# UNION OF INDIA AND OTHERS v. GWALIOR RAYON SILK MANUFACTURING (WEAVING) CO. LTD. AND ANOTHER

- **Citation:** [1964] 7 S.C.R. 892
- **Court:** Supreme Court of India
- **Decided:** 1964
- **Case number:** Civil Appeals Nos. 934Wanchoo, J. • 935 of 1963
- **Bench:** P. B. Gajendragadkar, K. N. Wanchoo, M. Hidayatullah, K. C. Das Gupta, N. Rajagopala Ayyangar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-and-others-v-gwalior-rayon-silk-manufacturing-weaving-co-ltd-and-3139
- **Pages:** 28

## Headnote

lncome Tax-Exemption from taxation-Agreement with
erstwhile Indian State-Indian State becoming a Part B State
under the Constitution of India.-Binding nature of the agreement-Finance Act, .1950
(25 of 1950), s. 13-Part B States
(Taxation Concessions) Order, 1950, cl. 16-Constitution of India,
Arts. 278, 295, 372.
.
In October 1946, B wrote to the Government of thi! erstwhile>
State of Gwalior stating that certain industries would be
established in Gwalior if the Government gave certain facili-·
ties including exemption from taxation. The matter was eventually put up before the Ruler who on January 18, 1949, made an,
J
order .sanctioning the proposals made by the minister which
._
included exemption from taxation as desired by B. On April
7, 1947, an agreement was entered into between the Government and B in accordance with the order of the Ruler dated
January 18, 1947, under whlch certain facilities and concessions
were granted to B for the establishment of industries in Gw,.-·
lior, which included exemption from any iorm of taxation on
the income for a period of 12 years from the date of starting
of the factories. In pursuance ·of the agreement the appellant
company was started and actual production began sometime
in June 1949 so far as the weaving section of manufacturing:
cloth from artificial silk yarn was concerned, while the staple·
fibre section of the company started actual working on or about
February 18, 1954. In April 1948 the Ruler of Gwalior enterecll
into a covenant with the rulers of certain other States for the·
formation of a United State called Madhya Bharat, under which·
the Rulers made over the administration to the Raj Pramukh ..
Article VI of the Covenant provided, inter alia, that the duti5
and obligations of the Ruler pt!rtaining or incidental to the>
Government of the covenanting states •hall devolve on th<>
United State and sha)) be discharged by it. On December 13,.
1948, the Madhya Bharat Act, No. 1 of 1948, was passed which
provided, inter alia, that alI laws of the covenanting states
f
shall continue to remain in force until repealed' -Or amended ..
On January 26, 1950, the Constitution of India ca~e into force>
and the State of Madhya Bharat became a Part B 1State under
the Constitution. On April 1, 1950, the Indian Income-tax Act.
1922, was extended to the Part B State of Madhya !Bharat, and
from the same date Finance Act, 1950, also became applicable
to that State. The effect of s. 13 of the Act of 1950 v.!as to repeal
ail laws relating to income-tax prevailing in t~e pa,rts of
India to which the Indian Income-tax Act was e
nded. On
February 25, 1950, an agreement was entered into
tween the
*
Pre•ident of India and the State of Madhya Bhara~ which was
to be in force for a period of ten years under which certain
recommendations of Indian States Finances Enquir\r Committee
were accepted. The Government of India also issued the Part
.
I
7S.C.R.
SUPREME 'COURT REPORTS
893
1961
B States (Taxation Concessions) Order, 1950, by cl. 16 of which,
certain concessions were given
to
industri3.1
ulldertaklngs
Union of lndfa
which had beerr granted exemption from income-tax by the
anti Ot1'era
Ruler of an Indian State. In December 1950, the company
. v.
applied under cl. 16 of the Concessions 6rder fpr an exemption . Gwah~1;;,Y'"!
from payment of income-tax for the full period of twelve years B•lk Man. ) :',""9
as provided in the agreeme.nt dated April 7, 1947, but ·the GovJl•a•,;n~n~r;..,
ernment of India decided to exempt the company from income-
·an
tax and super-tax for the ',assessment years 1950-51 to 1954-55 in
respect of the weaving section and rejected the cl"im for
• exemption of the staple 1ibre section which began working in
April 1954. On November 23, 1956, the company filed a suit
against the Uriion of India for a declaration _that under the
a,greement W:ted Apnl 7, 1947, it was entitled to exemption
from income-tax and super-tax for a period of 12 years frbm
June 1949 with respect to the weavi

## Text

_Characters 0–39,979 of 84,448. This is a partial read: ask again with offset=39979 for what follows._

1964
.April 28
892
SUPREME COURT REPORTS
[I96iJ
UNION OF INDIA AND OTHERS
v.
