Maharaja Shree Umaid Mills Ltd. vs Union Of India (Uoi)

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: A.K. Sarkar, J.L. Kapur, M. Hidayatullah, Raghuvar Dayal, S.K. Das

In the matter titled Maharaja Shree Umaid Mills Ltd. versus Union of India, the Supreme Court rendered its judgment on 27 November 1962. The opinion was authored by Justice S.K. Das and was delivered by a bench comprising Justices A.K. Sarkar, J.L. Kapur, M. Hidayatullah, Raghuvar Dayal, and S.K. Das. The Court noted that the two appeals under consideration arose from certificates granted by the High Court of Rajasthan, and because they presented common questions of law and fact, the Court chose to hear them together and to issue a single judgment that would apply to both appeals.

The principal issue in Civil Appeal No. 399 of 1960 concerned whether the appellant, Maharaja Shree Umaid Mills Ltd., was obligated to pay excise duty on the cloth and yarn it manufactured, in accordance with the provisions of the Central Excises and Salt Act, 1944, which had been extended to the territory of Rajasthan on 1 April 1950. The primary question in Civil Appeal No. 214 of 1956 dealt with whether the same appellant was liable to pay income tax under the Indian Income‑Tax Act, 1922, from the date those provisions were extended to Rajasthan. The first appeal originated from a suit filed by the appellant in the District Court of Jodhpur, which was dismissed by the learned District Judge; an appeal to the Rajasthan High Court was also dismissed, after which a certificate under Articles 132(1) and 133(1) of the Constitution was obtained, permitting the appeal to the Supreme Court. The second appeal stemmed from a writ petition seeking a mandamus or any appropriate writ to restrain the respondents from assessing or recovering income tax from the appellant; the Rajasthan High Court dismissed the petition on the preliminary ground that the appellant had an alternative remedy under the Income‑Tax Act, 1922, and subsequently a certificate was issued, allowing the appeal before this Court. In deciding the merits of both appeals, the Court found it unnecessary to revisit the preliminary ground that had led to the dismissal of the writ petition. The appellant in both appeals was Maharaja Shree Umaid Mills Ltd., based in Pali. In Civil Appeal No. 399 of 1960, the respondents were the Union of India, the State of Rajasthan, the Collector of Central Excise, New Delhi, and the Superintendent, Central Excise, Jodhpur. In Civil Appeal No. 214 of 1956, the respondents were the Union of India, the State of Rajasthan, the Commissioner of Income‑Tax, Delhi, and the Income‑Tax Officer, Jodhpur. The Court then proceeded to state the facts relevant to the appeals, noting that the appellant had been incorporated under the Marwar

Maharaja Shree Umaid Mills Ltd. was incorporated under the Companies Act, 1923, maintains its registered office at Pali in the State of Rajasthan, and has engaged in the manufacture of cloth and yarn since 1941. The Ruler of the State of Jodhpur wished to establish a cotton mill at Pali and therefore consented to grant the mill certain concessions. These concessions provided immunity from taxes and duties then in force in Jodhpur State or that may become applicable under the contemplated federation of Indian States and Provinces of the Government of India Act, 1935. Negotiations and correspondence on the exact form of these concessions continued for some time and the parties eventually executed a formal deed of agreement on 17 April 1941. The deed was signed by the Government of His Highness the Maharaja of Jodhpur on one side and by the appellant on the other. Clause six of the agreement, which is the portion relevant to the present dispute, enumerates the duties and royalties that the State agreed to exempt or remit. It lists items a through g, with the specific descriptions of items a, b, c, d and g omitted in the record, while items e and f are reproduced in full. Item e provides that State or Federal Excise duty on goods manufactured in the mill premises shall be exempt. If any such duty is nonetheless paid by the company, the State shall refund the entire amount to the company. Item f deals with State or Federal Income Tax, Super Tax, surcharge or any other tax on income. It states that if any such tax is required to be paid by the company, the State will refund the whole amount to the company. In consideration for these concessions, the appellant agreed to pay the State of Jodhpur a royalty of seven and a half per cent on the net profits of the company for each financial year. The royalty was to be paid within three months after the close of each financial year, as stipulated in the agreement. The parties asserted that the State of Jodhpur had acted upon the agreement and that, as a result, the appellant enjoyed immunity from both excise duty and income tax.

