Maharaja Shree Umaid Mills Ltd vs Union of India

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, J.L. Kapur, A.K. Sarkar, M. Hidayatullah, Raghubar Dayal

In the matter of Maharaja Shree Umaid Mills Ltd. versus the Union of India decided on 27 November 1962, the Supreme Court of India delivered a judgment authored by Justice S K Das, with the bench comprising Justices S K Das, J L Kapur, A K Sarkar, M Hidayatullah and Raghubar Dayal. The case is reported in 1963 AIR 953 and 1963 SCR Suppl. (2) 515, and it has been cited in numerous subsequent decisions. The dispute arose from a formal agreement executed in 1941 between the ruler of the former State of Jodhpur and Maharaja Shree Umaid Mills Ltd., under which the State was to exempt the company from all State or Federal excise duty, income‑tax, super‑tax, surcharge or any other tax on its income, and to refund any such duty or tax if the company was nevertheless required to pay it. After India attained independence, Jodhpur merged into the United State of Rajasthan on 7 April 1949, and on 26 January 1950 Rajasthan was designated a Part B State. Consequently, the Central Excises and Salt Act, 1944, was extended to Rajasthan on 1 April 1950, and the Union of India recovered excise duty from the appellant for the period from 1 April 1950 to 31 March 1952. Similarly, the Indian Income‑Tax Act, 1922, was extended to Rajasthan, and the Union assessed and sought recovery of income‑tax from the appellant. The appellant argued that it was not liable for either excise duty or income‑tax because the 1941 agreement with the ruler of Jodhpur, which granted the exemptions, constituted law that remained in force. It further contended that, even if the agreement were purely contractual, the rights and obligations it created had been accepted by each successive sovereign and, under Article 295(1)(b) of the Constitution, had become enforceable obligations of the Government of India that could not be overridden by any subsequent law. The appellant also claimed that, pursuant to the agreement, it was entitled to a refund from the State of Rajasthan of any excise duty it had paid. The Court held that the appellant was indeed liable to pay both the excise duty and the income‑tax. It observed that the 1941 agreement was not law and did not possess the force of law. The Court explained that not every order issued by a sovereign ruler can be treated as law irrespective of its nature or character; the true nature of the order must be examined, and for an order to qualify as law it must exhibit the characteristics of a binding rule of conduct expressed as the will of the sovereign, rather than deriving its authority merely from a contract. An

In this case the Court observed that an agreement which exists only because the parties have consented to it is fundamentally different from a law that derives its authority from the sovereign’s will. The Court held that the agreement entered into in 1941 was purely contractual and did not possess any of the essential characteristics of law. The Court referred to several earlier decisions, namely Ameer‑un‑Nissa Begum v. Mahboob Begum (AIR 1955 SC 352), Director of Endowments, Government of Hyderabad v. Akram Ali (AIR 1956 SC 60), Madharo Phalke v. State of Madhya Pradesh ([1961] ISC 957) and Promode Chandra Dev v. State of Orissa ([1962] Supp. ISC 405), to support the view that a contract cannot be treated as legislation. The 1941 agreement, according to the Court, contained no clause or undertaking that promised exemption from excise duty or income‑tax that might later be imposed by the Union Legislature. Consequently, the question of whether later sovereigns could accept such a term and incur an obligation under Article 295(1)(b) of the Constitution never arose. Moreover, the evidentiary record showed that neither the United State of Rajasthan nor the Part B State of Rajasthan ever affirmed the 1941 agreement. Even assuming that an obligation persisted and that Article 295(1)(b) applied, the Court noted that nothing in that article prohibits Parliament from legislating on excise duty or income‑tax in a manner that modifies the terms of the agreement. The Court cited Maharaj Umeg Singh v. State of Bombay (AIR 1953 SC 540) to illustrate that parliamentary power to alter fiscal obligations remains unfettered.

The judgment then set out the procedural posture of the two appeals. Both appeals arose from certificates granted by the Rajasthan High Court and were heard together because they raised identical questions of law and fact. The first appeal, Civil Appeal No. 214/56, challenged the judgment and order dated 19 October 1953 of the Rajasthan High Court in D.B. Civil Miscellaneous Writ No. 47 of 1953. The second appeal, Civil Appeal No. 399 of 1960, contested the judgment and decree dated 7 May 1959 of the Rajasthan High Court in D.B. Civil Regular First Appeal No. 10 of 1955. Counsel for the appellants included G. S. Pathak, Rameshwar Nath, S. N. Andley and P. L. Vohra. For the respondents, the Attorney‑General for India, M. C. Setalvad, appeared together with the Additional Solicitor General, H. N. Sanyal, and K. N. Rajagopal Sastri and R. N. Sachthey. Additional counsel representing various respondents included G. C. Kasliwal, Advocate‑General of Rajasthan, M. M. Tiwari, S. K. Kapur, Kan Singh, S. Venkatakrishnan and K. K. Jain. The judgment was delivered on 27 November 1962 by Justice S. K. Das. The Court explained that it would decide the two appeals together, and it identified the principal issues. The principal issue in Civil Appeal No. 399 of 1960 was whether the appellant, Maharaja Shree Umaid Mills Ltd., was required to pay excise duty on the cloth and yarn it manufactured in accordance with the Central Excises and Salt Act, 1944, which had been extended to the territory of Rajasthan on 1 April 1950. The principal issue in Civil Appeal No. 214/56 concerned the appellant’s liability to pay income‑tax under the Indian Income‑Tax Act, 1922, from the date those provisions were extended to Rajasthan.

