Holding

Acquisition of shares, even if it incidentally confers control, does not fall within the prohibition of Section 20 of the IDRA; the State Act is constitutionally valid.

Summary

M.K. Saharia, former Managing Director of Nagaland Forest Products Ltd., challenged the Nagaland Forest Products Ltd. (Acquisition of Shares) Ordinance, 1981 and the subsequent Act, 1982, which transferred the State's acquisition of the company's S‑class shares. He argued that the State's takeover of shares amounted to taking over the management and control of a declared industry, which is prohibited by Section 20 of the Industries (Development and Regulation) Act, 1951, and that the legislation was ultra vires the State Legislature. The Supreme Court held that the State Act merely effected acquisition of ownership; any incidental acquisition of control does not fall within the mischief of Section 20, which restrains only the exercise of executive power to take over management apart from ownership. The Court found the legislation fell within Entry 42 of List III (acquisition of property) and did not conflict with the Union's power over declared industries. Consequently, the appeal was dismissed, affirming the validity of the State Act.

Issues considered

The State's acquisition of shares under the Nagaland Act constitutes a taking over of management or control of a declared industry prohibited by Section 20 of the Industries (Development and Regulation) Act, 1951.
Whether the Nagaland Forest Products Ltd. (Acquisition of Shares) Act, 1982 is within the legislative competence of the Nagaland State Legislature under Entry 42 of List III.
Whether the precedent set in Ishwari Khetan Sugar Mills Ltd. v. State of Uttar Pradesh requires reconsideration.

Legislation cited

Industries (Development and Regulation) Act, 1951s. 2, s. 20

Subjects

legislative competenceacquisition of sharesSection 20Industries (Development and Regulation) Actdeclared industrystate legislationincidental controlconstitutional lawUnion-State relations

Judgment

A MAHESH KUMAR SAHARIA
11.
STA TE OF NAG ALAND AND ORS.

OCTOBER 14, 1997

B [DR. A.S. ANAND AND K. VENKATASWAMI, JJ.]

Industries (Development and Regulation) Act, 195/-Sections 20, 2 &
Sch.-/ Item 36(1)-Nagaland Forest Products Ltd. (Acquisition of Shares)
Act, 1982, Sec. 3-Acquisition of Shares of the Company by the State Govt.
c amounted to acquisition of ownership of the Company-Legislative
Competence of State Legislature-Held, the vesting of management or control
of the company was incidental to the· ownership and not a take-over of the
management or control of the Company-Hence, it did not fall within the
mischief of Sec. 20 of the Central Act which is concerned only with the
D control and management of the undertaking and not with its ownership.

The appellant was a Managing Director of a plywood factory. To establish
the company the appellant's father and the State Government entered into an
agreement, by which the appellant's group and State Government subscribed
equally, i.e. 50% of the equity shares.in the company.
E
The State Govt. vide Ordinance I ofl981 (subsequently replaced by the
Act) took over all the assets, books of account, registers etc. of th_~ company.
Appellant challenged the Ordinance/Act before the High Court on various
grounds including legislative competency of the State as the taking over of
F the assets (Acquisition of Shares of the company) amounts to taking over the
of management or control of the Company and this field was occupied by
Parliament as contemplated by Section 20 of the Industries (Development and
Regulation) Act, 1951. The High Com:t rejected the challenge. Hence, this
appeal

Dismissing the appeal, the Court
G
HELD : I.I. Merely because an industry is a declared industry under
Entry 52 List-I, that by itself will not put an embargo on the State Legislature
to pass legislation within its competence. It has also been found in many of
the cases that mere incidental trenching does not warrant the striking down
H of an impugned Act. On examination of the various provisions of the State
458
M.K. SAHARIAv. STATE 459
Act there arise no doubt that it is for acquisition of property in 'S' class A
shares of the company and in" pith and substance it falls under Entry 42 of
List-HI, and is not in conflict with Entries 52 or 7 of List-I. [461-H; 462-A)

