28 April 1964
Supreme Court
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UNION OF INDIA AND OTHERS Vs GWALIOR RAYON SILK MANUFACTURING (WEAV-ING) CO. LTD. AND

Bench: GAJENDRAGADKAR, P.B. (CJ),WANCHOO, K.N.,HIDAYATULLAH, M.,GUPTA, K.C. DAS,AYYANGAR, N. RAJAGOPALA
Case number: Appeal (civil) 934 of 1963


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PETITIONER: UNION OF INDIA AND OTHERS

       Vs.

RESPONDENT: GWALIOR RAYON SILK MANUFACTURING (WEAV-ING) CO.  LTD.  AND A

DATE OF JUDGMENT: 28/04/1964

BENCH: WANCHOO, K.N. BENCH: WANCHOO, K.N. GAJENDRAGADKAR, P.B. (CJ) HIDAYATULLAH, M. GUPTA, K.C. DAS AYYANGAR, N. RAJAGOPALA

CITATION:  1964 AIR 1903            1964 SCR  (7) 892  CITATOR INFO :  D          1971 SC 530  (126,410)  R          1971 SC 846  (9)  R          1976 SC  43  (2)

ACT: Income Tax-Exemption from taxation-Agreentent with erstwhile Indian State-Indian State becoming a Part B State, under the Constitution  of  India-Binding  nature  of  the  agreement- Finance  Act,  1950  (25  of  1950),  s.  13-Part  B  States (Taxation  Concessions) Order, 1950 cl.  16-Constitution  of India, Arts. 278, 295, 372.

HEADNOTE: In October 1946, B wrote to the Government of the  erstwhile State  of Gwalior stating that certain industries  would  be established  in  Gwalior  if  the  Government  gave  certain facilities  including exemption from taxation.   The  matter was  eventually put up before the Ruler who on  January  18, 1949,  made an order sanctioning the proposals made  by  the minister which. included exemption from taxation as  desired by  B.  On  April’ 7, 1947, an agreement  was  entered  into between the Government and B in accordance with the order of the  Ruler  dated  January 18,  1947,  under  which  certain facilities  and  concessions  were  granted  to  B  for  the establishment  of  industries  in  Gwalior,  which  included exemption  from  any form of taxation on the  income  for  a period  of  12  years  from the  date  of  starting  of  the factories.   In  pursuance of the  agreement  the  appellant company was started and actual production began sometime  in June  1949 so far as the weaving section  of  manufacturing, cloth  from  artificial silk yarn was concerned,  while  the staple  fibre section of the company started actual  working on  or about February 18, 1954.  In April 1948 the Ruler  of Gwalior  entered into a covenant with the rulers of  certain other  States  for the, formation of a United  State  called Madhya  Bharat,  under  which  the  Rulers  made  over   the administration to the Raj Pramukh.Article VI of the Covenant provided,  inter alia, that the duties. and  obligations  of the Ruler pertaining or incidental to the Government of  the

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covenanting  states  shall devolve on the United  State  and shall be discharged by it.  On December 13, 1948, the Madhya Bharat Act, No. 1 of 1948, was passed which, provided, inter alia,  that  all  laws  of  the  covenanting  states.  shall continue  to remain in force until repealed or amended..  On January 26, 1950, the Constitution of India came into  force and  the State of Madhya Bharat became a Part B State  under the  Constitution.  On April 1, 1950, the Indian  Income-tax Act,.  1922,  was  extended to the Part B  State  of  Madhya Bharat,  and,  from the same date Finance  Act,  1950,  also became  applicable, to that State.  The effect of s.  13  of the  Act of 1950 was to repeal all laws relating to  income- tax  prevailing in those parts of India to which the  Indian Income-tax  Act  was  extended.  On February  25,  1950,  an agreement  was entered into between the President  of  India and the State of Madhya Bharat, which was to be in force for a period of ten years under which certain recommendations of Indian States Finances Enquiry Committee were accepted.  The Government of India also issued the Part 893 B  States (Taxation Concessions) Order, 1950, by cl.  16  of which,   certain  concessions  were  given   to   industrial undertakings  which had been granted exemption from  income- tax by the Ruler of an Indian State.  In December 1950,  the company applied under cl. 16 of the Concessions Order for an exemption from payment of income-tax for the full period  of twelve  years  as provided in the agreement dated  April  7, 1947,  but  the Government of India decided  to  exempt  the company  from  incometax and super-tax  for  the  assessment years  1950-51 to 1954-55 in respect of the weaving  section and  rejected  the claim for exemption of the  staple  fibre section which began working in April 1954.  On November  23, 1956,  the company filed a suit against the Union  of  India for  a declaration that under the agreement dated  April  7, 1947,  it  was  entitled to exemption  from  income-tax  and super-tax  for  a  period of 12 years from  June  1949  with respect to the weaving section and for a period of 12  years from February 1954 with respect to the staple fibre  section of  the  company.  The company also filed a  petition  under Art. 226 of the Constitution before the High Court of Madhya Pradesh for the same reliefs. Held:(i)  The order of January 18, 1947, was not a  law by which the Ruler of Gwalior granted exemption from income- tax to the company to be established.  It only amounted to a signification  of the Ruler’s acceptance of the request  for concessions  made  by  B and an order  to  his  officers  to proceed further in the matter after the signification of the Ruler’s acceptance of the request. (ii)In  finding out whether a particular order of  a  Ruler continued  under  Art. 372 of the Constitution of  India  as law,  the jurisprudential distinction  between  legislative, judicial  and executive acts had to be considered; and  only those  orders  of  the Ruler  which  were  jurisprudentially legislative acts would continue as laws under Art. 372. (iii)The  fact  that  the obligation of  the  Ruler  of Gwalior  under the agreement of April 7, 1947,  devolved  on the  Government  of  India  eventually  by  virtue  of  Art. 295(l)(b), did not take away the power of Parliament to pass a  valid law within its competence which did not  transgress the  constitutional limitations, and which might affect  the obligation  arising out of the agreement of April  7,  1947, and even completely supersede it. (iv)After  the  extension of the Indian Income-tax  Act  to Part B State of Madhya Bharat and the passing of the Finance Act,  1950, the exemption claimed by the company  under  the

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agreement of April 7, 1947, must fall and the company  would only  be entitled to (i) reduction in rates provided by  the Concessions Order and (ii) such exemption or concessions  as the  Central  Government  might grant under cl.  16  of  the Concessions Order. (v)Art. 278(l)(a) merely contemplated an agreement between the  Centre and Part B States with respect to levy,  collec- tion and distribution of public revenues which were leviable by  the Government of India and had nothing to do  with  any contract  between a former Indian State and  another  person with  respect to such revenues which might have  become  the obligation of the Government of India under Art. 295(1)(b) 894 (vi)The  Agreement  of February 25, 1950, with  respect  to concessions to corporations must be deemed to have been  en- tered under Art. 295(l)(b) and not under Art. 278(l)(a) and, hence, the company could not rely on that agreement and con- tend that the agreement of April 7, 1947, was binding for at least ten years thereunder.

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos. 934935  of 1963.  Appeals from the judgment and orders dated August 12, 1960,  and April 30, 1960, of the Madhya Pradesh High  Court in  Civil Suit No. 1 of 1958 and Misc.  Petition No. 101  of 1958 respectively. C.K. Daphtary, Attorney-General, R. Ganapathy Iyer and R. H. Dhebar, for the appellants (in both the appeals). M.C.  Setalvad, K. A. Chitale, M. K. Nambyar.   Rameshwar Nath  and  S. N. Andley, for the respondents  (in  both  the appeals). April 28, 1964.  The judgment of the Court was delivered by WANCHOO, J.-These two appeals on certificates granted by the Madhya Pradesh High Court raise common questions of law  and will  be  dealt with together.  The respondent  the  Gwalior Rayon   Silk   Manufacturing   (Weaving)   Company   Limited (hereinafter referred to as the company) is registered under the  Indian Companies Act.  It is necessary to set  out  how the  company came to be established in order  to  understand the  case  put  forward by the  company.   In  October  1946 Messrs.   Birla  Brothers  Limited, Gwalior,  wrote  to  the Government  of  Gwalior that they intended to  establish  at some  suitable place in Gwalior a kind of industrial  centre in which they intended to set up certain industries provided certain facilities were granted to them by the Government of Gwalior.   The  facilities for which they made  the  request were  (i) free adequate land at a suitable site;  (ii)  free processing  water  if  obtainable  from a  river  and  at  a specially  concessional rate if obtainable from a  dam;  and (iii)  exemption from any form of taxation on income  for  a period of fifteen years from the date of the starting of the factories.   On this letter being received, the  matter  was processed in the Secretariat of the former State of Gwalior. The Secretariat noting shows that the decision to  establish industries  in Gwalior was largely to be influenced  by  the decision  of  the Gwalior Government as  to  the  facilities asked  for.   The Secretariat also noted  that  no  positive scheme  regarding  the proposed industrial centre  had  been submitted  but  that only tentative proposals were  made  to ascertain if the State was willing to grant the  concessions asked  for.  It was pointed out that the main question  that required  consideration was with respect to  exemption  from any  form  of  taxation on income for a  period  of  fifteen

