TaxTMI 
TaxTMI 
1954 (6) TMI 14
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.... terms and conditions for a period of twenty-five years commencing from the date of agreement and gave an option to the licensee to renew it for successive periods of twenty five years each up to an aggregate of 100 years counted from 21st July, 1936. Besides other benefits that the State and its subjects were to derive from the said agreement, it was stipulated that 6% cumulative preference shares fully paid-up of the face value of Rs. 1,00,000 and ordinary shares fully paidup of the total face value of Rs. 50,000 would be allotted by the company to the State or its nominee without any payment whatsoever. Out of a number of other balancing and reciprocal terms one with which we are primarily concerned is clause (23), the relevant portion of which reads as follows:- "The company shall be assessed to income-tax in accordance with the State procedure but the rate of income-tax shall always be four per cent. upto a limit of the income or rupees five lacs ad five per cent. on such income as it is in excess of rupees five lacs." Clause (24) bound the State not to impose or realize any export or import duty or any other tax on the licensee's business under the agreement o....
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.... jurisdiction belonging to the Ruler, which appertain, or are incidental to the Government of the Conevanting State shall vest in the Union and shall hereafter be exercisable only as provided by this Covenant or by the Constitution to be framed thereunder ; (b) all duties and obligations of the Ruler pertaining or incidental to the Government of the Covenanting State shall devolve on the Union and shall be discharged by it; (c) all the assets and liabilities of the Covenanting State shall be the assets and liabilities of the Union; and (d) the military forces, if any, of the Covenanting State shall become the military forces of the Union." Provisions for the administration of the new State were made in Article X of the Covenant and it runs thus:- "(1) There shall be formed, as soon as may be practicable, a Constituent Assembly in the manner indicating in Schedule II; and it shall be the duty of that Assembly to frame a Constitution of a unitary type for the Union within the framework of this Covenant and the Constitutions of India and providing for a Government responsible to the legislature. (2) Until a legislature electe....
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....re that day. The Patiala Income-tax Act was subsequently repealed and ceased to have effect by virtue of Section 13 of the Finance Act, 1950, which came into force on 8th April, 1950. But with that legislation we are not for the present concerned as the assessment in question relates to an earlier period. Ordinance No. 1 of 2005 was repealed and was in substance re-enacted by the Pepsu General Provisions (Administration) Ordinance, No. XVI of 2005 Bk. promulgated on 4th Phagan, 2005/5th February, 1949. With slight variation in language of the corresponding section in the prior Ordinance, Section 3(1) of this later Ordinance lays down:- "As from the appointed day, all laws and rules, regulations, bye-laws and notifications made thereunder, and also other provisions having the force of law, in Patiala State on the said day shall apply, mutatis mutandis, to the territories of the State and all laws in force in the other Covenanting States immediately before that day shall cease to have effect: Provided that all suits, appeals, revisions, applications, reviews, executions and other proceedings or any of them, whether civil or criminal, or revenue pending in the cou....
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....he assessee or deemed to be operative after 20th August, 1948, On an application by the assessee under Section 66 (1) of the Income-tax Act, the Tribunal has stated the case to this Court and formulated the following question for its decision:- "Whether the assessee's profits and gains earned in the calendar year 1948 were assessable for S. 2006(1949-50) at the rates in force according to the Patiala Income-tax Act of S. 2001 read with Section 3 or the Patiala & East Punjab States Union Administration Ordinance (No. 1 of 2005), as repealed and re-enacted in Section 3 of the Patiala & East Punjab States Union General Provisions (Administration) Ordinance (No. XVI of 2005), or in accordance with clause (23) of the agreement of April, 1938, above referred to?" Mr. Sikri, at the fag end of his address in reply to the arguments of the assessee's counsel, took exception to the jurisdiction of this Court to deal with the matter in question on the ground that it was expressly barred by Article 362(1) of the Constitution. Since the objection relates to jurisdiction it would be better to dispose of it before proceeding to merits. The article says:- "Notwithstandi....
