Full Judgment Text
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PETITIONER:
MAHARAJA SHREE UMAID MILLS LTD.
Vs.
RESPONDENT:
UNION OF INDIA
DATE OF JUDGMENT:
27/11/1962
BENCH:
DAS, S.K.
BENCH:
DAS, S.K.
KAPUR, J.L.
SARKAR, A.K.
HIDAYATULLAH, M.
DAYAL, RAGHUBAR
CITATION:
1963 AIR 953 1963 SCR Supl. (2) 515
CITATOR INFO :
F 1964 SC 888 (6)
R 1964 SC1043 (96,133)
D 1964 SC1495 (12)
R 1964 SC1793 (14)
R 1964 SC1903 (17,23)
R 1967 SC 40 (5,7)
R 1971 SC 846 (9)
ACT:
Excise Duty- Agreement with Ruler-Exempting payment of duty-
Ifamounts to law-Whether agreement binding on Government
of India-Power of Parliament to alter agreement-Constitution
of India, Art. 295.
HEADNOTE:
A formal agreement executed in 1941, between the Ruler of
jodhpur and the appellant provided that the State would
exempt the appellant from State or Federal excise duty and
income-tax, super-tax, surcharge or any other tax on income
and that if the appellant had to pay any such duty or tax,
the State would refund the same to the appellant. After
India had attained independence, jodhpur joined the United
State of Rajasthan on April 7, 1949. On January 26, 1950,
Rajasthan became a Part B State. The Central Excises and
Salt Act, 1944, was extended to Rajasthan from April 1,
1950, and the Union of India recovered excise duty from the
appellant for the period 1-4-1950 to 31-3-1952. Similarly,
the Indian Income-tax Act, 1922, was extended to Rajasthan
and the Union sought to assess and recover income-tax from
the appellant. The appellant contended that it was not
liable to pay any excise duty or income-tax on the grounds
that the agreement of. 1941 with, the Ruler of jodhpur under
which the exemptions were granted was law which continued in
force and that even if the agreement was purely contractual,
the rights and obligations thereunder were accepted by each
succeeding Sovereign and under Art. 295 (1) (b) of the
Constitution they became the rights and obligations of the
Government of India which could not be abrogated by any law.
The appellant further contended that under the agreement it
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was entitled to a refund from the State of Rajasthan of the
excise duty paid by it.
Held, that the appellant was liable to pay the excise duty
and income-tax.
The 1941 agreement was not law and did not have the force of
law. I Every order’ of a Sovereign Ruler cannot be treated
as law irrespective of the nature or character thereof,
516
The true nature of the order has to be considered and the
order, to be law must have the characteristics of ’law,’
that is of a binding rule of conduct as’ the expression of
the will of the Sovereign, which does not derive its
authority from a mere contract. An agreement which is based
solely on the consent of the parties is different from a law
which derives its sanction from the will of the Sovereign.
The 1941 agreement was entirely contractual in nature and
was not law, as it had none of the characteristics of law.
Ameer-un-nissa Begum v. Mahboob Begum, A. I. R. (1955) S. C.
352, Director of Endowments, Government of Hyderabad v.
Akram Ali, A. 1. R. (1956) S.C. 60, Madharo Phalke v. The
State of Madhya Pradesh, [1961] I S. C. R..957 and Promode
Chandra Dev v. State of Orissa, [1962] Supp. I S. C. R.
405, referred to.
The 1941 agreement contained no term and no undertaking as
to exemption from excise duty or income-tax to be imposed by
the Union Legislature in future. As such the question of
succeeding Sovereigns accepting such a term and an
obligation arising therefrom under Art.295 (1) (b) did not
arise. Apart from this, the correspondents showed that
neither the United State of Rajasthan nor the Part B State
of Rajasthan affirmed this agreement. Even if the
obligation under the agreement continued and Art. 295 (1)
(b) was applicable to it, there was nothing in Art. 295
which Prohibited Parliament from enacting a law as to excise
duty or income-tax altering the terms of the agreement.
