Supreme court Decision About Tax on Eleavator Installation
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL/APPELLATE JURISDICTION
WRIT PETITION (C) NO. 232 OF 2005
M/S. Kone Elevator India Pvt. Ltd. … Petitioner
Versus
State of Tamil Nadu and Ors. … Respondents
WITH
Writ Petition (Civil) Nos. 298/2005, 487/2005,
528/2005, 67/2006, 511/2006, 75/2007,
519/2008,531/2008,548/2008, 569/2008,
186/2009, 23/2010, 62/2010, 232/2010,
279/2010,377/2010,112/2011, 137/2011,
181/2011,207/2011,278/2011, 243/2011,
372/2011,398/2011, 381/2011, 468/2011,
547/2011,107/2012, 125/2012, 196/2012,
263/2012,404/2012,567/2012, 145/2013,
241/2013,454/2013,404/2013, 723/2013,
440/2012,441/2012,156/2013, 533/2013,
403/2012,824/2013, 428/2009, 1046/2013,
1047/2013, 1048/2013, 1049/2013, 1050/2013,
1051/2013 1052/2013, 1098/2013,
WITH
Civil Appeal Nos. 5116-5121 of 2014
(Arising out of SLP (C) Nos. 14148-14153/2005)
WITH
Civil Appeal Nos. 5135-5141 of 2014
(Arising out of SLP (C) Nos. 14961-14967/2005)
WITH
Civil Appeal Nos. 5142-5147 of 2014
[Arising out of SLP (C) Nos. 17842-17847/2005
WITH
Page 2
2
Civil Appeal No. 5152 of 2014
[Arising out of SLP (C) No. 5377/2006
WITH
Civil Appeal No. 5153 of 2014
[Arising out of SLP (C) No. 7037/2006
WITH
Civil Appeal No. 5154 of 2014
[Arising out of SLP (C) No. 30272/2008
WITH
Civil Appeal No. 5156 of 2014
[Arising out of SLP (C) No. 30279/2008
WITH
Civil Appeal No. 5157 of 2014
[Arising out of SLP (C) No. 5289/2009
WITH
Civil Appeal Nos. 5159-5160 of 2014
[Arising out of SLP (C) Nos. 6520-6521/2009
WITH
Civil Appeal Nos.5162-5164 of 2014
[Arising out of SLP (C) Nos. 4469-4471/2010
WITH
Civil Appeal No. 5165 of 2014
[Arising out of SLP (C) No. 11258/2010
WITH
Civil Appeal No. 5166 of 2014
[Arising out of SLP (C) No. 17228/2010
WITH
Civil Appeal Nos.5167-5168 of 2014
[Arising out of SLP (C) Nos. 17236-17237/2010
WITH
Civil Appeal Nos.5170-5172 of 2014
[Arising out of SLP (C) Nos. 23259-23261/2010
WITH
Civil Appeal No. 5174 of 2014
[Arising out of SLP (C) No. 15732/2011
WITH
Civil Appeal No. 5175 of 2014
[Arising out of SLP (C) No. 16466/2011
Page 3
3
WITH
Civil Appeal No. 5178 of 2014
[Arising out of SLP (C) No. 16137/2011
WITH
Civil Appeal No. 5179 of 2014
[Arising out of SLP (C) No. 5503/2011
WITH
Civil Appeal No. 5180 of 2014
[Arising out of SLP (C) No. 11147/2011
WITH
Civil Appeal Nos.5181-5192 of 2014
[Arising out of SLP (C) Nos. 11227-11238/2012
WITH
Civil Appeal No. 5193 of 2014
[Arising out of SLP (C) No. 19901/2013
WITH
Civil Appeal Nos. 5195-5206 of 2014
[Arising out of SLP (C) Nos. 36001-36012/2013 and
WITH
Civil Appeal No. 6285/2010
J U D G M E N T
Dipak Misra, J. [for R.M. Lodha, C.J., A.K. Patnaik,
Sudhansu Mukhopadhaya, JJ. and
himself]
Leave granted in all the special leave petitions.
