Tax concession under pre-merger agreement displaced by later ordinance; covenant rights unenforceable without post-formation recognition.

A tax concession granted under a 1938 Patiala agreement was held not to survive the later Ordinance that applied the Patiala income-tax laws and repealed earlier laws in force before the takeover. The Covenant and article VI were treated as part of an act of State on the formation of the new sovereign, and they did not create enforceable municipal rights unless recognised by the new State. No post-formation affirmation of the concession was shown. Because the concession had already ceased to operate when the Constitution came into force, no subsisting right remained for fundamental-rights protection, and the levy could not be invalidated.

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Issues: (i) Whether the Ordinance applying the Patiala income-tax law displaced the tax concession contained in the 1938 agreement; (ii) whether the Covenant and article VI could be enforced to preserve the appellant's rights against the new sovereign; (iii) whether the Patiala Union had affirmed the 1938 agreement so as to make the concession binding on it; and (iv) whether the appellant could invoke fundamental rights under the Constitution to challenge the levy.

Issue (i): Whether the Ordinance applying the Patiala income-tax law displaced the tax concession contained in the 1938 agreement.

Analysis: The agreement was treated as conferring special rights, but section 3 of the Ordinance expressly applied the laws in force in the Covenanting State and repealed the earlier laws in force immediately before the takeover. The language was held to be clear and unqualified, leaving no scope to preserve the earlier tax concession by implication.

Conclusion: The tax concession under the 1938 agreement was displaced by the Ordinance and the levy under the Patiala income-tax law was valid.

Issue (ii): Whether the Covenant and article VI could be enforced to preserve the appellant's rights against the new sovereign.

Analysis: The Covenant was held to be an act of State arising from the formation of a new sovereign State after the merger of the Covenanting States. Clauses in such a treaty or covenant, including provisions said to protect pre-existing rights, were held not to create enforceable rights in municipal courts against the new sovereign unless and until those rights were recognised by that sovereign through law or other binding post-formation act.

Conclusion: Article VI of the Covenant did not confer an enforceable right on the appellant against the Patiala Union.

Issue (iii): Whether the Patiala Union had affirmed the 1938 agreement so as to make the concession binding on it.

Analysis: Affirmation required some post-formation declaration or conduct by the new State recognising the concession. The first legislative act of the new sovereign applied the Patiala laws and negated the concession, and there was no evidence of any later recognition sufficient to amount to affirmation.

Conclusion: The appellant failed to prove affirmation of the 1938 agreement by the Patiala Union.

Issue (iv): Whether the appellant could invoke fundamental rights under the Constitution to challenge the levy.

Analysis: The constitutional challenge depended on the existence of subsisting rights when the Constitution came into force. Since the concession had already ceased to operate under the Ordinance, there was no surviving right capable of protection under the relevant fundamental-rights provisions.

Conclusion: The constitutional challenge failed.

Final Conclusion: The appellant's tax concession did not survive the takeover and the resulting levy could not be invalidated on the basis of the Covenant, the agreement, or fundamental rights.

Ratio Decidendi: Clauses in a covenant or treaty made during the transition to a new sovereign do not, without post-formation recognition by the new sovereign, create enforceable rights in municipal courts, and pre-existing contractual or fiscal concessions not so recognised may be displaced by later valid legislation.

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