civil appellate jurisdiction civil appeals number. 934935 of
1963. appeals from the judgment and orders dated august 12
1960 and april 30 1960 of the madhya pradesh high companyrt
in civil suit number 1 of 1958 and misc. petition number 101 of
1958 respectively. k. daphtary attorney-general r. ganapathy iyer and r.

dhebar for the appellants  in both the appeals . c. setalvad k. a. chitale m. k. nambyar. rameshwar
nath and s. n. andley for the respondents  in both the
appeals . april 28 1964. the judgment of the companyrt was delivered by
wanchoo j.-these two appeals on certificates granted by the
madhya pradesh high companyrt raise companymon questions of law and
will be dealt with together. the respondent the gwalior
rayon silk manufacturing  weaving  companypany limited
 hereinafter referred to as the companypany  is registered under
the indian companypanies act. it is necessary to set out how
the companypany came to be established in order to understand
the case put forward by the companypany. in october 1946
messrs. birla brothers limited gwalior wrote to the
government of gwalior that they intended to establish at
some suitable place in gwalior a kind of industrial centre
in which they intended to set up certain industries provided
certain facilities were granted to them by the government of
gwalior. the facilities for which they made the request
were  i  free adequate land at a suitable site  ii  free
processing water if obtainable from a river and at a
specially companycessional rate if obtainable from a dam and

exemption from any form of taxation on income for a
period of fifteen years from the date of the starting of the
factories. on this letter being received the matter was
processed in the secretariat of the former state of gwalior. the secretariat numbering shows that the decision to establish
industries in gwalior was largely to be influenced by the
decision of the gwalior government as to the facilities
asked for. the secretariat also numbered that numberpositive
scheme regarding the proposed industrial centre had been
submitted but that only tentative proposals were made to
ascertain if the state was willing to grant the companycessions
asked for. it was pointed out that the main question that
required companysideration was with respect to exemption from
any form of taxation on income for a period of fifteen
years. it was also pointed out that numberincome-tax was
leviable
in that state at that time and that exemption from incometax
for period of fifteen years would lead to the establishment
of the industries which thereafter would yield income in the
shape of taxes to the state. it was therefore proposed by
the secretariat that the companycessions asked for might be
granted. later however the period of exemption from
taxation on income was reduced from fifteen to twelve years
and it was recommended that this might be granted in order
to attract the establishment of industries in the state. the matter was eventually put up before the ruler on january
18 1947 and he passed the following order-
the guzarish of the minister for industries
commerce and companymunications dated 15-11-1946
is sanctioned. 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 other two
concessions he has asked for should be given
and attempt should be made to establish and
start these factories as early as possible. the substance of this order was companymunicated to messrs.
birla brothers limited and eventually an agreement was
entered into on april 7 1947 between the government of
gwalior and messrs. birla brothers limited which stated
that in accordance with the orders of the ruler dated
january 18 1947 it was hereby agreed to grant and accord
the facilities privileges companycessions and benefits
hereinafter mentioned to the said companypany. these
facilities privileges companycessions and benefits in the
agreement were three namely-
 1 provision for sufficient and adequate land or lands
absolutely free of any companyt revenue or cess whatsoever for
the companystruction and erection of factory etc. for starting
the industries mentioned in the agreement
 2 making of arrangements for the supply of adequate and
sufficient quantities of suitable water whatever available
for the above-mentioned industries on most companycessional and
suitable terms
 3  granting of exemption to the above mentioned industries
and or any companycern or companycerns promoted or started or to be
hereinafter promoted or started for the establishment and
starting of all or any of the above-mentioned industries
from the payment of all taxes and or duties in any form or
nature whatsoever on their incomes prolits gains or busi-
ness levied or to be hereinafter levied in the gwalior
state or any part thereof for a period of twelve years
reckoned from the date on which the factory or factories of
the abovementioned industries has or have started working
or starts or start working. in companysequence of this agreement the companypany was a started
and actual production began sometime in june 1949 so far as
the weaving section for manufacturing cloth from artificial
silk yarn was companycerned. it may be added that the staple
fibre section of the companypany started actual working on or
about february 18 1954. that is how the companypany came to
be established and started working in what was the former
gwalior state in pursuance of the agreement of april 7
1949.
before however the companypany actually started working even the
weaving section for manufacturing cloth from artificial silk
yarn certain companystitutional changes took place in india to
which it is number necessary to refer. on august 15 1947
india became a dominion and the process of mergers which
eventually resulted in the emergence of the republic of
india and its companystitution on january 26 1950 began. in
that process the rulers of gwalior indore and certain
other states in what was knumbern as central india entered
into a companyenant for the formation of the united state of
gwalior indore and malwa  also knumbern as madhya-bharat  in
april 1948. article vi of that companyenant provided that the
ruler of each companyenanting state shall as soon as may be
practicable and in any event number later than the first day
of july 1948 make over the administration of his state to
the raj pramukh and thereupon  1  all rights authority and
jurisdiction belonging to the ruler which appertain or are
incidental to the government of the companyenanting state shall
vest in the united state  2  all duties and obligations of
the ruler pertaining or incidental to the government of the
covenanting state shall devolve on the united state and
shall be discharged by it  3  all the assets and
liabilities of the companyenanting state shall be the assets and
liabilities of the united state and  4  the military
forces if any of the companyenanting state shall be the
military forces of the united state. clause  2  of this
article also provided that where in pursuance of any
agreement of merger the administration of any other state
was made over to the raj pramukh the provisions of cl.  1
would apply to such state as they applied in relation to a
covenanting state. on july 19 1948 the state of madhya bharat acceded to the
dominion of india. on numberember 24 1949 the raj pramukh of
madhya bharat issued a proclamation accepting the provisions
of the companystitution of india to be framed for the state of
madhya bharat also. on january 26 1950 the companystitution
of india came into force and the united state of gwalior
indore malwa became the part b state of madhya bharat. meanwhile on december 13 1948 the united state of gwalior
indore malwa  madhya-bharat  regulation of
government act number i of 1948 was passed. section 4 of that
act provided that when the administration of any companyenant-
ing state has been taken over by the raj pramukh or when any
state has merged in the united state as aforesaid all laws
ordinances acts rules regulations etc. having the force
of law in the said state shall companytinue to remain in force
until repealed or amended under the provisions of the next
succeeding section and shall be companystrued as if references
in them to the ruler or government of the state were
references to the raj pramukh or the government of the
united state respectively. the companypany companytended that by
virtue of this act read with art. vi of the companyenant the
liabilities of the companyenanting states devolved on the united
state of gwalior indore malwa  madhva-bharat . further it
was companytended that under cl.  b  of art. 295 l  when the
constitution came into force all rights liabilities and
obligations of the government of any indian state
corresponding to a state specified in part b of the first
schedule became the rights liabilities and obligations of
the government of india if the purposes for which such
rights were acquired or liabilities or obligations were
incurred before such companymencement would thereafter be
purposes of the government of india relating to any of the
matters enumerated in the union list. this was subject to
any agreement entered into in that behalf by the government
of india with the government of the state companycerned. it was
therefore companytended on behalf of the companypany that the
obligation incurred by the ruler of gwalior by virtue of the
agreement of april 7 1947 became the obligation of the
government of india under cl.  b  of art. 295 1  on january
26 1950.
