Assuming that view, and assuming that the investigator must primarily examine the specific issue that gave rise to the investigation—such as a fall in production or a deterioration in quality—the Court held that this does not prevent the investigator from seeking to determine the causes of the fall in production or the deterioration in quality, and that such inquiry inevitably includes scrutiny of the quality of management. Counsel for the petitioner argued that if an investigation based on one or more of the opinions mentioned in clause (a) of section 15 were sufficient to provide the material on which the Government could decide whether an industrial undertaking was being managed in a manner highly detrimental to the scheduled industry or to the public interest, then clause (b) would be entirely unnecessary. The Court could not accept this submission. It noted that many situations may arise where there is information that justifies forming an opinion that the undertaking is being managed detrimentally to the scheduled industry or public interest, even though there is no material to support an opinion that there has been or is likely to be an unjustifiable fall in production, an avoidable deterioration in quality, an unjustifiable rise in prices, or the need to take action to conserve resources as mentioned in the four sub‑clauses of clause (a) of section 15.

In this case, the Court examined the four sub‑clauses of clause (a) of section 15. It was argued that it would be unfair to require the management, when an investigation has been started based on an opinion described in clause 15(a), to produce evidence concerning the quality of its own management, because the investigator might then be misled. The Court saw no reason for any management to doubt that an investigation could be directed, among other matters, to the question of management quality. The Court observed that the first response of any management faced with an investigation founded on such an opinion would be to demonstrate its efficiency and to argue that, despite the high quality of its management, undesirable conditions were caused by labour misconduct, unsympathetic government action, transport difficulties, or other causes beyond its control. The submission that, except where an investigation is started on the basis of an opinion mentioned in section 15(b), there would be no material for the Government to form an opinion that the undertaking was being managed in a manner highly detrimental to the scheduled industry or to public interest, was therefore rejected. The Court also found the second argument advanced by counsel to be untenable. Counsel suggested that absurd results would follow if the words “investigation has been made under section 16” were interpreted to include investigations based on any of the opinions in section 15(a). When asked to specify the absurd consequences, counsel could only say that an order under section 18A(1)(b) would be unfair because the owner would have no notice that the quality of management was being investigated, effectively condemning a person unheard. That argument rested on the assumption that an investigation started on the basis of any opinion in clause (a) would not examine management quality. The Court had already stated that there is no basis for that assumption. Consequently, the Court concluded that the plain wording used by the legislature, “in respect of which an investigation has been made under section 15,” cannot be narrowed by the restricting phrase “based on an opinion that the industrial undertaking is being managed in a manner highly detrimental to the scheduled industry concerned or to public interest.” Accordingly, the construction applied by the High Court to these words in section 18A(1)(b) was held to be incorrect. The Court then turned to the remaining issue raised, namely whether the investigation had in fact examined the question of whether the undertaking was being managed in a manner highly detrimental to the scheduled industry or to public interest.

On the issue of whether an investigation had actually examined the manner in which the industrial undertaking was being managed, the High Court had reached a decision that was adverse to the appellants. The Court found it difficult to understand how the respondents, after abandoning the argument that the Government possessed no material to form the opinion that the undertaking was being managed in a manner highly detrimental to the scheduled industry or to the public interest, could still maintain that no investigation had been conducted on that specific question. The relevance of determining whether an investigation had been carried out on the management of the undertaking lay solely in demonstrating that the Government might have acted without any material before it or might have acted mala fide. Consequently, if the allegation of mala fide conduct or the claim that the Government lacked material to form its opinion were abandoned, the question of whether an investigation had in fact been conducted on the management of the undertaking would become immaterial.

