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PETITIONER: M/S.  DALMIA DADRI CEMENT CO.  LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX(and connected petition)

DATE OF JUDGMENT: 28/04/1958

BENCH: AIYYAR, T.L. VENKATARAMA BENCH: AIYYAR, T.L. VENKATARAMA BOSE, VIVIAN DAS, SUDHI RANJAN (CJ) DAS, S.K. GAJENDRAGADKAR, P.B.

CITATION:  1958 AIR  816            1959 SCR  729

ACT:        Act  of State-Covenant between States for  merger-Rights  of        subjects of the Covenanting States-Enforcement in  municipal        courts   of  the  New  State-Income-tax-Concessional   rates        granted by the Covenanting State-Whether binding on the  New        State.

HEADNOTE: The appellant company which was incorporated in 1938 in  the erstwhile  State of Jind obtained certain  concessions  from the  Ruler  of the State under an agreement dated  April  1, 1938, -which, inter alia, provided that the State was to  be allotted  certain shares in the company without any  payment and as regards income-tax the company was to be assessed  at concessional rates.  On May 5, 1948, the Ruler of jind along with  the  Rulers  of  seven other  States  entered  into  a Covenant for the merger of their territories into one State, Article  VI of the Covenant provided, inter alia,  that  the Ruler   of  the  Covenanting  State  shall  make  over   the administration  of  his State to the Rajpramukh of  the  new State  and that all duties and obligations of the  Ruler  of the  Covenanting  State shall devolve on the New  State  and shall be discharged by it.  In accordance with that  Article the  Rajpramukh  took  over the administration  of  jind  on August 20, 1948, and immediately after assumption of  office promulgated Ordinance No. 1 Of S. 2005, by s. 3 of which all laws  in force in the State of Patiala were made  applicable mutatis  mutandis  to the territories of the New  State  and that  all  laws  in force in the  Covenanting  States  stood repealed.   On  November 24, 1949, the Rajpramukh  issued  a proclamation  accepting  the Constitution of  India  and  on April 13, 1950, the New State became a taxable territory  of the Union of India. 730 The  result of the constitutional changes was that  the  law relating to income-tax applicable to the appellant, for  the period  prior to August 20, 1948, was that of Jind, for  the period  August  20,  1948, to April 13, 1950,  that  of  the Patiala Income-tax Act and after April 13, 1950, the  Indian

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Income-tax  Act  ;  but the  appellant  contended  that  the income-tax  should  be  levied on him  as  provided  in  the agreement  entered into with the Ruler of jind, dated  April 1, 1938: Held, (1) that S. 3 Of the Ordinance No. 1 Of S. 2005 on its true construction extinguished the right to tax  concessions conferred  on the appellant under the agreement dated  April 1,  1938,  and  that  the  appellant  cannot  rely  on  that agreement after August 20, 1948. (2)The  Covenant  dated  May 5, 1948, entered  into  by  the Rulers  of  the States, is in whole and in parts an  act  of State  and Article VI cannot be relied on by  the  appellant for the enforcement of the rights conferred on him under the agreement  with the Ruler of jind as against the  Rajpramukh of the new State, Per  S.  R.  Das C. J., Venkatarama Aiyar,  S.  K.  Das  and Gajendragadkar   JJ.-When  a  treaty  is  entered  into   by sovereigns  of independent States whereunder sovereignty  in territories  passes from one to the other,  clauses  therein providing  for the recognition by the new sovereign  of  the existing  rights of the residents of those territories  must be  regarded  as invested with the character of  an  act  of State  and no claim based thereon could be enforced  in  the municipal  courts  established by the new  sovereign  unless those rights have been recognised by him. Secretary of State for India v. Bai Ralbai, (1915) L. R.  42 I. A. 229, Vajasingji Joravarsingji and others v.  Secretary of State, (1924) L. R. 51 1. A. 357, Sccretary of  State  v. Sardar  Rustam  Khan,  (1941) L. R. 68 1. A.  109,  Cook  v. Sprigg, [1899] A. C. 572 and Hoani Te Heuheu Tukino v. Aotea District Maori Land Board [1941] A. C. 308, relied on. Per  Bose  J.-International  opinion is  divided  about  the effect  that  a  change  of sovereignty  has  on  rights  to immoveable property and this decision must not be used as  a precedent  in a case in which rights to immoveable  property are concerned.

JUDGMENT: CIVIL  APPELATE, JURISDICTION: Civil Appeal No.230 of  1954. Petition No. 276 of 1953. Appeal  from the judgment and order dated June 7,  1954,  of the former Pepsu High Court in Civil Misc.  No. 97 of  1953. Petition  under Article 32 of the Constitution of India  for the enforcement of fundamental rights. 731 G.S.   Pathak,  Veda  Vyasa,  S.  K.  Kapur  and  J.   B. Dadachanji, for the appellants-petitioners. H.   N.    Sanyal,    Additional    Solicitor-General     of India,R.Ganapathi  Iyer, Raj Gopal Sastri and R. H.  Dhebar, for the respondents. 1958.   April  28.   The  judgment  of  S.  R.  Das  C.  J., Venkatarama  Aiyar,  S. K. Das and  Gajendragadkar  JJ.  was delivered  by  Venkatarama  Aiyar J.  Bose  J.  delivered  a separate judgment. VENKATARAMA  AIYAR J.-Messrs. Dalmia Dadri Cement  Co.  Ltd. which  is the appellant in Civil Appeal No. 230 of 1954  and the  petitioner  in Petition No. 276 of 1953,  is  a  public company  engaged in the manufacture and sale of cement at  a place called Dadri situate in what was once the  independent State of Jind.  On April 1, 1938, one Shanti Prasad Jain,  a promoter of the above company, obtained certain  concessions from the Ruler of Jind under an agreement, Ex.  A, and as it is  this document that forms the basis of the present  claim

