JAGAT NARAYAN, C. J. - (1.) -
(2.) THIS is an appeal by the State of Rajasthan (defendant No. 2) against a decree of the District Judge, Kota, dated 25-9 58 decreeing a suit instituted against it and against the Union of India (defendant No. 1) by the Associated Stone Industries Kota (hereinafter referred to as the Company ). The relevant facts are that the Ruler of the erstwhile State of Kota entered into an agreement Ex. A on 2-5-45 with the Company for quarrying Kachcha stone from the Tehsils of Ramganj Mandi and Chechat. Monopoly rights for quarrying Kachcha stone in [these two tehsils were granted to the Company for a period of 15 years from 1-10-44 The terms and conditions contained in cl. 18 (1) of the agreement ran as under. "in consideration of the concessions and privileges granted by the Grantor and in lieu of Income-tax, Super-tax and excess profits tax, the Grantee covenants to pay to the Grantor royalty on the stone excavated at the rate of rupee one per 100 sq. ft. subject to the minimum amount of Rs. 1,50,000 per financial year. Provided that the aforesaid rate of Re. 1 per 100 sq. ft. will be operative so long as the selling rate of unpolished slabs does not exceed Rs. 10 per 100 sq. ft. In the event of the selling rate going above this figure, the royalty per 100 sq ft. shall be increased by 25% of the excess over ten rupees. " The agreement was acted upon by both the parties. The Rulers of Kota Bundi, Banswara, Dungarpur, Jhalawar, Kishangarh, Partabgarh, Shahpura and Tonk formed the first United State of Rajasthan on 25-3-48. The Ruler of Mewar agreed to join this Union and the second United State of Rajasthan was formed on 18-4-48. Jaipur, Jodhpur, Bikaner and Jaisalmer later on joined in and the third United State of Rajasthan was formed on March 30, 1949. Matsya Union, which was inaugurated on 18-4-48 joined this Union and the fourth United State of Rajasthan came into being on May 15, 1949. On 23-11-49 the Rajpramukh of the United State of Rajasthan agreed to accept the Constitution of India which may be framed and on 26 1 -50 the United State of Rajasthan became the Part B State of Rajasthan under the Constitution. On 1-11-56 the present State of Rajasthan was formed as a result of the reorganisation of States. On 1-4-1950 the Union of India extended the Finance Act to Rajasthan with the result that the Indian Income-tax Act 1922 was extended to it. The Government of India appointed a Commissioner of Income-tax for Rajasthan. An Income-tax Officer was also appointed at Kota, who served the Company with a notice under sec. 22 (2) of the Indian Income-tax Act asking it to file return of income for the income-tax year 1950-51. The Company filed an application under para 16 of the Part B States (Taxation Concession) Order 1950 on 2-4-51 (Ex. D), But the same was rejected by the Commissioner of Income-tax by his letter dated 24. 10. 51 (Ex. E ). A representation was made to the Ministry of States, Government of India, on 17th December, 1952 (Ex. F.) The Ministry of Finance (Revenue Division) advised the Company by its letter dated 29th April, 1953 (Ex. G.) to approach the Rajasthan Government for relief from the payment of royalty under the agreement entered into with the former Ruler of Kota. The Company had already made a representation to the Minister for Industries and Commerce of Rajasthan on 3rd July 1950 Ex. H) to the effect that part of the payment of royalty under agreement (Ex, A) was in lieu of income tax etc. and that if income-tax is demanded from it and it is he'd liable to pay the same "the payment which we are making to you is, without prejudice to right under cl. 18 of the agreement, against the Government of India for exemption on the basis of the agreement and therefore we are entitled from the Rajasthan Government for the refund to the extent to which we may be held liable to pay income-tax etc. " In reply to this letter the Government of Rajasthan wrote letter dated 2. 11. 50 (Ex. I) to the Company, which runs as follows - "i am directed to inform you that the contention made in your above noted letter is not tenable inasmuch as no undertaking to compensate the Company for levy of any income-tax, super tax etc. under the authority of a valid statute to be promulgated in future was ever given in the agreement. For the levy of income-tax or super tax etc. by the Central Government which was beyond the control of the Rajasthan Government, the Rajasthan Government cannot be made to pay the compensation. " On 2nd Tune 1952 the Government of Rajasthan served notice Ex. A. 1 on the Company cancelling the agreement dated 2nd May, 1945 on the ground that it was "prima facie against public interest" and the terms and concessions obtained thereby were "grossly unreasonable and extravagant" and requiring it to deliver possession over the quarries to the Director of Mines and Geology, Rajasthan, within 3 months from the date of the receipt of the notice. The Company then filed suit No. 8/1952 for an injunction to restrain the State from taking possession over the quarries. On 2-9-52 an ex parte injunction was issued restraining the State from taking possession of the quarries or from taking any acton whatsoever to the prejudice of the plaintiff Company in enforcing the memorandum or notice dated 2-6-52 or committing any breach of the terms and conditions of the grant dated 2-5-45. This order was confirmed on 22 9 56 and remained in force throughout the pendency of the suit out of which the present appeal arises. On the expiry of the term of the agreement dated 2 5-45 on 30-9 59 the suit No. 8/52 became infructuous and was dismissed. The State granted a fresh lease to the Company under the Rajasthan Minor Mineral Concession Rules for a period of 10 years. On 15-12 53 the present suit was filed by the Company against the Union of India and the State of Rajasthan. With regard to income-tax the case