Union Of India And Others vs Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd.

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 934-935 of 1963

Decision Date: 28 April, 1964

Coram: K.N. Wanchoo, P.B. Gajendragadkar, M. Hidayatullah, K.C. Das Gupta, N. Rajagopala Ayyangar

In the matter titled Union of India and Others versus Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd., the judgment was delivered on 28 April 1964 by the Supreme Court of India. The opinion was authored by Justice K. N. Wanchoo and the bench was composed of Justices K. N. Wanchoo, P. B. Gajendragadkar, M. Hidayatullah, K. C. Das Gupta, and N. Rajagopala Ayyangar. The parties before the Court were the Union of India and certain other respondents as petitioners and Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. as the respondent. The case is reported in 1964 AIR 1903 and 1964 SCR (7) 892, and it is cited in subsequent authorities including D 1971 SC 530, R 1971 SC 846, and R 1976 SC 43. The principal statutory provisions discussed were the Income‑Tax Act, exemption provisions granted under an agreement with the former State of Gwalior, the Finance Act 1950 (section 13), the Part B States (Taxation Concessions) Order 1950 clause 16, and the relevant constitutional articles 278, 295, and 372.

The Court recorded that in October 1946 a representative identified only as “B” wrote to the Government of the erstwhile State of Gwalior requesting that certain industries be established in Gwalior provided the government would grant specific facilities, notably exemption from taxation. The request was taken up before the Ruler of Gwalior, who on 18 January 1949 issued an order approving the proposals made by the minister, thereby including the desired tax exemption. Subsequently, on 7 April 1947 an agreement between the Government and B was executed in accordance with the ruler’s order dated 18 January 1947; the agreement conferred various facilities and concessions, among them a complete exemption from any form of income tax for a period of twelve years commencing from the date the factories began operations. Pursuant to this agreement, the appellant company was incorporated and the weaving division, which produced cloth from artificial silk yarn, commenced actual production in June 1949, while the staple‑fibre division became operational around 18 February 1954. In April 1948 the Ruler of Gwalior entered into a covenant with the rulers of several other princely states to form the United State of Madhya Bharat, delegating all duties and obligations of the individual rulers to the new United State as stipulated in Article VI of the covenant. The Madhya Bharat Act No. 1 of 1948, enacted on 13 December 1948, provided that all laws of the covenanting states would remain in force until expressly repealed or amended. With the coming into force of the Constitution of India on 26 January 1950, Madhya Bharat attained the status of a Part B State. Consequently, on 1 April 1950 the Indian Income‑Tax Act 1922 was extended to the Part B State of Madhya Bharat, and from the same date the Finance Act 1950 also became applicable, thereby repealing the pre‑existing income‑tax statutes in the territories to which the 1922 Act was extended.

In the case before the Court, the State of Madhya Bharat, which was designated as a Part B State under the Constitution, became subject to the Indian Income‑tax Act, 1922, and, on the same date, the Finance Act, 1950, also became applicable to that State. The operation of section 13 of the Finance Act, 1950, resulted in the repeal of all income‑tax laws that had previously been in force in the territories to which the Indian Income‑tax Act had been extended. Subsequently, on 25 February 1950, an agreement was executed between the President of India and the State of Madhya Bharat. That agreement was intended to remain in effect for ten years and incorporated certain recommendations of the Indian States Finance Enquiry Committee. In the same year, the Government of India issued the Part B States (Taxation Concessions) Order, 1950, and clause 16 of that order granted specific concessions to industrial undertakings that had previously received exemption from income‑tax by the ruler of an Indian State. In December 1950, the appellant company invoked clause 16 of the Concessions Order and applied for an exemption from the payment of income‑tax for the full twelve‑year period specified in the agreement dated 7 April 1947. The Government of India, however, decided to extend exemption from both income‑tax and super‑tax only for the assessment years 1950‑51 to 1954‑55 in respect of the weaving section of the company, while it rejected the claim for exemption concerning the staple‑fibre section, which had commenced operations in April 1954. On 23 November 1956, the company instituted a suit against the Union of India seeking a declaration that, under the 7 April 1947 agreement, it was entitled to a twelve‑year exemption from income‑tax and super‑tax beginning June 1949 for the weaving section and a twelve‑year exemption beginning February 1954 for the staple‑fibre section. In parallel, the company filed a petition before the High Court of Madhya Pradesh under article 226 of the Constitution, seeking the same reliefs.

The Court held that the order dated 18 January 1947 was not a law by which the Ruler of Gwalior granted an income‑tax exemption to the company; rather, it merely signified the ruler’s acceptance of the company’s request for concessions and directed his officers to proceed with the matter after that acceptance. The Court further explained that, in determining whether a specific order of a ruler continued to have the force of law under article 372 of the Constitution, it was necessary to distinguish among legislative, judicial and executive acts, and only those orders that could be characterized as legislative acts would survive as law under article 372. Finally, the Court observed that the fact that the obligations of the Ruler of Gwalior under the 7 April 1947 agreement had, by operation of article 295(1)(b), devolved upon the Government of India did not deprive Parliament of the authority to enact a valid law within its competence that did not violate constitutional limits, and such a law could affect the obligations created by the 7 April 1947 agreement.

In this case, the Court observed that after the extension of the Indian Income‑tax Act to the Part B State of Madhya Bharat and the enactment of the Finance Act, 1950, the exemption that the company claimed under the agreement dated April 7, 1947, could no longer continue. Consequently, the company could only rely on two benefits: firstly, a reduction in tax rates that were provided in the Concessions Order, and secondly, any exemption or concession that the Central Government might choose to grant under clause 16 of the same Concessions Order.

Further, the Court explained that Article 278(l)(a) of the Constitution merely envisaged an agreement between the Centre and the Part B States concerning the levy, collection and distribution of public revenues that were payable to the Government of India. That provision did not relate to any contract between a former Indian State and another party concerning such revenues, even if that contract had become an obligation of the Government of India under Article 295(1)(b).

The Court then turned to the agreement dated February 25, 1950, which dealt with concessions to corporations. It held that this agreement should be regarded as having been entered into under Article 295(1)(b) and not under Article 278(l)(a). As a result, the company could not invoke that agreement to argue that the April 7, 1947, agreement remained binding for a period of at least ten years.

The judgment concerned civil appeals numbered 934 and 935 of 1963, which arose from the judgments and orders dated August 12, 1960, and April 30, 1960, of the Madhya Pradesh High Court in Civil Suit No. 1 of 1958 and Miscellaneous Petition No. 101 of 1958 respectively. The appellants were represented by counsel for the Attorney‑General and other counsel, while the respondents were represented by counsel for the company. The judgment was delivered on April 28, 1964, by Justice Wanchoo. Both appeals, which were filed on certificates granted by the Madhya Pradesh High Court, raised common questions of law and were therefore heard together.

The respondent, Gwalior Rayon Silk Manufacturing (Weaving) Company Limited, was a company incorporated under the Indian Companies Act. To understand the company’s case, the Court found it necessary to set out the background of the company’s establishment. In October 1946, the firm known as Messrs Birla Brothers Limited, Gwalior, wrote to the Government of Gwalior indicating its intention to establish an industrial centre at a suitable location in Gwalior. The letter specified that the centre would house certain industries, provided that the Government would grant particular facilities. The facilities requested were: (i) allocation of free, adequate land at a suitable site; (ii) provision of free processing water if it could be obtained from a river, or, alternatively, water supplied at a highly concessional rate if sourced from a dam; and (iii) exemption from any form of income tax for a period of fifteen years measured from the date the factories commenced operations.