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of the appellant, it is necessary to refer to the,  material terms  thereof.  Clause (1) of the agreement grants  to  the licensee,  Shanti  Prasad  Jain,  the  sole  and   exclusive monopoly right of manufacturing cement in the Jind State and for that purpose he is authorised in Cl. (2) to win and work all  quarries,  strata,  seams and beds  of  kankar,  rorey, limestone  or  other like materials ". Under  Cl.  (7),  the licence is to last for a period of 25 years with option  for successive  renewals.   Clause (10) requires that  a  public limited  company should be formed before July 21,  1936,  to work  the concessions, and that it should be  registered  in the Jind State.  Under Cl. (11), the State is to be allotted 6  per cent. cumulative preference shares fully paid  up  of the face value of rupees one lack and ordinary shares  fully paid  up of the total face value of Rs. 50,000  without  any payment  whatsoever.   Then  there are  provisions  for  the payment  of  royalty  to the State and  sale  of  cement  at concession  rates to local consumers.  Clause (23)  is  very material for the present dispute, and is as follows: 93 732 " The Company shall be assessed to income-tax in  accordance with  the State procedure but the rate of  income-tax  shall always  be  four per cent. up to a limit of  the  income  of rupees five lacs and five per cent. on such income as is  in excess  of  rupees five lacs........... Clause  (24)  grants exemption  from  export, import and other  duties  excepting consmers.   Clause  (37)  provides  for  settlement  of  all disputes between the parties by arbitration. In  accordance with the terms set out above,  the  appellant company was duly incorporated in the Jind State, and on  May 27,  1938, Shanti Prasad Jain executed in its favour a  deed agreeing  to  transfer  all "  his  rights,  privileges  and obligations " under Ex.  A. The appellant claims that it has become in this wise entitled as assignee of the licensee  to all  the benefits granted under Ex.  A. The  contention  was raised  by the respondent that the deed dated May 27,  1938, does  not  itself  purport to assign the  rights  under  the license,  Ex. A but merely agrees to do so, and that in  the absence  of  a further deed transferring those  rights,  the appellant  could not claim the rights of assignee.  But  Cl. (35)  expressly provides that " the licensee shall  transfer his  rights to the proposed Company on its formation ",  and after   the  appellant  was  incorporated,  the  State   had throughout  recognised  it  as the person  entitled  to  the rights and subject to the obligations under the license  and realised  royalty and levied income-tax in  accordance  with the  provisions of Ex.  A. This objection was taken for  the first time only in the Writ Petition No. 276 of 1953 in this Court.   It  is  stated for the appellant-and  that  is  not controverted  for the respondent-that under the law of  Jind State  an assignment need not be in writing, and that  being so,  it  is  open to us to infer such  assignment  from  the conduct  of the parties.  We must accordingly  decide  these cases on the footing that the rights under the license,  Ex. A,  dated April 1, 1938, had become vested in the  appellant by assignment. On  August  15, 1947, India became independent, and  on  the same  date,  the  Ruler  of Jind  signed  an  Instrument  of Accession ceding to the Government of India 733 power to legislate with respect to Defence, External Affairs and Communications.  On May 5, 1948, eight of the Rulers  of States in East Punjab including Jind entered into a Covenant for  the merger of their territories into one State,  called

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the Patiala and East Punjab States Union.  For brevity, this State  will hereafter be referred to as the  Patiala  Union. Article VI of the Covenant on which the appellant relies  in support of its claim is as follows: " The Ruler of each Covenanting State shall, as soon as  may be  practicable,  and in any event not later than  the  20th August,  1948, make over the administration of his State  to the Raj Pramukh; and thereupon, (a)all  rights, authority and jurisdiction belonging to  the Ruler  which appertain, or are incidental to the  Government of  the Covenanting State shall vest in the Union and  shall hereafter  be exercisable only as provided by this  Covenant or by the Constitution to be framed thereunder; (b)all  duties  and obligations of the Ruler  pertaining  or incidental to the Government of the Covenanting State  shall devolve on the Union and shall be discharged by it; (c)all the assets and liabilities of the Covenanting State " shall be the assets and liabilities of the Union; and (d)the  military  forces, if any, of the  Covenanting  State shall become the military forces of the Union." Article  X  provides that a Constituent Assembly  should  be formed  as early as practicable, and that it should frame  a Constitution for the State, and that until the  Constitution is  so framed, the Rajpramukh is to have power to  make  and promulgate  Ordinances for the peace and good government  of the  Union.  Under Art.  XVI, the Union " guarantees  either the  continuance in service of the permanent members of  the public  services  of  each  of  the  Covenanting  States  on conditions which will be not less advantageous than those on which  they were serving on the 1st February, 1948,  or  the payment   of  reasonable  compensation  or   retirement   or proportionate pension." 734 In accordance with Art.  VI of the Covenant, the  Rajpramukh of the Patiala Union took over the administration of Jind on August 20, 1948, and immediately after assumption of office, he  promulgated  the Patiala and East  Punjab  States  Union Administration Ordinance No. 1 of S. 2005.  Section 3 of the Ordinance, which is material for the present discussion,  is as follows:   " As soon as the administration of any  covenanting  State has  been  taken over by the Raj Pramukh  as  aforesaid  all Laws,  Ordinances, Acts, Rules, Regulations,  Notifications, Hidayate  Firman-i-Shahi,  having force of  law  in  Patiala State  on the date of commencement of this  Ordinance  shall apply mutatis mutandis to the territories of the said  State and  with  effect from that date all laws in force  in  such Covenanting  State  immediately before that  date  shall  be repealed: Provided  that proceedings of any nature whatsoever  pending on  such  date  in  the  courts  or  offices  of  any   such Covenanting State shall, notwithstanding anything  contained in  this Ordinance or any other Ordinance be disposed of  in accordance with the laws governing such proceedings in force for the time being in any such Covenanting State." This  Ordinance  came  into force on August  20,  1948.   On February 5, 1949, it was repealed and replaced by  Ordinance No. XVI of S. 2006, s. 3(a) whereof being in the same  terms as s. 3 of Ordinance No. 1 of 8. 2005. Article   X(1)  of  the  Covenant  provided,  as  has   been mentioned,  for the framing of a Constitution for the  Union in  the  manner  provided therein.  That,  however  did  not materialise, and on November 24, 1949, the Rajpramukh issued a proclamation accepting the Indian Constitution as that  of the Patiala Union, and thus, the Union became a Part B State

