The Keshav Mills Co. Limited And Another Petitioners v. Union Of India & Others S

Hardayal Hardy, C.J:— The following question of law has been referred to a Full Bench.

“Whether in view of Rule 5 of the Investigation of Industrial Undertakings (Procedure) Rules 1967 providing for an opportunity of hearing before the investigator and the absence of any specific provision either in the Act or in the Rules for supplying a copy of the investigator's report to the management, the taking over of the industrial undertaking without supplying a copy of the investigator's report is vitiated ?”

The question relates to a textile mill owned by Keshav Mills Company Limited, Petlad. The company was incorporated in the year 1935 and has over the years been yielding rich dividends and has been paying large sums of money by way of capital refund and bonus payment.

The petitioners claim that the years 1966, 1967 and 1968 were years of grave crisis for the Textile Industry in India as a whole and out of 500 and odd textile mills nearly 80 of them closed down during those years. About 12 of such textile mills were in the State of Gujarat, one of them being the mill run by the company. During these years the company suffered heavy losses aggregating to Rs. 56,74,985 and there was an un-provided depreciation of Rs. 15,13,160.

In order to resume the working of its mill the company required at least Rs. 20,00,000 as margin money for its working capital. It therefore approached the Bank of Baroda for a loan of this amount. The bank agreed to advance the money on certain securities, one such security being the guarantee given by the Gujarat State Textile Corporation Limited. A scheme under Section 391 of the Companies Act, 1956 was thereupon filed in the Gujarat High Court, but between the filing of the scheme and its acceptance by the various interests concerned the Government of India purported to make an order dated 31st May 1969 which was published in the Gazette of India, Part II, Section 3, Sub-section (ii) dated 7th June, 1969. This order was made in exercise of the powers conferred by Section 15 of the Industries (Development and Regulation) Act, 1951 which will hereafter be referred to as the Act.

The Investigation Committee submitted its report to the Central Government in January 1970 expressing the view that the closure of the mill was due to the following reasons:—

“(i) Accumulated losses wearing out the capital and adversely affecting the capital of the money.

(ii) timely action for renovation of the old machinery had not been taken.

(iii) inefficient management.

(iv) Non-availability of qualified technical staff for running the mill.

(v) Low production which led to high costs and idle capacity during the last three to four years of the working of the mill being between 25 to 30 per cent.”

After considering the said report, a copy of which was however not furnished to the company, the Central Government decided to take over the said mill under Section 18A of the Act. Meanwhile the petitioners were informed in June 1970 that the company's application for furnishing guarantee to the Bank of Baroda was being treated as dropped. The petitioners wanted the Central Government to reconsider the said decision and it is their case that in August 1970, the petitioner No. 2 was told by the concerned Minister that if he could procure guarantee for the amount of Rupees Twenty Lacs within a period of four weeks, re-open the mill and start functioning smoothly the mill would not be taken over.

It appears that during this interval there was nationalisation of Banks and it became difficult for the petitioners to arrange for the loan and the securities. On 24th November 1970 an order was passed under Section 18A which was to be published in the Gazette of India Extraordinary, Part II, Section 3, Sub-section (ii) dated 24th November, 1970. The material portion of the order is re-produced below:—

“S.O/18A/INDRA/70. Whereas the Central Government is of the opinion that the Keshav Mills Co. Ltd., Petlad, an industrial undertaking in respect of which an investigation has been made under Section 15 of the Industrial (Development and Regulation) Act, 1951 (65 of 1951), is being managed in a manner highly detrimental to public interest;

Now, therefore, in exercise of the powers conferred by Section 18A of the said Act, the Central Government authorises the Gujarat State Textile Corporation (hereinafter referred to as authorised Controller) to take over the management of the whole of the said undertaking, namely, the Keshav Mills Co. Ltd. Petlad, subject to the following terms and conditions, namely:—

(i) The Authorised Controller shall comply with all directions issued from time to time by the Central Government;

(ii) The Authorised Controller shall hold office for five years from the date of publication in the official gazette of this notified order;

(iii) The Central Government may terminate the appointment of the Authorised Controller earlier if it considers necessary to do so.

