# Union of India v. Maharaj" Krishnag'1rh Mills Ltd. fl961] 3

- **Citation:** [1964] 4 S.C.R. 280
- **Court:** Supreme Court of India
- **Decided:** 1964
- **Bench:** S. K. Das, Acting C. J, K. Subba Rao, Raghubar Dayal, N. Rajagopala Ayyangar, J. R. MuoHoLKAR
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-v-maharaj-krishnag-1rh-mills-ltd-fl961-3-3039
- **Pages:** 19

## Headnote

Sales Tax-Assess1nent in respect of works contracts-Constitutionality-Afreemcnl betwun Prw'dent and Raj Pramukh of Part
B St•te-V aliJity-Continuance in force of existing laws and their
t!ld•ptati011J-"Subjcct to the other provisions of the Constitution"-
Scope and ef}ect of-Constitution of India, Arts. 277, 278, and 372Tr.vancore-Cochio General Sales Tax Act. 11 of 1125 M.E.-Tra..
v«ncore-Cochin General S•les Tax Act 1957 (12 of 1957)-Kerala
Act 11 of 1957.
On March 17, 1959 the appellant, a private limited company
was aS:i;essed to sales· tax under the Travancore-Cochin General Sales
Tax Act, 1125 M.E. for the assessment year 1952-53 in rc.pect of
"works contr~cts". The company filed a revision petition before the
1st respondent, but it w~s rejected. Likewise, the 2nd respondent
assessed the company to sales tax for the assessment year5 1956-57,
1957-58, 1958-59 in respect of '\vorks contracts". The as!;essment
for the year 1952-53 was made only under the Travancorc-Cochin
General Sab T.x Act (11 of 1125 M.E.) and, therefore, the subsequent alleged enhancement of the tax did not affect the as.'iessment
of that year.
Assessment for the years 1956-57, 1957 .. 58 and
1958-59 were m:;i.de under the Travancore-Cochin General Sales Tax
(Amendment) Act, 1957(12 0£ 1957) and, therefore, the provisions
if any, enhancing the rate under the Act would affect
the said
asM:ssments. The enhancen1ents made under the l(erala Act 11 of 1957
would not govern the assessment year 1956-57 but only the assess1nent
years 1957-58 and 1958-59. The appellant moved the High Court
under Arts. 226 and 227 of the Constitution for quashing the said
orders of as!lessqient.
The petitions were dismissed. In this Court,
the appellant mainly contended : ( 1) Art. 277 can only save the
levy of a tax that was being lawfully levied by a State in11r1ediately
before the commencement of the Constitution and that as the Act
came into force only after the Constitution, the levy made thereunder doe~ not satisfy the condition laid do\vn by the Article. (2)
Assuming that Art. 277 saved the levy of a tax under the Act, there
was an agreement betvveen the President of India and the Rajpramukh of the State of T ravancore-Cochin and under the said agreement the Union agreed to recoup the loss in revenue incurred by the
91.id SNte by rea.5on of the constitutional transference of the B State's
power of taxation in respect of certain item5 to the Union List and
thati tA!:rraftcr, the State ceased to have the power to levy any tax in
>
4 S.C.R.
SUPREME COURT REPORTS
281
respect of the subjects so transferred. (3) Article 372 is subject to
other provisions of the Constitution and a law empowering a State to
impose a tax in respect of a federal subject is inconsistent 'vith the
federal structure of the Constitution and, therefore, is bad; and, that
apart, it is also inconsistent with the express provisions of Part XII of
the Constitution and particularly with those of Arts. 277 and 278
thereof.
field: 'J'he tax under the
~i\ct would not be saved, as the
necessary condition that the levy should have been lawfully made
before the Constit_ation, was not satisfied.
The effect of the provisions in Art. 278 is that to the extent
c(lvered by an agreem~nt the power of the State Govcrn1nent to
continue to leYy taxes under Art. 277 is superseded.
--
Union of India v. Maharaj" Krishnag'1rh Mills Ltd. fl961] 3
S.C.R. 524. applied.
·•
The agre..:tnent in question fell squarely within the scope of
the power. That would have its full force unless the Constitution
(Seventh Amendment) Act, 1956, in terms avoided it.
The said
amend1nent was only prospective in operation and it could not have
affected the validity of the agreetnent. It must be held, therefore, that
the impugned assessment orders were not validly made by the sales
tax authorities in exercise of the power saved under Art. 277 of the
Constitution.
A- pre-Con~titution la.\V n12de by a competent authority, though
it has lost its legislat

## Text

_Characters 0–39,749 of 46,141. This is a partial read: ask again with offset=39749 for what follows._

1963
August 13
280
SUPREME COURT REPORTS
[ 1964]
THE SOUTH INDIA CORPORATION(P) LTD.
ti.
THE SECRETARY, BOARD OF REVENUE.
TRIVANDRUM & ANR.
