Gwalior Rayon Silk Manufacturing Weaving Co Ltd Vs the Union of India Uoi and ors - Citation 504357 - Court Judgment

Judgment:

Dixit, C.J.

1. By this application under Article 226 of the Constitution of India, the petitioner Company prays for the issue of an appropriate writ or direction restraining the opponents from making any assessment under the Indian Income-tax Act and from levying or collecting income-tax from the Company for a period of twelve years from June 1949 in respect of income of the Weaving Division and for a period of twelve years from February 1954 in respect of the income of the Staple Fibre Section of the petitioner-Company.

2. The events leading to the supplicant's claim for exemption from taxation are that in order to promote the industrial development of the former Gwalior State and to facilitate the establishment of certain industries in the State, the Maharaja of Gwalior on the recommendation of his Minister for Industries, Commerce and Communications, made an order on 18-1-1947 exempting from any form of taxation for a period of twelve years the income of certain industries and factories which M/s. Birla Bros., Ltd., Gwalior, intended to establish in Gwalior State. Consequent to this order of the Ruler, an agreement was entered into between the Gwalior Government and M/s. Birla Bros., Ltd., on 7-4-1947 for the grant of certain facilities, concessions and exemption from taxation in connection with the establishment and starting of certain industries mentioned in the agreement. One of the industries specified was the rayon silk manufacturing factory which included production of rayon or other synthetic fibres, yarns, and knitting, weaving and processing of such fibres and yarns. By Clause (3) of the agreement the Gwalior Government undertook

'To exempt, the above mentioned industries and/or any concern or concerns promoted or started or to be hereinafter promoted or started for the establishment of all or any of the above mentioned industries, from the payment of all taxes and/or duties, in any form or nature whatsoever, on their incomes, profits, gains or business, levied or to be hereinafter levied in the Gwalior State, or any part thereof, for a 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.'

After the conclusion of this agreement, the petitioner-Company was promoted and started by M/s. Birla Bros., Ltd., for manufacturing staple fibre and for the manufacture of cloth with artificial silk yarn and staple fibre yarn. The Weaving Section for the manufacture of cloth from artificial Silk Yarn was started in June 1949. The staple fibre section of the factory commenced production On or about 18-2-1954.

3. When the agreement was concluded, the position of the State of Gwalior was of a State under the British suzerainty. That position was altered by the Indian Independence Act, 1947, which came into force on 15-8-1947. With the coming into force of this Act, the British paramountcy over the Indian States lapsed and the State of Gwalior, like other Indian States, was released from its obligations to the British Crown. Section 1 of the Act of 1947 set up as from 15-8-1947, two independent dominions to be known as India and Pakistan. The Government of India Act, 1935, was modified under the provisions of the Act of 1947 and the orders issued under Section 9 of the Act.

The Act of 1935, as so modified, provided by Section 5 that the Dominion of India established under the provisions of 1947 Act shall comprise of the Governors' Provinces, Chief Commissioners' Provinces, the Indian States as might accede to the Dominion under Section 6, and any other areas that may, with the consent of the Dominion, be included in it. In pursuance of this section, the Ruler of Gwalior executed on 15-8-1947 an instrument of Accession.

It is well known that after 15-8-1947, the process of consolidation of the Indian States in sizeable administrative units and their democratsation went on with vigorous and rapid strides, and on 22-4-1948, the Rulers of Gwalior, Indore, and certain other States in Central India entered into a covenant, which was concurred in by the Government of India, for the formation of the United States of Gwalior, Indore and Malwa (Madhya Bharat). Article VI of the Covenant required the Ruler of each covenanting State to make over the administration of his State to the Raj Pramukh as soon as may be practicable and in any event not later than the first day of July 1948. It proceeded to say inter alia that on the making over the administration of a State by its Ruler

'(a) .....

(b) all duties and obligations of the Ruler pertaining or incidental to the Government of the Covenanting State shall devolve on the United State and shall be discharged by it;

(d).....

In accordance with Article VIII of the Covenant, the Raj Pramukh executed on 19-7-1948 on behalf of the State of Madhya Bharat a revised Instrument of Accession, which was accepted by the Governor-General of India on 13-9-1948. By that Instrument, the Raj Pramukh accepted all the matters mentioned in List I and List III of the 7th Schedule of the Government of India Act, 1935, except the entries in List I relating to any tax or duty as matters with respect to which the Dominion Legislature may make laws for the State of Madhya Bharat Some time in May 1949 a supplementary covenant' was entered into by the Rulers of Gwalior, Indore and certain other States of Central India modifying the original covenant in certain respects. The modification material here was about the acceptance of the Constitution of India adopted by the Constituent Assembly of India as the Constitution for the United State of Madhya Bharat and for its enforcement as such in accordance with the tenor of its provisions,

On 24-11-1949 a proclamation was issued by the Raj Pramukh, which after stating that in the best interest of Madhya Bharat it was desirable that the constitutional relationship established between the State and the Dominion should not only be continued but further strengthened, declared that the Constitution of India, as adopted by the Constituent Assembly of India, shall be the Constitution for Madhya Bharat and shall be enforced as such in accordance with the tenor of its provisions and that the provisions of the said Constitution shall as from the date of its commencement supersede and abrogate all other constitutional provisions inconsistent therewith which were then in force in the State. The Constitution of India came into force on 26-1-1950. Article 295(1)(b) of the Constitution of India, which provides for the succession to property, assets, rights, liabilities and obligations of an Indian State corresponding to a State specified in Part B of the First Schedule, runs as follows:

'I. As from the commencement of this Constitution

(a) .....

(b) all rights, liabilities and obligations 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.

4. The Indian Income-tax Act was made applicable to Part B States, including Madhya Bharat. on 1-4-1950. The Finance Act, 1950, amended the Income-tax Act by inter alia introducing in the Act the definition of the term 'Taxable Territories'.

The effect of the amendment was that for the assessment year 1950-51 an assessee who was a resident in a Part B State in the relevant previous year was deemed to be 'resident' in the taxable territories though Part B States were not part of taxable territories prior to 1-4-1950, and such an assessee, as a resident, was taxable in respect of all his income of the previous year.

Section 60-A of the Act, which was inserted in the Indian Income-tax Act by the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, authorised the Central Government to make an exemption, reduction or modification as regards liability to tax in favour of any class of income or in regard to the whole or any part of income of any person or class of persons, for the purpose of avoiding any anomaly or removing any difficulty arising from the extension of the Income-tax Act to the merged territories or any Part B State. In exercise of the powers conferred by Section 60-A the Central Government issued the Part B States (Taxation Concessions) Order, 1950,

The provision of the Order that is material here is paragraph 16 which provided for grant of exemption or concessions in respect of income-tax or super-tax to industrial undertakings situated in any Part B State where such industrial undertakings were enjoying exemption or concession immediately before 1-4-1950. The petitioner Company applied under the said paragraph 16 to the Central Government for exemption from income-tax and super-tax claiming that they were enjoying the same on 1-4-1950 under an agreement between the Company and the Gwalior State. The Company claimed exemption for Weaving Division for the unexpired period of eleven years and for the Staple Fibre Section for the full period of twelve years from the date of starting of production.

The Government of India first gave exemption in respect of Weaving Section only for the assessment years 1950-51 to 1954-55. No exemption was given for the Staple Fibre Section. Its consideration was postponed by the Central Government till after the Staple Fibre Factory commenced production. On the company representing to the Government again for full exemption to which it claimed it was entitled under the agreement with the Gwalior State, exemption from income-tax and super-tax for Weaving Section for a further period of five assessment years was granted. Its request for grant of exemption to the Staple Fibre Section was rejected. Thereafter assessment proceedings against the Company were started and the petitioner Company was assessed to income-tax for the assessment years 1950-51, 1951-32, and 1952-53.