This order will have effect for a period of five years commencing from the date of its publication in the official gazette.”

On 15th December, 1970 the petitioners filed a writ petition in this Court challenging the above mentioned order on various grounds. In the petition, Union of India to be served through Secretaries of the two Ministries of Industrial Development, and Foreign Trade and Supply, was impleaded as respondent No. 1. Gujarat State Textile Corporation Limited and its Assistant Secretary, Shri R.C Bhatt, were impleaded as respondents 2 and 3.

In the affidavits filed in opposition to the writ petition some of the contentions and facts alleged by the petitioners have been controverted but when the case was argued before S. Rangarajan J. who heard it in the first instance, the petitioner's counsel stated that the constitutional questions in paragraphs 29 to 34 of the writ petition would not be argued although they were to be kept alive so that they might be urged later if it became necessary. The only important question argued before the learned Judge was whether despite Rule 5 of the Investigation of Industrial Undertakings (Procedure) Rules, 1967, framed in exercise of the powers conferred by Section 30 of the Act of 1951 requiring the investigator appointed under Section 15 of the Act to give an opportunity of hearing to the management before completing the investigation, a copy of the report had still to be furnished to the company before the industrial undertaking was taken over under Section 18A of the Act, as a result of such investigation. Rule 5 reads as follows:—

“5. Opportunity of hearing. — The Investigator shall, after completing the investigation, submit a report to the Central Government within the period specified therefor.”

In support of his argument the counsel for the petitioners relied on a Bench decision of this Court in Civil Writ No. 560 of 1969: (Bharat Kumar Chinubhai… v. Union Of India & Others…S decided on 10-2-1970 (1).

The correctness of that decision was called in question by the counsel for respondent No. 1 and it was urged that rule 5 had built-in safeguard ensuring compliance with rules of natural justice and that there was no warrant to read into these rules a further requirement that a copy of the Investigator's report should be furnished to the management before taking over the industrial under-taking under Section 18A of the Act.

As the correctness of this court's decision in Bharat Kumar Chinubhai's 1 case was called in question, the case was ultimately laid before the Full Bench.

At the hearing of the petition, counsel for the petitioners strongly relied on the afore-mentioned Division Bench judgment of this Court and submitted that in that case the copy of the Investigation report was not made available to the petitioner and other directors and they were also not given any opportunity to show cause why action under Section 18A should not be taken with respect to the company on the basis of the material disclosed at investigation. The case related to the taking over of the management of a textile mill run by the New Manekchoke Spinning and Weaving Company Limited, Ahmedabad. The action under Section 18A was the result of an investigation held under Section 15 of the Act. The Division Bench held that it was only after the Investigation Committee had submitted its report and the Government had decided upon a course of action which prejudicially affected the rights of the petitioner on the basis of that report that the petitioners' right to be informed of the material, would arise.

The counsel who was appearing for the Union of India in Bharat Kumar Chinubhai's (1) case had conceded that even if there was nothing in Section 18A of the Act providing for a show cause notice and no rules had been framed in that behalf, the rules of fair play made it imperative that the petitioner should have been supplied a copy of the report and he should also have been given an opportunity to explain and meet the material found against the management before action under the section was taken, by the Government.

A perusal of the judgment shows that apart from the concession made by the learned counsel for Union of India it was evident that the petitioner and the directors of the company were not afforded any opportunity of appearing before the Investigation Committee. According to them, after a preliminary discussion held on 24th January, 1968 when the management submitted to the Committee a tentative scheme for the future working of the company, the management did not hear anything thereafter from the Government or the Committee. Meanwhile the Investigation Committee kept on calling and examining behind the back of the petitioner several persons, e.g, representatives of Labour Union, selling agents and brokers etc. and in April 1969 when the Committee concluded its labours neither the copy of the report was made available to the petitioner or to the other members of the Board of Directors nor were they informed about the conclusion reached by the Committee and the material on which those conclusions were based and all of a sudden an order was made on 14th February, 1969 in exercise of the powers conferred by Section 18A of the Act authorising the Gujarat State Textile Corporation Limited to take over the management of the mill.