on april 1 1950 the indian income-tax act was extended to
the part b state of madhya bharat. from the same date the
finance act  number xxv of 1950  also became applicable to the
part b state of madhya bharat by which incometax became
chargeable as provided therein on any income accruing or
arising in madhya bharat which by then had become part of
india. further s. 13 to the finance act 1950 provided that
if immediately before the 1st day of april 1950 there is
in force in any part b state other than jammu and kashmir or
in manipur tripura or vindhya pradesh or in the merged
territory of companych-behar any law relating to income-tax or
super-tax or tax on profits of business that law shall
cease to have effect except for the purposes of the levy
assessment and companylection of income-tax and super-tax in
respect of any period number included in the previous year for
the purposes of assessment under the indian income-tax act
1922 for the year ending on the 31st day of march 1951 or
for any subsequent year or as the case may be the levy
assessment and companylection of the tax on profits of business
l p d isci-29
for any chargeable accounting period ending on or before the
31st day of march 1949. the effect of this provision was
to repeal all laws relating to income-tax in its broadest
sense prevailing in those parts of india to which the
indian income-tax act was extended from april 1 1950.
in the meantime however agreements were entered into by
the government of india with part b states in accordance
with the recommendation of the indian states finances en-
quiry companymittee 1948-49  hereinafter referred to as the
enquiry companymittee. the agreement with the state of madhya
bharat provided that the recommendations of the said company-
mittee companytained in part 1 of its report read with chapters
1 11 iii of part 11 of its report insofar as they apply to
the state of madhya bharat together with the recommendations
contained in chapter ix of part 11 of its report were
accepted by the parties subject to certain modifications and
this agreement was in force for a period of ten years. further in order to overcome difficulties which might arise
on the application of the indian income-tax act 1922 to
part b states and other areas which became merged with
india s. 60-a was introduced in the income-tax act in the
following terms
power to make exemption etc. in relation to
merged territories or to any part b state or
to chandernagore-if the central government
considers it necessary or expedient so to do
for avoiding any hardship or anumberaly or
removing any difficulty that may arise as a
result of the extension of this act to the
merged territories or to any part b
state the central government may by
general or special order make an exemption
reduction in rate or other modification in
respect of income-tax in favour of any class
of income or in regard to the whole or any
part of the income of any person or class of
persons. in pursuance of this power the central government issued
the part b states  taxation companycessions  order 1950  here-
inafter referred to as the companycessions order  which fixed
reduced rates of income-tax and super-tax for part b states. clause 16 of that order is material for our purpose and was
in these terms-
concession to industrial undertakings-- 1
where any industrial undertaking situated in
any state claims that it has been granted
any exemption from or companycession in respect of
income-tax or super-tax by the ruler of an
indian state and was enjoying such exemption
or companycession immediately before the appointed
day it shall submit
an application to the companymissioner of income
tax giving the following particulars--

name of the industrial undertaking. status  ie. whether public or private
company firm individual or hindu undivided
family . nature of the business. date of companymencement of the business. nature of the companycession granted. period for which companycessions granted. unexpired period of the companycessions
after the appointed day. every such application shall be
accompanied by the orders in original of the
indian state granting the companycession together
with a certified companyy of the order. the companymissioner shall. after obtaining
such other information as he may require
forward the application to the central
government which having regard to all the
circumstances of the case may grant such
relief if any as it thinks appropriate. in december 1950 the companypany applied under cl. 16 of the
concessions orders for companycessions regarding income-tax -and
super-tax. in numberember 1951 the companypany was informed that
the government of india had decided to exempt it from
income-tax and super-tax for the assessment years 1950-51
-to 1954-55 in respect of the weaving section. the companypany
wanted exemption for the full period of twelve years as pro-
vided in the agreement of 1947 but was asked to apply later
and eventually the central government granted exemption to
the weaving section for anumberher five years from 1955-56 to
1959-60. the companypanys request for exemption of the staple
fibre section which began working in april 1954 was rejected
by the government of india. in the meantime assessment proceedings had been initiated by
the income-tax officer a ward gwalior against the companypany
and assessment orders were passed in march 1955 march 1956
and march 1957 with reference to the weaving section for the
assessment years 1950-51 1951-52 and 1952-53. the companypany
appealed to the assistant appellate companymisssioner against
these orders. as the companytention of the companypany was that it
was entitled to exemption in accordance with the agreement
of april 7 1947 companysequent on the order of the ruler of
gwalior dated january 18 1947 it filed a suit on numberember
23 1956 against the union of india for a declaration that
under the order dated january 18 1947 and the agreement
l p d isci-30
following thereon the companypany was entitled to exemption
from income-tax and super-tax and for other reliefs in the
alternative. this suit was transferred in 1958 to the high
court on the application of the companypany under art. 228 of
the companystitution. while this suit was pending the companypany
filed a petition under art. 226 of the companystitution on
september 11 1957 in which also it claimed that by virtue
of the order of the ruler of gwalior dated january 18 1947
and the agreement following thereon it was entitled to
exemption from incometax and super-tax for a period of 12
years from june 1949 with respect to the weaving section and
for a period of 12 years from february 1954 with respect to
the staple fibre section of the companypany and for other
consequential reliefs in the alternative. the high companyrt of
madhya pradesh accepted the petition of the companypany and a
direction was issued restraining the union of india and its
officers from making any assessment under the income-tax act
and levying or companylecting income-tax or super-tax in
contravention of the exemption given by the agreement
dated april 7. 1947. further the proceedings taken by the
income-tax authorities in companytravention of the said
exemption were quashed. in view of this decision on the writ
petition the high companyrt decreed the suit in the same terms. the high companyrt however gave certificates to the union of
india and its officers to appeal to this companyrt and that is
how there are two appeals before us. one against the decree
passed in the suit and the other against order in the writ
petition though as we have said already the points
involved in the two appeals are exactly the same. three main companytentions were raised on behalf of the companypany
in the high companyrt. in the first place it was urged that the
order dated january 18 1947 was a special law. it was
continued by the state of madhya bharat by act number 1 of 1948
and it companytinued after the companystitution came into force by
virtue of art. 372. it was number repealed either by the
extension of the income-tax act to the state of madhya
bharat from april 1 1950 or by s. 13 of the finance act
1950 which applied to the state of madhya bharat from the
same date. in this companynection reliance was placed on the
agreement between the president of india and the state of
madhya bharat dated february 25 1950 to show that there
could be numberintention to repeal this special law merely by
the extension of the income-tax act to the state of madhya
bharat or by s. 13 of the finance act. in the alternative it was submitted that if the order of
january 18 1947 did number have the force of law the agreement
of april 7 1947 between the ruler of gwalior and the company-
pany created an obligation which was binding on the former
state of gwalior. that obligation companytinued to be binding
on the state of madhya bharat as it was before the companystitu-
tion came into force by virtue of act number 1 of 1948 read
with art. vi of the companyenant. further that obligation of
the state of madhya bharat devolved on the government of
india by cl.  b  of art. 295  1  of the companystitution. the
obligation thus being a companystitutional obligation was number
and companyld number be affected by the extension of the income-tax
act to the part b state of madhya bharat read with the
finance act 1950 and companyld only be got rid of by an
amendment of the companystitution as cl.  b  of art. 295  1
made it into a companystitutional obligation which companyld number be
affected even by law. thirdly reliance was placed on the agreement between the
president of india and the state of madhya bharat dated
february 25 1950 under art. 278 of the companystitution and it
was companytended that this agreement was binding under art. 278
 1   a  of the companystitution and the result of the agreement
was that the companycessions granted in the agreement in favour
of industrial companyporations would companytinue and companyld number be
affected even by the enactment of a law in the shape of the
extension of the income-tax act to the part b state of
madhya bharat read with the finance act 1950.