2. By an order dated 13.2.2008 in Kone Elevator
India Private Limited v. State of Tamil Nadu and
others1, a three-Judge Bench of this Court, while dealing
with the writ petition preferred by Kone Elevator India Pvt.
1 (2010) 14 SCC 788
Page 4
4
Ltd. along with Special Leave Petitions, noted that the
question raised for consideration in the said cases is
whether manufacture, supply and installation of lifts is to
be treated as “sale” or “works contract”, and a three-
Judge Bench, in State of A.P. v. Kone Elevators
(India) Ltd.2, had not noticed the decisions rendered by
this Court in State of Rajasthan v. Man Industrial
Corporation Ltd.3, State of Rajasthan and others v.
Nenu Ram4 and Vanguard Rolling Shutters and Steel
Works v. Commissioner of Sales Tax5 and perceiving
the manifest discord, thought it appropriate that the
controversy should be resolved by the larger Bench.
Thereafter, keeping in view the commonality of the
controversy in Civil Appeal No. 6285 of 2010 and other
Special Leave Petitions, they were tagged with the
originally referred matters. Thus, the matters are before
us.
2 (2005) 3 SCC 389
3 (1969) 1 SCC 567
4 (1970) 26 STC 268 (SC)
5 (1977) 2 SCC 250
Page 5
5
3. The seminal controversy which has emerged in this batch
of matters is whether a contract for manufacture, supply
and installation of lifts in a building is a “contract for sale
of goods” or a “works contract”. Needless to say, in case
of the former, the entire sale consideration would be
taxable under the sales tax or value added tax
enactments of the State legislatures, whereas in the latter
case, the consideration payable or paid for the labour and
service element would have to be excluded from the total
consideration received and sales tax or value added tax
would be charged on the balance amount.
4. Keeping in mind the said spinal issue, we think it apposite
to briefly refer to the facts as adumbrated in the writ
petition preferred by Kone Elevator India Pvt. Ltd. The
petitioner is engaged in the manufacture, supply and
installation of lifts involving civil construction. For the
Assessment Year 1995-96, the Sales Tax Appellate
Tribunal, Andhra Pradesh, considering the case of the
petitioner, opined that the nature of work is a “works
contract”, for the erection and commissioning of lift
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cannot be treated as “sale”. On a revision being filed, the
High Court of Andhra Pradesh affirmed the view of the
tribunal and dismissed the Tax Case (Revision) filed by the
Revenue. Grieved by the decision of the High Court, the
State of Andhra Pradesh preferred special leave petition
wherein leave was granted and the matter was registered
as Civil Appeal No. 6585 of 1999 and by judgment dated
17.2.2005 in Kone Elevators (supra), the view of the
High Court was overturned. After the pronouncement in
the said case, the State Government called upon the
petitioner to submit returns treating the transaction as
sale. Similarly, in some other States, proceedings were
initiated proposing to reopen the assessments that had
already been closed treating the transaction as sale. The
said situation compelled the petitioner to prefer the
petition under Article 32 of the Constitution. As far as
others are concerned, they have preferred the writ
petitions or appeals by special leave either challenging
the show cause notices or assessment orders passed by
the assessing officers or affirmation thereof or against the
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interim orders passed by the High Court requiring the
assessee to deposit certain sum against the demanded
amount. That apart, in certain cases, appeals have been
preferred assailing the original assessment orders or
affirmation thereof on the basis of the judgment in Kone
Elevators (supra).
