Pre-merger tax exemptions require recognition by the successor sovereign to remain enforceable after merger.

An income-tax exemption granted by a ruler of an erstwhile State was not enforceable against the Union of India after merger because rights arising from pre-cession sovereign arrangements do not automatically survive in municipal courts. Such stipulations remain part of the act of State unless the successor sovereign recognises the right. On the facts, there was no sufficient material to show recognition by the Dominion or Union of India, and mere non-assessment for a short period did not amount to acceptance of the exemption. The claimed exemption therefore failed.

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Issues: Whether an exemption from income-tax granted by the ruler of the erstwhile State could be enforced against the Government of India after merger, and whether such a right had been recognised so as to survive in municipal courts.

Analysis: Rights claimed under covenants or arrangements made by an independent sovereign before cession or merger do not, by that fact alone, become enforceable in the courts of the successor sovereign. Such stipulations are ordinarily part of the act of State and are not enforceable unless the new sovereign has recognised the right. On the facts, no sufficient material showed recognition by the Dominion or Union of India of the claimed exemption, and mere non-assessment for a short period could not amount to such recognition.

Conclusion: The claimed exemption was not enforceable against the Union of India, and the petition failed.

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