In the petition numbered C.A. No. 214/1956 the issue was whether the appellant, Maharaja Shree Umaid Mills Ltd., was required to pay income‑tax under the Indian Income‑tax Act, 1922 from the date on which the provisions of that Act were extended to the territory of the State of Rajasthan. The petition bearing the number C.A. No. 399/1960 arose out of a suit that the appellant had instituted before the District Judge at Jodhpur. The District Judge dismissed that suit and the appellant subsequently appealed to the High Court of Rajasthan. The High Court also dismissed the appeal. Thereafter the appellant moved the High Court for a certificate under Articles 132(1) and 133(1) of the Constitution. The High Court granted the certificate, and the appellant filed an appeal before this Court. The second petition, C.A. No. 214/1956, originated from a writ petition in which the appellant sought a writ of mandamus or any other appropriate writ to restrain the respondents from assessing or recovering income‑tax from the appellant. The High Court dismissed the writ petition on the preliminary ground that the appellant had an alternative remedy available under the Income‑tax Act, 1922. The appellant subsequently obtained a certificate under the same constitutional provisions and filed the present civil appeal. Since the Court is addressing both appeals on their substantive merits, it is unnecessary to revisit the preliminary ground on which the writ petition was dismissed.

The appellant in both appeals is the same corporate entity, Maharaja Shree Umaid Mills Ltd., having its registered office at Pali in the State of Rajasthan. In the appeal numbered C.A. No. 399/1960 the respondents are the Union of India, the State of Rajasthan, the Collector of Central Excise, New Delhi, and the Superintendent, Central Excise, Jodhpur. In the appeal numbered C.A. No. 214/1956 the respondents are the Union of India, the State of Rajasthan, the Commissioner of Income‑tax, Delhi, and the Income‑tax Officer, Jodhpur. The factual background relevant to the two appeals is as follows. The appellant was incorporated under the Marwar Companies Act, 1923, and has been engaged in the manufacture of cloth and yarn since 1941. The appellant’s case is that the then Ruler of the State of Jodhpur was keen to establish a cotton mill at Pali and, for that purpose, promised certain concessions, including immunity from all taxes and duties then in force in the Jodhpur State or that might become applicable under the contemplated federation of Indian states and provinces under the Government of India Act, 1935. After negotiations and correspondence concerning these concessions, the parties executed a formal deed of agreement on April 17, which set out the specific immunities and tax remissions to be granted to the appellant.

In the agreement executed on 17 April 1941, Clause 6 listed the duties and royalties that the State would exempt or remit, namely items (a) through (g), which included State or Federal Excise duty on goods manufactured in the mill premises and any State or Federal Income Tax, Super Tax, surcharge, or any other tax on income; the clause provided that if the Company were required to pay any such duty or tax, the State would refund the full amount to the Company. In consideration of these concessions, the appellant agreed to pay the State of Jodhpur a royalty of seven and a half percent of the Company’s net profits for each financial year, with the payment to be made within three months after the close of the year. The parties claimed that the State of Jodhpur had acted upon the agreement, granting the appellant immunity from excise duty and income tax. The Indian Independence Act, 1947 created the Dominion of India effective 15 August 1947, and the Ruler of Jodhpur acceded to the Dominion by executing an Instrument of Accession as shown in Appendix VII of the White Paper on Indian States. Jodhpur, one of the Rajputana States, was integrated in three stages: first a Rajasthan Union of smaller southeastern states was formed; subsequently the United State of Rajasthan was created; finally the Ruler of Jodhpur joined the United State of Rajasthan and, on 17 April 1949, transferred the administration of his State to the Rajpramukh of the United State of Rajasthan, an act recorded in Appendix XL of the White Paper. On the same day the Rajasthan Administration Ordinance, 1949 (Ordinance No. 1 of 1949), section 3, was promulgated, providing that all laws in force in any Covenanting State would continue until altered, repealed, or amended by a competent legislature or authority. A fresh Instrument of Accession dated 15 April 1949 was made on behalf of the United State of Rajasthan, whereby the United State accepted all matters enumerated in List I and List III of the Seventh Schedule to the Government of India Act, 1935, as subjects on which the Dominion Legislature could legislate for the United State; however, a proviso expressly stated that nothing in those lists would empower the Dominion Legislature to impose any tax or duty in the territories of the United State of Rajasthan or to prohibit the imposition of any tax or duty by the legislature of the United State. Subsequently, on 5 September 1949, the Rajasthan Excise Duties Ordinance, 1949 (Ordinance No. XXV of 1949) was promulgated and published on 19 September 1949; section 30 of that Ordinance declared that all laws dealing with matters covered by the Ordinance that were in force at its commencement in any part of Rajasthan were repealed. The Court was asked to determine whether that provision effectively abrogated the 17 April 1941 agreement in the event that the agreement had acquired the force of law in the State of Jodhpur. On 23 November 1949, the United State of Rajasthan issued a proclamation stating that the Constitution of India, soon to be adopted by the Constituent Assembly, would become the Constitution for Rajasthan. The Constitution of India came into force on 26 January 1950, and from that date Rajasthan became a Part B State. The matters before the Court therefore required consideration of the three stages of constitutional evolution affecting the position of the agreement.

