Associated Stone Industries (Kotah) vs Union Of India And Another

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 27 November, 1962

Coram: S. K. DAS

In this case, the Court noted that the judgment concerned an appeal filed by Associated Stone Industries (Kotah) Ltd. against the Union of India and another respondent. The appeal arose from a certificate that had been granted by the High Court of Rajasthan under article 132 (1) of the Constitution. The appeal was heard together with two other appeals, including Maharaja Shree Umaid Mills Ltd. v. Union of India, and the Court delivered its judgment on 27 November 1962. The appellant, Associated Stone Industries (Kotah) Ltd., had been incorporated in 1945 under the Indian Companies Act, 1913, as it applied to the former Kotah State. Its registered office was situated at Ramganjmandi in the district of Kotah. At the time of incorporation, His Highness the Maharajah of Kotah, who was the sovereign ruler of the Kotah State, granted a written lease to the company. The lease authorized the appellant to work the limestone mines located in two tahsils of the Kotah State for a period of fifteen years, commencing on 1 October 1944 and expiring on 30 September 1959. Clause 18 of the lease set out the financial terms. It provided that, in consideration of the concessions and privileges granted by the Maharajah, and in lieu of any liability for income tax, super‑tax or excess‑profit tax, the appellant covenanted to pay a royalty of one rupee per one hundred square feet of stone excavated, subject to a minimum royalty of Rs 1,50,000 for each financial year. The clause further stipulated that the rate of one rupee per one hundred square feet would continue to apply so long as the selling price of unpolished slabs did not exceed Rs 10 per one hundred square feet. If the selling price rose above that ceiling, the royalty would be increased by twenty‑five percent of the amount by which the selling price exceeded ten rupees per one hundred square feet.

The appellant submitted that the lease embodied the sovereign will of the Maharajah of Kotah and that, by virtue of the stipulations in clause 18, the state was expressly prohibited from levying, assessing or collecting any income‑tax, super‑tax or excess‑profit tax, and that the appellant was to be exempted from any existing or future statute dealing with the levy, assessment or collection of those taxes. After India became a republic, the State of Kotah was merged with the other princely states to form the United State of Rajasthan. The Court explained that this integration process, whose details were set out in the judgments of the other two appeals decided that day, first placed Kotah within the United State of Rajasthan. Subsequently, on 26 January 1950, the United State of Rajasthan was designated as a Part B state of Rajasthan within the Union of India under the constitutional framework. By operation of the Finance Act, 1950, the Indian Income‑Tax Act, 1922, was extended to the territories of the Part B state of Rajasthan. Consequently, the Government of India appointed a Commissioner of Income‑Tax for Rajasthan, and an Income‑Tax Officer was posted at Kotah to administer the tax provisions now applicable to the region.

In this matter, the Income‑tax Officer issued a notice to the appellant invoking section 22(2) of the Income‑tax Act, directing the appellant to file a return of income for the assessment year 1950‑51. The appellant challenged this demand and consequently filed a writ petition under article 226 of the Constitution before the High Court of Rajasthan. The High Court, on December 14 1951, is alleged to have issued a writ restraining the Union of India from taking any action under the Indian Income‑tax Act, 1922, for any period preceding 1 April 1950. After this, the Income‑tax Officer at Kotah again demanded that the appellant submit a return of income for the year 1951‑52, to which the appellant complied but filed the return under protest. The officer subsequently demanded a return for the year 1952‑53, prompting the appellant to approach the High Court once more and obtain an ad interim injunction. The appellant later claimed that it was advised to withdraw the writ petition in the High Court and instead commence a suit in an appropriate civil court. Accordingly, on December 15 1953, the appellant instituted a suit before the District Judge of Kotah, seeking a declaration that, during the continuance of the grant dated 2 May 1945, the Union of India (defendant No 1) was not entitled to recover from the appellant any income‑tax, super‑tax, or excess‑profit tax; the appellant also sought a second declaration that the application of the Indian Income‑tax Act, 1922, to it during the existence of the grant violated article 295 of the Constitution and was therefore illegal and void, together with other reliefs whose particulars need not be set out. The suit was contested by the Union of India and by the State of Rajasthan, the two respondents in the action. The learned District Judge who tried the suit framed eleven separate issues and rendered findings on most of them. While dealing with issue 11, which concerned the reliefs to which the appellant might be entitled, the judge referred to section 113 of the Code of Civil Procedure and observed: “In this case I am of the opinion that the application of the Indian Income‑tax Act, 1922, is invalid so far as the plaintiff company is concerned and I have given my reasons therefor. There is no decision on the point of the Hon’ble High Court or the Hon’ble Supreme Court. The case will be submitted to the Hon’ble High Court for the favour of its opinion on the point whether by virtue of the grant, Exhibit A, the Indian Income‑tax Act, 1922, is invalid so far as the plaintiff company is concerned during the continuance of the grant.” Following this, the matter was referred to the High Court of Rajasthan for its opinion on the question raised.