5. In this slate of facts, which are not in dispute, Shri Mitra. learned counsel appearing for the petitioner Company, first submitted that by the agreement dated 7-4-1947, entered into between the Gwalior Government and M/s. Birla Bros., Ltd., the Gwalior Government undertook the obligation that no income-tax, super-tax or any other form of tax would be levied on the petitioner for a period of twelve years; that this was an obligation of the Ruler of the Gwalior State pertaining to the Government of that State, which devolved under Article VI of the Covenant on the State of Madhya Bharat and was re-cognised by that State when the sovereignty of the Ruler of Gwalior State was extinguished and the new State of Madhya Bharat was established; that eventually On the Republic of India coming into existence on 26-1-1950 and the State of Madhya Bharat becoming a Part B State of the Republic, this obligation of the State of Madhya Bharat was recognised by Article 295(1)(b) of the Constitution and became an obligation of the Government of India as the levy of any income-tax or super-tax was a matter enumerated in the Union List.

Under this head of the argument, learned counsel emphasised that the establishment of a new State of Madhya Bharat in 1948 and the State thereafter becoming a territory of the Republic of India were Acts of State; and that Article 295(1)(b) of the Constitution was a provision dealing not simply with mere transference of devolution of the rights, liabilities and obligations of the Government of any Indian State, corresponding to a State specified in Part B, to the Government of India, but that it also made the rights, liabilities and obligations devolving as the, rights, liabilities and obligations of the Government of India so as to bind that Government with the devolved rights, liabilities and obligations.

Learned counsel emphasised the use of the word 'obligations' in Article 295(1)(b) and proceeded to say that the obligation to exempt the petitioner-Company from any form of taxation during the period of twelve years having been thus embodied in an Article of the Constitution, it became a constitutional obligation which could not be abrogated by ordinary law; that the extension of the Indian Income-tax Act by the Finance Act of 1950 did not, on its true construction, destroy the exemption granted to the petitioner-Company under the aforesaid agreement; that the Income-tax Act was a general statute, and on the rule of construction expressed in the maxim 'generalia speciali-bus non derogant', the special rights given to the petitioner by the agreement which became a. constitutional obligation under Article 295(1)(b) could not be construed as interfering with or impairing those rights; that Section 13 of the Finance Act did not in terms or by necessary implication abrogate the exemption granted by the agreement; and that Section 60-A of the Indian Income-tax Act and paragraph 16 of the Part B States (Taxation Concessions) Order, 1950, issued under Section 60-A, were only provisions enabling the Central Government to make exemption in certain cases and they could not be used for purposes of rescinding an exemption already granted and embodied in Article 295(1)(b).

Learned counsel did not contest the position that Article 295(1)(b) did not fetter or limit the legislative competence of Parliament and the Legislature of the State under Arts, 245 and 246 of the Constitution. He, however, said that if the Income-tax Act, Section 13 of the Finance Act, 1950, and paragraph 16 of the Part B States (Taxation Concessions) Order, 1950, were to be construed as having the effect of abrogating the rights of the petitioner-Company under the agreement, then they were an infringement of a constitutional obligation contained in Article 295(1)(b) and would, therefore, be unconstitutional and void qua the petitioner-Companywhose rights under the agreement were thus infringed.

In support of his contention that a general statute should be interpreted so as not to interfere with the rights created under special laws, learned counsel relied on the statement of law in Maxwell's Interpretation of Statutes (10th edn.) at pp. 176 and 179, and on the decisions in Seward v. Vera Cruz, (1884) 10 AC 59, Blackpool Corporation v. Starr Estate Co., (1922) 1 AC 27, Kutner v. Phillips, (1891) 2 QB 267, Williams v. Pritchard, (1890) 100 ER 862, Eddington v. Borman, (1790) 100 ER 863, Perchard v. Heywood, (1800) 101 ER 1494, and on the observations of the Supreme Court in paragraph 9 of the judgment in Dalmia Dadri Cement Co., Ltd. v. Commr. of Income-tax, AIR 1958 SC 818.

He sought to derive support for his contention that though Article 295(1)(b) did not limit the legislative power of Parliament, the Income-tax Act, the provisions of Section 13 of the Finance Act, 1950, and paragraph 16 of the Part B States (Taxation Concessions) Order, 1950, if they purported to annul the rights granted to the petitioner Company under the agreement. were quoad the petitioner, whose rights were thus infringed, unconstitutional and void, and were unenforceable from the decision in Behram Khurshid v. State of Bombay, (S) AIR 1955 SC 123; 1955-1 SCR 613. Learned counsel also referred to Probhat Chandra v. Emperor, AIR 1930 PC 209, Rajendra Narayan v. Commr. of Income-tax, AIR 1937 Pat 1, Maharaj Umeg Singh v. State of Bombay, (S) AIR 1955 SC 540: 1955-2 SCR 164 and Associated Stone Industries (Kotah) Ltd. v. Union of India, ILR (1958) 8 Raj 700 (FB), and said that these cases were essentially distinct from the present case and did not in any way affect the validity of his argument. The distinction which the learned counsel sought to make between those cases and the one before us will be referred to later on,

6. In answer to these contentions, learned Advocate-General submitted that the agreement dated 7-4-1947 only granted a concession to the petitioner Company; that it could not impose any binding obligation on the Ruler of Gwalior State as to the form of subsequent legislation as the Ruler was sovereign Ruler and his powers were not subject to any constitutional limitations. Learned Advocate-General did not controvert the position that if any obligation was created, it would under Article 295(1)(b) of the Constitution devolve On the Union Government.

He suggested that as the Instrument of Accession executed by the Raj Pramukh of Madhya Bharat the sovereignty of the Rulers of the Covenanting States over their subjects and territories was completely ceded to the Government of India, there was no question of recognition of any rights, liabilities or obligations of the State by the Government of India when the Constitution came into force and the State of Madhya Bharat became a Part B State within it; and that Article 295 was not a provision recognising any rights, liabilities or obligations of any Indian State corresponding to a State specified in Part B of the First Schedule.

He then argued that the said Article could not be read as restricting in any way the legislative power under Article 295 by the terms of any grant or contract devolving under the provision. It was pointed out that the wording of Article 295(1)(h) was similar to that of Article 295(1)(b) and, therefore, it must receive the same construction as was put by the Supreme Court on Article 294 (1Kb) in (S) AIR 1955 SC 540 (supra). Learned Advocate-General further argued that if, as was conceded on behalf of the petitioner, Article 295 did not fetter legislative power, then it was unreal to say that the Income-tax Act, Section 13 of the Finance Act, 1950, and paragraph 16 of the Part B States (Taxation Concessions) Order, 1950, were unconstitutional and void as they were in contravention of any obligation devolved under Article 295(1)(b); that there was no infringement of any fundamental right in the valid imposition, assessment or collection of a tax; and that being so, the principle laid down in (S) AIR 1955 SC 123 (supra) that a statute, though within the legislative competence of a Legislature, could still be declared unconstitutional and void by reason of abridgement of fundamental rights had no applicability.

In regard to the cases cited by the learned counsel for the petitioner to support the proposition that a general statute should be interpreted so as not to interfere with the rights created under special laws, learned Advocate-General said that those cases turned on the wording of the enactments considered in those cases, but here the intention of the Legislature to abrogate exemption or concession in respect of income-tax or super-tax granted by the Ruler of an Indian State and to repeal any law relating to income-tax or super-tax in force in any Part B State before 1-4-1950 was patent from the explicit and clear wording of the definition of 'taxable territories' given in Section 2 (14A) of the Income-tax Act and of the provisions of Section 13 of the Finance Act, 1950, and paragraph 16 of the Part B States (Taxation Concessions) Order, 1950; and that, therefore, the petitioner's claim for exemption from income-tax or super-tax for the period mentioned in the agreement dated 7-4-1947 was altogether unsutainable.

7. On the submissions made by the learned counsel, the question that arises in this case can be Stated, briefly, thus: whether the exemption from tax accorded to the petitioner-Company by the former Gwalior State by Clause (3) of its agreement with the Government of Gwalior State became a constitutional obligation of the Union Government! so that the Government was incompetent to abrogate the exemption by legislation; and, if it was not incompetent, whether the language used in the relevant provisions of the Income-tax Act, Finance Act of 1950 and the Taxation Concessions Order, 1950, was adequate for the purpose.

On some of the points arising in the case, the guidance and the authority of the pronouncements of the Supreme Court in some decisions are fully available. But the substantial issue which arises for determination is not covered by any direct authority. It is, therefore, necessary to examine in some detail the determining considerations, which are partly general consisting in the history of the matter and partly particular comprising of the relevant statutory provisions.