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.... High Court on a reference under Section 51 of the Indian Income-tax Act, 1918, (now Section 66 in Act XI of 1922) was appealable to the Privy Council. This depended upon interpretation of the words "original jurisdiction" in clause 39 of the Letters Patent of the Bombay High Court. In the opinion of their Lordships, since these words were used in contradistinction to the words "made on appeal" mentioned earlier in the same clause the decision of the High Court from which an appeal could be taken to the Privy Council must be either a final judgment, or a final decree or a final order; and as the order made in its consultative or advisory capacity did not fall under that category it was held that the order was not appealable. It may be mentioned that in order to supersede this view Section 66A has been added to the Income-tax Act by its amendment of 1926, and any judgment of the High Court delivered on an income-tax reference is expressly made appealable to the Supreme Court. A similar question depending upon interpretation of clause 31 of the Letters Patent of the Patna High Court came up before their Lordships of the Supreme Court in Seth Premchand Satramdas v. The State of Bihar ....
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....ssioner, under Section 33 of the Act, may appeal against an order passed by the Appellate Assistant Commissioner. This second appeal by the assessee or an appeal by the Income-tax Officer is presented to and heard and decided by the Appellate Tribunal. Under Section 66 of the Act the assessee or the Commissioner may be application require the Appellate Tribunal to refer to the High Court any question of law arising out of such order and the Tribunal has then to draw up a statement of the case and refer it to the High Court. The Income-tax Commissioner and the assessee are parties to these proceedings, and obviously there is a lis or dispute between the two contestants before the High Court. In Commissioners of Inland Revenue v. Sneath(1) the question was whether a decision of the Income-tax Commissioner in assessing super-tax for a previous year did operate as res judicata to prevent a contrary decision in assessing super-tax for a later year. This depended on the question whether there was any lis inter partes before the Commissioner. Their Lordships, therefore, proceeded to examine the function and power of the Commission and observed that his duty is merely to form an estimat....
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.... It must, therefore, be regarded as having remained in operation even after the commencement of the Constitution. It is next urged that the case stated relate to period before the Constitution was adopted by the State of PEPSU and, therefore, Article 363 does not oust the jurisdiction of this Court to deal with the question in the manner it would have done before the Constitution. It is argued that the Constitution is only prospective and not retrospective and since jurisdiction was not taken away in express terms, it could not be so done merely by implication. Gondicalo Hypolito Constancio Noronha. v. Damji Devji and Others [1954] A.C. 49 is relied upon as an authority in support of the contention. In that case an action for possession of premises was brought in the Supreme Court of Kenya which then had admittedly jurisdiction to entertain the action. When the case was still pending the Ordinance, on which the action was started, was repealed by a new enactment and according to the latter jurisdiction to deal with the action was conferred upon the Rent Controller Board. On an appeal to their Lordships of the Privy Council, it was held that the latter Ordinance was not retrospec....
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....o operation. In may opinion this argument is based on a mistaken meaning given to the words 'prospective' and 'retrospective.' It is not disputed that the Constitution is prospective. The question however is that the Supreme Court having been created by the Constitution itself on the day the Court proceeds to determine the matter, what according to the Constitution of India, is the jurisdiction of this Court. This approach does not make the provision retrospective. Both the contentions were consequently overruled and it was held that the Supreme Court having been created by the Constitution its original jurisdiction to hear was limited by the proviso to Article 131 and Article 363(1), and that having regard to the subject-matter of the suit the Supreme Court had no jurisdiction to entertain the suit. This contention of the assessee must also, therefore, fail. Lastly, it is urged that for the application of the article it is necessary that the parties to the proceedings should be one of the Rulers of the Covenanting States on the one side and the Government of India on the other, and the dispute between them should be one arising out of the Covenant. State of S....
