M/S. Dalmia Dadri Cement Co. Ltd vs The Commissioner Of Income-Tax

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 230 of 1954

Decision Date: 28 April 1958

Coram: S.K. Das, P.B. Gajendragadkar, Venkatarama Aiyar, S.R. Das, Bose J., Vivian Das, Sudhi Ranjan

In this matter, the petitioner was M/S Dalmia Dadri Cement Co. Ltd, a company that had been incorporated in 1938 in the former princely State of Jind, and the respondent was the Commissioner of Income‑Tax together with a connected petition. The Supreme Court rendered its judgment on 28 April 1958, and the Bench consisted of Justices S K Das, P B Gajendragadkar, T L Venkatarama Aiyar, Bose, Vivian Das, and Sudhi Ranjan, who acted as Chief Justice. The decision was reported in 1958 AIR 816 and 1959 SCR 729. The core question before the Court was whether an Act of State, arising from a covenant between merging princely states, could bind the newly formed state with respect to income‑tax concessions that had previously been granted by the ruler of Jind.

The appellant company argued that it had obtained specific concessions from the Ruler of Jind under an agreement dated 1 April 1938. That agreement provided, inter alia, that the State would be allotted certain shares in the company without any payment and that the company would be assessed for income‑tax at concessional rates. On 5 May 1948, the Ruler of Jind, together with the rulers of seven other princely states, entered into a Covenant for the merger of their territories into a single State. Article VI of that Covenant stipulated that the ruler of each Covenanting State would transfer the administration of his State to the Rajpramukh of the new State and that all duties and obligations of the Covenanting ruler would devolve upon, and be discharged by, the new State.

In accordance with Article VI, the Rajpramukh assumed administration of Jind on 20 August 1948 and promptly promulgated Ordinance No 1 of Schedule 2005. Section 3 of that Ordinance declared that all laws then in force in the State of Patiala would, mutatis mutandis, apply to the territories of the new State, and that all laws previously in force in the Covenanting States would stand repealed. Subsequently, on 24 November 1949 the Rajpramukh issued a proclamation accepting the Constitution of India, and on 13 April 1950 the new State became a taxable territory of the Union of India.

As a result of these constitutional changes, the law governing income‑tax for the appellant varied over time: for the period before 20 August 1948, the Jind law applied; for the period from 20 August 1948 to 13 April 1950, the Patiala Income‑Tax Act applied; and after 13 April 1950, the Indian Income‑Tax Act applied. Nevertheless, the appellant contended that income‑tax should continue to be levied on it according to the concessions specified in the 1 April 1938 agreement with the Ruler of Jind.

The Court held that, upon true construction, Section 3 of Ordinance No 1 of Schedule 2005 extinguished the right to the tax concessions that had been conferred on the appellant under the 1 April 1938 agreement, and consequently the appellant could not rely on that agreement after 20 August 1948. Additionally, the Court confirmed that the Covenant of 5 May 1948 constituted an Act of State, and that Article VI of the Covenant could not be invoked by the appellant to enforce the rights granted under the 1938 agreement against the Rajpramukh of the new State.

In this case, the Court observed that the covenant dated 5 May 1948, which was entered into by the Rulers of the States, constituted an act of State both in its entirety and in its individual provisions. Consequently, the appellant could not invoke Article VI of the covenant to enforce the rights that had been conferred on him under the earlier agreement with the Ruler of Jind against the Rajpramukh of the newly formed State. The Court, speaking for the learned Judges S. R. Das, Venkatarama Aiyar, S. K. Das and Gajendragadkar, explained that when a treaty is executed by sovereigns of independent States and sovereignty over a territory passes from one sovereign to another, any clause in the treaty that provides for the recognition by the new sovereign of the existing rights of the territory’s residents must be treated as an act of State. Such a clause cannot give rise to a claim that is enforceable in the municipal courts of the new sovereign unless the new sovereign expressly recognises those rights. The Court relied upon several authorities to support this principle, namely Secretary of State for India v. Bai Ralbai (1915) L.R. 42 I.A. 229; Vajasingji Joravarsingji and others v. Secretary of State (1924) L.R. 51 I.A. 357; Secretary of State v. Sardar Rustam Khan (1941) L.R. 68 I.A. 109; Cook v. Sprigg [1899] A.C. 572; and Hoani Te Heuheu Tukino v. Aotea District Maori Land Board [1941] A.C. 308. In a separate observation, Justice Bose noted that international opinion is divided on the effect that a change of sovereignty has on rights to immovable property and cautioned that the present decision should not be taken as a precedent in cases involving immovable‑property rights.