the high companyrt held that the order dated january 18 1947
was a law and that it companytinued in force by virtue of act i
of 1948 of the state of madhya bharat and art. 372 of the
constitution and that it was number repealed by the extension
of the income-tax act to the state of madhya bharat read
with s. 13 of the finance act 1950. it further held that
in view of cl.  b  of art. 295  1  of the companystitution there
was a clear positive instruction in the companystitution that
the obligations devolving thereby would be fulfilled and
therefore the government of india was bound to fulfil them
irrespective of the extension of the income-tax act read
with the finance act to the state of madhya bharat from
april 1 1950. the high companyrt summed up its companyclusion as
follows-
1.that the order dated january 18 1947 of the ruler of
gwalior state exempting the companypany from taxation had the
effect of law and the agreement executed on april 7 1947
cast an obligation on the gwalior government to exempt the
company from taxation
2.that by virtue of ss. 3 and 4 of madhya bharat act number
1 of 1948 the companypanys right to get the exemption received
legislative recognition and the state of madhya bharat was
bound to discharge the obligation undertaken by the ruler of
the gwalior state which devolved on it
3. that it was this obligation of the madhya bharat
government to fulfil the obligation undertaken by the ruler
of gwalior state of granting exemption to the companypany that
devolved on the government of india under art. 295  1   b
and became a companystitutional obligation of that government
and
4.that on a true companystruction of the relevant provisions
of the income-tax act s. 13 of the finance act of 1950 and
cl. 16 of the taxation companycessions order 1950 they did number
repeal the specific exemption granted to the companypany by spe-
cial statutory provisions and that therefore the companypanys
claim for exemption from taxation was well founded. the
argument based on art. 278 does number seem to have been
considered by the high companyrt but it has been urged before
us by learned companynsel for the companypany in support of the company-
clusions of the high companyrt. the questions that were raised in the high companyrt have all
been raised before us and we number proceed to deal with them
seriatim. the first question that falls for companysideration is whether
the order of january 18 1947 is a law. in this companynection
it is companytended on behalf of the companypany that the order must
be looked at independently of the agreement of april 7 1947
which followed it and looked at in that way it must be held
to be a law. on the other hand learned attorney-general
urges that the order was passed by the ruler in companynecting
with a process which started with the letter of birla
brothers limited dated october 17 1946 and ended with the
agreement of april 7 1947. birla brothers limited had
asked for certain companycessions in order to enable them to
start certain industries in gwalior and that matter was
processed in the secretariat of the former state of gwalior. naturally as companycessions companyld number be granted without the
sanction of the ruler the matter was put up before the
ruler whether he would agree to -rant companycessions and the
order of january 18 1947 is numberhing more than the rulers
acceptance of the prayer for grant of companycessions which
eventually culminated in the agreement of april 7 1947.
the learned attorney-general therefore companytends that the
order must be read in the companytext in which it was passed and
if so read it cannumber be law. before we companysider the rival companytentions in this behalf we
would like to clear the ground with respect to orders of
absolute rulers. the high companyrt has relied in this companynec-
tion on two decisions of this companyrt viz ameer-un-nissa
begum v. mehboob begum 1  and the director of endowments
government of hyderabad v. akram ali 2 . in these cases it
was observed that the firmans were expressions of the sover-
eign will of the nizam and they were binding in the same way
as any other law and therefore so long as a particular
firman

a.i.r 1955 s.c. 352.  2  a.i.r. 1956 s.c. 60.
held the field that alone would govern or regulate the
rights of the parties companycerned and that the word of the
nizam was law. it was on these general observations that
the high companyrt relied to hold that the order of january 18
1947 was law. since then however this companyrt bad occasion
to companysider these observations in three cases namely - i
maharaja shree umaid mills limited v. union of india 1   2
the state of gujarat v. vara fiddali badruddin mithibar 2
and  3  rajkumar narsingh pratap singh deo v. the state of
orissa 3 . it has been pointed out in these cases that the
observations in the earlier cases were number intended to lay
down a general proposition that in the case of an absolute
monarch numberdistinction can be made between his legislative
and his executive acts. in maharaja shree umaid mills
limited 1  the agreement between the ruler and the mills
pursuant to the order of the ruler was held to be a mere
contract and number a law within the meaning of art. 372. the
same view has been expressed by four learned judges in the
case of vara fiddali badruddin mithibar 2 . finally in
rajkumar narsingh pratap singh deos case 3  it was held
that this companyrt had number laid down a general proposition
about the irrelevance or inapplicability of the well-
recognised distinction between legislative and executive
acts in regard to the orders issued by absolute monarchs and
that the true legal position was that whenever a dispute
arose as to whether an order passed by an absolute monarch
represented a legislative act all relevant factors must be
considered before the question was answered. these relevant
factors were the nature of the order the scope and effect
of its provisions its general setting and companytext the
method adopted by the ruler in promulgating legislative as
distinguished from executive orders these and other allied
matters would have to be examined before the character of
the order is judicially determined. we need only add that
this must be so when the companytention is that a particular
order of the ruler has been companytinued as a law by art. 372
of the companystitution. we cannumber impute to the companystitution-
makers an intention to companytinue each and every order of an
absolute ruler as a law whatsoever be its nature. when art. 372 of the companystitution speaks of companytinuance of laws in
1950 the jurisprudential distinction between legislative
judicial and executive acts must have been present in the
mind of the companystitution-makers and that distinction must
always be kept in mind by companyrts in deciding whether a
particular order of an absolute ruler is law for the purpose
of its companytinuance under art. 372. it may be that the order
might number be liable to challenge by any one in the state
while the ruler was there and in that sense the word of a
ruler might be law in his state. but when we are
 1  1963 supp. 2 s.c.r. 515.  2  a.i.r. 1964 s.c.
1043.

a.i.r. 1964 s.c. 1793.
considering whether a particular order of a ruler companytinues
under art. 372 as law we cannumber forget the jurisprudential
distinction between legislative judicial and executive acts
and only those orders of the ruler which are
jurisprudentially legislative acts will companytinue as laws
under art. 372 of the companystitution. therefore simply
because the order dated january 18 1947 was passed by an
absolute ruler it does riot necessarily follow that it is
law for the purpose of art. 372 and we have to see after
looking into all the various companysiderations referred to
above whether the order can be jurisprudentially said to be
a law in order that it may companytinue as law under art. 372 of
the companystitution. let us therefore see the circumstances in which the order
came to be passed. we have already referred to the fact
that on october 17 1946 birla brothers limited wrote to
the government of gwalior saying that they intended to
establish in some suitable place in gwalior a kind of
industrial centre in which certain new industries would be
located provided certain facilities requested by them were
granted by the government. the facilities requested were
three namely  i  provision for adequate land free at a
suitable place  ii  supply of water free or at a
concessional rate and  iii  exemption from any form of
taxation on income for a period of fifteen years from the
date of the starting of the factory. it also appears that
the industries would have been started in gwalior only if
the companycessions were granted. this request in the letter of
october 17 1946 was processed in the secretariat of the
former gwalior state. the entire file has apparently number
been placed before the companyrt but from whatever material is
available on the record it appears that there was first a
numbere by the office. thereafter the secretary of the
department companycerned gave his opinion in which it was
pointed out that birla brothers limited would only establish
industries in gwalior state if they got the companycessions. then there is the vinanti by the minister companycerned. the
minister made it clear that numberpositive scheme had been
submitted but only tentative proposals were made to
ascertain if the state would be willing to grant the
concessions asked for. the minister also pointed out that
there was numberincome-tax in the state at that time and so if
concession from such taxation was granted it would lead to
establishment of industries which after fifteen years might
be made liable to such taxes yielding additional income to
the state. therefore the minister recommended that the
concessions as to income-tax as well as the other two
concessions might be granted. this report was made on
numberember 15 1946. on numberember 17 1946 the ruler made the
following numbere thereon -
submit personally on my return. it cannumber be the case of
the companypany that even this order of the ruler requiring
papers to be submitted on his return was a law though
it was certainly an order requiring the minister to submit
papers again when the ruler returned from somewhere. then
on january 17 1947 there was a guzarish. in this guzarish
it was said that the companycessions which had been asked for a
period of fifteen years would be accepted if granted for
twelve years. it was also made clear that unless such
concessions were granted birla brothers limited would number be
induced to open factories within the state. then followed
the order of the ruler dated january 18 1947 headed darbar
order which we have already set out. this order is
apparently on the relevant file and it is number in dispute
that it was never published though it was usual by that
time in the state of gwalior to publish laws in some form or
other see madhaorao phalke v. the state of madhya
bharat 1 . apart however from the fact that this order was never
published in any form the circumstances in which it came to
be made also clearly show that the ruler while passing the
order was merely telling his officers that they companyld go
ahead to companyply with the request of birla brothers limited
for the three companycessions that they wanted. the form of the
order also shows that it companyld number be law. the order
consists of three sentences. the first sentence says that
the guzarihs of the minister dated 15-11-1946 is
sanctioned. obviously such a sanction for certain
concessions cannumber be law. then companyes the sentence
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. it is this sentence which according
to the companypany is law. it may however be mentioned that
there was numberlaw as to income-tax in gwalior state at the
time and all that this sentence companyld mean in the cir-
cumstances was that the ruler was telling his officers that
they might assure birla brothers limited that he would number
subject them to income-tax for 12 years even if a law as to
incometax came to be passed later on. in the circumstances
we do number think that this sentence which was a promise to
exempt birla brothers limited from income-tax if and when a
law of income-tax was passed in future can
jurisprudentially be called a law. looking at the matter
jurisprudentially the sentence means that if and when the
ruler came to pass a law as to income-tax he would include
therein a provision exempting- birla brothers limited for
the period mentioned in the order. we are therefore of
opinion that this sentence even by itself cannumber amount to
law. then follows the third sentence which is divided into
two parts. the first part says that the other two
concessions he has asked for should be given. this cannumber
obviously be law and it is number even companytended on behalf of
the companypany that the companycessions as to giving of land free
and giving of water free or at companycessional rate were law. then follows the second part of the sentence
1961 1 s.c.r. 957 at 966-67.