(S. K. DAS, ACTING C. J., K. SUBBA RAO, RAGHUBAR DAYAL,
N. RAJAGOPALA AYYANGAR AND J. R. MuoHoLKAR, JJ.)
Sales Tax-Assess1nent in respect of works contracts-Constitutionality-Afreemcnl betwun Prw'dent and Raj Pramukh of Part
B St•te-V aliJity-Continuance in force of existing laws and their
t!ld•ptati011J-"Subjcct to the other provisions of the Constitution"-
Scope and ef}ect of-Constitution of India, Arts. 277, 278, and 372Tr.vancore-Cochio General Sales Tax Act. 11 of 1125 M.E.-Tra..
v«ncore-Cochin General S•les Tax Act 1957 (12 of 1957)-Kerala
Act 11 of 1957.
On March 17, 1959 the appellant, a private limited company
was aS:i;essed to sales· tax under the Travancore-Cochin General Sales
Tax Act, 1125 M.E. for the assessment year 1952-53 in rc.pect of
"works contr~cts". The company filed a revision petition before the
1st respondent, but it w~s rejected. Likewise, the 2nd respondent
assessed the company to sales tax for the assessment year5 1956-57,
1957-58, 1958-59 in respect of '\vorks contracts". The as!;essment
for the year 1952-53 was made only under the Travancorc-Cochin
General Sab T.x Act (11 of 1125 M.E.) and, therefore, the subsequent alleged enhancement of the tax did not affect the as.'iessment
of that year.
Assessment for the years 1956-57, 1957 .. 58 and
1958-59 were m:;i.de under the Travancore-Cochin General Sales Tax
(Amendment) Act, 1957(12 0£ 1957) and, therefore, the provisions
if any, enhancing the rate under the Act would affect
the said
asM:ssments. The enhancen1ents made under the l(erala Act 11 of 1957
would not govern the assessment year 1956-57 but only the assess1nent
years 1957-58 and 1958-59. The appellant moved the High Court
under Arts. 226 and 227 of the Constitution for quashing the said
orders of as!lessqient.
The petitions were dismissed. In this Court,
the appellant mainly contended : ( 1) Art. 277 can only save the
levy of a tax that was being lawfully levied by a State in11r1ediately
before the commencement of the Constitution and that as the Act
came into force only after the Constitution, the levy made thereunder doe~ not satisfy the condition laid do\vn by the Article. (2)
Assuming that Art. 277 saved the levy of a tax under the Act, there
was an agreement betvveen the President of India and the Rajpramukh of the State of T ravancore-Cochin and under the said agreement the Union agreed to recoup the loss in revenue incurred by the
91.id SNte by rea.5on of the constitutional transference of the B State's
power of taxation in respect of certain item5 to the Union List and
thati tA!:rraftcr, the State ceased to have the power to levy any tax in
>
4 S.C.R.
SUPREME COURT REPORTS
281
respect of the subjects so transferred. (3) Article 372 is subject to
other provisions of the Constitution and a law empowering a State to
impose a tax in respect of a federal subject is inconsistent 'vith the
federal structure of the Constitution and, therefore, is bad; and, that
apart, it is also inconsistent with the express provisions of Part XII of
the Constitution and particularly with those of Arts. 277 and 278
thereof.
field: 'J'he tax under the
~i\ct would not be saved, as the
necessary condition that the levy should have been lawfully made
before the Constit_ation, was not satisfied.
The effect of the provisions in Art. 278 is that to the extent
c(lvered by an agreem~nt the power of the State Govcrn1nent to
continue to leYy taxes under Art. 277 is superseded.
--
Union of India v. Maharaj" Krishnag'1rh Mills Ltd. fl961] 3
S.C.R. 524. applied.
·•
The agre..:tnent in question fell squarely within the scope of
the power. That would have its full force unless the Constitution
(Seventh Amendment) Act, 1956, in terms avoided it.
The said
amend1nent was only prospective in operation and it could not have
affected the validity of the agreetnent. It must be held, therefore, that
the impugned assessment orders were not validly made by the sales
tax authorities in exercise of the power saved under Art. 277 of the
Constitution.
A- pre-Con~titution la.\V n12de by a competent authority, though
it has lost its legislative competency under the Constitution, shall
continue in forcr:, provided the law does not contravene the "other
r>roviiions" of the Constitution.
It!/!. Cannon Dunkerlay & Co. v. Sales Tax Officer, Maatanf .,
ckmy, l.L.R [1957] Kerala 462, Sagar Mall v. State, I.L.R. f1952J
1 All 062, Kanpur Oil Mills v. fudge (Appeals) Sales Tax, Kanpur,
A.LR. 1955 All 99,
The Amalgamated Coalfields Ltd.
v.
The
fanapada Sabha, Chhindwara, [1962] I S.C.R. 1, fagdish Prasad
•. SaharanpNr Municipality A.I.R. 1961 All. 583; Sheoshankar v. M.
P. State, AJ,R. 1951 Nag. 58, State v. Yash Pal, A.I.R. 1957 Punj.
91 and Bmoy Bhusan v. State of Bihar, A.LR. 1954 Pat. 346,
followed.
Article 372 ~annot be constr~ed in such a way as to enlarge the
scope of the saving of taxes, duties, cesses or fees. Article 372 must
be read subject to Art. 277.
.