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under  the  Constitution.  On April 13,  1950,  the  Patiala Union accepted the Federal Financial Integration Scheme, and became  a  taxable territory of the Union of India  and  the Indian Finance Act, 1950, became applicable to it from April 13,  1950.   The  position, therefore, is  that  as  regards liability to be assessed to income-tax 735 which  is what we are concerned with in  these  proceedings, the law applicable to the appellant for the period prior  to August  20, 1948, was the income-tax law of’ Jind,  for  the period  August  20,  1948, to April 13,  1950,  the  Patiala Income-tax  Act,  S.  2001,  which  came  into  force  under Ordinance  No.  1 of S. 2005 and after April 13,  1950,  the Indian Income-tax Act. Civil  Appeal No. 230 of 1954 arises out of proceedings  for assessment  of  income-tax for the year 1949-1950.   By  its order  dated November 11, 1952, the Appellate  Tribunal  has found that the taxable profits of the appellant for the year of account which is the calendar year 1948 was Rs. 1,94,265, and  that  finding is not now in dispute.   The  substantial point  now  in controversy is as to the rate  at  which  tax should  be levied on that amount, whether it should be  what is  enacted in the Patiala Income-tax Act as  contended  for the  respondent,  or  what is provided in Cl.  (23)  of  the agreement,  Ex.   A, as claimed by the appellant.   On  this question, the Appellate Tribunal held that the Patiala Union which  was  a new State that had come into  existence  as  a result  of  the  Covenant was not bound  by  the  agreements entered  into  previously by the rulers of  the  Covenanting States,  that the appellant could claim the benefit of  that agreement  only  if the new State chose to recognise  it,  " that there had been, in fact, no such recognition, and that, in  consequence, the tax was leviable as prescribed  in  the Patiala Income-tax Act, S. 2001.  On the application of  the appellant,  the  Tribunal  referred under s.  66(1)  of  the Indian  Income-tax  Act,  the  following  question  for  the opinion of the High Court: "  Whether the asseessee’s profits and gains earned  in  the calendar year 1948 were assessable for S. 2006 (1949-50)  at the  rates in force according to the Patiala Income-Tax  Act of S. 2001 read with section 3 of the Patiala & East  Punjab States  Union Administration Ordinance (No.  1 of S.  2005), as  repealed  and re-enacted in section 3 of the  Patiala  & East Punjab States Union General Provisions (Administration) Ordinance  (No.  XVI of 2006), or in accordance with  clause (23) of the agreement of April, 1938 above referred to," 736 By their judgment dated June 7, 1954, the learned ,Judges of the High Court answered the question against the  appellant, but granted a certificate under s. 66(A)(2)  of  the  Indian Income-tax Act, and that is   how  Civil Appeal No.  230  of 1954  comes before us. Meantime,   proceedings   were  taken  by   the   Income-tax authorities  for assessment of tax for years  subsequent  to 1949-1950,  and  the dispute again related to  the  question whether the amount of tax should be determined in accordance with  Cl.  (23) of Ex.  A or the provisions  of  the  Indian Income-tax  Act,  1922.   The  Income-tax  Officer,  Rohtak, rejected the contention of the appellant that it was  liable to  pay  tax  only in accordance with.  Ex.   A  and  passed orders  determining  the  tax under the  provisions  of  the Indian  Incometax  Act for the year 1950-1951 on  April  28, 1952,  for 1951-1952 on May 12, 1952, and for  1952-1953  on March  17,  1953.  Appeals against these  orders  have  been preferred  by  the  appellant, and they  are  stated  to  be