The Indian Independence Act, 1947 created a Dominion of India which came into effect on 15 August 1947, thereby establishing the independent nation. The Ruler of Jodhpur acceded to the Dominion of India by executing an Instrument of Accession referred to in Appendix VII, pages 165 to 168 of the White Paper on Indian States. Jodhpur was one of the Rajputana States, and its integration into the Indian Union proceeded in three stages. First, a Rajasthan Union was formed by several smaller Rajputana states situated in the south‑east of the region. Subsequently, the United State of Rajasthan was created, and the Ruler of Jodhpur joined this new political entity, thereby becoming part of the United State. On 7 April 1949 the Ruler transferred the administration of his State to the Rajpramukh of the United State of Rajasthan. The covenant documenting this transfer appears in Appendix XL, pages 274 to 282 of the White Paper, providing a detailed record of the arrangement. On the same day the Rajasthan Administration Ordinance, 1949 was promulgated, continuing all laws previously in force in any Covenanting State until altered or repealed by a competent legislature.

The Court recorded that on the day in question the Rajasthan Administration Ordinance of 1949, identified as Ordinance No I of 1949, was issued. Section 3 of that Ordinance provided that every law that was applicable in any Covenanting State would continue to operate until it was altered, repealed or amended by a legislature or another competent authority. Subsequently, on 15 April 1949 a new Instrument of Accession was executed on behalf of the United State of Rajasthan. By that instrument the United State of Rajasthan accepted all matters listed in List I and List III of the Seventh Schedule to the Government of India Act, 1935 as subjects over which the Dominion Legislature could legislate for the United State of Rajasthan. However, the instrument contained a proviso stating 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, nor would it prevent the legislature of the United State of Rajasthan from imposing taxes or duties therein. Later, on 5 September 1949 the Rajasthan Excise Duties Ordinance, 1949 (Ordinance No XXV of 1949) was promulgated and subsequently published on 19 September 1949. Section 30 of that Ordinance declared that any law dealing with matters covered by the Ordinance and in force at the time of its commencement in any part of Rajasthan was repealed. The Court noted that a key issue before it was whether the operation of Section 30 resulted in the abrogation of the agreement dated 17 April 1941, assuming that the agreement possessed the force of law in the State of Jodhpur. On 23 November 1949 the United State of Rajasthan issued a proclamation declaring that the Constitution of India, which was then being prepared by the Constituent Assembly, would become the Constitution for the State of Rajasthan. The Constitution of India came into force on 26 January 1950, and from that date Rajasthan assumed the status of a Part B State. For the purpose of the two appeals, the Court identified three distinct phases in the constitutional evolution: first, the State of Jodhpur, whose ruler possessed complete sovereignty and exercised legislative, executive and judicial powers; second, the United State of Rajasthan, into which Jodhpur was merged on 7 April 1949 by the Covenant recorded in Appendix XL of the White Paper; and third, the Part B State of Rajasthan created under the Constitution of India on 26 January 1950, with Jodhpur becoming part of that larger state.

The Court further observed that both excise duties (excluding alcoholic liquors and similar products) and taxes on non‑agricultural income fall within List I of the Seventh Schedule of the Constitution of India. Pursuant to Section 11 of the Finance Act, 1950, the provisions of the Central Excises and Salt Act, 1944 together with all rules and orders made under it were extended to the territory of Rajasthan effective 1 April 1950. Accordingly, the excise officers of the Union of India began to recover excise duties in the newly integrated territory.

The Union of India had recovered from the appellant a sum of Rs. 4,05,014-12-0 as excise duty for goods that the appellant had manufactured and produced during the period from 1 April 1950 to 31 March 1952. The appellant acknowledged that it paid this amount, but it did so under protest, asserting that the demand was unlawful. On 16 April 1952, the appellant instituted legal proceedings by filing a plaint in the court of the District Judge at Jodhpur. In the plaint the appellant set out several averments supporting its claim that the respondents were not entitled to realise excise duty from it because of an agreement dated 17 April 1941. The appellant sought four specific reliefs: first, a declaration that the 1941 agreement bound all the respondents; second, a directive that the amount of excise duty already realised be refunded together with interest calculated at six per cent per annum; third, a permanent injunction restraining the Union of India, the State of Rajasthan and their servants, agents and officers from ever again realising any excise duty from the appellant; and fourth, an order directing the State of Rajasthan to reimburse, from time to time, any excise duty that the appellant might be compelled to pay to the Union of India pursuant to the indemnity clause contained in the 1941 agreement. The learned District Judge framed several issues for trial and, after hearing the case, held substantially that the 1941 agreement was not binding on the respondents. He further concluded that the agreement had become frustrated by subsequent events and, consequently, was unenforceable. An appeal against the District Judge’s decision was filed in the High Court, which affirmed the principal findings of the learned District Judge.

