TMI Blog1964 (4) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... evenues 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. - Civil Appeals Nos. 934-935 of 1963 - - - Dated:- 28-4-1964 - Judge(s) : P. B. GAJENDRAGADKAR., K. N. WANCHOO., M. HIDAYATULLAH., K. C. DAS GUPTA., N. RAJAGOPALA AYYANGAR JUDGMENT 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 promote 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Raj Pramukh, the provisions of clause (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 and Malwa became the Part B State of Madhya Bharat. Meanwhile on December 13, 1948, the United State of Gwalior, Indore and Malwa (Madhya Bharat) Regulation of Government Act (No. 1 of 1948) was passed. Section 4 of that Act provided that " when the administration of any covenanting 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 1st April, 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 Enquiry 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 Committee contained in Part I of its report read with Chapters I, II, III of Part II of its report in so far as they apply to the State of Madhya Bharat together with the recommendations contained in Chapter IX of Part II of its report were accepted by the parties subject to certain modifications and this agreement was to be 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, section 60A was introduced in the Income-tax Act in the following terms : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provided 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 Appellate Assistant Commissioner 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 declaration that under the order dated Janu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, 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 section 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 company created an obligation which was binding on the former State of Gwalior. That obligation continued to be binding on the State of Madhya Bharat as it was before the Constitution came into force by virtue of Act No. 1 of 1948 read with article VI of the covenant. Further that obligation of the State of Madhya Bharat devolved on the Government of India by clause (b) of article 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 clause (b) of article 295(E) made it into a constitutional obligation which could not be affected even by law. Thirdly, reliance was placed on the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company by special statutory provisions and that therefore the company's claim for exemption from taxation was well-founded. The argument based on article 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 conclusions of the High Court. The questions that were raised in the High Court have all been 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 connection 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 forme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chs 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 article 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 article 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 obivious 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 agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contents 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the rights and liabilities arising, for example, out of an agreement between the previous Indian State and any other person, the Government of India will in the circumstances mentioned in article 295(1)(b) be substituted for the Indian State concerned. He further contends that 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 and that it is not correct to say that article 295(1)(b) cast any constitutional obligation on the Government of India to honour the liabilities and obligations. It is urged that the Government of India would have the same defence against a contract as the previous Indian State which originally entered into it would have had, and that article 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 the contract if Parliament was competent to enact it and it did not in any way transgress the constitutional limitations. We are of opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 II 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 to the Union or Part A or Part B States against such contracts and the fact that articles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... article 294 nor article 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 effect the contract by legislation provided the law passed was valid. The position in our opinion is the same even after the devolution provided in articles 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 article 295 does not involve and is not intended to involve any change in the character of the said rights and liabilities ; and 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 article 295(1)(b) on the Government of India to fulfill the contracts irrespective of whether they were binding on the original State which entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance 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 II, Chapter II of the recommendations, where the following recommendation was made in paragraph II(4)(ii) : Any special financial privileges and immunities affecting federal revenues conferred by the States 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 granted by the agreement of April 7, 1947. The agreement between the President of India and the State of Madhya Bhar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is recommendation 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. Section 60A was introduced in the Income-tax Act by section 19 of the Taxation Laws (Extension to Merged States and Amendment) Act (LXVI I of 1961). 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, section 60A 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 section 60A which we have already set out above to Part B States. That section provides that 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompetence 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 clause 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 clause 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 Concessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommendation of the Enquiry Committee, which was made part of the agreement and to which also we have already referred. The argument is that recommendation must be treated to be an agreement under article 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 article 278 ; it was a composite agreement under articles 278, 291, 295 and 306. We have already pointed out while dealing with the argument based on article 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 article 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 agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 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 this 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 article 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 article 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 India and for the distribution of its proceeds in spite of the provision in article 266 requiring all such proceeds to be credited in the Consolidated Fund of India. When article 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 article 278(1) it seems to us that they only cover the assessment and collection and not the imposition of a tax. We may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h which article 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 article 278(1)(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 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. The appeals are, therefore, allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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