Upon receipt of this letter, the matter was processed by the Secretariat of the former State of Gwalior. The Secretariat noted that the decision to establish the industries would largely depend on the Gwalior Government’s response to the facilities sought. It also observed that no definitive scheme for the proposed industrial centre had been submitted; only tentative proposals had been offered to determine whether the State was willing to grant the requested concessions. The Secretariat highlighted that the principal issue for consideration was the request for exemption from income tax for fifteen years. It further pointed out that at that time no income tax was levied in the State, and that granting such an exemption would encourage the establishment of the industries, which would later generate taxable income for the State. Consequently, the Secretariat proposed that the requested concessions might be granted. Later, however, the period of exemption from income tax was reduced from fifteen years to twelve years.

The Secretariat of the former State of Gwalior recorded that the decision to set up industries in the state would largely depend on the facilities requested by the petitioner. It also noted that no detailed scheme for the proposed industrial centre had been submitted; only tentative proposals were presented to determine whether the State was prepared to grant the requested concessions. The Secretariat identified the principal issue as the request for exemption from any form of taxation on income for a period of fifteen years. At that time the State did not levy any income‑tax, and the Secretariat observed that granting such an exemption would encourage the establishment of the industries, which would later generate taxable income for the State. Consequently, the Secretariat proposed that the requested concessions could be granted. Subsequently, the proposed exemption period was reduced from fifteen years to twelve years, and the Secretariat recommended that this reduced term might still serve to attract industrial development. The matter was finally placed before the Ruler on 18 January 1947, and he issued an order stating that the minister’s request dated 15‑11‑1946 was sanctioned, that exemption from any form of taxation on income for twelve years from the date the factories started would be granted, that the other two requested concessions should also be given, and that efforts should be made to establish and commence the factories as soon as possible. This order was communicated to Messrs Birla Brothers Limited, and on 7 April 1947 the Government of Gwalior and Messrs Birla Brothers entered into an agreement embodying the Ruler’s directives. The agreement expressly provided that, in accordance with the Ruler’s order, three facilities, privileges, concessions and benefits would be accorded to the company: first, the provision of sufficient and adequate land free of any cost, revenue or cess for constructing and erecting the factories; second, the arrangement for supplying adequate and sufficient quantities of suitable water on the most concessional terms possible; and third, the granting of exemption to the industries and any concerns promoted or to be promoted from payment of all taxes and duties of any kind on their income, profits, gains or business, whether presently levied or to be levied in the State of Gwalior, for a period of twelve years.

It was recorded that the period of benefit specified in the agreement was to be counted from the date on which the factory or factories of the industries mentioned in the agreement actually began to operate or started working. In accordance with that provision, the company commenced its operations and the first actual production of the weaving section, which manufactured cloth from artificial silk yarn, took place in June 1949. The record further indicated that the staple‑fibre section of the enterprise started its own actual work on or about 18 February 1954. Thus the company was established and began its commercial activity in the territory that had formerly been the Gwalior State, doing so in pursuance of the agreement dated 7 April 1949. The narrative then turned to the constitutional developments that occurred in India before the weaving section could become operational. On 15 August 1947 India attained the status of a Dominion, and a series of mergers commenced which ultimately led to the proclamation of the Republic of India and the coming into force of the Constitution on 26 January 1950. During that process the rulers of Gwalior, Indore and certain other princely states in the region known as Central India entered into a covenant in April 1948 for the creation of the United State of Gwalior, Indore and Malwa, also referred to as Madhya‑Bharat. Article VI of that covenant stipulated that each ruler should, as soon as practicable and in any event no later than 1 July 1948, transfer the administration of his state to the Raj Pramukh. The article further provided that, upon such transfer, (1) all rights, authority and jurisdiction belonging to the ruler that were incident to the government of the covenanting state would vest in the United State; (2) all duties and obligations of the ruler pertaining to the government of the covenanting state would devolve upon the United State and be discharged by it; (3) all assets and liabilities of the covenanting state would become the assets and liabilities of the United State; and (4) any military forces of the covenanting state would become the military forces of the United State. Clause (2) of the same article added that where, pursuant to any merger agreement, the administration of another state was transferred to the Raj Pramukh, the provisions of clause (1) would apply to that state in the same manner as to a covenanting state. Subsequently, on 19 July 1948 the State of Madhya Bharat acceded to the Dominion of India. Later, on 24 November 1949 the Raj Pramukh of Madhya Bharat issued a proclamation accepting the provisions of the Constitution of India that were to be framed for Madhya Bharat. When the Constitution of India came into force on 26 January 1950, the United State of Gwalior, Indore and Malwa became a Part B state within Madhya Bharat. In the meantime, on 13 December 1948 the United State of Gwalior, Indore and Malwa (Madhya‑Bharat) Regulation of Government Act, No I of 1948, had been passed, laying further legal groundwork for the new constitutional order.

Section 4 of the United State of Gwalior, Indore, Malwa (Madhya‑Bharat) Regulation of Government Act, No 1 of 1948, stated that when the administration of any covenanting State was taken over by the Raj Pramukh or when any State merged into the United State, all existing laws, ordinances, Acts, rules and regulations that possessed the force of law in that State would continue to operate until they were repealed or amended under the provisions of the succeeding section. The provision further directed that such statutes should be interpreted as if any reference to the Ruler or Government of the State were a reference to the Raj Pramukh or to the Government of the United State, respectively.

The company argued that, by virtue of this Act read together with Article VI of the covenant, the liabilities of the covenanting States automatically devolved upon the United State of Gwalior, Indore, Malwa (Madhya‑Bharat). The company further contended that, under clause (b) of Article 295(1), the commencement of the Constitution caused all rights, liabilities and obligations of the Government of any Indian State that corresponded to a State listed in Part B of the First Schedule to become the rights, liabilities and obligations of the Government of India, provided that the purposes for which such rights were acquired or liabilities incurred before the Constitution’s commencement related thereafter to matters enumerated in the Union List. This transition was subject, however, to any agreement that the Government of India might have entered into with the concerned State. Accordingly, the company maintained that the obligation incurred by the Ruler of Gwalior pursuant to the agreement dated 7 April 1947 became, on 26 January 1950, an obligation of the Government of India under clause (b) of Article 295(1). On 1 April 1950, the Indian Income‑Tax Act was extended to the Part B State of Madhya‑Bharat, and on that same date the Finance Act (No XXV of 1950) also became applicable, thereby making income‑tax chargeable on any income accruing or arising in Madhya‑Bharat, which had by then become part of India. Section 13 of the Finance Act, 1950 provided that if, immediately before 1 April 1950, any law relating to income‑tax, super‑tax or tax on profits of business was in force in any Part B State other than Jammu and Kashmir, Manipur, Tripura, Vindhya Pradesh or the merged territory of Cooch‑Behar, such a law would cease to have effect except for the purposes of levy, assessment and collection of income‑tax and super‑tax for periods not covered by the previous year’s assessment under the Indian Income‑Tax Act, 1922, for the year ending 31 March 1951 or any subsequent year, or, as the case might be, for the levy, assessment and collection of tax on profits of business for any chargeable accounting period ending on or before 31 March 1949. The effect of this provision was to repeal all existing income‑tax laws in the areas to which the Indian Income‑Tax Act was extended from 1 April 1950.

