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Dalmia Dadri Cement Co., Ltd. Vs. Commissioner of Income-tax, SimlA. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberCivil Miscellaneous No. 97 of 24th June, 1953
Reported in[1954]26ITR375(P& H)
AppellantDalmia Dadri Cement Co., Ltd.
RespondentCommissioner of Income-tax, SimlA.
Cases ReferredLimited v. The King
Excerpt:
- sections 100-a [as inserted by act 22 of 2002], 110 & 104 & letters patent, 1865, clause 10: [dr. b.s. chauhan, cj, l. mohapatra & a.s. naidu, jj] letters patent appeal order of single judge of high court passed while deciding matters filed under order 43, rule1 of c.p.c., - held, after introduction of section 110a in the c.p.c., by 2002 amendment act, no letters patent appeal is maintainable against judgment/order/decree passed by a single judge of a high court. a right of appeal, even though a vested one, can be taken away by law. it is pertinent to note that section 100-a introduced by 2002 amendment of the code starts with a non obstante clause. the purpose of such clause is to give the enacting part of an overriding effect in the case of a conflict with laws mentioned with the.....orderchopra, j. - the facts giving rise to this reference under section 66 (1) of the indian income-tax act, 1922, are these : the assessee company, m/s. dalmia dadri cement ltd., dadri, before it was started entered into an agreement with the ruler of the erstwhile jind state, on 1st april, 1938. the document was duly executed and signed by one of its promoters on behalf of the company and by the then chief minister on behalf of the state government. by clause (1) of the agreement, the state granted and conferred upon the company termed as licensee the sole and exclusive monopoly right of manufacturing cement in the jind state, both for consumption in the state and for exporting outside, on the terms and conditions for a period of twenty-five years commencing from the date of agreement.....
Judgment:
ORDER

CHOPRA, J. - The facts giving rise to this reference under Section 66 (1) of the Indian Income-tax Act, 1922, are these : the assessee company, M/s. Dalmia Dadri Cement Ltd., Dadri, before it was started entered into an agreement with the Ruler of the erstwhile Jind State, on 1st April, 1938. The document was duly executed and signed by one of its promoters on behalf of the company and by the then Chief Minister on behalf of the State Government. By clause (1) of the agreement, the State granted and conferred upon the company termed as licensee the sole and exclusive monopoly right of manufacturing cement in the Jind State, both for consumption in the State and for exporting outside, on the terms and conditions for a period of twenty-five years commencing from the date of agreement and gave an option to the licensee to renew it for successive periods of twenty-five years each up to an aggregate of 100 years counted from 21st July, 1936. Besides other benefits that the State or its subjects were to derive from the said agreement, it was stipulated that 6% cumulative preference shares fully paid-up of the face value of Rs. 1,00,000 and ordinary shares fully paid-up of the total face value of Rs. 50,000 would be allotted by the company to the State or its nominee without any payment whatsoever. Out of a number of other balancing and reciprocal terms one with which we are primarily concerned is clause (23), the relevant portion of which reads as follows :-

'The company shall be assessed to income-tax in accordance with the State procedure but the rate of income-tax shall always be four per cent. upto a limit of the income of rupees five lacs and five per cent. on such income as is in excess of rupees five lacs.'

Clause (24) bound the State not to impose or realize any export or import duty or any other tax on the licensees business under the agreement or on his machinery, materials etc. By clause (25), the licensee was made subject to all statutory enactments for the time being in force in the Jind State so far as they were not inconsistent with or repugnant to the provisions of the agreement. In clause (31) it was agreed that the licensee would not be entitled to claim any compensation for the agreement or any part of it becoming inoperative in consequence of the State joining the proposed federation of India or any change in constitution or for any other reason beyond the control of the State.

It is not disputed that the Maharaja, the sovereign authority of the legislative, executive and judicial functions of the Government of Jind, could and did validly enter into the agreement and grant the concessions embodied in it. It is also common ground between the parties that the Maharaja chose to abide by the obligation contained in clause (23) of the agreement and that it remained in force so long as the State had its existence as a separate entity. No tax was thus charged on the income of the company during the period under the Jind State Income-tax Act, 1938, which came into force on 1st April, 1938, or under the Jind State Income-tax Act, 1947, Section 19 of which repealed the earlier Act.

On 15th August, 1947, the Ruler of Jind, like the Rulers of a number of other Indian States, acceded to the Dominion of India with respect to Defence, External Affairs and Communications. Later on, on 5th May, 1948, the Rulers of eight of such States, including the Ruler of Jind, with the concurrence and guarantee of the Government of India, entered into a Covenant and agreed to unite and integrate their territories in one State with a common executive, judiciary and legislative by the name of the Patiala and East Punjab State Union. On 20th August, 1948, the Ruler as stipulated in the Covenant, made over the administration of their respective States to the Raj Pramukh of the new State (Patiala and East Punjab States Union). Article VI of this Covenant on which reliance is placed by the assessee reads as follows :-

'(1) The Ruler of each Covenanting State shall, as soon as may be practicable, and in any event not later than 20th of August, 1948, make over the administration of his State to the Raj Pramukh; and thereupon,

(a) all rights, authority and jurisdiction belonging to the Ruler, which appertain, or are incidental to the Government of the Covenanting State shall vest in the Union shall hereinafter be exercisable only as provided by this Covenant or by the Constitution to be framed thereunder;

(b) all duties and obligations of the Ruler pertaining or incidental to the Government of the Covenanting State shall devolve on the Union and shall be discharged by it;

(c) all the assets and liabilities of the Covenanting State shall be the assets and liabilities of the Union; and

(d) the military forces, if any, of the Covenanting State shall become the military forces of the Union.'

Provisions for the administration of the new State were made in Article X of the Covenant and it runs thus :-

'(1) There shall be formed, as soon as may be practicable, a Constituent Assembly in the manner indicated in Schedule II; and it shall be the duty of that Assembly to frame a Constitution of a unitary type for the Union within the framework of this Covenant and the Constitution of India, and providing for a Government responsible to the legislature.

(2) Until a legislature elected in accordance with the terms of the Constitution framed by it comes into being, the Constituent Assembly as the interim Legislature of the Union :

Provided that until the Constitution framed by the Constituent Assembly comes into operation after receiving the assent of the Raj Pramukh, the Raj Pramukh shall have power to make and promulgate Ordinances for the peace and good government of the Union or any part thereof, and any Ordinance so made shall have the like force of law as an Act passed by the Constituent Assembly; but any such Ordinance may be controlled or suspended by any such Act, and if promulgated after the first meeting of the Constituent Assembly, shall not be in force for more than six months from its promulgation.'

On the day the administration of the eight States got vested in the Raj Pramukh, i.e., 20th August, 1948, he, in exercise of the powers conferred on him by the above proviso to Article X (2), made and promulgated an ordinance No. 1 of 2005 Bk. (1948) by the name of the Patiala and East Punjab States Union Administration Ordinance, 2005. Section 3 of this Ordinance is to the following effect :-

'As soon as the administration of any Covenanting State has been taken over by the Raj Pramukh as aforesaid, all Laws, Ordinances, Acts, Rules, Regulations, Notifications, Hidayats and Firman-i-Shahi, having force of law in Patiala State on the date of commencement of this Ordinance shall apply mutatis mutandis to the territories of the said State and with effect from that date all laws in force in such Covenanting State immediately before that date shall be repealed :

Provided that proceedings of any nature whatsoever pending on such date in the Courts or Offices of any such Covenanting State shall, notwithstanding anything contained in this Ordinance or any other Ordinance, be disposed of in accordance with the Laws governing such proceedings in force for the time being in any such Covenanting State.'

This was followed by the issue, over the signature of the Revenue Secretary, of Notification No. 35, dated 27-5-2005/11th September, 1948, that the Patiala Income-tax Act of 2001 and the rules thereunder had come into force in the various Covenanting States from 20th August, 1948, and replaced the law or laws in force in that behalf in those States before that day. The Patiala Income-tax Act was subsequently repealed and ceased to have effect by virtue of Section 13 of the Finance Act, 1950, which came into force on 8th April, 1950. But with that legislation we are not for the present concerned as the assessment in question relates to an earlier period.

Ordinance No. 1 of 2005 was repealed and was in substance re-enacted by the Pepsu General Provisions (Administration) Ordinance, No. XVI of 2005 Bk. promulgated on 4th Phagan, 2005/5th February, 1949. With slight variations in language of the corresponding section in the prior Ordinance, Section 3(1) of this later Ordinance lays down :-

'As from the appointed day, all laws and rules, regulations, bye-laws and notifications made thereunder, and all other provisions having the force of law, in Patiala State on the said day shall apply, mutatis mutandis, to the territories of the State and all laws in force in the other Covenanting States immediately before that day shall cease to have effect :

Provided that all suits, appeals, revisions, applications, reviews, executions and other proceedings or any of them, whether civil or criminal, or revenue pending in the courts and before authorities of any Covenanting State shall, notwithstanding anything contained in this Ordinance be disposed of in accordance with the laws governing such proceedings in force in any such Covenanting State immediately before the appointed day.'