While Art .. 372. is subject to Art. 278, Article 278 operates in
ir_s own sphere m Sj11te of Art. 372. The result is that Art. 278 overr~de~ Art. 372; that is to say, notwithstanding the fact that a pre-Constitotion taxation law continues in force under Art. 372, the Union •nd
11-2 S. C. Indiaj6~
1963
The Sot<th
l ndia Corporation (P) Ltd.
v.
The Secretar'J,
Board of
Revenue,
Trivandrum
1963
The South
India Corporation ( P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trivondrurn
282
SUPREME COURT REPORTS
(1964]
the State Governments can enter into an agree1nent in terms of Art.
278 in respect of Part B States depriving the State law of its efficacy.
In one vie\V Art. 277 excludes the operation of Art. 372, and in the
other view, an agreement in tenns of Art. 278 overrides Art. 372. In
either view, the result is the same, namely, that at any rate during
the period covered by the agreement the States ceased to have anv
power to impose the tax in respect of "works_ contracts". ~fhe said
orders of assessment, therefore, muSt be set aside.
Chicago, Rock Island and Pacific Railway Company v. William
Moglim, (1884) 29 L. Ed. 270 and Vilas v. City of Manila, (1910)
55 L. Ed. 491, distinguished.
C1v1L APPELLATE JuR1so1cTION : Civil Appeals Noi:. 295
to 298 of 1962.
Appeals from the judgment and order dated February
3, 1961, of the Kerala High Court in 0. Ps. Nos. 232 of
1957, 70, 71 and 673 of 1960.
M. K. Nambyar, J. B. Dadachanji, 0. C. Mathur and
Ravinder Narain, for the appellant.
V. P. Gopalan Nambyar, Advocate-General for the
State of Kerala and Sardar Bahadur, for the respondents.
Subba Rao, /.
August 13, 1963. The Judgment of the Court was
delivered by SuBBA RAo J.-These four companion appeals
arise out of a common judgment of the High Court of
Kerala dismissing the four petitions filed by the appellant
seeking to quash. the orders of assessment made by
the
Sales Tax authorities imposing sales tax in respeet of
"works contracts"·
The undisputed facts may briefly be stated. The: appellant is a private limited company incorporated under the
Indian Companies Act. The principal office of the Company is at Mattancherry. It carries on business in iron,
hardware.. electrical goods, timber, coir, engineering contracts etc. In the course of its business, the Company acted
as engineering contractor for the State and Central Government departments and also for private parties. On March
17, 1959, the Sales Tax Officer, special Circle, Ernakulam
assessed the Company to sales tax under the TravancoreCochin General Sales Tax Act, 1125 M.E. for the assessment
year 1952-53 in respect of "works contracts". The Company
filed a revision petition before the 1st respondent, but it was
rejected. Likewise the 2nd respondent assessed the Com-
-
,;. '
..
. '
-
..
4 S.C.R.
SUPREME COURT REPORTS
283
pany w sales tax by his orders dated 7-1-1960, 4-1-1960 and
31-3-1%0 for
the assessment years 1956-57,
1957-58 and
1958-59 in respect of "works contracts". The appellant filed
four petitions in the High Court of Kcrala under Arts. 226
and 227 of the Constitution for quashing the said orders of
assessment. The main contention advanced on behalf of
the appellant-Company before the High Court was that,
after the Constitution came into force the relevant Sales Tax
Acts imposing sales tax on "works contracts" were unconstitutional and, therefore, void. The High Court rejected
the contention and dismissed the petitions with costs.
Hence the appeals.
Before adverting to the rival contentions it would be
convenient at the outset to give briefly the historical background of the sales tax legislation in Kerala.
Originally, Travancore and Cochin were two separate
sovereign States having plenary powers of taxation. In the
Cochin State, the Cochin General Sales Tax Act 15 of 1121
M.E. and in the Travancore State, the Travancore General
Sales Tax Act 18 of 1124 M.E. imposed tax on "works contracts". As a result of the merger of the two States, the
United State of Travancore-Cochin was formed with
a
common Legislature. The said Legislature enacted the T ravancore-Cochin General Sales Tax Act 11 of 1125 M.E.
(1950), hereinafter called the Act.
The said Legislature
also had plenary powers of taxation and, therefore, it validly
imposed sales tax on "works contracts". The Act was published in the Gazette on January 17, 1950, but s. 1 (3) thereof provided that it would come into force on such date as
the Government migllt, by notification in the Gazette,
appoint. The requisite notification was issued by the Govvernment in May 30, 1950. Rules were framed under powers conferred by s. 24 of the Act prescribing the mode, inter
alia, for ascertaining the amounts for which goods were sold
in relation to "works contracts". Rules 4(3) provided that,
"For the purposes of sub-rule (I), the amount for
which goods are sold by a dealer shall, in relation to
a works contract, be deemed to be the amount payable
to the dealer for carrying out such contract less a sum
not exceeding such percentage of the amount payable
as may be fixed by the Board of Revenue from time to
time for different areas, representing the usual propor1963
The South
India Corporation (P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trivandrum
Subba Raa J.
1963
The South
India Corporation (P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trir1andrum
Subba Rao l.
