TaxTMI 
TaxTMI 
1964 (4) TMI 20
X X X X Extracts X X X X
X X X X Extracts X X X X
....ovided certain facilities were granted to them by the Government of Gwalior. The facilities for which they made the request were : (i) free adequate land at a suitable site ; (ii) free processing water if obtainable from a river and at a specially concessional rate if obtainable from a dam ; and (iii) exemption from any form of taxation on income for a period of fifteen years from the date of the starting of the factories. On this letter being received, the matter was processed in the Secretariat of the former State of Gwalior. The Secretariat noting shows that the decision to establish industries in Gwalior was largely to be influenced by the decision of the Gwalior Government as to the facilities asked for. The Secretariat also noted that no positive scheme regarding the proposed industrial centre had been submitted but that only tentative proposals were made to ascertain if the State was willing to grant the concessions asked for. It was pointed out that the main question that required consideration was with respect to exemption from any form of taxation on income for a period of fifteen years. It was also pointed out that no income-tax was leviable in that State at that time an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....period of twelve years reckoned from the date on which the factory or factories of the above-mentioned industries has or have started working or starts or start working. In consequence of this agreement, the company was started and actual production began some time in June, 1949, so far as the weaving section for manufacturing cloth from artificial silk yarn was concerned. It may be added that the staple fibre section of the company started actual working on or about February 18, 1954. That is how the company came to be established and started working in what was the former Gwalior State in pursuance of the agreement of April 7, 1949. Before however the company actually started working even the weaving section for manufacturing cloth from artificial silk yarn, certain constitutional changes took place in India to which it is now necessary to refer. On August 15, 1947, India became a Dominion and the process of mergers which eventually resulted in the emergence of the Republic of India and its Constitution on January 26, 1950, began. In that process, the Rulers of Gwalior, Indore and certain other States in what was known as Central India, entered into a covenant for the formati....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... with article VI of the covenant, the liabilities of the covenanting States devolved on the United State of Gwalior, Indore and Malwa (Madhya Bharat). Further it was contended that under clause (b) of article 295(1), when the Constitution came into force all rights, liabilities and obligations of the Government of any Indian State corresponding to a State specified in Part B of the First Schedule, became the rights, liabilities and obligations of the Government of India, if the purposes for which such rights were acquired or liabilities or obligations were incurred before such commencement would thereafter be purposes of the Government of India relating to any of the matters enumerated in the Union List. This was subject to any agreement entered into in that behalf by the Government of India with the Government of the State concerned. It was therefore contended on behalf of the company that the obligation incurred by the Ruler of Gwalior by virtue of the agreement of April 7, 1947, became the obligation of the Government of India under clause (b) of article 295(1) on January 26, 1950. On April 1, 1950, the Indian Income-tax Act was extended to the Part B State of Madhya Bharat. F....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Central Government considers it necessary or expedient, so to do for avoiding any hardship or anomaly, or for removing any difficulty that may arise as a result of the extension of this Act to the merged territories ...... or to any Part B State ...... the Central Government may, by general or special order, make an exemption, reduction in rate or other modification in respect of income-tax in favour of any class of income, or in regard to the whole or any part of the income of any person or class of persons. " In pursuance of this power, the Central Government issued the Part B States (Taxation Concessions Order, 1950 (hereinafter referred to as the Concessions Order), which fixed reduced rates of income-tax and super-tax for Part B States. Clause 16 of that order is material for our purpose and was in these terms : Concessions to industrial undertakings.----(1) Where any industrial undertaking situated in any State claims that it has been granted any exemption from or concession in respect of income-tax or super-tax by the Ruler of an Indian State and was enjoying such exemption or concession immediately before the appointed day it shall submit an application to the Commissi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efs in the alternative. The suit was transferred in 1958 to the High Court on the application of the company under article 228 of the Constitution. While this suit was pending, the company filed a petition under article 226 of the Constitution on September 11, 1957, in which also it claimed that by virtue of the order of the Ruler of Gwalior dated January 18, 1947, and the agreement following thereon, it was entitled to exemption from income-tax and super-tax for a period of 12 years from June, 1949, with respect to the weaving section and for a period of 12 years from February, 1954, with respect to the staple fibre section of the company and for other consequential reliefs in the alternative. The High Court of Madhya Pradesh accepted the petition of the company and a direction was issued restraining the Union of India and its officers from making any assessment under the Income-tax Act and levying or collecting income-tax or super-tax in contravention of the exemption given by the agreement dated April 7, 1947. Further the proceedings taken by the income-tax authorities in contravention of the said exemption were quashed. In view of this decision on the