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Petitioner: MAHARAJA SHREE UMAID MILLS LTD. VS Respondent: UNION OF INDIAHonorable Justice S. K. DASG. S. Pathak,M. C. Setalvad, Attorney-General
1968 P T D 461
1968 P T D 461
[Supreme Court India]
Present: S. K. Das, J. L. Kapur, A. K. Sarkar, M. Hidayatullah and Raghubar Dayal, JJ
MAHARAJA SHREE UMAID MILLS LTD.
Versus
UNION OF INDIA AND OTHERS
Civil Appeals Nos. 214 of 1956 and 399 of 1960, decided on 27th November 1962.
Income‑tax‑Excise duty‑Native State ‑ Jodhpur ‑ Conces sions under agreement with ruler--Accession of State to India‑ Formation of United State of Rajasthan‑-Rajasthan becoming a Part B State‑Local laws repealed and Indian Acts extended to Part B State‑Concessions under agreement whether enforceable against Union of India or State Government of Rajasthan‑Consti tution, of India, Arts. 19, 31, 295, 372-‑Income‑tax Act, 1922-- Central Excises and Salt Act, 1944‑Finance Act, 1950, Ss. 11,13-- Rajasthan Administration Ordinance, 1949, S. 3-‑Rajasthan Excise Duties Ordinance, 1949, S. 34.
Under a deed of agreement executed on April 17, 1941, between the Government of the Maharaja of the Native State of Jodhpur and the appellant company, certain concessions were granted to the company. Clause (6) of the agreement provided as follows : "The State will exempt or remit the following duties and royalties : (e) State or Federal excise duty on goods manufactured in the mill premises. If any such duty has to be paid by the company, the State will refund the sum wholly to the company. (f) State or Federal income‑tax or super‑tax or surcharge or any other tax on income. If any such tax has to be paid by the company the State will refund the same to the company " In consideration of the concessions the appellant company agreed to pay to the State of Jodhpur a royalty of 7 percent. of the net profits of the company in each of its financial years, payable within three months after the close of each financial year. After the coming into existence of the Dominion of India under the Indian Independence Act, 1947, the Maharaja of Jodhpur acceded to the Dominion. The ruler then joined the United State of Rajasthan and on April 7, 1949, made over the administration of his State to the Rajpramukh of the United State of Rajasthan. On the same day was promulgated the Rajasthan Administration Ordinance, 1949, section 3 whereof continued all the laws in force in any covenanting State until altered or repealed 'or amended by a competent Legislature or authority. There was a fresh instrument of accession on April 15; 1949, on behalf of the United State of Rajasthan, by which it accepted all matters enumerated in List I and List III of the Seventh Schedule to the Government of India Act, 1935, as matters in respect of which the Dominion Legislature might make laws for that State. On September 5, 1949, the Rajasthan Excise Duties Ordinance, 1949, was promulgated whereby all laws dealing with matters covered by the Ordinance in force at its commencement in any part of Rajasthan were repealed. On November 23, 1949, the United State of Rajasthan made a proclamation to the effect that the Constitution of India to be adopted by the Constituent Assembly of India shall be the Constitution of the Rajasthan State. On the coming into force of the Constitution of India on January 26, 1950, Rajasthan became a Part B State. By the Finance Act, 1950; passed by the Indian Parliament, the provisions of the Central Excises and Salt Act, 1944, and of the rules and orders made thereunder and the provisions of the Indian Income‑tax Act, 1922, were extended to the territory of Rajasthan as from April 1, 1950, and the local laws were repealed. The question was whether the appellant company was liable to pay excise duty and income‑tax under these Acts.