of the Company was that in view of agreement Ex. A the Union of India is not entitled to recover it from the Company. In the alternative the case was that the Union of India should recover income-tax etc from the State which should pay it out of royalty part of which was attributable to exemption from income-tax etc. Another alternative case was that the court should decide what part of royalty is attributable to the consideration of exempting the Company from income tax etc. Under cl. 18 of the agreement and restrain the State from recovering it from the Company. Appropriate reliefs were prayed for on the basis of the above case. Both the Union of India and the State contested the suit. With regard to income-tax the following 3 issues were framed by the learned District Judge which were decided against the Company by the High Court and the decision was affirmed by the Supreme Court in Associated Stone Industries (Kotha) Ltd. vs. Union of India (1) - (2) Whether cl. 18 of the Grant created a legal obligation not to levy income tax, etc. on the income of the plaintiff for the duration of the grant? (on plaintiff) (3) Whether the obligation not to levy income tax etc. devolved upon defendant No. 2 by virtue of Art. 6 of the Covenant and upon defendant No. 1 by virtue of Art. 29 of the Constitution ? ( on plaintiff) (4) Is the Income-tax Act not applicable to the plaintiff in view of the Government Grants Act or any other reason ? ( on plaintiff) The remaining issues were decided by the learned District Judge and his findings were these. It was held that agreement Ex. A had the force of law which was binding on the State by virtue of the covenants entered into between the Rulers of the successive integrating States and laws enacted by them after the formation of various Unions of States. Next it was held that agreement Ex. A was recognised by the State of Rajasthan and was binding on it for that reason also. Lastly it was held that the amount of royalty above the sum of Rs. 1,50,000 was in lieu of income tax etc. The decree of the learned District Judge was based on these findings. All the above findings were challenged by the learned Additional Government Advocate on behalf of the State. The learned counsel for the Company conceded that the first finding namely that the agreement dated 2 5 45 was law could not be supported in view of the decision of the Supreme Court in Maharaja Shree Umaid Mills Ltd. vs. Union of India{2) in which it was held that an agreement between the Sovereign and the subject which rested solely on the consent of the parties and was entirely contractual in nature was not law. He supported the other two findings of the learned District Judge. We shall first take up the question as to whether agreement Ex. A was binding on the State of Rajasthan when it was formed. In this connection we refer to the following decisions of this Court and of the Supreme Court which are fully applicable to the facts of this case - Full Bench decision of this Court in State of Rajasthan vs. Shyamlal (3) This decision was affirmed by the Supreme Court in State of Rajasthan vs. Shyaralal (4 ). 2 The State of Rajasthan vs. The Bundi Electric Supply Co. Ltd. Bundi (5) (Certified copy placed on record) The facts in State of Rajasthan vs. Shyamlal (1) were these. In June 1947 Shyam Lal, a resident of the former State of Dholpur applied for and was granted a permit for export of 15,000 mds. chuni and in connection therewith deposited Rs. 30,000/-an export duty in advance. The permit remained in force upto 2-12-47 and was not extended further. During this period he could export only 4,572 mds due to market conditions and as such was entitled to refund of Rs. 20,855/- out of the advance duty already paid by him. He filed a suit for refund of the excess amount against the State of Rajasthan in January, 1952. In defence it was contended that the liability of the former State of Dholpur to refund the amount of tax collected in advance did not devolve on the Part B State of Rajasthan as there was no recognition of this liability by the new State at any time. It was held after reviewing the process of merger of former Rajasthan States by different stages to form the Part B State of Rajasthan that there was recognition of liability by new State throughout this process and under the Constitution the suit was maintainable against the Part-B State of Rajasthan. In the State of Rajasthan vs. Bundi Electric Supply Co. an agreement was executed between the Bundi Co. and the former Bundi State on 9th October, 1945 under which a sum of Rs. 6,000 was payable annually by the State as rent for the electricity lines belonging to the Bundi Co. The State of Rajasthan refused to pay the agreed yearly amount and took the plea that it was not bound by the liability as it never recognised the agreement dated 9th October, 1945. This contention was overruled by this Court on the basis of covenants executed and the laws enacted by the Rulers at successive stages of integration which ultimately resulted in the formation of the Part B State of Rajasthan and on the authority of the decision of the Supreme Court in State of Rajasthan vs. Shyamlal [4]. As we have pointed out above Bundi State like Kota State integrated along with seven other States to form the first United State of Rajasthan on 25th March, 1948. Soon thereafter the Ruler of Mewar joined the Rajasthan Union and this second United State of Rajasthan was inaugurated on 18-4-48 by the covenant entered into by the Rulers of the various States. On 28th April, 1948 The United State of Rajasthan Administration Ordinance No. 1 of 1948 was issued by the Rajpramukh. By Cl. 2 of the Ordinance Cls. (a), (b) and (c)i of paragraph (1) of Art 6 of the Covenant were enforced as law. Under cl. (c) all the assets and liabilities of covenanting States became the assets and liabilities of the United State of Rajasthan.