In this case, the Court observed that the United State of Rajasthan issued the Rajasthan Excise Duties Ordinance, 1949 (Ordinance No XXV of 1949) on 5 September 1949. The ordinance was subsequently published on 19 September 1949 and, under its section 30, it was declared that every law dealing with matters that fell within the scope of the ordinance and that was in force at the commencement of the ordinance in any part of Rajasthan would be repealed. The Court identified one of the principal questions as whether the operation of section 30 effectively annulled the agreement dated 17 April 1941, assuming that the agreement possessed the force of law in the State of Jodhpur. The Court further noted that on 23 November 1949 the United State of Rajasthan issued a proclamation stating that the Constitution of India, soon to be adopted by the Constituent Assembly, would become the Constitution for the Rajasthan State. The Constitution of India did indeed come into force on 26 January 1950, and from that date Rajasthan was designated a Part B State. For the purpose of resolving the two appeals, the Court required consideration of three distinct stages in the constitutional development. First, the Court described the pre‑integration State of Jodhpur, whose ruler possessed absolute sovereignty and exercised legislative, executive and judicial powers personally. Second, the Court explained that the United State of Rajasthan was formed by integrating Jodhpur on 7 April 1949 through the Covenant, Appendix XL, covering pages 274 to 282 of the White Paper. Third, the Court stated that the United State of Rajasthan later became a Part B State within the framework of the Constitution of India that had taken effect on 26 January 1950, thereby making Jodhpur a component of the Part B State of Rajasthan.

The Court further explained that both excise duties (excluding alcoholic liquors and similar items) and taxes on income other than agricultural income fall within List I of the Seventh Schedule of the Constitution of India. By section 11 of the Finance Act 1950, the provisions of the Central Excises and Salt Act, 1944, together with all rules and orders made thereunder, were extended to the territory of Rajasthan effective 1 April 1950. The Court recorded that the Union of India’s excise officers recovered from the appellant a sum of Rs 4,05,Q,14‑12‑0 as excise duty on goods manufactured and produced by the appellant for the period from 1 April 1950 to 31 March 1952. The appellant stated that it paid the amount under protest. On 16 April 1952, the appellant instituted a suit by filing a plaint in the Court of the District Judge at Jodhpur. In that plaint, the appellant made several averments asserting that the respondents were not entitled to realise excise duty from the appellant because of the agreement dated 17 April 1941. The reliefs sought by the appellant were: (a) a declaration that the agreement of 17 April 1941 is binding on all the respondents; (b) an order that the amount of excise duty already realised be refunded with interest at six percent per annum; (c) an injunction permanently restraining the Union of India, the State of Rajasthan, and their servants, agents and officers from collecting any excise duty from the appellant; and (d) a direction that the State of Rajasthan refund, from time to time, any excise duty paid by the appellant to the Union of India pursuant to the indemnity clause in the 17 April 1941 agreement.

The appellant prayed, among other reliefs, that an injunction be granted to restrain any excise duty from being realised from it and that the State of Rajasthan be ordered to refund, from time to time, any excise duty that the appellant might be compelled to pay to the Union of India, on the basis of the indemnity clause contained in the agreement dated 17 April 1941. The learned District Judge framed several issues for trial and, after examining those issues, held that the agreement of 17 April 1941 was not binding on the respondents. He further observed that the agreement had become frustrated by subsequent events and was consequently unenforceable. An appeal was lodged before the High Court, which affirmed the principal findings of the learned District Judge.

The facts of Civil Appeal No 214 of 1956 are identical to those previously described, the sole distinction being that the present appeal concerns a claim under the Income‑Tax Act whereas the earlier proceedings dealt with excise duty. Once again the appellant relied upon the agreement dated 17 April 1941 and contended that the agreement bound the respondents, thereby precluding the appellant from being required to pay income tax under the provisions of the Indian Income‑Tax Act, 1922, as extended to the whole of India—except the State of Jammu and Kashmir—by amendments introduced through the Finance Act, 1950.

On behalf of the appellant two principal lines of argument were advanced in support of the submission that the 17 April 1941 agreement is binding on the respondents and that the contrary findings of the lower courts are erroneous. The first line of argument asserts that the agreement is, in effect, law because it was the command of the Ruler of Jodhpur, who at that time was a sovereign ruler exercising legislative, executive and judicial functions. Learned counsel for the appellant characterized this as a legislative contract that continued in force when Jodhpur merged into the United State of Rajasthan by virtue of section 3 of the Rajasthan Administration Ordinance, 1949, which preserved all existing laws in any covenanting State that were in force immediately before the Ordinance commenced. Section 3 expressly defines “law” to include any rule, order or bye‑law made by a competent authority in a covenanting State that has the force of law in that State. Accordingly, the agreement of 17 April 1941, having been sanctioned by the Ruler and constituting his order, possessed the force of a special law in Jodhpur and, as argued, remained operative by operation of section 3 of the Ordinance.

