Shri Shubhlaxmi Mills Ltd vs Union Of India and Anr

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

Court: Supreme Court of India

Case Number: Appeal (civil) 269 of 1955

Decision Date: 02/09/1960

Coram: S.K. Das, M. Hidayatullah, K.C. Das Gupta, J.C. Shah, N. Rajagopala Ayyangar

In this appeal by special leave, the Supreme Court reviewed the order of the Bombay High Court that had dismissed the petitioner’s petition under article 226 of the Constitution. The petitioner, Shri Shubhlaxmi Mills Ltd., was a company incorporated under the Indian Companies Act with its registered office at Station Road, Cambay, Bombay State. The factual background showed that in May 1943 the Nawab Saheb of Cambay, acting for the State of Cambay, sold the property known as “Cambay State Mills” to a private limited company called Shree Vijaylaxmi Cotton Mills Ltd. The deed of conveyance contained a covenant whereby the vendor promised that, for a period of five years from the date of conveyance and for any additional period later determined by the Cambay Durbar, no income‑tax, super tax, excess‑profits tax or any other tax, impost or duty would be levied, claimed or recovered from the purchaser‑company, its successors or assigns on the income, profits or gains of the mills or its business. When Vijaylaxmi Cotton Mills Ltd. sought an extension of this exemption for a further fifteen years after the expiry of the original five‑year term, the Nawab granted an extension of eleven years beyond the original period. In December 1949 Vijaylaxmi Cotton Mills transferred its entire interest in the mills to the present appellant, Shubhlaxmi Mills Ltd. Earlier, on 19 March 1948, the Nawab of Cambay had signed an agreement for the merger of the State of Cambay into the Bombay Province, an agreement that became effective on 10 June 1948. Subsequently, on 31 December 1949 the Government of the Dominion of India passed the “Taxation Laws Extension to Merged States Act,” which brought the Income‑Tax Act into force in the merged states, including the former State of Cambay, effective 1 August 1949. On the same day the Government issued the “Merged States Taxation Concession Order, 1949.” Clause 15 of that order provided that any industrial factory situated in a merged state that had previously been granted exemption from income‑tax, super tax or any other tax by the ruler of that state before 1 August 1949 could apply to the Commissioner of Income‑Tax for a continuation of such exemption, and that the Commissioner was to forward the application to the Central Government, which might, after considering all circumstances, grant the relief it deemed appropriate. Acting on this provision, the appellant filed an application on 7 May 1949 with the Commissioner of Income‑Tax, Bombay, seeking exemption from income‑tax, super tax, excess‑profits tax and business‑profits tax based on the covenant made by the Cambay State in favour of Vijaylaxmi Cotton Mills. The Government of India rejected the application, and the rejection was communicated to the appellant by a letter dated 25 October 1951 from the Commissioner. Following this refusal, the appellant was assessed income‑tax for the financial years 1951‑52 and 1952‑53. Consequently, on 11 June 1954 the appellant approached the Bombay High Court for relief under article 226 of the Constitution, contending that it was entitled to the exemption from income‑tax that it claimed from the Government of India.

According to clause fifteen of the Merged States Taxation Concession Order, 1949, any industrial establishment situated in a merged state that had obtained an exemption from income‑tax, super tax or any other tax from the ruler of that state before 1 August 1949 was required to file an application with the Commissioner of Income‑tax. The Commissioner was then instructed to forward that application to the Central Government, which, after considering all the relevant circumstances, could grant such relief as it deemed appropriate. The appellant, Shubhlaxmi Mills Ltd., submitted its application on 7 May 1949 to the Commissioner of Income‑tax, Bombay, seeking exemption from income‑tax, super tax, excess‑profits tax and business‑profits tax. The basis of the claim was the covenant that had been executed by the former Cambay State in favour of its vendor, Vijaylaxmi Cotton Mills. The Central Government, however, rejected the appellant’s request, and the decision was communicated to the appellant through a letter dated 25 October 1951, signed by the Commissioner of Income‑tax. Following that refusal, the appellant was assessed for income‑tax for the financial years 1951‑52 and 1952‑53. On 11 June 1954, the appellant approached the High Court of Bombay for relief under Article 226 of the Constitution, challenging the assessment orders. The appellant contended that, on the basis of the exemption originally granted by the Nawab of Cambay to Vijaylaxmi Cotton Mills, it was entitled to an exemption from income‑tax from the Government of India. The Bombay High Court, however, dismissed the petition summarily. The matter now before this Court raises the question whether the exemption that Vijaylaxmi Cotton Mills previously enjoyed under the covenant with the Nawab of Cambay transferred to the present appellant, thereby obligating the Government of India to honour that exemption. The fact that Vijaylaxmi Cotton Mills is no longer a party and that the appellant has acquired the property does not, in the Court’s view, alter the substantive issue. The core issue is whether a contractual right enforceable against the former Cambay State, after the state’s accession to the Dominion of India, could be enforced against the Government of India in Indian courts. The Court notes that an exhaustive review of the relevant authorities on this point was provided in Dalmia Dadri Cement Co. Ltd. v. Commissioner of Income‑tax, 1959 SCR 729 (AIR 1958 SC 816), and therefore it is unnecessary to repeat that analysis. The Court merely refers to the concise statement of law offered by Lord Dunedin in Vajesingji Joravarsinghji v. Secretary of State for India, 51 Ind App 357 at p. 360 (AIR 1924 PC 216 at p. 217), which holds that when a territory is acquired by a sovereign state, the acquisition constitutes an act of state, and irrespective of the manner of acquisition—whether by conquest, cession, or occupation—the new sovereign’s municipal courts recognise only the rights that the sovereign itself, through its officers, acknowledges; any rights that existed under the predecessor’s rule cannot be enforced in those courts.