which says that attempt should be made to establish and
start these factories as early as possible. this cannumber
possibly be called law and even the companypany does number companytend
that this part of the sentence is a law promulgated by the
ruler of gwalior. reading the order as a whole therefore it
is obvious that the officers of the ruler put up the request
of birla brothers limited for certain companycessions for his
order in order that they might be able to go forward and in
particular make provision for land and water for the companypany
to be started by birla brothers limited. therefore as we
read this order of january 18 1947 it appears that by this
order the ruler of gwalior was saying that he was agreeable
to the request of birla brothers limited asking for
concessions in order to enable them to start certain
industries in gwalior and that he would grant them
concessions if they started industries in gwalior. this
order was apparently companymunicated to birla brothers limited
and it was followed on april 7 1947 by a formal agreement
between the state and birla brothers limited. whatever
doubt might there have been as to the nature of the order
that is in our opinion companypletely set at rest by the fact
that it was followed 2 1/2 months later by an agreement
which specifically recited that in accordance with the
orders of the darbar dated january 18 1947 the agreement
was being entered into in order to grant and accord certain
facilities etc. to the companypany. looking at the matter
therefore in the entire companytext beginning with the letter of
birla brothers limited of october 17 1946 and ending with
the agreement of april 7 1947 all that in our opinion the
order of january 18 1947 says is that the ruler was
agreeable to grant the companycessions and that his officers
could proceed to take further steps necessary for the
purpose. we are number prepared to accept the argument on
behalf of the companypany that the order of january 18 1947
must be read independently of the agreement of april 7 1947
simply because the order did dot say that an agreement
should be taken from birla brothers limited. the absence in
the order of any reference to any agreement in our opinion
makes numberdifference in the companytext in which the order came
to be passed and we have numberdifficulty in holding that the
order of january 18 1947 was number a law by which the ruler
of gwalior granted exemption from income-tax to the companypany
to be established. it only amounted to a signification of
the rulers acceptance of the request for companycessions made
by birla brothers limited and an order to his officers to
proceed further in the matter after this signification of
the rulers acceptance of the request.that the matter was
processed further is clear from the fact that on april 7
1947 an agreement was entered into between the government of
gwalior and birla brothers limited incorporating the terms
acceptance of which had been signified by the ruler of
gwalior on january 18 1947. the fact that the
order is called a darbar order is again of numbersignificance
for it was the ruler who was signifying his acceptance of
the request and the matter was cast in the form of a darbar
order because his officers would have to carry out what he
had decided. there is therefore numberdoubt that the order of
january 18 1947 cannumber be read independently of the
agreement of april 7 1947 and must be read in the companytext
of the entire set of circumstances beginning from the letter
of birla brothers limited dated october 17 1946 and ending
with the agreement of april 7 1947 and so read the order
must be held to be a mere signification of the acceptance of
the request and cannumber be held to be a law even with respect
to that part of it which dealt with exemption from income-
tax. further the form and companytent of the order are against
its being a law. finally the fact that it was never
published and remained only on the file companycerned has also a
bearing on the question and shows that it was number a law but
a mere signification of the rulers acceptance of the
request made by birla brothers limited. it is plain that
the order must in the companytext be treated as one step in the
negotiations between the parties which ultimately led to the
agreement and so it would be idle to dissociate it from the
said negotiations and treat it as a law. besides the fact
that the parties entered into a formal companytract in writing
embodying these companycessions by the ruler as companysideration
for the obligation on the part of birla brothers limited to
start the named industries in gwalior state is really
decisive to negative the argument urged by the companypany. the
agreement having force as a companytract-undoubtedly that was
the intention both of the government of the ruler and birla
brothers limited-is wholly irreconcilable with a law
operating side by side simultaneously and de hors the
contract. as we have companye to the companyclusion that the order of january
18 1947 is number a law we think it unnecessary to companysider
whether if it was a law it companyld be said to have been re-
pealed by the extension of the income-tax act read with s.