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pending before the Appellate Assistant Commissioner.  On the allegation  that the tax as imposed in the orders  aforesaid is  unauthorised,  and  that  it  constitutes  an   unlawful interference with its rights to carry on business guaranteed under  Art. 19(1)(g), the appellant has filed  Petition  No. 276   of  1953  for  an  appropriate  writ   directing   the respondents  to levy tax in accordance with  the  agreement, Ex.   A, dated April 1, 1938.  In support of this  petition, in  addition to the contentions raised in Civil  Appeal  No. 230 of 1954 the petitioner also urges that even if the Union of India is entitled to repudiate the agreement dated  April 1,  1938, it has not, in fact, done so, and that it has,  on the  other hand, recognised it as good and is therefore  not entitled now to go back upon it, and that the levy of tax in accordance with the provisions of the Indian Income-tax  Act is  accordingly illegal.  As the contentions raised  in  the appeal and in the petition are substantially identical, they were heard together. Before  us, the validity of the assessment of incometax  for the  year  1949-1950  was challenged by Mr.  Pathak  on  the following grounds: 737 (1)Ordinance  No.  1 of S. 2005 under  which  the  Patiala Income-tax Act Act is sought to be applied -to the appellant does  not,  on  its true  construction,  annul’  the  rights granted under Ex.  A. (2)If  the  Ordinance in question is to  be  construed  as having that effect, then it is in contravention of Art.   VI of the Covenant, and is therefore unconstitutional and void. (3)Even apart from the Covenant, the agreement, Ex. A,  is binding  on the Patiala Union and the impugned Ordinance  is bad as infringing it; and (4)the  Patiala Union had, in fact, recognised the  rights granted  under Ex.  A and it is therefore binding on it,  as if it were a contract entered into by itself. (1)On  the first question, the argument of Mr.  Pathak  is this:  The  Ruler of Jind was an absolute monarch,  and  his word was law.  The agreement, Ex. A, must therefore be  held to  be  a  special law conferring rights  on  the  licensee. Section  3  of  Ordinance  No. 1 of S.  2005  is  a  general provision extending all laws of the State of Patiala to  the territories   of  the  Covenanting  States.   The  rule   of construction  is  well  established  that  general  statutes should  be  interpreted so as not to interfere  with  rights created  tinder  special laws.  Section 3 of  the  Ordinance should therefore be construed as not intended to affect  the rights  conferred  under Ex.  A. Reliance is placed  on  the statement   of  the  law  in  Maxwell’s  Interpretation   of Statutes,   10th  Edn.,  pp.  176  and  180,  and   on   the observations  in Blackpool Corporation v. Starr  Estate  Co. (1).   Now the rule of construction expressed in  the  maxim generalia   specialibus   non  derogant  is   well   settled and we shall also assume in favour of the appellant that the agreement,  Ex.   A,  is a special law in the  nature  of  a private  Act  passed  by the British  Parliament,  and  that accordingly  s. 3 of the Ordinance should not be  construed, unless  the  contrary  appears  expressly  or  by  necessary implication,  as  repealing the provisions of  Ex.   A.  But ultimately,  the question is what does the language  of  the enactment mean ? Section 3 is quite explicit, and (1)[1922] 1 A. C. 27, 34. 738 it  provides that from the date of the commencement  of  the Ordinance  "  all laws in force in such  Covenanting  States immediately  before that date shall be repealed ",  and  the

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proviso  further enacts that pending proceedings are  to  be disposed  of in accordance with laws in force for  the  time being,  in  the  Covenanting States.  In the  face  of  this language  which  is  clear and unqualified, it  is  idle  to contend that Ordinance No. 1 of S. 2005 saves the rights  of the  appellant to the tax concessions under Cl. (23) of  Ex. A. (2)It is next contended by Mr. Pathak that if Ordinance  No. 1  of S. 2005 is to be construed as extinguishing the  right to concessions conferred under Ex.  A, then it must be  held to  be unconstitutional and void.  This contention is  based on  Art.   VI (b) of the Covenant, which provides  that  the obligations  of  the rulers pertaining to or  incidental  to government  of  the Covenanting State shall devolve  on  the Union and be discharged by it.  It is argued that the  Ruler of  Jind had for good and valuable consideration  undertaken certain obligations under Cl. (23) of Ex.  A with  reference to  taxation which is a governmental function, that  he  had himself  scrupulously  honoured  them so long as  he  was  a Ruler, and then passed them on under Art.  VI (b) to the new State  created under the Covenant, that the  Rajpramukh  who was  a party to the Covenant and claimed under it was  bound by that obligation, that his power to enact laws is  subject under Art.  VI (a) to the obligations mentioned in Art.   VI (b), and that the impugned law is, if it is to be  construed as having the effect of abrogating those obligations,  ultra vires his powers under the Covenant and is, in  consequence, void.   In answer to this, the respondent contends that  the Covenant  entered into by the rulers is an act of State  and that  any violation of its terms cannot form the subject  of any  action  in the municipal courts, that  the  obligations mentioned  in  Art.  VI (b) refer not to  liabilities  under agreements for which there was special provision in Art.  VI (c) but to obligations of the character contemplated by  the Instrument of Accession, and that, in any event, the  rights granted to the - licensee under Ex.  A were 739 terminable  by  the  Ruler of Jind at  will,  and  that,  in consequence,  if the obligation under Cl. (23)  devolved  on the Raj Pramukh under Art.  VI (b) it did so subject’ to his rights  under Art.  VI (a) to terminate it if he so  willed, and  that, therefore, the impugned law did not violate  Art. VI (b). The  question  that arises for our decision is  whether  the Covenant was an act of State.  On that, there can be no  two opinions.   It  was  a  treaty entered  into  by  rulers  of independent States, by which they gave up their  sovereignty over  their  respective territories, and vested  it  in  the ruler  of a new State.  The expression " act of State "  is, it  is  scarcely necessary to say, not  limited  to  hostile action  between  rulers  resulting  in  the  occupation   of territories.  It includes all acquisitions of territory by a sovereign  State  for  the  first time,  whether  it  be  by conquest  or  cession.  Vide Vajesingji Joravar  Singji  and others  v. Secretary of State (1) and Thakur Amar Singji  v. State  of  Rajasthan  (2).  And on principle,  it  makes  no difference  as  to  the nature of the  act,  whether  it  is acquisition  of new territory by an existing State or as  in the   present  case,  formation  of  a  new  State  out   of territories  belonging to quondam States.  In  either  case, there is establishment of new sovereignty over the territory in question, and that is an act of State. Mr. Pathak did not contest the position that the Covenant in so far as it provided for the extinction of the  sovereignty of   the   rulers  of  the  Covenanting   States   and   the