Held, (i) that the agreement of April 17, 1941, rested solely on the consent of the parties : it was entirely contractual in nature and was not a law;
(ii) that the Maharaja of Jodhpur could make a law within his own competence and jurisdiction and not one for some other sovereign. He had therefore no authority to give exemption from Federal excise duty or Federal income‑tax. Such an exemption was a dead letter and did not have the force of law. Assuming that clause (6) of the agreement was an assurance to influence the Federation, if and when it came into existence, so as to secure an exemption from Federal excise duty or Federal income‑tax, such an assurance could not be enforced even, as a contract;
(iii) that clause (6) of the agreement could not be treated as law in any case in respect of a tax or duty imposed by the Union Government which came into existence on January 26, 1950, when there was no mention of such a tax or duty in the agreement;
(iv) that Article 372 of the Constitution, which continued existing laws must be considered as embracing those orders only which had the force of law; namely, law as understood at the time;
(v) that in view of the clear words of, section 30 of the Rajasthan Excise Duties the 1949, and of the repealing provisions in the Finance Act, 1950, the earlier special law in matters of excise duties or, income‑tax or exemption therefrom did not continue in force;
(vi) that in the absence of any term ‑as to the exemption from excise duty or income-tax to be imposed by the Union Legislature the question of the Union Legislature accepting such a term and an obligation arising therefrom on January 26, 1950, under Article 295(1) (b) of the Constitution, could not arise;
(vii) that, on the facts, neither the United State of Rajasthan nor the Part B State of Rajasthan armed the agreement dated April 17, 1941;
(viii) that under Article 295(1) (b) there must be a right or liability on an Indian State corresponding to a State specified in Part B of the First Schedule which could become the right or liability of the Government of India. If the right itself did not exist before the commencement of the Constitution and could not be enforced against any Government, the question of its vesting in another Government under Article 295(1) (b) could not arise. There was nothing in Article 295 which expressly prohibited Parliament from enacting a law as to income‑tax or excise duties in territories which became Part B States and which were formerly Indian States, and such a prohibition could not be read into Article 295 by virtue of some contract that might have been made by the then ruler of a Native State with any person;
(ix) that under the agreement entered into between the President of India and the Rajpramukh of Rajasthan on February 25, 1950, it was open to the Union of India to limit in any way it thought fit any concessions as appeared to the Union Government to be extravagant and against the public interest. The appellant company could not therefore claim that it had a constitutional guarantee to exemption from excise duty or income‑tax:
(x) that as the appellant company bad no right either against the State Government of Rajasthan or the Union Government on January 26, 1950, it could not invoke to its aid either Article 19 or Article 31 of the Constitution of India.
Decisions of the Rajasthan High Court affirmed.
[Case‑law ref.]
G. S. Pathak, Senior Advocate (Rameshwar Nath, S. N. Andley and P. L. Vohra of Rajinder Narain and Co. with him) for appellants.
M. C. Setalvad, Attorney‑General for India, H. N. Sanyal, Additional Solicitor General for India, and K. N. Rajagopal Sastri, Senior Advocate (R. N. Sachthey with them) for the Respondents in C. A. No. 214 of 1956 and Respondents Nos. 1, 3 and 4 in C. A. No. 399 of 1960.
G. C. Kasliwal, Advocate‑General for the State of Rajasthan and M. M. Tiwari, Senior Advocate (S. K. Kapur, Khan Singh, S. Venkatakrishnan and K. K. Jain with them) for Respondent No. 2 in C. A. No. 399 of 1960.
JUDGMENT
S. K. DAS, J.‑These two appeals on certificates granted by the High Court of Rajasthan have been heard together, because they raise common questions of law and fact, and this judgment will govern them both.
Shortly put, the main question in C. A. No. 399 of 1960, is whether the appellant, the Maharaja Shree Umaid Mills Ltd., is liable to pay excise duty on the cloth and yarn manufactured and produced by it, in accordance with the provisions of the Central Excises and
Salt Act, 1944, which provisions were extended to the territory 6f the State of Rajasthan on April 1, 1950. The main question in C. A. No. 214 of 1956 is whether the same appellant is liable to pay Income‑tax in accordance with the provisions of the Indian Income‑tax Act, 1922, from the date on which those provisions were extended to the territory of the State of Rajasthan. C. A. No. 399 of 1960 arises out of a suit which the appellant had filed in the court of the District Judge, Jodhpur. That suit was dismissed by the learned District Judge. Then there was an appeal to the High Court of Rajasthan. The High Court of Rajasthan dismissed the appeal. The High Court was then moved for a certificate under Articles 132(1) and 133(1) of the Constitution. Such certificate having been granted by the High. Court the appeal has been preferred to this court. C. A. No. 214 of 1956, arises out of a writ petition which the appellant had filed for the issue of a writ of mandamus or any other appropriate writ restraining the respondents from assessing or recovering Income‑tax from the appellant. This writ petition was dismissed by the High Court on the preliminary ground that the appellant had another remedy open to it under the provisions of the Income‑tax Act, 1922. The appellant moved the High Court and obtained a certificate, in pursuance of which it has filed C. A. No. 214 of 1956. As we are deciding both the appeals on merits, it is unnecessary to deal with the preliminary ground on which the High Court dismissed the writ petition.