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....e respected and followed till lawfully set at rest or repealed by competent authority. Counsel further points out that there is nothing illegal or unusual in making a special law relating to one individual or a company or with respect to a particular matter. It is then contended that a private or special law can exist side by side with the general law and a later general law, unless an intention to do so is specifically declared, is not to be taken to rip off the earlier special law. Corporation of Blackpool. v. Star Estate Co. Ltd. [1922] 1 A.C. 27 is cited as an authority for the proposition that a general statute will not, in the absence of clear words, be construed as derogating from special provision in a private statute. It is, therefore, urged that clause (23) of the agreement could be abrogated only by express terms and since no mention of it was expressly made in Section 3 of Ordinance No. 1 or XVI or 2005, it should be deemed to be still subsisting. The phrase "all laws in force in such Covenanting States.....shall be repealed" in the one and "all laws.....shall cease to have effect" in the second Ordinance, it is contended, cannot have the effect of putting an end to the....
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....e Union, i.e., 20th August, 1948. By virtue of this Ordinance the Patiala Income-tax Act, 2001, was enforced and thereafter in matter of income-tax this Act was to be the law for all the subjects of the newly formed State. No discrimination of any kind or any exemption in favour of any individual was made. If there was any earlier legislation in any of the States or any exemption in favour of any individual, introduction of this legislation, by necessary implication, put an end to all these statutes or special laws by which any exemption was created. After the enforcement of this legislation the question whether or not the income of an assessee is taxable has to be decided in accordance with the new Act. In the case Rajendra Narayan Bhanja Deo v. Commissioner of Income-tax, Bihar and Orissa [1937] 5 I.T.R. 111, the Raja of a state was assessed to income-tax after his estate was included in the Province of Orissa. He claimed exemption in respect of certain incomes on the ground that under a treaty with the Government in 1803, the Government had, in view of this undertaking to pay a special annual tribute to the Government, agreed that "no further demand, however small, shall be made....
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..... This obligation or liability, like the gains derived by the Jind State by force of the above provisions of the Covenant devolved upon and became liability and assets of the Union. Under clause (a) of Article VI all rights, authority and jurisdiction which got vested in the Union was to be exercised by the Raj Pramukh only as provided by the Covenant or the Constitution to be framed thereunder. The authority of the Raj Pramukh to legislate being subject to the provisions of the Covenant, it should be regarded as limited to the extent of the obligations and liabilities which devolved upon the Union. It is, therefore, contended that the Raj Pramukh acted beyond his authority in enforcing the legislation which ignored or abrogated those obligations and liabilities, and hence the promulgation of the Patiala Income-tax Act, 2001, without any exemption or exception in favour of the assessee, is ultra vires the Covenant from which the Raj Pramukh derived that authority. Mr. Sikri on the other hand contended that Article X of the Covenant granted absolute power, without any limitations, to the Raj Pramukh to legislate. The phrase "shall hereafter be exercisable only as provided by this....
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.... Rulers of the Covenanting States? The Rulers termed it as "Covenant" which ordinarily means an agreement between two or more persons or parties or a solemn pact. The term is not without historical significance. Treaties entered into by Sovereign States under divergent circumstances have sometime been termed as such, for instance the Covenant of the League of Nations, (being the first part containing 26 Articles of the Treaty of Versailles, 1919). In order to decide the true import of the instrument in questions its Contents have to be examined in some detail. As a preamble the Covenant recites that the eight Rulers are convinced that the welfare of the people of this region can best be secured by the establishment of a State comprising the territories of their respective States with a common executive, legislature and judiciary and they, therefore, resolve to entrust to a Constituent Assembly consisting of elected representatives of the people the drawing up of a democratic Constitution for the State within the frame work of the Constitution of India, to which they had already acceded, and of the Covenant. Article Ii of the Covenant gives the name by which the new State is to b....