Nevertheless, the Court was satisfied that the High Court’s view that it had not been established that an investigation had in fact been held on this matter was incorrect. The Court observed that the petition under article 226 alleged that the investigation had not been directed toward any alleged mismanagement of the mills, a claim that was contradicted by an affidavit sworn on behalf of the Union of India. Further, on 10 October 1960, affidavits filed in rejoinder on behalf of the petitioners reiterated that “no question was put which would suggest that the committee was investigating into any mismanagement of the mills.” In response, an affidavit of Mr Thomas de Sa, a member of the investigating committee, was filed on behalf of the Union of India. That affidavit categorically asserted that the committee had not only examined the decline in production of cotton textiles in the industrial undertaking but had also undertaken a full and complete inquiry into the circumstances of the undertaking’s operation, including its management, and had considered whether the undertaking was being managed in a manner detrimental to the concerned industry or to public interest. The High Court had chosen to reject Mr de Sa’s testimony, offering reasons that the Court found wholly insufficient. The record showed that during the hearing the Advocate‑General had requested additional time to file an affidavit, preferably of Mr P H Bhuta, who was the principal official member of the investigating committee, but ultimately filed the affidavit of Mr de Sa instead of that of Mr Bhuta. The High Court appeared to place weight on the fact that Mr Bhuta was an independent member of the committee while Mr de Sa was a government officer, a distinction the Court considered improper.

De Sa was a civil servant of the Government of India and his statement was held to be open to suspicion. In the view of the Court, such a suspicion merely because the witness occupied a high public office could not be justified. The Court observed that De Sa was a member of the investigating committee on the same footing as Mr Bhuta and therefore possessed no lesser competence to give evidence on the matters under consideration. It was deemed inappropriate to question his honesty solely on the basis of his position as a Union officer. The Court further noted that the High Court had apparently overlooked the fact that the questionnaire attached as Annexure X to the affidavit of the second respondent, Rajendra Prasad Manek Lal, contained several questions that unmistakably showed that an enquiry into the quality of management of the industrial undertaking had been undertaken. A factor that seemed to influence the High Court’s reasoning was the observation that the report of the committee, which the learned judges correctly identified as the best evidence of an investigation into the management of the undertaking, had not been produced by the Union of India when the petitioners, represented by I & Nanavati, asked for it. The Court pointed out that the High Court judges had not directed, nor appear to have requested, the Advocate‑General to produce the report for their inspection, and that no written application for the production of the document had been filed on behalf of the petitioners. Consequently, the Court found it unfair to infer a negative conclusion against the Union of India merely because an informal request by the petitioners’ counsel had not been honoured.

In view of the developments in the lower court, the Court asked counsel for the appellants whether the report could be produced before it. The counsel promptly produced the report, and after examining the relevant sections dealing with the question of management, the Court read those portions aloud so that the respondents’ counsel could understand the exact findings. The report stated that the management of the mills was in the hands of a young and inexperienced person, that the committee opined the present manager was incapable of handling the affairs of the mills, and that the existing managing agents were unable to invest any further. The presence of such opinions in the report was held to be sufficient proof that an investigation into the quality of management had indeed been conducted, confirming the assertions made by Mr De Sa. Accordingly, the Court concluded that the High Court’s view that no investigation had been undertaken into the management of the undertaking was erroneous. The Court therefore held that the respondents were not entitled to any writ directing the appellants to refrain from giving effect to the Government’s order under section 18A(1)(b). As a result, the appeal was allowed, the order of the High Court directing the issue of the writ was set aside, and the appellants were awarded costs both in the appellate court and at the lower level.

The Court issued a writ and an order directing that the application filed under article 226 of the Constitution be dismissed. In doing so, the Court expressly stated that the petition seeking relief under that constitutional provision would not be permitted to proceed. Accordingly, the Court ordered that the costs of the proceedings be awarded to the appellants. The award of costs was specified to cover both the costs incurred in the present case and the costs incurred in the lower court. By granting the appellants their costs in both forums, the Court ensured that the financial burden of the litigation would fall on the opposing party. The Court further concluded that the appeal filed by the appellants was allowed. In other words, the Court affirmed the appellant’s position and granted the relief sought on appeal. This final direction encompassed both the dismissal of the article 226 application and the allocation of costs in favor of the appellants, thereby providing a complete resolution of the matters raised in the appeal.