We have already stated that in both the appeals the Maharaja Shri Umaid Mills Ltd., Pali, is the appellant. In C. A. No. 399 of 1960, the respondents are the Union of India, the State of Rajasthan, the Collector of Central Excise, New Delhi, and the Superintendent, Central Excise, Jodhpur. In C. A. No. 214 of 1956, the respondents are the Union of India, the State of Rajasthan, the Commissioner of Income‑tax, Delhi and the Income‑tax Officer, Jodhpur.
We may now state the facts which are relevant to these two appeals. The appellant was incorporated under the Marwar Companies Act, 1923, and, has its registered office at Pali in the present State of Rajasthan. It has been manufacturing cloth and yarn since 1941. The case of the appellant was that the then Ruler of the State of Jodhpur was earnestly desirous of having a cotton mill started at Pali and for that purpose agreed to give certain concessions by way of immunity from payment of taxes and duties then in force in the Jodhpur State or likely to come into force in view of the contemplated federation of the Indian States and Provinces under the Government of India Act, 1935. There were negotiations and correspondence about the concessions which were to be granted and finally a formal deed of agreement incorporating the concessions and immunities granted was executed between the Government of His Highness the Maharaja of Jodhpur on one side and the appellant on the other on April 17, 1941. Clause 6 of this agreement, in so far as it is relevant for our purpose, said:
"The State will exempt or remit the following duties and royalties :...
(e) State or Federal excise duty on goods manufactured in the mill premises. If any such duty has to be paid by the company the State will refund the same wholly to the company.
(f) State or Federal Income‑tax or super‑tax or surcharge or any other tax on income If any such tax has to be paid by the company the State will refund the same wholly, to the company..."
In consideration of the concessions given the appellant agreed to pay to the State of Jodhpur, a royalty of 7 , percent. on the net profits of the company in each of its financial years, such payments to be made within three months after the close of each financial year. This agreement, it was stated, was acted upon by the State of Jodhpur and the appellant enjoyed an immunity from excise duty and Income‑tax. The Indian Independence Act, 1947, brought into existence, as from. August 15, 1947, a Dominion of India. The Ruler of Jodhpur acceded 'to the Dominion of India by means of an Instrument of Acces sion in the form referred to in Appendix VII at pages 165 to 168 of the White Paper on Indian States. Jodhpur was one of the Rajputana States. The integration of these States was completed in three stages. Firstly, a Rajasthan Union was formed by a number of smaller Rajputana States situated in the south‑east of that region. Later, there was formed the United State of Rajasthan. The Ruler of Jodhpur joined the United State of Rajasthan and on April 7, 1949, made over the administration of his State to the Rajpramukh of the United State of Rajasthan. The Covenant by which this was done is Appendix XL at pages 274 to 282 of the White Paper. On the same day was promulgated the Rajasthan Administration Ordinance, 1949 (Ordinance No. 1 of 1949), section 3 whereof continued all the laws in force in any covenanting State until altered or repealed or amended by a competent Legislature or other competent authority, etc. There was a fresh Instrument of Accession on April 15, 1949, on behalf of the United State of Rajasthan by which the United State of Rajasthan accepted all matters enumerated in List I and List III of the Seventh Schedule to the Government of India Act, 1935, as matters in respect of which the Dominion Legislature might make laws for United State of Rajasthan ; there was a proviso, however, which said that noth ing in the said Lists shall be deemed to empower the Dominion Legislature to impose any tax or duty in the territories of the United State of Rajasthan or to prohibit the imposition of any duty or tax by the Legislature of the United State of Rajasthan in the said territories. On September 5, 1949, was promulgated the Rajasthan Excise Duties Ordinance, 1949 (Ordinance No. XXV of 1949). This Ordinance was published on September 19, 1949, and section 34 thereof said that all laws dealing with matters covered by the Ordinance in force at its commencement in any part of Rajasthan were repealed. One of the questions before us is whether this section had the effect of abrogating the agreement dated April 17, 1941, in case that agreement had the force of law in the State of Jodhpur. On November 23, 1949, the United State of Rajasthan made a proclamation to the effect that the Constitution of India shortly to be adopted by the Constituent Assembly of India shall be the Constitution for Rajasthan State. The Constitution of India came into force on January 26, 1950, and as from that date Rajasthan became a Part B State.