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years.   It  was  also pointed out that  no  income-tax  was leviable                             895 in that State at that time and that exemption from incometax for period of fifteen years would lead to the  establishment of the industries which thereafter would yield income in the shape  of taxes to the State.  It was therefore proposed  by the  Secretariat  that the concessions asked  for  might  be granted.   Later,  however,  the period  of  exemption  from taxation on income was reduced from fifteen to twelve  years and  it was recommended that this might be granted in  order to  attract  the establishment of industries in  the  State. The matter was eventually put up before the Ruler on January 18, 1947, and he passed the following order:-               "The Guzarish of the Minister for  Industries,               Commerce  and Communications dated  15-11-1946               is  sanctioned.   Exemption from any  form  of               taxation  on  the income for a  period  of  12               years  from  the  date  of  starting  of   the               factories   is   granted.    The   other   two               concessions  he has asked for should be  given               and  attempt should be made to  establish  and               start these factories as early as possible." The  substance  ’of this order was communicated  to  Messrs. Birla  Brothers  Limited  and eventually  an  agreement  was entered  into  on April 7, 1947 between  the  Government  of Gwalior  and Messrs.  Birla Brothers Limited,  which  stated that  in  accordance  with the orders  of  the  Ruler  dated January  18, 1947, it was hereby agreed to grant and  accord the   facilities,  privileges,  concessions   and   benefits hereinafter   mentioned   to  the   said   company.    These facilities,  privileges,  concessions and  benefits  in  the agreement were three, namely- (1)provision  for  sufficient and adequate land  or  lands absolutely free of any cost, revenue or cess whatsoever, for the  construction and erection of factory etc. for  starting the industries mentioned in the agreement; (2)making  of arrangements for the supply of adequate  and sufficient quantities of suitable water, whatever available, for the above-mentioned industries on most concessional  and suitable terms; (3) granting of exemption to the above mentioned  industries and/or any concern or concerns promoted or started or to  be hereinafter  promoted or started for the  establishment  and starting  of  all or any of the  above-mentioned  industries from the payment of all taxes and/or duties, in any form  or nature whatsoever, on their incomes, prolits, gains or busi- ness,  levied  or to be hereinafter levied  in  the  Gwalior State,  or  any part thereof, for a period of  twelve  years reckoned from the date on which the factory or factories  of the  abovementioned industries has or have started,  working or starts or start working. 896 In consequence of this agreement, the company was  a started and actual production began sometime in June 1949 so far  as the weaving section for manufacturing cloth from  artificial silk  yarn was concerned.  It may be added that the   staple fibre  section of the company started actual working  on  or about February 18, 1954.  That is how the company    came to be  established and started working in what was  the  former Gwalior  State  in pursuance of the agreement  of  April  7, 1949. Before however the company actually started working even the weaving section for manufacturing cloth from artificial silk yarn, certain constitutional changes took place in India  to

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which  it  is now necessary to refer.  On August  15,  1947, India  became  a Dominion and the process of  mergers  which eventually  resulted  in the emergence of the  Republic  ,of India  and its Constitution on January 26, 1950, began.   In that  process,  the Rulers of Gwalior,  Indore  and  certain other  States  in what was known as Central  India,  entered into  a  covenant for the formation of the United  State  of Gwalior,  Indore and Malwa (also known as Madhya-Bharat)  in April  1948.  Article VI of that covenant provided that  the Ruler  ,of each covenanting State shall, as soon as  may  be practicable,  and in any event not later than the first  day of  July 1948, make over the administration of his State  to the Raj Pramukh, and thereupon (1) 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 United State; (2) all duties and obligations  of the Ruler pertaining or incidental to the Government of  the covenanting  State  shall devolve on the  United  State  and shall   be  discharged  by  it;  (3)  all  the  assets   and liabilities of the covenanting State shall be the assets and liabilities  ’of  the  United State; and  (4)  the  military forces,  if  any,  of the covenanting  State  shall  be  the military  forces  of the United State.  Clause (2)  of  this Article  also  provided  that  where  in  pursuance  of  any agreement  of merger, the administration of any other  State was made over to the Raj Pramukh, the provisions of cl.  (1) would  apply to such State as they applied in relation to  a covenanting State. On July 19, 1948, the State of Madhya Bharat acceded to  the Dominion of India.  On November 24, 1949, the Raj Pramukh of Madhya Bharat issued a proclamation accepting the provisions of  the Constitution of India to be framed for the State  of Madhya  Bharat also.  On January 26, 1950, the  Constitution of  India came into force and the United State ,of  Gwalior, Indore, Malwa became the Part B State of Madhya Bharat. Meanwhile on December 13, 1948, the United State of Gwalior, Indore, Malwa (Madhya-Bharat) Regulation of 897 Government Act, No. I of 1948 was passed.  Section 4 of that Act provided that "when the administration of any  covenant- ing State has been taken over by the Raj Pramukh or when any State has merged in the United State as aforesaid, all laws, Ordinances, Acts, Rules, Regulations etc., having the  force of  Law in the said State shall continue to remain in  force until  repealed or amended under the provisions of the  next succeeding section, and shall be construed as if  references in  them  to  the  Ruler or Government  of  the  State  were references  to  the  Raj Pramukh or the  Government  of  the United  State respectively".  The company contended that  by virtue  of this Act read with Art.  VI of the covenant,  the liabilities of the covenanting States devolved on the United State of Gwalior, Indore, Malwa (Madhva-Bharat).  Further it was  contended that under cl. (b) of Art. 295(l),  when  the Constitution  came  into force all rights,  liabilities  and obligations   of   the  Government  of  any   Indian   State corresponding  to a State specified in Part B of  the  First Schedule, became the rights, liabilities and obligations  of the  Government  of India, if the purposes  for  which  such rights  were  acquired or liabilities  or  obligations  were incurred  before  such  commencement  would  thereafter   be purposes  of the Government of India relating to any of  the matters  enumerated in the Union List.  This was subject  to any agreement entered into in that behalf by the  Government of India with the Government of the State concerned.  It was therefore  contended  on  behalf of  the  company  that  the

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obligation incurred by the Ruler of Gwalior by virtue of the agreement  of  April 7, 1947 became the  obligation  of  the Government of India under cl. (b) of Art. 295(1) on  January 26, 1950. On April 1, 1950, the Indian Income-tax Act was extended  to the  Part B State of Madhya Bharat.  From the same date  the Finance Act (No.  XXV of 1950) also became applicable to the Part  B  State of Madhya Bharat by  which  incometax  became chargeable  as  provided therein on any income  accruing  or arising  in Madhya Bharat, which by then had become part  of India.  Further s. 13 to the Finance Act, 1950 provided that "if immediately before the 1st day of April, 1950, there  is in force in any Part B State other than Jammu and Kashmir or in  Manipur,  Tripura or Vindhya Pradesh or  in  the  merged territory  of Cooch-Behar any law relating to income-tax  or super-tax  or  tax on profits of business,  that  law  shall cease  to have effect except for the purposes of  the  levy, assessment  and  collection of income-tax and  super-tax  in respect of any period not included in the previous year  for the purposes of assessment under the Indian Income-tax  Act, 1922, for the year ending on the 31st day of March, 1951  or for  any subsequent year, or, as the case may be, the  levy, assessment and collection of the tax on profits of  business L/P(D)ISCI-29 898 for any chargeable accounting period ending on or before the 31st day of March, 1949".  The effect of this provision  was to  repeal all laws relating to income-tax in  its  broadest sense  prevailing  in  those parts ’of India  to  which  the Indian Income-tax Act was extended from April 1, 1950. In  the meantime, however, agreements were entered  into  by the  Government  of India with Part B States  in  accordance with  the recommendation of the Indian States  Finances  En- quiry  Committee,  1948-49 (hereinafter referred to  as  the Enquiry Committee’.  The agreement with the State of  Madhya Bharat  provided that the recommendations of the  said  Com- mittee contained in Part 1 of its report read with  Chapters 1, 11, III of Part 11 of its report insofar as they apply to the State of Madhya Bharat together with the recommendations contained  in  Chapter  IX of Part 11  of  its  report  were accepted by the parties subject to certain modifications and this  agreement  was  in force for a period  of  ten  years. Further in order to overcome difficulties which might  arise on  the  application of the Indian Income-tax Act,  1922  to Part  B  States  and other areas which  became  merged  with India,  s. 60-A was introduced in the Income-tax Act in  the following terms:               "Power to make exemption etc., in relation  to               merged  territories or to any Part B State  or               to  Chandernagore-If  the  Central  Government               considers it necessary or expedient, so to  do               for  avoiding  any  hardship  or  anomaly,  or               removing  any difficulty that may arise  as  a               result  of  the extension of this Act  to  the               merged  territories......  or to any  Part,  B               State.......  the Central Government  may,  by               general  or special order, make an  exemption,               reduction  in  rate or other  modification  in               respect  of income-tax in favour of any  class               of  income, or in regard to the whole  or  any               part  of the income of any person or class  of               persons." In  pursuance of this power, the Central  Government  issued the Part B States (Taxation Concessions) Order, 1950  (here- inafter  referred to as the Concessions Order), which  fixed

