Pre-merger tax concessions yield to later uniform fiscal law where the successor sovereign does not recognise the earlier agreement.

Article 363(1) did not bar the High Court from answering the income-tax reference because the dispute arose from the later assessment regime and the earlier Jind agreement, not from the covenant itself. The Court further stated that a pre-merger tax concession granted by a former sovereign is not enforceable in municipal courts after merger unless the successor sovereign recognises it. The PEPSU Administration Ordinances, by applying the Patiala income-tax law to the territory, were treated as displacing inconsistent prior concessions, including clause (23) of the 1938 agreement. The assessment was therefore governed by the PEPSU income-tax law rather than the earlier concessional arrangement.

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Issues: (i) Whether Article 363(1) of the Constitution of India barred the High Court from answering the reference because the dispute arose out of a covenant entered into by the Rulers of the Covenanting States. (ii) Whether the assessee could claim assessment at the concessional rate in clause (23) of the 1938 agreement with the Ruler of Jind, or whether the later PEPSU income-tax law governed the assessment.

Issue (i): Whether Article 363(1) of the Constitution of India barred the High Court from answering the reference because the dispute arose out of a covenant entered into by the Rulers of the Covenanting States.

Analysis: The bar under Article 363(1) extends to disputes arising out of a treaty, covenant, agreement or similar instrument entered into before the Constitution and continuing in operation thereafter. A reference under the income-tax law still involves a lis between the assessee and the Revenue, and the Court's consultative character does not exclude jurisdiction. However, the Court held that the dispute referred did not arise out of the covenant itself, but out of the earlier agreement with the Ruler of Jind and the later income-tax law enforced under the PEPSU ordinances.

Conclusion: Article 363(1) did not bar the Court from answering the reference.

Issue (ii): Whether the assessee could claim assessment at the concessional rate in clause (23) of the 1938 agreement with the Ruler of Jind, or whether the later PEPSU income-tax law governed the assessment.

Analysis: The Covenant was treated as a treaty and an act of State, not as a municipal constitution capable of enforcing the earlier contractual concession in court. Rights arising from the prior sovereign arrangement could be recognised only if the new sovereign expressly or impliedly adopted them. The PEPSU Administration Ordinances applied the Patiala income-tax law to the Union territory and, by necessary implication, displaced inconsistent prior concessions, including the tax concession in the Jind agreement. The later law was also not invalidated by international law principles or by Article 295(2) of the Constitution, which was inapplicable to the pre-Constitution assessment period.

Conclusion: The assessee was not entitled to the contractual concessional rate, and the assessment was governed by the Patiala income-tax law as applied in PEPSU.

Final Conclusion: The reference was answered against the assessee and the assessment was upheld under the PEPSU income-tax regime rather than the earlier Jind agreement.

Ratio Decidendi: A concession granted by a former sovereign under a pre-merger agreement is not enforceable in municipal courts after merger unless the successor sovereign recognises it, and a later valid uniform fiscal law may impliedly repeal such prior concession.

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