GWALIOR RAYON SILK MANUFACTURING (WEAVING) CO. LTD. AND ANOTHER
[P. B. GAJENDRAGADKAR, C. J., K. N. WANCHOO, M. HIDAYATULLAH, K. C. DAS GUPTA AND N. RAJAGOPALA AYYANGAR, JJ.]
lncome Tax-Exemption from taxation-Agreement with
erstwhile Indian State-Indian State becoming a Part B State
under the Constitution of India.-Binding nature of the agreement-Finance Act, .1950
(25 of 1950), s. 13-Part B States
(Taxation Concessions) Order, 1950, cl. 16-Constitution of India,
Arts. 278, 295, 372.
.
In October 1946, B wrote to the Government of thi! erstwhile>
State of Gwalior stating that certain industries would be
established in Gwalior if the Government gave certain facili-·
ties including exemption from taxation. The matter was eventually put up before the Ruler who on January 18, 1949, made an,
J
order .sanctioning the proposals made by the minister which
._
included exemption from taxation as desired by B. On April
7, 1947, an agreement was entered into between the Government and B in accordance with the order of the Ruler dated
January 18, 1947, under whlch certain facilities and concessions
were granted to B for the establishment of industries in Gw,.-·
lior, which included exemption from any iorm of taxation on
the income for a period of 12 years from the date of starting
of the factories. In pursuance ·of the agreement the appellant
company was started and actual production began sometime
in June 1949 so far as the weaving section of manufacturing:
cloth from artificial silk yarn was concerned, while the staple·
fibre section of the company started actual working on or about
February 18, 1954. In April 1948 the Ruler of Gwalior enterecll
into a covenant with the rulers of certain other States for the·
formation of a United State called Madhya Bharat, under which·
the Rulers made over the administration to the Raj Pramukh ..
Article VI of the Covenant provided, inter alia, that the duti5
and obligations of the Ruler pt!rtaining or incidental to the>
Government of the covenanting states •hall devolve on th<>
United State and sha)) be discharged by it. On December 13,.
1948, the Madhya Bharat Act, No. 1 of 1948, was passed which
provided, inter alia, that alI laws of the covenanting states
f
shall continue to remain in force until repealed' -Or amended ..
On January 26, 1950, the Constitution of India ca~e into force>
and the State of Madhya Bharat became a Part B 1State under
the Constitution. On April 1, 1950, the Indian Income-tax Act.
1922, was extended to the Part B State of Madhya !Bharat, and
from the same date Finance Act, 1950, also became applicable
to that State. The effect of s. 13 of the Act of 1950 v.!as to repeal
ail laws relating to income-tax prevailing in t~e pa,rts of
India to which the Indian Income-tax Act was e
nded. On
February 25, 1950, an agreement was entered into
tween the
*
Pre•ident of India and the State of Madhya Bhara~ which was
to be in force for a period of ten years under which certain
recommendations of Indian States Finances Enquir\r Committee
were accepted. The Government of India also issued the Part
.
I
7S.C.R.
SUPREME 'COURT REPORTS
893
1961
B States (Taxation Concessions) Order, 1950, by cl. 16 of which,
certain concessions were given
to
industri3.1
ulldertaklngs
Union of lndfa
which had beerr granted exemption from income-tax by the
anti Ot1'era
Ruler of an Indian State. In December 1950, the company
. v.
applied under cl. 16 of the Concessions 6rder fpr an exemption . Gwah~1;;,Y'"!
from payment of income-tax for the full period of twelve years B•lk Man. ) :',""9
as provided in the agreeme.nt dated April 7, 1947, but ·the GovJl•a•,;n~n~r;..,
ernment of India decided to exempt the company from income-
·an
tax and super-tax for the ',assessment years 1950-51 to 1954-55 in
respect of the weaving section and rejected the cl"im for
• exemption of the staple 1ibre section which began working in
April 1954. On November 23, 1956, the company filed a suit
against the Uriion of India for a declaration _that under the
a,greement W:ted Apnl 7, 1947, it was entitled to exemption
from income-tax and super-tax for a period of 12 years frbm
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 company. The company all;p filed a petition under
Art. 226 of the Constitution before the High Court of Madhya <-
PradeW. for the same reliefs.