In that period the provision which stated that the relevant period ended on or before the thirty‑first day of March 1949 operated to repeal every law relating to income tax in its broadest sense that had been in force in those parts of India to which the Indian Income‑tax Act was extended from the first day of April 1950. Subsequently, the Government of India entered into agreements with the Part B States in accordance with the recommendation of the Indian States Finances Inquiry Committee for 1948‑49, which is hereinafter referred to as the Enquiry Committee. The agreement executed with the State of Madhya Bharat incorporated the recommendations of that Committee contained in Part 1 of its report and the chapters identified as I, II, III of Part II of the report, to the extent that they applied to Madhya Bharat, together with the recommendations set out in Chapter IX of Part II of the report. The parties accepted those recommendations subject to certain modifications, and the agreement remained in force for a period of ten years. In order to address difficulties that might arise from applying the Indian Income‑tax Act of 1922 to Part B States and to other areas that had merged with India, section 60‑A was inserted in the Income‑tax Act. That section empowered the Central Government, if it considered it necessary or expedient, to make an exemption, a reduction in rate or any other modification in respect of income tax for merged territories, any Part B State, or Chandernagore, so as to avoid hardship, remove anomalies or resolve any difficulty that might result from extending the Act to those territories. By exercising this power, the Central Government issued the Part B States (Taxation Concessions) Order, 1950, hereinafter referred to as the Concessions Order, which prescribed reduced rates of income‑tax and super‑tax for the Part B States. Clause 16 of that Order was particularly relevant for the present case. Clause 16 provided a concession to industrial undertakings, stating that when an industrial undertaking situated in any State claimed that it had obtained an exemption or concession in respect of income‑tax or super‑tax from the ruler of an Indian State and had been enjoying such benefit immediately before the appointed day, the undertaking was required to submit an application to the Commissioner of Income Tax. The application had to contain specific particulars, namely: the name of the industrial undertaking; its status, whether a public or private company, a firm, an individual or a Hindu undivided family; the nature of its business; the date on which the business commenced; the nature of the concession granted; the period for which the concession was granted; and the unexpired period of the concession after the appointed day. Furthermore, every such application had to be accompanied by the original orders of the Indian State granting the concession together with a certified copy of the order. The Commissioner, after obtaining any additional information he deemed necessary, was required to forward the application to the Central Government, which, after considering all the circumstances of the case, could grant such relief as it thought appropriate.

The Order required that the Indian State granting the concession must also supply a certified copy of the original order. Clause 3 then directed that the Commissioner, after obtaining any additional information he deemed necessary, must forward the completed application to the Central Government. The Central Government, after considering all the circumstances of the case, was authorised to grant any relief it considered appropriate.

In December 1950 the company submitted an application under clause 16 of the Concessions Orders seeking relief from income‑tax and super‑tax. In November 1951 the Government of India replied that it would exempt the company from both taxes for the assessment years 1950‑51 through 1954‑55, but only with respect to the weaving section of the business. The company, relying on the agreement of 1947, subsequently requested exemption for the entire twelve‑year period contemplated by that agreement. The Government asked the company to file a fresh application and eventually granted an additional exemption for the weaving section covering the five years from 1955‑56 to 1959‑60. The company’s request for a similar exemption for the staple‑fibre section, which had commenced operations in April 1954, was declined. Meanwhile, the Income‑Tax Officer, A Ward of Gwalior, initiated assessment proceedings against the company. Assessment orders were issued in March 1955, March 1956 and March 1957 for the weaving section, relating respectively to the assessment years 1950‑51, 1951‑52 and 1952‑53. The company appealed these orders to the Assistant Appellate Commissioner, contending that it was entitled to exemption under the April 7 1947 agreement that was based on the Ruler of Gwalior’s order dated January 18 1947. Consequently, on November 23 1956 the company filed a suit against the Union of India seeking a declaration that, pursuant to the January 18 1947 order and the subsequent agreement identified as L/P(D)ISCI‑30, it was entitled to exemption from income‑tax and super‑tax and, alternatively, other reliefs. The suit was transferred to the High Court in 1958 on the company’s application under Article 228 of the Constitution. While the suit was pending, the company also filed a writ petition under Article 226 on September 11 1957, asserting that, by virtue of the January 18 1947 order and the accompanying agreement, it should receive exemption from income‑tax and super‑tax for twelve years beginning June 1949 for the weaving section and for twelve years beginning February 1954 for the staple‑fibre section, along with any consequential reliefs. The High Court of Madhya Pradesh accepted the company’s petition, issued a direction restraining the Union of India and its officers from making any assessment under the Income‑Tax Act or from levying or collecting income‑tax or super‑tax in contravention of the exemption granted by the April 7 1947 agreement, and set aside the income‑tax authorities’ proceedings that had been pursued in violation of that exemption.

In considering the effect of the decision on the writ petition, the High Court applied the same decree that had been issued in the original suit. The High Court, however, issued certificates permitting the Union of India and its officers to appeal to this Court, which resulted in the filing of two separate appeals before the Supreme Court: one challenging the decree that was passed in the suit and the other challenging the order made in the writ petition. Although there are two distinct appeals, the Court noted that the matters raised in both appeals are identical.

During the proceedings before the High Court, the company advanced three principal contentions. First, it contended that the order dated 18 January 1947 constituted a special law. The company argued that this order was given continued effect by the State of Madhya Bharat through Act No. 1 of 1948 and that it persisted after the Constitution came into force by virtue of Article 372. Moreover, the company maintained that the order had not been repealed by either the extension of the Income‑Tax Act to the State of Madhya Bharat, which became effective on 1 April 1950, or by Section 13 of the Finance Act 1950, which applied to the same State from the same date. To support this position, the company relied upon the agreement between the President of India and the State of Madhya Bharat dated 25 February 1950, asserting that the agreement demonstrated an intention not to repeal the special law merely by extending the Income‑Tax Act or by invoking Section 13 of the Finance Act.

Second, the company submitted an alternative argument. It claimed that, if the order of 18 January 1947 did not possess the force of law, then the agreement dated 7 April 1947 between the Ruler of Gwalior and the company created an obligation that bound the former State of Gwalior. The company further argued that this obligation continued to bind the State of Madhya Bharat because it existed before the Constitution came into force and was upheld by Act No. 1 of 1948 read with Article VI of the covenant. The company added that, under Clause (b) of Article 295(1) of the Constitution, that obligation devolved upon the Government of India. Because the obligation had become a constitutional obligation, the company asserted that it could not be altered by the extension of the Income‑Tax Act to the Part B State of Madhya Bharat together with the Finance Act 1950, and that only a constitutional amendment could remove it, as Clause (b) of Article 295(1) elevated the obligation to a status beyond alteration by ordinary legislation.

Third, the company relied upon the agreement between the President of India and the State of Madhya Bharat dated 25 February 1950, which was executed under Article 278 of the Constitution. The company contended that this agreement was binding under Article 278(1)(a) of the Constitution and that the effect of the agreement was to ensure that the concessions granted in favor of industrial corporations would continue unabated and could not be overridden even by the enactment of subsequent legislation.

The High Court held that the order dated 18 January 1947, issued by the Ruler of Gwalior State, possessed the character of law. The Court observed that the order continued to operate because it was incorporated by Act I of 1948 of the State of Madhya Bharat and by virtue of Article 372 of the Constitution. Consequently, the extension of the Income‑tax Act to Madhya Bharat, read with section 13 of the Finance Act 1950, did not repeal the 1947 order. Further, the Court said that clause (b) of Article 295(1) of the Constitution imposed a positive duty on the Government of India to honour the obligations that flowed from the order. Accordingly, the Government of India was bound to maintain the tax exemption irrespective of the 1950 statutory changes. The Court summarized its findings as follows: first, the 18 January 1947 order exempting the company from taxation functioned as law and the agreement executed on 7 April 1947 created an enforceable duty on the Gwalior Government to maintain that exemption; second, sections 3 and 4 of Madhya Bharat Act No 1 of 1948 gave legislative recognition to the company’s right to the exemption and obliged the State of Madhya Bharat to fulfil the Ruler’s commitment; third, this State obligation, by virtue of Article 295(1)(b), transferred to the Government of India as a constitutional duty; fourth, a proper construction of the relevant provisions of the Income‑tax Act, section 13 of the Finance Act 1950, and clause 16 of the Taxation Concessions Order 1950 showed that they did not abrogate the specific exemption granted to the company, thereby confirming the company’s claim for tax exemption.