8. The first question to be decided is whether tile agreement concluded between the petitioner and the Gwalior Government on 7-4-1947 cast any binding obligation on the Gwalior Government and the Ruler of that State for exempting the applicant-Company from taxation. Learned Advocate-General suggested that the agreement did not impose any such obligation inasmuch as it only granted a concession which could have been taken away by the Ruler of Gwalior State any time as he was the sovereign Ruler and his powers were not subject to any constitutional limitations.

On a plain reading of the agreement, it is clear that by it the Gwalior Government undertook to exempt the petitioner, Company from taxation for a certain number of years. It is no doubt true that the Ruler could have rescinded at any time the exemption granted by him. But that does not alter the fact that so long as the agreement stood the Gwalior Government was bound to the petitioner-Company to forbear from imposing any tax. While considering the question whether any obligation of the former Gwalior State devolved first on the State of Madhya Bharat and then on the appropriate Government, the material point is not whether the obligation could or could not have been abrogated.

It is whether at the time of devolution it was a fully constituted obligation. That this is the right approach is clear from the decision of the Supreme Court in Virendra Singh v. State of U. P., AIR 1954 SC 447. In that case, the question arose whether certain absolute muafi grants of lands made by the Rulers of erstwhile States of Charkari and Sairola, which were independent States under the paramountcy of the British Crown before the integration of the States into United States of Vindhya Pradesh and their subsequent accession to the Dominion of India, could be revoked as an act of State by the State of Uttar Pradesh. The Supreme Court, after pointing out that these grants which had been created by the Rulers of Charkari and Sairola wore recognised in 1948 by the Vindhya Pradesh Union and that when this Union was dissolved its rights, duties and obligations became those of the Government of India under the Vindhya Pradesh Merger Agreement and that subsequently the muafi granted by the said Rulers in respect of four villages became the obligation of the Uttar Pradesh Government when these villages were absorbed in Uttar Pradesh under the Provinces and States (Absorption of Enclaves) Order, 1950, on 25-1-1950, proceeded to say;

'The grants are absolute in character and would under any civilised system of law pass an absolute and indefeasible title to the grantee. Let it be conceded, as was argued (though we do not so decide) that they were defeasible at the mere will of a sovereign who held absolute and despotic sway over his subjects in all domestic concerns. The fact remains that up till that time they were neither resumed by the former rulers nor confiscated by the Dominion of India as an act of State. Therefore, up to 25-1-1950, the right and title of the petitioners to continue in possession was good, at any rate, against all but the Rulers and the Dominion of India.'

By these observations, the Supreme Court rejected the suggestion that as the grants were terminable bythe Rulers concerned at their will, no obligation in respect of the grants could be said to devolve on the State of Uttar Pradesh. The observation of the Supreme Court that the title of the grantees to the disputed lands was good at any rate against all but the Rulers and the Dominion of India cannot be read as importing a decision that as the grants could be annulled by the Rulers or the Dominion of India, therefore, no obligation in respect of those grants was imposed on the Rulers or the Dominion of India. The Supreme Court did not decide whether the grants could be repudiated by the Rulers or the Dominion of India.The obligation of the Rulers in respect of the grants having been transferred first to the Dominion Government and then to Uttar Pradesh Government, they could not be said to have been good as against the Rulers or the Dominion of India. The said observation only emphasised the position that the grants not having been repudiated up to 25-1-1950 they were good against the State of Uttar Pradesh on whom the rights, liabilities and obligations of the Dominion Government in respect of the four villages concerned devolved under the Provinces and States (Absorption of Enclaves) Order, 1950. There can, therefore, be no doubt that under the agreement dated 7-4-1947 there was a binding obligation on the Gwalior State to exempt the petitioner, Company from taxation.

9. The conclusion that the Gwalior State and the Ruler of that State undertook the obligation of exempting the petitioner from taxation also follows from the order of the Maharaja of Gwalior made on 18-1-1947. Shri Mitra, learned counsel for the petitioner, seemed to place rather less reliance on the order and more on the agreement itself. But the order of the Ruler is equally, if not more, important than the agreement itself and cannot be ignored. The agreement was but a sequel to this order. By that order 'exemption from any form of taxation on the income for a period of twelve years from the date of starting of the factories' was granted. Now, as is clear from the decisions of the Supreme Court in Ameer-un-Nissa Begum v. Mahboob Begum, AIR 1955 SC 352, and Director of Endowments, Govt. of Hyderabad v. Akram Ali, (S) AIR 1956 SC 60, the said order of the Ruler had the effect of law.

In the former case the Nizam of Hyderabad had issued a Firman directing that the report of a Commission appointed by him to advise on a case of succession of a deceased Nawab be implemented. The Supreme Court said that the Firmans of the Nizam were expressions of his sovereign will; that they were binding in the same way as any other law; that they would even override all other laws which were in conflict with them; and that so long as the Firman held the field, that alone would 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. The case of (S) AIR 1958 SC 60 (supra) dealt with a Finnan of the Nizam directing the Ecclesiastical Department to supervise a Dargah until the rights of the contending parties had been enquired into and decided by a civil Court. In that case, the Supreme Court made the following observations:

'Now the Nizam was an absolute sovereign regarding all domestic matters at that time and his word was law. It does not matter whether this be called legislation or an executive act or a judicial determination because there is in fact no clear cut dividing line between the various functions of an absolute ruler whose will is law. Whatever he proclaimed through his Firmans had the combined effect of law and the decree of a Court.'

Following these two decisions it must be held that under the order of the Maharaja of Gwalior dated 18-1-1947, whether viewed as a legislative act or an executive act, there was a binding obligation on the Gwalior State to exempt the petitioner from taxation.

10. The question whether this obligation of the Gwalior State devolved on the State of Madhya Bharat presents no difficulty. As has been stated earlier, the State of Madhya Bharat came into existence as a result of a Covenant entered into on 22-4-1948 by the Rulers of Gwalior, Indore, and Central India States for the merger of their territories into one State. The Covenant inter alia extinguished the sovereignty of the Rulers of the Covenanting States and established a new State.

The question as to the nature of the Covenant and the effect of Article VI of the Covenant is concluded by the decision of the Supreme Court in AIR 1958 SC 816, where the Supreme Court considered the effect of an analogous Covenant and its terms bringing into existence the State of Patiala and East Punjab States Union. Venkatarama Aiyar J., delivering the main judgment in that case, said:

'The question that arises for our decision is whether the Covenant was an act of State. On that, there can be no two opinions. It was a treaty entered into by rulers of independent States, by which they gave up their sovereignty over their respective territories, and vested it in the ruler of a new State. The expression 'act of State' is, it is scarcely necessary to say, not limited to hostile action between rulers resulting in the occupation of territories. It includes all acquisitions of territory by a sovereign State for the first time, whether it be by conquest or cession. Vide Vaje-singji Joravar Singji v. Secy. of State, 51 Ind App 857 at p. 360: AIR 1924 PC 216 at p. 217 and Thakur Amar Singhji v. State of Rajasthan, 1955-2 SCR 303 at p. 335: (S) AIR 1955 SC 504 at p. 523). And on principle, it makes no difference as to the nature of the act, whether it is acquisition of new territory by an existing State or as in the present case, formation of a new State out of territories belonging to quondam States. In either case, there is establishment of new sovereignty over the territory in question, and that is an act of State.'

It was then pointed, out that in law the process of acquisition of new territories was one continuous act of State terminating on the assumption of sovereign powers de jure over them by the new sovereign and it was only thereafter that rights accrue to the residents of those territories as subjects of that sovereign. The learned Judge then proceeded to say that 'no act done or declaration made by the new sovereign prior to his assumption of sovereign powers over acquired territories can quoad the residents of those territories be regarded ashaving the character of a law conferring on them rights such as could be agitated in his Courts. After discussing certain authorities, his Lordship then went on to say:

'The result of the authorities then is that when a treaty is entered into by sovereigns of independent States whereunder sovereignty in territories passes from one to the other, clauses therein providing for the recognition by the sovereign of the existing rights of the resident of those territories must be regarded as invested with the character of an act of State and no claim based thereon could be enforced in a Court of law. It must follow from this that the Covenant in question entered into by the rulers of the Covenanting States is in its entirety an act of State, and that Article VI therein cannot operate to confer on the appellant any right as against the Patiala Union.'