writ petition, the High Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... contended that this agreement was binding under article 278(1)(a) of the Constitution and the result of the agreement was that the concessions granted in the agreement in favour of industrial corporations would continue and could not be affected even by the enactment of a law in the shape of the extension of the Income-tax Act to the Part B State of Madhya Bharat read with the Finance Act, 1950. The High Court held that the order dated January 18, 1947, was a law and that it continued in force by virtue of Act 1 of 1948 of the State of Madhya Bharat and article 372 of the Constitution and that it was not repealed by the extension of the Income-tax Act to the State of Madhya Bharat read with section 13 of the Finance Act, 1950. It further held that in view of clause (b) of article 295(1) of the Constitution there was a clear positive instruction in the Constitution that the obligations devolving thereby would be fulfilled and therefore the Government of India was bound to fulfil them irrespective of the extension of the Income-tax Act read with the Finance Act to the State of Madhya Bharat from April 1, 1950. The High Court summed up its conclusion as follows : 1. that the orde....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... he would agree to grant concessions and the order of January 18, 1947, is nothing more than the Ruler's acceptance of the prayer for grant of concession which eventually culminated in the agreement of April 7, 1947. The learned Attorney-General therefore contends that the order must be read in the context in which it was passed and, if so read, it cannot be law. Before we consider the rival contentions in this behalf we would like to clear the ground with respect to orders of absolute Rulers. The High Court has relied in this connection on two decisions of this court, viz., Ameer-un-Nissa Begum v. Mahboob Begum and Director of Endowments, Government of Hyderabad v. Akram Ali. In these cases it was observed that the Firmans were expressions of the sovereign will of the Nizam and they were binding in the same way as any other law ; and therefore so long as a particular Firman held the field, that alone would govern or regulate the rights of the parties concerned and that the word of the Nizam was law. It was on these general observations that the High Court relied to hold that the order of January 18, 1947, was law. Since then, however, this court had occasion to consider these ob....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the State, while the Ruler was there and in that sense the word of a Ruler might be law in his State. But when we are considering whether a particular order of a Ruler continues under article 372 as a law we cannot forget the jurisprudential distinction between legislative, judicial and executive acts and only those orders of the Ruler which are jurisprudentially legislative acts will continue as laws under article 372 of the Constitution. Therefore, simply because the order dated January 18, 1947, was passed by an absolute Ruler it does not necessarily follow that it is law for the purpose of article 372 and we have to see after looking into all the various considerations referred to above whether the order can be jurisprudentially said to be a law in order that it may continue as law under article 372 of the Constitution. Let us therefore see the circumstances in which the order came to be passed. We have already referred to the facts that on October 17, 1946, Birla Brothers Limited wrote to the Government of Gwalior saying that they intended to establish in some suitable place in Gwalior a kind of industrial centre in which certain new industries would be located provided cer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7, headed Darbar Order, which we have already set out. This order is apparently on the relevant file and it is not in dispute that it was never published, though it was usual by that time in the State of Gwalior to publish laws in some form or other : see Madhaorao Phalke v. State of Madhya Bharat. Apart, however, from the fact that this order was never published in any form the circumstances in which it came to be made also clearly show that Ruler while passing the order was merely telling his officers that they could go ahead to comply with the request of Birla Brothers Limited for the three concessions that they wanted. The form of the order also show that it could not be law. The order consists of three sentences. The first sentence says that " the Guzarish of the Minister, dated November 15, 1946, is sanctioned ". Obviously such a sanction for certain concessions cannot be law. Then comes the sentence : " exemption from any form of taxation on the income for a period of 12 years from the date of starting of the factories is granted ". It is this sentence which according to the company is law. It may however be mentioned that there was no law as to income-tax in Gwalior State....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y set at rest by the fact that it was followed 2 1/2 months later by an agreement which specifically recited that in accordance with the orders of the Darbar dated January 18, 1947, the agreement was being entered into in order to grant and accord certain facilities, etc., to the company. Looking at the matter therefore in the entire context beginning with the letter of Birla Brothers Limited of October 17, 1946, and ending with the agreement of April 7, 1947, all that in our opinion the order of January 18, 1947, says is that the Ruler was agreeable to grant the concessions and that his officers could proceed to take further steps necessary for the purpose. We are not prepared to accept the argument on behalf of the company that the order of January 18, 1947, must be read independently of the agreement of April 7, 1947, simply because the order did not say that an agreement should be taken from Birla Brothers Limited. The absence in the order of any reference to any agreement in our opinion makes no difference in the context in which the order came to be passed and we have no difficulty in holding that the order of January 18, 1947, was not a law by which the Ruler of Gwalior gran....