5. Mr. Harish Salve, learned senior counsel for the
petitioners, has contended that prior to the decision of
this Court in Bharat Sanchar Nigam Ltd. and another
v. Union of India and others6, which has been further
explained in Larsen and Toubro Limited and another
v. State of Karnataka and another7, the law as
understood was (a) where a contract was divisible by
itself, then the element of sale would be taxed as an
ordinary sale of goods, irrespective of the element of
service; (b) where a contract was for the supply of goods,
and for rendition of services, if the pre-dominant intention
of the parties was to supply goods, the element of service
would be ignored and the entirety of the contract
6 (2006) 3 SCC 1
7 (2014) 1 SCC 708
Page 8
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consideration would be treated as the price of goods
supplied and the tax imposed accordingly; and (c) as the
law did not provide for dividing, by a legal fiction, a
contract of such a nature into a contract for goods and a
contract for services, the goods in which property passed
from the contractor to the owner could not be brought to
tax under the law of sales tax. It is assiduously urged by
Mr. Salve that the “predominant intention test” is no
longer relevant and after the decision in Larsen and
Toubro (supra), supply and installation of lift cannot be
treated to be a contract for sale. It is argued that a lift
comprises of components or parts [goods] like lift car,
motors, ropes, rails, etc. and each of them has its own
identity prior to installation and they are
assembled/installed to create the working mechanism
called lift. Learned senior counsel would contend that the
installation of these components/parts with immense skill
is rendition of service, for without installation in the
building, there is no lift.
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6. Mr. Salve, learned senior counsel, has also referred to the
Bombay Lifts Act, 1939, the Bombay Lifts Rules, 1958 and
Bombay Lifts (Amendment) Rules, 2010. He has referred
to the Preamble of the Act which stipulates that an Act
has been enacted to provide for the regulation of the
construction, maintenance and safe working of certain
classes of lifts and all machinery and apparatus pertaining
thereto in the State of Bombay. The State Act applies to
the whole of Maharashtra. He has drawn our attention to
the dictionary clause of “lift” as has been defined in
clause 3(c) to mean a “hoisting mechanism” equipped
with a car which moves in a substantially vertical
direction, is worked by power and is designed to carry
passengers or goods or both; and “lift installation” which
includes the lift car, the lift way, the lift way enclosure and
the operating mechanism of the lift and all ropes, cables,
wires and plant, directly connected with the operation of
the lift. He has also placed reliance on Section 4 which
deals with permission to erect a lift, Section 5 that deals
with licence to use a lift and Section 7 which provides a lift
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not to be operated without a licence. Learned senior
counsel has also drawn our attention to the various rules
that deal with many a technical aspect and the terms on
which lift shall work and what requirements are to be
carried out by a licencee under the Act. In essence, the
submission is that the manufacture, supply and the
installation are controlled by the statutory provisions
under an enactment of the legislature and also the rules
made in consonance with the Act which would reflect that
immense skill is required for such installation and the
separate parts of the lift are not sold like goods, but it only
becomes operational after it is installed, adjusted, tested
and commissioned in a building.
7. Mr. Khambatta, learned Advocate General, appearing for
the State of Maharashtra, submitted that in the case of
sale and installation of a lift or elevator, the contract
would include the obligation to install the lift or to
undertake any services in relation to the lift and these
elements of value need to be deducted while taxing the
sale of goods involved in such a contract. It is his
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submission that in a given case, there can be a contract
which is exclusively for sale of lift, i.e., for sale of goods
which does not include any labour or service element at
all where the lift is bought from a manufacturer but a
separate contract for installation is entered into with an
independent engineering contractor. Learned Advocate
General urged that such an installation by way of contract
is permissible under the Bombay Lifts Act, 1939 read with
the Bombay Lifts Rules, 1958. It is urged by him that prior
to the decision in Kone Elevators case, the State of
Maharashtra had treated contracts for sale and
installation of lifts as “works contract” as per the decision
of the High Court in Otis Elevator Company (India)
Ltd. v. The State of Maharashtra8. He has copiously
referred to the rule position which is prevalent in the State
of Maharashtra. He has brought on record a Trade
Circular dated 11.11.2013 to show that from 1.4.2006, the
decision in Kone Elevators (supra) has been followed in
the State of Maharashtra and it has adjusted the position
8 (1969) 24 STC 525 (Bom)
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in accordance with the said authority and the State having
adjusted its position to the law rendered by the three-
Judge Bench, in case the authority in Kone Elevators
(supra) is overruled, it should be given prospective effect.