The High Court did not address the argument based on Article 278, although counsel for the company later raised it in support of the High Court’s conclusions. The issues that the High Court examined are identical to those now before this Court, and the present Court will consider them sequentially. The initial question for determination is whether the order of 18 January 1947 qualifies as a law. The company argues that the order must be evaluated independently of the subsequent 7 April 1947 agreement; when viewed in isolation, the company contends that the order should be treated as law.

On the other hand, the Attorney‑General argued that the order of 18 January 1947 was issued by the Ruler as part of a process that began with a letter from Birla Brothers Limited dated 17 October 1946 and concluded with the agreement dated 7 April 1947. Birla Brothers Limited had requested certain concessions that would enable it to establish specific industries in Gwalior, and that request was examined by the Secretariat of the former State of Gwalior. Because such concessions could not be granted without the Ruler’s sanction, the matter was placed before the Ruler for his decision on whether to grant the concessions. The order dated 18 January 1947, the Attorney‑General contended, was merely the Ruler’s acceptance of the petition for those concessions and it ultimately led to the agreement of 7 April 1947. Accordingly, the Attorney‑General submitted that the order must be interpreted in the context in which it was passed and, if read in that context, it could not be regarded as a law. Before addressing the rival submissions, the Court wished to clarify the position regarding orders issued by absolute rulers. The High Court had relied on two earlier decisions of this Court, namely Ameer‑un‑Nissa Begum v. Mehboob Begum (1) and Director of Endowments, Government of Hyderabad v. Akram Ali (2). In those cases it was held that the Firmans represented the sovereign will of the Nizam, were binding in the same manner as any other law, and that, as long as a particular Firman was in force, it alone regulated the rights of the parties concerned, so that the Nizam’s word constituted law. The High Court based its conclusion that the order of 18 January 1947 was law on those general observations. Since that time, however, this Court has examined those observations in three further cases: Maharaja Shree Umaid Mills Ltd. v. Union of India (1), State of Gujarat v. Vara Fiddali Badruddin Mithibar (2) and Rajkumar Narsingh Pratap Singh Deo v. State of Orissa (3). In those decisions it was emphasized that the earlier observations were not intended to create a sweeping rule that, in the case of an absolute monarch, no distinction exists between legislative and executive acts. In Maharaja Shree Umaid Mills Ltd. the agreement between the Ruler and the mills, which arose from the Ruler’s order, was characterized as a simple contract rather than a law within the meaning of Article 372. The same view was endorsed by four judges in the Vara Fiddali Badruddin Mithibar case. Finally, in the Rajkumar Narsingh Pratap Singh Deo case, the Court held that it had not established a universal proposition negating the recognised distinction between legislative and executive actions of an absolute monarch.

The Court explained that the distinction between legislative and executive acts remains relevant when examining orders issued by an absolute monarch. It held that whenever a controversy arises as to whether a particular order of an absolute ruler should be characterized as a legislative enactment, the court must consider all pertinent factors before reaching a conclusion. The factors identified by the Court included the nature of the order, the scope and effect of its provisions, the general setting and context in which it was made, and the method adopted by the ruler in promulgating the order as opposed to issuing executive instructions. The Court stressed that these considerations, together with any other related matters, must be examined before the judicial determination of the character of the order is made.

The Court added that the same thorough analysis is required when a party contends that a specific order of the ruler has been continued as law under Article 372 of the Constitution. It observed that it would be erroneous to assume that the framers of the Constitution intended to preserve every order of an absolute ruler, regardless of its nature, as a continuing law. When Article 372 speaks of the continuance of laws as of 1950, the Court said, the constitutional drafters must have been aware of the doctrinal distinction among legislative, judicial and executive acts, and that distinction must continue to guide courts in deciding whether any particular order of an absolute ruler qualifies as law for the purpose of Article 372.

The Court noted that although an order might not be subject to challenge by anyone in the state while the ruler was alive, and therefore the ruler’s word could, in that limited sense, operate as law within the state, this does not automatically make every such order a law that survives under Article 372. The Court cited the authorities in Maharaja Shree Umaid Mills Ltd. v. Union of India, State of Gujarat v. Vara Fiddali Badruddin Mithibar, and Rajkumar Narsingh Pratap Singh Deo v. State of Orissa (see citations (1) [1963] Supp. 2 S.C.R. 515, (2) A.I.R. 1964 S.C. 1043, (3) A.I.R. 1964 S.C. 1793) to underscore that only those orders which can be classified jurisprudentially as legislative acts will continue as law under Article 372. Consequently, the mere fact that an order dated 18 January 1947 was issued by an absolute ruler does not, by itself, render it a law for the purposes of Article 372. The Court therefore required an examination of all the aforementioned considerations to determine whether the order can be said, in legal terms, to be a law that may continue under Article 372.

Having set out the analytical framework, the Court turned to the facts surrounding the issuance of the order in question. It recalled that on 17 October 1946, Birla Brothers Limited wrote to the Government of Gwalior indicating its intention to set up an industrial centre in Gwalior, provided that certain facilities were granted. The letter requested three specific concessions: (i) allocation of adequate land free of cost at a suitable location, (ii) supply of water either free of charge or at a concessional rate, and (iii) exemption from any form of income tax for a period of fifteen years from the commencement of the factory. The Court indicated that these factual circumstances would be examined in light of the analytical criteria previously outlined.

In the matter before the Court, it was recorded that Birla Brothers Limited had asked for an exemption from every form of income tax for a period of fifteen years beginning on the date a factory was started. The record further showed that the contemplated industries would have been established in Gwalior only if the requested concessions were granted. The request was made in a letter dated 17 October 1946 and was taken up by the Secretariat of the former Gwalior State. Though the complete file was not produced before the Court, the materials that were available indicated that the first step was a note prepared by the office. After that, the Secretary of the relevant department gave his opinion, stating that Birla Brothers Limited would set up its industries in the State only if it received the concessions. Following the Secretary’s note, a vinanti was submitted by the Minister concerned. In that vinanti the Minister explained that no definitive scheme had been submitted; rather, only tentative proposals had been put forward so as to determine whether the State was prepared to grant the requested concessions. The Minister also observed that at that time the State of Gwalior did not have any income‑tax law, and that granting a concession from such taxation would encourage the establishment of industries which, after fifteen years, could become liable to income tax and thereby generate additional revenue for the State. On this basis, the Minister recommended that the income‑tax concession, together with the other two concessions, should be granted. The Minister’s report was dated 15 November 1946. Two days later, on 17 November 1946, the Ruler entered a brief note on the matter, stating “Submit personally on my return”. The Court noted that this instruction, which merely required the Minister to submit papers after the Ruler’s return, could not be regarded as a law, even though it was an order directing the Minister to act. Subsequently, on 17 January 1947, a Guzarish was issued. That Guzarish declared that the concessions originally sought for fifteen years would be accepted if they were limited to twelve years, and it emphasized that without those concessions Birla Brothers Limited would not be induced to establish factories in the State. Finally, the Court observed that the Ruler issued a Darbar Order on 18 January 1947. The order, which appeared on the relevant file, had never been published, although it was customary at that time in Gwalior to publish statutes. The Court further noted that, apart from the lack of publication, the circumstances surrounding the issuance of the order clearly indicated that the Ruler was merely directing his officers to proceed with the three concessions requested by Birla Brothers Limited, and the form of the order itself suggested that it was not intended to create a law.