Later on, in paragraph 23 of the Judgment, while dealing with the contention that Article VI (similar to Article VI of the Covenant here) furnished valuable evidence from which affirmance of the rights, liabilities and obligations devolving on the new State could be inferred, it was said:

'It was argued that Article VI of the Covenant would at least be valuable evidence from whichaffirmance of those rights could be inferred. That is so; but that inference must relate to act or conduct of the new State, and that can only be after its formation.....'

In the case of AJR 1958 SC 816 (supra), there was not any act of the new State from which it could be held in the light of Article VI of Pepsu Covenant that its intention was to affirm certain concessions granted to the Company by an agreement with the Jind State. But here the affirmation of the exemption granted to the petitioner-Company is to be found in Section 4 of the Regulation of Government Act (No. 1 of 1948) and Article VI of the Covenant read with Section 3 of Act No. 1 of 1948. Section 4 of the Act ran as follows:

'When the administration of any Covenanting State has been taken over by the Raj Pramukh or when any State has merged in the United State as aforesaid, all Laws, Ordinances, Acts, Rules, Regulations etc., having the force of law in the said State shall continue to remain in force until repealed or amended under the provisions of the next succeeding section, and. shall be construed as if references in them to the Ruler or Government of the State were references to the Raj Pramukh or the Government of the United State respectively.'

This section gave continuity to the laws of the Covenanting States. The words 'having the force of law in the said State' in Section 4 are plain enough to show that any provision in the Covenanting States having the character or having the force of law was continued in Madhya Bharat by Section 4. Now, if the order dated 18-1-1947 of the Maharaja of Gwalior exempting the petitioner Company from taxation had the effect of law --as it had undoubtedly on the authority of AIR 1955 SC 352, then it follows that under Section 4 of Act No. 1 of 1948 that order having the force of law in the Gwalior State was continued after the formation of Madhya Bharat.

The continuance of that order by Section 4 was an act or conduct of the new State after it was formed and was one giving legislative recognition to the privilege of exemption from taxation granted to the petitioner. An equivalent result is reached from Section 3 of the Act, which provided as follows:

'When in pursuance of Clause (b) of paragraph (1) of Article II of the Covenant, any State be included in the United State, the provisions of paragraph (2) of Article VI of the Covenant shall immediately come into force.'

The provisions of paragraph (2) of Article VI of the Covenant, which were to come into force in relation to a State when it became a part of Madhya Bharat, laid down that on the administration of a State being made over to the Raj Pramukh the provisions of Clauses (a), (b), (c) and (d) of paragraph 1 of Article VI would apply in relation to that State. By process of substitution, Clauses (a), (b), (c) and (d) of Article VI (1) must therefore be read in Section 3. So read, Section 3 becomes a provision saying that when any State is included in Madhya Bharat, then the consequences mentioned in Clauses (a), (b), (c) and (d) of paragraph (1) of Article VI of the Covenant shall ensue in relation to that State.

Now, Clause (b) of paragraph (1) of Article VI provided that an the making over of the administration of a State by its Ruler to the Raj Pramukh, all duties and obligations of the Ruler pertaining or incidental to Government of that State shall devolve on the State of Madhya Bharat and shall be discharged by it. The positive direction that the obligation shall be discharged did not leave any liberty to the State of Madhya Bharat to repudiate it. If, therefore, a Ruler had undertaken an obligation towards a person before the merger of his State in Madhya Bharat, then the effect of Section 3 is to make that obligation an obligation of the State of Madhya Bharat and to enjoin upon the State of Madhya Bharat to discharge that obligation.

Thus, Section 3 gave statutory recognition to the rights, duties, obligations, and liabilities dealt with by Article VI, paragraph (1) of the Covenant and gave to the persons interested in those rights, obligations, and liabilities a legal enforceable right in respect of them against the State of Madhya Bharat. It is thus clear that the obligation, which the Ruler of Gwalior State had incurred of granting exemption to the petitioner from taxation, devolved on the State of Madhya Bharat under Section 3 of Act No. 1 of 1948, and that State was bound to discharge that obligation.

It was on this reasoning that it was held in State of Madhya Pradesh v. Behramii Dungqji and Co., 1958 MPC 82: AIR 1958 Madh Pra 71, that an order of the Maharaja of Ratlam fixing certain rates at which the plaintiff in that case was to be paid for the liquor supplied by him to the State had the effect of law; that the order created a binding obligation on the Ratlam State; and that as the order was continued after the formation of Madhya Bharat, the obligation under it devolved on the State of Madhya Bharat when that State was brought into existence and became a liability of Madhya Bharat as a Part B State under Article 295(1) of the Constitution. It may be mentioned that the decision in the case of 1958 MPC 82: AIR 1958 Madh Pra 71, (supra) was upheld by the SupremeCourt in that when the State's application for leave to appeal to the Supreme Court was rejected by this Court, it sought special leave to appeal from the Supreme Court which was refused.

11. The next question that falls to be determined is whether this obligation of the Madhya Bharat Government to exempt the petitioner from taxation devolved on and became a binding obligation of the Union Government so as to prevent it from impairing the obligation. The question turns on the true construction of Article 295(1)(b) of the Constitution. Clause (a) of Article 295(1) relates to the vesting in the Union of all property and assets which immediately before the commencement of the Constitution were vested in any Indian State corresponding to a State specified in Part B of the First Schedule, if the purposes for which such property and assets were held immediately before such commencement are thereafter the purposes of the Union relating to any of the matters enumerated in the Union List.

Clause (b) is concerned with the rights, liabilities and obligations of the Government of any Indian State mentioned above and says that those rights, liabilities, and obligations will, after the commencement of the Constitution, become 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 were the purposes of the Government of India relating to any of the matters enumerated in the Union List. There is no dispute that if there was an obligation on the Madhya Bharat Government in the matter of exempting the petitioner from taxation then it was passed on to the Government of India under Article 295(1)(b).

The controversy centres round the point whether Article 295(1)(b) can be read as enjoining the Government of India to fulfil all the obligations and discharge the liabilities arising out of any contract or otherwise and devolving on it under that provision. Learned counsel for the petitioner maintained that the provision had that effect. He contrasted the language of Article 295(1)(b) of the Constitution with that of Sections 172 and 173 of the Government of India Act, 1935, and emphasized the significance of a provision for the first time for the devolution of obligations of Indian States and said that the object of the said provision was inter alia to respect the rights, liabilities, and obligations of the Indian States accepting from 26-1-1950 the Constitution of India as the Constitution for their States and becoming a part of the Indian Republic.

The learned Advocate-General, however, sought to argue that Article 295 dealt only with the question of the apportionment of all property and assets and of rights, liabilities, and obligations of Indian States as between the Government of India and Part B States; and that as the sovereignly of Indian States had already been extinguished by the Instalments of Accession executed by the Rulers and the Raj Pramukhs concerned before the Constitution came into force there was therefore no question of recognition or affirmance of any rights, liabilities or obligatioas of these States devolving on the Government of India.

12. On a plain reading of el. (b) of Article 295(1) it is clear that it is not a provision dealing merelywith the devolution on the Government of India of rights, liabilities and obligations of the Indian States. If that had been the intention of the farmers of the Constitution, it would have been sufficient to say that all rights, liabilities and obligations of the Indian States mentioned in Clause (b) shall devolve on the Government of India if the purposes for which such rights were acquired or liabilities and obligations were incurred were the purposes of the Government of India relating to any of the matters enumerated in the Union List. But the language of Clause (b) is different. It says that all such rights, liabilities and obligations shall be the rights, liabilities and obligations of the Government of India.

The words 'shall be the rights, liabilities and obligations' are a clear positive instruction that not only the rights, liabilities and obligations shall devolve on the Government of India but that it shall also be the duty of the Government of India to discharge them. It must be noted that the question is not whether the words 'shall be' have been used in a mandatory or a directory sense. In Clause (b) they have, without any doubt, an imperative meaning. The precise question is as to the content of the mandatory provision 'shall be the rights, liabilities and obligations'.

