1964 Supreme(SC) 152

SUPREME COURT OF INDIA
28th April, 1964.
P.B. GAJENDRAGADKAR, C.J.I., K.N. WANCHOO, M. HIDAYATULLAH, K.C. DAS GUPTA AND N. RAJAGOPALA AYYANGAR, JJ.
Union of India etc, Appellants
Versus
Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd., Birlanagar, Gwalior and another, Respondents.
Civil Appeals Nos. 934 and 935 of 1963.
Advocates Appeared
Mr. C. K. Daphtary, Attorney General for India (M/s. R. Ganapathy Iyer and R. H. Dhebar, Advocates, with him), for Appellants (In both the Appeals ); M/s. M.C. Setalvad, K. A. Chitale and M. K. Nambyar, Senior Advocates, (M/s. Rameshwar Nath and S.N. Andley, Advocates of M/s. Rajinder Narain and Co., with them), for Respondents (In both the Appeals).

Headnote:(1) Constitution of India - Art. 372 - orders of absolute monarch or Ruler of former Indian State - whether law for purposes of the Article - relevant factors to be considered - Order of Gwalior Darbar D/- 18-1-1947 - not law within meaning of Art. 372.

       Whenever a dispute arises as to whether an order passed by an absolute monarch represented a legislative Act all relevant factors must be considered before the question is answered. These relevant factors are 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. [Para 7

       While considering whether a particular order of a Ruler continues under Art. 372 as a law the jurisprudential distinction between legislative, judicial and executive Acts must always be kept in mind and only those orders of the Ruler which are jurisprudentially legislative Acts will continue as laws under Art. 372 of the Constitution. AIR 1964 SC 1793 relied on. AIR 1964 SC 1043 and AIR 1963 SC 953 referred to. AIR 1955 SC 352 and AIR 1956 SC 60 explained. [Para 17

       Applying the above tests it was held that the Gwalior Darbar 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 significations of the Ruler's acceptance of the request. 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. The agreement having force as a contract is wholly irreconcilable with a law operating side by side simultaneously and de hors the contract. 1960 JLJ 501 reversed. [Para 19

       (2) Constitution of India - Arts. 278, 294 and 295 - scope - agreement dated 7-4-1947 by former Ruler of Gwalior State to grant exemption from payment of tax to certain corporation - contractual obligation devolving on Part B State of Madhya Bharat due to constitutional changes and ultimately, on Government of India by virtue of Art. 295 (1) (b) - Act, 295 (1) (b) does not cast any constitutional obligation on Government of India to fulfill it and it can be affected by law validly passed by Parliament - agreement dated 25-2-1950 between President of India and Madhya Bharat with regard to continuance of such privileges and immunities - effect of - Income Tax Act, 1922 - S. 60-A - Finance Act 1950 S. 13 - Part B States (Taxation Concessions) Order 1950 - Cl. l6 - effect of, is to supersede agreement dated 7-4-1947 - company held not entitled to claim exemption from payment of Income-tax by virtue of that agreement.

       The provisions of Arts, 294 and 295 relating to devolution of rights, liabilities and obligations were 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. The words "shall be the rights, liabilities and obligations of the Government of India" in Art. 295 (1) (b) cannot be read to mean that there was a clear positive instruction that the obligations so devolving shall be fulfilled. 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 had; further if the contract could be affected by legislation previously it could equally be affected by legislation after the provisions in Art. 295 (1) (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. 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 fulfill 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. AIR 1963 SC 953 and AIR 1964 SC 1495 relied on. [Para 22

       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. [Para 23

       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 is there 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 II of the Seventh Schedule to the Constitution 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. [Para 30

       By an agreement dated 7-4-1947 entered into between the Government of former Gwalior State and the respondent company, the former granted to the latter certain concessions including inter alia an exemption from payment of all taxes and duties, including income-tax for a period of 12 years from the date on which the industries to be set up by the Company in Gwalior starts working. After the formation of State of Madhya Bharat, the liabilities of the former Gwalior State devolved on the State of Madhya Bharat by virtue of the United State of Gwalior, Indore, Malwa (Madhya Bharat) Regulation of Government Act (1 of 1948) read with Art. VI of the Covenant. Ultimately after the coming into force of the Constitution the obligation of the Ruler of Gwalior under the agreement of 7-4-1947 devolved on the Government of India by virtue of Art. 295 (1) (b) of the Constitution. Thereafter by an agreement dated 25-2-1950 between the President of India and the State of Madhya Bharat, any special financial privileges and immunities affecting federal revenues conferred by the States on other individuals and corporations were ordinarily to be continued on the same terms by the Centre subject to a maximum period of 10 years and subject also to limiting in other ways any such concessions as may be extravagant or against the public interest. The Income-tax Act was extended to Part B States as from 1-4-1950 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 issued under S. 60-A Income-tax Act 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 undertaking situated in Part B States which had been granted any exemption from or any concession in respect of a income-tax or super-tax by the Ruler of an Indian State and was enjoying such exemption or concession immediately before April 1, 1950.

       The respondent company claimed exemption from payment of income-tax and super-tax contending that the Government of India was bound to honour the agreement dated 7-4-1947 entered in to by the company with the Gwalior State.

       Held (i) that the provisions with regard to income-tax which were valid and which came into force as from 1-4-1950 had the effect of superseding the agreement of 7-4-1947, under which the Company claimed exemption from payment of tax and the Company could only get such benefits as it was entitled to under the Concessions Order. It was not necessary to amend the Constitution in order to affect the agreement of 7-4-1947. The Company was therefore not entitled to rely on that agreement for the purpose of exemption with respect to income accruing to it in Madhya Bharat. [Para 28

       (ii) that in view of the very wide power which the Government of India had even under the agreement of 25-2-1950 it could not be contended that the Government of India was bound to continue the privileges and immunities to corporations without any modification. [Para 26

       (iii) that the agreement of 25-2-1950 was a composite agreement under Arts. 278, 291, 295 and 306 and the provision of the agreement relating to Corporations as to exemptions and concessions to be granted to them must be deemed to have been entered into under Art. 295 (1) (b) and not under Art. 278 (1) (a), Art. 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 Art. 295 (1) (b). The Company, therefore, could not 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 there under. 1960 JLJ 581 reversed. [Para 33