The phrase 'appointed day' means, as stated in Section 2(a) of this Ordinance, in fifth day of Bhadon, 2005/twentieth day of August, 1948, and the phrase 'Covenanting States' means any of the States mentioned in Section 2(b); the State of Jind is one of the States mentioned therein. It is to be noticed that in or in the earlier Ordinance there is no saving as regards any income-tax concessions that may have been granted by the Rulers of the Covenanting States.

The assessment in the present case is for the year 2006 Bk. (1949-50) and was made in accordance with the Patiala Income-tax Act, 2001, as applied to all the component parts of Pepsu by the Raj Pramukh under the powers conferred on him by Article X of the Covenant. The assessed profits and gains of the company for the 'previous year', viz., calendar year 1948, were found by the Income-tax Officer to amount to Rs. 2,16,010. The amount was reduced by the Appellate Assistant Commissioner by Rs. 11,965 and by a further sum of Rs. 9,780 by the Appellate Tribunal. The tax and the super-tax demand amounted to Rs. 90,000. The contention of the assessee was, and now is, that according to the terms of its agreement with the Ruler of Jind the tax could only be charged at the flat rate of four per cent. on its income. Counted at this rate, the total tax payable comes to a little less than Rs. 8,000. The Tribunal turned down the contention by holding that in the absence of any new Notification by or under the authority of the Raj Pramukh or any ordinance promulgated by him subsequent to the formation of Pepsu recognizing the tax concession granted by the Jind State, the said concession could not be availed of by the assessee or deemed to be operative after 20th August, 1948. On an application by the assessee under Section 66 (1) of the Income-tax Act, the Tribunal has stated the case to this Court and formulated the following question for its decision :-

'Whether the assessees profits and gains earned in the calendar year 1948 were assessable for S. 2006 (1949-50) at the rates in force according to the Patiala Income-tax Act of S. 2001 read with Section 3 or the Patiala & East Punjab States Union Administration Ordinance (No. 1 of 2005), as repealed and re-enacted in Section 3 of the Patiala & East Punjab States Union General Provisions (Administration) Ordinance (No. XVI of 2005), or in accordance with clause (23) of the agreement of April, 1938, above referred to ?'

Mr. Sikri, at the fag end of his address in reply to the arguments of the assessees counsel, took exception to the jurisdiction of this court to deal with the matter in question on the ground that it was expressly barred by Article 363(1) of the Constitution. Since the objection relates to jurisdiction it would be better to dispose of it before proceedings to merits. The article says :-

'Notwithstanding anything in this Constitution but subject to the provisions of Article 143, neither the Supreme Court nor any other court shall have jurisdiction in any dispute arising out of any provision of a treaty, agreement, covenant, engagement, sanad, or other similar instrument which was entered into or executed before the commencement of this Constitution by any Ruler of an Indian State and to which the Government of the Dominion of India or any of its predecessor Governments was a party and which has or has been continued in operating after such commencement, or in any dispute in respect of any right accruing under or any liability or obligation, arising out of any of the provisions of this Constitution relating to any such treaty, agreement, covenant, engagement, sanad, or other similar instrument.'

The argument is that the dispute relates to a term of the Covenant which was entered into and executed by Rulers of eight of the Indian States before the commencement of the Constitution and which has continued in operation thereafter, and, therefore, it is hit by the mandatory provision of the article. It is common ground between the parties that the Government of India was a party to the Covenant inasmuch as it concurred in the Covenant and guaranteed all its provision, and in confirmation thereof Mr. V. P. Menon, Secretary to the Government of India in the Ministry of States, appended his signature on behalf and with the authority of the Government of India. Mr. Pathak, learned counsel for the assessee, meets the objection by contending that since the present is only a reference under Section 66 of the Indian Income-tax Act in which the Court is not called upon to pronounce any final order or judgment but has only to express an opinion on the particular question referred to it, Article 363 can have no application. It is argued that the final order in the case is to be passed by the Appellate Tribunal, though it has to be in conformity with the decision of the High Court, and that the Court in expressing its opinion only acts as an advisory body. Counsel in his connexion relies on Tata Iron and Steel Company Ltd. v. the Chief Revenue Authority of Bombay. The point involved in that case, however, was altogether different and it cannot be regarded as an authority in support of the contention. The question there was whether a decision of the High Court on a reference under Section 51 of the Indian Income-tax Act, 1918, (now Section 66 in Act XI of 1922) was appealable to the Privy Council. This depended upon interpretation of the words 'original jurisdiction' in clause 39 of the Letters Patent of the Bombay High Court. In the opinion of their Lordships, since these words were used in contradistinction to the words 'made on appeal' mentioned earlier in the same clause the decision of the High Court from which an appeal could be taken to the Privy Council must be either a final judgment, or a final decree or a final order, and as the order made in its consultative or advisory capacity did not fall under that category it was held that the order was not appealable. It may be mentioned that in order to supersede this view Section 66A has been added to the Income-tax Act by its amendment of 1926, and any judgment of the High Court delivered on an income-tax reference is expressly made appealable to the Supreme Court. A similar question depending upon interpretation of clause 31 of the Letters Patent of the Patna High Court came up before their Lordships of the Supreme Court in Seth Premchand Satramdas v. The State of Bihar. The relevant portion of clause 31 ordained that an appeal to the Privy Council would lie from 'any final judgment, decree or order' of the High Court of Judicature at Patna. On an objection that no appeal was competent Fazl Ali, J., observed that the order made by the High Court on a reference under Section 21 of the Bihar Sales Tax Act could not be regarded as a final order nor as an order passed in the exercise of the original or appellate jurisdiction of the High Court, because it was merely an advisory one and did not by its own force bind or affect the rights of the parties. It was consequently held that no appeal against the said order lay to the Federal Court.

Much of argument is not required to show that the above cases or observations made therein have no bearing to the facts of the present case. Article 363 of the Constitution bars the jurisdiction of courts to go into any dispute arising out of any Covenant etc., and the word 'jurisdiction' would include the consultative jurisdiction as well. In my view, therefore, if other requirements of the articles are satisfied it cannot be regarded as inapplicable on this ground.

On behalf of the assessee Shri Ved Vyas contended that the phrase 'jurisdiction in any dispute' in Article 363 means the jurisdiction to give a final decision on a lis and that in a case like the present where the court is only to express an opinion on a question of law referred to it, it is not exercising jurisdiction to decide any dispute between two parties. I have not been able to appreciate the argument, nor do I see any relevancy of the decision in Commissioners of Inland Revenue v. Sneath which is cited as an authorised to decide it finally. Jurisdiction of a Court may be limited either locally, or personally, or as to amount, or as to the character of the questions to be determined. In the last case, the Court does have jurisdiction even though it is only to decided a particular question. It cannot also be said that there is no lis or dispute between two parties in the present case. An assessee has the right of appeal against an order of assessment as provided by Section 30 of the Income-tax Act. The assessee as well as the Income-tax Commissioner, under Section 33 of the Act, may appeal against an order passed by the Appellate Assistant Commissioner. This second appeal by the assessee or an appeal by the Income-tax Officer is presented to an heard and decided by the Appellate Tribunal. Under Section 66 of the Act the assessee or the Commissioner may by application require the Appellate Tribunal to refer to the High Court any question of law arising out of such order and the Tribunal has then to draw up a statement of the case and refer it to the High Court. The Income-tax Commissioner and the assessee are parties to these proceedings, and obviously there is a lis or dispute between the two contestants before the High Court.

In Commissioner of Inland Revenue v. Sneath the question was whether a decision of the Income-tax Commissioner in assessing super-tax for a previous year did operate as res judicata to prevent a contrary decision in assessing super-tax for a later year. This depended on the question whether there was any lis inter partes before the Commissioner. Their Lordship, therefore, proceeded to examine the function and power of the Commissioner and observed that his duty is merely to form an estimate in each year of assessment of the amount of the income of the taxpayer on which the sur-tax imposed for that year is to be charged. In estimating the total income of the taxpayer the Commissioner must necessarily form and express opinion upon various incidental questions of fact and law, but the only thing the Commissioner has jurisdiction to decided directly and as a substantive matter is the amount of taxpayers income for the year in question. His decision is final not as judgment inter partes but as a final assessment of the income which determines the tax payable. It was further observed that there can be no lis until the rights and duties are ascertained and thereafter questioned by litigation. Their Lordships did not regard Hoystead v. Commissioner of Taxation as an authority to the contrary, because in that case the decision which was treated as giving rise to an estoppel was the decision not of the Commissioner but of the Australian High Court. On the basis of this authority it cannot, therefore, be urged that there is no lis inter partes even in the case stated to the High Court.