The argument further contends that when the Raipramukh of the United State of Rajasthan promulgated the Rajasthan Excise Duties Ordinance, 1949 (Ordinance XXV of 1949), section 30 of that Ordinance did not abrogate the special law embodied in the 1941 agreement. The coming into force of the Constitution on 26 January 1950, when

Rajasthan had become a Part B State, so Article 372 of the Constitution became applicable and the special law continued to be in force. The Finance Act of 1950 did not repeal that special law, and consequently the special law remained binding on the respondents. This formed the first line of argument presented by counsel for the appellant. The second line of argument was based on the premise that the agreement dated 17 April 1941 was purely a contract and not a law. Even on that basis, counsel contended that the contract created rights for one party and obligations for the other, and that these rights and obligations had been accepted by each successive sovereign: first by the State of Jodhpur, then by the United State of Rajasthan, and finally by the Part B State of Rajasthan. Counsel submitted that the lower courts erred in holding otherwise. He argued that because each sovereign accepted the rights and liabilities, Article 295(1)(b) of the Constitution took effect from 26 January 1950, and the rights and liabilities of Jodhpur State or the United State of Rajasthan therefore became the rights and liabilities of the Government of India to the extent that they related to matters enumerated in the Union List. Counsel further maintained that Article 295 was a constitutional guarantee, and any law contravening it must be void to the extent of the violation. In addition to these two principal lines of argument, counsel asserted that the contract constituted a right to property, and that the appellant could not be deprived of that right in violation of the guaranteed rights under Articles 19 and 31 of the Constitution. He also argued that there was no frustration of the contract, contrary to the finding of the learned District Judge, and that, on any view, the appellant was entitled to a refund of the duty or tax paid to the Union Government by reason of clause 6 of the agreement. The Court then proceeded to consider these arguments in the order in which they had been presented.

The Court concluded that the agreement of 17 April 1941 rested solely on the consent of the parties, was entirely contractual in nature, and did not possess any of the characteristics of law. Accordingly, the Court held that the agreement could not be regarded as a law. Counsel for the appellant had relied upon several decisions of this Court, namely Ameer‑un‑Nissa Begum v. Mahboob Begum, Director of Endowments, Government of Hyderabad v. Akram Ali, Madhaorao Phalke v. State of Madhya Bharat, and Promod Chandra Deb v. State of Orissa. The Court found that those decisions did not support the appellant’s position. In particular, the Court noted that the Madhaorao Phalke case emphasized that, in determining whether a particular order of a sovereign ruler possessed the character of law, one must examine the nature of the provisions contained in the document. The Court therefore rejected the contention that the 1941 agreement had the force of law, and reaffirmed that it was a private contract without legislative authority.

In order to determine whether an order issued by a sovereign ruler, who possessed combined legislative, executive and judicial functions, could be treated as law, it was necessary to examine the nature of the order itself. The Court therefore turned its attention to the Kalambandi document that was before it and observed that “the nature of the provisions contained in this document unambiguously impresses upon it the character of a statute or a regulation having the force of a statute.” (1) AIR 1955 SC 352; (2) AIR 1956 SC 60; (4) [1962] Supp. ISR 405. The same principle was applied in Ameer‑un‑Nissa v. Mahboob Begum and in Director of Endowments, Government of Hyderabad, where the Court considered the effect of Firmans issued by the Nizam, who at that time was an absolute ruler. The Court held that such Firmans operated as law because the Nizam issued Firmans in all domestic matters to determine the rights of his subjects. The authority of the Firmans did not arise from any consent of the parties but flowed directly from the sovereign will of the Nizam. For instance, in Ameer‑un‑Nissa’s case the Firman set aside a decision of a Special Commission with respect to certain claimants, and although a later Firman revoked the earlier one, it did not reinstate the Commission’s decision. In that circumstance the Court remarked that “the determination of all these questions depends primarily upon the meaning and effect to be given to the various Firmans of the Nizam which we have set out already.” It was undisputed that, before the integration of Hyderabad State into the Indian Union and the commencement of the Constitution, the Nizam exercised uncontrolled sovereign powers, acting as the supreme legislature, the supreme judiciary and the supreme executive without any constitutional restraints. The Firmans were therefore expressions of the Nizam’s sovereign will and were binding in the same way as any other law, even to the extent of overriding any other law that conflicted with them. A particular Firman remained the governing rule for the parties concerned so long as it “held the field,” and it could be annulled or modified only by a subsequent Firman issued at the Nizam’s discretion.

These observations, however, do not support the extreme proposition that every order of a sovereign ruler who combines all functions must be treated as law irrespective of its character. In Promod Chandra Deb v. State of Orissa, the Court considered Khorposh grants in the context of the rules laid down in Order 31 of the Rules, Regulations and Privileges of Khanadars, which had been accepted by the ruler of the State as the law governing the rights of Khorposhdars. The Court held that those rules continued in force until they were altered by a competent authority, and that grants made in accordance with those rules remained valid until such a change occurred.

In the view of the Court, none of the earlier decisions establishes that every order issued by a sovereign ruler, who possesses all functions of authority, must automatically be treated as law regardless of the nature or character of that order. The Court emphasized that the true nature of the order must be examined, and for an order to be considered law it must possess the essential qualities of law – namely, it must be a binding rule of conduct that expresses the sovereign’s will and does not derive its authority merely from the mutual consent of two parties entering into a bargain. The Court stated that it is unnecessary to delve into complex theories of legal philosophy or to provide a formal definition of law. Nonetheless, the Court noted that law may be defined, for example, as a command of the supreme legislature, as some jurists have suggested, or as a body of rules laid down for the determination of legal rights and duties that courts recognize. The Court observed a clear distinction between an agreement that is based solely on the consent of the parties and a law that derives its sanction from the sovereign’s will. A contract is essentially a compact between two or more parties, whereas a law is not an agreement between parties but a binding rule of conduct that obtains its authority from the sovereign. From this perspective, there exists a legitimate difference between a specific agreement between two or more parties—even if one of those parties is the sovereign ruler—and the general law relating to agreements. The former rests on the consensus of mind, while the latter expresses the sovereign’s will.