The facts presented in Criminal Appeal No. 214 of 1956 were identical to those described above, the only distinction being that the present appeal concerned the liability of the appellant to pay income‑tax rather than excise duty. Once again the appellant based its claim on the agreement dated 17 April 1941, contending that the agreement bound the respondents and that the appellant could not be demanded to pay income‑tax under the provisions of the Indian Income‑Tax Act, 1922, which had been extended to the whole of India, except the State of Jammu and Kashmir, by amendments introduced through the Finance Act, 1950. In support of its contention that the 1941 agreement was binding on the respondents and that the findings of the lower courts were erroneous, the appellant advanced two principal lines of argument before the Court. The first line asserted that the 1941 agreement itself constituted law because it represented the command of the Ruler of Jodhpur, who at that time possessed full sovereignty and exercised legislative, executive and judicial functions in a single person. The appellant’s counsel further described the agreement as a “legislative contract” that continued to have legal effect.

The appellant first argued that the agreement dated 17 April 1941 remained in force after Jodhpur merged into the United State of Rajasthan because section 3 of the Rajasthan Administration Ordinance, 1949 expressly provided that all laws existing in any covenanting state at the moment the ordinance commenced would continue to be operative. It was explained that, for the purpose of that provision, the term “law” was intended to include any rule, order or bye‑law that had been made by a competent authority in a covenanting state and that therefore possessed the force of law within that state. The appellant maintained that the 1941 agreement had been sanctioned by the Ruler of Jodhpur, who at that time exercised the full suite of sovereign powers—legislative, executive and judicial—and that the agreement consequently constituted a special law of Jodhpur. On the basis of section 3 of the ordinance, the appellant asserted that this special law automatically survived the merger. Further, when the Rajpramukh of the United State of Rajasthan issued the Rajasthan Excise Duties Ordinance, 1949 (Ordinance No. XXV of 1949), the appellant contended that section 30 of that ordinance did not repeal or abrogate the special law embodied in the 1941 agreement. After the Constitution came into force on 26 January 1950, Rajasthan became a Part B State, and article 372 of the Constitution was applied, which, according to the appellant, allowed the continuation of the special law. The appellant also argued that the Finance Act, 1950 did not expressly or implicitly repeal the special law, and therefore the agreement continued to bind the respondents. This constituted the first line of argument. The second line of argument presented by the appellant was that the 1941 agreement was purely contractual and not legislative in character. Nevertheless, the appellant’s counsel submitted that even as a contract the instrument created enforceable rights for one party and corresponding obligations for the other. Those rights and obligations, it was said, had been accepted by each successive sovereign authority: first by the State of Jodhpur, then by the United State of Rajasthan, and finally by the Part B State of Rajasthan. The appellant argued that this acceptance brought the contract within the ambit of article 295(1)(b) of the Constitution, which had become operative on 26 January 1950. Under article 295, any rights and liabilities that had previously belonged to Jodhpur or to the United State of Rajasthan would, to the extent that they related to matters enumerated in the Union List, become the rights and liabilities of the Government of India. The appellant further contended that article 295 represented a constitutional guarantee, and that any law enacted in contravention of that provision would be void to the extent of the violation. In addition to these two principal approaches, the appellant’s counsel submitted that because the contract concerned a right to property, the appellant could not be deprived of that right without infringing the constitutional guarantees under articles 19 and 31. The counsel also argued that the district judge’s finding of frustration of the contract was erroneous, and that, in the appellant’s view, there was no frustration. Consequently, the appellant claimed that it was entitled to a refund of the duty or tax that it had paid to the Union Government from the State of Rajasthan, relying on clause 6 of the 1941 agreement.