It was in this context that the above-mentioned decision was given by the Division Bench. The Bench also expressed agreement with a Division Bench judgment of the Punjab High Court in L.P.A No. 101-D of 1963: Union of India and others v. Shri Narayan Lal Bansilal and another, decided on 1-8-1963 (2) which supported the argument of the petitioner's counsel. The Letters Patent Bench consisting of D.K Mahajan and Shamsher Bahadur JJ. had approved in that case the following observations of Harbans Singh J. from whose judgment an appeal was taken before them:

“I have, therefore, no doubt in my mind that before the Central Government can legally act under Section 18A, it must comply with the rules of fair play and abide by the Rules of natural justice and give a hearing to the other party, namely, the management of the mill, before taking any final action in taking over the direct management of the mill.”

Harbans Singh J. had also said that “even if the investigation body does not find it expedient to associate the management while collecting material and investigating the case, yet, if the Central Government wants to take the drastic action under Section 18A, it must bring to the notice of the management the material brought out against it and give it an opportunity of being heard.”

The ratio decidendi of the two decisions of this Court as well as of the Punjab High Court, therefore, is that in a case where ex-parte investigation has been carried on by the Committee of Investigation and witnesses have been called and examined behind the back of the management of the company without associating the management of the company while collecting material and investigating the case, the company and its management are entitled to be given a copy of the report and also to be afforded an opportunity of showing cause why the management of the undertaking should not be taken away from them.

Another aspect of the matter which was canvassed before the Division Bench in Bharat Kumar Chinubhai's (1) case was based on a decision of the Supreme Court in Ambalal M. Shah and another v. Hathisingh Co. Ltd. and another (AIR 1962 SC 588) (3). It was there stated that any investigation on the basis of Section 15 (a) of the Act would necessarily cover also the quality of the management of the industrial undertaking which came within the purview of Section 15 (b) and therefore the validity of the action under Section 18A cannot be assailed on the ground that the ultimate action was not in consonance with the preliminary order under Section 15 (a). The Division Bench, however proceeded to observe that if the ex-parte investigation is based on one kind of allegation and the ultimate action is taken on a different allegation the rules of fair play demanded that the management should be apprised of the material on which the ultimate decision is based. Learned Attorney-General, however, invited our attention to what was said by their Lordships of the Supreme Court in the case of Ambalal M. Shah (3). It was there said:—

“....... that where the investigation has been initiated, in respect of an industrial undertaking on an opinion that there has been or is likely to be a fall in the volume of production for which having regard to the economic conditions there is no justification S. 15 (a) (i) or an opinion that there has been or is likely to be a marked deterioration in the quality of any article which could have been or can be avoided s. 15 (a) (ii); or an opinion that there has been or is likely to be a rise in the price of any article for which there is no justification s. 15 (a) (iii); or an opinion that it is necessary to take action for the purpose of conserving any resources of national importance s. 15 (a) (iv), the investigation in order to be complete must also consider the quality of the management of the undertaking just as it would so consider the quality of management where the investigation is initiated on an opinion that the industrial undertaking is being managed in a manner highly detrimental to the scheduled industry concerned or to public interest. For, even when the investigation has been initiated on the Government's forming any of the opinions mentioned in the four sub-clauses of cl. (a) of section 15, the investigator has necessarily to examine three matters: (1) whether the opinion formed by the Government is correct; secondly, what are the causes of this state of things, viz., the unjustifiable fall in the volume of production or the deterioration in the quality of the article or the rise in the price of the articles or the necessity of an action for the purpose of conserving the resources; and thirdly how this state of things if it exists, can be remedied. In considering the second of these matters, viz., the cause of this state of things, the investigator must examine how far and in what manner the quality of management is responsible for it. He may come to the conclusion that the management is in no way responsible and that some other cause lies at the root of the difficulty. He may hold on the other hand, that the management is solely responsible; or he may hold that while other causes also play their part the defect in the quality of management is also in part responsible. Indeed, we find it difficult to understand how an investigator having embarked on an investigation order by the Government in respect of an industrial undertaking on the basis of one or more of the opinions mentioned in s. 15 (a) can avoid an inquiry into the quality of the management of the industrial undertaking.”