.1.2. In consequence of vesting of shares of the Company by virtue of
Section 3 of the State Act, the Government exercises rights as a shareholder B
and incidentally acquires the control and management of the Company. But
that will not fall under the mischief of Section 20 of the Central Act because
section 20 prohibits the State Government from taking over the management
or control dehors ownership of the undertaking. The Central Act is concerned
with the control and management of the undertaking and not with its
ownership. Ifby acquiring ownership, incidentally management and control C
of the company also vests with that, it will be incidental and such an exercise
of legislative power is not prohibited under Section 20 of the Central Act.
[464-H; 465-A)

1.3. This Court's decision in lshwari Khetan case has been followed/
applied in a number of cases right up to the present date. Merely because a D
particular aspect had not been expressly considered in that case will not take
away the binding effect of that decision. Hence, the ruling of lshwari Khetan
case does not require reconsideration. (469-A)

lshwari Khetan Sugar Mills (P) Ltd. and Ors. v. State of Uttar Pradesh
& Ors., [1980) 4 sec 136, followed: E
Smt. Somavati & Ors. v. The State ofPunjab&. Ors., (1963) 2 SCR 774;
T. Govindaraja Mudaliar Etc.. Etc. v. The State a/Tamil Nadu & Ors., (1973)
3 SCR 222; Orissa Cement Ltd v. State o/Orissa & Ors., (1991) Supp. I SCC
430; Indian Aluminium Company Limited & Anr. v. Karnataka Electricity F
Board & Ors., (1992) 3 SCC 580; Dalmia Industries Ltd. & Anr. v. State of
U.P. & Anr., (1994) 4 SCC 583; Ajay Kumar Singh & Ors. v. State ofBihar &
Ors., (1994) 4 SCC 401; Mahabir Sugar Mills Ltd. & Anr. v. State o/U.P. &
Ors., (1996] 10 SCC 259 and Mohd. Ayub Khan v. Commissioner of Police,
Madras and Anr., (1965) 2 SCR 884, referred to.
G
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3423 of 1984.

From the Judgment and Order dated 8.8.83 of the Assam High Court in _
C.R. No. 67of1982.

Sunil Gupta, Mrs. Anjali Verma and Nikhil M. Sakhardande for Mis. JB. H
460 SUPREME COURT REPORTS [1997) SUPP. 4 S.C.R.

A Dadachanji & Co. for the Appellant
K. Parasaran, P.K. Goswami and C.K. Sasi, Kailash Vasdev for the
Respondents.

The Judgment of the Court was delivered by ''
B
K. VENKA T ASWAMI, J. The appellant, formerly a shareholder and
Managing Director of the Nagaland Forest Products Limited (hereinafter called
the "Company"), challenged the vires of Nagaland Forest Products Ltd.
(Acquisition of Shares) Ordinance, 1981 and Nagaland Forest Products Ltd.
C (Acquisition of Shares) Act, 1982, which replaced the Ordinance (hereinafter
called the "State Act"), contending inter alia that the said legislations were
ultra vircs the powers of Nagaland State Legislature in view of Section 20 of
the Industries (Development & Regulation) Act, 1951 (hereinafter called the
"Central Act").

D Pursuant to a contract entered into between late Shri Ram Gopal Saharia, ·
father of the appellant and the Government of N!!galand dated 24.4.1972 to .
establish a plywood factory in the territory of Nagaland on the. terms and
conditions stipulated therein, the Company was incorporated. The authorised
share capital of the company was Rs. 50,00,000 divided into (i) 20,000 (6%
E cumulative redeemable) preference shares of Rs. 100 each (ii) 15,000 'G' class
equity shares of Rs. 100 each and (iii) 15,000 'S' class equity shares of Rs.
100 each. 'G' and 'S' class equity shares carried the same rights. It appears
that the appellant's group, on the one hand and the Government ofNagaland
on the other hand, subscribed 50% each of the equity shares. The company
after obtaining necessary certificate of commencement of business on 22. 7.1972,
F as required under the Central Act, commenced its business thereafter. The
father of the appellant was the first Managing Director of the Company. After
the death of his father, the appellant became the Managing Director some time
in 1975. A cabinet ranking Minister of the Government ofNagaland was the
Chairman of the Company since its inception except during Governor's Rule.
G
While so, on December 14, 1981, the Deputy Commissioner, Mon District,
directed the Manager, Nagaland Forest Product Limited to close down the
plywood factory on 14.12.1981 till further orders. It was followed by ordinance
1 of 1981 which enabled the State Government to take over the assets, books
of accounts, registers etc. of the company. The Ordinance came into force on
H 17.12.1981. As noticed earlier, the Ordinance was replaced by the Act. The
M.K. SAHARIA v. STATE [K. VENKATASWAMI, J.] 461
appellant challenged the Ordinance initially and subsequently by amending A
the petition appropriately, the Act was also challenged.