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....al proceedings against any person in respect of any act done in the execution of his duty as a servant of any Covenanting State before its accession without the previous sanction of the Raj Pramukh. The above synopsis of the Covenant shows that most of its provisions appertain to the rights, privileges, guarantees etc. of the contracting parties or their servants and officers. It embodies the terms on which the Rulers agreed and decided to unite or federate and bring into existence a new international persona. This is one of the circumstance under which a State personality breaks or ceased to exist and the results in such a case are not materially different from those which flow when a sovereign State cedes to or is subjugated by another sovereign State. The Instrument of Accession executed in any of the circumstances is generally known as a treaty and recognized as an act of State. Exigencies of the momentous plan required that some provision should also be made for administering the new State and as to the form of Government it should have during the transitional period. These provisions were laid down in Article IX and the proviso to Article X. Provision s of this nature in t....
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....executed before the commencement of this Constitution and has, or has been continued in operation after such commencement." Article 363(1) places a bar to interference by Courts in dispute arising out of any provisions of a treaty, covenant, etc. entered into or executed by any Ruler of an Indian State, Paragraph 240 of the White Paper on Indian States giving reasons for excluding the jurisdiction of Courts in certain matters inter alia says:- "Guarantees have been given to the Rulers under the various Agreements and Covenants for the continuance of their rights, dignities, and privileges. The rights enjoyed by the Rulers vary from State to States and are exercisable both within and without the State....Obviously, it would have been a source of perpetual regret if all these matters had been treated as justiciable. Article 363 has, therefore, been embodied in the Constitution which excludes specifically the Agreements of Merger and the Covenants from the jurisdiction of Courts except in cases which may be refereed to the Supreme Court by the President." An agreement executed by the Ruler of the State of Seraikella was under consideration before their Lordships of the ....
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....hich Kesho Ram, J. (now C.J.)., agreed, quoted with approval a few passages from the above decision of Kaul, C.J., and observed: "These observations in my opinion apply to our Covenant and in the light of them I hold that the real nature of the Covenant was that of a treaty between the Rulers of Independent States..........." The Covenant was brought into existence by exercise of the sovereign powers of the Rulers as a matter of policy in the course of their relations with one another. In my judgment, therefore, the Covenant was an act of State and should more appropriately be regarded as a treaty. It was not meant to be an instrument embodying the fundamental organic law or all the principles of government of the new State and cannot consequently acquire the status of a Constitution. The question then arises whether a law, otherwise validly promulgated by the Raj Pramukh, can be regarded as invalid or inoperative if it ignores or is in contravention of something contained in the Covenant. To be more precise the question is whether the assessee can take advantage of his agreement with the Rulers of Jind, the obligation under which is said to have devolved upon the ne....
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.... argued that the transactions of independent States between each other were governed by other laws than those which the municipal courts administer and as such Courts had neither the means of deciding what was right nor the power of enforcing any decision which they make. The contention was accepted and it was held that the declaration of the Government's intention in the treaty to make provisions for the proper maintenance of his widows, his daughters and other dependents depended upon their own notions of what was just and reasonable and not according to any rules of law to be enforced against them by their own Courts. It was further hold that the property claimed by the widow had been seized by the British Government acting as a Sovereign power, through its delegate the East Indian Company, and that the act so done with its consequences, was an act of State over which the Supreme Court of Madras had no jurisdiction. Rt. Hon'ble Lord Kingsdown, in the concluding portion of his judgment, observes: "Of the propriety or justice of that act, neither the Court below nor the Judicial Committee have the means of forming, or the right of expressing, if they had formed, a....