The Division Bench was not holding that if an investigation has been ordered on the basis of opinion mentioned in s. 15 (1) (a) it excluded an inquiry into quality of management of industrial undertaking as mentioned in s. 15 (1) (b). This question was not before the Division Bench.

We thus do not find and the Learned Attorney General himself agreed, that there is any contradiction between what was held by the Supreme Court and the Division Benches of this Court and the Punjab High Court. The management of the company is at any rate entitled to a hearing and an opportunity to adduce evidence and if no such opportunity has been afforded to it at the stage of investigation it has to be afforded such opportunity when action under Section 18A is taken in respect of the company.

We may as well mention that in the case of Bharat Kumar Chinubhai (1) the attention of the Division Bench was not drawn to Rule 5 which in terms provides that the investigator shall before the completion of the investigation give the management and the employees of the undertaking or undertakings in respect of which an investigation is ordered, reasonable opportunity of being heard including the opportunity to adduce evidence. The counsel who had appeared for Union of India had conceded that even if there was nothing in Section 18A of the Act providing for a show cause notice and no rules had been framed in that behalf the rules of fair-play made it imperative that the petitioner in that case should have been supplied a copy of the report and he should have also been given an opportunity to explain and meet the material found against the management before action was taken by the Government. The decision in that case, may therefore be taken 10 be correct in the light of the facts mentioned therein.

Counsel for the petitioners next drew our attention to several decisions of the Supreme Court under Article 311 (2) of the Constitution. On the basis of a decision in State Of Madhya Pradesh v. Chintaman Sadashiva Waishampayan (AIR 1961 SC 1623) (1) it was argued that an appropriate opportunity must be afforded to the public servant at the stage of inquiry after the charge is supplied to him as well as at the second stage when punishment is about to be imposed on him.

Reliance was also placed on a decision of the Supreme Court in State of Orissa v. Dr. (Miss) Binapani Dei and others (AIR 1967 SC 1269) (5) where the petitioner Dr. (Miss) Binapani Dei was not given the report of the inquiry officer who conducted the inquiry into the correct date of her birth. The order was held to be violative of the principles of natural justice.

Similarly in M. Gopalkrishan Naidu v. The State of Madhya Pradesh (AIR 1969 SC 1302) (6) the failure on the part of the competent authority to provide a copy of the report of the inquiry officer amounted to denial of a reasonable opportunity contemplated by Article 311 (2) of the Constitution.

Reference was also made by the learned counsel to the decision of the Supreme Court in A.K Kraipak and others v. Union of India and others (AIR 1970 SC 150) (7) where it was said that the concept of rule of law would loose its vitality if the instrumentalities of the State are not charged with the duties of discharging their functions in a fair and just manner.

On the basis of these authorities it was argued that serious effects followed the decision of the Central Government to take over the management of an industrial undertaking. The decision involved civil consequences for it deprived the management of its right to manage the industrial undertaking for a period which may extend to five years and this period may be further extended provided the matter is brought to the notice of Parliament. The rules of fair play and justice therefore required that the petitioners should not only be given a copy of the report but they should also be given an opportunity of being heard against the proposed action.

Learned Attorney-General appearing for Union of India drew our attention on the other hand to the scheme of Sections 15 to 18A of the Act. He argued that after an investigation was made under Section 15 if the Central Government was satisfied that action under Section 16 was desirable it could issue such instructions to the industrial undertaking as may be appropriate in the circumstances, for all or any of the following purposes:—

“(a) regulating the production of any article or class of articles by the industrial undertaking or undertakings and fixing the standards of production;

(b) requiring the industrial undertakings to take such steps as the Central Government may consider necessary to stimulate the development of the industry to which the undertaking or undertakings relates or relate;

(c) prohibiting the industrial undertaking or undertakings from resorting to any act or practice which might reduce its or their production, capacity or economic value;

(d) controlling the prices, or regulating the distribution, of any article or class of articles which have been the subject-matter of investigation.”