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reduced rates of income-tax and super-tax for Part B States. Clause 16 of that Order is material for our purpose and  was in these terms:-               "Concession  to  industrial  undertakings--(1)               Where  any industrial undertaking situated  in               any State claims that it has been granted               any exemption from or concession in respect of               income-tax  or  super-tax by the Ruler  of  an               Indian  State and was enjoying such  exemption               or concession immediately before the appointed               day it shall submit                                    899                an application to the Commissioner of Income                  tax giving the following particulars:--               1.    Name of the industrial undertaking.               2.    Status  (ie. whether public  or  private               company", firm, individual or Hindu  undivided               family).               3.    Nature of the business.               4.    Date of commencement of the business.               5.    Nature of the concession granted.               6.    Period for which concessions granted.               7.    Unexpired  period  of  the   concessions               after the appointed day.                (2)   Every   such   application   shall   be               accompanied  by the orders in original of  the               Indian State granting the concession  together               with a certified copy of the order.               (3)   The Commissioner shall. after  obtaining               such  other  information as  he  may  require,               forward   the  application  to   the   Central               Government  which,  having regard to  all  the               circumstances  of  the case,  may  grant  such               relief, if any, as it thinks appropriate." In  December 1950, the company applied under cl. 16  of  the Concessions Orders for concessions regarding income-tax -and super-tax.  In November 1951, the company was informed  that the  Government  of  India had decided  to  exempt  it  from income-tax  and super-tax for the assessment  years  1950-51 -to 1954-55 in respect of the weaving section.  The  company wanted exemption for the full period of twelve years as pro- vided in the agreement of 1947, but was asked to apply later and  eventually the Central Government granted exemption  to the  weaving section for another five years from 1955-56  to 1959-60.  The company’s request for exemption of the  staple fibre section which began working in April 1954 was rejected by the Government of India. In the meantime assessment proceedings had been initiated by the Income-tax Officer, A Ward, Gwalior against the  company and assessment orders were passed in March 1955, March  1956 and March 1957 with reference to the weaving section for the assessment years 1950-51, 1951-52 and 1952-53.  The  company appealed  to the Assistant Appellate  Commisssioner  against these orders.  As the contention of the company was that  it was  entitled to exemption in accordance with the  agreement of  April  7, 1947 consequent on the order of the  Ruler  of Gwalior dated January 18, 1947, it filed a suit on  November 23,  1956 against the Union of India for a declaration  that under the order dated January 18, 1947 and the agreement L/P(D)ISCI-30 900 following  thereon,  the company was entitled  to  exemption from  income-tax and super-tax and for other reliefs in  the alternative.  This suit was transferred in 1958 to the  High Court  on the application of the company under Art.  228  of

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the  Constitution.  While this suit was pending the  company filed  a  petition  under Art. 226 of  the  Constitution  on September  11, 1957 in which also it claimed that by  virtue of the order of the Ruler of Gwalior dated January 18,  1947 and  the  agreement following thereon, it  was  entitled  to exemption  from incometax and super-tax for a period  of  12 years from June 1949 with respect to the weaving section and for a period of 12 years from February 1954 with respect  to the  staple  fibre  section of the  company  and  for  other consequential reliefs in the alternative.  The High Court of Madhya  Pradesh accepted the petition of the company  and  a direction was issued restraining the Union of India and  its officers from making any assessment under the Income-tax Act and levying or collecting   income-tax   or   super-tax   in contravention of    the  exemption  given by  the  agreement dated April 7. 1947.   Further the proceedings taken by  the income-tax   authorities  in  contravention  of   the   said exemption were quashed. In view of this decision on the writ petition, the High Court decreed the suit in the same terms. The  High  Court however gave certificates to the  Union  of India and its officers to appeal to this Court; and that  is how there are two appeals before us. one against the  decree passed  in the suit and the other against order in the  writ petition,  though  as  we  have  said  already,  the  points involved in the two appeals are exactly the same. Three main contentions were raised on behalf of the  company in the High Court.  In the first place it was urged that the order  dated  January 18, 1947 was a special  law.   It  was continued by the State of Madhya Bharat by Act No. 1 of 1948 and  it continued after the Constitution came into force  by virtue  of  Art.  372.  It was not repealed  either  by  the extension  of  the  Income-tax Act to the  State  of  Madhya Bharat  from April 1, 1950 or by s. 13 of the  Finance  Act, 1950,  which applied to the State of Madhya Bharat from  the same  date.  In this connection reliance was placed  on  the agreement  between the President of India and the  State  of Madhya  Bharat  dated February 25, 1950 to show  that  there could  be no intention to repeal this special law merely  by the  extension of the Income-tax Act to the State of  Madhya Bharat or by s. 13 of the Finance Act. In  the  alternative it was submitted that if the  order  of January 18, 1947 did not have the force of law the agreement of  April 7, 1947 between the Ruler of Gwalior and the  com- pany  created an obligation which was binding on the  former State of Gwalior.  That obligation continued to be binding 901 on the State of Madhya Bharat as it was before the Constitu- tion  came  into force by virtue of Act No. 1 of  1948  read with  Art.  VI of the covenant.  Further that obligation  of the  State  of Madhya Bharat devolved on the  Government  of India  by cl. (b) of Art. 295 (1) of the Constitution.   The obligation  thus being a constitutional obligation  was  not and could not be affected by the extension of the Income-tax Act  to  the  Part B State of Madhya Bharat  read  with  the Finance  Act,  1950,  and could only be got  rid  of  by  an amendment  of the Constitution, as cl. (b) of Art.  295  (1) made it into a constitutional obligation which could not  be affected even by law. Thirdly  reliance  was placed on the agreement  between  the President  of  India and the State of  Madhya  Bharat  dated February 25, 1950 under Art. 278 of the Constitution and  it was contended that this agreement was binding under Art. 278 (1) (a) of the Constitution and the result of the  agreement was that the concessions granted in the agreement in  favour of  industrial corporations would continue and could not  be

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affected even by the enactment of a law in the shape of  the extension  of  the  Income-tax Act to the Part  B  State  of Madhya Bharat read with the Finance Act, 1950. The  High Court held that the order dated January  18,  1947 was a law and that it continued in force by virtue of Act  I of  1948 of the State of Madhya Bharat and Art. 372  of  the ,Constitution and that it was not repealed by the  extension of  the  Income-tax Act to the State of Madhya  Bharat  read with  s. 13 of the Finance Act, 1950.  It further held  that in view of cl. (b) of Art. 295 (1) of the Constitution there was  a clear positive instruction in the  Constitution  that the  obligations  devolving thereby would be  fulfilled  and therefore  the Government of India was bound to fulfil  them irrespective  of  the extension of the Income-tax  Act  read with  the  Finance Act to the State of  Madhya  Bharat  from April  1, 1950.  The High Court summed up its conclusion  as follows:- 1.that  the order dated January 18, 1947 of the Ruler  of Gwalior  State exempting the company from taxation  had  the effect  of law and the agreement executed on April  7,  1947 cast  an obligation on the Gwalior Government to exempt  the ,company from taxation; 2.that by virtue of ss. 3 and 4 of Madhya Bharat Act  No. 1 of 1948, the company’s right to get the exemption received legislative  recognition and the State of Madhya Bharat  was bound to discharge the obligation undertaken by the Ruler of the Gwalior State which devolved on it; 3.  that  it  was  this  obligation  of  the  Madhya  Bharat Government to fulfil the obligation undertaken by the  Ruler of Gwalior State of granting exemption to the company that 902 devolved  on the Government of India under Art. 295 (1)  (b) and  became a constitutional obligation of that  Government; and 4.that on a true construction of the relevant  provisions of the Income-tax Act, s. 13 of the Finance Act of 1950, and cl. 16 of the Taxation Concessions Order 1950, they did  not repeal the specific exemption granted to the company by spe- cial  statutory provisions and that therefore the  company’s claim  for  exemption from taxation was well  founded.   The argument  based  on  Art. 278 does not  seem  to  have  been considered  by the High Court; but it has been urged  before us by learned counsel for the company in support of the con- clusions of the High Court. The  questions that were raised in the High Court  have  all been  raised before us and we now proceed to deal with  them seriatim. The  first question that falls for consideration is  whether the order of January 18, 1947, is a law.  In this connection it is contended on behalf of the company that the order must be looked at independently of the agreement of April 7, 1947 which followed it and looked at in that way it must be  held to  be a law.  On the other hand,  learned  Attorney-General urges  that the order was passed by the Ruler in  connecting with  a  process  which started with  the  letter  of  Birla Brothers  Limited dated October 17, 1946 and ended with  the agreement  of  April 7, 1947.  Birla  Brothers  Limited  had asked  for  certain concessions in order to enable  them  to start  certain  industries in Gwalior and  that  matter  was processed in the Secretariat of the former State of Gwalior. Naturally  as concessions could not be granted  without  the sanction  of  the Ruler, the matter was put  up  before  the Ruler  whether he would agree to -rant concessions  and  the order  of January 18, 1947 is nothing more than the  Ruler’s acceptance  of  the prayer for grant  of  concessions  which