The Court further explained that, when this distinction is kept in mind, it becomes evident that the agreement dated 17 April 1941, although it was sanctioned by the ruler and appeared to be made on his behalf, actually rested on consent. The Court had examined the correspondence that led to the agreement and paid particular attention to a letter dated 22 April 1938, in which the ruler was recorded as having approved the terms and concessions determined by his ministers in a meeting held on 25 February 1938. The Court concluded that this correspondence did not support the appellant’s case; on the contrary, it demonstrated that there were extended negotiations, proposals, counter‑proposals, offers and acceptances of terms, all indicating that the matter was treated, even by the ruler, as a contract between his government and the appellant. Consequently, the letter of 22 April 1938 stated that Messrs Crawford Bailey & Co. Solicitors would prepare a formal agreement embodying the terms agreed upon by the parties, which ultimately resulted in the execution of the agreement on 17 April 1941. The Court held that describing such an agreement as law misuses the term “law”.

In this matter the Court observed that clause 6 of the agreement claimed to grant the appellant exemption not merely from the State excise duty but also from any Federal excise duty, and similarly to relieve the appellant not only from State income‑tax but also from Federal income‑tax, super‑tax or surcharge. The Court found it difficult to identify any authority that the Ruler of Jodhpur possessed to dispense with a Federal excise duty or a Federal income‑tax. If such an exemption were to be regarded as law, it would exceed the Ruler’s constitutional competence. The Court explained that a ruler may legislate only within his own jurisdiction and competence; he cannot enact a law that would bind another sovereign. Consequently, such an exemption would be a dead letter, lacking any legal force. Counsel for the appellant, however, suggested rather naively that the Ruler might use his influence over another sovereign – should a federation later be created – to secure an exemption from Federal tax for the appellant. The Court noted that an assurance of influence over another sovereign authority, even if the clause were to be interpreted in that way, did not possess the characteristics of a binding rule of conduct. Moreover, the Court expressed doubt that such an assurance could be enforced even as a contract, let alone as law.

Counsel for the respondents drew the Court’s attention to several other clauses of the agreement, arguing that taken as a whole the instrument could not be treated as law because some provisions merely promised that the State would take future action. For example, clause 8 assured that the State would amend the law at a later date, and the Court agreed that a future promise to amend legislation could not be regarded as present law. The Court found considerable force in this contention. When these difficulties were highlighted to counsel for the appellant, he proposed that the Court separate the individual clauses and treat only those provisions that bestowed a present right on the appellant as law. The Court rejected this approach, stating it could not dissect the agreement in such a manner to regard part of a clause as law while treating the remainder merely as an agreement. The Court further pointed out that clause 6 did not refer to excise duty or income‑tax that would be imposed by the Union of India. In 1941, no one could have foreseen the constitutional developments of 1947‑1950, and the parties’ reference to “Federal” duties related to the Federation scheme envisaged under the Government of India Act, 1935 – a scheme that never came into operation. Accordingly, the Court concluded that the agreement, in any view, could not be treated as law with respect to any tax or duty.

The Court observed that imposing a duty by the Union Government could not be justified when the agreement contained no reference to such a duty. It warned that extending this reasoning to a reductio ad absurdum would mean that every order issued by the former ruler would have to be obeyed by the successor sovereign, even if the order were as extreme as an instruction to beat a servant. The Court emphasized that the character of an order must be examined to decide whether it possesses the force of law. Accordingly, Article 372 of the Constitution, which preserves existing law, must be interpreted to cover only those orders that genuinely have legal force, as understood at the relevant time.

The Court noted that there had been extensive argument concerning the appellant’s use of the term “legislative contracts.” That expression is primarily found in American case law, where it relates to the “contract clause” of the United States Constitution and limits state legislative action that would affect pre‑existing contracts, for example in Piqua Branch of the State Bank of Ohio v. Jacob Knoop. The Court held that those American decisions did not assist in answering the present question, which was simply whether a purely contractual agreement between two or more parties becomes law merely because one of the parties is the sovereign ruler. The Court found the American authorities irrelevant to this issue.

Further, the Court considered a passage from Halsbury’s Laws of England, volume 8, third edition, paragraph 252, which cited (1853) 14 L. Ed. 977 at page 146. That passage dealt with the statutory confirmation of void contracts by a local and personal Act of Parliament, stating that such a statute makes the agreement entirely valid. The principle explained that when Parliament confirms a scheduled agreement, the agreement turns into a statutory obligation and is to be read as if its provisions were part of the Act, as illustrated in International Railway Company v. N. P. Commission. The Court found no application of that principle in the present case because there was no evidence that the ruler had ever confirmed the agreement as law. On the contrary, the Court reiterated that the agreement had always been treated as a contract between two parties.

The Court stressed that the phrase “legislative contract” carries no mystical meaning. A contract is simply a compact between two or more parties and may be executory or executed. Only when a statute adopts or confirms the contract does it become law and cease to be a mere contract. The Court concluded that no “legislative contract” existed in the matters before it. Since the Court had decided that the agreement dated 17 April 1941 was not law, it considered it unnecessary to address the further issue of whether section 3 of the Rajasthan Ordinance, 1949 (Ordinance I of 1949) continued the agreement or whether section 30 of the Rajasthan Excise Duties Ordinance, 1949 (Ordinance XXV of 1949) repealed it.