In this case the Court noted that the appellant claimed it should receive a refund of the duty or tax it had paid to the Union Government from the State of Rajasthan, relying on clause six of the agreement. The Court then stated that it would consider the arguments presented by the parties in the order in which they had been outlined. Regarding the first argument, the Court concluded that the agreement dated 17 April 1941 was based solely on the mutual consent of the parties, was entirely contractual, and did not possess the characteristics of law; therefore it could not be treated as legislation. The appellant’s counsel had referred to several earlier decisions of this Court, namely Ameer‑un‑nissa Begum v. Mahboob Begum, Director of Endowments, Government of Hyderabad v. Akram Ali, Madhaorao Phalke v. the State of Madhya Bharat and Promod Chandra Deb v. the State of Orissa [[1962] Supp. 1 S.C.R. 405]. The Court observed that none of those authorities supported the appellant’s position. It pointed out that in the case of Madhaorao Phalke, the Court had examined whether an order issued by a sovereign ruler, who exercised combined legislative, executive and judicial functions, should be regarded as law, and emphasized that the character of the order must be considered. The Court’s own observation in that case was that the document under review “unambiguously impresses upon it the character of a statute or a regulation having the force of a statute.” The Court went on to explain that a similar reasoning applied in Ameer‑un‑nissa’s case and in the case involving the Director of Endowments, Government of Hyderabad, where the matter concerned the effect of Firmans issued by the Nizam, who at that time was an absolute ruler. In those precedents the Court held that the Firmans operated as law because the Nizam issued them to determine the rights of his subjects in all domestic matters; the Firmans derived their authority not from the consent of any party but from the sovereign command of the Nizam, expressing his sovereign will. For instance, in Ameer‑un‑nissa’s case a Firman had set aside the decision of a Special Commission concerning certain claimants, and although a later Firman revoked the earlier one, it did not reinstate the Commission’s decision. The Court then quoted its earlier observation: “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 cannot be disputed that prior to the integration of Hyderabad State with the Indian Union and the coming into force of the Indian Constitution, the Nizam of Hyderabad enjoyed uncontrolled sovereign powers. He was the supreme legislature, the supreme judiciary and the supreme head of the executive, and there were no constitutional limitations upon his authority to act in any of these capacities. The ‘Firmans’ were expressions of the sovereign will of the Nizam and they were binding.”

The Court observed that a Firman could operate in the same manner as any other enactment; indeed, it could even displace any other law that was in conflict with it. As long as a specific Firman remained in effect, it alone would determine the rights of the parties involved, although the Nizam retained the power to cancel or alter that Firman at any moment he chose.

The Court held that these statements do not endorse the extreme proposition that every order issued by a sovereign ruler automatically becomes law. In the case of Promod Chandra Deb [1962] Supp. 1 S.C.R. 405, the Khorposh grants were examined in light of the rules set out in Order 31 of the Rules, Regulations and Privileges of Khajnadars, which the ruler of that State had accepted as the governing law for the rights of Khorposhdars. The Court concluded that those rules remained operative until they were amended by an authority competent to do so, and that the grants made pursuant to those rules continued to be valid. The Court further explained that none of the cited authorities establishes that every order of a sovereign who exercises all functions must be treated as law irrespective of the order’s nature or character. The true character of the order must be assessed, and for an order to qualify as law it must possess the attributes of a binding rule of conduct expressing the sovereign’s will, rather than merely reflecting the mutual consent of two parties in a bargain. The Court noted that it is unnecessary to delve into legal philosophy or to adopt a particular definition of law. Whether law is described as the command of a supreme legislature or as “a body of rules laid down for the determination of legal rights and duties which courts recognise,” a clear distinction exists between an agreement based solely on the parties’ consent and a law whose authority derives from the sovereign’s will. A contract is essentially a pact between two or more parties; a law is not such a pact but a compulsory rule of conduct sanctioned by sovereign authority. Accordingly, there is a valid difference between an agreement between parties, even when one of those parties is the sovereign ruler, and the general law governing agreements. The former rests on consensual agreement, whereas the latter expresses sovereign will. Applying this distinction, the Court observed that the agreement dated 17 April 1941, although endorsed by the ruler and presented as acting on his behalf, fundamentally rested upon consent. The Court had reviewed the correspondence leading to the agreement and noted a letter dated 22 April 1938 in which the ruler affirmed his sanction of the terms and concessions decided by his ministers in their meeting of 25 February 1938. The Court concluded that the correspondence demonstrated prolonged negotiations, proposals, counter‑proposals, offers and acceptances, indicating that even the ruler treated the matter as a contract between his government and the appellant. Consequently, describing such an agreement as “law” was deemed a misuse of the term.