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establishment  of  a new State is an act of State.   But  he contended that it was much more than that, that it was  also in  the  nature of a Constitution for the new State  in  the sense  that it is a law under which all the  authorities  of the  new  State including the Raj Pramukh had  to  act.   In support  of  this contention he referred to Art.   X,  which provided for the convening of a Constituent Assembly for the framing of the Constitution, and argued that the Articles of the  Covenant which provided for the administration  of  the State by the Rajpramukh were in the nature of an interin (1)(1924) L. R. 51 I. A. 357, 360. 94 (2) [1955] 2 S.C.R. 303, 335. 740 Constitution.  He also relied on Art.  XVI, which guaranteed the rights of the permanent members of  the public  services in  the  Covenanting States to continuance in  service,  and contended that this could not be regarded as an act of State but only as a law relating to the administration of the  new State.   In this view of the Covenant, he argued,  Art.   VI must  be held to be a constitutional provision  enacted  for the  protection  of private rights, that it was,  in  conse- quence, binding on the ruler of the new State, and that  the municipal courts were competent to grant appropriate reliefs for the breach thereof. This  argument proceeds, in our view, on a misconception  as to  what is an act of state and what is a law of  the  State conferring rights on the subject, or, as the learned counsel for  the  appellant termed it, Constitution  of  the  State. When the sovereign of a Statemeaning by that expression, the authority  in which the sovereignty of the State is  vested, enacts a law which creates, declares or recognises rights in the subjects, any infraction of those rights would be action- able  in the courts of that State even when that  infraction is by the State acting through its officers.  It would be no defence to that action that the act complained of is an  act of state, because as between the sovereign and his  subjects there  is  no  such  thing as an act of  state,  and  it  is incumbent on his officers to show that their action which is under challenge is within the authority conferred on them by law.  Altogether different considerations arise when the act of  the  sovereign has reference not to the  rights  of  his subjects  but  to acquisition of  territories  belonging  to another sovereign. That  is  a matter  between  independent sovereigns,and  any  dispute arising therefrom  must  be settled byrecourse  not  to  municipal  law  of  either States but to diplomatic action, and that failing, to force. That  is  an act of state pure and simple, and that  is  its character  until the process of acquisition is completed  by conquest  or cession.  Now, the status of the  residents  of the  territories  which  are thus  acquired  is  that  until acquisition is completed as aforesaid they are the  subjects of the ex-sovereign of those territories 741 and   thereafter  they  become  the  subjects  of  the   new sovereign.  It is also well established that in the new set- up these residents do not carry with them the, rights  which they possessed as subjects of the ex-sovereign, and that  as subjects  of the new sovereign, they: have only such  rights as  are  granted or recognised by him.   Vide  Secretary  of State for India v. Bai Rajbai (1), Vajesingji Joravar Singji and others v. Secretary of State (2), Secretary of State  v. Sardar Rustam Khan (3) and Asrar Ahmed v. Durgah  Committee, Ajmer (4).  In law, therefore, the process of acquisition of new  territories is one continuous act of state  terminating

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on  the assumption of sovereign powers de jure over them  by the  new  sovereign and it is only  thereafter  that  rights accrue to the residents of those territories as subjects  of that sovereign.  In other words, as regards the residents of territories   which  come  under  the  dominion  of  a   new sovereign,  the right of citizenship commences when the  act of state terminates and the two therefore cannot co-exist. It follows from this that no act done or declaration made by the  new  sovereign  prior to his  assumption  of  sovereign powers over acquired territories can quoad the residents  of those  territories be regarded as having the character of  a law  conferring on them rights such as could be agitated  in his courts.  In accordance with this principle, it has  been held  over and over again that clauses in a  treaty  entered into by independent rulers providing for the recognition  of the rights of the subjects of the ex-sovereign are incapable of enforcement in the courts of the new sovereign.  In  Cook v. Sprigg (5), the facts were that the ruler of Pondoland in Africa  had  granted certain concessions in  favour  of  the appellants  and subsequently ceded those territories to  the British Government.  The latter having declined to recognise those concessions, the appellants sued for a declaration  of their  rights thereunder, and the question was whether  they had  a  right  of action in respect of what was  an  act  of State.  One of the contentions (1)  (1015) L.R. 42 I.A. 229. (3)  (1941) L.R. 68 I.A. 109. (2)  (1924) L. R. 51 T.A. 357, 360. (4)  A.I.R. 1947 P.C. 1. (5)   [1899] A.C. 572,578. 742 urged on their behalf was that the ruler of Pondoland had at the time of cession of his territories expressed his  desire to the British Government that the concessions in favour  of the   appellants   should  be  recognised   and   that,   in consequence,  the appellants had the right to  enforce  them against  the new Government.  In rejecting this  contention, the Lord Chancellor observed: "  The taking possession by Her Majesty, whether by  cession or by any other means by which sovereignty can be  acquired, was  an act of state and treating Sigcau as  an  independent sovereign-which  the  appellants  are  compelled  to  do  in deriving title from him.  It is a well-established principle of  law that the transactions of independent States  between each  other  are  governed by other laws  than  those  which municipal courts administer." "It  is no answer to say that by the ordinary principles  of international  law  private  property is  respected  by  the sovereign  which accepts the cession and assumes the  duties and  legal obligations of the former sovereign with  respect to  such private property within the ceded  territory.   All that  can  be properly meant by such a proposition  is  that according to the well-understood rules of international  law a  change  of  sovereignty by cession ought  not  to  affect private property, but no municipal tribunal has authority to enforce  such  an  obligation.  And if there  is  either  an express  or  a well-understood bargain  between  the  ceding potentate  and the Government to which the cession  is  made that  private  property shall be respected, that is  only  a bargain  which  can  be enforced by  sovereign  against  the sovereign in the ordinary course of diplomatic pressure." In  Vajesingji  Joravar Singji and others  v.  Secretary  Of State for India (1), the dispute related to the title of the appellants  to certain lands situated in the  Panch  Mahals. This  area  formed at one time part of the dominion  of  the