The Court noted that the Rajasthan Excise Duties Ordinance of 1949, specifically Ordinance XXV, expressly repealed the earlier agreement dated 17 April 1941. It observed that counsel for the appellant relied on the presumption that a later enactment of a purely general character is not intended to disturb an earlier special provision for a particular case unless the general enactment reveals a legislative intent to create a rule of universal application, in which event the special provision must yield to the general rule, as explained in paragraph 711 of volume 36 of Halsbury’s Laws of England, Third Edition, and the cases Williams v Pritchard and Eddington v Borman (see citations (1) A.I.R. (1937) P.C. 214, (2) (1790) E.R. 862, (3) (1799) E.R. 863). The respondents submitted that section 30 of the Rajasthan Excise Duties Ordinance, 1949, in clear terms repealed every law dealing with matters covered by the ordinance, and that section 3 dealt with excise duties on goods produced or manufactured in Rajasthan, leaving no room for the maxim “generalia specialibus non derogant” to apply; they argued that section 30 unequivocally repealed all earlier statutes relating to excise duties or exemptions therefrom. The Court considered it unnecessary to resolve that contention because it had already held that the April 1941 agreement was neither a law nor possessed the force of law. It further explained that the true issue was the legislative intention, and given the unmistakable wording of section 30 of the 1949 ordinance together with the repealing provisions of the Finance Act 1950, it would be difficult to sustain that the earlier special law on the subject remained in force. Turning to the second line of argument raised on behalf of the appellant, the Court observed that, with respect to the Union Government and its officers, there is a concise and persuasive response. The Court pointed out that the agreement contained no term or undertaking granting exemption from excise duty or income‑tax that might be imposed by the Union Legislature in the future. It reiterated that any undertaking present referred only to Federal excise duty and Federal income‑tax, and that the Federation contemplated by the Government of India Act, 1935, never came into existence. The Union established under the Constitution of 1950 is fundamentally different from the Federation envisioned under the 1935 Act; consequently, in the absence of any term promising exemption from Union excise duty or income‑tax, the question of a successor sovereign accepting such a term and an attendant obligation on 26 January 1950, under article 295(i)(b) of the Constitution, could not arise. The Court concluded that a term or undertaking that does not exist cannot give rise to any right or obligation in favour of or against any party.

The Court observed that because the agreement contained no provision granting any exemption from excise duty or any tax that might be imposed by the Union Legislature, no enforceable right or obligation could arise in favour of or against any party. Consequently, on this single ground, the appellant’s claim must be dismissed against the respondents with respect to the levy of excise duty or tax by the Union. This dismissal is to be made without deciding the separate question of whether the Ruler of Jodhpur, or even the United State of Rajasthan, possessed the legal authority to bind the future actions of the Union Legislature.

It is now well settled by numerous decisions of this Court that an act of State constitutes the acquisition of sovereign powers by a State over a territory that was not previously part of it, whether such acquisition occurs by conquest, treaty, cession or any other means. The municipal courts recognised by the new sovereign are vested with the power and jurisdiction to investigate and determine only those rights that the new sovereign has chosen to recognise or acknowledge, either expressly through legislation or agreement, or implicitly by reference to the surrounding circumstances. In the present dispute the right asserted by the appellant derives from the agreement entered into by the Ruler of Jodhpur. The Court therefore framed two preliminary questions: first, whether the succeeding sovereign, the United State of Rajasthan, had recognised the right that the appellant now claims; and second, whether the subsequent sovereign, the State of Rajasthan, had recognised that same right.

The appellant’s principal claim against the State of Rajasthan is founded upon clause six of the agreement, which provides that if any duty or tax becomes payable by the company, the State will refund the amount to the company. Accordingly, the appellant seeks from respondent No 2 a refund of any duty or tax that it may be compelled to pay to the Union Government. The learned District Judge had held that the Ruler of Jodhpur had acted in accordance with the agreement insofar as customs concessions were concerned and had accepted royalty as stipulated in clause twelve of the agreement. However, the question of excise duty never arose before the Jodhpur State because no such duty was levied within that State.

In the appellate proceedings, the learned High Court Judge, Jagat Narayan, examined the evidence relating to this point and produced a list of relevant documents. He noted that the Director of Industries of the United State of Rajasthan had indeed demanded payment of royalty not only for the period following the formation of the United State of Rajasthan, but also for arrears relating to the period preceding its formation. Nevertheless, the Judge found that regarding exemption from excise duty or any claim for refund, the United State of Rajasthan had not, in any manner, affirmed the agreement. The Judge stated that the issue to be determined was whether, on the basis of the facts and circumstances evident from the record, it could be said that the United State of Rajasthan had affirmed the agreement. He expressed a firm opinion that no such inference could be drawn, observing that the State had not decisively decided whether to abide by the agreement and that, pending a final decision, the agreement had been acted upon only provisionally.

Turning to the position of the Part B State of Rajasthan, the Court found no evidence in the record to demonstrate that this State had affirmed the agreement. The judgment of Justice Bapna, acting with his fellow judge, referred specifically to a letter dated 20 January 1950 from the Commissioner of Excise, Jodhpur, addressed to the appellant. That letter informed the appellant that it was liable to pay excise duty under the Rajasthan Excise Duties Ordinance, 1949. The appellant replied that excise duty was not leviable on the basis of the agreement dated 17 April 1941. Subsequent correspondence continued, culminating in a reply dated 10 May 1952 from the Government of the State of Rajasthan, which stated that the rights and concessions granted to the company, together with the liabilities and obligations accepted by the former authority, would be honoured in accordance with the terms of the agreement. This final reply formed part of the material considered by the Court in reaching its conclusion.

