TMI Blog1962 (11) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent: M. C. Setalvad, H. N.Sanyal, K. N. Rajagopal, Sastri and R. N. Sachthey JUDGMENT S. K. DAS J. - These two appeals on certificates granted by the High Court of Rajasthan have been heard together, because they raise common questions of law and fact, and this judgment will govern them both. shortly put the main question in C. A. No. 399 of 1960, is whether the appellant, the Maharaja Shree Umaid Mills Ltd., is liable to pay excise duty on the cloth and yarn manufactured and produced by it in accordance with the provisions of the Central Excises and Salt Act, 1944 which provisions were extended to the territory of the State of Rajasthan on April 1, 1950. The main question in C. A. No. 214 of 1956 is whether the same appellant if liable to pay income-tax in accordance with the provisions of the Indian Income tax Act, 1922 from the date on which those provisions were extended to the territory of the State of Rajasthan. C. A. Nos. 399 of 1960 arises out of a suit which the appellant had filed in the court of the District Judge, Jodhpur. That suit was dismissed by the learned District Judge. Then there was an appeal to the High Court of Rajasthan. The High court of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s agreement, in so far as it is relevant for our purpose said : The State will exempt or remit the following duties and royalties (a) xx xx (b) xx xx (c) xx xx (d) xx xx (e) State or Federal excise duty on goods manufactured in the mill premises. If any such duty has to be paid by the company the State will refund the same wholly to the company. (f) State or Federal income-tax or super-tax or surcharge or any other tax on income - If any such tax has to be paid by the company the State will refund the same wholly to the company." (g) xx xx In consideration of the concessions given the appellant agreed to pay to the State of Jodhpur, a royalty of 7 1/2 per cent. on the net profits of the company in each of its financial years, such payments to be made within three months after the close of each financial year. This agreement, it was stated, was acted upon by the State of Jodhpur and the appellant enjoyed an immunity from excise duty and income-tax. The Indian Independence Act, 1947, brought into existence as from August 15, 1947, a Dominion of India. The Ruler of Jodhpur acceded to the Dominion of India by means of an Instrument of Accession in the form referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han become a Part B State. For the purpose of these two appeals we have to notice the three stages of evolution in the constitutional position. First, we have the States of Jodhpur whose Ruler had full sovereignty and combined in himself all functions legislative executive and judicial. Then we have the United State of Rajasthan into which Jodhpur was integrated as from April 7, 1949, by the Covenant, Appendix XL last pages 274 to 282 of the White Paper. Lastly, we have the Part B State of Rajasthan within the framework of the Constitution of India which came into force on January 26, 1950. Jodhpur then became a part of the Part B State of Rajasthan. Both duties of excise (except alcoholic liquors etc.) and taxes on income other than agricultural income fall within List 1 of the Seventh Schedule of the Constitution of India. By section 11 of the Finance Act, 1950, the provisions of the Central Excise and Salt Act 1944, and all rules and orders made thereunder were extended to the territory of Rajasthan as from April 1, 1950. The excise officers of the Union of India recovered a sum of Rs. 4,05,014-12-0 as excise duty for the goods manufactured and produced by the appellant for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The first line of argument is that the agreement of April 17, 1941, is itself law, being the command of the Ruler of Jodhpur who was a sovereign ruler at that time and combined in himself all legislative, executive and judicial functions. This law, or legislative contract, as learned counsel for the appellant has put it, continued in force when Jodhpur merged into the United State of Rajasthan, by reason of section 3 of the Rajasthan Administration Ordinance, 1949, which continued all existing laws in any convenanting State in force immediately before the commencement of the Ordinance. It is pointed out that for the purpose of section 3 aforesaid, "law" means any rule, order or bye-law which having been made by a competent authority in a covenanting State has the force of Law in that State. The agreement of April 17, 1941, it is argued, was sanctioned by the Ruler and was his order; therefore, it had the force of a special law in Jodhpur and this law continued to be in force by reason of section 3 of the Ordinance referred to above. When the Rajpramukh of the United State of Rajasthan promulgated the Rajasthan Excise Duties Ordinance, 1949 (Ordinance No. XXV of 1949), section 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parties; it is entirely contractual in nature and it not law, because it has none of the characteristics of law. Learned counsel for the appellant has relied on the decisions of this court in Ameer-un-nissa Begum v. Mahboob Begum A. I. R. 1955 S. C. 352; Director of Endowments Government of Hyderabad v. Akram Ali A. I. R. 1956 S. C. 60 ; Madhavrao Phalke v. State of Madhya Bharat [1961] 1 S. C. R. 957 and