Maharaj Umeg Singh v. State of Bombay, A. r. R. (1953) S. C.
540, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 214/56.
Appeal from the judgment and order dated October 19, 1953 of
the Rajasthan High Court in D. B. Civil Misc. Writ No.
47 of 1953
WITH
Civil Appeal No. 399 of 1960. Appeal from the judgment and
decree dated May 7, 1959, of the Rajastan High-Court in D.B.
Civil Regular First Appeal No. 10 of 1955.
517
G. S. Pathak, Rameshwar Nath, S. N. Andley and P. L.’ Vohra,
for the appellants.
M. C. Setalvad, Attorney-General for India, H. N.Sanyal,
Additional Solicitor General of India, -K. N. Rajagopal
Sastri and R. N. Sachthey, for the respondents (in C. A. No.
214/56) and respondents Nos. 1, 3 and 4 (in C. A. No.
399/6O), G. C. Kasliwal, Advocate-General, Rajasthan, M. M.
Tiwari, S. K. Kapur, Kan Singh, S. Venkatakrishnan and K. K.
Jain, for respondent No. 2 (in C. A. No. 399/60.)
1962. November 27. The judgment of the Court was delivered
by
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.
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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 yam
manufactured and produiced by it, in accordance with the
provisions of the Central Excises and Salt Act, 1944 which
provisions were extended to the territory of the State of
Rajasthan on April 1, 1950. The main question in C. A.
No. 214/1956 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
518
Court of Rajasthan. The High Court of Rajasthan dismissed
the appeal. The Court was then moved for a
certificate under Arts.132 (1) and 133(1) of the
Constitution. Such certificate having been granted by the
High Court, the I ’appeal has been preferred to this court.
C. A. Xi 214 of 1956 arises out of a writ petition which the
appellant had filed for the issue of 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 arc 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
Shree 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 whichare relevant to these two
appeals. The appellant was incorporated under the Marwar
Companies Act, 1923, and has its registered office at
Pali in the appellant Stat 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 mills started at
pali and for that purpose agreed togive certain
519
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 con templated 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
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:
(a) xx xx
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(b) xx xx
(c) xx xx
(d) xx xx
(c) State or Federal Excise duty on goods manufactured in
the mill premise. If any such duty his. 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.
(g) xx xx."
In consideration of the concessions given the appellant
agreed to pay to the State of jodhpur, a royalty
520
of 7 1/2 per cent 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 IndependenceAct, 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 Accession 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 kajaputana 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 Apri 17,1949, made over the
administration of his State to the Rajpramukh of the United
State of Rajasthan. The Covenantby which this was done IS
appendix XL ‘at pages 274 to 282 of the white is paper. On
the same day was promulgated the Rajasthan Administration
Ordinance, 1949 (Ordinance No. 1 of 1949), s. 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 Raj asthan 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 the United State of
Rajasthan, there was a proviso, however, which said that
nothing 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
521
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 s. 30
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
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Constitution for the 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 Bart 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 s. 11 of the Finance Act 1950, the provisions of the
Central Excises and
522
Salt Act,1944 and all rules and orders made there. under
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,Q,14-12-0 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
523
not binding on the respondents. He further held that the
agreement itself stood frustrated by reason of subsequent
events which happened and was therefore unenforceable.
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
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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
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 s. 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 s. 3 a resaid, "law" means any rule, order
or bye-law which having been made by a
524
competent authority ’in a covenanting State has the force
of law in that State’ The agreement of April 17, 1941, 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 s.3 of the’
Ordinance referred to above. When the Raipramukh of the
United State of Rajasthan promulgated the Rajasthan Excise
Duties Ordinance, 1949 (Ordinance XXV of 1949), s. 30
thereof did not abrogate the special law embodied in the
agreement. the coming into force of the Constitution on
January 26, 1950, when Rajasthan became a Part B State, Art.