8. Mr. K.N. Bhat, learned senior counsel for the State of
Karnataka, has submitted that the contract of
manufacture, supply and installation of lifts comprises a
works contract, for the expression “works contract” is not
a term of art as has been explained in Builders’
Association of India and others v. Union of India
and others9 as well as in Larsen and Toubro (supra). It
is put forth by Mr. Bhat that lifts are assembled and
manufactured to suit the requirement in a particular
building and are not something sold out of shelf and, in
fact, the value of goods and the cost of the components
used in the manufacturing and installation of a lift are
subject to taxation while the element of labour and
service involved cannot be treated as goods. In essence,
the submission of Mr. Bhat is that taking into
9 (1989) 2 SCC 645
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consideration the multifarious activities involved in the
installation of the lift, it has to be construed as a “works
contract” and the decision in Kone Elevators (supra)
does not lay down the law correctly.
9. Mr. Rakesh Dwivedi, learned senior counsel appearing for
the State of Orissa, has referred to the terms of the
quotation, the confirmation letter, the letter of approval,
the preparatory erection work or civil work which are to be
carried out by the customer at its own cost, the specific
mode of payment and the nature of supply and, on that
basis, contended that the contract was for sale and supply
of a lift to the customer for a monetary consideration. It is
urged by him that a part of manufacture is carried out at
the project site of the customer and the skill and labour
deployed in the installation or the work done is merely a
component of the manufacturing process and, as a matter
of fact, the elevator is supplied to the customer only after
its erection/installation at the site. It is further contended
by him that where a manufacturer of lift first
manufactures components and then completes the
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manufacture of the lift at the site and retains ownership in
the components as property while producing the
completed lift, it is a case of pure manufacture. It is
contended by him that the phraseology used in the
contract is not decisive because it is the economic reality
which is decisive, for the installation is a part of the
manufacturing process resulting in the emergence of the
product of elevator which is contracted for. Learned
senior counsel would contend that it has to be construed
as an elevator bought and sold as such. In this regard, he
has drawn inspiration from the authorities in Patnaik &
Co. v. State of Orissa10, T.V. Sundram Iyengar &
Sons v. State of Madras11, Union of India v. Central
India Machinery Manufacturing Company Ltd. and
others12, J. Marcel (Furrier) Ltd. v. Tapper13 and Love
v. Norman Wright (Builders) Ltd.14.
10 (1965) 2 SCR 782
11 (1975) 3 SCC 424
12 (1977) 2 SCC 847
13 (1953) 1 All ER 15
14 (1944) 1 All ER 618
Page 15
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10. Mr. Dwivedi has also contended that even if high
degree of skill and craftsmanship goes into installation
which is a part of the manufacturing process, it is not
more than erecting an article for sale on the basis of a
special order. For the aforesaid proposition, he has placed
reliance on J. Marcel (Furrier) Ltd. (supra). It is his
submission that emphasis on technology and skill
including labour and also the instructions in the manual
are of no consequence as all are insegregable facets of
the manufacturing process. It is proponed by him that
erection, commissioning and assembling of parts and
components amount to manufacture as has been laid
down by this Court in MIL India Ltd. v. Commissioner
of Central Excise, Noida15, Narne Tulaman v.
Collector of Central Excise, Hyderabad16, Titan
Medical Systems (P) Ltd. v. Collector of Customs,
New Delhi17, Collector of Central Excise, Calcutta-II
v. Eastend Papers Industries Ltd.18 and Aspinwall &
15 (2007) 3 SCC 533
16 (1989) 1 SCC 172
17 (2003) 9 SCC 133
18 (1989) 4 SCC 244
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Co. Ltd. v. Commissioner of Income Tax,
Ernakulam19. He has also placed reliance on
Underwood Limited v. Burgh Castle Brick and
Cement Syndicate20 wherein the Kings Bench has ruled
that until the railway engine was reassembled and put on
rail, it could not be said that the goods were delivered as
per the contract. Commenting on the attachment to
immovable property as permanent affixation, it is put
forth by him that the decisions in Sentinel Rolling
Shutters & Engineering Company (P) Ltd. v.