The contention that the Covenant has not continued in operation after the Constitution, and, therefore, Article 363 has no application is equally fallacious. The argument is that some of the terms of the Covenant are already discharged because of their fulfillment and most of the rest of them have been incorporated in the Constitution of Indian, which has been adopted by the State. Counsel, therefore, maintains that the Covenant has practically ceased to remain in operation. The fallacy of the argument is self-evident. The main case of the assessee, as will be presently seen, is based on one of the terms of the Covenant itself, viz., Article VI and its enforceability. The very foundation of his case goes out if the Covenant along with its terms has ceased to exist. There are terms in the Covenant, for instance, Articles XI to XV and XVII which relate to the rights, privileges, privy purses, etc., of the rulers who were parties to the Covenant, and the guarantees given to the members of the public services of each of the Covenanting States. These provisions, till they are, if they can be, abrogated or amended, must be deemed to be in operation even after the Constitution. It is common ground that the Covenant has in no way been superseded or abrogated. It must, therefore, be regarded as having remained in operation even after the commencement of the Constitution.

It is next urged that the case stated relates to period before the Constitution was adopted by the State of PEPSU and, therefore, Article 363 does not oust the jurisdiction of this Court to deal with the question in the manner it would have done before the Constitution. It is argued that the Constitution is only prospective and not retrospective and since jurisdiction was not taken away in express terms, it could not be so done merely by implication, Gondicalo Hypolito Constancio Noronha v. Damji Devji and Others is relied upon as an authority in support of the contention. In that case an action for possession of premises was brought in the Supreme Court of Kenya which then had admittedly jurisdiction to entertain the action. When the case was still pending the Ordinance, on which the action was started, was repealed by a new enactment and according to the latter jurisdiction to deal with the action was conferred upon the Rent Controller Board. On an appeal to their Lordships of the Privy Council, it was held that the latter Ordinance was not retrospective and had no application to suits begun in the Supreme Court before the Ordinance came into force and that upon its true construction the Ordinance did not purport to deprive the Supreme Court of jurisdiction in actions then pending. It was further observed that no statute should be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary and distinct implication. That is no doubt the general principle of interpretation of statutes; but the case before us stands on a different footing. In the first instance, no proceeding was pending in the High Court of Pepsu when the Constitution came into force. Secondly, ours is a new Court that was created by the Constitution itself and it derives jurisdiction from the provisions made in the Constitution. The Court, which could have jurisdiction in the matter before the Constitution, no longer exists and the one that has taken its place can have no jurisdiction over matters expressly excluded by the Constitution. In the case State of Seraikella and Others v. Union of India and Another the Ruler of the State of Seraikella brought a suit under Section 204 of the Government of India Act, 1935, in the Federal Court of India against the Dominion of India and the Province of Bihar. In the suit, the plaintiff based his claim on the Instrument of Accession and challenged the taking over of the administration of his State by the defendant under various Acts, Orders and Notification. On behalf of the plaintiff it was urged that if there was any limitation of the jurisdiction of the Supreme Court to hear such a suit, if instituted in it under its original jurisdiction, such limitation was not relevant to be considered in respect of suits which stood transferred to the Supreme Court under Article 374(2). It was further argued that as Article 363 was prospective and not retrospective it did not affect the suits field in the Federal Court before the Constitution of India came into operation. Kania C.J., repelled the objections with the following observation :-

'It was argued that the article is prospective and not retrospective. Therefore, it only covers the cases which are filed in the Supreme Court after the Constitution comes into force and does not affect suits filed in the Federal Court before the Constitution of India came into operation. In my opinion this argument is based on a mistaken given to the words prospective and retrospective. It is not disputed that the Constitution is prospective. The question however is that the Supreme Court having been created by the Constitution itself on the day the Court proceeds to determine the matter, what, according to the Constitution of India, is the jurisdiction of this Court. This approach does not make the provision retrospective'.

Both the contentions were consequently overruled and it was held that the Supreme Court having been created by the Constitution its original jurisdiction to hear was limited by the proviso to Article 131 and Article 363(1), and that having regard to the subject-matter of the suit the Supreme Court had no jurisdiction to entertain the suit. This contention of the assessee must also, therefore, fail.

Lastly, it is urged that for the application of the article it is necessary that the parties to the proceedings should be one of the Rulers of the Covenanting States on the one side and the Government of India on the other, and the dispute between them should be one arising out of the Covenant. State of Saurashtra v. Bholanath Jatashankar Thakar is cited as an authority for the proposition. while I may not be in agreement with the counsels contention that the article requires that one of the Rulers of the Covenanting State must be a party to the proceedings, I do agree with him that the dispute must be one that arises out of the provisions of the Covenant, agreement etc. referred to in Article 363(1). There is no mention of the former condition in the article, nor can it be necessarily implied from it or any other provision of the Constitution; but the latter does form a necessary requirement of the article itself. The question before this Court cannot be regarded as a dispute arising out of the Covenant. One of its terms may be relied upon in support of the assessees assertion that obligations of the Ruler of Jind have become the obligations of the new State; but that does not amount to saying that the dispute between him and the Income-tax Department arises out of the Covenant. The dispute in fact arises out of the agreement with the Ruler of Jind and the subsequent income-tax law enforced by virtue of Section 3 of the Ordinances (Nos. I and XVI of 2005). It is the alleged conflict between these two, viz., the agreement and the subsequent law, that has given the rise to and is the cause of the dispute. The question referred to us makes no mention of any term of the Covenant or the binding nature of it. The contention that Article 363 bars the jurisdiction of the Court to go into and decided the question is consequently overruled.

On merits, Mr. Pathak contends that taxation appertains or is incidental to the legislative functions of a Government. While some of the terms of the agreement between the company and the Ruler of Jind State related to executive matters, exemption from the ordinary rules of Income-tax Act and the concession granted by its clause (23) appertain to a legislative matter. The Ruler of Jind combined in him both the executive and legislative powers of his Government. He was the undisputed head of the State and his power and authority were unrestricted, in theory as well as in practice. He could make and administer laws. He was the fountain-head of justice. His word was law or in fact had the force of law. Exemption that he made in favour of the company was, therefore, the law of the time and as such was to be respected and followed till lawfully set at rest or repealed by competent authority. Counsel further points out that there is nothing illegal or unusual in making a special law relating to one individual or a company or with respect to a particular matter. It is then contended that a private or special law can exist side by side with the general law and a later general law, unless an intention to do so is specifically declared, is not to be taken to rip off the earlier special law. Corporation of Blackpool v. Star Estate Co. Ltd. is cited as an authority for the proposition that a general statute will not, in the absence of clear words, be constructed as derogating from special provisions in a private statute. It is, therefore, urged that clause (23) of the agreement could be abrogated only by express terms and since no mention of it was expressly made in Section 3 of Ordinance No. I or XVI of 2005, it should be deemed to be still subsisting. The phrase 'all laws in force in such Covenanting States...... shall be repealed' in the one and 'all laws ...... shall cease to have effect' in the second Ordinance, it is contended, cannot have the effect of putting an end to the special law in favour of the assessee. Reliance has also been placed on the principles laid down in Section 6 of the General Clauses Act, though it is conceded that the Act itself has no application to the present case. Force of the general principles enunciated by the learned counsel cannot be disputed. There can be a special law and clause (23) of the agreement may be regarded as one of kind. It was valid when made and continued to have the force of law up to the formation of Patiala and East Punjab States Union. It is also correct that a special law can be repealed only expressly or by necessary intendment by a subsequent legislation. It is equally clear that after the Covenant and prior to the setting up of a duly constituted legislature in the new State, the legislative authority vested in the Raj Pramukh of the State as laid down by the proviso to Article X(2) of the Covenant. The Raj Pramukh had thus the authority in him to repeal all laws, special or general, or to enact that they had ceased to have any effect and to make and promulgate laws for the peace and good government of the new State. At no time the agreement has been expressly abrogated or superseded. The question that remains to be seen is : Has it been so done by implication or necessary intendment In this connexion it has to be remembered that repeal did not come from the same source of legislative authority. Generally it is the same legislature which can repeal an earlier legislation. That seems to be the reason for enacting, in Section 3 of the Ordinance XVI of 2005, that all previous laws in force in the Covenanting States 'shall cease to have effect'. At the time the Union was formed there was diversity of laws in the various States. The Rulers of the Covenanting States did not make up their mind and decide by what laws was the new State to be governed. They gave that power to the Raj Pramukh. To remove the diversity and bring about uniformity in the matter of laws for the Union the Raj Pramukh decided and ordained that all laws and rules, regulations, bye-laws and notifications made thereunder, and all other provisions having the force of law, in the Patiala State 'shall be the laws in the Union' and that all such laws in force in the Covenanting States before that day 'shall cease to have effect'. This the Raj Pramukh did on the very first day he assumed administration of the Union, i.e., 20th August, 1948. By virtue of this Ordinance the Patiala Income-tax Act, 2001, was enforced and hereafter in matters of income-tax this Act was to be the law for all the subjects of the newly formed State. No discrimination of any kind or any exemption in favour of any individual was made. If there was any earlier legislation in any of the States or any exemption in favour of any individual, introduction of this legislation, by necessary implication, put an end to all these statutes or special laws by which any exemption was created. After the enforcement of this legislation the question whether or not the income of an assessee is taxable has to be decided in accordance with the new Act. In the case Rajendra Narayan Bhanja Devi v. Commissioner of Income-tax, Bihar and Orissa, the Raja of State was assessed to income-tax after his estate was included in the Province of Orissa. He claimed exemption in respect of certain incomes on the ground that under a treaty with the Government in 1803, the Government had, in view of his undertaking to pay a special annual tribute to the Government, agreed that 'no further demand, however small, shall be made on the said Raja'. The case having been stated to the High Court of Patna, it was held that the Income-tax Act, by imposing a tax on all persons in British India without exemption, must be deemed, by necessary implication, to have repealed the earlier exemption, and that the income in question was taxable under the Act. Courtney Terrell, C.J., in the course of his judgment observed as follows :-