The judgment related to Civil Appeal No. 230 of 1954, which also arose out of Petition No. 276 of 1953 filed under Article 32 of the Constitution of India for the enforcement of fundamental rights. The appeal challenged the judgment and order dated 7 June 1954 of the former PEPSU High Court in Civil Miscellaneous No. 97 of 1953. The counsel for the appellants‑petitioner comprised G.S. Pathak, Veda Vyasa, S. K. Kapur and J.B. Dadachanji, while the respondents were represented by H.N. Sanyal, Additional Solicitor‑General of India, R. Ganapathi Iyer, Raj Gopal Sastri and R.H. Dhebar. The judgment dated 28 April 1958 was delivered by Justice Venkatarama Aiyar, with Justice Bose delivering a separate opinion. The appellant, Messrs. Dalmia Dadri Cement Co. Ltd., is a public company engaged in the manufacture and sale of cement at Dadri, a location that formerly formed part of the independent State of Jind. On 1 April 1938, a promoter of the company, Shanti Prasad Jain, obtained certain concessions from the Ruler of Jind under an agreement (Exhibit A). The Court pointed out that this agreement forms the foundation of the appellant’s present claim. The first clause of the agreement granted the licensee, Shanti Prasad Jain, an exclusive monopoly right to manufacture cement within the State of Jind.

The agreement granted the licensee, Shanti Prasad Jain, an exclusive monopoly to manufacture cement in the Jind State and authorised him, under clause (2), to develop and work all quarries, strata, seams and beds of kankar, rorey, limestone or similar materials. Clause (7) stipulated that the licence would remain in force for twenty‑five years and could be renewed successively. Clause (10) required that a public limited company be formed before 21 July 1936 to operate the concessions and that such company be registered in the Jind State. Under clause (11) the State was to receive six per cent cumulative preference shares, fully paid up, with a face value of one lakh rupees, together with ordinary shares fully paid up having a total face value of Rs 50,000, without any monetary payment. The agreement also contained provisions for the payment of royalty to the State and for the sale of cement to local consumers at concession rates. Clause (23) was particularly important for the present dispute; it provided that the Company would be assessed for income‑tax according to the State procedure, with the tax rate fixed at four per cent on income up to Rs 5 lakhs and five per cent on income exceeding that amount. Clause (24) exempted the Company from export, import and other duties, except those applicable to consumers. Clause (37) mandated that any dispute between the parties be resolved by arbitration. In compliance with these terms, the appellant company was duly incorporated in the Jind State, and on 27 May 1938 Shanti Prasad Jain executed a deed in favour of the company whereby he agreed to transfer all “his rights, privileges and obligations” under the agreement. The appellant contended that, by virtue of this deed, it became the assignee of the licensee and therefore entitled to all benefits granted by the agreement. The respondent argued that the deed of 27 May 1938 did not itself convey the licence rights, but merely promised to do so, and that without a further deed effecting the transfer the appellant could not claim assignee status. However, clause (35) expressly required the licensee to transfer his rights to the proposed Company upon its formation, and after incorporation the State consistently recognised the appellant as the person entitled to the licence rights and obligated to fulfil the corresponding duties, having collected royalty and levied income‑tax in accordance with the agreement. This objection was first raised in Writ Petition 276 of 1953 before this Court. It is undisputed that, under Jind State law, an assignment need not be in writing; consequently, the Court may infer an assignment from the conduct of the parties. Accordingly, the cases must be decided on the basis that the licence rights under the agreement dated 1 April 1938 had vested in the appellant by assignment.

In the matter before the Court, it was established that the rights granted under the licence referred to as Exhibit A, which bore the date 1 April 1938, had been transferred to the appellant by way of an assignment. The historical backdrop included the event of 15 August 1947, when India attained independence, and on that very day the ruler of the former State of Jind executed an Instrument of Accession, thereby surrendering to the Government of India the authority to legislate with respect to defence, external affairs and communications. Subsequently, on 5 May 1948, eight rulers of States situated in East Punjab, Jind among them, entered into a Covenant intended to merge their territories into a single political entity that was to be known as the Patiala and East Punjab States Union; for brevity the Court will refer to this entity as the Patiala Union. The appellant relied upon Article VI of that Covenant to support its claim, and the provision reads in full: “The Ruler of each Covenanting State shall, as soon as may be practicable, and in any event not later than the 20th August 1948, make over the administration of his State to the Raj Pramukh; and thereupon, (a) all rights, authority and jurisdiction belonging to the Ruler which appertain, or are incidental to the Government of the Covenanting State shall vest in the Union and shall hereafter be exercisable only as provided by this Covenant or by the Constitution to be framed thereunder; (b) all duties and obligations of the Ruler pertaining or incidental to the Government of the Covenanting State shall devolve on the Union and shall be discharged by it; (c) all the assets and liabilities of the Covenanting State shall be the assets and liabilities of the Union; and (d) the military forces, if any, of the Covenanting State shall become the military forces of the Union.” Article X of the same Covenant required the formation, as early as practicable, of a Constituent Assembly tasked with framing a Constitution for the new State, and it provided that until such Constitution was framed, the Raj Pramukh would possess the power to make and promulgate Ordinances for the peace and good government of the Union. Moreover, Article XVI stipulated that the Union would either guarantee the continuation in service of the permanent members of the public services of each Covenanting State on conditions not less advantageous than those applicable on 1 February 1948, or alternatively would provide reasonable compensation, retirement benefits or proportionate pension. In accordance with the timetable set out in Article VI, the Raj Pramukh of the Patiala Union assumed administration of Jind on 20 August 1948. Immediately after taking office, the Raj Pramukh issued the Patiala and East Punjab States Union Administration Ordinance No. 1 of the year 2005. Section 3 of that Ordinance, which is the clause relevant to the present dispute, provides: “As soon as the administration of any covenanting State has been taken over by the Raj Pramukh as aforesaid all Laws, Ordinances, Acts, Rules, Regulations, Notifications, Hidayate Firman‑i‑Shahi, having force of law in Patiala State on the date of commencement of this Ordinance shall apply mutatis mutandis to the territories of the said State and with effect from that.”