Promod Chandra Deb v. State of Orissa [1962] Supp. I.S.R. 405. We do not think that these decisions help the appellant. It was pointed out in Madhavrao Phalke's case that in determining the question whether a particular order of a sovereign ruler in whom was combined all legislative, executive and judicial functions it would be necessary to consider the character of the orders passed. Their Lordships then examined the Kalambandi under consideration before them and pointed out that "the nature of the provisions contained in this document unambiguously impresses upon it the character of a statute or a regulation having the force of a state." Same was the position in Ameer-un-nissa's case and the case of the Director of Endowments, Government of Hyderabad A.I.R. (1956) S. 60 where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a sovereign ruler who combines in himself all functions must be treated as law irrespective of the nature or character of the order passed. We think that the true nature of the order must be taken into consideration, and the order to be law must have characteristics of law, that is, of a binding rule of conduct as the expression of the will of the sovereign, which does not derive its authority from mere consensus of mind of two parties entering into a bargain. It is not necessary for this purpose to go into theories of legal philosophy or to define law. However law may be defined, be it the command of the supreme legislature as some jurists have put it or be it a "body of rules laid down for the determination of legal rights and duties which courts recognise", there is an appreciable distinction between an agreement which is based solely on consent of parties and a law which derives its sanction from the will of the sovereign. A contract is essentially a compact between two or more parties; a law is not an agreement between parties but is a binding rule of conduct deriving its sanction from the sovereign authority. From this point of view, there is a valid distinction between a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his kind to exercise influence on another sovereign authority, assuming that the effect of the relevant clause in what learned counsel has submitted, as to which we have great doubt, will at once show that it has not the characteristics of a binding rule of conduct. It is doubtful if such an assurance to exercise influence on another sovereign authority can be enforced even as a contract not to speak of law. Learned counsel for the respondents referred us to several other clauses of the agreement which in his opinion showed that the agreement read as a whole could not be treated as law, because some of the clauses merely gave an assurance that the state would take some action in future; as for example, clause 8, which gave an assurance to amend the law in future. He contended that an assurance to amend the law in future cannot to treated as present law. There is, we think, much force in this contention. When these difficulties were pointed out to learned counsel for the appellant, he suggested that we should separate the various clauses of the agreement and treat only those clauses as law which gave the appellant a present right. We do not see how we can dissect the agreement in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, the agreement becomes a statutory obligation and is to be read as if its provisions were contained in a section of the Act (see International Railway Company v. N. P. Commission A.I.R. (1937) P.C. 214.). We fail to see how this principle has any application in the present case. There is nothing to show that the agreement in the present case was confirmed as a law by the ruler; on the contrary, we have shown earlier that it was always treated as a contract between two parties. There is no magic in the expression "legislative contract". A contract is a compact between two or more parties and is either executory or executed. If a statue adopts or confirms it, it becomes law and is no longer a mere contract. That is all that a "legislative contract" means. In the cases before us there is no "legislative contract". In view of our conclusion that the agreement of April 17, 1941, is not law, it is perhaps unnecessary to decide the further question as to whether section 3 of the Rajasthan Ordinance, 1949 (Ordinance 1 of 1949) continued it or whether section 30 of the Rajasthan Excise Duties Ordinance, 1949 (Ordinance XXV of 1949) repealed it. We may merely say that with regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontemplated under the Government of India Act, 1935. Therefore, in the absence of any term as to exemption from excise duty or income-tax to be imposed by the Union Legislature, the question of succeeding sovereigns accepting such a term and an obligation arising therefrom on January 26, 1950, by means of article 295(1)(b) of the Constitution cannot at all arise. Surely, a term or undertaking which is non-existent cannot give rise to a right or obligation in favour of or against any party. On this short ground only the claim of the appellant should be rejected against the respondents in so far as the levy of excise duty or tax by the Union is concerned, apart altogether from any question whether the Ruler of Jodhpur or even the United State of Rajasthan could legally bind the feature action of the Union Legislature. It is now well settled by a number