'If there be any earlier legislation or a treaty between the Sovereign power and the subject for special exemption from future taxation, followed by the introduction by the Sovereign power at a later date of legislation which admittedly, but for the claim to the earlier exemption, applies to and includes the person who was originally exempted, if follows that by necessary implication the later state repeals the earlier statue or other Act under which the exemption is claimed'.

I am, therefore, of opinion that if the legislation was within the authority of the Raj Pramukh and if it cannot be attacked on any other ground the Patiala Income-tax Act, 2001, irrespective of any previous agreement with the Ruler of Jind, must decide whether the income of the assessee in this case is taxable or not and also the rate at which it is to be taxed.

Shri Pathak takes exception to the validity of the Act, so far as it affects or abrogates the terms of the agreement between the assessee and the Ruler of Jind State, on three grounds, (1) that it is ultra vires the Covenant, which is the source of authority of the Raj Pramukh to legislate; (2) that it does not recognize the general principles of international law; and (3) that it is in conflict with the provisions of Article 295 of the Constitution of India. On the first of these grounds, learned counsel points out that by virtue of Article VI(b) of the Covenant all duties and obligations of the Rulers appertaining or incidental to the governments of the Covenanting States devolved on the Union and were thereafter to be discharged by the Union, and similarly by clause (c) of this article all the assets and liabilities of the Covenanting States became the assets and liabilities of the Union. The concession granted to the assessee by the agreement, which appertained or was incidental to his Government, created a corresponding obligation on the Ruler of Jind nor to charge any tax in excess of the one that was contracted. This obligation or liability, like the gains derived by the Jind State by force of the above provisions of the Covenant devolved upon and became liability and assets of the Union. Under clause (a) of Article VI all rights, authority and jurisdiction which got vested in the Union was to be exercised by the Raj Pramukh only as provided by the Covenant or the Constitution to be framed thereunder. The authority of the Raj Pramukh to legislate being subject to the provisions of the Covenant, it should be regarded as limited to the extent of the obligations and liabilities which devolved upon the Union. It is, therefore, contended that the Raj Pramukh acted beyond his authority in enforcing the legislation which ignored or abrogated those obligations and liabilities, and hence the promulgation of the Patiala Income-tax Act, 2001, without any exemption or exception in favour of the assessee, is ultra vires the Covenant from which the Raj Pramukh derived that authority.

Mr. Sikri on the other hand contends that Article X of the Covenant granted absolute power, without any limitations, to the Raj Pramukh to legislate. The phrase 'shall hereafter be exercisable only as provided by this Covenant' in Article VI(a), according to the learned counsel, was only meant to convey the manner in which and the person by whom the power was to exercised. As the above phrase or anything of the kind does not appear in Article X the power to legislate was not made subject to anything contained in the Covenant, and therefore, the Raj Pramukh had unrestricted power to legislate so far as it was necessary for the peace and good government of the Union. In any case, counsel continues, the Covenant was a treaty between the eight Sovereign States, by which they ceded their territories and sovereignty and formed into a new State. The treaty being an act of State the validity or otherwise of anything done under it by the new Sovereign is beyond the powers of municipal courts to adjudicate. Any obligation assumed under or created by a treaty, whether it be in favour of the ceding Sovereign or individuals, is not one which the municipal courts are authorised to enforce.

While not accepting the above proposition as one of general application, Mr. Pathak maintains that the Covenant in the present case is not a treaty of cession by one Sovereign State to another but, for all intents and purposes, it is in fact a Constitution or at least an interim Constitution for administration of the new State. It is pointed out that what actually happened is that the several Rulers joined together and decided to bring into existence a new State by means of this Covenant. The Covenant provided for the formation of a Constituent Assembly to frame a Constitution for the Union and also laid down the frame and form of government to be carried on during the interim period, as otherwise it would have created a vacuum. According to the learned counsel, the Covenant contains all the characteristics and legal requirements of a Constitution and provides for the executive, legislative and judicial functions of the Government for the interim period. He, therefore, concludes that the laws promulgated by the Raj Pramukh could not contravene the provisions of the Covenant, and since the Covenant was meant to be the interim Constitution for the State it is the right and duty of the municipal courts to see and decide that those laws are in consonance with its provisions.

The question thus arises what is the nature and character of the agreement arrived at and the instrument executed by the Rulers of the Covenanting States The rulers termed it as 'Covenant' which ordinarily means an agreement between two or more persons or parties or a solemn pact. The term is not without historical significance. Treaties entered into by sovereign States under divergent circumstances have sometime been termed as such, for instance the Covenant of the League of Nations, (being the first part containing 26 Articles of the Treaty of Versailles, 1919).

In order to decide the true import of the instrument in question its contents have to be examined in some detail. As a preamble the Covenant recites that the eight Rulers are convinced that the welfare of the people of this region can best be secured by the establishment of a State comprising the territories of their respective States with a common executive, legislature and judiciary and they, therefore, resolve to entrust to a Constituent Assembly consisting of elected representatives of the people the drawing up of a democratic Constitution for the State within the framework of the Constitution of India, to which they had already acceded, and of the Covenant. Article II of the Covenant gives the name by which the new State is to be called. According to Article III Rulers of the Covenanting Salute States and one of the Rulers of the two Covenanting non-salute States, from the Council of Rulers, which is to exercise such powers as are assigned to it by the Covenant and also such functions, if any, as may be assigned to it by or under the Constitution of the Union. The President and Vice-President, that is the Raj Pramukh and Up-Raj Pramukh, are to be elected at a meeting of the Council of Rulers. Other clauses of this article lay down the mode of election and terms of office of the President and the Vice-President, with a proviso that the then Rulers of Patiala and Kapurthala, shall respectively be the first President and Vice-President of the Council of rulers and that they would be entitled to hold office during their lifetime. Article IV provides for payment of allowances to the Raj Pramukh and Up-Raj Pramukh and for the discharge of duties of their office. Article V authorises the Raj Pramukh to choose a Council of Ministers for the interim period. Article VI has already been quoted in extenso. Article VII vests in the Raj Pramukh the authority to raise, maintain and administer the military forces of the Union. Article VII enjoins upon the Raj Pramukh to execute on behalf of the Union an instrument of accession to the Government of India and thereby accept its authority to legislate for the Union in certain matters. Article IX vests the executive authority of the Union in the Raj Pramukh. Article X, which has been reproduced above, relates to the legislative functions of the Union. Articles XI-XIV lay down the rules to be followed with respect to privy purses of the rulers of the Covenanting States, their private properties, personal privileges, dignities and titles to be enjoyed by them and the mode of succession to their Gaddis. Article XV provides that 'no enquiry shall be made by or under the authority of the Union, and no proceedings shall lie in any Court in the Union against the Ruler of any Covenanting State, whether in a personal capacity or otherwise in respect of anything done or omitted to be done by him or under his authority during the period of his administration of that State'. Article XVI recites the guarantees to which the permanent members of the public services of the Covenanting States shall be entitled. The last article (XVII) bars the initiation of civil or criminal proceedings against any person in respect of any act done in the execution of his duty as a servant of any Covenanting State before its accession without the previous sanction of the Raj Pramukh.