Section 3 of the Patiala and East Punjab States Union Administration Ordinance No. 1 of S. 2005 stipulated that, from the date of its commencement, all laws then in force in a Covenanting State would be repealed, but that any legal proceedings pending on that date in the courts or offices of the Covenanting State must be concluded according to the laws then governing such proceedings in that State, regardless of any other provision of the Ordinance or any other Ordinance. This Ordinance became effective on 20 August 1948. Subsequently, on 5 February 1949, it was repealed and replaced by Ordinance No. XVI of S. 2006; section 3(a) of the new Ordinance reproduced the same terms as section 3 of Ordinance No. 1 of 2005. Article X(1) of the Covenant had provided for the drafting of a Constitution for the Union, a provision that never materialised. Consequently, on 24 November 1949, the Rajpramukh issued a proclamation accepting the Constitution of India as the Constitution of the Patiala Union, thereby converting the Union into a Part B State under the Indian Constitution. On 13 April 1950, the Patiala Union accepted the Federal Financial Integration Scheme, becoming a taxable territory of the Union of India, and the Indian Finance Act 1950 was applied to it from that date. Accordingly, for the purposes of income‑tax liability, the law applicable to the appellant was as follows: for the period preceding 20 August 1948, the income‑tax law of Jind applied; for the period from 20 August 1948 to 13 April 1950, the Patiala Income‑Tax Act, S. 2001, which had been brought into force by Ordinance No. 1 of S. 2005, applied; and for the period after 13 April 1950, the Indian Income‑Tax Act applied. Civil Appeal No. 230 of 1954 arose out of assessment proceedings for the year 1949‑1950. By its order of 11 November 1952, the Appellate Tribunal held that the appellant’s taxable profits for the calendar year 1948 amounted to Rs 1,94,265, a finding that was not contested. The principal issue before the Court was the rate at which tax should be levied on that amount—whether the rate prescribed by the Patiala Income‑Tax Act, as argued by the respondent, or the rate contained in clause (23) of the agreement annexed as Exhibit A, as claimed by the appellant. The Tribunal concluded that the Patiala Union, being a newly created State under the Covenant, was not bound by the agreements previously entered into by the rulers of the Covenanting States, and that the appellant could benefit from such an agreement only if the new State chose to recognise it; the Tribunal found that no such recognition had occurred, and therefore the tax was to be levied according to the Patiala Income‑Tax Act, S. 2001. On the application of the appellant, the

The Tribunal, invoking section 66(1) of the Indian Income‑tax Act, referred a specific question to the High Court for its opinion. The question asked whether the profits and gains of the assessee earned in the calendar year 1948 should be assessed for the assessment year 1949‑50 at the rates prescribed by the Patiala Income‑Tax Act of section 2001, read in conjunction with section 3 of the Patiala & East Punjab States Union Administration Ordinance (No 1 of 2005), which had subsequently been repealed and re‑enacted as section 3 of the Patiala & East Punjab States Union General Provisions (Administration) Ordinance (No XVI of 2006), or whether the assessment should instead be made in accordance with clause (23) of the agreement dated April 1938 that had been referred to earlier. The learned judges of the High Court delivered their judgment on 7 June 1954. In that judgment they answered the question adversely to the appellant, holding that the assessment should follow the statutory provisions rather than the agreement. Nevertheless, they granted the appellant a certificate under section 66(A)(2) of the Indian Income‑tax Act. The grant of that certificate gave rise to Civil Appeal No. 230 of 1954, which now stands for consideration before this Court.

Subsequent to the Tribunal’s decision, the income‑tax authorities initiated assessment proceedings for tax years succeeding 1949‑50. The new dispute again centered on whether the tax liability should be computed according to clause (23) of the April 1938 agreement (Ex A) or pursuant to the provisions of the Indian Income‑tax Act, 1922. The Income‑tax Officer in Rohtak rejected the appellant’s claim that tax was payable only under Ex A and issued assessment orders based on the Indian Income‑tax Act for the year 1950‑51 on 28 April 1952, for 1951‑52 on 12 May 1952, and for 1952‑53 on 17 March 1953. The appellant filed appeals against each of those orders, and the appeals remain pending before the Appellate Assistant Commissioner. Claiming that the tax imposed by those orders was unauthorized and constituted an unlawful interference with its business‑carrying‑out right protected by Article 19(1)(g) of the Constitution, the appellant also filed Petition No. 276 of 1953. That petition sought a writ directing the respondents to levy tax in conformity with the April 1 1938 agreement, Ex A. In support of the petition the appellant reiterated the arguments advanced in Civil Appeal No. 230 of 1954 and added that even if the Union of India possessed the power to repudiate the 1938 agreement, it had not exercised such power and, on the contrary, had recognized the agreement as valid, thereby rendering any levy under the Indian Income‑tax Act illegal. Because the contentions raised in the appeal and the petition were substantially identical, the matters were heard together. Before this Court, the validity of the assessment for the year 1949‑50 was challenged by counsel on four principal grounds: (1) that Ordinance No 1 of 2005, under which the Patiala Income‑tax Act was applied to the appellant, does not, on its proper construction, nullify the rights granted under Ex A; (2) that if the Ordinance were construed as having that effect, it would contravene Article VI of the Covenant, making it unconstitutional and void; (3) that irrespective of the Covenant, the agreement Ex A is binding on the Patiala Union and the impugned Ordinance infringes it; and (4) that the Patiala Union had, in fact, recognized the rights conferred by Ex A, thereby binding itself as if it had entered into a contract on those terms.