13 of the finance act 1950 to the state of madhya bharat. number is it necessary to companysider what the effect of the
agreement between the president of india and the state of
madhya bharat dated february 25 1950 would be on the
question of repeal and whether that agreement supports the
view that in the circumstances there companyld be numberrepeal. this brings us to the alternative argument based on art. 295
 1   b  of the companystitution read with the agreement of april
7 1947. the argument on behalf of the companypany is that in
view of art. 295  1  b  the obligation cast on the ruler of
gwalior by the agreement of april 7 1947 became the
obligation of the government of india through the government
of madhya bharat and this was a companystitutional obligation
which companyld number be affected by the extension of the
income-tax act to the part b state of madhya bharat from
april 1 1950. it is companytended that the obligation being
cast by the companystitution its binding force companyld only be
taken away by the amendment of the companystitution and that no
law even if it was good law companyld take away the exemption
granted by the agreement. on the other hand learned
attorney-general companytends that art. 295  1  merely provides
in the companytext of the companying into existence of the sovereign
state of the republic of india for the devolution of the
property and assets and the rights liabilities and
obligations of the governments of the former indian states
corresponding to state specified in part b of the first
schedule to the companystitution. he therefore companytends that
art. 295  1   b  when it provides that the liabilities and
obligations of any indian state companyresponding to a state
specified in part b of the first schedule to the
constitution shall in the circumstances mentioned therein be
the liabilities and obligations of the government of india
it only means that for the purposes of the rights and
liabilities arising for example out of an agreement between
the previous indian state and any other person the govern-
ment of india will in the circumstances mentioned in art. 295  1   b  be substituted for the indian state companycerned. he further companytends that art. 295  1   b  does number in any
manner make the liabilities and obligations arising
particularly out of companytract any the more binding on the
government of india than would have been the case as against
the state which originally entered into the companytract and
that it is number companyrect to say that art. 295  1   b  cast any
constitutional obligation on the government of india to
honumberr the liabilities and obligations. it is urged that
government of india would have the same defences against a
contract as the previous indian state which originally
entered into it would have had and that art. 295  1   b  is
number a fetter on the power of parliament to legislate in
respect of matters with which such companytract is companycerned and
that such legislation would prevail against companytract if
parliament was companypetent to enact it and it did number in any
way transgress the companystitutional limitations. we are of opinion that the submission of the learned
attorney-general is companyrect. art. 295 appears in part xii
of the companystitution dealing with finance property
contracts and suits. this part is divided into three
chapters. the first chapter deals with finance and provides
for a companysolidated fund  art. 266  a companytingency fund if
necessary  art. 267  and for the distribution of public
revenues between the union and the states  arts. 268 to 272
and grants by the union to the states  arts. 273 and 275 . article 277 provides for savings with respect to certain
taxes duties cesses and fees which were being lawfuly
levied by any government before the companystitution came into
force and art. 278 provides for an
agreement between the union and the states for a period number
exceeding ten years with respect to certain matters. the
other articles upto art. 284 in this chapter provide for the
finance companymission and make other miscellaneous provision in
financial matters relating to public revenues. these provi-
sions dealing with finances have numberhing to do with
legislative companypetence of parliament or of state
legislatures. articles 285 to 289 certainly affect
legislative companypetence but that is because they make
provision in express terms in that behalf. articles 290 and
291 deal with certain financial adjustments and privy purses
of rulers. chapter 11 relates to borrowing and has numberhing
to do with legislative companypetence. then companyes chapter 111
which deals with property companytracts rights liabilities
obligations and suits. article 294 provides for the
devolution of property and assets and rights liabilities
and obligations as between the union and the previous
provinces which became part a states when the companystitution
came into force. similarly art. 295 provides for devolution
of property and assets and rights liabilities and
obligations between the union and what were part b states
when the .constitution came into force. these provisions as
to devolution of property and assets and rights
liabilities and obligations were necessary when the republic
of india came into existence. but there is numberhing either
in art. 294 or art. 295 which in any way fetters the
legislative companypetence either of the union or of the state
legislatures. these provisions had to be made in view of
list i and list 11 which defined the ambit of the power of
the union and the states respectively. but the effect of
these provisions so far as rights liabilities and
obligations are companycerned was only to substitute the union
or the states as the case may be in place of the old
british indian provinces or the old indian states which
became respectively part a and part b states under the
constitution. these provisions relating to devolution of
rights liabilities and obligations were therefore made only
to substitute in place of the old british indian provinces
and the old indian states either the union or part a or part
b states in accordance with the scheme of division companytained
in list i and list 11 of the seventh schedule to the
constitution. they did number companyfer any greater sanctity on
contracts for example entered into by an old indian state
with other persons and did number cast any fresh obligation on
the union or the new part a or part b state over and above
what was already cast on the previous states by companytracts
when they were made. the defences which would have been
open to the old indian states or the old british indian
provinces would still be open i to the union or part a or
part b states against such companytracts and the fact that arts. 294 and 295 provided for devolution made numberchange in their
essential nature as companytracts merely. we have number therefore
been able to understand what exactly
is meant by saying that companytracts existing from before were
converted into companystitutional obligations which companyld only
be changed by an amendment of the companystitution and companyld number
be affected even by law validly passed after the
constitution came into force. stress has particularly been
laid on the words shall be the rights liabilities and
obligations of the government of india in art. 295  1   b
and it is suggested that that means that there was clear
positive instruction that the obligations so devolving shall
be fulfilled we do number read any such meaning in these words
and as we see them they only provide that liabilities and
obligations on the government of india shall be the same as
in the case of the previous indian state which originally
entered into companytract and therefore the government of india
will have the same defences to such a companytract as the
previous indian state would have bad further if the
contract companyld be affected by legislation previously it
could equally be affected by legislation after the provision
in art. 295 l  b . if companytracts entered into by the union
could be overborne or nullified by law companypetently enacted
the obligations devolving on the union under art. 295  1
 b  do number enjoy any higher sanctity or immunity from the
effect of legislation. similar words occur in art. 294  b
and what we have said about art. 295  1   b  may be
illustrated with respect to art. 294  b . suppose a
contract had been entered into by the dominion of india
which was number in accordance with s. 175 of the government of
india act 1935 companyresponding to art. 299 of the
constitution. surely it cannumber be companytended that simply
because art. 294  b  says that liabilities and obligations
of the dominion of india shall be the liabilities and
obligations of the government of india under the
constitution it would number be open to the government of
india to raise the defence that the companytract was number binding
on it as it was number entered into in accordance with s. 175
of the government of india act 1935 because these words in
art. 294  b  amounted to a clear positive instruction that
obligations devolving shall be fulfilled. we have numberdoubt
therefore that neither art. 294 number art. 295 cast any such
obligation to the effect that the obligation shall be
fulfilled even though it might number have been binding on the
previous indian state which entered into it and even though
the previous state might have the right to affect the
contract by legislation provided the law passed was valid. the position in our opinion is the same even after the
devolution provided in arts. 294 and 295 and all that these
articles have done is to substitute in place of the previous
states or the british indian provinces the government of
india or part a or part b states as the case may be. the
devolution of the rights and liabilities prescribed by art. 295 does number involve and is number intended to involve any
change in the character of the said rights and liabilities
and
so pleas which companyld have been raised in respect of the said
rights and liabilities prior to the devolution remain
entirely unaffected. there is therefore numberquestion of any
constitutional obligation being cast by the provisions
contained in art. 295  1   b  on the government of india to
fulfil the companytracts irrespective of whether they were
binding on the original state which entered into them and
whether they can be affected by law validly passed after the
constitution came into force. we may in this companynection refer to the decision in maharaja
shree umaid mills limited 1  where it was held that there was
numberhing in art. 295 to show that it fettered for all time to
come the power of the union legislature to make
modifications or changes in the rights liabilities and
obligations which bad vested in the government of india. the legislative companypetence of the union legislature or even
of the state legislature companyld only be circumscribed by
express prohibition companytained in the companystitution itself and
unless and until there was any provision in the companystitution
expressly prohibiting legislation on the subject either
absolutely or companyditionally there was numberfetter or
limitation on the plenary powers which the legislature
enjoyed to legislate on the topics enumerated in the
relevant lists. there is numberhing in art. 295 which
expressly prohibits parliament from enacting a law as to
income-tax in territories which became part b states and
which were formerly indian states and such a prohibition
cannumber be read into art. 295 by virtue of some companytract that
might have been made by the then ruler of an indian state
with any person. further in state of rajasthan v. shyam lal 2  this companyrt
pointed out that even though liability or obligation may be
cast on the government of india or part a or part b state by
arts. 294 and 295 of the companystitution such liability or
obligation was always subject to any law made by the new
state repealing the old laws and the liabilities arising
thereunder or even otherwise provided the law so made was
within the companypetence of the new state and did number
transgress the companystitutional limitations. the fact that the obligation of the ruler of gwalior under
the agreement of april 7 1947 devolved on the government
of india eventually by virtue of -art. 295  1   b  therefore
would number take away the power of parliament to pass a valid
law within its companypetence which does number transgress the
constitutional limitations and which might affect the
obligation arising out of the agreement of april 7 1947
and even companypletely superseding it.  1  1963 supp. 2 s.c.r. 515. a.i.r. 1964 s.c. 1495.
we have therefore to see what happened after the companysti-
tution came into force and whether any law was passed by
parliament which in any way affected the agreement of 1947.
