C. V. K. Rao vs Dentu Bhaskara Rao

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 1072 of 1963

Decision Date: 4 May 1964

Coram: M. Hidayatullah, P.B. Gajendragadkar, K.C. Das Gupta, J.C. Shah, Raghubar Dayal

In the matter titled C. V. K. Rao versus Dentu Bhaskara Rao, the Supreme Court rendered its judgment on 4 May 1964. The decision was reported in the 1965 volume of the All India Reporter at page 93 and in the 1964 volume of the Supreme Court Reports (8) at page 156. The bench comprised Chief Justice M. Hidayatullah, Justice P. B. Gajendragadkar, Justice K. C. Das Gupta, Justice J. C. Shah and Justice Raghubar Dayal. The petitioner in the appeal was C. V. K. Rao and the respondent was Dentu Bhaskara Rao. The appeal, numbered 1072 of 1963, was filed against the judgment and order dated 10 April 1963 of the Andhra Pradesh High Court in Special Appeal No. 52 of 1962. The case concerned the interpretation of section 7(d) of the Representation of the People Act (43 of 1951) and the meaning of the phrase “in the course of trade or business” as it applied to a mining lease. The respondent had obtained a mining lease from the State Government, and clause 21 of that lease reserved to the Government a right of pre‑emptive purchase of the minerals raised by the lessee. While the lease remained in force, the respondent stood for election to the State Legislative Assembly and was elected. The petitioner, who had been the respondent’s closest competitor, filed an election petition challenging the election on the ground that the respondent was disqualified under section 7(d) because of a contract with the Government for the supply of goods.

The Court held that the election petition must be dismissed because the disqualification under section 7(d) is conditioned upon three circumstances: first, the existence of a subsisting contract between the appropriate Government and the candidate; second, that the contract be in the course of the candidate’s trade or business; and third, that the contract involve the supply of goods to that Government. The Court observed that the mining lease, being subsisting, constituted a subsisting contract, and that a contract could itself constitute the commencement of a trade or business; it was not necessary for the candidate to have previously engaged in other transactions of the same kind. However, the Court concluded that the mining lease was not a contract for the supply of goods to the Government. The lease merely gave the Government a right of pre‑emptive purchase, and the lessee could not commence delivery of minerals until the Government issued a notice specifying the quantity and the time for supply. Consequently, the arrangement represented only a reservation of a pre‑emptive right and did not amount to a contract for the supply of goods that could be said to subsist between the parties. The appeal was thus dismissed. Counsel for the appellant were represented by a senior counsel, while counsel for the respondent were represented by two learned advocates.

The judgment dated 4 May 1964 was delivered by Justice Hidayatullah, who presided over the appeal. In that election the respondent, Dentu Bhaskara Rao, had been returned to the Andhra Pradesh Legislative Assembly from the Kakinada constituency. His principal opponent was the appellant, C. V. K. Rao, who finished the closest runner‑up in the poll. Two additional candidates also contested, but each received only a small number of votes and subsequently showed no further political interest. The appellant instituted an election petition challenging the respondent’s election on a number of grounds, one of which alleged disqualification under section 7(d) of the Representation of the People Act, 1951. The respondent had acquired a mining lease from the State of Andhra Pradesh on 13 April 1960, but at the time he filed his nomination paper he had not yet commenced any mining operations under that lease. Relying on the allegation that the respondent possessed a contract with the Andhra Pradesh Government that fell within the prohibition of section 7(d), the appellant objected to the respondent’s nomination. The Returning Officer, however, rejected the objection, concluded that the alleged contract did not disqualify the candidate, and allowed the nomination to stand. Subsequently the Election Tribunal examined the disqualification claim and held that the respondent was indeed disqualified under section 7(d), thereby declaring the election void. On appeal, the High Court of Andhra Pradesh reversed the Tribunal’s decision, and the present appeal was filed on a certificate granted by that High Court. Section 7(d) of the Act provides that a person shall be disqualified for election if a contract exists that was entered into in the course of his trade or business with the appropriate Government for the supply of goods to, or for the execution of works undertaken by, that Government. The mining lease in question was a standard‑form agreement that began with a statement of consideration and, in Parts I to III, set out the area of the lease, a description of that area, and the liberties, powers and privileges that the lessee could exercise, together with the restrictions and conditions applicable to those exercises. Part IV described the liberties, powers and privileges that were reserved to the State Government, while Parts V and VI dealt with the rents, royalties and other related provisions stipulated by the lease. Part VII contained the covenants binding the lessee concerning payment of rents, royalties, taxes and other similar financial obligations imposed by the lease. One particular covenant, clause 21, titled “Right of Pre‑emption,” granted the State Government a right to pre‑empt the minerals located in or upon the leased land or elsewhere under the lessee’s control. The Tribunal interpreted that clause as constituting a contract entered into in the course of the respondent’s trade or business for the supply of goods to the Government. The High Court, however, held that no such contract existed and therefore the respondent was not disqualified under the statutory provision. Consequently, the question of whether the respondent could be disqualified under section 7(d) remained for determination on the merits.