--~
Held: (i) Tbe order of January 18, 1947, was not a law by
·which the.Edler of Gwalior granted exemption from income-tax
to the company to be established. It only amounted to a signification of the Ruler's acceptancie of the request for concessions
made by B and an order to his officers to proceed further in
the matter after the signification of the Ruler's &cceptance 6f
the request.
(i!J 'In finding out whether a particular order of a Ruler
<eontjnued under Art 372 of the Constitution of India as law,
the jurisprudential distinction between legislative. judicial and
executive acts had to be considered; and only those orders of
the Ruler which were jurisprudentially legislative acts would
continue as laws under Art. 372.
·
/
(iii} Tbe fact- that the obligE.tion of the Ruler of Gwalior
under the agree!Ilent of :April 7. 1947, devolved on the Government of India eventually by virtue of Art. 295(1)(b). did not
take away the power of Parliament to pass a valid l"w within
its competence which did not transgress the constitutional
limitations, and which might affect the obligation arising out
of the agreement of April 7, 1947, and even completely supersede it.
I
.(iv} After the extension of the Indi'!_n- Income-tax Act to
Pali: B State of Madhya Bharat and the passing of the Finance
Act, 1950, the exemption claimed by the company under the·
~greement of April 7, 1947, must fall.-and the company would:
only be entitled to (i) reduction in rates provided by the Concessions Order end (ii) such exemption or concessions as the·
Central Government might grant under cl. 16 of the Conces-.
si9ns Order.
(v} Art. 278(1)(a) merely contemplated an agreement between the Centre and Part B States with respect to levy, collection and distribution of public revenues which were leviable
by the Government of India and had nothing to do with any
contract between a former Indian State and another person
with respect to such revenues which might have become the
obligation of the Goverrup:ent of India under Art. 295(1)(1!}.
'"
1061
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894 ;
SUPRE)IE COURT-REPORTS·
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[1964]
(vi) The ·Agreement of February 25. 1950, .with respect to
· con.cessions .,to corporations
1 must be deemed to ha.ve been en ..
Un~;,/{i.1,;';;~
tered under Art. 295(1)(b) and not under Art: 278(1}(a) and,
v.
·
hence, the company could not rely on that agreement and conGwalior Rayon· ·tend that the agreement of 'April· 7, 1947, was binding for at
Silk Manufacturing least ten years thereunder.
·
(Wearing} Co.
Ltd. and An'Jther --
. CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 934Wanchoo, J.
•
935 of 1963. Appeals from the judgment and orders dated
August 12, 1960, and April 30, 1960, of the Madhya Pradesh
High Court in Civil Suit No. 1 of 1958 and Misc. Petition
No. 101 of 1958 respectively.
C. K. Daphtary, Attorne~eneral, R. Ganapathy. Iyer
and R. H. Dhebar, for the appellants tin both the appeals).- ·
M. 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 Court was-delivered
by
W ANCHOO, J.-These two appeals on certificates granted
by the Madhya Pradesh High Court raise common questions
of law and will be ,dealt with together. The respondent the
Gwalior Rayon Silk Manufacturing . <Weaving)
Company
Limit~d (hereinafter referred to as the company) is registered
under the Indian Companies Act. It is necessary to set out
how. the company came to be established in order to understand "the case put forward by the company. In October _1946
Messrs. Bfrla 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 (iJ
free adequate land at a suitable site; (ii) free processing water·
if obtainable from a· river and at ·a specially concessional
· - rate if obtainable. from a dam; and (iii) 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 n_oting 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 noted that-.
no positive 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 concessions asked_ for. It was pointed out that the main question
that. required consideration . was with · respect. to exemption
from any form of taxation on income for a. period of fifteen '
years. It was also pointed out that no income-tax was leviable
.... -----~
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' ' ,"\ '
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\
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', \ 7 S.C.R. ' "SUrRE.'.\IE COURT REPORTS-- -. ··-· 895
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'
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--_
•\. .