284
SUPREME COURT REPORTS
(1964]
tion in such areas of the cost of labour to the cost of .
materials used in carrying out such contract, subject
to the following maximum percentages:-
*
*
*
*
*
But, it is statetl that the Board of Revenue did uot fix the
percentage for deduction from the amount payable to the
dealer for carrying out a works contract.
This fact
was not denied in the High Court, but before ns an application is made to produce the Travancore-Cochin Gazette
to establish that such a percentage was fixed. The Rules
also were notified on May 30, 1950. The earlier Acts of Travancore and Cochin were repealed from May 30, 1950. Till
May 30, 1950, sales tax was levied on works contr~cts in
Travancore and Cochin areas under the respective Acts
and the rules framed thereunder. As from the said date
the said Acts were repealed, thereafter the said tax was
imposed under the Act and the rules framed therrnnder.
On November 1, 1956, the States Reorganization Act of
1956 came into force and the new State of Kerala was
formed thereunder.
The newly formed Kerala State
comprised the area covered by the Travancore-Cochin
State, excepting a small part thereof, and the district of
Malabar in the Madras State.
Thereafter, the Keula
Legislature passed the Travancore-Cochin General s~b
Tax (Amendment) Act, 1957 (12 of 1957)
~mending
the Act and extending its provisions to the whole State of
Kerala. The new Act practically contained the provisions of
the earlier Act. The said Act came into force on October
1, 1957. By the provisions of Act 12 of 1957, among other
things, the tax on electric goods was enhanced from 3 n.p. to
4 n.p. in the rupee and in regard to cement, this item was
freshly added and charged to sales tax at 5 n.p. in the rupee.
The State of Kerala does not admit that either there was ;my
enhancement of tax in the case of electrical 'goods or that
any tax was imposed in regard to cement involved in a
works contract. Further, the· sales tax leviable under the
Act was enhanced by the Kerala Surcharge on Taxes Act,
1957 ( 11 of 1957) and again by the Kerala Surcharge on
Taxes Act, 1%0. We are not concerned with the latter
Act as no assessment was made under that Act in respect
of any of the transactions in question.
.
The factual position may, therefore, be stated thm :
, __
-
!
,
•
..
•
4 S.C.R.
SUPREME COURT REPORTS
285
The assessment for the year 1952-53 was made only under
the Travancore-Cochin General Sales Tax Act (11 of 1125
M.E.) and, therefore, the subsequent alleged enhancement
of the tax does not affect the assessment of that year. Assessments for the years 1956-57, 1957-58 and 1958-59 were
made under the Travancore-Cochin General Sales Tax
(Amendment) Act, 1957 ( 12 of 1957) and, therefore, the
provisions, if any, enhancing the rate under the Act would,
affect the said assessments. The enhancements made under
the Kerala Act 11 of 1957 would not govern the assessment
year 1956-57, but only the assessment years 1957-58 and 195859.
The material contentions of Mr. Nambiar, appearing
for the appellant may be summarised thus : ( 1) The
Travancore-Cochin Act of 1125 would not continue in
force under Art. 372 of the Constitution inasmuch as its
provisions were inconsistent with the structure of the
Constitution as well as with the provisions of Part XII
thereof. (2) Art. 277 of the Constitution cannot be relied
upon by the respondent, as it can be availed of only :
(a) if a particular tax was lawfully levied by the Government of the State immediately before the commencement
of the Constitution and is expressly mentioned in the Union List, and {b) if there is an identity between the tax im-
•posed bv the State before the Constitution and that continued by it thereafter in respect of rate, area, State and purpose.
It is said that the said two conditions are not satisfied. (3)
Assuming that Art. 277 applied, the said provision could
not be relied upon by the appellant in view of the agreement entered into between the Rajpramukh of Travancore
and the \Jnion Government under Art. 278 of the Constitution. ( 4) The impugned Act, in so far as it imposed tax in
respect of "works contracts", would offend Art. 14 of the
Constitution inasmuch as it was not applied to areas other
than those covered by the Travancore-Cochin States and,
therefore, discriminatory in its application. And (5) in
any view, in respect of the assessment year 1952-53 the nonfixation of the percentage by the Board of Revenue under
r. 4(3) of the Rules made under the Act renders the said
assessment illegal.
The learned Advocate-General of Kerala counters some
of the said arguments. We shall refer to his arguments in
1963
The South
India Corporation (P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trivandrum
Subba Rao f.
1963
The South
lndi• Corporation (P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trivandrum
Subba Rao f.
286
SUPREME COURT REPORTS
[1964]
the course of the judgment at appropriate places. It may be
metioned at this stage that the learned Advocate-General
conceded that the assessment orders for the years 1956-57,
1957-58 and 1958-59 made under the Travancore-Cochin
General Sales Tax (Amendment) Act, 1957 (12of1957) and
the Kerala Surcharge on Taxes Act (11 of 1957) were bad,
but prayed that the State might be given liberty to assess
the appellant de nova for the said years under the Act.