The view that Article 295(1) not only deals with the transference of rights, liabilities and obli-gations to the Government of India but also binds the Government to the obligations transferred to it finds support in certain observations of the Supreme Court in (S) AIR 1955 SC 540 (supra). That was a case in which some Jagirdars and relations of the Rulers of the erstwhile States which had merged in Bombay filed a petition under Article 32 challenging the vires of the Bombay Merged Territories and Areas (Jagirs Abolition) Act, 1953. They relied on Clause 5 of the letters of guarantee which had been obtained by the Rulers from the Dominion Government and complained that the State Legislature had no power to enact the impugned Act depriving them of their Jagirs.

One of the contentions advanced on behalf of the Jagirdars was that the Government of the Dominion of India was bound by these guarantees and this obligation of the Dominion Government devolved upon the Province of Bombay when the erstwhile States merged in it under the States Merger (Governor's Provinces) Order 194.9; that the obligation was thus binding on the Province of Bombay; and that on the coming into force of the Constitution on 26-1-1950 all rights, liabilities and obligations of each of the Governors' Provinces became under Article 294(1)(b) the rights, liabilities and obligations respectively of the Government of each corresponding State and, therefore, the obligations of the Province of Bombay became the obligations of the State of Bombay.

In substance the contention was that the State of Bombay was bound by the obligations which had been first undertaken by the Dominion Government, later transferred to the Province of Bombay and then transferred under Article 294 to the State of Bombay and that, therefore, the State of Bombay could not repudiate the obligations. In regard to this contention, the Supreme Court said in paragraph 9 of the judgment that it was not withoutforce. The Supreme Court did not consider it necessary to decide the question whether the State of Bombay was or was not bound by these obligations.

On the assumption that the State of Bombay was bound by these obligations, the question whether the Jagirdars were entitled to enforce the obligations against the State of Bombay was considered and decided against the petitioners. The Supreme Court also considered the question whether the transference under Article 294 to the State of Bombay of the obligations undertaken by the Union Government in Clause 5 of the letters of guarantee imposed a fetter or limitation on the legislative competence of the State Legislature to enact the impugned legislation, and held that it did not.

It is easy to see that fundamental to the contention of the petitioners in Maharaj Umeg Singh's case (S) AIR 1955 SC 540 (supra) was the question whether Article 294(1)(b) bound the State of Bombay by all the obligations which had been originally undertaken by the Dominion Government under the agreements of merger and letters of guarantee and which devolved on the State of Bombay under that Article. If ex facie Article 294(1)(b) was provision dealing merely with transference of rights, liabilities and obligations and not with the binding effect of the obligations transferred, then the Supreme Court would have said so and would not have thought it necessary to make an assumption that the obligations were binding on the State of Bombay and decide the question whether the petitioners before them were entitled to enforce those obligations against the State or whether the transference of the obligations imposed a fetter or limitation on the legislative power.

Article 294(1)(b) and Article 295(1)(b) both use the expression 'shall be the rights, liabilities and obligations' and that expression must receive the same construction in the two articles. The observation of the Supreme Court in Maharaj Umeg Singh's case (S) AIR 1955 SC 540 (supra) on the contention that the obligations transferred under Article 294(1)(b) were binding on the State on whom they devolved, 'that it was not without any force' thus indirectly lends support to the view expressed earlier in this judgment on the construction of Article 294(1)(b).

13. Our attention has been drawn to the decision of the Rajasthan High Court in ILR (1958) 8 Raj 700 (FB). In that case, Wanchoo C. J. (as he then was) expressed the opinion that Article 295 was merely concerned with the fact of vesting of property and assets and with the transference of rights, liabilities and obligations; that it did not make any contract or grant out of which any rights, liabilities or obligations might arise apart of Article 295(1)(b): and that any legislation touching the vesting of property and assets and the 'arising rights, liabilities and obligations' could not be made under Article 245.

The learned Chief Justice observed that Article 294(1) said nothing about the right of Parliament to pass a law as to income-tax, super-tax or excess profits tax and that the provision could not be read further as if it contained all the terms of all the contracts and grants to which Governmentof India might become liable. The Rajasthan decision ILR (I95S) 8 Raj 700 (FB) (supra) does not give full effect, to the meaning of the words 'shall be the right, liabilities and obligations'. It does not also take into account the circumstances (which will be referred to presently) in which it became necessary to include in the Constitution a provision for the protection of the rights, liabilities and obligations devolving under Article 295(1)(b).

If the expression 'shall be the rights, liabilities and obligations' has the implication of a clear positive instruction that the obligations devolving shall be fulfilled, it would be irrelevant to consider the difficulties of fulfilling them or to get over them by saying that there is no specific mention of them, in the clause. The rights, liabilities and obligations of the Indian States devolving under Article 295(1)(b) being numerous and of a varied nature and kind, clearly it was impossible to enumerate them specifically in Clause (b) for the purpose of making them binding on the Government of India. The absence, therefore, of a specific mention in Clause (b) of a particular obligation, or obligations, cannot be taken as indicative of the fact that Clause (b) of Article 295(1) did not intend to make any transferred obligation binding on the Government of India.

14. Learned Advocate General sought to read Article 295(1)(b) as merely declaring devolution of rights, liabilities and obligations on the argument that by the execution of the Instruments of Accession the sovereignty of the Indian States had already been extinguished long before 26-1-1950 and that, therefore, there was no occasion on that date for the recognition of the rights, liabilities and obligations of the Indian States mentioned in the provision. This argument cannot stand. The Instruments of Accession executed by the Rulers of Indian States in August 1947 and the revised Instruments of Accession executed by the Raj Pramukhs' of the Union of States formed out of the territories belonging to the quondam Indian States were not Instruments of Merger.

By these instruments the sovereignty of the various States formed under the Covenants entered into by the Rulers of Indian States was in no way surrendered. Those instruments only enabled the power authority, rights and jurisdiction of the Raj Pramukhs in respect of those matters which they had agreed to recognize as Federal subjects to be exercised by the Governor-General, Dominion Legislature, Federal Court and any other Dominion authority but strictly within the limits defined by the Instruments of Accession. Outside those limits the autonomy of the States was in no way affected by the Government of India Act, 1935.

This becomes clear on a perusal of the revised Instrument of Accession executed by the Raj Pra-mukh of Madhya Bharat on 19-7-1948 (see page 320 of the White Paper on Indian States). As a result of the execution of the Instrument of Accession and of the provisions of the Government of India Act, 1935, the constitutional position of the Raj Pramukh of Madhya Bharat and of that State was as follows:

(a) The Dominion Legislature had power to make laws for Madhya Bharat with respect to matters enumerated in Lists I and III of the 7th Schedule to the Government of India Act.

(b) The executive authority of the Dominion in the State in relation to these subjects was exercisable in accordance with Sections 124 and 125 of the Act of 1935 and Clause 6 of the Instrument that it either through the Raj Pramukh and his officers or by officers of the Dominion Government. Otherwise the executive authority of the State remained with the Raj Pramukh.

(d) By Clause 8 of the Instrument of Accession it was provided that the State of Madhya Bharat was not committed to accept any future Constitution of India and that its discretion to enter into any agreement with any future Government of India was not fettered.

(e) Clause 9 of the Instrument of Accession said that save as provided by or under the Instrument nothing in it shall affect the exercise of any powers, authority and rights enjoyed by the Raj Pramukh in the State or the validity of any law for the time being in force in the State. The constitutional arrangements set out in the Instrument of Accession conclusively show that the limitations imposed by the Instrument on the sovereignty of the State of Madhya Bharat had no application over a substantial sphere. Within those limitations the State continued to remain a sovereign foreign State even after the execution of the Instrument of Accession. It is not necessary to labour the point further. In the decision of the Supreme Court in AIR 1954 SC 447 the nature and effect of a similar Instrument of Accession executed by the? Ruler of Rewa State was considered, and it was observed: 'Broadly speaking, the effect of the accession was to retain to the Rulers their full autonomy and sovereignty except on three subjects : Defence, External Affairs and Communications, These were transferred to the Central Government of the new Dominion.'

The fact that with the formation of the Union the legislative power of the Dominion Parliament was extended by revised Instruments of Accession to all matters specified in the Federal and Concurrent Lists does not alter the position. In Shiv Bahadur Singh v. State of Vindhya Pradesh, AIR 1953 SC 394 it was pointed out that the provisions under the Government of India Act under which the Instrument of Accession had been executed keep the position of the provinces distinct from the position of the acceding States. It is thus clear that though by the execution of the Instruments of Accession the internal sovereignty of the States was subjected to a servitude and incalculably affected, none-the-less they remained sovereign and autonomous States till 26th January 1950.