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 contended that the finding to the contrary by
the courts below is wrong. As the rights and obligations
were accepted by each succeeding Sovereign, ’Art. 295 (i)
(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 in so far as these
rights and liabilities were for the pur poses of the
Government of India relating to any of the matters enumered
in the Union List. Learned counsel for the appellant argues
that Art.295
525
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 Arts. 19 and 31 of the Constitution
that there was no frustration of the contract as found by,
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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 (1) Director of
Endowments, Govt. of Hyderabad v. Akram Ali (2), Madhaorao
Phalke v. The State of Madhya Bharat (3) and Promod Chandra
Deb v. The State of Orissa (4). We do not think that these
decisions help the appellant. It was pointed out in
Madhaorao Phalke’s Case (3) 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 consideration before them, and pointed out that "the
nature of the provisions contained in this document
unambiguously impresses upon in the character of a statute
or a regulation having the force of a statute."
(1) A.I.R. (1955) S.C. 352.
[1961].S.C.R. 957.
(2) A.I.R. (1956) S.C. 60.
(4) [1962] Supp. I.S.R. 405.
526
Same was the position in Ameer-un-nissa’s case and the case
of the Director of Endowments," Govt. of Hyderabad (2) 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, (1) the Firmam set
aside the decision of a 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 gives 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 to 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;...nay, 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
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the. fights of the parties concerned, though
it could ’be annulled or
(1) A.I.R. (1955) S.C. 352,(2) A.I.R. (1956) S. 60;
527
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 Promod
Chandra Deb’s case (1). the Khorposh grants were considered.
in the context of the rules laid down in Order 31 of the
Rules, Regulations and Privileges of Kha jnadars which were.
accepted by the Ruler of the State is the law governing the
rights of Khorposhdars. It was in these circumstances held
that the rules continued in force till they were changed; by
a competent; authority, and the grants made in accordance
with those rules continued to be valid.
In our view, none of the aforesaid decisions go the extent
of laying down that any and every order of a Sovereign
Ruler. who combines in himself all functions must be treated
as law irrespective of the nature or character of the order
passed. We think that the true -nature of the order must be
taken into consideration, and the order to be law must have
the characteristics of law, that is, of a binding rule of
conduct as the expression of the will of the sovereign,
which does not derive its authority from mere consensus of
mind of two parties entering into a bargain. It is not
necessary for this purpose to go into theories of legal
philosophy or to ’define law. However law may be defined,
be it the command of the supreme legislature as some jurists
have put it or be it a "body of rules laid down for the
determination of legal rights and duties which courts
recognise there is an appreciable distinction between an
agreement which is based solely on consent of parties and a
law which derives its sanction from the will of the
Sovereign. A contract is. essentially a compact between two
or more parties a law is not an agreement between parties
but is a binding rule of conduct deriving its sanction from’
the sovereign authority. From this
(1) [1962] Supp . I S.C.R 405.
528
point of view, there is a valid distinction between a
particular agreement between two or more parties even if one
of the parties is the sovereign Ruler, and the law relating
generally, to agreements. The former rests on consensus of
mind, and the latter expresses the will of the Sovereign.
If one bears in mind this distinction, it seems clear enough
that the agreement of April 17, 1941, even though
sanctioned by the Ruler and purporting to be on his, behalf
rests really on consent. We have, been taken through the
correspondence which resulted in the agreement and our.
attention was particularly drawn to a letter dated April 22,
1938, in which the Ruler was stated to have sanctioned the
terms and concessions decided upon by his Ministers in their
meeting of February 25, 1938. We do not think that the
correspondence to which we have been referred advances the
case of the appellant. On the contrary, the, correspondence
shows that there were prolonged negotiations, proposals and
counter-proposals, offer and acceptance of terms ... all
indicating that the matter-was treated even by the Ruler as
a contract between his Government and the appellant. That
is why in the letter dated April 22, 1938, it was stated
that Messrs Crawford Bailey & Co. Solicitors, would draw up
a formal agreement embodying the terms agreed to by the
parties. This resulted ultimately in the execution of the
agreement dated April 17,1941:. To call such an agreement
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as law is in our opinion to misuse the term "law’.