'
: in that State at that time and that exemption from income1964
tax for period of fifteen years would lea'cl to the establishment
Unian of India
of the industries which thereafter- would yield income in the
and. Others
_shape .of taxes to the. State.' It was therefore proposed by the_
Gwali":,;. Rayon
Secretariat that the concessions asked for might be granted.SilkManufacturi"!1
Later, however, the period of exemption from taxation on in-. L(dW.a:~nAg) Goh.
.
. d
d fr
fif
. I
d ·
1 ·•'~ not,,..
come was re uce
om
teen to twe ve years an
1t was
recommended that this might be granted in order to attract
Wanchoo, J.
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 t1ie Minister for Industries, Commerce and .Communications dated .15-11-1946 is
sanctioned. Exemption from any form of taxation
on the income.for a period of J2 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 . \vas
communicated to
Messrs. Birla Brothers Limited and eventuaily 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, concessions and benefits hereinafter· mentioned to the said oompany. These facilities, privileges; conces-
. sions and. benefits in the. agreement weni ·three: namely::..:. ·
(!) provision for suffident and adequate land or lands
:absolutely free of any- cost, revenue- or cess whatsoever,· for
_the construction and erection of factory_ etc; for starting the
industries mentioned in the agreement; .
. ·
: ·
.
{2) making of airangemenis for the supply of adequate
and sufficient quantities of suitable water, whatever available.
for the above-mentioned industries· on most concessional and
suitable terms;
(3) granting of exemption to the above mentioned industries and/or any concern or concerns 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 I or. duties, in any form or
·nature whatsoever, on their incomes, profits, gains or business, 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.
-
896
SUPREME COURT REPORTS
[1964]
1964
In consequence of this agreement, the company was
Union of India started and actual production began sometime in June 1949
and Other'
so far as the weaving section for manufacturing cloth from
Gwali;; Rayon
artificial silk ya~n was concerned. It may be added that ~he
./Jilk Manufacturing staple fibre section of the company started actual workmg
(Weaving) Go.
on or about February 18, 1954. That is how the company
Ltd. and Another
b
bl" h d
d
d
1 •
•
h
th
_
came to e esta 1s e an starte worxmg m w at was
e
•
Wanchoo, J.
former Gwalior State in pursuance of the agreement of April
7, 1949.
Before however the company actually started working
even the weaving section for manufacturing cloth from artificial silk yarn, certain constitutional changes took place in
India to which it is now 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 Constitution on January 26, 1950, began. In
that process, the Rulers of Gwalior, Indore and certain other
States in what was known as Central India, entered into a
covenant for the formation of the United State of Gwalior,
Indore and Malwa (also known as Madhya-Bharat) in April
1948. Article VI of that covenant provided that the Ruler
of each covenanting State shall, as soon as may be practicable, and in any event not 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 jurisdic-
. tion belonging to the Ruler, which appertain or are incidental to the Government of the covenanting 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 covenanting State shall be the assets and liabilities of the
United
State; and (4) the military forces, if any, of the covenanting
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. (!) 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 November 24, 1949, the Raj
Pramukh of Madhya Bharat issued a proclamation accepting
the provisions of the Constitution of India to be framed for
the State of Madhya Bharat also. On January 26, 1950, the
Constitution 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
"
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7. S.C.H.
SUPREME COURT REPORTS
897
Government Act, No. I of 1948 was passed. Section 4 of that
196;
A.ct provided that "when the administration of any covenantUnion of Indio
ing State has been taken over by the Raj Pramukh or when
and Others
any State has merged in the United State as aforesaid, all
Gwolio~·Rayon
laws, Ordinances, Acts, Rules, Regulations etc., having the8ilk Manufacturing
force of Law in the said State shall continue to remain in df'
0"J"1) ~~·
force until repealed or amended under the provisions of the
~ · · an
"' er
next succeeding section, and shall be construed as if referW!!nchoo, J.
ences 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 company contended that by
virtue Of this Act read with Art. VI of the covenant, the
liabilities of the covenanting States devolved on the United
State of Gwalior, Indore, Malwa (Madhva·Bharat). Further
it was contended that under cl. (b) of Art. 295(1), 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 commencement 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 concerned. It was therefore contended on behalf
of the company 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 I, 1950, the Indian Income-tax Act was extended to the Part B State of Madhya Bharat. From the same
date the Finance Act (No. 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 Cooch.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 collection of income-tax and super-tax
in respect of any period not 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 collection of the tax on profits of business
L.'P(D)ISOI-29
1964
T!n1'.on of India
and Others
v.
flu:alior Rayon
,..,'ilk llfrtnufacturing
( W caving) Oo.
itd. a.nd Another
lVanclwo, J.
