Case: Maharaja Shree Umaid Mills Ltd Vs. Union Of India

We may now state the facts whichare relevant to these two appeals. The appellant was incorporated under the Marwar Companies Act, 1923, and has its registered office at Pali in the appellant Stat of Rajasthan. It has been manufacturing cloth and yarn since 1941. The case of the appellant was that the then Ruler of the State of Jodhpur was earnestly desirous of having a cotton mills started at pali and for that purpose agreed togive certain concessions by way of immunity from payment of taxes and duties then in force in the Jodhpur State or likely to come into force in view of the con templated federation of the Indian States and Provinces underthe Government of India Act, 1935. There were negotiations and- correspondence about the concessions which were to be finally a formal deed of agreement incorporating the concessions and immunities granted was executed between the Government of His Highness the Maharaja of. jodhpur on one side and the appellant on the other on April 17, 1941. Clause 6 of this agreement, in so far as it is relevant for our purpose said "The State will exempt or remit the following duties and royalties: (a) xx xx (b) xx xx (c) xx xx (d) xx xx (c) State or Federal Excise duty on goods manufactured in the mill premise. If any such duty his. to be paid by the Company the State will refund the same wholly to the Company. (f) State or Federal Income, Tax or Super Tax or surcharge or any other tax on, income If any such tax has to be paid by the company the State will refund the- same wholly to the company. (g) xx xx." In consideration of the concessions given the appellant agreed to pay to the State of jodhpur, a royalty of 7 1/2 per cent on the net profits of the company in each of its financial years, such payments to be made within three months after the close of each financial year. This agreement, it was stated, was acted upon by the State of Jodhpur and the appellant enjoyed an immunity from excise duty and income-tax. The Indian IndependenceAct, 1947 brought into existence as from August 15, 1947, a Dominion of India. The Ruler of Jodhpur acceded to the Dominion of India by means of an Instrument of Accession in the form referred to in Appendix VII at pages 165 to 168 of the White Paper on Indian States. jodhpur was one of the Rajputana States. The integration of these States was completed in three stages. Firstly, a Rajasthan Union was formed by a number of smaller kajaputana States situated in the south- east of that region. Later, there was formed the United State of Rajasthan. The Ruler of jodhpur joined the united State of Rajasthan and on Apri 17, 1949, made over the administration of his State to the Rajpramukh of the United State of Rajasthan. The Covenantby which this was done IS appendix XL at pages 274 to 282 of the white is paper. On the same day was promu lgated the Rajasthan Administration.Ordinance, 1949 (Ordinance No. 1 of 1949), s. 3 whereof continued all the laws in force in any Covenanting State until altered or repealed or amended by a competent legislature or other competent authority, etc. There was a fresh Instrument of Accession on April 15 , 1949, on behalf of the United State of Raj asthan by which the United State of Rajasthan accepted all matters enumerated in List I and List III of -the Seventh Schedule tothe Government of India Act, 1935 as matters in respect of which the Dominion Legislature might make laws for the United State of Rajasthan, there was a proviso, however, which said that nothing in the said. Lists shall be deemed to empower the Dominion Legislature to -impose any tax or duty in the territories of the United State of Rajasthan or to prohibit the imposition of any duty or tax by the legislature of the United State of Rajasthan in the said territories. On September 5, 1949, was promulgated the Rajasthan Excise Duties Ordinance, 1949 (Ordinance No. XXV of 1949). This Ordinance was published on September 19, 1949, and s. 30 thereof -said that all laws dealing with matters covered by the Ordinance in force at its commencement in any part of Rajasthan wereApril 16, 1952, the appellant instituted a suit by means of a plaint filed in the court of the District judge, jodhpur. In the plaint the appellant made several averments on the basis of- which it claimed that the respondents were not entitled to realise excise duty from the appellant by reason of the agreement dated April 17, 1941. The appellant asked for the following-reliefs (a)a declaration that the agreement dated April 17, 1941, is binding on all the respondents; (b)that the amount of excise duty already realised be refunded with interest at 6% per annum; (c)that the Union of India and the State of Rajasthan and their servants., agents and officers be permanently restrained by means of an injunction from realising any excise duty from the appellant; and (d)that the State of Rajasthan be directed to refund from time to time as and when the appellant is to pay excise duty to the Union of India, by reason of the indemnity clause in the agreement of April 17, 1941.Several issues were framed by the learned District judge who on a trial of those issues substantially held that the agreement of April 17, 1941, was (SCR at page 524) not binding on the respondents. He further held that the agreement itself stood frustrated by reason of subsequent events which happened and was thereforewas an appeal to the High .Court which affirmed the ;main findings of the learned Districtfacts in C.A.No.214 of 1956 are the same as those given above, the only point of distinction being that this appeal relates to income-tax while the other relates to excise duty. Here again the appellant bases its claim on the agreement dated April 17 1941, and contends that the agreement is binding on the respondents and the appellant cannot be, asked to pay income-tax by reason of the provisions of the Indian Income-tax Act, 1922 which were extended to the whole of India except the State of Jammu and Kashmir as a result of certain amendments inserted in. the said Act by the Finance Act, 1950.