Commissioner of Sales Tax21, Ram Singh & Sons
Engineering Works v. Commissioner of Sales Tax,
U.P.22, Man Industrial Corporation (supra) and
Vanguard Rolling Shutters & Steel Works (supra)
were rendered prior to the amendment of the Constitution
and hence, they stand on a different footing as they were
fundamentally dealing with indivisible contracts.
Elaborating on the nature of affixation, it is urged by him
19 (2001) 7 SCC 525
20 (1922) 1 KB 343
21 (1978) 4 SCC 260
22 (1979) 1 SCC 487
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that only the guide rails and the frame of the entry/exit
doors are attached to the immovable property by nuts and
bolts and the motor is also placed on the beam with the
help of nuts and bolts. The sheave is attached to the
motor and it enables the steel rope to move. The steel
rope is attached to one side of the cabin car and on the
other side to the counter weight. These parts are aligned
so that the cabin car and the counter weight move up and
down in opposite directions. Therefore, contends the
learned senior counsel, the lift is only partially attached to
the building and the remaining major portions of the
components are constantly mobile. In fact, people buy
lifts only with the object of movability and the lifts are
advertised as transport systems. The learned senior
counsel would further submit that if railway engines and
coaches are goods notwithstanding motion on rail alone
which is fixed to the earth by nuts and bolts, the elevators
will also be goods notwithstanding the attachment of
guide rails. For the aforesaid purpose, he has drawn
inspiration from Sirpur Papers Mills Ltd. v. Collector
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of Central Excise, Hyderabad23, Commissioner of
Central Excise, Ahmedabad v. Solid & Correct
Engineering of Works and others24 and Detroit Steel
Cooperage Company v. Sistersville Brewing
Company25.
11. Mr. R. Venkataramani, learned senior counsel appearing
for the States of Tamil Nadu and Andhra Pradesh, has
contended that the primary intention behind the demand
of installation of a lift is the intention to have the lift as a
system and, therefore, the work of installation merely
fulfills the erection and functional part of the system. The
service or work element may be the means to render a set
of goods constituting a unit to be fit for use and, in fact,
the act of installation is to bring the goods to use and
hence, it is the culmination of the act of sale. The learned
senior counsel has put forth that the contract involved
would come in the category of contracts which can be
described as contracts where goods, in any form
23 (1998) 1 SCC 400
24 (2010) 5 SCC 122
25 58 L.Ed. 1166
Page 19
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whatsoever, are intended for transfer but the completion
of the transfer may involve certain set of activities, by
whatever name called, for the purposes of securing the
use or consumption of such goods in question and to that
class of contracts, the principle of “deliverable state” as
used in Section 21 of the Sale of Goods Act, 1930 would
be attracted and, therefore, such a contract would be a
pure contract for sale of goods. It is emphasized by him
that the threshold question to be put in every case is
whether the purchaser’s true object is to obtain an
identifiable product or goods or the intention is to utilize
the services of or works from a person for the purposes of
realizing an end product which may emerge only for the
reason of the execution of the work by rendering of the
services in question. Applying the said principle to a lift, it
is canvassed by him that a lift or an elevator is an
identifiable good which is transferred to the purchaser as
such and solely because certain amount of labour or
service is required for the purpose of putting together all
the components of the lift at the site to bring it to its
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usable state, the same does not make a difference as to
the nature of the contract and it cannot be regarded as a
works contract.
12. Ms. Hemantika Wahi and Mr. Preetesh Kumar, learned
counsel for the State of Gujarat, while adopting the
submissions of the learned senior counsel for the State of
Orissa, have submitted that the traditional tests for
determining whether a contract is a works contract or not
would continue to apply. It is urged that the sale of goods
involved in the execution of a works contract is quite
distinct from the works performed while executing a sale
of goods contract. It is also put forth that it would come
within the competence of the State legislature being a
measure of tax and for that purpose, reliance has been
placed on Federation of Hotel and Restaurant
Association of India v. Union of India and others26.