•
898
SUPREME COURT REPORTS
[1964 J
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 1 ndian
Income-tax Act was extended from April 1, I 950.
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 Enquiry Committee,
1948-49
(hereinafter r~ferred to as the
Enquiry Committee). The agreement with the State of Madhya
Bharat provided that the recommendations of the said Committee contained in Part I of its report read with Chapters I,
II, III of Part II of its report insofar as they apply to the
State of Madhya Bharat together with the recommendations
contained in Chapter IX of Part II of its report were accept·
ed 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 Chander·
nagore-If the Central Government considers it
necessary or expedient, so to do for a voiding any
hardship or anomaly, 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 Concessions) Order, 1950 (hereinafter referred to as the Concessions 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 war.
in these terms : -
"Concession to industrial
undertakings-(!) Where
any industrial undertaking situated in any State
claims that it has been granted any exemption
from or concession in respect of income-tax or
super-tax by the Ruler of an Indian State and
was enjoying such exemption or concession immediately before the appointed day it shall submit
'· \
r '
7S.C.R.
SUPREME COURT REPORTS
899
an application to the Commissioner of Income·
1964
tax giving the following particulars : -
Union of India
and Others
l. Name of the industrial undertaking.
v ..
2. Status (ie. whether public or private company, Gwalior Rayon.
fi
, d' 'd l
H' d
. 'd d f
.
Silk Manufacturing
rm, m 1v1 ua or
m u und1v1 e
am1ly).
(Weavil!11) Co.
3. Nature of the business.
Ltd. and Another
4. Date of commencement of the business.
5. Nature of the concession granted.
6. Period for which concessions granted.
7. Unexpired period of the concessions after the
appointed day.
~2) Every such application shall be accompanied by
the orders in original of the Indian State grantmg
the concession together with a certified copy of
the order.
(3) The Commissioner 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 company applied under cl. 16 of
the Concessions Orders for concessions regarding income-tax
and super-tax. In November 1951, the company 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 company
wanted exemption for the full period of twelve years as provided in the agreement of 1947, but was asked to apply later
and eventually the Central Government granted exemption to
the weaving section for another five years from 1955-56 to
1959-60. The company's 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 initiat·
ed by the Income-tax Officer, A Ward, Gwalior against the
·company 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 company appealed to the Assistant Appellate Commis-
-sioner against these orders. As the contention of the company
was that it was entitled to exemption in accordance with the agreement of April 7, 1947 consequent on the order of the Ruler
of Gwalior dated January 18, 1947, it filed a suit on November
23, 1956 against the Union of India .for a declaration that
under the order dated January 18, 1947 and the agreement
L.1P(D)ISCI-30
Wanehoo, J.
1964
Union of India
and Others
...
900
SUPREME COURT REPORTS
?,·."
v
[196! J
Owal£or Rayon
iilk Manufacturing
(Weaving) Co.
following thereon, the company was entitled to exemption
from iRcome-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 company under Art 228 of the
Constitution. While this suit was pending, the company filed
a petition under Art. 226 of the Constitution on September 11,
1957 in which also it claimed that by virtue of the order of the
Ltd. and Another
Wanchoo, J.
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 company and for other consequential reliefs in the
alternative. The High Court of Madhya Pradesh accepted
the petition of the company 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 collecting 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 contravention of the said exemption were quashed. In view of this decision on the writ petition, the High Court
decreed the suit in the same terms. The High Court however
gave certificates to the Union of India and its officers to
appeal to this Court; 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 contentions were raised on behalf of the
company in the High Court. 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 No. 1
of 1948 and it continued after the Constitution came into
force by virtue of Art. 372.