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eventually  culminated  in the agreement of April  7,  1947. The  learned  Attorney-General therefore contends  that  the order must be read in the context in which it was passed and if so read, it cannot be law. Before we consider the rival contentions in this behalf’  we would  like  to clear the ground with respect to  orders  of absolute Rulers.  The High Court has relied in this  connec- tion  on two decisions of this Court,  viz..  Ameer-un-Nissa Begum  v. Mehboob Begum(1), and the Director  of  Endowments Government of Hyderabad v. Akram Ali(2).  In these cases  it was observed that the Firmans were expressions of the sover- eign will of the Nizam and they were binding in the same way as  any  other law; and therefore so long  as  a  particular Firman (1)A.I.R  1955 S.C. 352. (2) A.I.R. 1956 S.C. 60. 903 held  the  field, that alone would govern  or  regulate  the rights  of  the parties concerned and that the word  of  the Nizam  was law.  It was on these general  observations  that the High Court relied to hold that the order of January  18, 1947 was law.  Since then, however, this Court bad  occasion to consider these observations in three cases, namely:  -(I) Maharaja  Shree Umaid Mills Ltd. v. Union of  India(1),  (2) the  State of Gujarat v. Vara Fiddali Badruddin  Mithibar(2) and  (3) Rajkumar Narsingh Pratap Singh Deo v. The State  of Orissa(3).  It has been pointed out in these cases that  the observations  in the earlier cases were not intended to  lay down  a general proposition that in the case of an  absolute monarch  no distinction can be made between his  legislative and  his  executive  acts.  In Maharaja  Shree  Umaid  Mills Limited(1),  the agreement between the Ruler and  the  Mills pursuant  to  the order of the Ruler was held to be  a  mere contract and not a law within the meaning of Art. 372.   The same  view has been expressed by four learned Judges in  the case  of  Vara Fiddali Badruddin  Mithibar(2).   Finally  in Rajkumar  Narsingh  Pratap Singh Deo’s case(3) it  was  held that  this  Court had not laid down  a  general  proposition about  the  irrelevance  or  inapplicability  of  the  well- recognised  distinction  between legislative  and  executive acts in regard to the orders issued by absolute monarchs and that  the  true legal position was that whenever  a  dispute arose  as to whether an order passed by an absolute  monarch represented  a legislative act all relevant factors must  be considered before the question was answered.  These relevant factors were, the nature of the order, the scope and  effect of  its  provisions, its general setting  and  context,  the method  adopted by the Ruler in promulgating legislative  as distinguished from executive orders, these and other  allied matters  would have to be examined before the  character  of the  order is judicially determined.  We need only add  that this  must  be so when the contention is that  a  particular order  of the Ruler has been continued as a law by Art.  372 of the Constitution.  We cannot impute to the  Constitution- makers  an intention to continue each and every order of  an absolute Ruler as a law whatsoever be its nature.  When Art. 372  of  the Constitution speaks of continuance of  laws  in 1950  the jurisprudential distinction  between  legislative, judicial  and executive acts must have been present  in  the mind  of the Constitution-makers and that  distinction  must always  be  kept  in mind by courts in  deciding  whether  a particular order of an absolute Ruler is law for the purpose of its continuance under Art. 372.  It may be that the order might  not be liable to challenge by any one in  the  State, while  the Ruler was there and in that sense the word  of  a Ruler might be law in his State.  But when we are

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(1)  [1963]  Supp. 2 S.C.R. 515.     (2) A.I.R.  1964  S.C. 1043. (3)  A.I.R. 1964 S.C. 1793. 904 considering whether a particular order of a Ruler  continues under  Art. 372 as law we cannot forget the  jurisprudential distinction between legislative, judicial and executive acts and   only   those   orders   of   the   Ruler   which   are jurisprudentially  legislative  acts will continue  as  laws under  Art.  372  of  the  Constitution.   Therefore  simply because  the order dated January 18, 1947 was passed  by  an absolute  Ruler it does riot necessarily follow that  it  is law  for  the purpose of Art. 372 and we have to  see  after looking  into  all the various  considerations  referred  to above whether the order can be jurisprudentially said to  be a law in order that it may continue as law under Art. 372 of the Constitution. Let  us therefore see the circumstances in which  the  order came  to  be passed.  We have already referred to  the  fact that  on October 17, 1946, Birla Brothers Limited  wrote  to the  Government  of  Gwalior saying that  they  intended  to establish  in  some  suitable place in  Gwalior  a  kind  of industrial  centre in which certain new industries would  be located  provided certain facilities requested by them  were granted  by the Government.  The facilities  requested  were three  namely,  (i) provision for adequate land  free  at  a suitable   place  (ii)  Supply  of  water  free  or   at   a concessional  rate,  and (iii) exemption from  any  form  of taxation  on income for a period of fifteen years  from  the date  of the starting of the factory.  It also appears  that the  industries would have been started in Gwalior  only  if the concessions were granted.  This request in the letter of October  17,  1946 was processed in the Secretariat  of  the former  Gwalior State.  The entire file has  apparently  not been  placed before the court but from whatever material  is available  on the record it appears that there was  first  a note  by  the  office.   Thereafter  the  Secretary  of  the department  concerned  gave  his opinion  in  which  it  was pointed out that Birla Brothers Limited would only establish industries  in  Gwalior State if they got  the  concessions. Then  there is the vinanti by the Minister  concerned.   The Minister  made  it clear that no positive  scheme  had  been submitted   but  only  tentative  proposals  were  made   to ascertain  if  the  State  would be  willing  to  grant  the concessions  asked for.  The Minister also pointed out  that there was no income-tax in the State at that time and so  if concession  from such taxation was granted it would lead  to establishment of industries which after fifteen years  might be  made liable to such taxes yielding additional income  to the  State.   Therefore the Minister  recommended  that  the concessions  as  to  income-tax as well  as  the  other  two concessions  might  be  granted.  This report  was  made  on November 15, 1946.  On November 17, 1946, the Ruler made the following note thereon: - "Submit personally on my return".  It cannot be the case  of the  company  that even this order of  the  Ruler  requiring papers to be submitted on his return was a law, though 905 it  was certainly an order requiring the Minister to  submit papers  again when the Ruler returned from somewhere.   Then on January 17, 1947, there was a Guzarish.  In this Guzarish it was said that the concessions which had been asked for  a period  of  fifteen years would be accepted if  granted  for twelve  years.   It  was also made clear  that  unless  such concessions were granted Birla Brothers Limited would not be

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induced  to open factories within the State.  Then  followed the order of the Ruler dated January 18, 1947, headed Darbar Order,  which  we  have  already set  out.   This  order  is apparently  on  the relevant file and it is not  in  dispute that  it  was never published, though it was usual  by  that time in the State of Gwalior to publish laws in some form or other:  see,  Madhaorao  Phalke  v.  The  State  of   Madhya Bharat(1). Apart  however  from  the fact that  this  order  was  never published in any form the circumstances in which it came  to be  made also clearly show that the Ruler while passing  the order  was  merely telling his officers that they  could  go ahead  to comply with the request of Birla Brothers  Limited for the three concessions that they wanted.  The form of the order  also  shows  that it could not  be  law.   The  order consists  of three sentences.  The first sentence says  that "the  Guzarihs  of the Minister......  dated  15-11-1946  is sanctioned".    Obviously  such  a  sanction   for   certain concessions  cannot  be  law.   Then  comes  the   sentence: "exemption  from  any form of taxation on the income  for  a period  of  12  years  from the  date  of  starting  of  the factories is granted".  It is this sentence which  according to  the  company is law.  It may however be  mentioned  that there  was no law as to income-tax in Gwalior State  at  the time  and  all  that this sentence could mean  in  the  cir- cumstances was that the Ruler was telling his officers  that they  might assure Birla Brothers Limited that he would  not subject them to income-tax for 12 years, even if a law as to incometax came to be passed later on.  In the  circumstances we  do not think that this sentence which was a  promise  to exempt Birla Brothers Limited from income-tax, if and when a law    of   income-tax   was   passed   in    future,    can jurisprudentially  be called a law.  Looking at  the  matter jurisprudentially,  the sentence means that if and when  the Ruler  came to pass a law as to income-tax he would  include therein  a provision exempting- Birla Brothers  Limited  for the  period  mentioned in the order.  We  are  therefore  of opinion  that this sentence even by itself cannot amount  to law.  Then follows the third sentence, which is divided into two  parts.   The  first  part  says  that  "the  other  two concessions he has asked for should be given".  This  cannot obviously  be law and it is not even contended on behalf  of the  company that the concessions as to giving of land  free and  giving of water free or at concessional rate were  law. Then follows the second part of the sentence  [1961] 1 S.C.R. 957, at 966-67. 906 which  says  that "attempt should be made to  establish  and start  these factories as early as possible".   This  cannot possibly be called law and even the company does not contend that  this part of the sentence is a law promulgated by  the Ruler of Gwalior.  Reading the order as a whole therefore it is obvious that the officers of the Ruler put up the request of  Birla Brothers Limited for certain concessions  for  his order in order that they might be able to go forward and  in particular make provision for land and water for the company to  be started by Birla Brothers Limited.  Therefore  as  we read this order of January 18, 1947, it appears that by this order the Ruler of Gwalior was saying that he was  agreeable to  the  request  of  Birla  Brothers  Limited  asking   for concessions  in  order  to  enable  them  to  start  certain industries   in  Gwalior  and  that  he  would  grant   them concessions  if  they started industries in  Gwalior.   This order was apparently communicated to Birla Brothers  Limited and  it was followed on April 7, 1947 by a formal  agreement