The main contention of learned counsel for the appellant centres on the provisions of Arts. 277 and 278 of the
Constitution. Under Art. 277, any taxes that were being
lawfully levied by the Government of any State before
the Constitution could be continued to be levied thereafter,
notwithstanding that the s~id t;ixes were mentioned in the
Union List, till Parliament made a law to the contrary.
Article 278 enables the Government of India and a State
Government specified in Part B of the First Schedule to
the Constitution to enter into an agreement with respect to
levy and collection of any tax leviable by the Government
of India in such State and for the distribution of the proceeds thereof and also in respect of the grant of any financial
assistance by the Government of India to such State if it
incurred any loss of revenue derived by it from any source.
Under cl. (2) thereof. such an agreement shall continue in
force for a period of ten years from the commencement 1
of the Constitution. We are not concerned here with the
legal position after the expiry of the said period, and w~
do not propose to express our view thereon.
The first contention of learned counsel for the appellant is that Art. 277 of the Constitution can only save the
levy of a tax that was being lawfully levied by a State
immediately before the commencement of the Constitution
and that, as the Act came into force only after the Constitution, the levy made thereunder does not satisfy t11e condition laid down by the article. To appreciate this contention
some relevant facts may be recapitulated. The Act was
published in the Gazette on January 17, 1950, hut was brought into force only on May 30, 1950, i.e., after the commen- .
cement of the Constitution. If so, it follows that the tax
under the Act would not be saved, as necessary condition
that the levy should have been lawfully made before the
Constitution was not satisfied.
;_-,_
-
!
•,
..
-
4 S.C.R.
SUPREME COURT REPORTS
287
On the assumption that Art. 277 saved the levy of tax
under the Act, the turther contention of the appellant is
that there was an agreement dated February 25, 1950 between the President of India and the Rajpramukh of the
State of Travancore-Cochin in the matter of the federal
financial integration in the said State and that under the
said agreement the ·Union agreed to recoup the loss
in
revenue incurred by the said State by reason of the constitutional transfrrance of the B State's power of taxation in
respect of certain items to the Union List and that, thereafter, the State ceased to have the power to levy tax in respect of the subjects so transferred.
The learned Advocate-General, on the other hand, contends that Art.
278(2) enables the Union and a B State to enter into
an agreement only in respect of a tax leviable by the
Government of India in the said State and in respect
whereof a loss has been incurred by the State by reason of
the fact that under the Constitution it has ceased to have
the power to levy and collect the said tax, and that, as in the
instant case by reason of Art. 277 the State would continue
to have the power to levy the tax in respect of "works contracts" till Parliament made appropriate law, it did not incur any loss in respect of the said tax and, therefore, no valid agreement could be entered into between the State Government and the Union in respect thereof. To state it differently, Art. 278 does not come into play unless the Government of India acquires the power to levy a particular tax
saved by Art. 277 by Parliament making an appropriate
law; for, it is said, with some force, there cannot be an
agreement to recoup any loss of revenue when there is no
such loss. But this question is covered by a decision of this
Court in Union of India v. Maharaja Krishnagarh Mills
Ltd.('). There, the question for determination was whether
the Union of India was entitled to levy and recover arrears
of excise duty on cotton cloth for the period April 1, 1949
to March 31, 1950, payable by the respondent, a cloth mill
in the State of Rajasthan, under the Rajasthan Excise duties
Ordinance, 1949. By reason of Art. 277 of the Constitution,
the State of Rajasthan became entitled to recover the said
duty notwithstanding the fact that it was transferred to the
Union_List The pro~isi_on to the contrary contemplated by
(1) [1961] 3 S.C.R. 524.
1963
The South
India Corporation ( P) Ltd.
v.
The Secretary,
Bo«rd of
Revenue,
Trivandrum
Subba Rao /.
1963
The South
India Corporation (P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trivandrum
Subba Rao/.
288
SUPREME COURT REPORTS
[ 1964]
Art. 277 of the Constitution was made by Finance Act XXV
of 1950 s. 11 whereof extended the Cen'tral Excise and Salt
Act, 1944, along with other Acts, to the whole of India
except the State of J ammu and Kashmir. That section had
effect only from April 1, 1950 and did not apply to arrears
of duty of excise in regard to the earlier period. The Un:,on
pleaded that an agreement envisaged by Art. 278 w<is entered into on February 25, 1950 which conceded to the
Centre the right to levy and collect the arrears of duty in
question. The question now raised before us, namely, whether there can be a valid agreement under Art. 278 of the
Constitution in respect of taxes leviable by the State and
leviable by the Government of India till an appropriate law
is made by Parliament arose for consideration in that case.
The learned Chief Justice, speaking for the Court came to
the following conclusion, at p. 535 :
"Thus, the combined operation of Arts. 277 and 278
read with the agreement vests the power of levy and
collection of the duty in the Union of India".
The reasons for the conclusion are found at p. 533:
"It is note)"orthy that the provisions of Art. 278 override ·pro tan to other provisions of the Constitution including Art. 277 and the terms of the agreement override the provisions of the Chapter, namely Chapter 1
of Part XII .... Article 277, therdore, is in the nature
of a saving provision permitting the States to levy a
tax or a duty which, after the Constitution, could be
levied only by the Centre. But Art. 277 must yield to
any agreement made between the Government of India and the Government of a State in Part B in respect
of such taxes ~r duties, etc."