It is also worthy of note in this connection that clause 6
of the agreement purports to give the appellant exemption
not only from State Excise duty, but also from Federal
Excise duty; similarly not only from State Income-tax, but
from Federal Income tax or Super-tax or Surcharge. It is
difficult to see what, authority the Jodhpur Ruler had to
give exemption from Federal Excise duty or Federal Income-
tax. Such an exemption, if it were to be treated as, law,
would be beyond the competence of the Ruler. A
529
Ruler can make a law within his own competence and
jurisdiction. He cannot make a law for some other
sovereign. Such an exemption would be a dead letter and
cannot have the force of law. Learned counsel for the
appellant suggested somewhat naively that the Ruler might
exercise his influence on the other Sovereign (if and when
Federation came into existence) so as to secure an exemption
from Federal tax for the appellant. Surely, an assurance of
this kind to exercise influence on another sovereign
authority, assuming that the effect of the relevant clause
is what learned counsel has submitted, as to which we have
great doubt, will at once show that it has not the
characteristics of a binding rule of conduct. It is
doubtful if such an, assurance to exercise influence on
another sovereign authority can be enforced even as a
contract not to speak of law.
Learned counsel for the respondents referred us to several
other clauses of the agreement which in his opinion showed
that the agreement read as a whole could not be treated as
law, because some of the clauses merely gave an assurance
that the State would take some action in future; as for
example, clause 8 which gave an assurance to amend the law
in future. He contended that an assurance to amend the law
in future cannot be treated as present law. There is, we
think, much force in this contention. When these
difficulties were pointed out to learned counsel for the
appellant, he suggested that we should separate the various
clauses of the agreement and treat only those clauses as law
which gave the appellant a present right. We do not see how
we can dissect the agreement in the manner suggested and
treat as law one part of a clause and treat the rest as an
agreement only.
We should notice here that clause 6 of the agreement does
not refer to excise duty or income-tax to be imposed by the
Union of India. As a matter of
530
fact, nobody could envisage in 1941 the constitutional
developments which took place in 1947-1950, and when the
parties talked of Federal excise duty and Federal income-
tax, they had in mind the scheme of Federation envisaged by
the Government of India Act, 1935 ... which scheme never
came into operation. It is difficult to see how the
agreement in any view of the matter can be treated as law in
respect of a tax or duty imposed by the Union Government
when there is no mention of it therein.
The argument if carried to a reductio ad absurdum would come
to this that every order of the Ruler would have to be
carried out by the succeeding Sovereign. That order may be
almost of any kind, as for example, an order to thrash a
servant. We have no doubt in our minds that the nature of
the order must be considered for determining whether it has
the force of law. Art. 372 of the Constitution which
continues existing law must be construed as embracing those
orders only which have the force of law...Iaw as understood
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at the time.
There has been a lot of argument before us as to what
learned counsel for the appellant has characterised as
’legislative contracts,’ an expression used mostly in
American decisions relating to the limitation placed by the
’contract clause’ in the American Constitution upon action
taken by the State legislature in respect of pre-existing
contracts (see Piqua Branch of the state Bank of Ohio v.
Jacob Knoop (1)). We do not think those decisions have any
bearing on the question before us, which is simply this :
does a compact between two or more parties, purely
contractual in nature, become law because one of the parties
to the contract is the Sovereign Ruler ? The American
decisions throw no light on this question. Learned counsel
also referred us to the statement of the law in Halsbury’s
Laws of England, Vol.8, Third Edition,, paragraph 252 at
(1) (1853) 14L. Ed. 977.