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Limited----is wholly irreconcilable with a law operating side by side simultaneously and de hors the contract. As we have come to the conclusion that the order of January 18, 1947, is not a law, we think it unnecessary to consider whether if it was a law it could be said to have been repealed by the extension of the Income-tax Act read with section 13 of the Finance Act, 1950, to the State of Madhya Bharat. Nor is it necessary to consider what the effect of the agreement between the President of India and the State of Madhya Bharat dated February 25, 1950, would be on the question of repeal and whether that agreement supports the view that in the circumstances there could be no repeal. This brings us to the alternative argument based on article 295(1)(b) of the Constitution read with the agreement of April 7, 1947. The argument on behalf of the company is that in view of article 295(1)(b) the obligation cast on the Ruler of Gwalior by the agreement of April 7, 1947, became the obligation of the Government of India through the Government of Madhya Bharat, and this was a constitutional obligation which could not be affected by the extension of the Income-tax Act to the Part B St....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and suits. This Part is divided into three chapters. The first chapter deals with finance and provides for a consolidated fund (article 266), a contingency fund if necessary (article 267), And for the distribution of public revenues between the Union and the States (articles 268 to 272) and grants by the Union to the States (articles 273 and 275). Article 277 provides for savings with respect to certain taxes, duties, cesses and fees which were being lawfully levied by any Government before the Constitution came into force and article 278 provides for an agreement between the Union and the States for a period not exceeding ten years, with respect to certain matters. The other articles up to article 284 in this chapter provide for the Finance Commission and make other miscellaneous provisions in financial matters relating to public revenues. These provisions dealing with finances have nothing to do with legislative competence of Parliament or of State Legislatures. Articles 285 to 289 certainly affect legislative competence but that is because they make provision in express terms in that behalf. Articles 290 and 291 deal with certain financial adjustments and privy purses of Ruler....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tly is meant by saying that contracts existing from before were converted into constitutional obligations which could only be changed by an amendment of the Constitution and could not be affected even by law validly passed after the Constitution came into force. Stress has particularly been laid on the words shall be the rights, liabilities and obligations of the Government of India in article 295(1)(b) and it is suggested that that means that there was a clear positive instruction that the obligations so devolving shall be fulfilled. We do not read any such meaning in these words and as we see them they only provide that liabilities and obligations on the Government of India shall be the same as in the case of the previous Indian State which originally entered into contract and, therefore, the Government of India will have the same defences to such a contract as the previous Indian State would have had ; further if the contract could be effected by legislation previously it could equally be effected by legislation after the provisions in article 295(1)(b). If contracts entered into by the Union could be overborne or nullified by law competently enacted, the obligations devolving o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Maharaja Shree Umaid Mills Ltd., where it was held that there was nothing in article 295 to show that it fettered for all time to come the power of the Union legislature to make modifications or changes in the rights, liabilities and obligations which had vested in the Government of India. The legislative competence of the Union legislature or even of the State legislature could only be circumscribed by express prohibition contained in the Constitution itself and unless and until there was any provision in the Constitution expressly prohibiting legislation on the subject either absolutely or conditionally, there was no fetter or limitation on the plenary powers which the legislature enjoyed to legislate on the topics enumerated in the relevant Lists. There is nothing in article 295 which expressly prohibits Parliament from enacting a law as to income-tax in territories which became Part B States and which were formerly Indian States, and such a prohibition cannot be read into article 295 by virtue of some contract that might have been made by the then Ruler of an Indian State with any person. Further in State of Rajasthan v. Shyam Lal, this court pointed out that even though li....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by virtue of article 295(1) which provided for devolution of property and assets, and rights, liabilities and obligations subject to any agreement entered into in that behalf by the Government of India with the Government of the State, and to that extent the Government of India was bound to honour the agreement of February 25, 1950. But we have to see what exactly this agreement provides with respect to any special financial privileges and immunities conferred on corporations by the old Indian States. The provision is that privileges and immunities should ordinarily be continued on the same terms by the Centre subject to a maximum period of ten (or fifteen) years. We may emphasise the word " ordinarily " in this provision which shows that the Centre was not bound to continue the privileges and immunities exactly in the same form though " ordinarily " it was expected to do so. Even so, the use of the word " ordinarily " shows that it was open to the Centre to examine the privileges and immunities and decide for itself whether they should be continued and if so in what form and to what extent. Further the provision as to the continuance of the privileges and immunities was