Before the High Court, the Act was challenged on various grounds but
before us the learned counsel appearing for the appellant, Mr. Sunil Gupta,
confined his attack to the lack of legislative competence based on Section 20 B
of the Central Act. In other words, the contention was that taking over of the
assets (Acquisition of Shares of the Company) amounts to taking over of
management/control of the company, wpich field is occupied by Parliament as
contemplated by Section 20 of the Central Act.

The High Court in its considered and reasoned judgment rejected all the C
contentions and observed thus while rejecting the contention based on lack
of legislative competence, which alone was pressed before us :-

"The Act w~s not enacted for taking over management or control of
the company by the Nagaland State Government. In pith and substance D
it was enacted to acquire the S class shares of the Company. If an
attempt was made to take over management or control of any industrial
undertaking in a declared industry indisputably the bar of Section 20
of the IDRA would inhibit exercise of such executive power. However,
if pursuant to a valid legislation for acquisition of scheduled
undertaking the management stands transferred to the acquiring body E
it cannot be said that this would be in violation of Section 20. Section
20 does not preclude or forbid a State legislature exercising legislative
power under an entry other than Entry 24 of List II, and if an exercise
of that legislative powers, to wit, acquisition or shares of a company
owning an industrial undertaking in a declared industry the F
consequential transfer of management for control over the industry or
under taking follows as an incident of acquisition, such taking over
of management or control pursuant to an exercise of legislative power
is not within the inhibition of Section 20."

G

"52. from the principles of catena of decisions enunciated in the
decided cases, it is found that merely because an industry is a declared
industry under Entry 52, that by itself will not put an embargo on the
State legislature to pass legislation within its competence. It has H
462 SUPREME COURT REPORTS (1997] SUPP. 4 S.C.R.

A further been found in many of the cases that mere incidental trenching
does not warrant the striking down of an impugned Act. As regards·
the contention that the Parliament having made the requisite declaration
in Section 2 of Schedule I thereof the State Legislature was denuded
of its competence to enact the impugned provisions under Entry 42
of List III cannot be accepted. On examination of the various provisions
B of the Act there arises no doubt that it ·is for acquisition of property
in 'S' class shares of the company and in pith and substance it falls
under Entry 42 of List III, and is not in conflict with Entries 52 or 7
List L"

C Undoubtedly, Mr. Sunil Gupta, learned counsel for the appellant
elaborately argued the matter and ultimately contended that the ruling of a
Constituti"on Bench of this Court in Ishwari Khetan Sugar Mills (P.) ltd. &
Ors. v. State ofUttar Pradesh & Ors., [1980] 4 SCC 136 requires reconsideration
as certain aspects were not brought to the notice and considered by the
Constitution Bench while handing down the ruling in that judgment. He,
D however, fairly conceded in the face of the ruling of the Constitution Bench
in Ishwari Khetan's case it is not open to him to contend that the impugned
legislation Jacks legislative competence, as this Court has clearly held that
taking over of the assests of the company will not amount to taking over of
management or control of the company. Still, as stated earlier, his attempt was
E to persuade us to refer the matter to a larger bench for reconsideration of the ·
ruling of this Court in lshwari Khetan case.