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....g paid to her. In the course of this judgment, Lord Coleridge. C.J., observed:- ".......She (the Queen) acted throughout out the making of the treaty and in relation to each and every of its stipulations in her sovereign character, and by her own inherent authority; and, as in making the treaty, so in performing the treaty, she is beyond the control of municipal law, and here acts are not to be examined in her own Courts. It is a treaty between herself as sovereign, and the Emperor of China as sovereign, and though he might complain of infraction, if infraction there were, of it provisions, her subjects cannot..... If there has been a failure to perform that duty, which we only suggest for the sake of argument, it is one which Parliament can and will correct: not one with which the Courts of law can deal." In Cook and Another v. Sir James Gordon Sprigg [1899] A.C. 572 certain concessions made by Paramount of Chief Pondoland, granting privileges and rights to the plaintiffs, were sought to be enforced after Sigcau, the Paramount Chief and sovereign authority, ceded his sovereignty of the British Government. The claim was rejected by the Supreme Court of the Cape of Good ....
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....ason of the conquest and annexation of the territories of the Republic by Her late Majesty the obligation of the Government of the Republic towards the suppliants in respect of the gold was binding upon His Majesty the King. The argument of the suppliants was that their claims based upon the principle of international law, that the conquering State in bound by the obligations of the conquered, could be enforced by a petition of right. The contention was not accepted by their Lordships on the ground that the obligations of the conquering State with regard to private property or private individuals. particularly land, to which the title had already been perfected before the conquest or accession, are altogether different from the obligation which arose in respect of personal rights buy contract; personal contracts or obligations of a contractual character do not pass on to the successor State. It was, therefore, held that the petition disclosed a right on the part of the suppliant which could not be enforced against His Majesty in any municipal courts. Certain American decisions cited before their Lordships, some of which are being relied upon in this case by learned counsel for the ....
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....ji and Others v. Secretary of State for India in Council [1924 ] I.L.R. 48 Bom. 613. In this case certain Naiks sued the Government of Indian for a declaration that they were proprietors of the entire land in the Talukas belonging to them and that they were not bound to accept a lease of the same on the terms offered to them by the Government. Thee Talukas were included in the territory ceded by Scindia of Gwalior to the British Government by a treaty in 1860. One of the terms of the treaty was that: "Each Government shall respect the conditions of existing leases until their expiry, and that in order that this may be made clear to all concerned, each Government shall give to its new subjected leases for the same terms of years and on the same conditions as those which they at present enjoy." The claim of the Nails based upon this clauses in the treaty was not regarded as justifiable because it arose out of an act of State. On a reference to the earlier authorities, Lord Dunedin summarised the matter as follows:- "when a territory is acquired by a sovereign State for the first time that is an act of State. It matters not how the acquisition has been brought abo....
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....ights and lass and customs of the natives cannot legally interfere with a subsequent exercise of the sovereign powers of the Crown, or invalidate subsequent orders in Council." In Civilian War Claimants Association Limited v. The King [1932] A.C. 14 the facts were like this: By the Treaty of Versailles (Articles 232) Germany undertook to make compensation for all damage done to the civilian population of the Allied and Associated Powers and to their property during the period of belligerency, and moneys were received by the Crown under this articles. By a petition of right the suppliants, as assignees of civilian claimants who had suffered loss or damage by German aggression during the war claimed on their behalf payment of compensation out of the moneys paid or payable as reparations under the above article. The case made by the petition was that the claimants had sent particulars of their claims, first, too the Foreign Claims Office, and afterwards, to the Reparation Claims Department in accordance with the instructions of His Majesty' s Government, that these claims had been duly verified by the Government, and were included in the agreed total of claims for reparations w....
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....ts. On a reference to the " wealth of weighty authority" on the point Lord Atkinson accepted the defendant's contentions and held that the agreement created rights between two Sovereign Sates and it gave the British Government fill sovereign rights over the territory, that they had a right to recognise or not to recognise the existing titles to land and that the act of the British Government in not recoginising the title of the plaintiffs to the suit lands was an act of State for which the plaintiffs could have no recourse against the Government in municipal courts. In another case for same year, Hoani Te Heuheu v. Aotea District Maori Land Board [1941] A.C. 308, a provision of an enactment was impugned as ultras vires the legislature of New Zealand inasmuch as it derogated from the rights conferred on the native owners by the treaty of Waitangi. By Article I of the treaty, all rights of sovereignty were ceded absolutely, and Article II guaranteed the rights of native. Before their Lordships of the Privy Council the appellant maintained that the treaty of Waitangi was a solemn compact defining the rights given to the people in respect of their lands and that the right thus a....
