Pre-Constitution tax concession and contractual exemption did not override later valid fiscal legislation or survive constitutional devolution.

A pre-Constitution concession embodied in a State order and later contract did not acquire the status of continuing law under Article 372 because the 18 January 1947 order was an acceptance of the company's request, not a legislative act of general application. The 7 April 1947 agreement did not become an immutable constitutional obligation under Article 295(1)(b), as that provision concerns devolution of rights and liabilities and does not protect contractual tax exemptions from valid fiscal legislation. Article 278 likewise did not preserve the company's exemption, since it governs intergovernmental revenue arrangements, not private tax immunities. The claimed exemption was therefore superseded by valid legislation.

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Issues: (i) Whether the order of 18 January 1947 was a law capable of continuing in force under Article 372 of the Constitution of India. (ii) Whether the obligation created by the agreement of 7 April 1947 became a constitutional obligation under Article 295(1)(b) of the Constitution of India so as to override the Income-tax Act and the Finance Act. (iii) Whether the agreement of 25 February 1950 under Article 278 of the Constitution of India preserved the exemption from income-tax and super-tax for the company.

Issue (i): Whether the order of 18 January 1947 was a law capable of continuing in force under Article 372 of the Constitution of India.

Analysis: The order was examined in its full setting, beginning with the company's request for concessions, the processing of that request by the State authorities, and the later formal agreement of 7 April 1947. The order was not published as law, was directed to the officers to proceed with the concessions sought, and was followed by a contract which embodied the same arrangement. On its nature, form, context, and effect, it was treated as an acceptance of the request and not as a legislative act of general application.

Conclusion: The order of 18 January 1947 was not law and could not continue as law under Article 372.

Issue (ii): Whether the obligation created by the agreement of 7 April 1947 became a constitutional obligation under Article 295(1)(b) of the Constitution of India so as to override the Income-tax Act and the Finance Act.

Analysis: Article 295 was construed as a provision dealing with devolution of property, assets, rights, liabilities, and obligations on the coming into force of the Constitution, and not as a provision conferring immunity on pre-existing contracts from valid legislation. The Government of India succeeded to the position of the former State, but acquired the same rights and defences that the State itself had under the contract. Once Parliament validly extended the Income-tax Act to Part B States and made consequential provision by the Finance Act and the Taxation Concessions Order, the contractual exemption could not prevail against those legislative provisions.

Conclusion: The agreement of 7 April 1947 did not create an unalterable constitutional obligation, and the exemption stood superseded by valid legislation.

Issue (iii): Whether the agreement of 25 February 1950 under Article 278 of the Constitution of India preserved the exemption from income-tax and super-tax for the company.

Analysis: Article 278 was held to concern agreements about levy, collection, and distribution of public revenues between the Union and a Part B State, not agreements conferring tax exemptions on private corporations. The recommendation incorporated into the 25 February 1950 arrangement was read as permitting the Centre to continue or modify concessions in appropriate cases, not as binding it to maintain every prior exemption. The provision therefore did not enlarge the company's contractual rights or bar Parliament from legislating on income-tax in Part B States.

Conclusion: The company could not rely on Article 278 or the 25 February 1950 agreement to preserve the claimed exemption.

Final Conclusion: The claimed exemption under the 1947 arrangement was not enforceable against the later fiscal legislation and the relief granted by the High Court was unsustainable.

Ratio Decidendi: A pre-Constitution concession granted by a princely State as part of a contractual arrangement does not become an immutable constitutional obligation on devolution under Article 295, and valid fiscal legislation enacted within legislative competence prevails over such contractual exemptions; Article 278 concerns intergovernmental revenue arrangements and not private tax exemptions.

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