In reviewing the material, the Court observed that no inference could be drawn that the State had decided to adhere to the agreement; rather, the State had not reached a definite conclusion and, pending a final decision, the agreement had been applied only on a provisional basis. Concerning the Part B State of Rajasthan, the record contained no evidence that it had affirmed the agreement. Justice Bapna concurred with his colleague on the bench and drew particular attention to a letter dated 20 January 1950, which was issued by the Commissioner of Excise, Jodhpur, to the appellant. That letter informed the appellant that it was liable to pay excise duty in accordance with the Rajasthan Excise Duties Ordinance 1949. The appellant replied, asserting that excise duty could not be imposed because of the agreement dated 17 April 1941. Subsequent exchanges of correspondence ensued, culminating in a reply dated 10 May 1952 from the Government of the State of Rajasthan. In that reply the Government described the rights and concessions granted to the company and the liabilities and obligations assumed by the former Jodhpur State under the agreement as “extraordinary, unconscionable and disproportionate to the public interest,” and it concluded that the appellant’s claim to exemption could not be accepted. The appellant also relied on a letter dated 1 May 1950, in which the Government of Rajasthan explained that the burden of excise duty on cloth produced by the appellant ultimately fell on the consumers who purchased the cloth; consequently, the Government did not deem it necessary to exempt the appellant from payment of excise duty. It is noteworthy that all of this correspondence began shortly after the promulgation of the Rajasthan Excise Duties Ordinance 1949. From these letters, Justice Bapna inferred that neither the United State of Rajasthan nor the State of Rajasthan had affirmed the agreement. The Court found no reason to adopt a different interpretation of the correspondence before it. The next question, therefore, was to determine the legal position. If the new sovereign entities—whether the United State of Rajasthan or the Part B State of Rajasthan—had not affirmed the agreement with respect to exemption from excise duty or income tax, the appellant could not succeed in its claim. The appellant’s counsel relied on Article 295(1)(b) of the Constitution, which provides: “295. (1) As from the commencement of this Constitution: (a) all property and assets which immediately before such commencement were vested in any Indian State corresponding to a State specified in Part B of the First Schedule shall vest in the Union, if the purposes for which such property and assets were held immediately before such commencement will thereafter be purposes of the Union relating to any of the matters enumerated in the Union List, and (b) all rights, liabilities and obligations of the Government of any Indian State corresponding to a State specified in Part B of the First Schedule, whether arising out of any contract or otherwise, shall be the rights, liabilities and obligations of the Government of India, if the purposes for which such rights were acquired or liabilities or obligations were incurred before such commencement will thereafter be purposes of the Government of India relating to any of the matters enumerated in the Union List, subject to any agreement entered into in that behalf by the Government of India with the Government of that State.”

The Court examined the text of Article 295 of the Constitution, which provides that “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.” It further stated that, “Subject as aforesaid, the Government of each State specified in Part B of the First Schedule shall, as from the commencement of this Constitution, be the successor of the Government of the corresponding Indian State as regards all property and assets and all … rights, liabilities and obligations, whether arising out of any contract or otherwise, other than those referred to in clause (1).” The appellant argued that this provision gave a constitutional guarantee concerning the rights, liabilities and obligations mentioned in clause (b) and that no law could be made to alter those rights, liabilities and obligations. To support this contention, the appellant referred to Article 245, which provides that, subject to the provisions of the Constitution, Parliament may make laws for the whole or any part of the territory of India. The appellant maintained that because the power of Parliament to make laws was subject to the Constitution, the limitation contained in Article 295 controlled Parliament’s power to legislate with respect to the rights, liabilities and obligations described in Article 295(1)(b); consequently, Parliament could not enact any law that altered those rights, liabilities or obligations.

The Court indicated that it did not accept this interpretation of Article 295. Before addressing the substantive question of interpretation, the Court noted that if the United State of Rajasthan had not affirmed the agreement in question, the appellant possessed no enforceable right against either the United State of Rajasthan or the Part B State of Rajasthan. Under Article 295(1)(b), a right or liability must first exist in an Indian State corresponding to a State specified in Part B of the First Schedule before it can become a right or liability of the Government of India. The Court observed that, where the right itself did not exist before the commencement of the Constitution and could not be enforced against any Government, the issue of its vesting in another Government under Article 295(1)(b) could hardly arise. The Court explained that the scheme of Article 295 related to succession to property, assets, rights, liabilities and obligations. Clause (a) provided that, from the commencement of the Constitution, all property and assets that were vested immediately before that date in a State specified in Part B would vest in the Union if the purposes for which those property and assets were held were thereafter purposes of the Union. Clause (b) stipulated that all rights, liabilities and obligations of the Government of any such State, whether arising out of any contract or otherwise, would become the rights, liabilities and obligations of the Government of India if the purposes for which those rights were acquired or liabilities incurred were thereafter purposes of the Government of India. The Court concluded that the provision did not permanently restrain the Union Legislature’s power to modify or change the rights, liabilities and obligations that had vested in the Government of India, and that the express provisions of Article 295 dealt only with the vesting of property and assets and the arising of rights, liabilities and obligations, leaving Parliament free to legislate on subsequent modifications.