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between  the  State and Birla  Brothers  Limited.   Whatever doubt  might there have been as to the nature of the  order, that  is in our opinion completely set at rest by  the  fact that  it  was followed 2 1/2 months later  by  an  agreement which  specifically  recited  that in  accordance  with  the orders  of the Darbar dated January 18, 1947, the  agreement was being entered into in order to grant and accord  certain facilities  etc.  to  the company.  Looking  at  the  matter therefore in the entire context beginning with the letter of Birla  Brothers Limited of October 17, 1946 and ending  with the agreement of April 7, 1947, all that in our opinion  the order  of  January  18,  1947 says is  that  the  Ruler  was agreeable  to  grant the concessions and that  his  officers could  proceed  to  take further  steps  necessary  for  the purpose.   We  are not prepared to accept  the  argument  on behalf  of  the company that the order of January  18,  1947 must be read independently of the agreement of April 7, 1947 simply  because  the  order did Dot say  that  an  agreement should be taken from Birla Brothers Limited.  The absence in the  order of any reference to any agreement in our  opinion makes  no difference in the context in which the order  came to  be passed and we have no difficulty in holding that  the order  of January 18, 1947 was not a law by which the  Ruler of Gwalior granted exemption from income-tax to the  company to  be established.  It only amounted to a signification  of the  Ruler’s acceptance of the request for concessions  made by  Birla Brothers Limited and an order to his  officers  to proceed  further in the matter after this  signification  of the  Ruler’s acceptance of the request.That the  matter  was processed  further is clear from the fact that on  April  7, 1947 an agreement was entered into between the Government of Gwalior  and Birla Brothers Limited incorporating the  terms acceptance  of  which  had been signified by  the  Ruler  of Gwalior on January 18, 1947.  The fact that the 907 order  is called a Darbar Order is again of no  significance for  it was the Ruler who was signifying his  acceptance  of the request and the matter was cast in the form of a  Darbar Order  because his officers would have to carry out what  he had decided.  There is therefore no doubt that the order  of January  18,  1947  cannot  be  read  independently  of  the agreement  of April 7, 1947 and must be read in the  context of the entire set of circumstances beginning from the letter of Birla Brothers Limited dated October 17, 1946 and  ending with  the agreement of April 7, 1947 and so read  the  order must be held to be a mere signification of the acceptance of the request and cannot be held to be a law even with respect to  that part of it which dealt with exemption from  income- tax.  Further the form and content of the order are  against its  being  a  law.   Finally the fact  that  it  was  never published and remained only on the file concerned has also a bearing on the question and shows that it was not a law  but a  mere  signification  of the  Ruler’s  acceptance  of  the request  made by Birla Brothers Limited.  It is  plain  that the order must in the context be treated as one step in  the negotiations between the parties which ultimately led to the agreement; and so it would be idle to dissociate it from the said  negotiations and treat it as a law.  Besides the  fact that  the parties entered into a formal contract in  writing embodying  these concessions by the Ruler  as  consideration for the obligation on the part of Birla Brothers Limited  to start  the  named  industries in Gwalior  State,  is  really decisive to negative the argument urged by the company.  The agreement  having force as a contract-undoubtedly  that  was the intention both of the Government of the Ruler and  Birla

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Brothers   Limited-is  wholly  irreconcilable  with  a   law operating  side  by  side simultaneously  and  de  hors  the contract. As we have come to the conclusion that the order of  January 18,  1947 is not a law, we think it unnecessary to  consider whether  if it was a law it could be said to have  been  re- pealed  by the extension of the Income-tax Act read with  s. 13  of the Finance Act, 1950 to the State of Madhya  Bharat. Nor  is  it  necessary to consider what the  effect  of  the agreement  between the President of India and the  State  of Madhya  Bharat  dated  February 25, 1950  would  be  on  the question  of repeal and whether that agreement supports  the view that in the circumstances there could be no repeal. This brings us to the alternative argument based on Art. 295 (1) (b) of the Constitution read with the agreement of April 7,  1947.  The argument on behalf of the company is that  in view of Art. 295 (1)(b) the obligation cast on the Ruler  of Gwalior  by  the  agreement  of April  7,  1947  became  the obligation of the Government of India through the Government of  Madhya Bharat, and this was a constitutional  obligation which could not be affected by the extension of the 908 Income-tax  Act to the Part B State of Madhya  Bharat,  from April  1,  1950. it is contended that the  obligation  being cast  by  the Constitution its binding force could  only  be taken away by the amendment of the Constitution and that  no law, even if it was good law, could take away the  exemption granted  by  the  agreement.  On  the  other  hand,  learned Attorney-General contends that Art. 295 (1) merely  provides in the context of the coming into existence of the sovereign State  of ’the Republic of India for the devolution  of  the property  and  assets,  and  the  rights,  liabilities   and obligations  of the Governments of the former Indian  States corresponding  to  State specified in Part B  of  the  First Schedule to the Constitution.  He, therefore, contends  that Art. 295 (1) (b), when it provides that the liabilities  and obligations  of  any Indian State corresponding to  a  State specified   in  Part  B  of  the  First  Schedule   to   the Constitution shall in the circumstances mentioned therein be the liabilities and obligations of the Government of  India, it  only  means  that for the purposes  of  the  rights  and liabilities arising for example out of an agreement  between the previous Indian State and any other person, the  Govern- ment  of India will in the circumstances mentioned  in  Art. 295  (1) (b) be substituted for the Indian State  concerned. He  further contends that Art. 295 (1) (b) does not  in  any manner   make  the  liabilities  and   obligations   arising particularly  out  of contract any the more binding  on  the Government of India than would have been the case as against the  State  which originally entered into the  contract  and that it is not correct to say that Art. 295 (1) (b) cast any constitutional  obligation  on the Government  of  India  to honour  the liabilities and obligations.  It is  urged  that Government  of India would have the same defences against  a contract  as  the  previous Indian  State  which  originally entered into it would have had, and that Art. 295 (1) (b) is not  a  fetter on the power of Parliament  to  legislate  in respect of matters with which such contract is concerned and that  such  legislation would prevail  against  contract  if Parliament  was competent to enact it and it did not in  any way transgress the constitutional limitations. We  are  of  opinion  that the  submission  of  the  learned Attorney-General  is correct.  Art. 295 appears in Part  XII of   the  Constitution  dealing  with   finance,   property, contracts  and  suits.   This Part  is  divided  into  three