531
page 146 relating to statutory confirmation of void
contracts by means of a local and personal Act of Parliament
: the effect of such a statute is to make the agreement
valid in toto. The principle is that where an Act of
Parliament confirms a scheduled agreement, the agreement
becomes a statutory obligation and is to be read as if its
provisions were contained in a section of the Act (see
International Railway Company v. N. P. Commission (1)). We
fail to see how this principle has any application in the
present case. There is nothing to show that the agreement
in the present case was confirmed as a law by the Ruler; on
the contrary, we have shown earlier that it was always
treated as a contract between two ,parties. There is no
magic in the expression ’legislative contract’. A contract
is a compact between two or more parties and is either
executory or executed. If a statute adopts or confirms it,
it becomes law and is no longer a mere contract. That is
all that a legislative contract’ means. In the cases before
us there is no ’legislative contract’.
In view of our conclusion that the agreement of April 17,
1941, is not law, it is perhaps unnecessary to decide the
further question as to whether s.3 of the Rajasthan
Ordinance, 1949 (Ordinance I of 1949) continued it or
whether s.30 of the Rajasthan Excise Duties Ordinance, 1949
(Ordinance XXV of 1949) repealed it. We may merely say that
with regard to the effect of s.30, learned counsel for the
appellant relied on the principle that the presumption is
that a subsequent enactment of a purely general character is
not intended to interfere with an earlier special provision
for a particular case, unless it appears from a
consideration of the general enactment that the intention of
the legislature was to establish a rule of universal
application in which case the special provision must give
way to the general (see paragraph 711, page 467 of Vol. 36,
Halsbury’s Laws of England, Third Edition, and Williams v.
Pritchard Eddington v. Borman (3)).
(1) A.I.R. (1937) P.C. 214.
(2) (1790) E.R. 862.
(3) (1799) E.R. 863.
532
On behalf of the respondents it was submitted that s. 30 of
the Rajasthan Excise Duties Ordinance, 1949, in express
terms repealed all laws dealing with matters covered by the
ordinance, and s. 3 thereof dealt with excise duties on
goods produced or manufactured in Rajasthan therefore, there
was no room for the application of the maxim generalia
specialibus non derogant and s. 30 clearly repealed all
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earlier laws in the matter of excise duties or exemption
therefrom. It is perhaps unnecessary to decide this
question ; because we have already held that the agreement
of April 17, 1941, was neither law nor had the force of law.
We may merely point out that the question is really one of
finding out the intention or the legislature, and in view of
the very clear words of s. 30 of the Rajasthan Excise Duties
Ordinance, 1949 and of the repealing revisions in the
Finance Act, 1950 it would be difficult to hold that the
earlier special law on the subject still continued in force.
We proceed now to consider the second line of argument
pressed on behalf of the appellant. So far as the Union
Government and its officers are concerned, there is, we
think, a very short but convincing answer to. the argument
The agreement in question contains no term and no
undertaking as to exemption from excise duty or income-tax
to be imposed by the Union Legislature in future. We have
pointed out earlier that the undertaking, such as it was,
referred to Federal excise duty and Federal income-tax and
we have further stated that the Federation contemplated by
the Government of India Act, 1935 never came into existence.
The Union which came into existence under the Constitution
of 1950 is fundamentally different from the Federation
contemplated under the Government of India Act, 1935.
Therefore, in the absence of any term as to exemption from
excise duty or income-tax to be imposed by the Union
Legislature, the question
533
of succeeding sovereigns accepting such a term and an
obligation arising therefrom on January 26, 1950, by means
of Art. 295 (i) (b) of the Constitution cannot at all arise.
Surely, a term or undertaking which is non-existent cannot
give rise to a right or obligation in favour of or against
any party. On this short ground only, the claim of the
appellant should be rejected against the respondents in so
far as the levy of excise duty or tax by the Union is
concerned, apart altogether from any question whether the
Ruler of jodhpur or even the United State of Rajasthan could
legally bind the future action of the Union Legislature.