It was when on this date the Constitution of India was accepted as the Constitution for these States that there was a complete extinction of then sovereignty and complete surrender to the Indian Republic of full and exclusive authority, jurisdiction, and powers in relation to the governance of the States. It cannot, therefore, be maintained that when the Constitution was brought into force and accepted by the Union of Indian States; no question of affirming or repudiating their rights, liabilities and obligations could at all arise.

15. It must be remembered that when the Indian States entered the Constituent Assembly it was not contemplated that their Constitution should form a part of the Constitution of India. It was also thought that the accession of States to the new Indian Union would be by means of some process of ratification of the Constitution. The Covenants establishing the various Unions of States contained provisions for the framing of their Constitutions by their respective Constituent Assemblies within the framework of the Covenants and the Constitution of India.

It was late in 1949 that the Heads and the people of the Unions of States agreed after some persuasion by the Ministry of States that the Constitution of the States should also form an integral part of the Constitution of India. One has only to go through the White Paper on Indian States to appreciate this position and know the hesitation and doubts the Rulers had when they executed the Instruments of Accession and later on agreed to merge their identity by executing Covenants establishing various Unions of States. The Rulers and the people of the States attached great importance to the commitments the Rulers had made to their people, their liabilities and obligations to them.

The White Paper shows that in 1947 when the Rulers acceded on three subjects of Defence, External Affairs and Communications, they were assured that they would retain the status quo except for accession of these subjects, that the accession did not imply financial liability and no encroachment on the internal autonomy or sovereignty, and that it did not fetter their discretion in respect of their acceptance of the new Constitution of India Even when they acceded, the Dominion Legislature did not get any power to impose any tax or duty in the territories of Indian States.

It was in the context of these commitments and assurances for safeguarding their rights, liabilities and obligations that it was provided by Article VI of the Covenant, under which the State of Madhya Bharat was formed, as in other Covenants, that all rights, liabilities and obligations of the Rulers of Covenanting States shall devolve on the United State and shall be discharged by it. These commitments and assurances could not have been clearly forgotten when the Indian States were persuaded to accept the new Constitution of India, as adopted by the Constituent Assembly, as the Constitution for their States also. The Constituent Assembly could do no less than make a provision for the protection of these rights, liabilities and obligations unless it was prepared to repudiate them and commit a deliberate breach of faith. A provision in the Constitution of India for the affirmation of the rights, liabilities and obligations of the Indian States has, therefore, full justification in the history of the Indian States in the period between the passing of the Indian Independence Act and the inauguration of the Republic.

16. From what has been stated above, it is plain that Article 295(1)(b) deals not only with the devolution of the rights, liabilities and obligation of the Indian States referred to therein but also makes them binding on the Union Government. Itis important to note that here even on the restricted construction of the provision contended by the learned Advocate General, the transference itself of the obligation of the Madhya Bharat Government to exempt the petitioner-Company from taxation imposes a duty on the Union Government to discharge it. The petitioner was granted exemption from taxation by an order of the Ruler of Gwalior State which had the effect of law and which continued to remain in force in Madhya Bharat by virtue of Section 3 of the Madhya Bharat Act No. I of 1948. Section 4 of that Act gave legislative recognition to the duties and obligations of the Rulers of Covenanting States which devolved on the State of Madhya Bharat and further expressly enjoined that they shall be discharged by the State of Madhya Bharat. The obligation, therefore, that rested in the Madhya Bharat Government just before the commencement of the Constitution was not merely one exempting the petitioner from taxation with liberty to terminate the exemption at any time. The obligation was one which the State of Madhya Bharat was bound to fulfil as provided in Section 4 of the aforesaid Act.

It is this obligation of the Madhya Bharat Government of discharging the obligation undertaken by the Ruler of Gwalior State of granting exemption from taxation to the petitioner that devolved on the Government of India under Article 295(1)(b). The transference of the obligation to the Government of India itself thus makes it liable to fulfil it. It is necessary to emphasise that quite apart from Article 295(1)(b) there would be a binding obligation on the Government of India to exempt the petitioner from taxation if the order of the Maharaja of Gwalior, which had the effect of law and which as law was in force in Madhya Bharat, is held to be still operative and not re- pealed by any of the provisions of the Income-tax Act or the Finance Act of 1950 or the Taxation Concessions Order, 1950.

17. This brings us to the consideration of the contention of the learned counsel for the petitioner that there being thus a constitutional obligation on the Government of India to exempt the petitioner from taxation the relevant provisions of the Indian Income-tax Act, Finance Act of 1950, and the Taxation Concessions Order, 1950, purporting to authorise imposition of tax on the petitioner, Company so as to abrogate the exemption were unconstitutional and unenforceable against the petitioner. In view of the decision of the Supreme Court in (S) AIR 1955 SC 540 (supra), learned counsel did not dispute that Article 295(1)(b) did not impose a fetter or limitation on the legislative competence of Parliament. What he contended was that though it was within the legislative competence of Parliament to impose income-tax in Part B States, the provisions levying the tax would be unconstitutional and unenforceable against the petitioner inasmuch as they infringed the right secured by Article 295(1)(b) in the matter of exemption from taxation.

Strong reliance was placed by the learned counsel on certain observations of the Supreme Court in (S) AIR 1955 SC 123, on the distinction between a statute which is beyond the competence of the Legislature and one which is within the competence of the Legislature but repugnant to a constitutional provision. Learned counsel also submitted that assuming that the obligation under Article 295(1)(b) could be taken away by legislation, the general provisions of the Income-tax Act, Finance Act and the Taxation Concessions Order could not be construed as abrogating the exemption granted to the petitioner under a special law, viz., the order of the Ruler and the agreement.

18. In substance, the contention of the learned counsel for the petitioner is no more than this that though the material provisions of the Income-tax Act and the Finance Act imposing tax in Part B States are intra vires, the ambit of those provisions is narrowed down so far as their, 'enforceability against the petitioner is concerned -and they cannot be applied to the applicant, Company so as to annul the exemption granted under the order of the Maharaja and the agreement dated 7-4-1947, and protected by Article 295 (1Kb).

Having regard to the view we have formed about the construction of the material provisions of the Income-tax Act, Finance Act and the Taxation Concessions Order (which we will state presently), it is not necessary for us to decide the question whether if the said provisions are intra vires, they can be declared to be unconstitutional and unenforceable qua the petitioner whose rights are infringed thereby. We will only add that in the case of Maharaj Umeg Singh, (S) AIR 1955 SC 540 (supra), the Supreme Court, while dealing with Article 294(1)(b), ruled that the legislative competence of the Legislature can only be circumscribed by an express prohibition contained in the Constitution itself and unless and until there is any provision in the Constitution prohibiting legislation on the subject either absolutely or conditionally there is no fetter or limitation On the power of the Legislature to legislate on the topics within its field.

In that case it was held that Clause 5 of the letters of guarantee itself reserved to the Government of Bombay the right to issue any legislation which did not discriminate against the States and their subjects and thus the Dominion Government had not undertaken any obligation precluding them from enacting any legislation which had the effect of destroying the enjoyment and ownership of Ja-girs. It was on the basis of this effect of the Clause (5) of the letters of guarantee that the Supreme Court made the observation:

'The provisions of Article 294(b)of the Constitution which is said to have transferred the obligations of the Government of the Province to the State of Bombay would not by involving the transference of the obligation undertaken by the Dominion Government in Clause (5) of the letters of guarantee to the State Government impose a fetter or limitation on the legislative competence of the State Legislature to enact legislation on any of the topics enumerated in Lists 2 and 3 of the Seventh Schedule to the Constitution. The remedy of the petitioners would be elsewhere and not in this forum.'

The Supreme Court had no occasion to consider whether, if there had been an absolute guarantee against legislation abolishing Jagirs in Clause (5) and if that obligation had become a binding obli-gation of the State of Bombay under Article 294(1)(b), the Bombay Merged Territories and Areas (Jagirs Abolition) Act, 1953, though within the legislative power of the State Legislature as falling under any of the topics enumerated in Lists 2 and 3 of the Seventh Schedule, would be still wholly or partly good against the petitioners before them.