Mr. K. Parasaran, learned Senior Counsel appearing for the respondents,
after referring to judgments of this Court in Smt. Somavati & Others, v. The
State of Punjab & Others, [l 963] 2 SCR 774 and T. Govindaraja Muda/iar
F Etc. Etc. v. The State of Tamil Nadu & Others, [1973] 3 SCR 222 submitted
that the reason advanced by the learned counsel for the appellant, will not
be a ground for requesting the Court to refer the question to a larger Bench.
He also submitted that the Constitution Bench has considered every aspect
concerning the constitutionality of an identical legislation impugned therein
G and there is no scope for putting forward an argument that certain provisions
of the Constitution were not brought to the notice of the Constitution Bench
which led the Court to uphold the constitutionality of the legislation impugned
therein. He· also brought to our notice that the ruling of the Constitution
Bench in Jshwari Khetan's case had been followed/applied consistently right
from the year 1980 till date and that shows there is no deficiency in the ruling
H of the Constitution Bench in Ishwari Khetan 's case.
M.K. SAHARIA v. STATE (K. VENKATASWAMI, J.] 463
Before proceeding further to consider the submissions made by the A
counsel on both sides, it !s necessary and will be useful to extract the relevant
provisions of Central Act and the State Act.

Central Act Sections 2. Schedule 1 Item 36{1) and Section 20 are as
follows:-
B
Section 2

"It is hereby declared that it is expedient in the public interest that
the Union should take under its control the industries specified in the
First Schedule."
c
Sch. l Iteni 36 (/)

"Any industry engaged in the manufacture or production of any of
the articles mentioned under each of the following headings or sub-
headings, namely :-
D

36. Timber Products :

{I) Plywood."
E
Section 20

"20 After the commencement of this Act, it shall not be competent for
any State Government or a local authority to take over the management
or control of any industrial undertaking under any law for the time
being in force which authorises any such Government or lo.cal authority F
so to do."

Section 3 of State Act :

"3. (!)On the appointed day, all shares of the company other than the
shares already held by the Government or its nominees in the Company G
shall, by virtue of this Act stand transferred to, and vested in the
State Government.

(2) The State Government shall be deemed on and from the
appointed day, to have been registered in the Register of members of
the company as the holder of each share which stands transferred to H
464 SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R.

A and vested in it by virtue of the provisions of sub-section {I).

(3) All the shares which have vested in the State Government
under sub-section (I), shall by force of such vesting, be freed and
discharged of all trusts, liabilities, obligations, mortgages, charges,
liens and other encumbrances affecting them, and any attachment
B injunction or any decree or order of the Court, tribunal or other
authority restricting the use of such shares in any manner, shall be
deemed to have been withdrawn.

(4) For the removal of doubts, it is hereby declared that the
provision of sub-sections (I) and (2) shall not be deemed to affect -
c
(a) any right of the Company subsisting immediately before the
appointed day, against any shareholder to recover from such
shareholder any sum of money on the ground that the shareholder
has not paid or credited to the Company the whole or any part of the
value of the shares held by him, or any other ground whatsoever, or
D
(b) any right of the shareholder subsisting, immediate!~' before the
appointed day against this company to receive any dividend or other
payment due from the Company."

It is not in dispute that Section 20 (supra) of the Central Act provided
·E that after the commencement of the said Act, it shall not be competent for
any State to take over the management or control of any industrial undertaking
under any law which authorises a State Government so to do. It is also an
admitted position that inasmuch as by Section 2 (supra) read with Item 36 (i)
of the First Schedule (supra) of the Central Act, it has been declared that in
F the public interest, the Union Government should take control of plywood
industry, the State Legislature, therefore, cannot legislate with regard to the
management or control of such industry.

The question is whether the impugned legislation attempts/authorises
mere taking over the management/control of the plywood industry or it only
G enables the State Government to acquire the assets (shares) of the Company.
Section 3 of the State Act stated that all the shares of the Company other
than those already held by the Government stood transferred to and vested
in the State Government. In consequence of such vesting of the shares, the
Government naturally exercises rights as shareholders and incidentally acquires
the control and management of the Company. But that will not fall under the
H mischief of Section 20 of the Central Act because Section 20 prohibits the
M.K. SAHARIA v. STATE [K. VENKATASWAMJ, J.) 465
State Government from taking over management or control dehors ownership A
· of the undertaking. The Central Act is concerned with the control and
management of the undertaking and not with its ownership. By acquiring
ownership, incidentally management and control of the Company also vests
with that, it will be incidental and such an exercise of legislature power is not
prohibited under Section 20 of the Central Act. Notwithstanding the taking B
over of the Company by the State Government still ifthe Central Government
finds scope to exercise their power under Section 20 of the Central Act, it
is open to them to do so. This is exactly what has been held by the Constitution
Bench of this Court in Jshwari Khetan's case:

"25. There is thus a long line of decisions which clearly establishes C
the proposicion that power to legislate for acquisition of property is
an independent and separate power and is exercisable only under
Entry 42, List III and not as an incident of the power to legislate in
respect of a specific head of legislation in any of the three lists. This
power of the State legislature to legislate for acquisition of property
remains intact and untrammelled except to the extent where on D
assumption of control of an industry by a declaration as envisaged
in Entry 52, list I, a further power of acquisition is taken over by a
specific legislation.