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Scindias  of  Gwalior,  and  it was  ceded  to  the  British Government by treaty on December 12, 1860.  Clauses (2)  and (3) of the treaty provided for (1)(1924) L.R. 51 I.A. 357, 360. 743 the  recognition  by  the new sovereign  of  rights  of  the residents  under existing leases, jagirs and the like.   The complaint  of  the appellants was that in 1907  the  British Government had proposed to lease the lands to them on  terms which infringed their proprietary rights, and that this  was in  violation of the rights which had been guaranteed  under Cls.  (2)  and (3) of the treaty, and was,  in  consequence, bad.   The answer of the Government was that the  treaty  in question was an act of state and conferred no rights on  the appellants.   In  upholding this  contention,  Lord  Dunedin observed: " When a territory is acquired by a sovereign state for  the first time that is an act of state.  It matters not how  the acquisition has been brought about.  It may be by  conquest, it  may  be  by cession following on treaty, it  may  be  by occupation of territory hitherto unoccupied by a  recognised ruler.  In all cases the result is the same.  Any inhabitant of  the  territory  can make good in  the  municipal  courts established  by the new sovereign only such rights  as  that sovereign  has,  through  his  officers,  recognized.   Such rights  as he had under the rule of predecessors  avail  him nothing.   Nay  more, even if in a treaty of cession  it  is ,stipulated  that certain inhabitants should  enjoy  certain rights,  that does not give a title to those inhabitants  to enforce  these  stipulations in the municipal  courts.   The right  to  enforce remains only with  the  high  contracting parties." In Hoani Te Heuheu Tukino v. Aotea District Maori Land Board (1),  the  question arose with reference to  the  Treaty  of Waitangi  entered  into by the British Government  with  the native chiefs of New Zealand in 1840.  Under cl. (1) of  the Treaty,  there was a complete cession by the chiefs  of  all their   rights  and  powers  of  sovereignty.   Clause   (2) guaranteed  to  the chiefs, the tribes  and  the  respective families  and individuals certain rights in  lands,  forests and  fisheries.   In 1935, the Legislature  of  New  Zealand enacted  a  law, the provisions of which  were  impugned  as ultra vires on the ground that they infrigned the rights (1)  [1941] A.C. 308. 744 protected by cl. (2) of the Treaty of Waitangi.  In  holding that  the  rights under the Treaty furnished no  ground  for action in the civil courts, Viscount Simon L. C. referred to the  decision  in Vajesingji Joravar Singji  and  others  v. Secretary of State (1) and observed : "  So  far as the appellant invokes the  assistance  of  the court,  it  is clear that he cannot rest his  claim  on  the Treaty of Waitangi, and that he must refer the court to some statutory recognition of the right claimed by him." The result of the authorities then is that when a treaty  is entered into by sovereigns of independent States  whereunder sovereignty  in  territories passes from one to  the  other, clauses  therein  providing for the recognition by  the  new sovereign  of the existing rights of the residents of  those territories must be regarded as invested with the  character of  an  act  of state and no claim based  thereon  could  be enforced  in a court of law.  It must follow from this  that the  Covenant in question entered into by the rulers of  the Covenanting  States is in its entirety an act of state,  and that  Art.   VI  therein cannot operate  to  confer  on  the

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appellant  any  right as against the  Patiala  Union.   This conclusion  becomes  all  the more impregnable  when  it  is remembered that the Covenant was signed by the rulers on May 5,  1948,  whereas  the new state came into  being  only  on August  20,  1948.   In  the  decisions  cited  above,   the sovereign against whom the obligations created by the treaty were  sought  to  be enforced was  the  very  sovereign  who entered  into that treaty or his successor.  But  here,  the ruler  of the Patiala Union against whom Art.  VI is  sought to  be  enforced  was not a party to the  Covenant  at  all, because that State had not come into existence on that date. The  person  who signed the Covenant was the  ruler  of  the State  of Patiala which was one of the  Covenanting  States, but  that  State  as well as the seven  other  States  which entered  into  the Covenant stood all of them  dissolved  on August 20, 1948, when the new Patiala Union came into being. The new State could not and did not enter into any  covenant before  August  20, 1948, and therefore, in  strictness,  it cannot be (1)  (1924) L.R. 511.  A. 357, 360. 745 held to be bound by Art.  VI, to which it was not a party. Considerable  emphasis  was laid for the appellant  on  Art. XVI  of  the Covenant under which the Union  guaranteed  the continuance  of the service of permanent members  of  public services, and this ’was relied on as showing that the rights of  the subjects of the quondam States were intended  to  be protected.   This argument is sufficiently answered by  what we have already observed, namely, that a clause in a  treaty between  high contracting parties does not confer any  right on  the subjects which could be made the  subject-matter  of action  in  the courts, and that the Patiala  Union  is  not bound by it, because it was not a party to the Covenant.  It should,  however, be mentioned that after the  formation  of the new State oil August 20, 1948, the first legislative act of the sovereign was the promulgation of Ordinance No. 1  of S. 2005, and s. 4 thereof expressly recognises the rights of the permanent members of public services.  That  undoubtedly is  a law enacted by the sovereign conferring rights on  his subjects and enforceable in a court of law, but at the  same time  the enactment of such a law serves to  emphasise  that the  Articles  have not in themselves the force of  law  and were  not intended to create or recognise rights.   In  this connection, reference should also be made to cl.  XVI of the Ordinance which enacts that " the provisions of articles  XV and  XVII  of the Covenant relating to the  bar  of  certain suits and proceedings shall have the force of law." In  support of his contention that Art.  VI of the  Covenant is to be regarded as a Constitutional provision, counsel for the appellant relied on certain passages in the judgment  of this  Court in Thakur Amar Singji v. State of Rajasthan  (1) at  pp. 313 and 315 wherein a similar covenant entered  into by the rulers of Rajasthan was described as a  Constitution. Apart  from  the use of the word " Constitution ",  we  find nothing in these passages which has any bearing on the point now under consideration.  There, the question was as regards the vires of a law enacted by (1)[1955] 2 S.C.R. 303. 746 the Rajpramukh of Rajasthan, and that depended on whether he was  the authority in whom the legislative authority of  the State  was  vested within Art. 385.  This  Court  held  that under  the Covenant it was the Rajpramukh who had the  power to  enact  laws, and that the Ordinance issued  by  him  was therefore  valid,  and  it  was in  that  context  that  the