The Supreme Court's decision in Maharaj Umeg Singh's case (S) AIR 1955 SC 540 (supra), cannot, therefore, be regarded as conclusive for the rejection of the petitioner's contention that the provisions and the Acts and Orders referred to above, though intra vires, were unenforceable against the petitioner inasmuch as they infringed the exemption from taxation granted to it and protected by Article 295(1)(b). In the other case, (S) AIR 1955 SC 123 (supra), the question that was considered was as to the effect of partial declaration of invalidity of Section 13(b) of the Bombay Prohibition Act, 1949, and it was said that

'the part of the section which has been declared void has no legal force so far as citizens are concerned and it cannot be recognised as valid law for determining the rights of citizens. In other words the ambit of the section stands narrowed down so far as its enforceability against citizens is concerned and no notice can be taken of the part of the section struck down in a prosecution for contravention of the provisions of that section.....'.

It was also observed that the declaration of uncon-stitutionality brought about by lack of legislative power did not stand on a different footing from a declaration of unconstitutionality brought about by reason of abridgement of the fundamental rights. Here the question is not one of the effect of a declaration of any provision as void. It is whether a legislation within the competence of the Legislature can be declared to he unenforceable against a person whose rights under the Constitution other than the fundamental rights are infringed. The argument that in such a case the provision can be held to be unenforceable against the person concerned can, however, be built up on some observations of the Supreme Court in (S) AIR 1955 SC 123 (supra). As has been said before, it is not necessary for us to consider whether the argument is substantial or untenable.

19. The argument of learned counsel for the petitioner on the question whether the taxing statute and the Taxation Concessions Order, 1950, referred to above on their true construction annul the exemption granted to the petitioner has already been slated earlier in some detail. Briefly stated, the argument is that the language of these provisions is not so clear and explicit as to operate as a repeal of the order of the Ruler of Gwalior State, which has the effect of law, and of the contractual exemption under the agreement dated 7-4-1947, which has now become a constitutional obligation under Article 295(1)(b). It was said that a specific exemption from taxation could not he abrogated by general provisions of a subsequent Act imposing taxation as there must be a specific repeal of the exemption,

20. This contention must be given effect to. The principle is firmly established that a general law has to be construed as not repealing a particular one, that is one directed towards a special object or a special class of objects and a general later law does not abrogate an earlier special one by mere implication. The applicability of this principle in the matter of taxation is illustrated by the decisions in (1790) 100 ER 862 and (1790) 100 ER 863. In the case of (1790) 100 ER 862 (supra), houses built on lands embanked from the Thames in pursuance of 7 Geo. 3, c. 37, which vested in the owners free from taxes, were held not liable to be assessed to the general land tax imposed by 27 Geo. 3, though such Act was conceived in general terms and was subsequent in point of time to the Act creating the exemption. This case shows that where the intention of the Legislature is not apparent to that purpose the general words of a later statute do not repeal the particular provisions of a former one. To the same effect is the decision in (1790) 100 ER 863 (supra). In (1800) 101 ER 1494, the same principle was recognised. In that case, the question was whether the exemption from certain rates and assessment granted under the Act of the 7 Geo. 3, c. 37, was taken away by a subsequent statute 38 Geo. 3, c. 40. The words of the subsequent Act were general but there were certain exemptions, and the one which was claimed by the plaintiff in that case was not included in that exemption. It was held that the concluding clause of the Act namely that 'no other or further exemption shall be allowed than such as are contained and expressly provided for in and by that Act notwithstanding any former statute or statutes to the contrary'' left no doubt as to the liability of the plaintiff to pay the tax in question under the subsequent Act.

In Maxwell's Interpretation of Statutes (10th edn.), there is a statement at p. 178 that the law laid down in (1790) 100 ER 862 (supra), (1790) 100 ER 863 (supra) and (1800) 101 ER 1494 (supra), is no longer a good law. This statement is based on the authority of Sion College. v. London Corporation, 1901-1 KB 617. A careful reading of that case shows that it does not lend any support to the statement. In 1901-1 KB 617 (supra), the question that was considered was whether exemption from certain taxes existing at the time of the passing of an Act gave immunity from tax imposed under the subsequent Act.'

It must be noted that this case was overruled in the Associated Newspapers Ltd. v. London Corporation, 1916-2 AC 429. This principle about the repeal of special laws granting exemption from taxation was recognised in AIR 1958 SC 816, where it was observed by the Supreme Court that assuming that the agreement in favour of the appellant in that case with the Ruler of Jind was a special law in the nature of a private Act granting certain concession to the appellant, then Section 3 of Ordinance No. 1 of Samvat 2005 extending all laws of the State of Patiala to Pepsu could not be construed unless the contrary appeared expressly or by necessary implication, as repealing the provisions of the agreement.

21. Now, as we have endeavoured to point out earlier, the order of the Ruler of the GwaliorState dated 18-1-1947 was a law granting exemption to the petitioner Company. The exemption granted under the subsequent agreement executed to implement the order became after 26-1-1950 a constitutional obligation of the Government of India under Article 295(1)(b) of the Constitution. The petitioner's claim for exemption is thus founded on statutory provisions granting specific exemption. The State of Madhya Bharat became a taxable territory from 1-4-1950. But there is nothing in any of the amendments made in the Indian Income-tax Act imposing income-tax in that State and making it a taxable territory which repealed the exemption granted to the applicant.

In AIR 1958 SC 816 (supra), the Supreme Court was not inclined to regard the general provisions of an ordinance bringing into the State of Pepsu all laws which were in force in the Patiala State on the date of the commencement of the ordinance, as a provision sufficient to repeal the rights granted to the claimant in that case under an agreement with the Jind State assuming that the agreement was a special law. Section 60-A of the Income-tax Act is only a provision enabling the Central Government to make an exemption, reduction or modification as regards the liability to 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. It nowhere rescinds an exemption from taxation already granted in any Part B State.

Section 13 of the Finance Act, 1950, on which strong reliance was placed by the learned Advocate-General as a provision repealing the exemptionin favour of the petitioner, says nothing about the repeal of special laws in force in any Part B State granting exemption from taxation. It aims at and in words provides for the repeal of positive laws relating to income-tax or super-tax in force in any Part B State, which are saved only for the purposes of the levy, assessment and collection of income-tax and super-tax in respect of the period specified in Section 13. It must be remembered that there was no Income-tax Act in the quondam Gwalior. State when the Ruler passed the order dated the 18th January, 1947. It cannot, therefore, be maintained that the Ruler's order had the effect of amending a law of income-tax in force in Gwalior State imposing a tax and that when that law was continued in Madhya Bharat and repealed by Section 13 of the Finance Act, 1950, the exemption also fell. The Part B States (Taxation Concessions) Order, 1950, which was issued under Section 60-A of the Income-tax Act is also of no avail whatsoever to the opponents for showing that the exemption granted to the petitioner was abrogated.

That Order gives no power to the Government to cancel an exemption from taxation provided for by a provision legislative in character. From the fact that paragraph 16 of the Order enables the Central Government to give relief and concessions in the matter of taxation to industrial undertakings, it cannot be argued that a concession given by the Ruler of an Indian State to an industrial undertaking in the matter of taxation has been automatically repealed or that the Central Government has been given the power to rescind the) exemption. The object of paragraph 16 of theaforesaid Order, is clearly to enable the Central Government to mould its executive action so as to conform both with a special law granting exemtion and the provisions of the Income-tax Act, 1922.

The general provisions of the Income-tax Act, Section 13 of the Finance Act of 1950 and paragraph 16 of the Taxation Concessions, Order, 1950, cannot therefore be read as taking away the exemption granted to the petitioner. In the absence of a specific repeal of the special law, it cannot be held that the petitioner, is liable to tax for the period during which it was entitled to the special exemption.

22. Learned Advocate-General seemed to place some reliance on the decisions in AIR 1930 PC 209 and AIR 1937 Pat 1 to support the contention that the amendments in the Income-tax Act and the Finance Act, 1950, repealed the provision granting exemption from taxation to the applicant. These cases are not of any assistance to the opponents. In AIR 1930 PC 209 (supra) the question was whether the income of a zamindar from his estate was liable to tax under the Income-tax Act, 1922, The assessee claimed that he was exempt from assessment as at the time of the Permanent Settlement in 1793 definite guarantees and assurances were given by the governing authority and were embodied in the Bengal Regulations of 1793 to the effect that the income of the zamindar from his estate would not, beyond payment thereout of the jama, be further taxed.