of decisions of this court that an act of State is the taking over of sovereign powers by a State in respect of territory which was not till then a part of it, by conquest, treaty, cession or otherwise, and the municipal courts recognised by the new sovereign have the power and jurisdiction to investigate and ascerta in only such rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specially to a letter dated January 20, 1950, which was a letter from the Commissioner of Excise, Jodhpur, to the appellant. In that letter the appellant was informed that it was liable to pay excise duty in accordance with the Rajasthan Excise Duties Ordinance, 1949. The appellant sent a reply in which it stated that excise duty was not leviable by reason of the agreement dated April 17, 1941. Further correspondence followed and finally a reply was given on May 10, 1952, in which the Government of Rajasthan said that "the rights and concessions granted to the company and the liabilities and obligations accepted by the former Jodhpur State under the agreement are extraordinary, unconscionable and disproportionate to the public interest." The letter ended by saying that the claim of the appellant to exemption could not be accepted. Another letter on which the appellant relied was dated May 1, 1950. In this letter the Government of Rajasthan said that the burden of the excise duty on cloth produced by the appellant fell on the consumers who purchased the cloth; therefore the Government of Rajasthan did not consider it necessary to exempt the appellant from payment of excise duty. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o in clause (b) and no law can be made altering those rights, liabilities and obligations. In support of this argument our attention has been drawn to article 245 which says that subject to the provisions of the Constitution Parliament may make laws for the whole or any part of the territory of India, etc. The contention is that the power of parliament to make laws being subject to the provisions of the Constitution, article 295 which is one of the provisions of the Constitution controls the power of Parliament to make laws in respect of rights, liabilities, obligations, etc., referred to in article 295(1)(b), and therefore Parliament cannot any law altering those rights, liabilities and obligations. We do not think that this is a correct interpretation of article 295 of the Constitution. But before going into the question of interpretation of article 295 it may be pointed out that if the United State of Rajasthan did not affirm the agreement, then the appellant had no enforceable right against either the United State of Rajasthan or the Part B State of Rajasthan. Under article 295(1)(b) there must be a right or liability on an Indian State corresponding to a State specified in P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r limitation on the plenary powers which the legislature enjoys to legislate on the topics enumerated in the relevant Lists (Maharaja Umeg Singh v. State of Bombay [1955] 2 S. C. R. 164. In our opinion there is nothing in article 295 which expressly prohibits Parliament from enacting a law as to income-tax or excise duty in territories which became Part B States and, which were formerly Indian States, and such a prohibition cannot be read into article 295 by virtue of some contract that might have been made by the then Ruler of Indian State with any person. There is another aspect of this question. The rights, liabilities and obligations referred to in article 295(1)(b) are, by the express language of the article, subject to any agreement entered into in that behalf by the Government of India and the Government of the State. Such an agreement was entered into between the President of India and the Rajpramukh of Rajasthan on February 25, 1950. It is necessary to explain how this agreement came into existence. A committee known as the Indian States Finances Enquiry Committee was appointed by a resolution of the Government of India dated October 22, 1948, to examine and report upon, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into between the President of India and the Rajpramukh of Rajasthan of February 25, 1950, the appellant can hardly plead it has a constitutional guarantee to claim exemption from excise duty or income-tax. This finishes the second line of argument urged on behalf of the appellant. As to the pleas bases on articles 19 and 31 of the Constitution, it is enough to say that on our findings the appellants had no enforceable right either against the State Government of Rajasthan or the Union Government on January 26, 1950. It is obvious, therefore, that the appellant cannot invoke to its aid either article 19 or article 31 of the Constitution. As to the claim of refund which the appellant preferred against the State of Rajasthan, the appellant's position is no better. If neither the United State of Rajasthan nor the Part B State of Rajasthan affirmed the agreement of April 17, 1941, the appellant cannot enforce any right against respondent No. 2 on the basis of that agreement. In the trial court as also in the High Court the question of frustration of the contract was canvassed and gone into. The courts found that the contract was frustrated. In view of the findings at which we have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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