The Court observed that a letter dated 22 April 1938 recorded the Ruler’s sanction of the terms and concessions that his Ministers had decided in their meeting of 25 February 1938. The Court noted that the correspondence presented to the Court did not support the appellant’s case; rather, it demonstrated that the negotiations involved lengthy discussions, proposals, counter‑proposals, offers and acceptances, all of which indicated that even the Ruler treated the matter as a contract between his Government and the appellant. Accordingly, 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. This process ultimately led to the execution of the agreement on 17 April 1941. The Court held that to describe such an agreement as “law” would be a misuse of the term, because the document originated from a contractual negotiation rather than from legislative authority.

The Court further examined clause 6 of the agreement, which purported to grant the appellant exemption not only from State excise duty but also from Federal excise duty, as well as exemption from State income‑tax and from Federal income‑tax, super‑tax or surcharge. The Court found it difficult to conceive any authority that the Jodhpur Ruler possessed to dispense with Federal excise duty or Federal income‑tax, and noted that if the clause were to be treated as law, it would exceed the Ruler’s competence. A sovereign may legislate within his own jurisdiction, but he cannot enact law for another sovereign; consequently, such an exemption would be a dead letter lacking legal force. Counsel for the appellant argued, rather naively, that the Ruler might influence another sovereign—if and when a Federation were to come into existence—to secure an exemption from Federal tax for the appellant. The Court expressed great doubt that such an assurance, even if it could be construed as a contractual promise, possessed the characteristics of a binding rule of conduct, and it was doubtful whether it could be enforced as a contract, let alone as law. Counsel for the respondents then referred to several other clauses, contending that the agreement as a whole could not be treated as law because some clauses merely assured that the State would take future action, such as clause 8, which promised to amend the law in the future. The Court found much force in that contention, observing that an assurance to amend the law at a later date could not be regarded as present law. When the Court pointed out these difficulties to counsel for the appellant, he suggested separating the various clauses of

In this matter, the Court considered the proposal to separate the agreement into distinct parts and to regard only those clauses that conferred a present right on the appellant as law. The Court expressed that such a dissection was not feasible because it would involve treating a portion of a clause as law while relegating the remaining portion to a mere agreement, a method that could not be justified. The Court then turned to clause 6 of the agreement and observed that this clause made no reference to excise duty or income‑tax that might be imposed by the Union of India. The Court noted that in 1941 no one could have foreseen the constitutional changes that occurred between 1947 and 1950, and that when the parties of that time spoke of Federal excise duty and Federal income‑tax they were thinking of the federation scheme outlined in the Government of India Act, 1935. That scheme, however, never became operative. Consequently, the Court found it difficult to treat the agreement as law concerning any tax or duty imposed by the Union Government when the agreement itself contains no mention of such taxes or duties.

The Court further warned that extending the argument to its logical extreme would imply that every order issued by a ruler would have to be obeyed by a succeeding sovereign, even orders of a trivial or oppressive nature, such as an order to beat a servant. The Court affirmed that the character of an order must be examined to determine whether it possesses the force of law. In this regard, Article 372 of the Constitution, which preserves existing law, must be interpreted to include only those orders that had the status of law at the time they were made. The Court also addressed the extensive discussion advanced by counsel concerning the notion of “legislative contracts,” a term primarily used in American jurisprudence to describe the limits imposed by the contract clause of the United States Constitution on state legislative actions affecting pre‑existing contracts. The Court held that those American decisions did not assist in resolving the present question, namely whether a purely contractual compact between private parties becomes law merely because one of the parties is the sovereign ruler. The Court observed that the American cases offered no guidance on this issue. Counsel also cited Halsbury’s Laws of England, Volume 8, Third Edition, paragraph 252, page 146, which explains that when a local or personal Act of Parliament confirms a void contract, the effect is to render the agreement fully valid. The principle stated there is that an Act of Parliament confirming a scheduled agreement transforms that agreement into a statutory obligation, to be read as if its provisions were incorporated into a section of the Act. The Court indicated that it could not discern how this principle applied to the present agreement.