26. As already pointed out, in pith and substance the impugned
legislation is one for acquisition of scheduled undertakings and that E
field of acquisition is not occupied by the !DR Act which deals with
control of management, regulation and development of a· declared
industry and there is no repugnancy between the impugned legislation
and the !DR Act. Both can coexist because the power acquired by the
Union under the IDR Act can as well effectively be exercised after the p
acquisition of the scheduled undertakings as it could be exercised
before the acquisition. Therefore, the contention that the state
legislature lacked legislative competence to enact the impugned
legislation must be negatived .

........................................................................................................................... G
30. The impugned legislation was not enacted for taking over
management or control of any industrial undertaking by the State
Government. In pith and substance, it was enacted to acquire the
scheduled undertakings. If an attempt was made to take over
management or control of any industrial undertaking in a de!lared H
466 SUPREME COURT REPORTS [1997) SUPP. 4 S.C.R.

A industry indisputably the bar of Section 20 would inhibit exercise of
such executive power. However, if pursuant to a valid legislation for
acquisition of scheduled undertaking the management stands
transferred to the acquiring body, it cannot be said that this would be
in violation of Section 20. Section 20 forbids executive action of taking
over management or control of any industrial undertaking under any
B law in force which authorises State Government or a local authority
so to do. The inhibition of Section 20 is on exercise of executive
power but if as a sequel to an acquisition of an industrial undertaking,
the management or control of the industrial undertaking stands
transferred to the acquiring authority, Section 20 is not attracted at all.
c Section 20 does not preclude or forbid a State legislature from exercising
legislative power under an entry other than Entry 24 of List II, and if
in exercise of that legislative power, to wit, acquisition of an industrial
undertaking in a declared industry the consequential transfer of
management or control over the industry or undertaking follows as an
incident of acquisition, such taking over of management or control
D pursuant to an exercise of legislative power is not within the inhibition
of Section 20. Therefore, the contention that the impugned legislation
violates Section 20 has no merit."

This judgment of the Constitution Bench has been followed and applied
E recently in Orissa Cement Ltd. & Ors. v. State ofOrissa & Ors., [1991] Supp.
I SCC 430; Indian Aluminum Company limited & Anr. v. Karnataka
Electricity Board & Ors. [1992] 3 SCC 580; Dalmia Industries Ltd. & Anr. v.
State of U.P. & Anr., [1994] 2 SCC 583; Ajay Kumar Singh & Ors. v. State of
Bihar & Ors., [I 994] 4 SCC 40 I and Mahabir Sugar Mills Ltd & A nr. v. State
of U.P. & Ors., [1996] 10 SCC 259.
F
The High Court also after elaborately discussing the matter and placing
strong reliance on lshwari Khetan's case rejected similar contention advanced
before it. In the circumstances, we do not think that there is any merit in the
contention of the learned counsel for the appellant that the ruling of this court
in Ishwari, Khetan's case requires re-consideration. Further, as submitted by
G the learned Senior Counsel, Mr. K. Parasaran that the reason given by the
learned counsel, for the appellant that certain aspects were not considered
and those require re-consideration by a larger Constitution Bench is not a
ground for referring the matter to a larger Bench.

In Smt. Somavanti's case (supra), a Constitution Bench of this Court
H obferved as follows:
M.K. SAHARIA v. STATE [K. VENKATASWAMI, J.) 467

"A binding effect of a decision does not depend upon whether a A
particular argument was considered therein or not provided that the
point with reference to which an argument was subsequently advanced
was actually decided."