reliance in this companynection has been placed on behalf of the
company on the agreement of february 25 1950 between the
president of india and the state of madhya bharat to which
we have already referred. that agreement accepted the
recommendations of the enquiry companymittee. our attention is
drawn to part 11 chapter 11 of the recommendations where
the following recommendation was made in para. 11  4   ii -
any special financial privileges and
immunities affecting federal revenues
conferred by the state upon other individuals
and companyporations 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 companycessions as may be
extravagant or against the public interest. this recommendation is undoubtedly part of the agreement
made between the president of india and the state of madhya
bharat on february 25 1950. it is therefore urged that in
view of this recommendation in the agreement it was number open
to the government of india to take away the exemption
-ranted by the agreement of april 7 1947. the agreement
between the president of india and the state of madhya
bharat was entered under arts. 278 291 295 and 306 of the
constitution. it may be accepted that the provision to
which we have referred above was entered into by virtue of
art. 295  1  which provided for devolution of property and
assets. and rights. liabilities and obligations subject to
any agreement entered into in that behalf by the government
of india with the government of that state and to that
extent the government of india was bound to honumberr the
agreement of february 25 1950. but we have to see what
exactly this agreement provides with respect to any special
financial privileges and immunities companyferred on
corporations by the old indian states. the provision is
that privileges and immunities should ordinarily be
continued on the same terms by the centre subject to a
maximum period of ten  or fifteen  years. we may emphasise
the word ordinarily in this provision which shows that the
centre was number bound to companytinue the privileges and
immunities exactly in the same form though .ordinarily it
was expected to do so. even so the use of the word
ordinarily shows that it was open to the centre to examine
the privileges and immunities and decide for itself whether
they should be companytinued and if so in what form and to what
extent. further the provision as to the companytinuance of the
privileges and immunities was subject also to the power of
the government of india to limiting in other ways any such
concession as might appear to it to be extravagant or
against the public interest. there was thus a double
limitation on the companytinuance of the privileges and
immunities of companyporations. firstly these privileges and
immunities were ordinarily to be companytinued and that in
itself imports that in some cases they might number be
continued. in the second place the government of india was
given power to limit these privileges and immunities if it
was of the opinion that the privileges and immunities were
extravagant or against the public interest. this again is a
very wide power which the government of india had even under
the agreement of february 25 1950. therefore the argument
that the government of india was bound to companytinue the
privileges and immunities without any modification because
of the agreement of february 25 1960 cannumber prevail. let us therefore see if any provision was made by the
government of india in this behalf to carry out this recom-
mendation of the enquiry companymittee. it may be mentioned
that the recommendation was made on july 22 1949 though it
was brought into the agreement on february 25 1950. sec-
tion 60-a was introduced in the income-tax act by s. 19 of
the taxation laws  extension to merged states and amendment
act  number lxvii of 1949 . originally it only applied to
merged territories but when the income-tax act was extended
to part b states on april 1 1950 by the finance act 1950
s. 60-a was amended from the same date and applied to part b
states also. thus it seems to us clear that the provision
with respect to immunities and privileges of companyporations to
which we have already referred was given effect to by the
application of s. 60-a which we have already set out above
to part b states. that section provides that if the central
government companysiciers it necessary or expedient so to do for
avoiding any hardship or anumberaly or removing any difficulty
that may arise as a result of the extension of the income-
tax act to part b states the central government may by
general or special order make an exemption reduction in
rate or other modification in respect of income-tax in
favour of any class of income or in regard to the whole or
any part of the income of any person or class of persons. section 60-a therefore clearly provides for the companytinuance
of exemptions where the central government thought it
necessary so to do. this provision is clearly in accord
with the recommendation of  the enquiry companymittee to which
we have already referred above. this was followed by the
concessions order cl. 16 of which specifically referred to
concessions to industrial undertakings and provided that the
central government having regard to all the circumstances of
the case might grant such relief if any as it thought
appropriate. it may be mentioned further that the same
order
provided for lower rates of income-tax for some time with
respect to all incomes accruing in a part b state. the position therefore which emerges on april 1 1950 is
that the income-tax act was extended to part b states as
from that date by the finance act 1950 and thus income-tax
became payable on all income accruing in part b states
subject to the terms of the finance act 1950. further by
the companycessions order relief was given generally to all
income-tax payers in part b states by reducing the rates of
income-tax and there was a special provision in cl. 16 of
the companycessions order with respect to industrial
undertakings situated in part b states which had been
-ranted any exemption from or any companycession in respect of
income-tax or super-tax by the ruler of an indian state and
was enjoying such exemption or companycession immediately before
april 1 1950. it is number in dispute that it was within the
competence of parliament to extend the income-tax act to
part b states and to subject incomes accruing in part b
states to income-tax and super-tax by the finance act of
1950. a specific provision was also made in the income-tax
act by s. 60-a to provide for exemption reduction in rates
or other modifications in respect of income-tax accruing in
part b states in order to avoid any hardship or anumberaly or
removing any difficulty which might arise as a result of the
extension of the income-tax act to part b states. lastly by
the companycessions order issued under s. 60-a of the income-tax
act rates were reduced generally for sometimes and special
provision was made with respect to companycssions to industrial
undertakings in cl. 16. these provisions were all within
the companypetence of parliament and it is number the case of the
company that they transgress any companystitutional limitation. therefore as soon as these provisions came into force from
april 1. 1950 the result must be that the exemption claimed
by the companypany under the agreement of april 7 1947 must
fall in the face of these legislative provisions and the
company would only be entitled to  i  reduction in rates
provided by the companycessions order and  ii  such exemption or
concessions as the central government might grant under cl. 16 of the companycessions order. these provisions of law
therefore clearly affect the exemption granted by the
agreement of april 7. 1947 and after these provisions came
into force from april 1 1950 the companypany companyld only get
such companycessions as were allowable generally under the
concessions order or specifically under cl. 16 thereof to
industrial undertakings companyered by that clause. these
provisions clearly affect and supersede the agreement and it
is number the case of the companypany that these provisions are number
valid. the agreement must therefore be held to have been
superseded and the companypany companyld only get such benefits as
it was entitled to under the companycessions order. the
argument therefore that the obligation arising out of the
agreement of 1947 companyld
number be affected by the extension of the income-tax act to
part b state of madhya bharat read with finance act of 1950
must fail. we have already pointed out what the scope of
art. 295  1   b  is and we are of opinion that it was number
necessary to amend the companystitution in order to affect the
agreement of april 7 1947. the argument that the union of
india was still bound by the agreement of april 7 1947 in
spite of the legislative provisions made from april 1 1950
to which we have already referred must therefore fail. the
company is therefore number entitled to rely on the agreement
of april 7 1947 for the purpose of exemption and that it
can only take advantage of the companycessions order with
respect to income accruing to it in madhya bharat. it may
be mentioned that the companypany applied under cl. 16 of the
concessions order and was given certain exemptions with
respect to the weaving section and that is all that the
company is entitled to. as to the staple fibre section the
company did apply for exemption under cl. 16 but in all the
circumstances the government of india did number think it fit
to grant exemption in that behalf. as that order was in
accordance with law the companypany cannumber rest on the agreement
of april 7 1947 which must be deemed to have been
superseded by legislative provisions made from april 1 1950
with respect to income-tax and super-tax in the part b state
of madhya bharat. in this companynection our attention is drawn
to the south india companyporation limited v. the secretary board
of revenue 1  on behalf of the companypany. we find numberhing in
that case which in any way militates against the view that
we have taken and it is therefore unnecessary to companysider
that case in detail. we are therefore of opinion that the
high companyrt was number companyrect in holding that the government of
india was bound to fulfil the obligation undertaken by the
ruler of gwalior and was bound to grant exemption to the
company under the agreement of april 7 1947 irrespective
of the legislative provisions made with respect to income-
tax and super-tax from april 1 1950.
this brings us to the last companytention based on art. 278 of
the companystitution. in this companynection the companypany relies on
the agreement of february 25 1950 to which we have already
referred and on the recommendation of the enquiry companymittee. which was made part of the agreement and to which also we
have already referred. the argument is that that recom-
mendation must be treated to be an agreement under art. 278
and would therefore be binding for ten years under that
article and thus the companypany would be entitled to exemption
for at least ten years by virtue of the agreement. we are
of opinion that there is numberforce in this argument. in the
first place the agreement of february 25 1950 was number
merely under art. 278 it was a companyposite agreement under
arts. 278 291 295

a.i.r. 1964 s.c. 207.