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chapters.  The first chapter deals with finance and provides for  a consolidated fund (Art. 266), a contingency  fund  if necessary  (Art.  267), and for the distribution  of  public revenues between the Union and the States (Arts. 268 to 272) and  grants by the Union to the States (Arts. 273 and  275). Article  277  provides for savings with respect  to  certain taxes,  duties,  cesses and fees which  were  being  lawfuly levied  by any Government before the constitution came  into force and Art. 278 provides for an 909 agreement between the Union and the States for a period  not exceeding  ten years, with respect to certain matters.   The other Articles upto Art. 284 in this chapter provide for the Finance Commission and make other miscellaneous provision in financial matters relating to public revenues.  These provi- sions  dealing  with  finances  have  nothing  to  do   with legislative   competence   of   Parliament   or   of   State legislatures.    Articles  285  to  289   certainly   affect legislative  competence  but  that  is  because  they   make provision in express terms in that behalf.  Articles 290 and 291 deal with certain financial adjustments and privy purses of Rulers.  Chapter 11 relates to borrowing and has  nothing to do with legislative competence.  Then comes Chapter  111, which  deals with property, contracts, rights,  liabilities, obligations  and  suits.   Article  294  provides  for   the devolution  of property and assets, and rights,  liabilities and  obligations  as  between the  Union  and  the  previous Provinces  which became Part A States when the  Constitution came into force.  Similarly Art. 295 provides for devolution of   property  and  assets,  and  rights,  liabilities   and obligations  between the Union and what were Part  B  States when the .Constitution came into force.  These provisions as to   devolution   of  property  and  assets,   and   rights, liabilities and obligations were necessary when the Republic of  India came into existence.  But there is nothing  either in  Art.  294  or  Art. 295 which in  any  way  fetters  the legislative  competence either of the Union or of the  State legislatures.   These provisions had to be made in  view  of List  I and List 11 which defined the ambit of the power  of the  Union and the States respectively’. but the  effect  of these   provisions  so  far  as  rights,   liabilities   and obligations are concerned, was only to substitute the  Union or  the  States,  as the case may be, in place  of  the  old British  Indian  Provinces or the old  Indian  States  which became  respectively  Part  A and Part B  States  under  the Constitution.   These provisions relating to  devolution  of rights, liabilities and obligations were therefore made only to  substitute in place of the old British Indian  Provinces and the old Indian States either the Union or Part A or Part B States in accordance with the scheme of division contained in  List  I  and  List 11 of the  Seventh  Schedule  to  the Constitution.   They did not confer any greater sanctity  on contracts, for example, entered into by an old Indian  State with other persons, and did not cast any fresh obligation on the  Union or the new Part A or Part B State over and  above what  was already cast on the previous States  by  contracts when  they  were made.  The defences which would  have  been open  to  the old Indian States or the  old  British  Indian Provinces  would still be open I to the Union or Part  A  or Part B States against such contracts and the fact that Arts. 294 and 295 provided for devolution made no change in  their essential nature as contracts merely.  We have not therefore been able to understand what exactly 910 is meant by saying that contracts existing from before  were

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converted  into constitutional obligations which could  only be changed by an amendment of the Constitution and could not be   affected   even  by  law  validly  passed   after   the Constitution  came into force.  Stress has particularly been laid  on  the words "shall be the  rights,  liabilities  and obligations of the Government of India" in Art. 295 (1)  (b) and  it  is suggested that that means that there  was  clear positive instruction that the obligations so devolving shall be fulfilled, We do not read any such meaning in these words and  as we see them they only provide that  liabilities  and obligations on the Government of India shall be the same  as in  the case of the previous Indian State  which  originally entered into contract and therefore the Government of  India will  have  the  same defences to such  a  contract  as  the previous  Indian  State  would  have  bad;  further  if  the contract  could  be affected by  legislation  previously  it could equally be affected by legislation after the provision in  Art. 295(l)(b).  If contracts entered into by the  Union could be overborne or nullified by law competently  enacted, the  obligations devolving on the Union under Art.  295  (1) (b)  do not enjoy any higher sanctity or immunity  from  the effect of legislation.  Similar words occur in Art. 294 (b), and  what  we  have  said about Art.  295  (1)  (b)  may  be illustrated  with  respect  to  Art.  294  (b).   Suppose  a contract  had  been entered into by the  Dominion  of  India which was not in accordance with s. 175 of the Government of India   Act,  1935,  corresponding  to  Art.  299   of   the Constitution.   Surely  it cannot be contended  that  simply because  Art. 294 (b) says that liabilities and  obligations of  the  Dominion  of India shall  be  the  liabilities  and obligations   of   the  Government  of  India,   under   the Constitution,  it  would not be open to  the  Government  of India to raise the defence that the contract was not binding on  it as it was not entered into in accordance with s.  175 of the Government of India Act, 1935, because these words in Art.  294 (b) amounted to a clear positive instruction  that obligations devolving shall be fulfilled.  We have no  doubt therefore  that neither Art. 294 nor Art. 295 cast any  such obligation  to  the  effect that  the  obligation  shall  be fulfilled, even though it might not have been binding on the previous Indian State which entered into it and even  though the  previous  State  might have the  right  to  affect  the contract  by legislation provided the law passed was  valid. The  position  in  our opinion is the same  even  after  the devolution provided in Arts. 294 and 295, and all that these Articles have done is to substitute in place of the previous States  or the British Indian Provinces, the  Government  of India  or Part A or Part B States, as the case may be.   The devolution of the rights and liabilities prescribed by  Art. 295  does  not involve and is not intended  to  involve  any change in the character of the said rights and  liabilities; and 911 so pleas which could have been raised in respect of the said rights  and  liabilities  prior  to  the  devolution  remain entirely unaffected.  There is therefore no question of  any constitutional  obligation  being  cast  by  the  provisions contained in ,Art. 295 (1) (b) on the Government of India to fulfil  the  contracts  irrespective of  whether  they  were binding  on the original State which entered into  them  and whether they can be affected by law validly passed after the Constitution came into force. We may in this connection refer to the decision in  Maharaja Shree  Umaid Mills Ltd.(1) where it was held that there  was nothing in Art. 295 to show that it fettered for all time to

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come,   the   power  of  the  Union  legislature   to   make modifications  or  changes in the  rights,  liabilities  and obligations  which  bad vested in the Government  of  India. The legislative competence of the Union legislature or  even of  the  State legislature could only  be  circumscribed  by express prohibition contained in the Constitution itself and unless and until there was any provision in the Constitution expressly  prohibiting  legislation on  the  subject  either absolutely   or  conditionally,  there  was  no  fetter   or limitation  on  the  plenary powers  which  the  legislature enjoyed  to  legislate  on  the  topics  enumerated  in  the relevant  lists.   There  is  nothing  in  Art.  295   which expressly  prohibits  Parliament from enacting a law  as  to income-tax  in  territories which became Part B  States  and which  were formerly Indian States, and such  a  prohibition cannot be read into Art. 295 by virtue of some contract that might  have been made by the then Ruler of an  Indian  State with any person. Further  in State of Rajasthan v. Shyam Lal(2),  this  Court pointed out that even though liability or obligation may  be cast on the Government of India or Part A or Part B State by Arts.  294  and 295 of the Constitution, such  liability  or obligation  was  always subject to any law made by  the  new State  repealing  the old laws and the  liabilities  arising thereunder  or even otherwise, provided the law so made  was within  the  competence  of  the  new  State  and  did   not transgress the constitutional limitations. The  fact that the obligation of the Ruler of Gwalior  under the  agreement of April 7, 1947, devolved on the  Government of India eventually by virtue of -Art. 295 (1) (b) therefore would not take away the power of parliament to pass a  valid law  within  its competence which does  not  transgress  the constitutional  limitations,  and  which  might  affect  the obligation  arising out of the agreement of April  7,  1947, and even completely superseding it. (1) [1963] Supp. 2 S.C.R. 515.       A.I.R. 1964 S.C. 1495. 912 We  have  therefore to see what happened after  the  Consti- tution  came  into force and whether any law was  passed  by Parliament which in any way affected the agreement of  1947. Reliance in this connection has been placed on behalf of the company  on the agreement of February 25, 1950  between  the President  of India and the State of Madhya Bharat to  which we  have  already  referred.  That  agreement  accepted  the recommendations of the Enquiry Committee.  Our attention  is drawn  to Part 11, Chapter 11 of the recommendations,  where the following recommendation was made in para. 11 (4) (ii):-               "Any   special   financial   privileges    and               immunities    affecting    federal    revenues               conferred by the State upon other  individuals               and   corporations   should   ordinarily    be               continued  on  the same terms by  the  Centre,               subject  to  a  maximum  period  of  ten   (or               fifteen)  years, and subject also to  limiting               in  other ways any such concessions as may  be               extravagant or against the public interest." This  recommendation  is undoubtedly part of  the  agreement made between the President of India and the State of  Madhya Bharat on February 25, 1950.  It is therefore urged that  in view of this recommendation in the agreement it was not open to  the  Government  of India to  take  away  the  exemption -ranted  by the agreement of April 7, 1947.   The  agreement between  the  President  of India and the  State  of  Madhya Bharat was entered under Arts. 278, 291, 295 and 306 of  the Constitution.   It  may be accepted that  the  provision  to