The Court observed that the order dated January 18, 1947 could not be regarded as law because it consisted of only three sentences. The first sentence merely stated that “the Guzarihs of the Minister… dated 15‑11‑1946 is sanctioned.” The Court noted that a sanction of this kind, which relates to particular concessions, does not possess the character of law. The second sentence read, “exemption from any form of taxation on the income for a period of 12 years from the date of starting of the factories is granted.” The Company argued that this clause should be treated as law. However, the Court pointed out that at the relevant time there was no income‑tax statute in the State of Gwalior. Consequently, the sentence could only be understood as the Ruler directing his officers to assure Birla Brothers Limited that, even if an income‑tax law were later enacted, the Company would not be subject to tax for twelve years. The Court further held that a promise to exempt the Company from a future income‑tax law cannot, in jurisprudential terms, be described as law. In other words, the sentence merely indicated that, should the Ruler later enact an income‑tax statute, he would incorporate a provision exempting Birla Brothers Limited for the specified period, and therefore, even taken alone, it could not amount to law.

The third sentence was divided into two parts. The first part declared that “the other two concessions he has asked for should be given.” The Court stressed that this statement could not be law, and the Company did not contend that the concessions concerning free land or water at a concessional rate were legislative in nature. The second part, quoted from the report, stated that “attempt should be made to establish and start these factories as early as possible.” The Court ruled that this directive likewise could not be described as law, and the Company made no claim to the contrary. Considering the order in its entirety, the Court concluded that the Ruler’s officers were merely conveying Birla Brothers Limited’s request for certain concessions so that the necessary provisions for land and water could be arranged. Accordingly, the order expressed the Ruler’s willingness to grant the requested concessions on the condition that the Company would commence industrial operations in Gwalior. The order was communicated to Birla Brothers Limited and was subsequently followed on April 7, 1947 by a formal agreement between the State and the Company.

In this case the Court observed that any uncertainty regarding the character of the Darbar Order dated 18 January 1947 was entirely removed by the subsequent execution, two and a half months later, of a formal agreement. That agreement expressly stated that it was being concluded in accordance with the Darbar Orders of 18 January 1947 and that its purpose was to grant certain facilities to Birla Brothers Limited. When the Court considered the entire sequence of events, starting with the letter addressed by Birla Brothers Limited on 17 October 1946 and ending with the agreement executed on 7 April 1947, it concluded that the January 18 order merely indicated the Ruler’s willingness to approve the requested concessions and authorised his officials to take the necessary steps to implement them. The Court declined to accept the company’s argument that the January order should be interpreted in isolation from the April agreement merely because the order itself did not expressly refer to a contract with Birla Brothers Limited. The absence of any reference to an agreement in the order, the Court held, does not alter its meaning in the surrounding circumstances. Consequently, the Court found no basis to treat the January 18 order as a law that conferred an income‑tax exemption on the proposed enterprise. Rather, the order represented a declaration of the Ruler’s acceptance of the concession request and an instruction to his officers to proceed with the necessary actions.

The Court further noted that the subsequent agreement of 7 April 1947, entered into between the Government of Gwalior and Birla Brothers Limited, incorporated the terms whose acceptance had been signified by the Ruler on 18 January. The designation of the January instrument as a “Darbar Order” was deemed irrelevant, because the order simply reflected the Ruler’s assent and was framed in that manner so that his officials could execute the decision. Accordingly, the Court held that the January 18 order could not be read independently of the April 7 agreement; it must be understood in the context of the whole series of negotiations that began with the October 17 letter and concluded with the April contract. In that context, the order was deemed a mere acknowledgment of the Ruler’s acceptance of the request and could not be treated as a law, even with respect to the clause concerning exemption from income tax. Moreover, the Court found that the form and substance of the order were contrary to the characteristics of a law.

It was observed that the order in question had never been published and existed only as a document kept in the relevant file. That circumstance, the Court said, indicated that the order could not be regarded as a law but rather represented a simple acknowledgment by the Ruler of Gwalior that he accepted the request made by Birla Brothers Limited. In the Court’s view, the order had to be understood as one stage in the series of negotiations that eventually produced the final agreement between the parties. To isolate the order from those negotiations and to describe it as a law would therefore be misplaced. Moreover, the parties had subsequently executed a formal written contract that incorporated the concessions granted by the Ruler. The contract was given as consideration for Birla Brothers Limited’s commitment to establish the named industries in Gwalior State. The existence of this binding contract was deemed decisive in rejecting the company’s argument that the order possessed the character of law. The Court emphasized that the contract, which reflected the intention of both the Government of the Ruler and Birla Brothers Limited, could not coexist with a separate law operating alongside it; the contractual obligations were mutually exclusive of any legislative enactment.

Having concluded that the order dated 18 January 1947 did not constitute a law, the Court found it unnecessary to examine whether, if it had been a law, it might have been repealed by the extension of the Income‑Tax Act in conjunction with section 13 of the Finance Act 1950 to the State of Madhya Bharat. Likewise, the Court held that it was not required to consider the possible effect of the agreement dated 25 February 1950 between the President of India and the State of Madhya Bharat on any question of repeal, nor to determine whether that agreement supported a view that repeal could not occur under the facts. The discussion then turned to an alternative contention founded on article 295(1)(b) of the Constitution, read together with the agreement of 7 April 1947. The company argued that, pursuant to article 295(1)(b), the obligation imposed on the Ruler by the April 1947 agreement transferred to the Government of India through the Government of Madhya Bharat, creating a constitutional obligation that could not be altered by the extension of the Income‑Tax Act to the Part B State from 1 April 1950. The company maintained that such a constitutional obligation could be removed only by a constitutional amendment and that no subsequent law, however valid, could extinguish the exemption granted by the agreement. In contrast, the Attorney‑General contended that article 295(1) merely addressed the devolution of property, assets, rights, liabilities and obligations of the former Indian States to the Republic of India at the time of its formation, and that it did not elevate contractual liabilities to a constitutional status that would bind the Government of India beyond the original parties.

The Attorney‑General argued that Article 295(1)(b) of the Constitution, which states that the liabilities and obligations of any Indian State that corresponds to a State listed in Part B of the First Schedule shall, in the circumstances specified, become the liabilities and obligations of the Government of India, merely indicates a substitution of parties for purposes of rights and liabilities arising from an agreement entered into by the former Indian State and a third party. According to his submission, the effect of Article 295(1)(b) is limited to replacing the former State with the Government of India for the particular incidents described in the provision; it does not transform contractual liabilities into a constitutional duty that binds the Union more strongly than they bound the original State. He further maintained that the article does not confer any special constitutional obligation on the Government of India to honour such contractual liabilities beyond what the original State would have been bound to honour. Consequently, the Government of India would be entitled to raise the same defences to the contract that the predecessor State could have raised. The Attorney‑General also asserted that Article 295(1)(b) does not restrain Parliament’s legislative power concerning matters covered by the contract, and that any valid parliamentary legislation, provided it falls within the competence of Parliament and does not breach constitutional limits, would prevail over the contractual obligations.

We agree with the Attorney‑General’s submission. Article 295 is situated in Part XII of the Constitution, the part that deals with finance, property, contracts and suits. This part is organized into three chapters. The first chapter addresses finance and includes provisions for a consolidated fund (Article 266), a contingency fund where necessary (Article 267), and the distribution of public revenues between the Union and the States (Articles 268 to 272), as well as grants by the Union to the States (Articles 273 and 275). Article 277 provides for savings concerning certain taxes, duties, cesses and fees that were lawfully levied by any Government before the Constitution commenced, and Article 278 authorises an agreement between the Union and the States for a period not exceeding ten years on specified matters. The remaining articles up to Article 284 in this chapter relate to the Finance Commission and contain miscellaneous financial provisions concerning public revenues. These financial provisions are unrelated to the legislative competence of Parliament or the State legislatures. By contrast, Articles 285 to 289 expressly affect legislative competence because they contain explicit provisions to that effect. Articles 290 and 291 deal with certain financial adjustments and the privy purses of Rulers. Chapter XI concerns borrowing and likewise does not touch upon legislative competence. The subsequent Chapter XII, which follows, deals with property, contracts, rights, liabilities, obligations and suits, and it is in this chapter that Article 294 provides for the devolution of property, assets, rights, liabilities and obligations between the Union and the former Provinces that became Part A States, while Article 295 provides a similar devolution concerning the former Part B States. These devolution provisions were necessary at the formation of the Republic, but neither Article 294 nor Article 295 imposes any restriction on the legislative authority of the Union or the States. Their purpose was simply to substitute the Union or the appropriate State in place of the former princely entities for the purposes of property and contractual relations.