The Court observed that the principle of a legislative contract had no relevance to the matter before it. No evidence was found to show that the agreement dated 17 April 1941 had ever been elevated to the status of law by the Ruler. On the contrary, the Court had already demonstrated that the agreement had consistently been treated as a private contract between two parties. The Court stressed that the term “legislative contract” does not possess any mystical quality; a contract is simply a compact between two or more parties and may be executory or executed. When a statute expressly adopts or confirms such a compact, the compact ceases to be a mere contract and acquires the force of law. That, the Court explained, is the entire meaning of a legislative contract, and in the present circumstances no legislative contract existed.

Having concluded that the April 1941 agreement was not a law, the Court found it unnecessary to decide 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 counsel for the appellant had argued that, as a matter of general principle, a later enactment of a purely general character is presumed not to disturb an earlier special provision unless the later statute clearly intends to create a rule of universal application, in which case the special provision must yield. The Court cited the authority from Halsbury’s Laws of England, vol. 36, paragraph 711, and the cases Williams v Pritchard (1790) ER 862 and Eddington v Borman (1790) 100 ER 863 in support of that principle.

The respondents, however, contended that section 30 of the Rajasthan Excise Duties Ordinance, 1949 expressly repealed all laws dealing with the matters covered by the ordinance, while section 3 dealt specifically with excise duties on goods produced or manufactured in Rajasthan. Therefore, they argued, there was no room for the maxim “generalia specialibus non derogant,” and section 30 unambiguously repealed any earlier statutes relating to excise duties or exemptions therefrom. The Court reiterated that it had already held the 1941 agreement to be neither law nor to possess the force of law, rendering a further determination on this point unnecessary. The Court added that the real issue was the legislature’s intention, and given the clear wording of section 30 of the 1949 Excise Duties Ordinance and the repealing provisions of the Finance Act, 1950, it would be difficult to sustain the view that the earlier special law continued in force.

The Court then turned to the second line of argument raised on behalf of the appellant. Regarding the Union Government and its officers, the Court found a concise but compelling answer. The agreement in question contained no term or undertaking relating to exemption from excise duty or income tax that might be imposed by the Union Legislature in the future.

The Court observed that the agreement contained no term or undertaking granting exemption from future excise duty or income‑tax that might be imposed by the Union Legislature. It reiterated that any such undertaking, to the extent it existed, referred only to Federal excise duty and Federal income‑tax, and that the Federation envisioned under the Government of India Act, 1935 never materialised. Consequently, the Union established under the Constitution of 1950 is fundamentally distinct from the contemplated Federation of 1935. In the absence of any provision ensuring exemption from excise duty or income‑tax by the Union Legislature, the Court held that the issue of successor sovereigns accepting such a term and incurring an obligation on 26 January 1950, pursuant to Article 295(1)(b) of the Constitution, could not arise. The Court stressed that a non‑existent term or undertaking cannot create a right or obligation for any party. On this concise basis, the Court concluded that the appellant’s claim must be dismissed against the respondents regarding the levy of excise duty or tax by the Union, without yet addressing whether the Ruler of Jodhpur or the United State of Rajasthan could lawfully bind future Union legislative action.

The Court then turned to settled jurisprudence, noting that an act of State constitutes the acquisition of sovereign powers over territory not previously part of the State, whether by conquest, treaty, cession, or other means. It explained that municipal courts recognised by the new sovereign possess authority to investigate and determine only those rights that the new sovereign has chosen to recognise or acknowledge, either expressly or by implication from circumstances, through legislation, agreement, or other means. The right asserted by the appellant originates from the agreement entered into by the Ruler of Jodhpur. The Court framed two critical questions: first, whether the succeeding sovereign, the United State of Rajasthan, recognised the right claimed by the appellant; second, whether the subsequent sovereign, the State of Rajasthan, recognised that right. Regarding the State of Rajasthan, the appellant’s principal claim relied on clause 6 of the agreement, which provides that if any duty or tax becomes payable by the company, the State will refund that amount to the company. Accordingly, the appellant sought from respondent No. 2 a refund of any duty or tax paid to the Union Government.

The Court noted the findings of the learned District Judge, who determined that the Ruler of Jodhpur acted under the agreement in granting customs concessions to the appellant and accepted royalty payments in accordance with clause 12 of the agreement. However, the District Judge observed that the question of excise duty never arose before the Jodhpur State, as no such duty was levied by that State.