It is now well settled by a number of decisions of this
court that an act of State is the taking over of sovereign
powers by a State in respect of territory which was not till
then a part of it, by conquest, treaty, cession or
otherwise, and the municipal courts recognised by the new
Sovereign have the power and jurisdiction to investigate and
ascertain only such rights as the new sovereign has chosen
to recognise or acknowledge by legislation, agreement or
otherwise ; and that such recognition may be express or may
be implied from circumstances. The right which the
appellant claims stems from the agreement entered into by
the Ruler of jodhpur. The first question is, did the
succeeding sovereign, the United State of Rajasthan,
recognise the right . which the appellant is now claiming?
The second question is., did the next succeeding sovereign,
the State of Rajasthan, recognise the right ? As against the
State of Rajasthan the main claim of the appellant is based
on that part of cl. 6 which says that if any such duty (or
tax) has to be paid by the company, the state will refund
the same to the company. The appellant claims as against
respondent No. 2 a refund of the duty or tax as and when it
is paid to the Union Government by the appellant.
534
The learned District judge found that the Ruler of jodhpur
acted upon the agreement in the matter of customs
concessions granted to the appellant and accepted the
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royalty as per cl. 12 of the agreement ; but the question
relating to excise duty never came before the Jodhpur State
as no such duty was leviable in the State. In the High
Court jagat Narayan, J., dealt with the evidence on the
point and gave a list of documents bearing on it. He
pointed out that the Director of Industries of the United
State of Rajasthan no doubt made demands for the payment of
royalty not only for the period since the formation of the
United State of Rajasthan, but also for arrears of royalty
for the period prior to the formation of that State. He
found however that as to exemption from excise duty or the
claim of refund the United State of Rajasthan had in no way
affirmed the agreement. The learned Judge said :
"What has to be determined is whether on the facts and
circumstances appearing from the evidence on record it can
be said that the United State of Rajasthan affirmed the
agreement. I am firmly of the opinion that no such
inference can be drawn. The state did not make up its mind
whether or not to abide by the agreement and pending final
decision the agreement was acted upon provisionally."
So far as the Part B State of Rajasthan is concerned, there
is nothing in the record to show that it had affirmed the
agreement. Mr. Justice Bapna agreed with his learned
colleague on the Bench and refer-red specially to a letter
dated January 20, 1950, which was a letter from the
Commissioner of Excise jodhpur, to the appellant. In that
letter the appellant was informed that it was liable to pay
excise duty in accordance with the Rajasthan Excise Duties
Ordinance, 1949. The appellant sent a reply in which it
stated that excise’ duty was not leviable by
535
reason of the agreement dated April 17, 1941. Further
correspondence followed and finally a reply was given on May
10, 1952, in which the Government of the State of Rajasthan
said that
"the rights and concessions granted to the company and the
liabilities and obligations accepted by the former jodhpur
State under the agreement are extraordinary, unconscionable
and disproportionate to the public interest."
The letter ended by saying that the claim of the appellant
to exemption could not be accepted. Another letter on which
the appellant relied was dated May 1, 1950. In this letter
the Government of Rajasthan said that the burden of excise
duty on cloth produced by the appellant fell on the
consumerswho purchased the cloth therefore the Government
of Rajasthan did not consider it necessary to exempt
the appellant formfrom payment of excise duty. It is
worthy of note that all this correspondence started within
a very short time of the promulgation of the Rajasthan
Excise Duties Ordinance, 1949. From this correspondence
Bapna, J., came to the conclusion that neither the United
State of Rajasthan nor the State of Rajasthan affirmed the
agreements We see no reasons to take a different view of the
correspondence to which our attention has been drawn.