In this part of the judgment the Court examined the provisions of Chapter 111 of the Constitution, which dealt with property, contracts, rights, liabilities, obligations and suits. Article 294 was explained as providing for the transfer of property, assets, rights, liabilities and obligations between the Union and the former Provinces that became Part A States when the Constitution came into force. Similarly, Article 295 was described as providing for the transfer of comparable property, assets, rights, liabilities and obligations between the Union and the former Part B States at the same point in time. The Court observed that these devolution provisions were required at the moment the Republic of India was created, but it stressed that neither Article 294 nor Article 295 placed any limitation on the legislative competence of the Union or the State legislatures. The Court noted that the provisions had to be enacted in view of List I and List II, which defined the respective powers of the Union and the States. However, the effect of the provisions, as far as rights, liabilities and obligations were concerned, was merely to replace the old British Indian Provinces or the former Indian States with the Union, Part A States or Part B States in accordance with the constitutional scheme set out in the Seventh Schedule. In other words, the devolution clauses were intended solely to substitute the newly formed Union or States for the pre‑existing entities, without creating any new or superior status for contracts that had been entered into by the former Indian States.

The Court further explained that the constitutional provisions did not grant any enhanced sanctity to contracts that had been executed by the old Indian States with private parties, nor did they impose any additional obligations on the Union or the newly formed Part A or Part B States beyond those that already existed under those contracts. The defences that were available to the former Indian States or British Indian Provinces would continue to be available to the Union or the newly created States in respect of those contracts. Consequently, the mere existence of Articles 294 and 295, which dealt with the devolution of rights, liabilities and obligations, did not alter the essential contractual nature of those agreements. The Court expressed that it could not comprehend the contention that pre‑existing contracts were transformed into constitutional obligations that could be altered only by a constitutional amendment and could not be affected by any law passed after the Constitution came into force. While some arguments had emphasized the phrase “shall be the rights, liabilities and obligations of the Government of India” in Article 295(1)(b) as indicating a mandatory directive to fulfil those obligations, the Court rejected that interpretation. It held that the wording merely indicated that the liabilities and obligations would lie with the Government of India, without bestowing any special protection or immunity from subsequent legislative action.

The Court explained that the obligations which, under Article 295(1)(b), were transferred to the Government of India were exactly the same obligations that had previously attached to the former Indian State that had originally entered into the contract. Consequently, the Government of India inherited exactly the same legal defences that the predecessor State could have asserted. The Court further observed that if, before the Constitution, a contract could be altered or nullified by a statute, the same result could be achieved after the enactment of Article 295(1)(b) by legislation. In other words, if the Union could have its contracts overridden or set aside by a law that was validly enacted, the obligations that now fell on the Union under Article 295(1)(b) did not possess any special sanctity or immunity from the operation of future statutes.

The Court noted that Article 294(b) contained language similar to that of Article 295(1)(b) and that the same analysis applied. To illustrate this, the Court considered a hypothetical situation in which the Dominion of India had entered into a contract that did not comply with section 175 of the Government of India Act, 1935, a provision corresponding to Article 299 of the Constitution. The Court held that it could not be argued that, merely because Article 294(b) declared that the liabilities and obligations of the Dominion of India became the liabilities and obligations of the Government of India, the Government of India would be barred from raising the defence that the contract was not binding because it had not been executed in accordance with section 175 of the 1935 Act. The Court clarified that the wording of Article 294(b) did not constitute a positive command that the devolved obligations must automatically be fulfilled.

Accordingly, the Court expressed firm confidence that neither Article 294 nor Article 295 imposed any mandatory duty on the Government of India to perform a contract regardless of whether the contract had been binding on the original State or whether it could be altered by valid legislation. The Court affirmed that, even after the devolution of rights and liabilities provided by Articles 294 and 295, the effect of those provisions was merely to replace the former States or British Indian Provinces with the Government of India or with Part A or Part B States, as appropriate. The Court stressed that the character of the rights and liabilities transferred by Article 295 was not changed by the Constitution and that any legal pleas or defences that could have been raised before the devolution remained fully available afterward. Hence, the Court concluded that no constitutional obligation arose from Article 295(1)(b) that would force the Government of India to honour contracts irrespective of whether the contracts were binding on the original State or whether they could be affected by legislation validly enacted after the Constitution came into force.

In addressing the issue, the Court referred to the earlier decision in Maharaja Shree Umaid Mills Ltd., where it was held that Article 295 contained no provision that permanently restrained the Union legislature’s authority to modify or alter the rights, liabilities and obligations that had vested in the Government of India. The Court explained that the legislative competence of either the Union or a State could be limited only by an express prohibition contained in the Constitution itself. Consequently, unless the Constitution expressly forbade legislation on a particular subject, either absolutely or conditionally, there was no restriction on the full powers that the legislature possessed to enact laws on matters enumerated in the relevant lists. The Court observed that Article 295 did not expressly forbid Parliament from passing an income‑tax law in territories that had become Part B States and that had previously been Indian States, and that such a prohibition could not be implied from any contract that the former Ruler of an Indian State might have made with any person. The Court then cited State of Rajasthan v. Shyam Lal, noting that even when Articles 294 and 295 cast liability or obligation upon the Government of India or upon a Part A or Part B State, that liability or obligation remained subject to any law subsequently enacted by the new State that repealed the old laws and the liabilities arising thereunder, provided that the new law was within the State’s competence and did not breach constitutional limits. The Court therefore concluded that the obligation of the Ruler of Gwalior, arising from the agreement dated 7 April 1947 and devolved to the Government of India by virtue of Article 295(1)(b), did not strip Parliament of its power to pass a valid law within its competence that might affect, modify or even completely supersede that obligation. The next step, the Court said, was to examine what legislation, if any, Parliament enacted after the Constitution came into force that might have impacted the 1947 agreement. The company had relied on the agreement dated 25 February 1950 between the President of India and the State of Madhya Bharat, which had accepted the recommendations of the Enquiry Committee. The Court noted that Part 11, Chapter 11 of those recommendations, specifically paragraph 11(4)(ii), stated that any special financial privileges or immunities affecting federal revenues granted by the State to individuals or corporations should ordinarily be continued by the Centre on the same terms, but only for a maximum period of ten (or fifteen) years and subject also to limitations on any concessions that might be extravagant or contrary to the public interest.

The Court observed that the recommendation—stating that special financial privileges and immunities granted by a State to corporations should ordinarily be continued by the Centre for a period not exceeding ten or fifteen years and that the Centre could also limit any such concession if it seemed extravagant or contrary to the public interest—formed an integral part of the agreement concluded between the President of India and the State of Madhya Bharat on 25 February 1950. On that basis, the Court noted that it was argued that the Government of India could not withdraw the exemption that had been granted under the earlier agreement dated 7 April 1947. The Court further explained that the 1950 agreement was executed pursuant to Articles 278, 291, 295 and 306 of the Constitution. In particular, the provision relied upon was entered into under Article 295(1), which provides for the devolution of property, assets, rights, liabilities and obligations, subject to any agreement that the Government of India may enter into with the government of a State. Consequently, the Government of India was bound to honour the 25 February 1950 agreement to the extent that it related to the devolution of such assets and obligations.