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.... of which was to exempt the company from payment of tax for a period of ten years, Chagla, C.J., who delivered the judgment of the Division Bench, in the first instance, expressed the view that all that they had to do on the reference was to look at the order which were made by the Income-tax Officer and to consider whether those order were justified by the Income-tax law. The learned Judge, however, proceeded to consider the effect of the exemption granted to the assessee by the Phaltan Darbar and observed as follows:- "It may be that the Raja of Phaltan combined all these functions in himself; but what we have to consider is what particular function was being discharged when this agreement was entered into between the assessee company and the Phaltan State. It could not possibly be said that it was the legislative function which the Raja of Phaltan was discharing when he entered into this agreement with the assessee company. It is clearly an executive act of the Phaltan Darbar and an executive act cannot override and supersede a statute or a law of the country. Even though the Phaltan State might be supreme, the Raja of Phaltan could not by a mere executive firman overri....
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....he very first day he assumed its administration by promulgating a uniform law for the whole of the Union. This contention of the assessee must consequently fail. Next it is urged that apart from the provision in the treaty devolving the obligations and liabilities of the Covenanting States upon the new States, rules of international law require that an absorbing States while succeeding to the assets should also honor the obligations and liabilities of the ceding State and that the change of Government should not affect adversely the vested property rights of the subjects. Exemption from tax being a property right the new legislation which ignored or abrogated that right of the assessee, it is contended, was invalid and in effective as it contravened the will-recognised principle of international law. In the first instance, it may not be possible to say that there is any universally or uniformly recognised rule of international law that the absorbing State is bound by the rights and monopolies arising out of the contracts with or concessions granted by the ceding State. "There is a considerable body of authority", according to Professor Oppenheim, "among writers in favour of the ....
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....f an Anglo-American convention of February 8, 1853, for the adjustment of claims between the two countries. The Commission's award stated that "it cannot entertain the claim, it being for transactions with the independent republic of Texas prior to its admission as a State of the United States": vide U.S. Arbitration's, Vol. IV, 3594. Again, the Transvaal Concession Commissioner appointed after the surrender of South Africa to Great Britain in 1903 to examine the various claims held that "it is clear that a state which has annexed another is not legally bound by any contracts made by the State which ceased to exist, and that no court of law has jurisdiction enforce such contracts if the annexing State refuses to recognise them." In West Rand Central Gold Mining Company Limited v. The King [1905] 2 K.B. 399 a case to which reference has already been made, it was argued that all contractual obligations incurred by the conquered State before war actually breaks out pass, upon annexation, to the conquering State, no matter what my be their nature, character, origin or history. In support of this contention the learned counsel for the appellant before their Lordships cited pa....
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....ticulars land as to which the title had already been perfected before the conquest or annexation, are widely different from the obligations which arise in respect of personal rights by contracts. As regards the contractual obligations of the ceding State it is for the new State to consider and decide which of them it is prepared to recognize and which others to repudiate. The principles of international law, as enunciated by the various authorities, do not insist on their wholesale recognition by the various authorities, ing States. In any case, legislation otherwise validly made an promulgated by the new State cannot be regarded as invalid or inoperative merely because it is not in consonance with or contravenes such supposed principles of international law, and no relief on that account can be granted by the municipal courts to persons adversely affected thereby. This contention of the learned counsel also must, therefore, fail. Reliance, in the end, is placed on clause (2) of Article 295 of the Constitution of India and it is urged that on the adoption of the Constitution by Pepsu all rights, liabilities, etc., whether arising out of any contract or otherwise, of the correspo....