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covenant  was referred to as a Constitution.  We had not  to consider there the question whether the Covenant was an  act of state, or whether it was a law conferring on the citizens of  the  defunct States rights which were enforceable  in  a court  of  law.  No such question arose  for  decision,  and therefore the description of the Covenant as a  Constitution cannot  be  read as importing a decision that it  is  a  law conferring  rights and not an act of state.  In the  result, we hold that the Covenant is in whole and in parts an act of state, that Art.  VI therein does not operate to confer  any rights on the subjects of the Covenanting States as  against the  sovereign of the new State constituted thereunder,  and that Ordinance No. 1 of S. 2005 is, in consequence, not open to attack as being a violation of Art.  VI. (3)We  shall now consider the contention of the  appellant that even apart from Art.  VI of the Covenant, the  impugned Ordinance  No.  1 of S. 2005 is bad in so far as  it  annuls rights  granted  by the Ruler of Jind  under  the  agreement dated  April 1, 1938.  It was argued that Ex.  A was  not  a mere concession which could be withdrawn by the sovereign at his will and pleasure, but that it was an agreement  entered into  for valuable consideration and creating mutual  rights and  obligations,  that  the appellant had,  acting  on  the agreement, allotted to the State shares of the value of  Rs. 1,50,000  without  payment  and  had  incurred  considerable expense in working the concessions, and that, therefore,  it was  not open to the Patiala Union to go back upon it.   The decisions  in The Piqua Branch of the State Bank of Ohio  v. Knoop  (1)  and  Home of the Friendless v.  Rouse  (2)  were relied on as authorities for the proposition that a State is not   competent   to  revoke  a  grant  made   by   it   for consideration. (1) (1853) 14 L. Ed. 977, (2) (1869) 19 L. Ed- 495. 747 In The Piqua Branch of the State Bank of Ohio v. Knoop  (1), a law of the State of Ohio of the year 1845 had provided for the incorporation of Banks and it contained provisions as to the  taxes  payable  by them to the State and  the  mode  of -payment.   In  1851 another Act was passed, the  effect  of which  was to increase the tax payable and the  validity  of this Act was questioned by a Bank incorporated under the Act of 1845.  It was held by the majority of the Court that  the Act  of 1845 was a legislative contract, and that the  State Legislature was not competent to impair the rights which had been   acquired  under  that  contract.   In  Home  of   the Friendless  V.  Rouse (2), a Society called the Home of  the Friendless  was established under a charter granted  by  the State  of  Missouri.   The charter  had  provided  that  the properties  of  the Society shall be exempt  from  taxation. Subsequently, the State proposed to withdraw the  concession and  impose  tax.  It was held by the Supreme Court  of  the United  States that the charter was a contract entered  into between  the  State and the Society, and that there  was  no power in the State to go behind it. Now,  it should be observed that the decisions  cited  above were given on S. 10 of Art.  1 of the American  Constitution that  " no State shall pass a law impairing the  obligations of  contracts ". There is, in our Constitution,  no  similar provision  protecting  contractual  rights,  and  it   would therefore  be  unsafe  to rely on  American  authorities  in deciding  on  the validity of legislation  which  interferes with  rights under contracts.  And moreover, we are  dealing with  a contract entered into by a sovereign,  whose  powers were not subject to any constitutional limitation, and whose