However, the Court emphasized that it was necessary to examine the exact terms of that agreement concerning special financial privileges and immunities that had been conferred on corporations by the former Indian States. The agreement specified that such privileges and immunities should “ordinarily” be continued by the Centre on the same terms, but only for a maximum period of ten or fifteen years. The Court highlighted the significance of the word “ordinarily,” indicating that the Centre was not absolutely compelled to maintain the privileges and immunities in precisely the same form, although it was generally expected to do so. The inclusion of “ordinarily” also signified that the Centre retained discretion to assess each privilege or immunity and to decide whether to continue it, and if so, in what shape and to what extent. Moreover, the agreement granted the Government of India the authority to limit any concession that it considered extravagant or against the public interest. This created a two‑fold limitation: first, the privileges and immunities were to be continued only ordinarily, implying that there could be cases where they would not be continued; second, the Government possessed a wide power to curtail those privileges if it deemed them excessive or detrimental to public welfare. Because this broad authority existed under the 1950 agreement, the Court concluded that the contention that the Government of India was bound to continue the privileges and immunities without any modification, solely on the basis of the 25 February 1950 agreement, could not succeed. The Court therefore proceeded to consider whether any subsequent provision had been enacted by the Government of India to implement the recommendation of the Enquiry Committee.

In this case the Court explained that the recommendation of the Enquiry Committee was made on 22 July 1949, although it was incorporated into the agreement dated 25 February 1950. The Court noted that section 60‑A was inserted into the Income‑tax Act by subsection 19 of the Taxation Laws (Extension to Merged States and Amendment) Act, No LXVII of 1949. Initially the provision applied only to merged territories, but when the Finance Act, 1950 extended the Income‑tax Act to the so‑called Part B States on 1 April 1950, section 60‑A was simultaneously amended to bring Part B States within its scope. The Court observed that the immunities and privileges of corporations previously discussed were therefore given effect in Part B States through the operation of section 60‑A as described. Section 60‑A authorises the Central Government, if it considers it necessary or expedient to avoid hardship, eliminate an anomaly, or remove any difficulty arising from the extension of the Income‑tax Act to Part B States, to issue a general or special order that may provide an exemption, a reduction in rate, or any other modification in respect of income‑tax for a particular class of income or for the whole or part of the income of any person or class of persons. The Court held that this statutory power clearly implements the Enquiry Committee’s recommendation. Subsequently the Court pointed out that the Concessions Order, in clause 16, specifically addressed concessions to industrial undertakings and authorised the Central Government, after taking into account all circumstances of each case, to grant such relief as it deemed appropriate. The Court further stated that the same Order also provided for lower rates of income‑tax for a period of time on all incomes accruing in a Part B State. Consequently, the position that emerged on 1 April 1950 was that the Income‑tax Act had been extended to Part B States by the Finance Act, 1950, making income‑tax payable on every income arising in those States subject to the terms of that Finance Act. In addition, the Concessions Order gave general relief to all taxpayers in Part B States by reducing income‑tax rates, and it contained a special provision in clause 16 for industrial undertakings situated in Part B States that had previously received an exemption or concession from the ruler of an Indian State and were enjoying such benefit immediately before 1 April 1950. The Court concluded that it was undisputed that Parliament possessed the competence to extend the Income‑tax Act to Part B States and to impose income‑tax and super‑tax on incomes accruing therein.

The Court observed that Parliament possessed the authority to extend the Income‑tax Act to Part B States and to subject incomes accruing in those States to both income‑tax and super‑tax by means of the Finance Act, 1950. In addition, Section 60‑A of the Income‑tax Act created a specific provision that allowed for exemption, reduction of rates, or other modifications concerning income‑tax payable in Part B States so as to avoid hardship, anomaly, or difficulty that might arise from the Act’s extension. Under the Concessions Order issued pursuant to Section 60‑A, rates were generally reduced, and Clause 16 of that Order contained a special provision granting concessions to industrial undertakings. The Court affirmed that all of these measures fell within Parliament’s competence and that the company did not contend that they breached any constitutional limitation. Consequently, when these provisions became effective on 1 April 1950, the exemption the company claimed under the Agreement dated 7 April 1947 was displaced by the legislative measures, leaving the company entitled only to (i) the rate reductions provided by the Concessions Order and (ii) any exemption or concession that the Central Government might grant under Clause 16 of that Order. The Court held that these statutory provisions clearly affected the exemption granted by the 1947 Agreement and, after 1 April 1950, the company could obtain only such concessions that were generally permissible under the Concessions Order or specifically under its Clause 16 for industrial undertakings. The Court further stated that these provisions superseded the Agreement and that the company did not dispute their validity. Accordingly, the Agreement was deemed to have been superseded, and the company could rely only on the benefits conferred by the Concessions Order. The Court rejected the argument that the obligation arising from the 1947 Agreement could not be altered by the extension of the Income‑tax Act to the Part B State of Madhya Bharat together with the Finance Act, 1950. Having already explained the scope of Article 295(1)(b), the Court found it unnecessary to amend the Constitution to affect the Agreement. The contention that the Union of India remained bound by the 1947 Agreement despite the legislative enactments was also dismissed. Therefore, the company could not invoke the 1947 Agreement for exemption and could only avail itself of the Concessions Order with respect to income accruing in Madhya Bharat. It was noted that the company had applied under Clause 16 of the Concessions Order and had been given

The Court observed that the company received only the exemptions specified for the weaving section under clause 16 of the Concessions Order, and that such relief constituted the full extent of the company’s entitlement. Regarding the staple‑fibre section, the company also sought exemption under the same clause, but the Government of India, after considering all circumstances, decided not to grant such exemption. Because that decision was made in accordance with law, the Court held that the company could not rely on the agreement dated 7 April 1947; that agreement was deemed to have been displaced by the legislative enactments that came into force on 1 April 1950 concerning income‑tax and super‑tax in the Part B State of Madhya Bharat.

The Court noted that reference had been made to the case of The South India Corporation Ltd. v. The Secretary, Board of Revenue on behalf of the company. After review, the Court found nothing in that decision that contradicted the present view and therefore deemed a detailed discussion of that case unnecessary.

Consequently, the Court expressed the opinion that the High Court was wrong in holding that the Government of India remained bound by the obligation undertaken by the Ruler of Gwalior to grant exemption to the company under the 7 April 1947 agreement, regardless of the tax legislation enacted from 1 April 1950 onward.

The final contention raised by the company concerned Article 278 of the Constitution. The company relied upon the agreement dated 25 February 1950, which had been previously referred to, together with the recommendation of the Enquiry Committee that had been incorporated into that agreement. The company argued that the Committee’s recommendation should be treated as an agreement within the meaning of Article 278, thereby making it binding for ten years and entitling the company to exemption for at least that period.

The Court rejected this argument, stating that it lacked merit. Firstly, the 25 February 1950 agreement was not solely founded on Article 278; it was a composite agreement invoking Articles 278, 291, 295(1) and 306. While the Court had earlier noted that the portion of the agreement dealing with corporations’ exemptions and concessions could be regarded as an agreement under Article 295(1), because it concerned obligations of the Government of India subject to any agreement with the concerned state, the Court saw no basis for classifying the exemption or concession provisions as an agreement under Article 278. The Court then indicated that the relevant text of Article 278(1), on which the company relied, would be quoted subsequently.