For the purpose of these two appeals, we have to notice the three stages of evolution in the constitutional position. First, we have the State of Jodhpur whose Ruler had full sovereignty and combined in himself all functions, legislative, executive and judicial. Then we have the United State of Rajasthan into which Jodhpur was integrated as from April 7, 1949, by the Covenant, Appendix XL at pages 274 to 282 of the White. Paper. Lastly, we have the Part B State of Rajasthan within the framework of the Constitution of India which came into force on January 26, 1950. Jodhpur then became a part of the Part B State of Rajasthan.
Both duties of excise (except alcoholic liquors etc.) and taxes on income other than agricultural income fall within List I of the Seventh Schedule of the Constitution of India. By section 11 of the Finance Act, 1950, the provisions of the Central Excises and Salt Act, 1944, and all rules and orders made thereunder were extended to the territory of Rajasthan as from April 1, 1950. The excise officers of the Union of India recovered a sum of Rs. 4,05,014‑12‑0 as excise duty for the goods manufactured and produced by the appellant, for the period from April 1, 1950, to March 31, 1952, from the appellant. The appellant said that it paid the amount under protest. On April 16, 1952, the appellant instituted a suit by means of a plaint filed in the court of the District Judge, Jodhpur. In the plaint the appellant made several averments on the basis of which it claimed that the respondents were not entitled to realise excise duty from the appellant by reason of the agreement dated April 17, 1941. The appellant asked for the following reliefs:
(a) a declaration that the agreement dated April 17, 1941, is binding on all the respondents;
(b) that the amount of excise duty already realised be refunded with interest at 6% per annum ;
(c) that the Union of India and the State of Rajasthan and their servants, agents and officers be permanently restrained by means of an injunction from realising any excise duty from the appellant; and
(d) that the State of Rajasthan be directed to refund from time to time as and when the appellant is to pay excise duty to the Union of India, by reason of the indemnity clause in the agreement of April 17, 1941.
Several issues were framed by the learned District Judge who on a trial of those issues substantially held that the agreement of April 17, 1941, was not binding on the respondents. He further held that the agreement itself stood frustrated by reason of subsequent events which happened and was therefore unenforce able. There was an appeal, to the High Court which affirmed the main findings of the learned District Judge.
The facts in C. A. No. 214 of 1956 are the same as those given above, the only point of distinction being that this appeal relates to income‑tax while the other relates to excise duty. Here again the appellant bases its claim on the agreement dated April 17, 1941, and contends that the agreement is binding on the respondents and the appellant cannot be asked to pay income‑tax by reason of the provisions of the Indian Income‑tax Act, 1922, which were extended to the whole of India except the State of Jammu and Kashmir as a result of certain amendments inserted in the said Act by the Finance Act, 1950.
On behalf of the appellant two main lines of argument have been presented before us in support of the contention, that the agreement dated April 17, 1941, is binding on the respondents and the finding to the contrary by the courts below is incorrect. The first line of argument is that the agreement of April 17, 1941, is itself law, being the command of the Ruler of Jodhpur who was a sovereign ruler at that time and combined in himself all legislative, executive and judicial functions. This law, or legislative contract, as learned counsel for the appellant has put it, continued in force when Jodhpur merged into the United State of Rajasthan, by reason of section 3 of the Rajasthan Administration Ordinance, 1949, which continued all existing laws in any covenanting State in force immediately before the commencement of the Ordinance. It is pointed out that for the purpose of section 3 aforesaid, "law" means any rule, order or bye‑law which having been made by a competent authority in a covenanting State has the force of law in that State. The agreement of April 17, 141, it is argued, was sanctioned by the Ruler and was his order ; therefore, it had the force of a special law in Jodhpur and this law continued to be in force by reason of section 3 of the Ordinance referred to above. When the Rajpramukh of the United State of Rajasthan promulgated the Rajasthan Excise Duties Ordinance, 1949 (Ordinance No. XXV of 1949), section 30 thereof did not abrogate the special law embodied in the agreement. On the coming into force of the Constitution on January 26, 1950, when Rajasthan became a Part B State, Article 372 of the Constitution applied and the special law continued in force. The Finance Act, 1950, did not abrogate the special law. Therefore, the special law still continues in force and binds the respondents. This is the first line of argument.