The above synopsis of the Covenant shows that most of its provisions appertain to the rights, privileges, guarantees etc. of the contracting parties or their servants and officers. It embodies the terms on which the rulers agreed and decided to unite or federate and bring into existence a new international persona. This is one of the circumstances under which a State personality breaks or ceases to exist and the results in such a case are not materially different from those which flow when a sovereign State cedes to or is subjugated by another sovereign State. The Instrument of Accession executed in any of the circumstances is generally known as a treaty and recognized as an act of State. Exigencies of the momentous plan required that some provision should also be made for administering the new State and as to the form of government it should have during the transitional period. These provisions were laid down in Article IX and the proviso to Article X. Provisions of this nature in the Covenant do not necessarily lead to the inference that the Rulers intended to lay down a Constitution for the new State. Studied as a whole, the Covenant appears to be more akin to a treaty entered into by the various States rather than a Constitution or supreme law, as styled by Shri Pathak, for the new State.

Intention of the parties to it may be an important criterion to judge the true nature of the instrument. At the relevant time the Rulers were the most concerned to interpret the Covenant and determine its effect. The Raj Pramukh was the delegate of all the powers and, if I may say so, he was to be mouthpiece of the Rulers who joined the Covenant. The interpretation placed by him would, therefore, have an important bearing on the point. On the very first day he assumed charge of the administration of the Union, i.e., 20th August, 1948, the Raj Pramukh, in exercise of the powers conferred by the proviso to Article X(2) of the Covenant, promulgated the Pepsu Administration Ordinance (No. 1 of 2005). Section 16 of this Ordinance reads as follows :-

'The provisions of Articles XV and XVII of the Covenant relating to the bar of certain suits and proceedings shall have the force of law'.

This was reproduced as Section 12 in Ordinance XVI of 2005, which repealed and took the place of the earlier Ordinance No. 1. Section 16 of the later Ordinance enjoins that 'All courts of the State shall take judicial notice of the Covenant'. If the covenant was intended to be the Constitution for the new State everything contained in it would have been the fundamental law for every one in the State and some of its provisions need not have been singled out to have the force of law. Nor was it necessary to lay down that it was a document judicial notice of which was to be taken by the Courts.

There are certain provisions in the Constitution of India as well, which lend some support to the view that I take. Article 131 gives exclusive and original jurisdiction to the Supreme Court in certain cases, and one of the provisos appended to the article reads as follows :-

'Provided that the said jurisdiction shall not extend to a dispute to which a State specified in Part B of the First Schedule is a party, if the dispute arises out of any provision of a treaty, agreement, Covenant, engagement, sanad or other similar instrument which was entered into or executed before the commencement of this Constitution and has, or has been, continued in operation after such commencement'.

Article 363(1) places a bar to interference by Courts in dispute arising out of any provision of a treaty, covenant, etc., entered into or executed by any Ruler of an Indian State. Paragraph 240 of the White Paper on Indian States giving reasons for excluding the jurisdiction of Courts in certain matters inter alia says :-

'Guarantees have been given to the Rulers under the various Agreements and Covenants for the continuance of their rights, dignities, and privileges. The rights enjoyed by the rulers very from State to State and are exercisable both within and without the State...... Obviously, it would have been a source of perpetual regret if all these matters had been treated as justiciable. Article 363 has, therefore, been embodied in the Constitution which excludes specifically the Agreements of Merger and the Covenants from the jurisdiction of Courts except in cases which may be referred to the Supreme Court by the President'.

An agreement executed by the Ruler of the State of Seraikella was under consideration before their Lordships of the Supreme Court in the case of State of Seraikella and Others v. Union of India and Another, reference to which has also been made in an earlier part of my judgment. The case was transferred to its original jurisdiction by the Federal Court where it was originally instituted. The Instrument of Accession was the sheet-anchor of the plaintiffs and they claimed that it survived in operation after the Constitution. While discussing the bar to the hearing of such suits by the Supreme Court or any other Court under the proviso to Article 131 and Article 363(1) of the Constitution, Patanjali Sastri, J., (later Chief Justice), made the following observations :-

'But as the States specified in Part B of the First Schedule had a semi-sovereign status before the Constitution, agreements with them were in the nature of international treaties and covenants, and disputes arising out of them would not lie in municipal courts. That principle is given effect to, so far as the Supreme Courts original jurisdiction is concerned, by the proviso to Article 131 which defines such jurisdiction and in regard to all Courts and in respect of all proceedings, by Article 363(1) '.

A Covenant similar to the one we have before us was entered into by Rulers of a number of States in Madhya Bharat. Question of interpretation of one of the clauses of that Covenant came up before a Full Bench in Ram Dubey v. The Government of the State of Madhya Bharat & Another. Learned counsel for the applicant wanted to interpret the Covenant as if it were a statute passed by a Parliament, Kaul, C.J., on reference to the origin of the document, the circumstances in and the purposes for which it was brought into existence arrived at the conclusion that the Covenant 'is more akin to a treaty entered into by various States rather than a statute passed by a Legislature and accordingly it is only appropriate if the rules to be applied to its construction are those applicable to treaties rather than those applied to interpretation of legislative enactments'.

In Pirthi Singh and Others v. State of Pepsu & Others this very Covenant came up for consideration before a Division Bench of our own High Court and the question there was whether the rulers themselves could modify or abrogate the covenant. Teja Singh, C.J., who wrote the judgment with which Kesho Ram, J. (now C.J.), agreed, quoted with approval a few passages from the above decision of Kaul, C.J., and observed :

'These observations in my opinion apply to our Covenant and in the light of them I hold that the real nature of the Covenant was that of a treaty between the Rulers of Independent States......'

The Covenant was brought into existence by exercise of the sovereign powers of the Rulers as a matter of policy in the course of their relations with one another. In my judgment, therefore, the Covenant was an act of State and should more appropriately be regarded as a treaty. It was not meant to be an instrument embodying the fundamental organic law or all the principles of government of the new State and cannot consequently acquire the status of a Constitution.

The question then arises whether a law, otherwise validly promulgated by the Raj Pramukh, can be regarded as invalid or inoperative if it ignores or is in contravention of something contained in the Covenant. To be more precise the question is whether the assessee can take advantage of his agreement with the Ruler of Jind, the obligation under which is said to have devolved upon the new State according to article V(b) or (c) of the Covenant in spite of a subsequent legislation ignoring that agreement and the obligation thereunder, and can he be heard to say that the subsequent law is invalid or inoperative so far as his rights under the agreement are concerne Once it has been found and held that the subsequent law is invalid or inoperative so far as his rights under the agreement are concerne Once it has been found and held that the Covenant is a sort of a treaty and an act of State, the question must be answered in the negative. It is not within the province of municipal courts to enforce or grant relief in respect of rights, howsoever forceful, reasonable and equitable they may appear to be, arising out of a treaty. The transactions of independent States between one another are governed by other laws than those which the municipal courts administer, and rights supposed to be acquired thereunder cannot be enforced by such courts. Relief in such cases has to be sought not in the precincts of law courts 'but along the corridors of diplomacy'. The rights against the previous Sovereign are those and only those which that Sovereign by subsequent agreement or recognition, express or implied, or by legislation chooses to confer. Any obligation assumed under the treaty either to the ceding Sovereign or to individuals is not one falling under this category. The principle that any rights purporting to be conferred by the treaty of cession cannot be enforced in municipal courts, except in so far as they have been incorporated in municipal laws, appears now to be well settled. It has been uniformly recognized and followed by their Lordships of the Privy Council in a number of decisions extending over the past one century.

The basic authority which has kept the field ever since 1859 is Secretary of State in Council of India v. Kamachee Boye Sahaba. A former Rajah, in the year 1787, was the absolute Sovereign of the fort and country of Tanjore, in the Presidency of Madras. In that and the subsequent years three Treaties were entered into between him and the East India Company. On the Rajahs death in 1885, the East India Company in exercise of their Sovereign power, eldest widow for declaration of her rights to the property was decreed by the Supreme Court of Judicature at Madras. On an appeal to the Privy Council, it was argued that the transactions of independent States between each other were governed by other laws than those which the municipal courts administer and as such Courts had neither the means of deciding what was right nor the power of enforcing any decision which they make. The contention was accepted and it was held that the declaration of the Governments intention in the treaty to make provision for the proper maintenance of his widows, his daughters and other dependents depended upon their own notions of what was just and reasonable and not according to any rules of law to be enforced against them by their own Courts. It was further held that the property claimed by the widow had been seized by the British Government acting as a Sovereign power, through its delegate the East India Company, and that the act so done with its consequences, was an act of State over which the Supreme Court of Madras had no jurisdiction. Rt. Honble Lord Kingsdown, in the concluding portion of his judgment, observes :

'Of the propriety or justice of that act, neither the Court below nor the Judicial Committee have the means of forming, or the right of expressing, if they had formed, any opinion. It may have been just or unjust, politic or impolitic, beneficial or injurious, taken as a whole, to those whose interests are affected. These are considerations into which their Lordships cannot enter. It is sufficient to say that, even if a wrong has been done, it is a wrong for which no municipal court of justice can afford a remedy'.