Their Lordships of the Privy Council, after pointing out that the words of Section 12 (1) of the Income-tax Act were clear and emphatic to bring into charge for the purposes of income-tax the income derived from a zamindari, proceeded to examine whether the imposition of tax in respect of the income derived from the zamindari was in any way inconsistent with the provisions of the Regulations. They found that in the Regulations there was no statement or assurance that a zamindar would never be liable to taxation in respect of the income of his zamindari. It is on this basis that the claim of the assessee for exemption from taxation was rejected. The Privy Council did not decide whether if, as a matter of fact, there had been such a prior obligation on the Government, then the assessee would or would not have been liable to tax.

In the other case (AIR 1937 Pat 1) also, the question arose whether the income of a raj in the State of Orissa was taxable under the Income-tax Act. The assessee claimed that by virtue of a treaty and engagement entered into by his ancestor with the Government of that day no other demand than that specified in the terms of the treaty and engagement could be made against him and that, therefore, he was not liable to pay tax on that income. It was argued on behalf of the assessee that in the Income-tax Act there was no express reference to the Raja and there was no repeal of the treaty relating to him which had statutory force; that there was no specific repeal of the contractual relationship; and that, therefore, the specific exemption from taxation granted to him could not be abrogated by the general terms of the Income-tax Act. The learned Chief Justice of the Patna HighCourt rejected this contention advanced on behalf of the assessee by observing:

'If there be any earlier legislation or a treaty between the Sovereign power and the subject for specific exemption from future taxation, followed by the introduction by the Sovereign power at a later date of legislation which admittedly, but for the claim to the earlier exemption, applies to and includes the person who was originally exempted, it follows that by necessary implication the later statute repeals the earlier statute or other Act under which the exemption is claimed.'

The learned Chief Justice also mentioned that counsel for the assessee was not able to cite any authority in support of the proposition that if special exemption from future taxation is granted under an Act, then unless there was a specific repeal of exemption in a subsequent Act, it must be taken to be subsisting. The authorities in support of this proposition have been already pointed out and discussed by us. It is firmly settled that repeal by implication is only effected when the provisions of a later enactment are so inconsistent with or repugnant to the provisions of an earlier one that the two cannot stand together.

It is difficult to see how a special statutory provision granting exemption from taxation and a general statute imposing taxation cannot stand together. The learned Chief Justice relied on AIR 1930 PC 209 (supra). But that decision, as already stated, is distinguishable by the fact that in that case the assessee's claim for exemption was rejected because there was nothing in the Regulations granting him immunity from taxation.

23. To sum up, our conclusions are: (i) that the order dated the 18th January 1947 of the Ruler of Gwalior State exempting the petitioner from taxation had the effect of law and the agreement executed on the 7th April 1947 cast an obligation on the Gwalior Government to exempt the petitioner from taxation; (ii) that by virtue of Sections 3 and 4 of the Madhya Bharat Act No. I of 1948 the petitioner's right to get the exemption received legislative recognition and the State of Madhya Bharat was bound to discharge the obligation undertaken by the Ruler 1 of the Gwalior State which devolved on it; (iii) that it was this obligation of the Madhya Bharat Government to fulfil the obligation undertaken by the Ruler of Gwalior State of granting exemption to the applicant that devolved on the Government of India under Article 295(1)(b) and became a constitutional obligation of the Government; and (iv) that on a true construction of the relevant provisions of the Income-tax Act, Section 13 of the Finance Act of 1950, and paragraph 16 of the Taxation Concessions Order, 1950, they do not repeal the specific exemption granted to the petitioner by special 'statutory provisions', and that, therefore, the petitioner's claim for exemption from taxation is well-founded.

24. It must be added that these conclusions do not in any way run counter to the decision of the Supreme Court in AIR 1958 SC 816. In that case the D. D. Cement Company obtained certain con-cessions in the matter of income-tax from the Ruler of Jind under an agreement. On the formation of the State of Pepsu, in which the State ofJind merged, an ordinance was promulgated by the Raj Pramukh which made applicable to the entire State of Pepsu all laws, ordinances, regulations etc. in force in Patiala Slate on the date of the Commencement of the Ordinance and repealed with effect from that date all laws in force in the covenanting States. The Covenant, under which the Pepsu Union was formed, contained an article that all rights, duties and obligations of the Ruler pertaining or incidental to the Government of his State shall devolve on the Union and shall be discharged by it.

The State of Pepsu was made a taxable territory from 13th April 1950. The assessee claimed that it was liable to tax only in accordance with the agreement with the Ruler of Jind and that no income-tax could be levied on it from 20th August 1948 to 13th April 1950 under the Patiala Income-tax Act, Samvat 2001 or under the Indian Income-tax Act, 1922, after 13th April 1950. The claim rested on the agreement and Article VI of the Covenant. The Supreme Court rejected the claim on the grounds that the agreement if it was in the nature of a private Act was expressly repealed by Ordiance No. I of Samvat 2005 and that Article VI itself could not operate to confer on the Company any right as against the Fatiala Union; and that there was no act or conduct of the new State from which any affirmance of the rights which the petitioner had in Jind could be inferred.

There is thus a material distinction between the present case and the case of D. D. Cement Co., Ltd., AIR 1958 SC 816 (supra). Here Section 4 of Act No. 1 of 1948 gave continuity to the order of the Ruler of Gwalior State which had the effect of law. Again Section 3 gave statutory recognition to the rights, duties and obligations of the Ruler pertaining or incidental to the Government of the State which devolved on Madhya Bharat and enjoined the State of Madhya Bharat to discharge them.

Article 295(1) was no doubt not considered by the Supreme Court in the case of D. D. Cement Co. Ltd., AIR 1958 SC 816 (supra). But the Supreme Court made a very significant observation in paragraph 23 of its judgment, while dealing with the contention of the Cement Company that the Pepsu had affirmed the agreement and that in consequence it was bound by it as if it had itself entered into it and that the liability of the appellant to income-tax should, therefore, be determined in accordance with Clause 23 thereof. The Supreme Court said that 'this contention would be irrefragable if the Patiala Union had, as a fact, affirmed the agreement'. This observation and the view expressed earlier in the judgment of the Supreme Court that if the agreement was a special law granting concession, then Section 3 of the Ordinance could not be construed as repealing the provisions of the agreement give an indication that the claim of the Cement Company based on the agreement would have been allowed if it had been made in circumstances such as those present in the case before us.

25. For all these reasons, we are of the opinion that the petitioner is entitled to succeed and that the direction prayed for by the applicant must issue. The petition is accordingly allowed and a direction restraining the opponents from making any assessment under the Indian Income-tax Act and levyingor collecting income-tax or Super-tax in contravention of the exemption given by the agreement dated the 7th April 1947 is issued. The proceedings for assessment taken by the Income-tax authorities in contravention of the said exemption are quashed. The petitioner-Company shall have costs of the petition. Counsel fee is fixed at Rs. 250/-. The outstanding amount of security deposit shall be refunded to the petitioner.

Subject	Direct Taxation;Constitution
Court	Madhya Pradesh High Court
Decided On	Apr-30-1960
Case Number	Misc. Petn. No. 101 of 1958
Judge	P.V. Dixit, C.J. and ;K.L. Pandey, J.
Reported in	AIR1960MP330; [1961]43ITR184(MP)
Acts	Constitution of India - Article 295(1); Madhya Bharat Regulation of Government Act, 1948 - Sections 3 and 4; Income Tax Act - Sections 13; Finance Act, 1950
Appellant	Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd.
Respondent	The Union of India (Uoi) and ors.
Appellant Advocate	A.C. Mitra, ;K.A. Chitaley and ;V.S. Dabir, Advs.
Respondent Advocate	M. Adhikari, Adv. General
Disposition	Petition allowed
Cases Referred	Associated Newspapers Ltd. v. London Corporation

Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. Vs. the Union of India (Uoi) and ors. - Court Judgment