What then is the position ? If the new Sovereign, namely,
the United State of Rajasthan or the Part B State of
Rajasthan, did not affirm the agreement so far as exemption
from excise duty or incometax was concerned, the appellant
is clearly out of court. Learned counsel for the appellant
has relied on Art. 295 (1) (b) of the Constitution. That
Article is in these terms :-
"295. (1) As from the commencement of this
536
Constitution :-
(a)all property and assets which immediately before such
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commencement were vested in any Indian State corresponding
to a State specified in Part B of the First
Schedule shall vest in the Union, if the
purposes for which such property and assets
were held immediately, before such
commencement will thereafter be purposes of
the Union relating to any of the matters
enumerated in the Union List, and
(b)all rights, liabilities and obligations of the Government
of any Indian State corresponding to a State specified in
Part B of the First Schedule, whether arising out of any
contract or otherwise, shall be 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 will
thereafter be purposes of the Government of India relating
to any of the matters enumerated in the Union List,
subject to any agreement entered into in that behalf by the
Government of India with the Government of that State.
(2)Subject as aforesaid, the Government of each State
specified in Part B of the First Schedule shall, as from the
commencement of this Constitution, be the successor of the
Government of the corresponding Indian State as regards all
property and assets and all............... rights,
liabilities and obligations, whether arising out of any
contract or otherwise, other than those referred to in
clause (1)."
The argument is that the Article provides a constitutional
guarantee in the matter of rights, liabilities and
obligations referred to in cl. (b) and no law can be made
altering those rights, liabilities
537
and obligations. in support of this argument our attention
has been drawn to Art. 245 which says that subject to the
provisions of the Constitution Parliament may make laws for
the whole or any part of the territory of India etc. The
contention is that the power of Parliament to make laws
being subject to the provisions of the Constitution, Art.
295 which is one of the provisions of the Constitution
controls the power of Parliament to make laws in respect of
rights, liabilities, obligations etc. referred to in Art.
295 (1) (b), and therefore Parliament cannot pass any law
altering those rights, liabilities and obligations.
We do not think that this is a correct interpretation of
Art. 295 of the Constitution. But before going into the
question of interpretation of Art. 295 It may be pointed out
that if the United State of Rajasthan did not affirm the
agreement, then the appellant had no enforceable right
against either the United State of Rajasthan or the Part B
State of Rajasthan. Under Art. 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 can
become the right or liability of the Government of India
etc. 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 Art. 295(1) (b) can hardly arise.
The scheme of Art. 295 appears to be this, It relates to
succession to property, assets, rights, liabilities and
obligations. Clause (a) states from the commencement of the
Constitution all property and assets which immediately
before such commencement were vested in an Indian State
corresponding to a State specified in Part B of the First
schedule shall vest in the Union, if the purposes for which
such property and assets were held-be purposes
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538
of the Union. Clause (b) states that all rights, liabili-
ties and obligations of the Government of’ any Indian State
corresponding to a State specified in Part B of the First
Schedule, whether arising out of any contract or otherwise
shall be the rights, liabilities and obligations of the
Government of India if the purposes for which such rights
were acquired or liabilities- and obligations were incurred
be purposes of the Government of India. There is nothing in
the Article to show that it fetters for all time to come,
the power of the Union Legislature to make modifications or
changes in the rights, liabilities etc. which have vested in
the Government of India. The express provisions of Art. 295
(10) deal with only two matters, namely, (1) vesting of
certain, property and assets in the Government of India, and
(2) the arising of certain rights, liabilities and
obligations on the Government of India. Any legislation
altering the course of vesting or succession as laid down in
Art. 295 will no doubt be bad on the ground that it
conflicts with Article. But there is nothing in the Article
which prohibits Parliament from enacting a law altering the
terms and conditions of a contract or of a grant under which
the liability of the Government of India arises. The
legislative competence of the Union Legislature or even of
the State Legislature can only be circumscribed by express
prohibition contained in the Constitution itself and unless
and until there is any provision in the Constitution
expressly prohibiting legislation on the subject either
absolutely or conditionally, there is no fetter or
limitation on the plenary powers which the legislature
enjoys to legislate on the topics enumerated in the relevant
Lists Maharaj Umeg Singh v. State of Bombay (1). In our
opinion, there is nothing in Art. 295 which expressly
prohibits Parliament from enacting a law as to income-tax or
excise duty in territories which became Part B States, and
which were formerly Indian States, and such a prohibition
cannot be read into Art. 295 by virtue of
(1) A.I.R. (1955) S.C. 540,
some contract that might have been made by the then Ruler of
an Indian State with any person.