In the present discussion the Court explained that after a territory passes to a new sovereign, the new sovereign can recognise only those rights that it itself possesses and can enforce through its officials. Any rights that existed under the rule of a predecessor do not automatically continue for the inhabitants. Moreover, even where a treaty of cession expressly provides that certain inhabitants should enjoy particular rights, such a provision does not confer upon those inhabitants a title that can be invoked in the municipal courts of the new sovereign. The authority to enforce the treaty remains exclusively with the principal parties to the treaty. The Court then referred to the authorities considered in the Dadri Cement case, 1959 SCR 729 (AIR 1958 SC 816), where Justice Venkatarama Aiyar, speaking for the Court, observed: “The result of the authorities then is that when a treaty is entered into by sovereigns of independent states, sovereignty in territories passes from one to the other; clauses therein providing for the recognition by the new sovereign of the existing rights of the residents 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.” Consequently, the Court held that the appellant company could not obtain any relief from Indian courts on the basis of the covenants, even though the merger agreement incorporated a clause communicated by the Government of India to the Nawab on 10 September 1948. That clause stated: “No order passed or action taken by you before the date of making over the administration to the Dominion Government will be questioned unless the order was passed or action taken after the 1st April 1948, and is considered by the Government of India to be palpably unjust or unreasonable. The decision of the Government of India in this respect will be final.”

The appellant thereafter attempted to argue that the Dominion of India had, in fact, recognised the right of Vijaylaxmi Cotton Mills to an exemption from income‑tax, and that such a right could therefore be enforced. The Court noted that the High Court application did not set up any such claim of recognition. The petition’s paragraph 6, which the learned counsel highlighted, read: “The petitioners say that ever since the grant of the said exemption from 1943 onwards the said Shree Vijaylaxmi Cotton Mills enjoyed the said exemption and the said Cambay State carried out its obligations.” The appellant contended that these words indicated that the Government of India had also granted the exemption on the basis of the covenant. However, the Court found that the wording of paragraph 6 could not be construed to support that inference. Furthermore, even assuming that the appellant had made a claim for recognition of the exemption right based on the covenant, the appellant had failed to place any material before the Court to substantiate such a claim. In the absence of any evidence or documentation showing that the Government of India had formally recognised the exemption, the Court held that the assertion remained unsupported.

In support of the claim that the right to exemption had been recognised, counsel for the appellant contended that during the interval from 1 August 1949—when the Dominion Government became authorised to levy income‑tax on Vijaylaxmi Cotton Mills—up to 16 December 1949—when the interest in the mill was transferred to the appellant company—the Dominion of India, and subsequently the Union of India, had made no tax assessment with respect to the mill. The counsel argued that this failure to assess tax for the brief period should be taken as evidence that the exemption right had been acknowledged. The Court, however, observed that the mere omission to assess tax for a short span could not, in law, be deemed to amount to an acceptance or recognition of a right to exemption. The Court further noted that Section 15 of the Taxation Concession Order dated 31 December 1949 expressly provided that the Government of India would either permit or deny any exemptions granted by an acceding State solely at its discretion. While it was true that recognition of a right need not assume a specific form, the Court referred to its earlier decision in Virendra Singh v. State of Uttar Pradesh (1955) 1 SCR 415 (AIR 1954 SCR 447), which held that recognition of rights existing at the date of cession may be conferred either by legislation or by proclamation, and may even be inferred from the manner in which the parties conduct themselves. The Court held that this principle offered little assistance to the appellant, whose case rested entirely on the fact that Vijaylaxmi Cotton Mills had not been assessed for tax between 1 August 1949 and 16 December 1949, and on no other material. Consequently, the Court concluded that, given these circumstances, the petition before the High Court had not raised any claim of recognition by the Dominion of India or the Union of India of an exemption right. In the Court’s opinion, the High Court was correct in dismissing the petition, and accordingly the appeal was dismissed.