Again another Constitution Bench in Mohd. Ayub Khan v. Commissioner B
of Police, Madras and Another, [ 1965] 2 SCR 884, held thus :

"This Court has pronounced upon the legislative competence of the
Parliament to enact Section 9 of the Citizenship Act. 1955 in Izhar
Ahmad Khan v. Union of India. In the same case challenge to the
validity of Rule 3 of Sch. III to the Rules framed under the Citizenship C
Act. 1955 was also negatived. Mr. Ram Reddy for the appellant
contended that as certain important aspects of the plea of invalidity
were not presented before the court at the hearing of Jzhar Ahmad
khan's case, we should again proceed to consider the challenge to the
validity of Rule 3 of Sch. III and Section 9 of the Citizenship Act D
limited to those arguments. We are unable, however, to countenance
the submission. This court has held on the arguments presented
before the court in Izhar Ahmad Khan's case that Section 9 of the Act
was validly enacted by the Parliament, and that Rule 3 of Sch. JJI was
competently made by the Central Government. in exercise of the powers
conferred by Section 18 of the Citizenship Act. Assuming that certain E
aspects of the question were not brought to the notice of the court,
we see no grounds for entering upon re-examination of the question.
It may be pointed out that the judgment of the court in lzhar Ahmad
Khan's case was followed by this court in the Government of Ahdhra
Pradesh v. Syed Mohd. Khan. F

In T. Govindaraja Mudaliar Etc. Etc. v. The State of Tamil Nadu &
Ors., (1973] 3 SCR 222, it was held as follows:

"The argument of the appellants is that prior to the decision in
Rustom Cavasjee Cooper's case it was not possible to challenge
G
Chapter IV-A of the Act owing to the decision of this court that Art,
19(l)(f) could not be invoked when a case fell·within Art. 31 and that
was the reason why this court in all the previous decisions relating
to the validity of Chapter IV-A proceeded on an examination of the
argument whether there was infringement of Article 19(1 )(g), and H
468 SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R.

A clause (f) of that Article could not possibly be invoked. We are unable
to hold that there is much substance in this argument. Banji Munji
and other decisions which followed it were based mainly on an
examination of the inter-relationship between Article 19(1 )(f) and Art.
31 (2). there is no question of any acquisition or requisition in Chapter
IV-A of the Act. The relevant decision for the purpose of these cases
B
was only the one given in Kochuni's case after which no doubt was
left that the authority of law seeking to deprive a person of his
property otherwise than by way of acquisition or requisition was
open to challenge on the ground that it constituted infringement of
the fundamental rights guaranteed by Article 19(1)(f). It was therefore,
c open to those affected by the provisions of Chapter IV-A to have
agitated before this Court the question which is being raised now
based on the guarantee embodied in Art. I 9(1 )(f) which was never
done. It is apparently too late in the day now to pursue this line of
argument, in this connection we may refer to the observations of this
D Court in Mohd. Ayub Khan v. Commissioner of Police. Madras &
Another according to which even if certain aspects of a question were
not brought to the notice of the court it would decline to enter upon
re-examination of the question since the decision had been followed
in other cases. In Smt. Somavanti & Other v. The State of Punjab &
Others a contention was raised that in none of the decisions the
E
argument advanced in that case that a law may be protected from an
attack under Art. 31 (2) but it would be still open to challenge under
Art. 19(1 )(f), had been examined or considered. Therefore, the decision
of the Court was invited in the light of that argument. This contention,
however, was repelled by the following observations at page 794 :
F
"The binding effect of a decision does not depend upon whether
a particular argument was considered therein or not, provided that
the point with reference to which an argument was subsequently
advanced was actually decided."
G It is common ground in the present cases that the validity of Chapter
IV-A of the Act. has been upheld on all previous occasions. Merely
because the aspect now presented based on the guarantee contained
in Art. 19(l)(f) was not expressly considered for a decision given
thereon will not take away the binding effect of those decisions on
H us."
M.K. SAHAR!Av. STATE [K. VENKATASWAMI, J.) 469

We have already noticed that the decision of the Constitution Bench A
in Ishwari Khetan' s has been consistently followed/applied right up to this
date. There is, therefore, no merit in the argument that Ishwari Khetan's case
requires reconsideration. No other point was urged. Accordingly the appeal
is dismissed. However, there will be no order as to costs.

B.K.S. Appeal dismissed. B