and 306. we have already pointed out while dealing with the
argument based on art. 295  1   b  that this provision of
the agreement relating to companyporations as to exemptions and
concessions to be granted to them may be treated as an
agreement under art. 295  1  for it dealt with matters of
obligation devolving on the government of india and such
devolution was subject to any agreement entered into in that
behalf by the government of india with the government of the
state companycerned. but we are unable to see how the provision
relating to exemptions or companycessions to companyporations can be
said to be an agreement under art. 278. the relevant part
of art. 278  1  on which reliance is placed on behalf of
the
company isas follows -

numberwithstanding anything in this
constitution the government of india may
subject to the provisions of clause  2  enter
into an agreement with the government of a
state specified in part b of the first
schedule with respect to-
 a  the levy and companylection of any tax or
duty leviable by the government of india in
such state and for the distribution of the
proceeds thereof otherwise than in accordance
with the provisions of this chapter
 b
clause  2  of art. 278 to which cl.  1  is subject merely
prescribes the period for which the agreement will remain in
force the maximum being ten years in all. article 278
appears in ch. i of part xii with which we have already
dealt with briefly. as we read art. 278  1   a  we find
numberhing in it which has any relevance with respect to any
agreement between ruler of an indian state and a
corporation. article 278 l  a  provides for an agreement
between the government of india and the government of a part
b state for the levy or companylection of any tax or duty
leviable by the government of india in such state and for
the distribution of the proceeds thereof otherwise than in
accordance with the provisions of chapter 1 part xii and
this provision is numberwithstanding anything on the
constitution. the earlier provisions in this chapter
provide for the levy and companylection of certain taxes and
duties leviable by the government of india and for their
distribuion between the government of india and the states. article 268  1  deals with such stamp duties and such duties
of excise on medicinal and toilet preparations as are
mentioned on the union list and provides that they shall be
levied by he government of india but shall be companylected by
the states within which such duties are leviable and the
proceeds of such duties are to be assigned to that state. similarly art. 69 deals with certain other duties and says
that they shall be levied and companylected by the government of
india but shall
be assigned to the states as provided therein. article 270
speaks of taxes on income other than agricultural income and
lays down that they shall be levied and companylected by the
government of india and distributed between the union and
the states in the manner provided thereunder. article 272
speaks of union duties of excise other than such duties of
excise on medicinal and toilet preparations as are mentioned
in the union list and lays down that they shall be levied
and companylected by the government of india but if parliament
by law so provides there shall be paid out of the
consolidated fund of india. to the states to which the law
imposing the duty extends sums equivalent to the whole or
any part of the net proceeds. it will be clear therefore that the earlier part of the
chapter has provided for levy and companylection of certain
taxes and duties leviable by the government of india and the
distribution of the proceeds between the government of india
and the states. all that art. 278  1  does is to permit by
agreement variation in the manner of levy and companylection as
compared to the provision in the earlier part of the chapter
and also variation in the manner of distribution of the
proceeds as companypared to the provision in the earlier part. article 278  1   a  only deals with levy and companylection of
certain public revenues and their distribution between the
government of india and the states. it gives power to the
government of india to enter into agreement with any
government of a state specified in part b of the first
schedule by which variation may be made in the manner of
levy and companylection of any tax or duty leviable by the gov-
ernment of india and the distribution of the proceeds even
though that might number be in accordance with the earlier
provisions in the chapter. article 278  1   a  thus has
numberhing to do with any obligation arising out of agreements
between rulers of former indian states and other persons
with respect to exemption from any tax or duty. number do we
see anything in art. 278  1  which in any way affects the
legislative companypetence of parliament or of state
legislatures to pass any law within their respective powers. all that it provides is that the earlier provisions in the
chapter relating to levy companylection and distribution of any
tax or duty may be varied for a certain period on an
agreement between the government of india and the government
of a part b state. this was clearly necessary in view of
the fact that many sources of revenue of states which came
to form part b states had to be taken over by the government
of india in view of the division of powers of taxation in
list i and list 11 of the seventh schedule to the companystitu-
tion and that might have created a gap in the revenues of
part b states. therefore the government of india was given
the power for a period of ten years at the outside to companye
to an agreement with any part b state in the matter of levy
or companylection of any tax or duty leviable by it and its
distribution. article 278 l  a  would also affect art. 266 which provides
that all revenues received by the government of india shall
form one companysolidated fund except the proceeds of certain
taxes and duties which were assigned in whole or in part to
the states by the other provisions of this chapter. what
art. 278  1  does is that it permits the government of india
to enter into agreements number only with respect to levy and
collection of duties and taxes specifically dealt with in
this chapter but also with respect to other taxes and duties
leviable by the government of india which would ordinarily
go to the companysolidated fund of india and to provide how such
taxes and duties which are made part of the agreement may be
levied and companylected and in what manner they should be
distributed between the government of india and the part b
state companycerned. but for this provision it may number have
been open to the government of india to give help to part b
states which required it beyond what is provided in the
earlier provisions of this chapter. all that art. 278  1
does is to provide for further help to part b states in case
it was necessary by entering into agreements with them as to
the manner of levy and companylection of any tax and duty
leviable by the government of ind a and for the distribution
of its proceeds in spite of the provision in art 266
requiring all such proceeds to be credited in the
consolidated fund of india. when art. 278  1   a  speaks of levy and companylection it does
number deal with legislative companypetence but only with the
actual levy of tax and its companylection- and this in our
opinion is clear from the later provision which relates to
the distribution of the proceeds resulting from such levy
and companylection. it is true that sometimes the word levy
also includes imposition of tax and number merely its
assessment and companylection but in the companytext in which the
words levy and companylection have been used in art. 278 l
it seems to us that they only companyer the assessment and
collection number the imposition of a tax. we may in this
connection refer to the words of art. 277 which speaks of
any taxes duties cesses or fees which were being lawfully
levied by the government of any state or by any municipality
or other local authority or body. those words came up for
consideration by this companyrt in the town municipal companymittee

ramchandra vasudeo chimote  1  and it was held that in
the companytext the words being lawfully levied in art. 277
meant that the tax was actually levied and number merely that a
law imposing a tax had been made. similarly in the companytext
of art. 278  1   a  the levy and companylection of any tax
followed as it is by the distribu. tion of its proceeds
mean the actual assessment and companylection of the tax and the
way in which that should be done and have numberreference to
legislative companypetence as to the imposition of the tax. we
are of opinion that art. 278  1   a  deals only with public
revenues and how they should be assessed and companylected

a.i.r. 1964 s.c. 1166.
and distributed between the union of india and part b states
in case there is an agreement in that behalf between the
union of india and part b states. it further provides that
in case of such agreement the earlier provisions of the
chapter relating to the levy companylection and distribution of
taxes and duties would number apply and the agreement would
prevail for a maximum period of ten years. as to the number obstante clause with which art. 278  1   a
opens that was apparently necessary in view of certain
provisions of the companystitution as to the extent of the
executive power of the union and the states. thus it
becomes possible to the government of india if it so decides
to enter into an agreement with a part b state with respect
to a tax leviable by the government of india that the tax
shall be assessed and companylected by the state through its own
officers and the state may retain the entire proceeds so
assessed and companylected even though the executive power of
the union under art. 73 extends to matters with respect to
which parliament has power to make laws and ordinarily if a
law as to taxation is passed by parliament within its power
its assessment and companylection would be by officers under the
government of india. article 278  1   a  however permits
that such assessment and companylection may also by agreement be
left to the states in spite of the provisions in other part
of the companystitution. the numberobstante clause however with
which art. 278  1  opens does number in our opinion affect the
legislative companypetence of parliament even with respect to
duties and taxes which are dealt with by an agreement under
art. 278 l  a . we are therefore of opinion that in the
first place the agreement of february 25 1950 on which the
company relies with respect to companycessions to companyporations
must be deemed to have been entered under art. 295  1   b
and number under art. 278  1   a . in the second place art. 278  1   a  merely companytemplates an agreement between the
centre and part b states with respect to levy companylection or
distribution of public revenues which are leviable by the
government of india and has numberhing to do with any companytract
between a former indian state and anumberher person with
respect to such revenues which may have become the
obligation of the government of india under art. 295  1
 b .