The High Court examined the question of whether excise duty was levied in the State and, finding that it was not, Judge Jagat Narayan considered the evidentiary material and prepared a list of the relevant documents. He observed that the Director of Industries of the United State of Rajasthan had certainly demanded the payment of royalty both for the period that elapsed after that State was created and for arrears of royalty that accrued before its formation. Nonetheless, Judge Jagat Narayan concluded that, with respect to exemption from excise duty or a claim for refund, the United State of Rajasthan had never affirmed the earlier agreement. He explained his reasoning, stating: “What has to be determined is whether on the facts and circumstances appearing from the evidence on record it can be said that the United State of Rajasthan affirmed the agreement. I am firmly of the opinion that no such inference can be drawn. The state did not make up its mind whether or not to abide by the agreement and pending final decision the agreement was acted upon provisionally.” Accordingly, the Court held that no definitive confirmation of the agreement by the United State of Rajasthan could be inferred from the record.

Turning to the Part B State of Rajasthan, the Court found no evidence that this successor government had affirmed the agreement either. Justice Bapna concurred with his colleague and highlighted a letter dated 20 January 1950 sent by the Commissioner of Excise, Jodhpur, to the appellant. That letter informed the appellant that, under the Rajasthan Excise Duties Ordinance of 1949, it was liable to pay excise duty. The appellant replied, contending that excise duty could not be imposed because the 17 April 1941 agreement exempted it. Subsequent exchanges culminated in a response dated 10 May 1952, in which the Government of the State of Rajasthan declared that “the rights and concessions granted to the company and the liabilities and obligations accepted by the former Jodhpur State under the agreement are extraordinary, unconscionable and disproportionate to the public interest.” The correspondence 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 bought the cloth, and therefore the Government did not deem it necessary to grant an exemption. All of this correspondence was exchanged 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 ever affirmed the 1941 agreement. The Court saw no justification for departing from that conclusion based on the documents before it.

The Court noted that the newly formed sovereign, namely the United State of Rajasthan or the Part B State of Rajasthan, had not affirmed the agreement insofar as exemption from excise duty or income‑tax was concerned, and therefore the appellant was clearly without a cause of action. The counsel for the appellant relied upon Article 295(1)(b) of the Constitution, which reads as follows: “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. (2) 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 constituted a constitutional guarantee concerning the rights, liabilities and obligations mentioned in clause (b), and that no law could be enacted to alter those rights, liabilities and obligations. In support of this contention, the appellant referred to Article 245, which provides that, subject to the Constitution, Parliament may make laws for the whole or any part of the territory of India. The appellant’s position was that because Parliament’s law‑making power was subject to the Constitution, the constitutional provision of Article 295, being a part of the Constitution, controlled Parliament’s authority to legislate on the rights, liabilities and obligations referred to in Article 295(1)(b). Consequently, the appellant claimed that Parliament could not pass any law that would modify those rights, liabilities or obligations. The Court expressed the view that this interpretation of Article 295 was not correct. However, before addressing the proper interpretation of Article 295, the Court indicated that if the United State of Rajasthan had not affirmed the agreement, the appellant possessed no enforceable right against either the United State of Rajasthan or the Part B State of Rajasthan.

In this case the Court explained that, under Article 295(1)(b), a right or liability that existed for an Indian State listed in Part B of the First Schedule could become a right or liability of the Government of India. However, if such a right did not exist before the Constitution came into force and could not be enforced against any government at that time, it could not later be transferred to another government under Article 295(1)(b). The Court described the overall design of Article 295 as dealing with succession of property, assets, rights, liabilities and obligations. Paragraph (a) of the article provides that, from the date the Constitution commenced, all property and assets that were immediately before that date vested in a Part B State shall vest in the Union if those property and assets were held for purposes belonging to the Union. Paragraph (b) provides that all rights, liabilities and obligations of the Government of a Part B State, whether they arise from contracts or from any other source, shall become the rights, liabilities and obligations of the Government of India when they were acquired or incurred for purposes of the Government of India. The Court noted that the article contains no language indicating that it permanently restricts the Union Legislature’s authority to modify or change the rights, liabilities or obligations that have vested in the Government of India.