The. learned Chief Justice proceeded to state thus at p. 535:
"That a duty of the kind now in controversy on the
date of the agreement after coming into force of the
Constitution is leviable only by the Government of India even in respect of the State of Rajasthan is clear
beyond all doubt. The Union List only, namely, entry
84 in the Seventh Schedule, authorises the levy and collection of the duty in question ..................... .
It is true that Art. 277 has saved, for the time being,
until Parliament made a provision to the contrary, the
power of the State of Rajasthan to levy such a duty,
-
..
-
-
4 S.C.R.
SUPREME COURT REPORTS
289
but that is only a saving provision, in terms subject to
the provisions of Art. 278."
This Court, therefore, held that after the coming into force
of the Constitution the excise duty in question in that case
was leviable only by the Government of India, though there
was a saving provision in favour of the State of Rajasthan
till Parliament made an appropriate law; and on that reasoning it held that the agreement under Art. 278 coulcl
be made in respect of such a levy notwithstanding the temporary reservation made in favour of the State. The only
difference between that case and the present one is that at
the time the agreement was entered into between the Union
and the State, Parliament had not made the appropriate
law depriving the State of its power to levy taxes in respect
of "works contracts". llut that cannot make any difference
in principle, for, even the earlier decision related only to the
validity of the agreement in respect of arrears leviable by
the State before the appropriate law was made. The effect
of the provisions in Art. 278 is that to the extent covered
by an agreement the power of the State Government to
continue to levy taxes under Art. 277 is superseded.
The next question is whether there was any such agreement whereunder the State agreed to give up its right to
kvy the said tax as a part of the agreement entered into by
it with the Union. This leads us to consider the terms of the
agreement dated February 25, 1950, entered into between
the President of India and the Rajpramukh of the State of
Travancore-Cochin. It would be convenient to read the
relevant clauses of the agreement. It reads:
"WHEREAS provision is made by Articles 278, 291,
295 and 306 of the Constitution of India for certain
matters to be governed by agreement between the Government of India and the Government of a State specified in Part B of the First Schedule to the Constitution:
*
*
*
*
*
*
Now, therefore, the President of India and the Rajpramukh of Travancore-Cochin, have entered into the
following agreement, namely: ·
The recommendations of the Indian States Finances Enquiry Commission, 1948-49 (hereafter referred to
2s the Committee) contained in Part I of its Report
read with Chapters I, II and III of Part II of its Report,
1962
Th< South
India Corporation (P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trivandrum
Subb• Rao /.
1963
The South
India
Corpora~
tion (P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trivandrum
Srtbba Rao /.
'
290
SUPREME COURT REPORTS
[1964]
in so far as they apply to Travancore-Cochin (hereinafter referred to as the State) together with the recommendations contained in the
Committee's Second
Interim Report, are accepted by the parties thereto subject to the following modifications, namely:-
( 1) With reference to paragraph 6 of the Committee's Second Interim Report, the date of federal financial integration of the State shall be 1st April 1950.
(2)
"
*
*
*
*
(3) The Committee's formula of guaranteeing the
'federal' revenue-gap for the first five years after federal
financial integration and of tapering it down over the
next five years will be applied to the combined 'federal'
revenue-gap of the former Indian States, Travancorc.·
and Cochin, taken together, computed as in (2) above.
*
*
*
*
*
*
Subject to the provisions of the Constitution of India,
this agreement shall, except where the context of the
Committee's Report and of this agreement otherwise
require, remain in force for a period of ten years from
the commencement of the Col;lstitution of India".
It will be seen from the said agreement that it incorporated the recommendations made by the Indian States Finances
Enquiry Committee with some modifications and that the
Union of India agreed to recoup the State for the loss caused
to it by reason of the federal financial integration in the
manner described thereunder. It was not a piecemeal agreement confined to a few items, but a comprehensive one to fill
up the entire revenue-gap caused to the State by reason of
some of its sources of revenue having been taken away by
the Union or otherwise lost to it. A perusal of the main
recommendations made by the Indian States Finance Enquiry Committee and incorporated in the agreement also
indicates the completeness of the agreement. The Committee
was asked to examine and report, inter alia, whether, and
if so, the extent to which, the process of so integrating
Federal Finance in the Indian States and Union with that
of the rest of India should be gradual and the manner in
which it should be brought about. One of the general principles followed by the Committee was that federal financial integration in States involved not merely the taking over
of all their "federal" revenues by die Centre, but also the
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4 S.C.R.
SUPREME COURT REPORTS
291
assumption of all expenditure in States upon Departments
and Services of a "federal" character. In Ch. II of Part II,
which dealt with "Specific matter concerning "Federal"
revenues and "Federal" service departments, it was stated
that with effect from the prescribed date, the Centre will
take over all "federal" sources of Revenue and all "federal"
items of expenditure in States, together with the administration of the Departments concerned, and that the Centre
must also take over all the current outstandings, liabilities
claims, etc. and all productive and unproductive Capital
assets connected with these departments.