Section 18A provides that if the Central Government is of opinion that an industrial undertaking to which directions had been issued in pursuance of Section 16, had failed to comply with such directions or an industrial undertaking in respect of which ah investigation had been made under Section 15 was being managed in a manner highly detrimental to the scheduled industry concerned or to public interest, he 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 etc.

In the instant case the contention of the petitioners is not that they were not heard under rule 5 or that they were not given an opportunity of leading evidence before the Investigation Committee. They also do not say that the order of Investigation was not made under Section 15 (a) (i) or Section 15 (b) nor do they say that they ever asked for a copy of the report. In fact they have not asked for it even now. Their grievance and their prayer is that the order dated 24th November, 1970 is void ab initio and should be quashed because it was made under Section 18A of the Act without providing the petitioners with a copy of the report of the Committee of Investigation and they were not afforded an opportunity of being heard on the said report.

It being a common case of the parties that a copy of the report was not furnished to the petitioners, the question is whether it is incumbent on the Central Government to provide the petitioners with a copy of the report before action under Section 18A was taken. To that question the reply of the Attorney-General is that it was not the duty of the Central Government to provide the petitioners with a copy of the report.

Learned Attorney-General argued that the principle of violation of rules of natural justice under Article 311 (2) of the Constitution did not have a bearing on the question before us and therefore the authorities cited by the learned counsel for the petitioners were entirely beside the point. In this connection he invited our attention to a decision, of the Supreme Court in Suresh Koshy George v. University of Kerala and others (AIR 1969 SC 198) (8) where Hegde J. observed:—

“There seems to be an erroneous impression in certain quarters evidently influenced by the provisions in Art. 311 of the Constitution particularly as they stood before the amendment of that Article that every disciplinary proceeding must consist of two inquiries, one before issuing the show cause notice to be followed by another inquiry thereafter. Such is not the requirement of the principles of natural justice. Law may or may not prescribe such a course. Even if a show cause notice is provided by law, from that it does not follow that a copy of the report on the basis of which the show cause notice is issued should be made available to the person proceeded against or that another inquiry should be held thereafter.”

We were also referred to Nagendra Nath Bora and another v. Commissioner of Hills Division and Appeals, Assam and others (AIR 1958 SC 398) (9). That was no doubt a case under the Eastern Bengal and Assam Excise Act, 1910. But it was laid down that the rules of natural justice vary with the varying constitutions of statutory bodies and the rules prescribed by the Act under which they function. The question whether or not the rules of natural justice had been contravened should be decided not under any pre-conceived notions, but in the light of the statutory rules and provisions.

Turning to the case of Dr. (Miss) Binapani Dei, (5) the Learned Attorney-General submitted that there were four different dates of birth before the State authorities. If an inquiry was intended to be made, the State authorities should have placed all the materials before the petitioner and called upon her to explain the discrepancies and to tender evidence about her date of birth.

Reliance was also placed on a decision of the Supreme Court in Abdul Husein Tayabali and others v. State of Gujarat and others [1968 (1) SCR 597] (10). That was a case under the Land Acquisition Act, 1894. Section 5A of the said Act provides for an inquiry where the owner of a land is heard and his objections are taken on record. The record of inquiry is required under that section to be sent to the Government so as to enable the Government to decide whether the acquisition is necessary for a public purpose or a company. The Government has thus, before it, not only the opinion of the Land Acquisition Collector but also of what the owner has to say by way of objections against the proposed acquisition. The owner therefore has an opportunity of being heard. Neither Section 5A nor any other provision of that Act lays down that a second opportunity has to be given before issuance of Section 6 notification.

In the light of the above decisions it was submitted that the rules do not provide for a second opportunity nor is there any other provision in the rules providing for a copy of the report being given to the petitioner.