It was not 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 connection 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 no intention 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 not have the force of law the agreement
of April 7, 1947 between the Ruler of Gwalior and the company created an obligation which was binding on the former
State of Gwalior.
That obligation continued to be binding
'
>
7 S.C.R.
SUPREME COURT REPORTS
!iOI
on the State of Madhya Bharat as it was before the Constitu1964
tion came into force by virtue of Act No. I of 1948 read with
Union of India
Art. VI of the covenant. Further that obligation of the State
and Others
of Madhya Bharat devolved on the Government of India by
Gwalio;Rayon
cl. (b) of Art. 295 (I) of the Constitution. The obligation thus Silk Man_ufacturing·
being a constitutional obligation was not and could not be
(Weaving) Oo. <II
.
Ltd. and A·n.otker
affected by the extens10n of the Income-tax Act to the Part B
___
. ,.
State of Madhya Bharat read with the Finance Act, 1950, and
Wanckoo.J-:
could only be got rid of by an amendment of the Constitution,
as cl. (b) of Art. 295 (I) made it into a constitutional obligation which could not 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 Constitution and it
was contended that this agreement was binding under Art. 278
(1) (a) of the Constitution and the result of the agreement was
that the concessions granted in the agreement in favour of
industrial· corporations would continue and could not 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 Court held that the order dated January 18,
1947 was a law and that it continued 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 not 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 (I) of the Constitution there was a clear
positive instruction in the Constitution that the obligations
devolving thereby would be fulfilled and therefore the Government of India was bound to fulfil them irrespective of the
extension Df the Income-tax Act read with the Finance Act to
the State of Madhya Bharat from April I, 1950. The High
Court summed up its conclusion as follows: -
I. that the order dated January 18, 1947 of the Ruler
Df Gwalior State exempting the company 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
No. I of 1948, the company's 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
Df Gwalior State of granting exemption to the company that
•
1964
Union of India
and Others
v.
Gwalior Rayon
-Silk Manufacturing
(Weaving) Co.
LU. an<i Anolher
Wanchoo, J.
•
902
SUPREME COURT REPORTS
[1964}'
devolved on the Government of India under Art. 295 (]) (b)
and became a constitutional obligation of that Government;.
and
4. that on a• true construction of the relevant provisions
of the Income-tax Act, s. 13 of the Finance Act of 1950. and
cl. 16 of the Taxation Concessions Order 1950, they did not
repeal the specific exemption granted to the company by special statutory provisions and that therefore the company's
claim for exemption from taxation was well founded.
The
argument based on Art. 278 does not seem to have been
considered by the High Court; but it has been urged before
us by learned counsel for the company in support of the conclusions of the High Court.
The questions that were raiSed in the High Court have
all been raised before us and we now proceed to deal with
them seriatim.
The first question that falls for consideration is whether
the order of January 18, 1947, is a law.
In this connection
it is contended on behalf of the company 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 connection
with a process which started with the letter of Birla Brothers
Limited dated October 17, 1946 and ended with the agreement
of April 7, 194 7. Birla Brothers Limited had asked for certain
concessions 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 concessions could
not be granted without the sanction of the Ruler, the matter
was put up before the Ruler whether he would agree to grant
concessions and the order of January 18, 1947 is nothing more
than the Ruler's acceptance of the prayer for grant of concessions which eventually cnhninated in the agreement of April
7, 1947. The learned Attorney-General therefore contends that
the order must be read in the context in which it was passed
and if so read, it cannot be law.
Before we consider the rival contentions in this behalf
w~ would like to clear the ground with respect to orders of
absolute Rulers. The High Court has relied in this connection on two decisions of this Court, viz., Ameer-un-Nissa
Begum v. Mehboob Begum('), and the Director of Endowments
Government of Hyderabad v. Akram Ali('). In these cases it
was observed that the F.irmans were expressions of the sovereign 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.LR. 1955 S.C::. 352.
(')A.LR. 1956 S.C. 60.
'
'
7 S.C.R.
SUPREME COUHT REPORTS
I 903
held the field, that alone would govern or regulate the nghts ot
1964
the parties concerned and that the word of the Nizam was law.