Court's reasoning:
As to the first line of argument we have come to the conclusion that the agreement of April 17, 1941, rests solely on the consent of the parties; it is entirely contractual in nature and is not law, because it has none of the characteristics ofour view, none of the aforesaid decisions go the extent of laying down that any and every order of a Sovereign Ruler. who combines in himself all functions must be treated as law irrespective of the nature or character of the order passed. We think that the true -nature of the order must be taken into consideration, and the order to be law must have the characteristics of law, that is, of a binding rule of conduct as the expression of the will of the sovereign, which does not derive its authority from mere consensus of mind of two parties entering into a bargain. It is not necessary for this purpose to go into theories of legal philosophy or to define law. However law may be defined, be it the command of the supreme legislature as some jurists have put it or be it a "body of rules laid down for the determination of legal rights and duties which courts recognise there is an appreciable distinction between an agreement which is based solely on consent of parties and a law which derives its sanction from the will of the Sovereign. A contract is. essentially a compact between two or more parties a law is not an agreement between parties but is a binding rule of conduct deriving its sanction from the sovereign authority. From this point of view, there is a valid distinction between a particular agreement between two or more parties even if one of the parties is the sovereign Ruler, and the law relating generally, to agreements. The former rests on consensus of mind, and the latter expresses the will of the Sovereign.If one bears in mind this distinction, it seems clear enough that the agreement of April 17, 1941, even though sanctioned by the Ruler and purporting to be on his, behalf rests really on consent. We have, been taken through the correspondence which resulted in the agreement and our. attention was particularly drawn to a letter dated April 22, 1938, in which the Ruler was stated to have sanctioned the terms and concessions decided upon by his Ministers in their meeting of February 25, 1938. We do not think that the correspondence to which we have been referred advances the case of the appellant. On the contrary, the, correspondence shows that there were prolonged negotiations, proposals and counter-proposals, offer and acceptance of terms ... all indicating that the matter-was treated even by the Ruler as a contract between his Government and the appellant. That is why in the letter dated April 22, 1938, it was stated that Messrs Crawford Bailey & Co. Solicitors, would draw up a formal agreement embodying the terms agreed to by the parties. This resulted ultimately in the execution of the agreement dated April 17, 1941:. To call such an agreement as law is in our opinion to misuse the termis also worthy of note in this connection that clause 6 of the agreement purports to give the appellant exemption not only from State Excise duty, but also from Federal Excise duty; similarly not only from State Income-tax, but from Federal Income tax or Super-tax or Surcharge. It is difficult to see what, authority the Jodhpur Ruler had to give exemption from Federal Excise duty or Federal Income- tax. Such an exemption, if it were to be treated as, law, would be beyond the competence of the Ruler. A Ruler can make a law within his own competence and jurisdiction. He cannot make a law for some other sovereign. Such an exemption would be a dead letter and cannot have the force ofan assurance of this kind to exercise influence on another sovereign authority, assuming that the effect of the relevant clause is what learned counsel has submitted, as to which we have great doubt, will at once show that it has not the characteristics of a binding rule of conduct. It is doubtful if such an, assurance to exercise influence on another sovereign authority can be enforced even as a contract not to speak ofargument if carried to a reductio ad absurdum would come to this that every order of the Ruler would have to be carried out by the succeeding Sovereign. That order may be almost of any kind, as for example, an order to thrash a servant. We have no doubt in our minds that the nature of the order must be considered for determining whether it has the force of law. Art. 372 of the Constitution which continues existing law must be construed as embracing those orders only which have the force of law...Iaw as understood at thefail to see how this principle has any application in the present case. There is nothing to show that the agreement in the present case was confirmed as a law by the Ruler; on the contrary, we have shown earlier that it was always treated as a contract between two , parties. There is no magic in the expression legislative contract. A contract is a compact between two or more parties and is either executory or executed. If a statute adopts or confirms it, it becomes law and is no longer a mere contract. That is all that a legislative contract means. In the cases before us there is no legislative contract.In view of our conclusion that the agreement of April 17, 1941, is not law, it is perhaps unnecessary to decide the further question as to whether s.3 of the Rajasthan Ordinance, 1949 (Ordinance I of 1949) continued it or whether s.30 of the Rajasthan Excise Duties Ordinance, 1949 (Ordinance XXV of 1949) repealed it. We may merely say that with regard to the effect of s.30, learned counsel for the appellant relied on the principle that the presumption is that a subsequent enactment of a purely general character is not intended to interfere with an earlier special provision for a particular case, unless it appears from a consideration of the general enactment that the intention of the legislature was to establish a rule of universal application in which case the special provision must give way to the general (see paragraph 711, page 467 of Vol. 36, Halsburys Laws of England, Third Edition, andWilliams v. Pritchard Eddington v. Borman ((1799) E.R. 863.).On behalf of the respondents it was submitted that s. 30 of the Rajasthan Excise Duties Ordinance, 1949, in express terms