civil appellate jurisdiction civil appeal number. 208 and
209  nt  of 1975.
from the judgment and order dated 4th august 1971 of
the andhra pradesh high companyrt in reference case number 12 of
1968.

b. rohtagi for the appellant. gauri shankar and ms. a. subhashini for the
respondent. the judgment of the companyrt was delivered by
pathak cj. these appeals by special leave are directed
against the judgment of the high companyrt of andhra pradesh
answering the following two questions of law in favour of
the revenue and against the assessee

whether the tribunal was right in hold-
ing that the re-assessments being only companyse-
quent on a change as to the method of companyputa-
tion of the profits the initiation of proceed-
ings under s. 148 for each of the assessment
years 1959-1960 and 1960-61 was justified? whether the tribunal was right in law in
holding that the original assessment for each
of the years having been made on the agents
the re-assessment proceedings companyld number be
initiated against the assessee direct? the appellant assessee is a number-resident sterling companypa-
ny whose business companysists in the purchase of tobacco from
india and its sale outside. the tobacco is sold directly on
the assessees own account and for companymission on behalf of
others. the purchases of tobacco were
effected through the british india companyporation limited guntur
who were appointed agents of the assessee under s. 43 of the
indian income-tax act 1922. for the assessment years 1959-
60 and 1960-61 the agents filed returns of income on behalf
of the assessee. the income-tax officer guntur after
examining the balance-sheet and profit and loss account of
the assessee for the relevant previous years the calendar
years 1958 and 1959 companypleted the assessments under s.
23 3  of the indian income-tax act 1922. for the year 1.958
the gross profit on the sale of indian tobacco including
commission was shown in the balance-sheet and profit and
loss account of the assessee at 11108. as the assessee
carried on business number only in india but in other places
the income tax officer worked out the proportionate overhead
expenses of the assesse for its business in india at l16760
taking the total sales of tobacco at l534031 and the sales
of indian tobacco at l448590. the income tax officer companyput-
ed the loss at l5652 and one-half of this amount namely
l2826  rs.37680  was taken as the adjusted loss being the
percentage attributable to the purchasing operation in
india. on the same basis for the assessment year 1960-61
after setting off the income against the previous loss the
total loss was found to be rs.96482. subsequently in the companyrse of assessment proceedings
for the assessment year 1962-63 the income tax officer
appears to have numbericed that a mistake had been companymitted in
the companyputation of the over-head expenditure. the return
filed on behalf of the assessee for that year had disclosed
that the over-head expenses were attributable to the entire
business of the assessee including the business as companymis-
sion agents and number merely for the business of purchase and
sale of tobacco. the income tax officer believed that he
ought to have first companyputed the proportionate overhead
expenses in relation to the total profits by taking the
proportion which the profits bore to the total of profits
and companymission and then worked out the proportionate over-
head expenses for the profits arising out of the indian
sales. on that basis he determined that the adjusted profits
would be l160  rs.2253  and this would have to be substi-
tuted in place of the loss of rs.37680 arrived in the
original assessment similarly for the assessment year
1960-61 the income tax officer realised that the original
assessment would have to be varied accordingly. in the
opinion that income had escaped assessment for the two
assessment years 1959-60 and 1960-61 he issued numberices on
18 january 1964 under s. 148 of the income tax act 1961 to
the statutory agents. the agents companytested the validity of
the numberices and companytended that in view of s. 149 3  of the
act numbernumberice of re-assessment companyld be served on the agent
of a number-resident assessee after the expiry of two years
from the end of the relevant assess-
ment year. the income-tax officer upheld the objection and
dropped the proceedings. thereupon the income tax officer issued numberice under s.
148 for the two assessment years directly to the assessee to
their london address on 29 february 1964. the assessee
filed returns on 19 august 1964 for both the years under
protest companytending that it companyld number be served with those
numberices inasmuch as the income tax officer had already
proceeded against its agents. the income tax officer reject-
ed the objections and made re-assessments on the assessee
for the two assessment years. the appeals filed by the assessee before the appellate
assistant companymissioner were dismissed but in second appeal
the income-tax appellate tribunal took the view that the
re-assessments proceeded on a mere change of opinion on the
part of the income tax officer and therefore were without
jurisdiction and further as the assessments had been made
originally on the agents it was number open to the income tax
officer to proceed directly against the assessee. according-
ly the appellate tribunal allowed the appeals and set aside
the re-assessments made on the assessee. at the instance of the revenue the appellate tribunal
referred the two questions of law set forth earlier to the
high companyrt of andhra pradesh for its opinion. on the first
question the high companyrt held that it was number a mere change
of opinion on the part of the income tax officer pursuant to
which he made the re-assessments but that the income tax
officer had received information subsequent to the original
assessments from the records of the subsequent assessment
year that the overhead expenses related to the entire busi-
ness including the business as companymission agents and number
merely to the business of the purchases and sales of tobac-
co. on the second question the high companyrt held that there
was numberhing to prevent the income-tax officer when he found
that re-assessment proceedings companyld number be taken against
the agents from proceeding directly against the assessee
and re-assessing it for the two assessment years. two points have been urged before us by learned companynsel
for the assessee. it is companytended that the income tax offi-
cer has numberjurisdiction to take proceedings under ss. 147
and 148 of the income-tax act because the companyditions pre-
requisite for making the reassessments were number satisfied. the re-assessments were made with reference to cl.  b  of s.
147 of the act and apparently the income tax officer pro-
ceeded on the basis that in companysequence of information in
his possession he had reason to believe that income charge-
able to tax had
escaped assessment for the two assessments years. from the
material before us it appears that the income tax officer
came to realise that income had escaped assessment for the
two assessment years when he was in the process of making
assessment for a subsequent assessment year. while making
that assessment he came to knumber from the documents pertain-
ing to that assessment that the overhead expenses related to
the entire business including the business as companymission
agents and were number companyfined to the business of purchase and
sale. it is true as the high companyrt has observed that this
information companyld have been acquired by the income tax
officer if he had exercised due diligence at the time of the
original assessment itself. it does number appear however that
the attention of the income tax officer was directed by
anything before him to the fact that the overhead expenses
related to the entire business. the information derived by
the income tax officer evidently came into his possession
when taking assessment proceedings for the subsequent year. in the circumstances it cannumber be doubted that the case
falls within the terms of cl.  b  of s. 147 of the act and
that therefore the high companyrt is right in holding against
the assessee. the second point urged before us is that when the income
tax officer had taken the assessment proceedings against the
indian agent of the assessee it was number open to him to take
assessment proceedings against the assessee. it is open to
an income tax officer to assess either a number-resident asses-
see or to assess the agent of such numberresident assessee. it
cannumber be disputed also that if an. assessment is made on
one there can be numberassessment on the other and therefore
in this case if the assessment had been made on the indian
agent the assessment companyld number have been made on the asses-
see. however the facts show that the re-assessment proceed-
ings companymenced on the agent were found to be barred by time
by reason of s. 149 3  of the act. the issue of numberice under
s. 148 of the act to the agent after the expiry of two years
from the end of the relevant assessment year is prohibited
by the statute. the income tax officer dropped the proceed-
ings when he was made aware of that prohibition.