In that proceeding the petitioner raised four principal contentions. First, it argued that, when properly construed, Ordinance No. 1 of 2005 should annul the rights that had been granted under Exhibit A. Second, it maintained that if the Ordinance were to have that effect, it would conflict with Article VI of the Covenant and therefore would be unconstitutional and void. Third, it contended that, even apart from the Covenant, Exhibit A was a binding agreement on the Patiala Union and that the impugned Ordinance infringed that agreement. Fourth, it asserted that the Patiala Union had, in fact, recognised the rights granted under Exhibit A, and consequently those rights should bind the Union as if the Union itself had entered into a contract. On the first question, counsel for the petitioner, Mr Pathak, submitted that the Ruler of Jind had exercised absolute monarchical authority and that his word had the force of law. Accordingly, the petitioner argued that Exhibit A should be treated as a special law conferring rights on the licencee. The petitioner further relied on Section 3 of Ordinance No. 1 of 2005, describing it as a general provision that extended all Patiala State laws to the territories of the Covenanting States, and invoked the well‑known rule of construction that general statutes must be interpreted so as not to interfere with rights created under special laws. Reference was made to the statements in Maxwell’s Interpretation of Statutes (10th edition, pp. 176 and 180) and to the observations in Blackpool Corporation v. Starr Estate Co. The maxim “generalia specialibus non derogant” was cited as settled law, and the petitioner asked the Court to assume, in favour of the appellant, that Exhibit A was a special law comparable to a private Act of the British Parliament, and that therefore Section 3 should not be read as repealing the provisions of Exhibit A unless such a repeal was expressed expressly or was necessary by implication.

The petitioner then turned to the second contention, asserting that if Ordinance No. 1 of 2005 were to be interpreted as extinguishing the tax concessions granted under Exhibit A, the Ordinance would be unconstitutional and void. This argument rested on Article VI(b) of the Covenant, which provided that the obligations of the rulers relating to governmental functions, including taxation, were to devolve upon the Union and be discharged by it. The petitioner maintained that the Ruler of Jind had undertaken the obligations in Clause 23 of Exhibit A for valuable consideration, had faithfully observed them while he remained ruler, and had subsequently transferred those obligations to the newly created State under Article VI(b). It was further argued that the Rajpramukh, as a party to the Covenant and a claimant under it, was bound by those obligations, that his power to enact laws was subject to Article VI(a) and the obligations referred to in Article VI(b), and that the impugned Ordinance, if read as abrogating those obligations, was ultra vires his authority under the Covenant and therefore void. The respondent, in reply, characterised the Covenant as an act of State and contended that any breach of its terms could not give rise to a cause of action, a point that would be addressed in the subsequent analysis.

The argument presented was that, under Article VI(b) of the Covenant, any obligations owed by the government of a Covenanting State were to be transferred to the Union and discharged by it. It was contended that the Ruler of Jind, for valuable consideration, had undertaken certain obligations under Clause (23) of Exhibit A relating to taxation, which is a governmental function. The claim was that the Ruler had faithfully fulfilled those obligations while he remained the sovereign ruler, and thereafter, pursuant to Article VI(b), he had transferred those obligations to the new State created under the Covenant. Consequently, it was asserted that the Rajpramukh, who was a party to the Covenant and who claimed rights under it, was bound by those obligations; that his authority to enact legislation was subject, under Article VI(a), to the obligations enumerated in Article VI(b); and that, if the impugned law were to be interpreted as nullifying those obligations, it would exceed the Rajpramukh’s powers under the Covenant and therefore be void. In response, the respondent argued that the Covenant entered into by the rulers constituted an act of State and that any breach of its terms could not be litigated in municipal courts. The respondent further maintained that the obligations mentioned in Article VI(b) did not refer to liabilities arising from agreements specially provided for in Article VI(c) but rather to obligations of the type contemplated by the Instrument of Accession. Moreover, the respondent asserted that the rights granted to the licensee under Exhibit A were terminable at the Ruler of Jind’s discretion, and that, consequently, if the obligation under Clause (23) passed to the Rajpramukh under Article VI(b), it did so subject to his authority under Article VI(a) to terminate it at will; thus, the impugned law did not contravene Article VI(b). The Court identified the principal issue as whether the Covenant constituted an act of State. It held unequivocally that the Covenant was a treaty among the rulers of independent States whereby they surrendered their sovereignty over their territories and vested it in the ruler of a new State. The term “act of State” was explained as not being limited to hostile actions leading to occupation, but encompassing all acquisitions of territory by a sovereign State, whether by conquest or cession, as recognized in Vajesingji Joravar Singji and others v. Secretary of State (1) and Thakur Amar Singji v. State of Rajasthan (2). Accordingly, the nature of the act—whether acquisition of new territory by an existing State or, as in the present case, the formation of a new State from former territories—makes no substantive difference; both result in the establishment of new sovereignty over the territory, which is an act of State. The submission that Mr Pathak did not dispute the characterization of the Covenant as an act of State in the context of extinguishing the rulers’ sovereignty and establishing a new State was noted.