It is correct that this was a case in which the personal property of the Rajah was involved and observations with respect to the rights of his subjects were obiter, but in a number of subsequent authorities the above dictum of their Lordships was approved and regarded as equally applicable to the property and rights of the subjects of the ceding State as well.

In Rustomjee v. The Queen, the facts were these : By a treaty between the Queen of England and the Emperor of China, the Emperor agreed to pay to the British Government a sum of 3,000,000 dollars on account of debts due to British subjects from certain Chinese merchants who had become insolvent being largely indebted to British merchants. The money was received by the British Government but was not paid to the British merchants. A petition of right by one of the British merchants to obtain payment of the money due to him from one of the Chinese merchants was dismissed by the Supreme Court on the ground that the treaty was an act of State and, therefore, its terms could not be enforced by the municipal courts. The decision was upheld on appeal to the Privy council in Rustomjee v. the Queen. The argument advanced before their Lordships was that in the treaty of peace entered into by Her Majesty and the Emperor of China, one of the articles was that the Employer should pay to Her Majesty 3,000,000 dollars as and for the amount of debts due to British subjects, of whom the suppliant was one, by Chinese merchants; that the sum was computed on the basis of claims sent in by British merchants, of which claims the suppliants was one, and that the sum was paid by the Emperor of China to Her Majesty for the purpose of paying the said claims. The contention was turned down on the ground that the terms on which the peace was made were in the absolute discretion of the Sovereign; the Queen might or might not, as she thought fit, have made peace at all; she might or might not, as she thought fit, have insisted on this money being paid to her. In the course of his judgment, Lord Coleridge, C.J., observed :-

'..... She (the Queen) acted throughout the making of the treaty and in relation to each and every of its stipulations in her sovereign character, and by her own inherent authority; and, as in making the treaty, so in performing the treaty, she is beyond the control of municipal law, and her acts are not to be examined in her own Courts. It is a treaty between herself as sovereign, and the Emperor of China as sovereign, and though he might complain of infraction, if infraction there were, of its provisions, her subjects cannot..... If there has been a failure to perform that duty, which we only suggest for the sake of argument, it is one which Parliament can and will correct; not one with which the Courts of law can deal'.

In Cook and Another v. Sir James Gordon Sprigg certain concessions made by Paramount Chief of Pondoland, granting privileges and rights to the plaintiffs, were sought to be enforced after Sigcau, the Paramount Chief and sovereign authority, ceded his sovereignty to the British Government. The claim was rejected by the Supreme Court of the Cape of Good Hope. The judgment of their Lordships on appeal to the Privy Council was delivered by the Lord Chancellor in the following terms :

'The taking possession by Her Majesty, whether by cession or by any other means by which sovereignty can be acquired, was an act of State and treating Sigcau as an independent sovereign - which the appellants are compelled to do in deriving title from him. It is a well-established principle of law that the transactions of independent States between each other are governed by other laws than those which municipal courts administer.

'It is no answer to say that by the ordinary principles of international law private property is respected by the sovereign which accepts the cession and assumes the duties and legal obligations of the former sovereign with respect to such private property within the ceded territory. All that can be properly meant by such a proposition is that according to the well-understood rules of international law a change of sovereignty be cession ought not to affect private property, but no municipal tribunal has authority to enforce such an obligation. And if there is either an express or a well-understood bargain between the ceding potentate and the Government to which the cession is made that private property shall be respected, that is only a bargain which can be enforced by sovereign against sovereign in the ordinary course of diplomatic pressure.

'In this case it certainly cannot be said that there was any bargain by the British government that Sigcaus supposed concessions should be recognized. Indeed, the only intelligible sense in which the allegations in the declaration can be understood is that the breach of duty complained of consists in the refusal of the Cape Government to recognize the plaintiffs concessions'.

The last two of these cases were again approved by their Lordships in West Rand Central gold Mining Company Limited v. The King. In a petition of right, it was alleged that, before the outbreak of war between the late South African Republic and Great Britain, gold, the produce of a mine in the Republic owned by the suppliants, had been taken from the suppliants by officials acting on behalf of the Government of the Republic; that the Government by the laws of the Republic was liable to return the gold or its value to the suppliants; and that by reason of the conquest and annexation of the territories of the Republic by Her late Majesty the obligation of the Government of the Republic towards the suppliants in respect of the gold was binding upon His Majesty the King. The argument of the suppliants was that their claims based upon the principle of international law, that the conquering State is bound by the obligations of the conquered, could be enforced by a petition of right. The contention was not accepted by their Lordships on the ground that the obligations of the conquering State with regard to private property of private individuals, particularly land, to which the title had already been perfected before the conquest or accession, are altogether different from the obligations which arose in respect of personal rights by contract; personal contracts or obligations of a contractual character do not pass on to the successor State. It was, therefore, held that the petition disclosed a right on the part of the suppliant which could not be enforced against His Majesty in any municipal courts. Certain American decisions cited before their Lordships, some of which are being relied upon in this case by learned counsel for the assessee, were distinguished as they related to the rights of the owners to landed property in territories formerly forming part of independent countries which had been ceded to or annexed by the United States. On a reference to these cases, Lord Alverstone, C.J., observed as follows :-

'They were all cases of cession, and in all of them the treaties of cession and subsequent legislation of the United States protected the rights of owners of private property as they existed at the time of cession, and the sole question was whether, under the circumstances of each individual case, private rights of property existed and could be enforced as against the United States. No question of duty of the country to whom territories passed, of fulfilling the obligations of the original country in any other respect arose.....'

In Secretary of State for India in Council v. Bai Rajbai Kasbatis of a village in District Ahmedabad, ceded by the Gaekwar to the British

'The relation in which they (Kasbatis) stood to their native sovereigns before this cession, and the legal rights they enjoyed under them, are, save in one respect, entirely irrelevant matters. They could not carry in under the new regime the legal rights, if any, which they might have enjoyed under the old. The only legal enforceable rights they could have as against their new sovereign were those, and only those, which that new sovereign, by agreement expressed or implied, or by legislation, chose to confer upon them. Of course, this implied agreement might be proved by circumstantial evidence, such as the mode of dealing with them which the new sovereign adopted, his recognition of their old rights, and express or implied election to respect them and be bound by them and it is only for the purpose of determining whether and to what extent the new sovereign has recognized these ante-cession rights of the Kasbatis, and has elected or agreed to be bound by them, that the consideration of the existence, nature, or extent of these rights becomes a relevant subject for inquiry in this case.'

The matter was again considered in detail by their Lordships of the Privy Council in Vajesinghji Joravarsinghji and Others v. Secretary of State for India in Council. In this case certain Naiks sued the Government of India for a declaration that they were proprietors of the entire land in the Talukas belonging to them and that they were not bound to accept a lease of the same on the terms offered to them by the Government. These Talukas were included in the territory ceded by Scindia of Gwalior to the British Government by a treaty in 1860. One of the terms of the treaty was that :

'Each Government shall respect the conditions of existing leases until their expiry, and that in order that this may be made clear to all concerned, each Government shall give to its new subjects leases for the same terms of years and on the same conditions as those which they at present enjoy'.

The claim of the Naiks based upon this clause in the treaty was not regarded as justiciable because it arose out of an act of State. On a reference to the earlier authorities, Lord Dunedin summarised the matter as follows :-

'When a territory is acquired by a sovereign State for the first time that is an act of State. It matters not how the acquisition has been brought about. It may be by conquest, it may be by cession following on treaty, it may be by occupation of territory hitherto unoccupied by a recognised ruler. In all cases the result is the same. Any inhabitant of the territory can only make good in the municipal courts established by the new sovereign such rights as that sovereign has, through his officers, recognised. Such rights as he had under the rule of predecessors avail him nothing. Nay more, even if in a treaty of cession it is stipulated that certain inhabitants should enjoy certain rights, that does not give a title to these inhabitants to enforce these stipulations in the municipal courts. The right to enforce remains only with the High Contracting Parties'.