The Court further observed that the explicit provisions of Article 295(10) address only two matters: the vesting of certain property and assets in the Government of India and the emergence of certain rights, liabilities and obligations on the Government of India. Accordingly, any legislation that attempts to alter the pattern of vesting or succession set out in Article 295 would be invalid to the extent that it conflicts with the article. Nevertheless, the article does not forbid Parliament from passing a law that changes the terms and conditions of a contract or a grant which gave rise to a liability of the Government of India. The Court held that the legislative competence of the Union Legislature, and even that of a State Legislature, is limited only by express prohibitions contained in the Constitution. In the absence of an express constitutional provision that absolutely or conditionally bars legislation on a particular subject, there is no limitation on the comprehensive powers of the legislature to enact laws on matters listed in the relevant constitutional lists. The Court concluded that Article 295 does not expressly prevent Parliament from legislating on matters such as income‑tax or excise duty in territories that became Part B States and were formerly Indian States, and that such a prohibition cannot be inferred into the article on the basis of any contract that might have been made by the former ruler of an Indian State with any person.

The Court observed that Article 295(1)(b) expressly subjects the rights, liabilities and obligations mentioned in that provision to any agreement that may be concluded between the Government of India and the Government of the State. Accordingly, an agreement was executed on 25 February 1950 between the President of India and the Rajpramukh of Rajasthan. To explain the origin of that agreement, the Court noted that the Government of India had, by a resolution dated 22 October 1948, constituted the Indian States Finance Enquiry Committee. The Committee was tasked to examine the existing structure of public finance in the Indian States and to consider the desirability and feasibility of integrating federal finance within those States. The Committee submitted its report exactly one year later, on 22 October 1949. The agreement between the President and the Rajpramukh quoted the Committee’s recommendations, specifically those in Part I of the Report together with Chapters I, II and III of Part II, and also the recommendations contained in Chapter VIII of Part II, to the extent that they applied to the State of Rajasthan. The parties accepted those recommendations subject to certain modifications, which the Court said need not be set out in detail for the purposes of the present judgment. The Court added that none of the modifications gave any benefit to the appellant.

The Court further explained that one of the modifications dealt with enterprises that are owned or operated by the State, providing them an exemption from income‑tax and similar levies. The appellant, however, was neither a State‑owned nor a State‑operated enterprise, and therefore could not rely on that particular modification. Another modification stipulated that State‑sponsored banks or similar State‑sponsored enterprises enjoying explicit tax exemptions would be treated as “Industrial Corporations” for the purpose of continuing the income‑tax concessions granted under paragraph 11(3)(b) of the Annexure to Part I of the Committee’s Report. The appellant was also not a State‑sponsored bank nor a State‑sponsored enterprise, so this provision was inapplicable to it. The Court then turned to a broader recommendation accepted in the agreement, which stated that any special financial privileges or immunities affecting federal revenues that the State conferred on individuals or corporations should ordinarily be continued by the Centre on the same terms for a maximum period of ten or fifteen years, and that the Centre could impose limits on such concessions if they appeared extravagant or contrary to the public interest. This recommendation clearly indicated that the Union retained the authority to modify or restrict any concessions it deemed excessive or against public welfare. Consequently, the Court concluded that, based on the agreement of 25 February 1950, the appellant could not claim a constitutional guarantee of exemption from excise duty or income‑tax.

In regard to the recommendation that formed part of the agreement executed between the President of India and the Rajpramukh of Rajasthan on 25 February 1950, the Court observed that the appellant could scarcely maintain that the recommendation conferred any constitutional guarantee allowing it to claim exemption from excise duty or income tax. The Court therefore considered that the appellant’s second line of argument had been fully answered. Turning to the submissions founded upon Articles 19 and 31 of the Constitution, the Court found that, on the basis of its own determination, the appellant possessed no enforceable right against either the State Government of Rajasthan or the Union Government as of 26 January 1950. Consequently, the Court held that the appellant could not lawfully rely on either Article 19 or Article 31 to support its claim. The Court further examined the appellant’s claim for a refund from the State of Rajasthan and reached the same conclusion. It noted that, because neither the United State of Rajasthan nor the Part B State of Rajasthan had affirmed the agreement dated 17 April 1941, the appellant was unable to enforce any right against respondent No. 2 on the foundation of that agreement.

The Court also noted that both the trial court and the High Court had examined the question of frustration of the contract and had found that the contract was indeed frustrated. In light of the conclusions already reached by this Court, it was deemed unnecessary to revisit that issue, and the Court expressly stated that it would not consider the matter further. Accordingly, for the reasons set out above, the Court concluded that the appeals presented no merit. The Court therefore dismissed the appeals, ordering the appellant to pay costs, including one hearing fee. The dismissal of the appeal was thus formally recorded.