In this case, the Court observed that the covenant did indeed provide for the termination of the sovereignty of the rulers of the covenanting States and for the creation of a new State, and that such termination was an act of State. However, the learned counsel for the appellant argued that the covenant went beyond a mere act of State; he maintained that it also functioned as a Constitution for the new State, serving as a law that bound all authorities of the new State, including the Raj Pramukh. To support this contention, he referred to Article X, which provided for the convening of a Constituent Assembly to draft a Constitution, and he claimed that the articles of the covenant dealing with the administration of the State by the Raj Pramukh were, in effect, an interim Constitution. He further relied on Article XVI, which guaranteed that the permanent members of the public services of the covenanting States would continue in service, and he argued that this provision could not be treated merely as an act of State but rather as a law concerning the administration of the new State. According to this view, the Court held that Article VI should be regarded as a constitutional provision enacted to protect private rights, that it therefore bound the ruler of the new State, and that the municipal courts possessed jurisdiction to grant appropriate reliefs for its breach. The Court found this argument to be based on a misunderstanding of the distinction between an act of State and a law of the State that confers rights on subjects, which the appellant’s counsel had termed the Constitution of the State. The Court explained that when the sovereign authority of a State enacts a law that creates, declares, or recognises rights in its subjects, any violation of those rights is actionable in the courts of that State, even if the violation is committed by the State through its officers. Such a defence that the act complained of is an act of State cannot succeed, because between the sovereign and its subjects there is no concept of an act of State; the officers must instead demonstrate that the challenged action was within the authority conferred by law. The Court distinguished this from situations where the sovereign’s act concerns the acquisition of territory belonging to another sovereign; such matters are disputes between independent sovereigns and must be resolved by diplomatic means or, failing that, by force. Those circumstances constitute a pure act of State, retaining that character until the acquisition is completed by conquest or cession, after which the new sovereign’s subjects acquire rights only as recognised by the new sovereign.

The Court observed that the inhabitants of a territory that is transferred to a new sovereign remain subjects of the former sovereign until the transfer is fully completed. Upon completion of the acquisition, those inhabitants become subjects of the new sovereign. The Court further stated that it is well settled that, once the new sovereign assumes authority, the former subjects do not retain the rights that they possessed under the previous sovereign. Instead, as subjects of the new sovereign, they are entitled only to those rights that the new sovereign chooses to grant or recognize. The Court referred to several authorities to support this proposition, namely Secretary of State for India v. Bai Rajbai (1), Vajesingji Joravar Singji and others v. Secretary of State (2), Secretary of State v. Sardar Rustam Khan (3) and Asrar Ahmed v. Durgah Committee, Ajmer (4). Accordingly, the legal process of acquiring new territory is described as a continuous act of state that ends only when the new sovereign formally assumes de jure sovereign powers over the territory. It is only after that moment that any rights may accrue to the residents as subjects of the new sovereign. In other words, the right of citizenship for the residents of a newly acquired territory commences only when the act of state terminates, and the two statuses cannot exist simultaneously.

The Court further concluded that any act or declaration made by the new sovereign before the assumption of sovereign powers over the acquired territory cannot, with respect to the residents, be treated as a law that confers enforceable rights in the new sovereign’s courts. In line with this principle, the Court noted that it has repeatedly held that clauses in treaties concluded by independent rulers, which purport to recognise the rights of the subjects of the former sovereign, are not enforceable in the courts of the new sovereign. The Court illustrated this point with the case of Cook v. Sprigg (5). In that case, the ruler of Pondoland in Africa had granted certain concessions to the appellants and later ceded the territory to the British Government. The British Government declined to recognise those concessions, prompting the appellants to sue for a declaration of their rights. One of the contentions advanced by the appellants was that, at the time of cession, the Pondoland ruler had expressed to the British Government a desire that the concessions be recognised, and therefore the appellants claimed a right to enforce the concessions against the new government. The Lord Chancellor rejected this argument, observing that the taking of possession by Her Majesty, whether by cession or any other means by which sovereignty can be acquired, constitutes an act of state, and that treating the former ruler’s expressions as creating enforceable rights would be inconsistent with the doctrine that a sovereign’s acquisition of territory ends the previous sovereign’s authority over the inhabitants.