The second line of argument proceeds on the footing that the agreement of April 17, 1941, is purely contractual in nature and is not law. Even on that, footing, learned counsel for the appellant argues, the contract in question gives rise to rights in one party and obligations on the other: These `rights and obligations, it is stated, were accepted by each succeeding Sovereign, (1) Jodhpur State, (2) United State of Rajasthan and (3) the Part B State of Rajasthan. It is contended that the finding to the contrary by the courts below is wrong. As the rights and obligations were accepted by each succeeding Sovereign, Article 25(1) (b) of the Constitution came into play as from January 26, 1950, and the rights and liabilities of the Jodhpur State or of the United State of Rajasthan became the rights and liabilities of the Government of India insofar as these rights and liabilities were for the purposes of the Government of India relating to any of the matters enumerated in the Union List.
Learned counsel for the appellant argues that Article 295 is of the nature of a constitutional guarantee and any law made in violation thereof must be void to the extent that it violates the article.
Apart from the aforesaid two main lines of argument, learned counsel for the appellant has also submitted that the contract in question being a right to property, the appellant could not be deprived of it in violation of its guaranteed rights under Articles 19 and 31 of the Constitution : that there was no frustration of the contract as found by the learned District Judge; and that in any view the appellant is entitled to a refund of the duty or tax paid by it to the Union Government from the State of Rajasthan by reason of clause 6 of the agreement.
We proceed now to deal with these arguments in the order in which we have stated them. As to the first line of argument we have come to the conclusion that the agreement of April 17, 1941, rests solely on the consent of the parties ; it is entirely contractual in nature and is not law, because it has none of the characteristics of law. Learned counsel for the appellant has relied on the decisions of this court in Ameer‑un‑nissa Begum v. Mahboob Begum (A I R 1955 S C 352), Director of Endowments Government of Hyderabad v. Akram Ali (A I R 1956 S C 60), Madhavrao Phalke v. State of Madhya Bharat ((1961) 1 S C R 957) and Promod Chandra Deb v. State of Orissa, Petitions Nos. 78/57, 167 & 168/1958 & 4/1959 decided on November 16, 1961. We do not think that these decisions help the appellant. It was pointed out in Madhavrao Phatke's case that in determining the question whether a particular order of a sovereign ruler in whom was combined all legislative, executive and judicial functions it would be necessary to consider the character of the orders passed. Their Lordships then examined the Kalambandi under considera tion before them and pointed out that the nature of the provisions contained in this document unambiguously impresses upon it the character of a statute or a regulation having the force of a statute." Same was the position in Ameer‑un‑nissa's case and the case of the Director of Endowments, Government of Hyderabad where this court had to deal with the effect of Firmans issued by the Nizam who was at the time an absolute ruler. It was held that such Firmans had the effect of law because in all domestic matters, the Nizam issued Firmans to determine the rights of his subjects. The Firmans were not based on consent, but derived their authority from the command of the sovereign, viz., the Nizam, expressing his sovereign will. For example, in Ameer‑un‑nissa's case the Firman set aside the decision of Special Commission in respect of certain claimants and though a subsequent Firman revoked the earlier Firman it did not restore the decision of the Special Commission. It was in these circumstances that this court observed:
"The determination of all these questions depends primarily upon the meaning and effect to be given to the various Firmans of the Nizam which we have set out already. It cannot be disputed that prior to the integration of Hyderabad State with the Indian Union and the coming into force of the Indian Constitution, the Nizam of Hyderabad enjoyed uncontrolled sovereign powers. He was the supreme Legislature, the supreme judiciary and the supreme head of the executive, and there were no constitutional limitations upon his authority to act in any of these capacities. The Firmans were expressions of the sovereign will of the Nizam and they were binding in the same way as any other law may, they would override all other laws which were in conflict with them. So long as a particular Firman held the field, that alone would govern or regulate the rights of the parties concerned, though it could be annulled or modified by a later Firman at any time that the Nizam willed."
These observations do not support the extreme view that any and every order of a sovereign ruler is law. In…
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