An argument was then advanced that by virtue of certain declarations subsequently made by the new Government, the Naiks became entitled to enforce the treaty. Before examining those declarations his Lordships observed :-

'If they give a right of themselves well and good, but they can never have the effect of altering the law as above stated; that is to say, of making the appellants, so to speak, a party to the treaty with a right to enforce the conditions of the same in a municipal court'.

The learned Judge then proceeded to see whether, after cession, the British Government had conferred or acknowledged as existing the property rights which the Naiks claimed. Having found that it was not so his Lordship refused to accept the claim of Naiks based as it was on a term of the treaty itself.

In Sobhuza II v. Miller and Others a petition of right based upon concessions granted by the former King of Swaziland and presented after the South African Republic, including Swaziland, was annexed to the British Government, was dismissed by the Special Court of Swaziland. A High Commissioner appointed by the British Government, after cession, had expropriated the concessions and granted the lands to persons other than the suppliants. On appeal to the Privy Council, the appellants placed their reliance on the Convention of 1894 between Great Britain and the Republic, an article of which guaranteed the natives the rights that they had in their lands according to the laws and custom then prevailing. The contention was overruled with the observation :

'The limitation in the Convention of 1894 on interference with the rights and laws and customs of the natives cannot legally interfere with a subsequent exercise of the sovereign powers of the Crown, or invalidate subsequent orders in Council.'

In Civilian War Claimants Association Limited v. The King the facts were like this : By the Treaty of Versailles (Article 232) Germany undertook to make compensation for all damage done to the civilian population to make compensation for all damage done to the civilian population of the Allied and Associated Powers and to their property during the period of belligerency, and moneys were received by the Crown under this article. By a petition of right the suppliants, as assignees of civilian claimants who had suffered loss or damage by German aggression during the war claimed on their behalf payment of compensation out of the moneys paid or payable as reparation sunder the above article. The case made by the petition was that the claimants had sent particulars of their claims, first, to the Foreign Claims Office, and, afterwards, to the Reparation Claims Department in accordance with the instructions of His Majestys Government, that these claims had been duly verified by the Government, and were included in the agreed total of claims for reparations which Germany was required to pay under the treaty, and that the Crown in inviting the claimants to submit their claims had constituted itself an agent or a trustee for the claimants in respect of the money received by it from Germany on account of reparations. On the basis of the dictum given by their Lordships in Rustomjee v. The Queen it was held that : 'The petition afforded no ground for the contention that the money received under the treaty was received by the Crown as an agent or a trustee for the claimants, or as money had and received to their use, and was bad as disclosing no ground of claim cognizable by the Court.'

In the course of his judgment, Lord Buckmaster observed :

'The terms of the treaty were that Germany should pay the sum necessary to satisfy the claims of various people who had suffered, and it was left to the Government themselves, as between them and their nationals, to determine how that money was to be distributed'.

In a more recent case before their Lordships of the Privy Council, Secretary of State v. S. Rustam Khan an Others, an agreement between Khan of Kalat and the British government in the year 1903 was in question. By this agreement, the Khan of Kalat granted to the British Government a perpetual lease of Nasirabad, a part of the Kalat territory, at a quit rent and ceded, in perpetuity, the entire management of Nasirabad absolutely and with all the rights and privileges, State or personal, as well as full and exclusive revenue, civil and criminal jurisdiction and all other forms of administration. Over part of the land comprised in the agreement the predecessors of the plaintiffs held proprietorial rights granted to them prior to 1903 by the then Khan of Kalat and the grants continued to be of full force up to the date of the agreement. After the agreement the Government of India made a settlement of the territory and recorded certain lands, including those comprised in the grants to the predecessors of the plaintiffs, as Government unoccupied lands. In a suit with respect to these lands the answer was that the treaty of 1903 gave the Government full sovereign rights over that territory and that if they decided to ignore the rights of previous holders and substitute as owners either themselves or anyone else, no one could have the right to complain of it in a municipal court. On a reference to the 'wealth of weighty authority' on the point Lord Atkinson accepted the defendants contention and held that the agreement created rights between two Sovereign States and it gave the British Government full sovereign rights over the territory, that they had a right to recognise or not to recognise the existing titles to land and that the act of the British government in not recognising the title of the plaintiffs to the suit lands was an act of State for which the plaintiffs could have no recourse against the Government in municipal courts.

In another case for the same year, Hoani Te Heuheu v. Aotea District Maori Land Board, a provision of an enactment was impugned as ultra vires the legislature of New Zealand inasmuch as it derogated from the rights conferred on the native owners by the treaty of Waitangi. By Article I of the treaty, all rights of sovereignty were ceded absolutely, and Article II guaranteed the rights of natives. Before their Lordships of the Privy Council the appellants maintained that the treaty of Waitangi was a solemn compact defining the rights given to the people in respect of their lands and that the right thus acquired was cognizable in the courts. The appellants further relied upon Section 73 of the New Zealand Constitution Act, 1852, which made the rights conferred by the treaty a substantive part of the municipal law. The first contention was repelled on the ground that rights purporting to be conferred by a treaty of cession could not be enforced in the Courts, except in so far as they had been incorporated in the municipal law. The second contention also was not accepted as the Imperial Parliament, by virtue of its sovereign power of legislation, might have altered any right recognised or conferred by Section 73, by enacting a few months later a provision in the precise terms of Section 14 of the New Zealand Act of 1935 - the provision of law impugned in the case. Section 14 of the New Zealand Act, 1935, which repealed Section 73 of the earlier Act of 1852, was, therefore, regarded as the law that was to be followed and applied by the municipal courts.

Ajmer was ceded to the British by Scindia in 1818. A sanad granted by the Ruling House of Scindia to the plaintiff was made the basis of a suit brought after the cession. The case went to the Privy Council and Lord Simonds in Asar Ahmed v. Durgah Committee, Ajmer, dismissed the claim with the observation that the rights, which the inhabitants of the State enjoyed against its former Rules, availed them nothing against the British government and could not be asserted in the courts established by that government except so far as they had been recognized by the new sovereign power. His Lordship then proceeded to find out if after the cession the hereditary rights of the appellants family to the office of Matwali were recognized by the British Government. Since the appellant could not refer to any instrument or act which amounted to an express recognition of such a right nor could the same be implied from the conduct or mode of dealing with the matter by the British Government, his claim, based as it was on the sanad granted by the ceding sovereign, was not accepted as one enforceable by the municipal courts.

In Phaltan Sugar Works Ltd. v. Commissioner of Income-tax, one of the questions referred to the High Court under Section 66 of the Income-tax Act, 1922, was based on an agreement which as entered into between the Phaltan Darbar and the assessee company and he effect of which was to exempt the company from payment of tax for a period of ten years. Chagla, C.J., who delivered the judgment of the Division Bench, in the first instance, expressed the view that all that they had to do on the reference was to look at the orders which were made by the Income-tax Officer and to consider whether those orders were justified by the income-tax law. The learned Judge, however, proceeded to consider the effect of the exemption granted to the assessee by the Phaltan Darbar and observed as follows :-

'It may be that the Raja of Phaltan combined all these functions in himself; but what we have to consider is what particular function was being discharged when this agreement was entered into between the assessee company and the Phaltan State. It could not possibly be said that it was the legislative function which the Raja of Phaltan was is charging when he entered into this agreement with the assessee company. It is clearly an executive act of the Phaltan Darbar and an executive act cannot override and supersede a statute or a law of the country. Even though the Phaltan State might be supreme, the Raja of Phaltan could not by a mere executive fireman override the provisions of statue which he himself had put into operation in his own State'.

Our attention has been drawn to a decision of our own Court, Shambhu Dayal v. Patiala & East Punjab State Union, in which the Division Bench appears to have held a contrary view. In that case subsequent amendment of certain Service rules was impugned on the round that it contravened the guarantee given to the permanent members of the public services of the Covenanting States by Article XVI of the covenant. The observation made by S. Teja Singh, C.J., on which reliance as been placed, is as follows :-

'Surely this is a very serious handicap to which the amended rule subjects the petitioner and consequently the new condition of service imposed by the amended rule is less advantageous to Rule 278 by which the petitioner was governed previously and it was not open to the Government to order the petitioners retirement under the amended rule'.

The learned Advocate-General in that case, as is apparent from the judgment, did not join issue with the petitioners counsel on the binding nature of the said article of the Covenant and 'frankly admitted that the Government was bound by the guarantee given thereby'. The argument of the Advocate-General on the other hand was that the article in fact did not give the guarantee on which the petitioners claim was based. As the point was conceded the learned Judge was not called upon on decide the enforceability or the binding nature of a term of the Covenant. The observation quoted above cannot, therefore, be regarded as an authority on the point in question.