The Court explained that the appellants were required to regard the former ruler as an independent sovereign when they derived any title from him. It highlighted a well‑established principle of law that dealings between independent States are governed by international rules rather than the domestic laws of municipal courts. The Court then rejected the argument that, under ordinary principles of international law, a sovereign who accepts a cession must respect private property rights of the former sovereign. The Court clarified that while international law generally holds that a change of sovereignty by cession should not disturb private property, no domestic court has the power to enforce that international obligation. Even if there is an explicit or implicit agreement between the ceding sovereign and the acquiring government that private property will be respected, such an agreement can only be enforced by one sovereign against another through diplomatic pressure, not by a municipal tribunal. The Court referred to the case of Vajesingji Joravar Singji and others v. Secretary of State for India, where the dispute concerned the appellants’ title to lands in the Panch Mahals. Those lands had formerly been part of the dominion of the Scindias of Gwalior and were transferred to the British Government by a treaty dated 12 December 1860. Clauses 2 and 3 of that treaty promised that the new sovereign would recognise the rights of residents under existing leases, jagirs and similar arrangements. The appellants alleged that in 1907 the British Government attempted to lease the lands to them on terms that violated those proprietary rights, thereby breaching the guarantees contained in clauses 2 and 3 and rendering the lease proposals invalid. The Government responded that the treaty was an act of state and that it created no enforceable rights for the appellants. In supporting that position, Lord Dunedin observed that whenever a territory is acquired by a sovereign state for the first time, the acquisition is an act of state, irrespective of whether it results from conquest, treaty cession or occupation of previously unoccupied land. The effect of such acquisition is that an inhabitant of the territory may invoke before the municipal courts only those rights that the new sovereign, through its officers, has chosen to recognise. Rights that existed under the previous sovereign have no operative effect in the new domestic courts. Moreover, even where a treaty of cession expressly provides that certain inhabitants should enjoy specific rights, that provision does not confer a title that can be enforced in the municipal courts of the acquiring sovereign. The enforceable right, therefore, remains solely with the contracting sovereigns themselves.

The Court observed that the authority to enforce remained only with the high contracting parties. It then discussed the case Hoani Te Heuheu Tukino v. Aotea District Maori Land Board (1), in which the issue related to the Treaty of Waitangi concluded between the British Government and the native chiefs of New Zealand in 1840. Under clause (1) of that Treaty, the chiefs had wholly ceded all their rights and powers of sovereignty. Clause (2) had promised the chiefs, their tribes, families and individuals certain rights over land, forests and fisheries. In 1935, the New Zealand Legislature passed a statute whose provisions were challenged as ultra vires on the ground that they infringed the rights (1) [1941] A.C. 308 protected by clause (2) of the Treaty of Waitangi. The Court held that the Treaty did not provide a basis for civil‑court action. In reaching that conclusion, Viscount Simon, L.C., referred to the earlier decision in Vajesingji Joravar Singji and others v. Secretary of State (1) and said: “So far as the appellant invokes the assistance of the court, it is clear that he cannot rest his claim on the Treaty of Waitangi, and that he must refer the court to some statutory recognition of the right claimed by him.” The authorities therefore established that when a treaty is concluded between sovereigns of independent states and the sovereignty over a territory passes from one sovereign to another, any clause that purports to recognise the existing rights of the territory’s residents must be treated as an act of state. Consequently, no claim based on such a clause could be enforced in a court of law. Applying this principle, the Court concluded that the Covenant entered into by the rulers of the Covenanting States was wholly an act of state, and that Article VI therein could not create any enforceable right against the Patiala Union. This view was reinforced by the fact that the Covenant had been signed on 5 May 1948, while the new State did not come into existence until 20 August 1948. In the earlier authorities, the sovereign against whom treaty obligations were sought to be enforced was the very sovereign who had signed the treaty or that sovereign’s successor. In the present case, however, the ruler of the Patiala Union, against whom Article VI was invoked, was not a party to the Covenant because the Union had not yet been created on the signing date. The individual who signed the Covenant was the ruler of the State of Patiala, one of the Covenanting States, but that State together with the seven other States that had signed the Covenant all ceased to exist on 20 August 1948 when the Patiala Union was formed. The newly created State could not and did not enter into any

In this case the Court observed that the Covenant could not have been entered into before 20 August 1948, and therefore, strictly speaking, the new State could not be held bound by Article VI of that Covenant, because it was not a party to it. The appellant placed considerable emphasis on Article XVI of the Covenant, which purported to guarantee the continuation of service for permanent members of public services, and argued that this provision demonstrated an intention to protect the rights of the subjects of the former States. The Court answered this argument by reiterating that a clause in a treaty between sovereign parties does not create a enforceable right for the subjects that can be the subject‑matter of a suit in the courts, and further noted that the Patiala Union was not bound by Article XVI because it never became a party to the Covenant.

