1964 (4) TMI 20 - SC - Income Tax

Whether the order of January 18 1947 is a law? Held that - 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January 18 1947 is not a law we think it unnecessary to consider whether if it was a law it could be said to have been repealed by the extension of the Income-tax Act read with section 13 of the Finance Act 1950 to the State of Madhya Bharat. 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 article 295(1)(b) and not under article 278(1)(a). In the second place article 278(1)(a) merely contemplates an agreement between the Centre and Part B States with respect to levy collection and 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 article 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. Appeal allowed.

Issues Involved:
1. Whether the order dated January 18, 1947, is a law.
2. Whether the agreement of April 7, 1947, created a constitutional obligation under Article 295(1)(b) of the Constitution.
3. The effect of the agreement between the President of India and the State of Madhya Bharat dated February 25, 1950.
4. The applicability of Article 278 of the Constitution.

Detailed Analysis:

1. Whether the Order Dated January 18, 1947, is a Law:
The first issue was whether the order of January 18, 1947, issued by the Ruler of Gwalior, constituted a law. The court examined the context in which the order was issued, noting that it was in response to a request from Birla Brothers Limited for certain concessions to establish industries in Gwalior. The court emphasized that the order was not published and was merely a step in the negotiation process leading to the formal agreement of April 7, 1947. The court concluded that the order was not a law but a signification of the Ruler's acceptance of the concessions requested, and it had to be read in conjunction with the subsequent agreement. The court stated, "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."

2. Whether the Agreement of April 7, 1947, Created a Constitutional Obligation under Article 295(1)(b):
The second issue was whether the agreement of April 7, 1947, created a constitutional obligation under Article 295(1)(b) of the Constitution. The court held that Article 295(1)(b) merely provided for the devolution of property, assets, rights, liabilities, and obligations from the former Indian States to the Government of India. It did not confer any greater sanctity on contracts or create any constitutional obligation that could not be affected by subsequent legislation. The court stated, "Article 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."

3. The Effect of the Agreement Between the President of India and the State of Madhya Bharat Dated February 25, 1950:
The third issue concerned the effect of the agreement between the President of India and the State of Madhya Bharat dated February 25, 1950. The court noted that this agreement accepted the recommendations of the Indian States Finances Enquiry Committee, which included a provision for the continuation of special financial privileges and immunities for a maximum period of ten or fifteen years. However, the court emphasized that the agreement allowed the Central Government to limit such privileges if they were extravagant or against public interest. The court concluded that the agreement did not bind the Government of India to continue the exemptions without any modification. The court stated, "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."

4. The Applicability of Article 278 of the Constitution:
The fourth issue was whether Article 278 of the Constitution applied to the agreement of February 25, 1950. The court held that Article 278(1)(a) dealt with the levy, collection, and distribution of taxes and duties between the Government of India and Part B States, and had nothing to do with contracts between former Indian States and other persons regarding exemptions from taxes. The court concluded that the agreement of February 25, 1950, could not be treated as an agreement under Article 278(1)(a) for the purpose of binding the Government of India to the exemptions granted in the agreement of April 7, 1947. The court stated, "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."

Conclusion:
The court allowed the appeals, setting aside the order of the High Court in the writ petition and the decree in the suit. It concluded that the company was not entitled to rely on the agreement of April 7, 1947, for exemption from income-tax and super-tax, as the agreement had been superseded by subsequent legislative provisions. The court ordered that parties bear their own costs throughout.

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