The learned District Judge of Kotah referred a single question to the High Court of Rajasthan, framing it as follows: whether, by virtue of the grant identified as Exhibit A, the Indian Income‑tax Act of 1922 was invalid as to the plaintiff company for the duration of the grant. The High Court expressed uncertainty about the competence of such a reference, yet it withdrew the suit under article 228 of the Constitution because a substantial question of law concerning the interpretation of the Constitution had arisen, a question whose determination was essential for disposing of the suit. The Court further observed that the District Judge had not complied with the procedure prescribed in Order XLVI, Rule 2 of the Code of Civil Procedure, since he had rendered decisions on almost all the issues and had referred only issue No 11—concerning the reliefs to which the appellant might be entitled—to the High Court. Inevitably, the decision on issue No 11 depended on the resolutions of the other legal and factual issues. Accordingly, the High Court chose to decide the constitutional question, formulating it thus: whether, in view of article 295 and clause 18 of the grant, the legislative power of the Union of India contained in article 245 was in any way limited so that the Union could not enact any law that would remove the exemption provided in clause 18, assuming such exemption existed. The High Court answered this question against the appellant and also rejected two further arguments, one based on section 3 of the Government Grants Act (XV of 1895) and the other founded on article 31 of the Constitution. Having settled the constitutional issues, the High Court returned the suit to the District Judge of Kotah together with a copy of its judgment and directed the judge to dispose of the suit in accordance with that judgment. The appellant subsequently obtained a certificate under article 132 of the Constitution concerning the High Court’s decision on the constitutional questions and filed the present appeal on the basis of that certificate. It is important to note that the present appeal is confined solely to the High Court’s decision on the constitutional question; the correctness of the District Judge’s findings on other legal and factual issues is not before this Court and will be considered only if an appeal is taken from the District Judge’s judgment. On the constitutional question, the appellants advanced two points: first, that the grant dated 2 May 1945, particularly clause 18 granting exemption from income tax, remained law and continued to operate in Kotah despite the Finance Act of 1950; and second, that article 295 of the Constitution precluded the Union Legislature from enacting any law that would derogate from the rights, liabilities and obligations accruing to the Government of India under clause (b) of article 295(1).

In this appeal the parties argued two principal points. First, they contended that the exemption granted to the appellant from liability to pay income‑tax and related charges was a lawful right that continued to operate in the territory of Kotah even after the passage of the Finance Act, 1950. Second, they maintained that, on the basis of article 295 of the Constitution, the Union Legislature was not empowered to enact any statute that would diminish, modify or otherwise affect the rights, liabilities and obligations that had accrued to the Government of India under clause (b) of article 295(1). Both of these contentions were examined in exhaustive detail in the earlier reference case of Maharaja Shree Umaid Mills Ltd. v. Union of India, the judgment of which the Court delivered on the same day as the present decision. After considering the reasoning set out in that judgment, the Court concluded that the grant dated 2 May 1945 did not constitute a law and therefore did not continue to have effect in Kotah. Moreover, the Court held that article 295(1)(b) did not in any manner invalidate the Finance Act, 1950, which lawfully extended the Indian Income‑tax Act, 1922, to the territories of the State of Rajasthan, including Kotah. Accordingly, the appeal was found to have no merit, was dismissed, and costs were awarded against the appellant.