The Court then mentioned that, after the formation of the new State on 20 August 1948, the first legislative act of the sovereign was the promulgation of Ordinance No 1 of S. 2005, and that Section 4 of that Ordinance expressly recognised the rights of permanent members of public services. While this provision constitutes a law enacted by the sovereign that confers rights on its subjects and is enforceable in a court of law, the Court held that the enactment of such a law also underscores the fact that the Articles of the Covenant themselves did not possess the force of law and were not intended to create or recognise rights. In the same connection, the Court referred to Clause XVI of the Ordinance, which provides that “the provisions of Articles XV and XVII of the Covenant relating to the bar of certain suits and proceedings shall have the force of law.”

In support of the appellant’s contention that Article VI of the Covenant should be treated as a constitutional provision, counsel for the appellant relied on passages from the judgment of this Court in Thakur Amar Singji v. State of Rajasthan (1) at pages 313 and 315, where a similar covenant entered into by the rulers of Rajasthan was described as a Constitution. The Court observed that, apart from the occasional use of the word “Constitution,” those passages contained nothing that bore on the present issue. In the Rajasthan case the question was the validity of a law enacted by the Rajpramukh of Rajasthan, which depended on whether the legislative authority of the State was vested in the Rajpramukh under Article 385 of the Constitution. The Court held that, under the Covenant, the Rajpramukh possessed the power to enact laws, and consequently the Ordinance issued by him was valid; the covenant was referred to as a Constitution only in that specific context. The Court did not consider, in that decision, whether the Covenant was an act of state or a law that conferred enforceable rights on the citizens of the defunct States, and therefore that description cannot be taken as a precedent establishing that the Covenant creates enforceable rights.

In the proceeding before the Court, no issue was raised requiring a determination of whether the Covenant should be treated as a Constitution that creates enforceable rights, as opposed to an act of state. Consequently, the description of the Covenant as a Constitution could not be interpreted as implying that it was a law conferring rights on individuals rather than an act of sovereign authority. The Court therefore concluded that the Covenant, in its entirety and in each of its parts, constituted an act of state. Accordingly, Article VI of the Covenant did not operate to grant any rights to the subjects of the Covenanting States against the sovereign of the new State formed under that Covenant. As a result, Ordinance No. 1 of S. 2005 could not be attacked on the ground that it violated Article VI.

The Court then turned to the appellant’s separate contention that, irrespective of Article VI, Ordinance No. 1 of S. 2005 was invalid because it annulled rights that had been granted by the Ruler of Jind under an agreement dated 1 April 1938. The appellant argued that Exhibit A was not a simple concession that the sovereign could withdraw at will, but rather an agreement entered into for valuable consideration, creating mutual rights and obligations. On the basis of that agreement, the appellant claimed to have allotted to the State shares valued at Rs. 1,50,000 without receiving any payment and to have incurred substantial expense in exploiting the concessions. The appellant therefore maintained that the Patiala Union could not lawfully retract the benefits conferred by the agreement.

To support this position, the appellant relied on the authorities The Piqua Branch of the State Bank of Ohio v. Knoop and Home of the Friendless v. Rouse, citing the principle that a State lacks the competence to revoke a grant made for consideration. In The Piqua Branch case, a statute of Ohio enacted in 1845 provided for the incorporation of banks and prescribed the taxes payable by those banks and the mode of payment. A subsequent Act of 1851 increased the tax liability, and the validity of that later Act was challenged by a bank incorporated under the 1845 law. The majority of the Court held that the 1845 statute was a legislative contract and that the State legislature could not impair the rights acquired under that contract. In Home of the Friendless, a society established under a charter granted by the State of Missouri enjoyed an exemption from taxation, and when the State later attempted to withdraw that exemption and impose tax, the United States Supreme Court held that the charter constituted a contract between the State and the society, and therefore the State could not abrogate the contractual rights. The appellant sought to apply these precedents to the present dispute.

It was observed that the American cases relied upon were decided on the basis of Section 10 of Article 1 of the United States Constitution, which declares that no State may pass a law impairing the obligations of contracts. The Indian Constitution contains no comparable provision that safeguards contractual rights, and therefore it would be unsafe to depend on United States authority when evaluating the validity of a statute that interferes with rights arising from contracts. Moreover, the present dispute concerns a contract entered into by a sovereign ruler, whose powers were not limited by any constitutional restriction, and whose word, as argued by the appellant, was treated as law. Even setting aside that consideration, there is a clear reason why the American decisions are inapplicable here. The issue before the American courts was whether a State that had entered into a contract with its subjects, thereby conferring rights on them, could later enact legislation that abridged or abolished those rights, as discussed in the cases reported at (1) (1853) 14 L.Ed. 977 and (2) (1869) 19 L.Ed. 495, where the answer was negative. In the present matter, however, the impugned legislation is that of the Patiala Union, and the contract affected was not made by the Union but by the Ruler of Jind. Unless it could be shown that the obligations of the Jind ruler had transferred to the sovereign of the Patiala Union, the question of whether the Union could repudiate those obligations does not arise. Such a question would have been relevant only if Article VI imposed obligations on the Union, but the Court found that it does not, and consequently there is no basis for contending that the Ordinance is invalid because it breaches contractual obligations of the Patiala Union or obligations that may have devolved upon it.