Dealing with
the States' rights, it observed:
""With effect from the prescribed date, all 'rights and
immunities' enjoyed or claimed by the States, whether
expressly or by usage, and whether relating to 'federal'
revenues and taxes generally present or future, or to
specific matters such as Railways, Customs, Posts and
Telegraphs, Opium, Salt, etc. will terminate and
must be extinguished. Thereafter. their constitutional
position in respect of these matters should be the same
as that of provinces under the new Constitution of
India."
The Committee recommended that the whole body of State
legislation relating to "federal" subjects should be repealed
and the corresponding body of Central legislation extended
proprio vi gore to the States, with effect from the prescribed
date, or as and when the administration of particular
•·federal"' subjects is assumed by the Centre. In its Second
Interim Report, dealing with Travancore and Cochin, the
following recommendations were made:
"Revenue Gap" arising out of Federal Financial Integration:
(i) The net revenue loss to the Travancore and Cochin
States, taken together, upon federal financial integration (on the basis of figures for their financial year
1123 M.E.) would be Rs. 330 lakhs; this includes a net
loss of Rs. 100 lakhs by abolition of internal Customs
. Duties in Travancore State.
(ii) We recommend that-
( a) the loss resulting from the immediate abolition of Internal Customs Duties of Travancore must
be borne by the State Government:
1963
The South
India Corpo1atio11
( P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trivandrum
Subba Rao {.
l963
The South
India Corpor•-
tion (P) Ltd.
v.
1'/Je Secretary,
Board of
Reve11ue,
Trivandrum
Subba Rao f.
292
SUPREME COURT REPORTS
[1964]
(b) as regards the residual net "Central" RcvenueGap of the two States taken together (Rs. 230 lakhs),
there should be a guaranteed reimbursement by the
Central Government to the _following extent during
~ transitional period:-
'
From the date of federal
financial intcgratior.
Rs. 230 lakhs per annum to 31st March 1955.
The agreement, read with the Report, makes the following
position clear : The loss arising to the State on account or
the federal financial integration in the State was ascertained and a provision was made for subsidizing the State by
filiing up the said revenue-gap.
The agreement ex facie
appears to be a comprehensive one. It takes into consideration the entire loss caused to the State by reason of some of
its sources of revenue being transferred under the Constitution to the Union. It would be unreasonable to construe the
agreement as to exclude from its operation certain taxes
which the State was authorized to levy for a temporary period. As we have said, that saving was subject to an agreement and, as by the agreement effective adjustments were
made to meet the loss which the State would have incurred
but for the agreement, there was no longer any nece,.sity
for the continuance of the saving and, it ceased to have any
force thereafter between the parties to the agreement. \¥ e
are not called upon in this case to decide whether the sai<l
power revived after the expiry of ten years from the commencement of the Constitution, for all the impugned as.essments fall within the said period. Nor do we find any forcr
in the contention that as Art. 278 was omitted by the Constitution (Seventh Amendment) Act, 1956, the agreement
entered into in exercise of a power thereunder automatically came to an end and thereafter the power of the State
to levy the tax came into life again. An obvious fallacv
underlies this ingenious argument. The validity of an agreement depends upon the existence of power at the time it
was entered into. Its duration will be limited bv its terms
or by the conditions imposed on the power its~lf. Artic!t
278 conferred a power upon the Union and the B State to
enter into an agreement which would continue in force for
a period not exceedfng ten years from the commencement
of the Constitution. The agreement in question.fell squarely within the scope of the power. That agreement, there-
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•
4 S.C.R.
SUPREME COURT REPORTS
293
r,
fore, would have its full force unless the Constitution (Seventh Amendment) Act, 1956, in terms avoided it. The said
amendment was only prospective in operation and it could
not have affected the validity of the agreement. We, therefore, hold that the impugned assessment orders were not
'
-
..
validly made by the sales tax authorities in exercise of the
power saved under Art. 277 of the Constitution.
Learned Advocate-General for the State of Kerala raises
an intertsting point, namely, that the impugned law, i.e.,
the .Tr2vancore-Cochin General Sales Tax Act of 1125 M.
E. continued in force after the Constitution under the express
provisions of Art. 372 thereof till the said law was altered,
repealed or amended by the competent authority and, therefore, even if there was an agreement between the Union
and the State as aforesaid, it could not affect the power
of the State to impose the tax under the said law.
Mr. Nambiar, on 'the other hand, argues that Art. 372
is subject to other provisions of the Constitution and a law
empowering a State to impose a tax in respect of a federal
subject is inconsistent with the federal structure of the
Constitution and, therefore, is bad; and, that apart, it is also
inconsistent with the express provisions of Part XII of the
Comtitution and particularly with those of Arts. 277 and 278
tJ1creof. Article 372 reads:
"(l) Notwithstanding the repeal by this Constitution of the enactments referred to in article 395 but
subject to the other provisions of this Constitution, all
the bw in force in the territory of India immediately
before the commencement of this Constitution shall
continue in force therein until altered or repealed or
amended by a ·competent Legislature or other competent authority.
