Income Tax Officer, Special Investigation Circle 'A' Nagpur vs J. B. Mangharam and Co. , Gwalior

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1964 Supreme(SC) 351

SUPREME COURT OF INDIA
P.B. Gajendragadkar, C.J.I., K.N. Wanchoo, M. Hidayatullah, K.C. Das Gupta, N. Rajagopala Ayyangar, JJ.
Income Tax Officer, Special Investigation Circle A', Nagpur - Appellant
Versus
J.B. Mangharam and Co., Gwalior and Others - Respondent
Civil Appeal No. 847 of 1963
Decided On : 28-04-1964

Important Points

Obligations of a predecessor state devolved upon the Union Government under Article 295(1)(b) of the Constitution are superseded by subsequent legislative enactments and orders.

Subject

Tax Law - Income Tax

Act Referred

CONSTITUTION OF INDIA: Art.226, Art.295(1)(b)
INCOME TAX ACT: S.60(a)

Headnote

(A) Constitution - Article 295(1)(b) - Income Tax Act - Part B States (Taxation Concessions) Order, 1950 - Tax exemption granted by a former state government - Whether such exemption is binding on the Union Government after the extension of central tax laws - Obligations devolved on the Union Government under Article 295(1)(b) are superseded by subsequent legislative provisions - Industrial undertakings are entitled only to concessions permissible under the applicable legislative orders. (Para 4)

Facts of the case:
An industrial undertaking was granted a seven-year tax exemption on profits by a former state government to encourage the establishment of a factory within its territory. Following the commencement of the Constitution and the extension of central income tax laws to the state, the Union Government issued a taxation concessions order. The undertaking was granted a five-year exemption under this order. Upon the expiry of the five-year period, the tax authority sought to assess the profits, leading the undertaking to claim the original seven-year exemption based on the agreement with the former state and the devolution of obligations under the Constitution.

Findings of Court:
The lower court had held that the original agreement was binding on the Union Government despite legislative changes. However, the court found that the legislative provisions and the taxation concessions order coming into force superseded the prior agreement.

Issues: Whether the tax exemption granted by a former state government, which became an obligation of the Union Government under Article 295(1)(b) of the Constitution, remained binding after the enactment of central tax legislation and the issuance of a taxation concessions order.

Ratio Decidendi: Obligations arising from agreements made by a former state and devolved upon the Union Government under Article 295(1)(b) of the Constitution are superseded by subsequent legislative provisions. Consequently, entities are entitled only to those concessions permissible under the prevailing law and applicable orders. (Para 4)

Result: Appeal allowed.

Legal Category Hierarchy

Advocates Appeared:
For the Appellant :C.K. Daphtry, Attorney-General for India (B.R.L. Iyengar and R.H. Dhebar, Advocates.
For the Respondents:M.C. Setalvad and Veda Vyasa, Senior Advocates (P.L. Dubey, S. Murty and K.K. Jain, Advocates, with them), I.N. Shroff, Advocate.

JUDGMENT :

Wanchoo, J.

This is an appeal on a certificate granted by the High Court of Madhya Pradesh. The respondents filed a petition under Article 226 of the Constitution praying for the issue of a writ or order in the nature of prohibition and/or mandamus directing the Income Tax Officer and the State of Madhya Pradesh from levying or collecting income tax and/or any other tax from them for Financial Years 1956-57, 1957-58 and, thereafter, up to June 1958 with respect to income from the business of their Biscuit and Confectionery Factory at Gwalior and for certain other consequential reliefs. The case of respondents was that they intended to instal a factory for the manufacture of biscuits and confectionary at Bombay, but the Government of Madhya Bharat was anxious that the factory should be started at Gwalior and therefore passed an order on May 20, 1949 granting certain concessions to the respondents if their factory was set up in Gwalior. These concessions were:

1. No customs duty would be levied on the import of building and other material required for the construction of the factory, all machinery and its parts required in connection with the factory and raw materials, packing and other material required for the factory, and on the export of finished products of the factory.

2. No tax on the profits of the factory would be levied for a period of seven years from the date the factory starts working.

3. There would be no restriction on export from Madhya Bharat of the products of the concern.

4. Within two years from the date of the Government Order, the respondents would install and work an upto date biscuit factory in Gwalior of a capacity of 8 tons and a confectionary factory of 5 tons per day of 8 hours and invest a total capital on machinery and buildings of approximately Rs. 15 lakhs.

5. The respondents would start construction of the buildings and take all necessary steps in regard to the project expeditiously from the date of sanction and show reasonable progress in regard to construction within one year.

6. The concessions mentioned in clauses 1, 2 and 3 above would not be transferable to any other party without the sanction of the Government.

2. This order was passed before the Constitution of India came into force. But as the Constitution was likely to be applied to the State of Madhya Bharat, the respondents wrote to the Government of Madhya Bharat that though there was no income tax at the time in Madhya Bharat, it was likely that income tax would be introduced after the Constitution came into force. The respondents therefore wanted to know if exemption from income tax would be available to them for the whole period of seven years. In reply to this the respondents were told by the Government of Madhya Bharat that their concession would continue for the whole period. On the faith of this undertaking, the respondents said that they built their factory at Gwalior and that the factory started working in June 1951. On January 26, 1950, the Constitution of India came into force and the former State of Madhya Bharat became the Part B State of Madhya Bharat thereunder. The Indian Income Tax Act was extended to the territory of the Part B State of Madhya Bharat from April 1, 1950 by the Finance Act (25 of 1950). Further in view of Section 60-A of the Income Tax Act the Government of India promulugated the Part B States (Taxation Concessions) Order, 1950 (hereinafter referred to as the Concessions Order) in December 1950 and clause 16 thereof provided for concessions to industrial undertakings. The respondents thereupon applied under that clause for exemption as a matter of abundant caution, though they were entitled to exemption by virtue of the agreement with the former State of Madhya Bharat. They were however granted exemption only for five years from 1952-53 to 1956-57 and they were further informed that though the exemption was granted, their income from the factory in Madhya Bharat would be liable to inclusion in their