Article 278(1) provides that, notwithstanding any other provision of the Constitution, the Government of India may, subject to the conditions laid down in clause (2), enter into an agreement with the Government of a State that is listed in Part B of the First Schedule. The agreement may relate to the levy and collection of any tax or duty that is normally payable to the Government of India in that State, and to the distribution of the proceeds of such tax or duty in a manner that differs from the scheme laid down in this Chapter. Clause (2) of Article 278 merely fixes the maximum duration for which such an agreement can remain in force, specifying that the period may not exceed ten years. This article is situated in Chapter I of Part XII, a portion of the Constitution that we have previously considered only briefly. When the text of Article 278(1)(a) is read, it contains no reference to any agreement that might exist between the ruler of a State and a corporate entity. Instead, it envisions an agreement solely between the Government of India and the Government of a Part B State concerning the manner of levy, collection, and distribution of a tax or duty that is ordinarily a Union revenue. The provision itself is expressed as being “notwithstanding anything on the Constitution.” Earlier sections of the same Chapter already contain detailed rules for the levy and collection of various taxes and duties that are payable to the Union. For example, Article 268(1) deals with stamp duties and certain excise duties on medicinal and toilet preparations; these duties are levied by the Government of India but are collected by the States in which they arise, and the proceeds are assigned to those States. Similarly, Article 69 provides that certain other duties shall be levied and collected by the Union and then allocated to the States as prescribed. Article 270 addresses taxes on income other than agricultural income, mandating that they be levied and collected by the Union and distributed between the Union and the States according to the formula set out therein. Article 272 concerns Union excise duties other than those on medicinal and toilet preparations; it provides that such duties shall be levied and collected by the Union, and, if Parliament so legislates, amounts may be paid out of the Consolidated Fund of India to the States to which the duty applies, in whole or in part of the net proceeds. Consequently, the earlier part of the Chapter establishes the framework for the levy and collection of certain taxes and duties that are payable to the Union.

The effect of Article 278(1) is therefore limited to permitting, by agreement, a variation in the manner of levy, collection, and distribution of the proceeds of a tax or duty, compared with the scheme laid down in the earlier provisions of the Chapter. Article 278(1)(a) is confined to matters of public revenue – specifically, the levy and collection of such revenue and its allocation between the Government of India and the States. It authorises the Government of India to negotiate an agreement with any Government of a Part B State that would allow a departure from the existing statutory scheme concerning how a tax or duty is levied, collected, or how its proceeds are distributed, even if that departure is not consistent with the earlier Chapter provisions. Accordingly, Article 278(1)(a) does not pertain to any obligations that might arise from agreements between the rulers of Indian States and corporate entities, and it cannot be invoked to support such agreements.

The Court explained that Article 278(1) merely authorises, by agreement, changes in the way taxes and duties are levied, collected and the proceeds distributed, compared with the rules set out in the earlier part of the Chapter. Article 278(1)(a) concerns only the levy and collection of certain public revenues and their distribution between the Government of India and the States. Under this provision the Government of India may conclude an agreement with any State listed in Part B of the First Schedule, whereby the manner of levy and collection of any tax or duty that is payable to the Union, and the manner of distributing the resulting proceeds, may be altered even if such alteration departs from the original provisions of the Chapter. The Court noted that Article 278(1)(a) does not create or affect any obligations that arise from historical agreements between the rulers of former Indian States and other parties concerning exemptions from any tax or duty. Likewise, the provision does not impinge upon the legislative competence of Parliament or of State legislatures to enact laws within the scope of their respective powers. The effect of Article 278(1)(a) is limited to allowing, for a specified period, a deviation from the Chapter’s standard rules on levy, collection and distribution of any tax or duty, provided the deviation is based on an agreement between the Union Government and the Government of a Part B State. The Court observed that such power was necessary because, when many of the revenue sources of the States that later became Part B States were transferred to the Union in accordance with the division of taxation powers between List I and List II of the Seventh Schedule, a potential gap in the finances of those States could arise. Consequently, the Constitution empowered the Union, for a period of ten years, to enter into agreements with any Part B State regarding the levy, collection and sharing of any tax or duty that the Union could impose. The Court further held that Article 278(1)(a) would also have an impact on Article 266, which states that all revenues received by the Union form a single consolidated fund except for the proceeds of certain taxes and duties that have been assigned, in whole or in part, to the States by other provisions of the Chapter. By permitting the Union to conclude agreements not only concerning taxes and duties expressly mentioned in the Chapter but also concerning other taxes and duties that would normally be credited to the Consolidated Fund of India, Article 278(1) expands the scope of possible arrangements between the Union and the Part B States.

The Court explained that Article 278(1)(a) required the agreement to specify the manner in which the taxes and duties that were included in the agreement would be levied, collected, and subsequently distributed between the Government of India and the Part B State concerned. The Court observed that, without this provision, the Government of India would not have been able to extend assistance to Part B States beyond what was already permitted by the earlier provisions of the Chapter. In the Court’s view, the purpose of Article 278(1) was to enable the Union to provide additional assistance to Part B States, if necessary, by entering into agreements concerning the levy, collection, and distribution of any tax or duty that was normally payable to the Union. The Court stressed that the clause did not alter the legislative competence of the Union or the States; rather, it dealt solely with the practical aspects of assessing and collecting the tax, as indicated by the language concerning the distribution of the proceeds. The Court acknowledged that the term “levy” can sometimes include the imposition of a tax, but held that, in the context of Article 278(1), the expression “levy and collection” was intended to refer only to assessment and collection, not to the power to impose the tax.

The Court referred to Article 277, which mentions taxes, duties, cesses, or fees that were being lawfully levied by a State, municipality, or other local authority. The Court cited the decision in The Town Municipal Committee v. Ramchandra Vasudeo Chimote, where it was held that the phrase “being lawfully levied” in Article 277 signified that the tax had actually been levied, rather than merely that a law authorising the tax existed. By analogy, the Court concluded that in Article 278(1)(a) the words “levy and collection” followed by the distribution of proceeds referred to the actual assessment and collection of the tax and the manner in which it should be carried out, without touching upon the legislative power to impose the tax. Consequently, the Court held that Article 278(1)(a) dealt exclusively with public revenues, describing how they should be assessed, collected, and divided between the Union and the Part B State when an agreement existed. The provision further stipulated that, where such an agreement was in place, the earlier provisions of the Chapter relating to levy, collection, and distribution of taxes and duties would be displaced, and the terms of the agreement would govern for the specified period.

In this case the Court explained that the provision in Article 278 (1) (a) which contains a non‑obstante clause was intended to address certain constitutional provisions relating to the scope of executive power of the Union and the States. The Court observed that the clause enables the Government of India, should it wish, to conclude an agreement with a former Part B State concerning a tax that is technically a tax of the Union. Under such an agreement the assessment and collection of the tax may be performed by the State’s own officers, and the State may retain the entire amount so collected, even though Article 73 gives the Union the executive power over matters for which Parliament may legislate and ordinarily a tax law passed by Parliament would be administered by officers of the Union government. The Court therefore held that Article 278 (1) (a) permits, by agreement, the delegation of assessment and collection to the State despite the general constitutional scheme. However, the Court also stated that the non‑obstante clause does not alter Parliament’s legislative competence, even with respect to duties and taxes that are dealt with under an agreement made pursuant to Article 278 (1) (a). Consequently, the Court concluded that the agreement dated 25 February 1950, which the company relied upon for certain corporate concessions, must be regarded as having been entered into under Article 295 (1) (b) rather than under Article 278 (1) (a). Moreover, the Court clarified that Article 278 (1) (a) only envisions an agreement between the Centre and a Part B State concerning the levy, collection, or distribution of public revenues that are leviable by the Union, and it does not cover any contract between a former Indian State and another party relating to such revenues that may have become an obligation of the Union under Article 295 (1) (b). Accordingly, the company could not invoke the 25 February 1950 agreement to argue that the earlier agreement of 7 April 1947 remained binding for a period of ten years. The Court therefore held that the High Court’s view was erroneous. As a result, the appeals were allowed, the High Court’s order in the writ petition and the decree in the suit were set aside, and both the writ petition and the suit were dismissed. Both parties were ordered to bear their own costs throughout, and the appeal was affirmed.