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word  was, as contended for the appellant, law.   But  apart from  this,  there  is  an  obvious  reason  why  the  above decisions  have no application to the  present  controversy. The  point for decision there was whether a State which  had entered into a contract with its subjects conferring  rights on them was entitled to enact a law abridging or  abrogating those rights, (1)  (1853) 14 L. Ed. 977. (2) (1869) 19 L. Ed. 495. 95 748 and the answer was in the negative.  But here, the ,impugned law  is that of the Patiala Union and the contract which  it affects  is  not a contract entered into by it  but  by  the Ruler  of  Jind and unless it can be  established  that  the obligations  of the Ruler have devolved on the sovereign  of the  Patiala Union, the question whether he could  repudiate obligations undertaken by him cannot arise.  That would have arisen  for  consideration  if Art.  VI had  the  effect  of imposing  obligations on him.  But on our finding that  that is not its effect, there is no scope for the contention that the  impugned  Ordinance  is  bad  as  involving  breach  of contractual  obligations,  which were entered  into  by  the Patiala Union, or which devolved on it. (4)Lastly,  we  have to deal with the  contention  of  Mr. Pathak  that the Patiala Union had affirmed  the  agreement, Ex.   A, that, in consequence, it was bound by it as  if  it had  itself entered into it, and that the liability  of  the appellant  to income-tax should therefore be  determined  in accordance with Cl. (23) thereof.  This contention would  be irrefragable  if the Patiala Union had, as a fact,  affirmed the agreement.  But has that been established ? It has  been already observed that the rights of the appellant under  Ex. A  would  become  enforceable  only if  the  new  State  had accorded  recognition  to  them,  and  what  is   requisite, therefore, is a declaration or conduct of the Patiala  Union subsequent  to  its  formation which could  be  regarded  as amounting  to  affirmation of Ex.  A. Of that, there  is  no evidence  whatsoever.  On the other hand, the first  act  of the  Rajpramukh  after assumption of office by him  was  the promulgation  of Ordinance No. 1 of S. 2005, the  effect  of which  was to sweep away the rights of the  appellant  under Cl.  (23)  of  Ex.  A. It was argued that Art.   VI  of  the Covenant  would  at least be valuable  evidence  from  which affirmance of those rights could be inferred.  That is so  ; but that inference must relate to act or conduct of the  new State,  and that can only be after its formation  on  August 20,  1948.   If there were any acts of the new  State  which were equivocal in character, it would have been possible  to hold in the light of Art.  VI of the 749 Covenant that its intention was to affirm the concessions in Cl.  (23)  of  Ex.  A. But the act  of  the  new.  sovereign immediately after he became in titulo was the application of the Patiala State laws including the Patiala Income-tax  Act to  the  territories  of Jind involving  negation  of  those rights.   It was said that the levy of income-tax for  1948- 1949 was made in accordance with Ex.  A, but that relates to a  period anterior to the formation of the new State and  is within  the  saving enacted in the proviso to s.  3  of  the Ordinance.   The  appellant has failed to  substantiate  his plea that there has been affirmance of Cl. (23) of Ex. A  by the  Patiala State Union, and this point also must be  found against it. All the contentions urged in support of the appeal fail, and

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it must therefore be dismissed with costs. Coming next to Petition No. 276 of 1953, in addition to  the contentions  already dealt with, the petitioner  urged  that whatever its rights under the law prior to the Constitution, when  once it came into force it conferred on  the  citizens certain  fundamental rights, that the tax concessions  which the petitioner had under the agreement, Ex.  A, were  rights to  property and they were protected by Art.  19(1)(f),  and that  it was entitled to seek redress under Art. 32  of  the Constitution when those rights were violated.  The  decision in  Virendra Singh and others v. The State of Uttar  Pradesh (1) is relied on in support of this position.  This argument assumes  that there were in existence at the date  when  the Constitution came into force, some rights in the  petitioner which are capable of being protected by Art. 19(1)(f).   But in  the view which we have taken that the concessions  under Cl. (23) of Ex. A came to an end when Ordinance No. 1 of  S. 2005  was  promulgated, the petitioner had  no  rights  sub- sisting on the date of the Constitution and therefore  there was nothing on which the guarantees enacted in Art. 19(1)(f) could operate.  The petition must therefore be dismissed  on this  short  ground.   In this view, it  is  unnecessary  to express any opinion on the soundness of the contention based on Art. 295 which was (1)  [1955] I S.C.R. 415. 750 urged  in support of the petition, or on the scope of   Art. 363.  The petitioner will pay the costs of the respondents. BOSE  J.-I agree, but want to reserve my opinion on a  point that  does not arise here but which the ratio of my  learned brother’s judgment will cover unless the reservation that  I make is set out. If  I judge aright, international opinion is  divided  about the  effect  that a change of sovereignty has on  rights  to immoveable property.  The English authorities hold that  all rights to property, including those in real estate, are lost when a new sovereign takes over except in so far as the  new sovereign chooses to recognise them or confer new rights  in them.   But  that,  I  gather,  is  not  the  view  of   the International  Court  of Justice.  According to one  of  its opinions, which I have quoted at p. 426 of Virendra Singh v. State of Uttar Pradesh private rights acquired under existing law do not cease on a change of sovereignty." Certain American cases take the same view though they can be distinguished on the facts.  But this view, as I  understand it, does not extend to personal rights, such as those  based on  contract,  nor,  in any event, does  the  new  sovereign assume  any obligations of the old State in the  absence  of express  agreement.  I have referred to this at p. 427.   In any event, whether I am right in thinking that that is  what I might call the international view, I would agree that  for our ,country that is, and should be, the law so far as per- sonal rights are concerned. In  the present case, in so far as the right is  claimed  on the  basis of contract, it would fall to the ground  on  any view; and in so far as it is not founded on contract, it  is an  obligation  that  is sought to be fastened  on  the  new State.   There is no contract between the new State and  the appellant,  so  there also he is out of court; and  even  if there  was some agreement or understanding between the  high contracting   parties,  it  cannot  be  enquired  into,   or enforced, by the municipal (1)[1955] 1 S. C. R. 415. 751

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courts  of the new State.  So I agree that, so far  as  this case is concerned, the appellant must fail. But  my, learned brother’s judgment is grounded to’ a  large extent on the views of the English courts which do not  draw the distinction that I am drawing here.  I therefore want to make  it  clear  that this decision must not be  used  as  a precedent  in a case in which rights to immoveable  property are concerned.  Without in any way committing myself to  one view or the other, as at present advised, I feel it may be a pity  for us to disregard the trend of modern  international thought and continue to follow a line of decisions based  on the views of an older Imperialism, when we are not bound  by them  and  are free to mould our own laws in  the  light  of modern  thought  and  conceptions about  rights  to  and  in immoveable  property.  But in so far as the present case  is concerned,  I agree that the appeal and the  petition  under Art. 32 should both be dismissed. Appeal and petition dismissed.