The Court then turned to the argument raised by counsel that the Patiala Union had affirmed the agreement identified as Exhibit A, and therefore was bound by it as if it had itself entered into the agreement, making the appellant’s liability to income‑tax payable under Clause (23) of that exhibit. This contention would be conclusive only if it could be established that the Patiala Union had, as a matter of fact, affirmed the agreement. The Court noted that the rights under Exhibit A would become enforceable only if the new State recognized them, which requires either a formal declaration or conduct by the Patiala Union after its formation that could be regarded as affirmation of Exhibit A. No such evidence was provided. Conversely, the first action taken by the Rajpramukh after assuming office was the issuance of Ordinance No. 1 of 2005, whose effect was to extinguish the appellant’s rights under Clause (23) of Exhibit A. The appellant’s counsel argued that…

Article VI of the Covenant could be treated as evidence from which an inference of affirmation of the rights in clause (23) of Exhibit A might be drawn. However, such an inference has to be based on an act or conduct of the new State after it was constituted on 20 August 1948. Even if the new State had performed some acts that were ambiguous, it could have been held, in the light of Article VI, that the State intended to confirm the concessions contained in clause (23). In reality, the very first act of the new sovereign, after assuming title, was to apply the Patiala State laws, including the Patiala Income‑Tax Act, to the territories of Jind, thereby repudiating those rights. The levy of income‑tax for the fiscal year 1948‑1949 was argued to have been made in conformity with Exhibit A, but that levy pertained to a period preceding the formation of the new State and fell within the saving clause contained in the proviso to section 3 of the Ordinance. The appellant was unable to produce any evidence that the Patiala State Union had affirmed clause (23) of Exhibit A, and that deficiency was adjudged against the appellant. Consequently, every contention raised in support of the appeal was found untenable and the appeal was dismissed with costs.

Turning to Petition No. 276 of 1953, the petitioner added further submissions. It asserted that rights it possessed under law before the Constitution, once the Constitution became operative, gave citizens certain fundamental rights; it claimed that the tax concessions granted under Exhibit A constituted rights to property protected by Article 19(1)(f) of the Constitution and that, under Article 32, the petitioner could seek redress for any violation of those rights. The petitioner relied on the decision in Virendra Singh and others v. State of Uttar Pradesh. This argument presupposed that, at the moment the Constitution came into force, the petitioner enjoyed rights that fell within the ambit of Article 19(1)(f). The Court, however, held that the concessions in clause (23) of Exhibit A terminated with the promulgation of Ordinance No. 1 of S. 2005; therefore, no such rights existed on the date the Constitution commenced, and consequently the guarantees of Article 19(1)(f) could not be invoked. On this concise ground, the petition was dismissed. The Court found it unnecessary to comment on the merit of the petitioner’s contentions based on Article 295 or on the scope of Article 363. The petitioner was ordered to pay the costs of the respondents. Justice Bose agreed with the dismissal but reserved his opinion on a separate point not addressed in this judgment.

The judge noted that a reservation was necessary because the ratio of his learned brother’s judgment would otherwise cover the issue. He observed that international opinion was divided regarding the effect of a change of sovereignty on rights to immovable property. English authorities held that all property rights, including rights in real estate, were lost when a new sovereign assumed power unless the new sovereign chose to recognize them or grant new rights. He indicated that, according to his understanding, the International Court of Justice did not share that view. He referenced an opinion quoted at page 426 of Virendra Singh v. State of Uttar Pradesh, which stated that private rights acquired under existing law do not cease on a change of sovereignty. He added that certain American cases adopted a similar position, although they could be distinguished on the facts. He further explained that, in his view, this principle did not extend to personal rights based on contract, and that a new sovereign did not assume the obligations of the predecessor State absent an express agreement, as he had noted at page 427. He then expressed that, irrespective of whether his interpretation corresponded to the true international view, Indian law should, and indeed does, govern personal rights. Applying this principle to the present dispute, he observed that a right claimed on the basis of a contract would be subject to any prevailing view, whereas a right not founded on contract would represent an obligation that the new State could not be forced to honour. He pointed out that there was no contract between the new State and the appellant, and therefore the appellant had no standing; even if an agreement or understanding existed between the principal contracting parties, such a matter could not be examined or enforced by the municipal courts of the new State, citing the case reported in 1[1955] 1 S. C. R. 415. Consequently, he agreed that, for the purposes of the present case, the appellant’s claim must fail. He noted that his learned brother’s judgment relied heavily on English court decisions that did not recognise the distinction he was drawing. He therefore clarified that his decision should not be used as precedent in cases involving rights to immovable property. While refraining from committing himself to either view, he expressed regret that the Court might ignore the modern international trend and continue to follow older imperial perspectives, when it is free to shape its own law in accordance with contemporary thought on rights in immovable property. He concluded that, as far as the present case was concerned, the appeal and petition should be dismissed.

In the matter before the Court, the judge concurred that both the appeal and the petition filed under Article 32 must be rejected. Consequently, the appeal was dismissed and the petition was also dismissed.