Mr. V.M Tarkunde, in the absence of Shri I.N Shroff who opened the case on behalf of the petitioners submitted in reply that the judgment in the case of Bharat Kumar Chinubhai (1) was correct and it was incumbent on the Government to provide the petitioners with a copy of the report and to hear them before action was taken for depriving the petitioners of their right of management. According to Mr. Tarkunde, the scheme of Chapters 3, 3A and 3B of the Act which begin with section 10 and end with section 18g is to provide for regulation of scheduled industries. Sections 18B to 18E provide for vacation of offices by the persons incharge of management and for termination of any contract of management. These sections also contain provisions for cancelling or varying the contract of management without any provision for compensation for the loss of office or for the premature termination of contract of management. All these provisions according to Shri Tarkunde, involve grave and serious civil consequences and therefore no adverse decision could be taken without providing the petitioners with a second opportunity.

Shri Tarkunde conceded that in the light of the opinion expressed by the Supreme Court in A.K Kraipak's case (AIR 1970 SC 150) (7) and in the subsequent decision of Union of India v. J.N Sinha and another (AIR 1971 SC 40) (11) the rules of natural justice are not embodied rules nor can they be elevated to the position of fundamental rules. These rules can operate only in areas not covered by any law validly made. They do not supplant law but supplement it. If a statutory provision can be read consistently with the principles of natural justice, the court should do so. But if a statutory provision either specifically or by necessary implication excludes the application of any rules of natural justice then the court cannot ignore the mandate of the legislature or the statutory authority and read into the concerned provision the principles of natural justice. Hegde J. who wrote the judgment of the Court in both the cases further observed that whether the exercise of a power conferred should be made in accordance with any principles of natural justice or not depends upon the express words of the provisions conferring power, the nature of the power conferred, the purpose for which it is conferred and the effect of the exercise of that power. In the instant case the petitioners admitted that they were heard and a reasonable opportunity of adducing evidence was also afforded to them at the stage of investigation. The question of the management of the undertaking being detrimental to the textile industry as a whole and to public interest was also before the Government. The petitioners were undoubtedly aware of the nature of the order that the Central Government intended to make. In a letter dated 12th September 1970, (Annexure E to the petition) the petitioner No. 2 on behalf of the company clearly stated that the Government of India was considering the question of appointing an authorised controller under Section 18A of the Act. They also knew that the Central Government was most eager to provide un-employment relief to the workers which had been rendered idle due to the closure of the mill. A great deal of time had gone by and yet the petitioners were unable to raise money to open the mill and to re-start its functioning. It could not therefore be said that the petitioners needed any further opportunity of hearing after obtaining a copy of the investigator's report.

Mr. Tarkunde also referred us to a decision of the Supreme Court in Barium Chemicals Limited and another v. Company Law Board and others (AIR 1967 SC 295) (12). At page 324 of the report a reference was made to the expression “reason to believe” or “in the opinion of”. It was urged that the expression “If the Central Government is of the opinion” is not the result of a subjective process. It has to be based on relevant facts and is objective to that extent. The provisions of clauses (a) and (b) of section 18a postulate certain requirements which if they are not there the Government will not be able to take any action under the Section. It was said that in that case the words “reason to believe” or “in the opinion of” do not always lead to the construction that the process of entertaining “reason to believe” or “the opinion” is an altogether subjective process not lending itself even to a limited scrutiny by the court that such “a reason to believe” or “opinion” was not formed on relevant facts or within the limits or what Lord Radcliffe and Lord Reid called in the case of Ridge v. Baldwin as “restraints of the statute” as an alternative safeguard to rules of natural justice where the function is administrative.

These observations were made in a case under Section 237 (b) of the Companies Act, 1956 and it was said that though an order passed in exercise of power under a statute cannot be challenged on the ground of propriety or sufficiency of evidence it is liable to be quashed on the ground of mala fides dis-honesty or corrupt purposes. That does not seem to be the situation in the present case.

The result is that the question is answered in the negative and since this was the only question argued before us, the writ petition itself will have to be dismissed. It is ordered accordingly. In the circumstances, however there will be no order as to costs.

Petition dismissed.