*
~
*
*
*
*
Explanation /.-The expression "law in force" in this
article shall include a law passed or made by a Legislature or other competent authority in the territory of
India before the commencement of this Constitution
wd not previously repealed, notwithstanding that it
or parts of it may not be then in operation either at all
or in particular areas."
;.
The object of this article is to maintain the continuity of
the pre· e.xisting laws after the Comtitution came into force
1963
The South
India Corporation ( P) Ltd.
v.
The Secretary,
Board of
Revenue,
TrivtJndrum
Subha Rao /.
1963
The South
India Corporation (P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trivandrum
Subba Rao /.
294
SUPREME COURT REPORTS
[1964]
till they were repealed, altered or amended by a competent
authority. Without the aid of such an article there would
be utter confusion in the field of law. The assumption underlyinp the article is that the State laws may or may not be
within ·the legislative competence of the appropriate autho-
•
rity under the Constitution. The article would become ineffective and purposeless if it was held that pre-Constitution laws should be such as could be made by the appropriate authority under the Constitution. The words "subject
to the other provisions of the Constitution" should, therefore, be given a reasonable interpretation, an interpretation which would carry out the intention of the makers of
the Constitution and also which is in accord with the constitutional practice in such matters. TI1e article posits the
continuation of the pre-existing laws made by a competent
authority notwithstanding the repeal of certain acts uru:ler
Art. 395; and the expression "other"·in the article can only
apply to provisions other than those dealing with legislative
competence.
The learned Advocate-General relied upon the following decisions for the said legal position: Messrs. Gani,on
Dunkerley & Co. v. Sales Tax Officer, Mattancherry(') ;
Sagar Mall v. State(2); Kanpur Oil Mills v. fudge (Appeals) Sales Tax, Kanpur('); The Amalgamated Coalfidds
Ltd. v. The fanapada Sabha, Chindwara('); fagdish Prasad v. Saharanpur Municipality('); Sheoshankar v. M.P.
State( 6 ); State v. Yash Pal('); and Binoy Bhusan v. State
of Bihar(').
It is not necessary to consider in detail the said decisions,
as they either assume the said legal position or sustain it,
but do not go further. They held that a law made by a competent authority before the Constitution continues to be
in force after the Constitution till it is altered or modified
or repealed by the appropriate authority, even though it
is beyond the legislative competence of the said authority
under the Constitution. We give our full assent to the view
and hold that a pre-Constitution law made by a competent
authority, though it has lost its legislative competency un-
(') LL.R. 1957 Kerala 462.
(2) LL.R. (1952) 1 AIL 862.
( 3 ) A.LR. 1955 All. 99.
(') [ 1962] 1 S.C.R. I.
(') A.LR. 1961 All. 583.
(') A.LR. 1951 Nag. 58.
(') A.LR. 1957 Punjab 91.
( 8) A.LR. 1954 Pat. 346.
-
-
' ' -
,
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4 S.C.R.
SUPREME COURT REPORTS
295
der the Constitution, shall continue in force, provided the
law does not contravene the "other provisions" of the Constitution.
But the real question is whether the said impugned law
is inconsistent with the provisions of the Constitution other
than those dealing with its legislative competency. The
words "subject to other provisions of the Constitution" mean
that if there is an irreconcilable conflict between the preexisting law and provision or provisions of the Constitution
the latter shall prevail to the extent of that inconsistency.
An article of the Constitution by its express terms may come
into conflict with a pre-Constitution law wholly or in part;
the said article or articles may also, by necessary implication,
come into direct conflict with the pre-existing law. It may
also be that the combined operation of a series of articles
may bring about a situation making the existence of the
pre-existing law incongruous in that situation. Whatever it
may be, the inconsistency must be spelled out from the other
provisions of the Constitmion and cannot be built up on the
supposed political philosophy underlying the Constitution.
These observations are necessitated by the reliance of Mr.
Nambiar on two decisions of the Supreme Court of the
United States of America. In Chicago, Rock Island and
Pacific Railway Company v. Willian McGlinn('), the
facts, briefly were: An Act of Kansas purported to cede to
the United States exclusive jurisdiction over the Fort Leavenworth Military Reservation. In considering the question
whether the previous laws continued after the said cession,
the Supreme Court of the United States of America made
a distinction between laws of political character and municipal laws intended for the protection of private rights, but
we are not concerned with that question in this case; and
indeed the law of India appears to be different from that
of America in that regard. But what is relied upon is the
effect of cession on pre-existing laws which are in conflict
with the political character, institution and Constitution
of the new Government. Field J ., speaking for the Court
observed, at p. 272, as follows:
"As a matter of course, all laws, ordinances and regulations in conflict with the political cl1aracter, institution
and Constitution of the new government are at once
(') (1884) 29 L. ed. 270.
1963
The South
India Corporation ( P) Ltd.
v.
The Secretary,
Board of
Revenue,
Trivandrum
Subba Rao f.
1963
The South
India Corporation ( P) Lt1l.
v.
The Secretary,
Board of
Revenue,
Trivandrum
Subba Rao/.
296
SUPREME COURT REPORTS
[1964]
displaced.