In my judgment, validity of the subsequent law enforcing the Patiala income-tax Act as applicable to all the subjects of the Union and hereby abrogating the agreement between the Ruler of Jind and the assessee company cannot be impugned on the ground that it contravenes a term of the Covenant, according to which all duties and obligations of the Ruler devolved on and were to be discharged by the Union. It is not disputed that the rights of the assessee under the agreement and the consequent obligation of the Ruler of Jind were not recognized by the ew State by means of any express legislation or even impliedly by any conduct on its part. On the other hand, the agreement, and hence the obligation, was repudiated by the Raj Pramukh on the very first day he assumed its administration by promulgating a uniform law for the whole of the Union. This contention of the assessee must consequently fail.

Next it is urged that apart from the provision in the treaty devolving the obligations and liabilities of the Covenanting States upon the new State, rules of international law require that an absorbing State while succeeding to the assets should also honour the obligations and liabilities of the ceding State and that the change of Government should not affect adversely the vested property rights of the subjects. Exemption from tax being a property right the new legislation which ignored or abrogated that right of the assessee, it is contended, was invalid and ineffective as it contravened the well-recognised principle of international law. In the first instance, it may not be possible to say that there is any universally or uniformly recognised rule of international law that the absorbing State is bound by the rights and monopolies arising out of the contracts with or concession granted by the ceding State. 'There is a considerable body of authority', according to Professor Oppenheim, 'among writers in favour of the view the absorbing State is bound by the contracts of the extinct States for instance, the contract for building warships or for coaling a fleet'. At the same time, this distinguished scholar administers a degree of caution when he says that 'it is believed that no judicial authority is in existence'. In the opinion of Professor Edwin D. Dickinson, 'The succeeding sovereigns obligation to respect private rights has been repeatedly affirmed and finds much support in traditional practice. Treaties, the public debt, contracts and concessions and other State obligations present greater difficulties. There is discord rather than harmony of view.' Professor Charles Chancy Hyde in his well-known book on International Law (IInd Edition Vol. 1) at page 395, says :-

'It is necessary to observe with care the extent to which a change of sovereignty serves directly to burden the transferee of territory with the obligations of its predecessor. This is problem of international law in the solution of which States have been confronted with a variety of considerations the influence of which has varied according to the circumstances of the particular case. The examination of existing practices may, therefore, tend to fortify the belief that, save under a few narrowly defined circumstances, discord rather than harmony of view is still prevailing and that there is lack of evidence of general agreement indicative of the nature and scope of duties to be regarded as possessing the character of law'.

Max Huber, writing on the same subject, emphasises that : 'All subjective private rights are maintained in favour of all individuals and corporation, and the personality and the property of institutions are secured to them, so far as no rule of the successor State prevents it'. Professor Higgins dealing with the question whether or not rights and obligations are transferred to the new State, observes, 'The subject is one upon which writers on international law are generally unsatisfactory'. The authors on the subject thus do not seem to be unanimous or uniform in their views.

Upon the absorption of Texas, an independent republic, into the United States of America in 1845, a British holder of certain Texan bonds on which there was default brought a claim against the United States. The matter was referred to the mixed commission appointed in pursuance of an Anglo-American convention of February 8, 1853, for the adjustment of claims between the two countries. The Commissions award stated that 'it cannot entertain the claim, it being for transactions with the independent republic of Texas prior to its admission as a State of the United States' : vide U. S. Arbitrations, Vol. IV, 3594. Again, the Transvaal Concession Commissioners appointed after the surrender of South Africa to Great Britain in 1903 to examine the various claims held that 'it is clear that is State which has annexed another is not legally bound by any contracts made by the State which ceased to exist, and that no court of law has jurisdiction to enforce such contracts if the annexing State refuses to recognise them'.

In west Rand Central Gold Mining company Limited v. The King a case to which reference has already been made, it was argued that all contractual obligations incurred by the conquered State before war actually breaks out pass, upon annexation, to the conquering State, no matter what may be their nature, character, origin or history. In support of this contention the learned counsel for the appellant before their Lordships cited passages from various writes on international law. Dealing with the point, Lord Alverstone, C.J., at page 401, observes :

'There is an essential difference, as to certainty and definiteness, between municipal law and a system or body of rules in regard to international conduct, which, so far as it exists at all (and its existence is assumed by the phrase international law), rests upon a consensus of civilized States, not expressed in any code or pact, nor possessing, in case of dispute, any authorised or authoritative interpreter; and capable, indeed, of proof, in the absence of some express international agreement, only by evidence of usage to be obtained from the action of nations in similar cases in the course of their history. It is obvious that, in respect of many questions that may arise, there will be room for difference of opinion as to whether such a consensus could be shown to exist....... The views expressed by learned writers on international law have done in the past, and will do in the future, valuable service in helping to create the opinion by which the range of consensus of civilized nations is enlarged. But in many instances their pronouncements must be regarded rather as the embodiments of their views as to what ought to be, from an ethical standpoint, the conduct of nations inter se, than the enunciation of a rule or practice so universally approved or assented to as to be fairly termed, even in the qualified sense in which that word can be understood in reference to the relations between independent political communities, Law.'

The learned Judge then proceeded to consider the practical difficulties that would arise in recognising this as a doctrine of universal application. It was pointed out that a country may have issued obligations to such an amount as wholly to destroy the national credit, and change of government may have been brought about by the very state of insolvency to which the country had been reduced by its own misconduct. The learned Judge, therefore, expressed the view that in such a case no valid reason could be suggested 'why the country which has made war and succeeded, should take upon itself the liability to pay out of its own sources the debts of the insolvent State'.

Under the international law, obligations of the successor State with regard to private property of private individuals, particulary land as to which the title had already been perfected before the conquest or annexation, are widely different from the obligations which arise in respect of personal rights by contracts. As regards the contractual obligations of the ceding State it is for the new State to consider and decide which of them it is prepared to recognize and which others to repudiate. The principles of international law, as enunciated by the various authorities, do not insist on their wholesale recognition by the conquering or annexing State. In any case, legislation otherwise validly made and promulgated by the new State cannot be regarded as invalid or inoperative merely because it is not in consonance with or contravenes such supposed principles of international law, and no relief on that account can be granted by the municipal courts to persons adversely affected thereby. This contention of the learned counsel also must, therefore, fail.

Reliance, in the end, is placed on clause (2) of Article 295 of the Constitution of India and it is urged that on the adoption of the Constitution by Pepsu all rights, liabilities, etc., whether arising out of any contract or otherwise, of the corresponding Indian State became the rights, liabilities, etc., of the new State. Clause (2) of Article 295 lays down :

'Subject as aforesaid, the government of each State specified in Part B of the First Schedule shall, as from the commencement of this constitution, be the successor of the Government of the corresponding Indian State as regards all property and assets and all rights, liabilities and obligations, whether arising out of any contract or otherwise, other than those referred to in clause (1)'.

Evidently the contention is devoid of any force. The constitutional provision can have no application to the present case, as the assessment relates to a period before the constitution came into operation. Moreover, by virtue of this clause the liabilities and obligations of Pepsu as an Indian State pass on to it as a Part B State. For the application of this clause, therefore, it is essential that the obligation or liability should have been that of Pepsu as an Indian State before the enforcement of the Constitution. That part of the case has already been discussed and decided against the assessee and hence the constitutional provision is of little avail to him.

Mr. Sikri, in support of his contention that the agreement could subsist only so long as Jind State existed and that it ipso facto terminated on its merger in the Union, relied upon a frustration clause (clause 31) of the agreement and Section 56 of the Contract Act in the alternative. As the point was not raised before the Income-tax authorities and also in view of my decision on the points urged by the assessee, I do not deem it necessary to deal with or decide it at this stage of the case.

For the reasons stated above, our answer to the question referred to us is that the assessees profits and gains earned in the calendar year 1948 were assessable for 2006 (1949-50) at the rates in vogue according to the Patiala Income-tax Act, 2001, read with Section 3 of the Patiala and East Punjab States Union Administration Ordinance (No. I of 2005), as repealed and re-enacted in Section 3 of the Patiala and East Punjab States Union General Provisions (Administration) Ordinance (No. XVI of 2005) and not in accordance with clause (23) of the agreement dated 1st April, 1938, between the assessee and the Ruler of Jind State.

In view of the peculiar circumstances of the case the parties are left to bear their own costs. A copy of this order shall go to the Income-tax Appellate Tribunal.

GURNAM SINGH, J. - I agree with the answer proposed by my learned brother.

Reference answered accordingly.


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