subject a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ance of exemptions where the Central Government thought it necessary so to do. This provision is clearly in accord with the recommendation of the Enquiry Committee to which we have already referred above. This was followed by the Concessions Order, clause 16 of which specifically referred to concessions to industrial undertakings and provided that the Central Government having regard to all the circumstances of the case might grant such relief, if any, as it thought appropriate. It may be mentioned further that the same order provided for lower rates of income-tax for some time with respect to all incomes accruing in a Part B State. The position therefore which emerges on April 1, 1950, is that the Income-tax Act was extended to Part B States as from that date by the Finance Act, 1950, and thus income-tax became payable on all income accruing in Part B States subject to the terms of the Finance Act, 1950. Further by the Concessions Order relief was given generally to all income-tax payers in Part B States by reducing the rates of income-tax and there was a special provision in clause 16 of the Concessions Order with respect to industrial undertakings situated in Part B States whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....B State of Madhya Bharat read with the Finance Act of 1950, must fail. We have already pointed out what the scope of articles 295(1)(b) is and we are of opinion that it was not necessary to amend the Constitution in order to affect the agreement of April 7, 1947. The argument that the Union of India was still bound by the agreement of April 7, 1947, in spite of the legislative provisions made from April 1, 1950, to which we have already referred must therefore fail. The company is therefore not entitled to rely on the agreement of April 7, 1947, for the purpose of exemption and that it can only take advantage of the Concessions Order with respect to income accruing to it in Madhya Bharat. It may be mentioned that the company applied under clause 16 of the Concessions Order and was given certain exemptions with respect to the weaving section and that is all that the company is entitled to. As to the staple fibre section, the company did apply for exemption under clause 16, but in all the circumstances the Government of India did not think it fit to grant exemption in that behalf. As that order was in accordance with law the company rest on the agreement of April 7, 1947, which must ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his Constitution, the Government of India may, subject to the provisions of clause (2), enter into an agreement with the Government of a State specified in Part B of the First Schedule with respect to (a) the levy and collection of any tax or duty leviable by the Government of India in such State and for the distribution of the proceeds thereof otherwise than in accordance with the provisions of this chapter ; ........ Clause (2) of article 278 to which clause (1) is subject merely prescribes the period for which the agreement will remain in force, the maximum being ten years in all. Article 278 appears in Chapter I of Part XII with which we have already dealt with briefly. As we read article 278(1)(a) we find nothing in it which has any relevance with respect to any agreement between the Ruler of an Indian State and a corporation. Article 278(1)(a) provides for an agreement between the Government of India and the Government of a Part B State for the levy or collection of any tax or duty leviable by the Government of India in such State and for the distribution of the proceeds thereof otherwise than in accordance with the provisions of Chapter I, Part XII ; and this provision is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by the Government of India and the distribution of the proceeds, even though that might not be in accordance with the earlier provisions in the Chapter. Article 278(1)(a) thus has nothing to do with any obligation arising out of agreements between Rulers of former Indian States and other persons with respect to exemption from any tax or duty. Nor do we see anything in article 278(1) which in any way affects the legislative competence of Parliament or of State Legislatures to pass any law within their respective powers. All that it provides is that the earlier provisions in the Chapter relating to levy, collection and distribution of any tax or duty may be varied for a certain period on an agreement between the Government of India and the Government of a Part B State. This was clearly necessary in view of the fact that many sources of revenue of States which came to form Part B States had to be taken over by the Government of India in view of the division of powers of taxation in List I and List II of the Seventh Schedule to the Constitution and that might have created a gap in the revenues of Part B States. Therefore, the Government of India was given the power for a period of ten....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by any municipality or other local authority or body. Those words came up for consideration by this court in Town Municipal Committee v. Ramchandra Vasudeo Chimote and it was held that in the context the words " being lawfully levied " in article 277 meant that the tax was actually levied and not merely that a law imposing a tax had been made. Similarly in the context of article 278(1)(a) the levy and collection of any tax, followed as it is by the distribution of its proceeds, mean the actual assessment and collection of the tax and the way in which that should be done and have no reference to legislative competence as to the imposition of the tax. We are of opinion that article 278(1)(a) deals only with public revenues and how they should be assessed and collected and distributed between the Union of India and Part B States in case there is an agreement in that behalf between the Union of India and Part B States. It further provides that in case of such agreement the earlier provisions of the Chapter relating to the levy, collection and distribution of taxes and duties would not apply and the agreement would prevail for a maximum period of ten years. As to the non obstante clau....