repealed all laws dealing with matters covered by the ordinance, and s. 3 thereof dealt with excise duties on goods produced or manufactured in Rajasthan therefore, there was no room for the application of the maxim generalia specialibus non derogant and s. 30 clearly repealed all earlier laws in the matter of excise duties or exemption therefrom. It is perhaps unnecessary to decide this question ; because we have already held that the agreement of April 17, 1941, was neither law nor had the force ofdo not think that this is a correct interpretation of Art. 295 of the Constitution. But before going into the question of interpretation of Art. 295 It may be pointed out that if the United State of Rajasthan did not affirm the agreement, then the appellant had no enforceable right against either the United State of Rajasthan or the Part B State of Rajasthan. Under Art. 295 (1) (b) there must be a right or liability on an Indian State corresponding to a State specified in Part B of the First, schedule which can become the right or liability of the Government of India etc. If the right itself did not exist before the commencement of the Constitution and could not be enforced against any Government, the question of its vesting in another Government under Art. 295(1) (b) can hardly arise. The scheme of Art. 295 appears to be this, It relates to succession to property, assets, rights, liabilities and obligations. Clause (a) states from the commencement of the Constitution all property and assets which immediately before such commencement were vested in an 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-be purposes of the Union. Clause (b) states that all rights, liabili- ties 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- and obligations were incurred be purposes of the Government of India. There is nothing in the Article to show that it fetters for all time to come, the power of the Union Legislature to make modifications or changes in the rights, liabilities etc. which have vested in the Government of India. The express provisions of Art. 295 (10) deal with only two matters, namely, (1) vesting of certain, property and assets in the Government of India, and (2) the arising of certain rights, liabilities and obligations on the Government of India. Any legislation altering the course of vesting or succession as laid down in Art. 295 will no doubt be bad on the ground that it conflicts with Article. But there is nothing in the Article which prohibits Parliament from enacting a law altering the terms and conditions of a contract or of a grant under which the liability of the Government of India arises. The legislative competence of the Union Legislature or even of the State Legislature can only be circumscribed by express prohibition contained in the Constitution itself and unless and until there is any provision in the Constitution expressly prohibiting legislation on the subject either absolutely or conditionally, there is no fetter or limitation on the plenary powers which the legislature enjoys to legislate on the topics enumerated in the relevant Lists Maharaj Umeg Singh v. State of Bombay (A.I.R. (1955) S.C. 540, ).In our opinion, there is nothing in Art. 295 which Expressly prohibits Parliament from enacting a law as to income-tax or excise duty in territories which became Part B States, and which were formerly Indian States, and such a Prohibition cannot be read into Art. 295 by virtue of some contract that might have been made by the then Ruler of an Indian State with anyis not necessary for our purpose to set out the modifications in detail. It is enough to say that there is nothing in the modifications which in any way benefits the appellant. One of the modifications relates to State-owned and State-operated enterprises which are to be exempt from income-tax etc. The appellant is neither a State-owned nor a State operate enterprise. Another modification states- "State-sponsored Banks or similar State-ponsored enterprises in the State now enjoying any explicit tax exemptions shall be treated as "Industrial Corporations" for purposes of the continuance of the Income tax concessions now enjoyed by them in accordance with paragraph 11 (3) (b) of the Annexure to Part 1 of the Committees Report." Now the appellant is neither a State-sponsored bank nor a State-sponsored enterprise. So far as the appellant is concerned the recommendations of the committee which were accepted in the agreement inter alia said : "Any special financial privileges and immunities (affecting "federal" revenues) conferred by the State upon other individuals and corporations should ordinarily be continued on the same terms by the Centre, subject to a maximum period of ten (or fifteen) years, and subject also to limiting in other ways any such concessions as may be extravagant against the public interest."The recommendation quoted above clearly shows that it was open to the Union to limit in any way it thought fit any concessions as appear to the Union Government to be extravagant and against the public interest. In view of this recommendation which was part of the agreement entered into between the President of India and the Rajpramukh of Rajasthan on February 25, 1950, the appellant can hardly plead it has a constitutional guarantee to claim exemption from excise duty orto the pleas based on Arts. 1.9 and 31 of the Constitution, it is enough to say that on our findings the appellant had no enforceable right either against the State Government of Rajasthan or the Union Government on january 26, 1950. It is obvious, therefore, that the appellant cannot invoke to its aid either Art. 19 or Art. 31 of the Constitution. As to the claim of refund which the appellant preferred against the State of Rajasthan, the appelant, s position is no better. If neither the United State of Rajasthan nor the Part B State of Rajasthan affirmed the agreement of April 17, 1941, the appellant cannot enforce any right against respondent No. 2 on the basis of thatthe trial court as also in the High Court the question of frustration of the contract was canvassed and gone into. The courts found that the contract was frustrated. In view of the findings at which we have arrived. It is now unnecessary to consider that question. Therefore we do not propose to deal with it.