Be it noted, the learned counsel for the State, while
placing reliance on Bharat Sanchar (supra), have also
asserted that the dominant nature test or other test
26 (1989) 3 SCC 634
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approved in Larsen and Toubro (supra) are still
relevant. It is apt to note here that in the written note of
submission, certain lines from para 45 of Bharat
Sanchar (supra) have been reproduced. Relying on the
same, it is contended that the “dominant nature test” is
still available.
13. Dr. Manish Singhvi, learned counsel appearing for the
State of Rajasthan, has submitted that the decision
rendered in Vanguard Rolling Shutters & Steel Works
(supra), Man Industrial Corporation Ltd. (supra) and
Nenu Ram (supra) do not lay down the correct law
because the underlying reason accorded in those cases is
that if a particular item is to be fixed in the immovable
property, then the property passes on as an immovable
property and, therefore, cannot be construed as a sale.
Reliance has been placed on the Constitution Bench
decisions in Patnaik & Co. (supra) and Hindustan
Shipyard Ltd. v. State of A.P.27.
27 (2000) 6 SCC 579
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14. Mr. P.N. Mishra, learned senior counsel appearing for
the State of Haryana, has supported the law laid down in
Kone Elevators (supra) and, on that base, contended
that supply and installation of the lift is a contract for sale
and not a works contract. For the aforesaid purpose, he
has laid emphasis on the specification laid down in the
terms and conditions of the contract in which the
customer is obliged to undertake certain work of civil
construction. He has brought on record an order of
assessment for the assessment year 2009-2010 from
which it is quite vivid that the assessing officer has
treated the transaction as a sale adopting the principle
stated in Kone Elevators case. Learned counsel for the
State has brought to our notice a Gazette Notification
providing 15% tax on labour, service and other like
charges as percentage of total value of the contract to
show that it has been so done keeping in view the nature
of composite contract.
15. Mr. P.P. Malhotra, learned Additional Solicitor General of
India appearing for Union of India, has submitted that
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parts of the lift are assembled at the site in accordance
with its design and requirement of the building which may
include the floor levels and the lift has to open on different
floors or otherwise depending upon the requirement. It
has to synchronize with the building and each door has to
open on the level of each floor and hence, by no stretch of
imagination, it can be treated as a manufacture or mere
supply but cumulatively considered, it is a works contract
and, more so, when the contract is a composite or turnkey
contract. Mr. Malhotra would further submit that it is not
a mere case of sale and according to the expanded
definition of tax on sale, “tax” is leviable only on the
transfer of property in goods, whether in goods or in some
other form, involved in the execution of work and no sales
tax is leviable on the execution of works contract. Thus,
the stand of the Union of India is that supply and
installation of lift is not a contract for sale but a works
contract.
16. To appreciate the controversy in the backdrop of the
rivalised submissions, it is necessary to delve into the
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genesis of the law in respect of “works contract” and
thereafter to dwell upon how far the principles pertaining
to “works contract” would govern the manufacture, supply
and installation of lifts. In this context, it is seemly to
appreciate the legal position as to how the impost of sales
tax on “works contract” was treated prior to the insertion
of Clause (29A) in Article 366 of the Constitution by the
Constitution (Forty-sixth Amendment) Act, 1982 with
effect from 1.3.1983 and how this court has dealt with the
said facet after the constitutional amendment that
changed the concept of levy of sales tax on “works
contract”. For the aforesaid purpose, chronological
recapitulation is imperative. In State of Madras v.
Gannon Dunkerley & Co., (Madras) Ltd.28, the
assessee faced a levy in respect of goods sold in relation
to works contract under the Madras General Sales Tax Act,
1939 as amended by the Madras General Sales Tax
(Amendment) Act 25 of 1947 wherein certain new
provisions were incorporated and one such provision,
28 AIR 1958 SC 560
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