Union of India
It was on these general observations that the High Court relied
and Others
to hold that \he order of January 18, 1947 was law. Since then,
Gwali;; Rayon
however, this Court had occasion to consider these observations Silk Manufacturing
in three cases namely·-(!) Mahara1·a Shree Umaid Mills Ltd
(Weaving) Oo.
.
'
.
·
·
Ltd. and Anoth.,.
v. Unwn of Indra('), (2) the State of Gujarat v. Vara Fiddali
Badruddin Mithibar(') and (3) Rajkumar Narsingh Pratap
Singh Deo v. The State of Orissa('). It has been pointed out in
these cases that the observations in the earlier cases were not
intended to lay down a general proposition that in the case of
an absolute monarch no distinction can be made between his
legislative and his executive acts. In Maharaja Shree Umaid
Mills Limited('), the agreement between the Ruler and the
Mills pursuant to the order of the Ruler was held to be a mere
:ontract and not 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('). Finally in
Rajkumar Narsingh Pratap Singh Deo's case(') it was held
that this Court had not 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 context, 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 contention is that a
particular order of the Ruler has been continued as a law
by Art. 372 of the Constitution. We cannot impute to the
Constitution-makers an intention to continue each and every
order of an absolute Ruler as a law whatsoever be its nature.
When Art. 372 of the Constitution speaks of continuance of
laws in 1950 the jurisprudential distinction between legislative, judicial and executive acts must have been present in the
mind of the Constitution-makers and that distinction must
always be kept in mind by courts in deciding
whether a particular order of an absolute Ruler is law for the
purpose of its continuance under Art. 372. It may be
that the order might not 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
(') [1963] Supp. 2 S.C.R. 515.
(')A.LR. 1964 S.C. 1043.
(')A.LR. 1964 S.C. 17~3.
Wanchoo, J.
1964
Union of India
and Others
v.
Gwalior 'Rayon
Silk J.l!anufacturing
(Weaving) Co.
Ltd. and A not her
Wanchoo, J.
904
SUPREME COURT REPORTS
[196
considering whether a particular order of a Ruler continues
under Art. 372 as law we cannot forget the jurisprudential
distinction between legislative, judicial and executive acts and
only those orders of the Ruler which are jurisprudentially
legislative acts will continue as laws under Art. 372 of the
Constitution.
Therefore simply because the order dated
January 18, 1947 was passed by an absolute Ruler it does not
necessarily follow that it is law for the purpose of Art. 372
and we have to see after looking into all the various considerations referred to above whether the order can be jurisprudentially said to be a law in order that it may continue as law
under Art. 372 of the Constitution.
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 concessions were granted. This request in the letter of October 17,
1946 was processed in the Secretariat of the former Gwalior
5tate. The entire file has apparently not been placed before the
court but from whatever material is available on the record
it appears that there was first a note by the office. Thereafter
the Secretary of the department concerned gave his opinion in
which it was pointed out that Birla Brothers Limited would
only establish industries in Gwalior State if they got the concessions. Then there is the vinanti by the Minister concerned.
The Minister made it clear that no positive 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 no income-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 lia1'1e 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 November 15, 1946. On November 17, 1946,
the Ruler made the following note thereon: -
"Submit personally on my
return". It cannot be the
(
case of the company that even this order of the Ruler requiring papers to be s1;1bmitted on his return was a Jaw, though
'l S.0.R.
SUPREME COURT REPORTS
905
it was certainly an order requiring the Minister to submit
1964
papers again when the Ruler returned from somewhere. Then
Union of India
on January 17, 1947, there was a Guzarish. In this Guzarish
and Other•
it was said that the concessions which had been asked for a
0
,.~· R
period of fifteen years would be accepted if granted for twelve Silk ':,,~';;'fact":I;;':.i,
years.
It was also made clear that unless such concessions
(Weaving) Oo.
were granted Birla Brothers Limited would not be induced
Lta. and Anothe,
to open factories within the State. Then followed the order
wa~ch0o, .r.
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 not 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, M adhaorao
Phalke v. The State of Madhya Bharat(').
·
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 could go ahead
to comply with the request of Birla Brothers Limited for the
three concessions that. they wanted. The form of the order
also shows that it could not be law.
The order consists of
three sentences. The hrst sentence says that "the Guzarish of
the Minister. ..... dated 15-11-1946 is sanctioned". Obviously
such a sanction for certain concessions cannot be law.