Section 7(d) imposes a qualification that depends upon several conditions. First, there must exist a contract that is actually in force between the appropriate Government and the candidate. Second, that contract must be engaged in the course of the candidate’s trade or business. Third, the contract must, among other things, relate to the supply of goods to that Government. The term “appropriate Government,” as defined, refers to the Government of Andhra Pradesh. The High Court, in reaching its determination, examined clause 21 of Part VII of the lease and concluded that the mining lease did not constitute a contract; it further held that clause 21 did not amount to a contract, and even assuming it were a contract, it was not a contract for the supply of goods to the Government. The appellant challenged this conclusion. For clarity, the court set out the full text of clause 21 at this point. Clause 21 reads as follows: “(a) The State Government shall from time to time and at all times during the said term have the right, to be exercised by notice in writing to the lessee, of pre‑emption of the minerals and all products thereof lying in or upon the lands demised or elsewhere under the control of the lessee; the lessee shall, with all possible expedition, deliver all minerals or products purchased by the State Government under the power conferred by this provision in the quantities, at the times, in the manner and at the price specified in the notice exercising the right. (b) If the pre‑emption right is exercised and a vessel chartered to carry the minerals or products procured on behalf of the State Government or the Central Government is detained on demurrage at the port of loading, the lessee shall pay the demurrage amount according to the charter party terms, unless the State Government is satisfied that the delay arose from causes beyond the lessee’s control. (c) The price to be paid for all minerals or products taken in pre‑emption by the State Government shall be the fair market price prevailing at the time of pre‑emption, provided that, to assist in determining that price, the lessee shall, if required, furnish the State Government with confidential details of quantities, descriptions and prices of the minerals or products, and shall produce, to any officer directed by the State Government, original or authenticated copies of contracts and charter parties entered into for the sale or freightage of such minerals or products. (d) Counsel for the appellant contended that under this clause there existed a standing contract for the supply of goods and that the Government need only issue a notice to the respondent to enforce the supply.”

In this dispute, the respondent alleged that he had been compelled to supply minerals to the Government under the terms of the mining lease. He observed that, from the moment the lease was granted, the Government repeatedly urged the respondent to begin extracting the minerals. Nevertheless, the respondent deliberately refrained from working the mine, apparently to avoid the disqualification provision that could apply to him. According to counsel for the petitioner, the actual operation of the mine was irrelevant; the crucial point was that a standing contract existed for the supply of the minerals to the relevant Government authority.

In response, counsel for the respondent argued that the mining lease could not be characterized as a contract and asserted that it did not fall within the respondent’s trade or business. He further maintained that, even if a contract existed, it was not a contract for the supply of goods. The Court found that the contention that the activity was not part of the respondent’s business was unconvincing. The Court explained that it is not necessary for a party to have an established line of business before a particular agreement is deemed to be “in the course of business.” An agreement may itself inaugurate a business, and the terminology remains appropriate. Since the mining lease remained in effect, any contract that might arise from it was also subsisting, leaving no doubt on that point.

The Court then framed the remaining issue as whether the provisions of clause 21 of the lease created a contract for the supply of goods. This issue was divided into two sub‑questions: first, whether clause 21 could be regarded as a contract at all; and second, whether, if it were a contract, it could be considered a contract for the supply of goods. The Court noted that clause 21 is a standard inclusion in every mining lease and reserves to the Government the right to pre‑empt any minerals that vest in the Government but are allowed to be extracted by the lessee. In this sense, the lease constitutes a contract between the Government and the lessee because there is consideration on both sides, an offer, and an acceptance, generating certain obligations that are contractual, even though some obligations may arise from the conditions of the grant.

The Court explained that without clause 21, the mining lease could not be described as a contract for the supply of goods, because there would be no reference to goods or their supply. Even if the lease were read to satisfy the disqualification provision in section 7(d), clause 21 alone would be sufficient for that purpose. Clause 21 confers upon the Government a right to pre‑empt the minerals and any products thereof located on or around the demised land or elsewhere under the lessee’s control. However, the Court emphasized that this right does not constitute a concluded contract for any goods. The lessee cannot commence delivery of ore to the Government merely by invoking this clause; delivery is permissible only after the Government issues a notice specifying the quantity to be pre‑empted and the time within which the supply must be made. Consequently, the clause does not create an obligation to sell or to deliver, nor does it compel the lessee to supply the minerals absent a formal notice from the Government.

The Court observed that the lessee could deliver the ore only after the Government issued a notice specifying the quantity that was to be pre‑empted and the period within which the supply had to be made. The Court emphasized that the clause did not create any duty on the Government to pre‑empt any quantity of mineral, nor did it obligate the Government to purchase anything at all. Accordingly, there was no compulsory obligation on the Government to buy, and the lessee was not forced to sell unless the Government actually made such a request. In the circumstances, the clause merely preserved the Government’s right to obtain the minerals or their products whenever it chose to exercise that right, and it did so in preference to any other claimant. The Court further noted that, until the Government decided to act and served the required notice, no obligation existed on the lessee to make any deliveries. Although the word “subsists” carries a wide import, the Court held that a contract for the sale of goods could not be said to subsist because a contract requires a clear offer and its acceptance, and the clause amounted only to a reservation of a right, not to the formation of a contract. Even when adopting the most liberal interpretation, the Court found that clause 21 did not give rise to a contract for the supply of goods; rather, it merely reserved to the Government the prior right to purchase the minerals raised by the respondent. The reservation of such a right, the Court explained, did not constitute a contract for the supply of goods that could be said to exist between the parties. Consequently, the Court held that the High Court was correct in overturning the decision of the Election Tribunal. The appeal was therefore dismissed with costs, and the order of dismissal was affirmed.