Clause (b) of Article 295 provides that all rights, liabilities and obligations of the Government of any Indian State that corresponds to a State listed in Part B of the First Schedule, whether those rights arise from a contract or from any other source, shall become the rights, liabilities and obligations of the Government of India when the purposes for which those rights were acquired or those liabilities and obligations were incurred are purposes of the Government of India. The provision does not contain any expression that permanently restricts the power of the Union Legislature to modify or change the rights, liabilities or obligations that have vested in the Government of India. The express terms of Article 295 deal only with two specific matters: first, the vesting of certain property and assets in the Government of India; and second, the arising of certain rights, liabilities and obligations on the Government of India. Consequently, any statute that attempts to alter the course of vesting or succession as laid down in Article 295 would be invalid to the extent that it conflicts with the article. However, the article does not forbid Parliament from passing a law that alters the terms and conditions of a contract or a grant that gave rise to a liability of the Government of India. The legislative competence of the Union Parliament, and even of a State Legislature, can be limited only by an express prohibition contained in the Constitution itself. In the absence of a specific constitutional provision that expressly bars legislation on a particular subject, either absolutely or conditionally, there is no restriction on the plenary powers of the legislature to enact laws on matters enumerated in the relevant Lists. The Court, relying on the decision in Maharaj Umeg Singh v. State of Bombay, expressed the view that Article 295 does not expressly prohibit Parliament from legislating on income‑tax or excise‑duty matters in territories that became Part B States and were formerly Indian States, and that such a prohibition cannot be implied from Article 295 on the basis of any contract that might have been concluded by the former ruler of an Indian State with any person.

The rights, liabilities and obligations referred to in Article 295(1)(b) are, by the clear language of the provision, subject to any agreement entered into on behalf of the Government of India and the Government of the State. Such an agreement was executed between the President of India and the Rajpramukh of Rajasthan on 25 February 1950. To understand the origin of this agreement, it is necessary to note that a committee called the Indian States Finance Enquiry Committee was constituted by a resolution of the Government of India dated 22 October 1948. The committee was tasked with examining and reporting on, among other issues, the existing structure of public finance in the Indian States and the desirability and feasibility of integrating federal finance in those States. The work of this committee ultimately led to the formulation of the agreement between the President and the Rajpramukh, which formed the basis for the discussion of the rights, liabilities and obligations under Article 295.

The Court noted that the Indian States Finance Enquiry Committee had submitted its report on 22 October 1949 and that an agreement was subsequently executed between the President of India and the Rajpramukh of Rajasthan on 25 February 1950. The agreement stated that the recommendations of the Committee for the year 1948‑49, as set out in Part I of the report together with Chapters I, II and III of Part II, and the recommendations contained in Chapter VIII of Part II, were accepted by the parties, subject to certain modifications. The Court observed that it was unnecessary to reproduce the modifications in full, but it was sufficient to point out that none of the modifications conferred any benefit upon the appellant. One modification related to enterprises owned or operated by the State, which were to be exempt from income‑tax; the appellant was neither a State‑owned nor a State‑operated enterprise. Another modification dealt with State‑sponsored banks or similar State‑sponsored enterprises that enjoyed explicit tax exemptions, stating that such entities would be treated as “Industrial Corporations” for the purpose of continuing the income‑tax concessions in accordance with paragraph 11(3)(b) of the Annexure to Part 1 of the Committee’s report. The appellant was neither a State‑sponsored bank nor a State‑sponsored enterprise. The Court further explained that the accepted recommendations contained a provision stating that any special financial privileges or immunities conferred by the State upon other persons or corporations should ordinarily be continued by the Centre on the same terms, subject to a maximum period of ten (or fifteen) years, and that the Union could limit such concessions if they appeared extravagant or against the public interest. Accordingly, the Court held that the recommendation clearly allowed the Union to restrict exemptions, and therefore the appellant could not claim a constitutional guarantee of exemption from excise duty or income‑tax. Regarding the appellant’s reliance on Articles 1.9 and 31 of the Constitution, the Court found that the appellant had no enforceable right against either the State Government of Rajasthan or the Union Government as of 26 January 1950, and consequently could not invoke Articles 19 or 31. The Court also rejected the appellant’s claim for a refund against the State of Rajasthan, noting that the appellant’s position was no better on that point.

The State of Rajasthan, by affirming the agreement that was executed on 17 April 1941, made clear that the appellant could not rely upon that agreement to assert any enforceable right against respondent number two. The lower trial court, and subsequently the High Court, were called upon to consider whether the operation of the agreement had been rendered impossible by the occurrence of events that made performance impracticable, a legal concept known as frustration of contract. Both courts examined the relevant facts, applied the legal principles governing frustration, and each arrived at the conclusion that the contract was indeed frustrated and therefore could not be performed. The present Court, having accepted the findings of the lower tribunals, found that there was no longer any necessity to revisit the question of frustration, and consequently it declined to reopen that issue for further discussion. On the basis of these determinations, the Court concluded that the appeals advanced by the appellant did not disclose any merit that would justify granting relief. Accordingly, the Court ordered that the appeals be dismissed, that the costs of the proceedings be awarded to the respondents, and that the appellant be required to pay a single hearing fee. The final order thus dismissed the appeals in their entirety.