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which  we have referred above was entered into by virtue  of Art.  295 (1) which provided for devolution of property  and assets.  and rights. liabilities and obligations subject  to any agreement entered into in that behalf by the  Government of  India  with the Government of that State,  and  to  that extent  the  Government  of India was bound  to  honour  the agreement  of  February 25, 1950.  But we have to  see  what exactly this agreement provides with respect to any  special financial    privileges   and   immunities   conferred    on corporations  by  the old Indian States.  The  provision  is that   privileges  and  immunities  should   ordinarily   be continued  on  the  same terms by the Centre  subject  to  a maximum period of ten (or fifteen) years.  We may  emphasise the word "ordinarily" in this provision which shows that the Centre  was  not  bound  to  continue  the  privileges   and immunities exactly in the same form though ’.ordinarily"  it was  expected  to  do  so.  Even so, the  use  of  the  word "ordinarily" shows that it was open to the Centre to examine the privileges and immunities and decide for itself  whether they should be continued and if so in what form and to  what extent.  Further the provision as to the continuance of  the privileges and immunities was subject also to the power of 913 the  Government of India to limiting in other ways any  such ,concession  as  might  appear to it to  be  extravagant  or against  the  public  interest.  There  was  thus  a  double limitation   on  the  continuance  of  the  privileges   and immunities  of corporations.  Firstly, these privileges  and immunities  were  ordinarily  to be continued  and  that  in itself  imports  that  in  some  cases  they  might  not  be continued.  In the second place the Government of India  was given  power to limit these privileges and immunities if  it was  of the opinion that the privileges and immunities  were extravagant or against the public interest.  This again is a very wide power which the Government of India had even under the agreement of February 25, 1950.  Therefore, the argument that  the  Government  of India was bound  to  continue  the privileges  and immunities without any modification  because of the agreement of February 25, 1960 cannot prevail. Let  us  therefore  see if any provision  was  made  by  the Government of India in this behalf, to carry out this recom- mendation  of  the Enquiry Committee.  It may  be  mentioned that the recommendation was made on July 22, 1949 though  it was  brought into the agreement on February 25, 1950.   Sec- tion  60-A was introduced in the Income-tax Act by s. 19  of the Taxation laws (Extension to Merged States and Amendment) Act,  (No.  LXVII of 1949).  Originally it only  applied  to merged territories, but when the Income-tax Act was extended to part B States on April 1, 1950 by the Finance Act,  1950, s. 60-A was amended from the same date and applied to part B States  also.  Thus it seems to us clear that the  provision with respect to immunities and privileges of corporations to which  we have already referred was given effect to  by  the application  of s. 60-A which we have already set out  above to Part B States.  That section provides that if the Central Government consiciers it necessary or expedient so to do for avoiding any hardship or anomaly or removing any  difficulty that  may arise as a result of the extension of the  Income- tax  Act  to Part B States, the Central Government  may,  by general  or special order, make an exemption,  reduction  in rate  or  other  modification in respect  of  income-tax  in favour  of any class of income or in regard to the whole  or any  part of the income of any person or class  of  persons. Section 60-A therefore clearly provides for the  continuance of  exemptions  where  the  Central  Government  thought  it

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necessary  so  to do.  This provision is clearly  in  accord with the recommendation of , the Enquiry Committee to  which we  have already referred above.  This was followed  by  the Concessions Order, cl. 16 of which specifically referred  to concessions to industrial undertakings and provided that the Central Government having regard to all the circumstances of the  case  might  grant such relief if  any  as  it  thought appropriate.   It  may be mentioned further  that  the  same Order 914 provided  for lower rates of income-tax for some  time  with respect to all incomes accruing in a Part B State. The  position  therefore which emerges on April 1,  1950  is that  the  income-tax Act was extended to Part B  States  as from that date by the Finance Act, 1950, and thus income-tax became  payable  on  all income accruing in  Part  B  States subject  to the terms of the Finance Act, 1950.  Further  by the  Concessions  Order relief was given  generally  to  all income-tax payers in Part B States by reducing the rates  of income-tax  and there was a special provision in cl.  16  of the   Concessions   Order   with   respect   to   industrial undertakings  situated  in  Part B  States  which  had  been -ranted  any exemption from or any concession in respect  of income-tax or super-tax by the Ruler of an Indian State  and was enjoying such exemption or concession immediately before April 1, 1950.  It is not in dispute that it was within  the competence  of  Parliament to extend the Income-tax  Act  to Part  B  States and to subject incomes accruing  in  Part  B States  to  income-tax and super-tax by the Finance  Act  of 1950.  A specific provision was also made in the  Income-tax Act by s. 60-A to provide for exemption, reduction in  rates or other modifications in respect of income-tax accruing  in Part B States, in order to avoid any hardship or anomaly  or removing any difficulty which might arise as a result of the extension of the Income-tax Act to Part B States.  Lastly by the Concessions Order issued under s. 60-A of the Income-tax Act  rates were reduced generally for sometimes and  special provision was made with respect to concssions to  industrial undertakings  in cl. 16.  These provisions were  all  within the  competence of parliament and it is not the case of  the company that they transgress any constitutional  limitation. Therefore  as soon as these provisions came into force  from April 1. 1950, the result must be that the exemption claimed by  the  company under the agreement of April 7,  1947  must fall  in  the face of these legislative provisions  and  the company  would  only be entitled to (i) reduction  in  rates provided by the Concessions Order and (ii) such exemption or concessions as the Central Government might grant under  cl. 16  of  the  Concessions Order.   These  provisions  of  law therefore  clearly  affect  the  exemption  granted  by  the agreement  of April 7. 1947 and after these provisions  came into  force from April 1, 1950 the company could  only   get such  concessions  as  were allowable  generally  under  the Concessions  Order or specifically under cl. 16  thereof  to Industrial  undertakings  covered  by  that  clause.   These provisions clearly affect and supersede the agreement and it is not the case of the company that these provisions are not valid.  The  agreement must therefore be held to  have  been superseded  and the company could only get such benefits  as it  was  entitled  to  under  the  Concessions  Order.   The argument  therefore that the obligation arising out  of  the agreement of 1947 could 915 not  be affected by the extension of the Income-tax  Act  to Part B State of Madhya Bharat read with Finance Act of  1950

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must  fail.  We have already pointed out what the  scope  of Art.  295 (1) (b) is and we are of opinion that it  was  not necessary  to amend the Constitution in order to affect  the agreement of April 7, 1947.  The argument that the Union  of India  was still bound by the agreement of April 7, 1947  in spite of the legislative provisions made from April 1,  1950 to which we have already referred must therefore fail.   The company  is therefore not entitled to rely on the  agreement of  April 7, 1947 for the purpose of exemption and  that  it can  only  take  advantage of  the  Concessions  Order  with respect  to income accruing to it in Madhya Bharat.  It  may be  mentioned that the company applied under cl. 16  of  the Concessions  Order  and was given  certain  exemptions  with respect  to  the weaving section and that is  all  that  the company is entitled to.  As to the staple fibre section, the company did apply for exemption under cl. 16, but in all the circumstances  the Government of India did not think it  fit to  grant  exemption in that behalf.  As that order  was  in accordance with law the company cannot rest on the agreement of  April  7,  1947  which  must  be  deemed  to  have  been superseded by legislative provisions made from April 1, 1950 with respect to income-tax and super-tax in the Part B State of Madhya Bharat.  In this connection our attention is drawn to The South India Corporation Ltd. v. The Secretary,  Board of Revenue(1) on behalf of the company.  We find nothing  in that  case which in any way militates against the view  that we  have taken and it is therefore unnecessary  to  consider that  case in detail.  We are therefore of opinion that  the High Court was not correct in holding that the Government of India  was bound to fulfil the obligation undertaken by  the Ruler  of  Gwalior and was bound to grant exemption  to  the company  under the agreement of April 7, 1947,  irrespective of  the legislative provisions made with respect to  income- tax and super-tax from April 1, 1950. This brings us to the last contention based on Art. 278,  of the Constitution.  In this connection the company relies  on the agreement of February 25, 1950 to which we have  already referred and on the recommendation of the Enquiry Committee. which  was made part of the agreement and to which  also  we have  already  referred.  The argument is that  that  recom- mendation must be treated to be an agreement under Art.  278 and  would  therefore be binding for ten  years  under  that Article and thus the company would be entitled to  exemption for  at least ten years by virtue of the agreement.  We  are of opinion that there is no force in this argument.  In  the first  place,  the agreement of February 25,  1950  was  not merely  under Art. 278; it was a composite  agreement  under Arts. 278, 291, 295 (1)  A.I.R. 1964 S.C. 207. 916 and 306.  We have already pointed out while dealing with the argument  based on Art. 295 (1) (b) that this  provision  of the agreement relating to corporations as to exemptions  and concessions  to  be  granted to them may be  treated  as  an agreement  under Art. 295 (1), for it dealt with matters  of obligation  devolving  on the Government of India  and  such devolution was subject to any agreement entered into in that behalf by the Government of India with the Government of the State concerned.  But we are unable to see how the provision relating to exemptions or concessions to corporations can be said  to be an agreement under Art. 278.  The relevant  part of  Art. 278 (1), on which reliance is placed on  behalf  of the company isas follows: -               "(1)Notwithstanding    anything   in    this