There is another aspect of this question. The rights,
liabilities and obligations referred to in Art. 295 (1) (b)
are, by the express language of the Article, subject to any
agreement entered into in that behalf by the Government of
India and the Government of the State. Such an agreement
was entered into between the President of India and
Rajpramukh of Rajasthan on February 25, 1950. It is
necessary to explain how this agreement came into existence.
A committee known as the Indian States Finances Enquiry
Committee was appointed by a resolution of the Government of
India dated October 22 1948, to examine and report upon,
among other things, the present structure of public finance
in Indian States and the desirability and feasibility of
integrating Federal Finance in Indian States. This
committee submitted its report on October 22, 1949. The
agreement between the President of India and the Rajpramukh
of Rajasthan said :
"The recommendations of the Indian States Finance Enquiry
Committee, 1948-49 (hereafter referred ’to as the Committee)
contained in Part I of its Report read with Chapters I, II
and III of Part II of its Report in so far as they apply to
the State of Rajasthan (hereafter referred to as the State)
together with the recommendations contained in Chapter VIII
of Part II of the report, are accepted by the parties
hereto, subject to the following modifications."
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It is not necessary for our purpose to set out the
modifications in detail. It is enough to say that there is
nothing in the modifications which in any way benefits the
appellant. One of the modifications relates to State-owned
and State-operated enterprises which are to be exempt from
income-tax etc.
540
The appellant is neither a State-owned nor a State operate
enterprise. Another modification states-
"State-sponsored Banks or similar State-ponsored enterprises
in the State now enjoying any explicit tax
exemptions shall be treated as "Industrial
Corporations" for purposes of the continuance
of the Income tax concessions now enjoyed by
them in accordance with paragraph 11 (3) (b)
of the Annexure to Part 1 of the Committee’s
Report."
Now the appellant is neither a State-sponsored bank nor a
State-sponsored enterprise. So far as the appellant is
concerned the recommendations of the committee which were
accepted in the agreement inter alia said :
"Any special financial privileges and immunities (affecting
"federal" revenues) conferred by the State upon other
individuals and corporations should ordinarily be continued
on the same terms by the Centre, subject to a maximum period
of ten (or fifteen) years, and subject also to limiting in
other ways any such concessions as may be extravagant
against the public interest."
The recommendation quoted above clearly shows that it was
open to the Union to limit in any way it thought fit any
concessions as appear to the Union Government to be
extravagant and against the public interest. In view of
this recommendation which was part of the agreement entered
into between the President of India and the Rajpramukh of
Rajasthan on February 25, 1950, the appellant can hardly
plead it has a constitutional guarantee to claim exemption
from excise duty or income-tax.
This finishes the second line of argument urged on behalf of
the appellant. As to the pleas based on Arts. 1.9 and 31 of
the Constitution, it is enough to
541
say that on our findings the appellant had no enforceable
right either against the State Government of Rajasthan or
the Union Government on january 26, 1950. It is obvious,
therefore, that the appellant cannot invoke to its aid
either Art. 19 or Art. 31 of the Constitution. As to the
claim of refund which the appellant preferred against the
State of Rajasthan, the appelant, s position is no better.
If neither the United State of Rajasthan nor the Part B
State of Rajasthan affirmed the agreement of April 17, 1941,
the appellant cannot enforce any right against respondent
No. 2 on the basis of that agreement.
In the trial court as also in the High Court the question of
frustration of the contract was canvassed and gone into.
The courts found that the contract was frustrated. In view
of the findings at which we have arrived. It is now
unnecessary to consider that question. Therefore we do not
propose to deal with it.
For the reasons given above, we have come to the conclusion
that the appeals are without any merits. We accordingly
dismiss them with costs, one hearing fee.
Appeal dismissed.