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             Constitution,  the Government of  India,  may,               subject to the provisions of clause (2), enter               into  an  agreement with the Government  of  a               State  specified  in  Part  B  of  the   First               Schedule with respect to-               (a)   the  levy and collection of any  tax  or               duty  leviable by the Government of  India  in               such  State  and for the distribution  of  the               proceeds thereof otherwise than in  accordance               with the provisions of this Chapter;               (b).............................................." Clause  (2) of Art. 278 to which cl. (1) is  subject  merely prescribes the period for which the agreement will remain in force,  the  maximum being ten years in  all.   Article  278 appears  in  Ch.  I of Part XII with which we  have  already dealt  with  briefly.  As we read Art. 278 (1) (a)  we  find nothing  in it which has any relevance with respect  to  any agreement   between   Ruler  of  an  Indian  State   and   a corporation.   Article 278(l)(a) provides for  an  agreement between the Government of India and the Government of a Part B  State  for  the levy or collection of  any  tax  or  duty leviable  by the Government of India in such State  and  for the  distribution of the proceeds thereof otherwise than  in accordance  with the provisions of Chapter 1 Part  XII;  and this   provision   is  "notwithstanding  anything   on   the Constitution."  The  earlier  provisions  in  this   Chapter provide  for  the levy and collection of certain  taxes  and duties  leviable  by the Government of India and  for  their distribuion between the Government of India and the  States. Article 268 (1) deals with such stamp duties and such duties of  excise  on  medicinal and  toilet  preparations  as  are mentioned on the Union List and provides that they shall  be levied  by he Government of India but shall be collected  by the  States  within which such duties are leviable  and  the proceeds  of such duties are to be assigned to  that  State. Similarly  Art. 69 deals with certain other duties and  says that they shall be levied and collected by the Government of India but shall 917 be assigned to the States as provided therein.  Article  270 speaks of taxes on income other than agricultural income and lays  down  that they shall be levied and collected  by  the Government  of India and distributed between the  Union  and the  States in the manner provided thereunder.  Article  272 speaks  of Union duties of Excise other than such duties  of excise on medicinal and toilet preparations as are mentioned in  the Union List and lays down that they shall  be  levied and collected by the Government of India, but, if Parliament by  law  so  provides,  there  shall  be  paid  out  of  the Consolidated  Fund of India. to the States to which the  law imposing  the duty extends sums equivalent to the  whole  or any part of the net proceeds. It  will  be clear therefore that the earlier  part  of  the Chapter  has  provided for levy and  collection  of  certain taxes and duties leviable by the Government of India and the distribution of the proceeds between the Government of India and the States.  All that Art. 278 (1) does is to permit  by agreement variation in the manner of levy and collection  as compared to the provision in the earlier part of the Chapter and  also  variation in the manner of  distribution  of  the proceeds  as compared to the provision in the earlier  part. Article  278 (1) (a) only deals with levy and collection  of certain  public revenues and their distribution between  the Government  of India and the States.  It gives power to  the Government  of  India  to  enter  into  agreement  with  any

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Government  of  a  State specified in Part B  of  the  First Schedule  by  which variation may be made in the  manner  of levy and collection of any tax or duty leviable by the  Gov- ernment of India and the distribution of the proceeds,  even though  that  might not be in accordance  with  the  earlier provisions  in  the Chapter.  Article 278 (1) (a)  thus  has nothing to do with any obligation arising out of  agreements between  Rulers  of former Indian States and  other  persons with  respect to exemption from any tax or duty.  Nor do  we see  anything in Art. 278 (1) which in any way  affects  the legislative   competence   of   Parliament   or   of   State Legislatures to pass any law within their respective powers. All  that it provides is that the earlier provisions in  the Chapter relating to levy, collection and distribution of any tax  or  duty  may  be varied for a  certain  period  on  an agreement between the Government of India and the Government of  a Part B State.  This was clearly necessary in  view  of the  fact that many sources of revenue of States which  came to form part B States had to be taken over by the Government of  India in view of the division of powers of  taxation  in List I and List 11 of the Seventh Schedule to the  Constitu- tion  and that might have created a gap in the  revenues  of Part B States.  Therefore the Government of India was  given the  power for a period of ten years at the outside to  come to an agreement with any Part B State in the matter of  levy or  collection  of any tax or duty leviable by  it  and  its distribution. 918 Article 278(l)(a) would also affect Art. 266 which  provides that all revenues received by the Government of India  shall form  one consolidated fund except the proceeds  of  certain taxes and duties which were assigned in whole or in part  to the  States by the other provisions of this  Chapter.   What Art. 278 (1) does is that it permits the Government of India to  enter into agreements not only with respect to levy  and collection  of duties and taxes specifically dealt  with  in this Chapter but also with respect to other taxes and duties leviable  by the Government of India which would  ordinarily go to the Consolidated Fund of India and to provide how such taxes and duties which are made part of the agreement may be levied  and  collected  and in what manner  they  should  be distributed  between the Government of India and the Part  B State  concerned.   But for this provision it may  not  have been open to the Government of India to give help to Part  B States  which  required it beyond what is  provided  in  the earlier  provisions of this Chapter.  All that Art. 278  (1) does is to provide for further help to Part B States in case it was necessary by entering into agreements with them as to the  manner  of  levy and collection of  any  tax  and  duty leviable by the Government of Ind a and for the distribution of  its  proceeds  in  spite of the  provision  in  Art  266 requiring   all  such  proceeds  to  be  credited   in   the Consolidated Fund of India. When Art. 278 (1) (a) speaks of levy and collection it  does not  deal  with  legislative competence but  only  with  the actual  levy  of tax and its collection-, and  this  in  our opinion  is clear from the later provision which relates  to the  distribution of the proceeds resulting from  such  levy and  collection.  It is true that sometimes the word  "levy" also   includes  imposition  of  tax  and  not  merely   its assessment  and collection; but in the context in which  the words  "levy and collection" have been used in Art.  278(l), it  seems  to  us that they only cover  the  assessment  and collection  not  the imposition of a tax.  We  may  in  this connection  refer to the words of Art. 277 which  speaks  of

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any taxes, duties, cesses or fees which were being  lawfully levied by the Government of any State or by any municipality or  other local authority or body.  Those words came up  for consideration by this Court in The Town Municipal  Committee v.  Ramchandra Vasudeo Chimote (1) and it was held  that  in the  context the words "being lawfully levied" in  Art.  277 meant that the tax was actually levied and not merely that a law imposing a tax had been made.  Similarly in the  context of  Art.  278 (1) (a) the levy and collection  of  any  tax, followed  as  it is by the distribu. tion of  its  proceeds, mean the actual assessment and collection of the tax and the way  in which that should be done and have no  reference  to legislative competence as to the imposition of the tax.   We are of opinion that Art. 278 (1) (a) deals only with  public revenues and how they should be assessed and collected (1)  A.I.R. 1964 S.C. 1166. 919 and distributed between the Union of India and Part B States in  case  there is an agreement in that behalf  between  the Union of India and Part B States.  It further provides  that in  case  of such agreement the earlier  provisions  of  the Chapter relating to the levy, collection and distribution of taxes  and  duties would not apply and the  agreement  would prevail for a maximum period of ten years. As  to the non obstante clause with which Art. 278  (1)  (a) opens,  that  was apparently necessary in  view  of  certain provisions  of  the  Constitution as to the  extent  of  the executive  power  of  the Union and  the  States.   Thus  it becomes possible to the Government of India if it so decides to enter into an agreement with a Part B State with  respect to  a tax leviable by the Government of India that  the  tax shall be assessed and collected by the State through its own officers  and  the State may retain the entire  proceeds  so assessed  and collected even though the executive  power  of the  Union under Art. 73 extends to matters with respect  to which Parliament has power to make laws and ordinarily if  a law as to taxation is passed by Parliament within its  power its assessment and collection would be by officers under the Government  of India.  Article 278 (1) (a)  however  permits that such assessment and collection may also by agreement be left to the States in spite of the provisions in other  part of  the Constitution.  The nonobstante clause  however  with which Art. 278 (1) opens does not in our opinion affect  the legislative  competence of Parliament even with  respect  to duties and taxes which are dealt with by an agreement  under Art.  278(l)(a).   We are therefore of opinion that  in  the first place the agreement of February 25, 1950 on which  the company  relies with respect to concessions to  corporations must be deemed to have been entered under Art. 295 (1)  (b), and  not under Art. 278 (1) (a).  In the second place,  Art. 278  (1)  (a) merely contemplates an agreement  between  the Centre and Part B States with respect to levy collection  or distribution  of public revenues which are leviable  by  the Government of India and has nothing to do with any  contract between  a  former  Indian State  and  another  person  with respect   to  such  revenues  which  may  have  become   the obligation  of  the Government of India under Art.  295  (1) (b).  The company therefore cannot rely on the agreement  of February  25, 1950 in this connection and contend  that  the agreement  of  April 7, 1947 was binding for  at  least  ten years thereunder. We are therefore of opinion that the view taken by the  High Court  is incorrect.  The appeals are therefore allowed  and the  order  of the High Court in the writ petition  and  the decree of the High Court in the suit are set aside, and  the

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writ   petition  and  the  suit  are  dismissed.    In   the circumstances  we  order  parties to bear  their  own  costs throughout. Appeal allowed. 920