(3.) THE next union was integrated on 30. 3 49. THE Covenant entered into by the Rulers of the integrating States is given in the White Paper at page 274. On the formation of this new State of Rajasthan Ordinance No. 1 of 1949 was promulgated by the Rajpramukh on 7th April, 1949. Cl. 3 (1) of this Ordinance provided for of the existing laws and it ran as follows - "all the laws in force in any covenanting State immediately before the commencement of this Ordinance in that State shall, until altered or repealed or amended by a competent Legislature or other competent authority, continue in force in that State subject to the modification that any reference therein to the Ruler or Government of that State shall be construed as a reference to the Rajpramukh, or as the case may be, to the Government of Rajasthan. " Thereafter Matsya Union also merged into the United State of Rajasthan. It was held by this Court that the Covenant entered in the year 1949 read with Ordinance No. 1 of 1949 must be taken to mean that the liability of the former State of Bundi devolved on the State of Rajasthan. It was observed - "this is the view taken by their Lordships of the Supreme Court in State of Rajasthan vs. Shyamlal (4 ). It was pointed out in that case that "each time a merger took place the new State by a provision in the Covenant took over the assets and liabilities of the merging States. This provision in the Covenant could not be availed of by the subjects of the new state as in view of the decision in Dalmia Dadri Cement Company's case (AIR 1958 S. C. 816), the Covenant in whole or in part was an act of State. But according to the same decision the presence of such a clause in the Covenant throughout would be valuable evidence which would show that the new State assumed the liabilities of the merging State and further every time when there was a merger and formation of a new State, the old laws were always to continue till they were repealed, amended or altered by the new State. " Under these circumstances their Lordships of the Supreme Court took the view that "when the new State continued all the old laws till they were altered or repealed, and there was specific provision in each Covenant that the assets and liabilities of the Covenanting States were to be the assets and liabilities of the Union, the new State must have intended to respect all the rights flowing from laws so continued and assume all liabilities arising from the existence of those laws". In the face of this authority we cannot accept the argument of the learned counsel for the defendant that the State of Rajasthan was not liable to honour the terms of the agreement. " We have found it necessary to refer to the case of Bundi Electric Supply Co. because it was argued by the learned Additional Government Advocate that the decision in the State of Rajasthan vs. Shyamlal (3) is not applicable where the liabilities arise out of a contract entered into between the parties. In the Bundi Electric Supply Company's case the liability arose out of a contract entered into by the Ruler with his subject as in the present case. We may point out that the liability in Shyamlal's case arose out of a quasi-contract The former State of Dholpur was liable to refund the amount under sec. 70 of the Contract Act, which was in force in that State. As the Contract Act continued to remain in force as existing law in the United State of Rajasthan under Ordinance No. 1 of 1949 the liability under sec. 70 of the Contract Act would be deemed to have been recognised by the new State. We may in this connection refer to the following passage in the judgment of Sarjoo Prasad C. J. in the State of Rajasthan vs. Shyamlal (3) at page 264 of the A. I. R. report - "it follows, therefore, that where the new sovereign does not repudiate the laws prevailing in the acceding territory, his conduct is equivocal, and the laws would be deemed to operate, and, therefore, in terms of Art. 6 of the Covenant those laws would continue to protect individual rights of the citizens. Here we find that under sec. 3 of the Rajasthan Administration Ordinance 1949 (No. 1 of 1949) it was expressly provided that all the laws in force in any covenanting State immediately before the commencement of the Ordinance in that State shall, until altered or repealed or amended by a competent Legislature or other competent authority, continue in force in that state and again by virtue of Art. 372, of the Constitution these laws continued to operate as existing laws at the date of the commencement of the Constitution. Therefore, under the law of contract, the liabilities of the Dholpur State devolved on the United State of Rajasthan, and then on the present State of Rajasthan when the Constitution came into force, because each of the successor States and their the then Sovereigns recognised those laws, and lent their authority tacitly or by express declaration to their continuance. Thus it was no longer open to the United State of Rajasthan so long as those laws continued to operate to repudiate the liability which arose under that law in favour of the individual concerned. " Wanchoo J. (as he then was) while delivering the judgment of the Supreme Court in the State of Rajasthan vs. Shyamlal (4) observed as follows - "but where as in the present case the old laws were to continue till they were repealed or altered it follows in our opinion that the rights arising under the old laws in the subjects of the merging States would continue and these subjects would have the same rights against the new State as they would have under the old laws against the merging State. Thus by continuing the old laws, till they are repealed, altered or modified, the new State in effect undertook the liability which might arise against it by virtue of the continuance of the old laws. Even if there was some doubt about the new State undertaking the liabilities of the old State in view of the continuance of the old laws, we can in accordance with the decision in Dalmia Dadri Cement Company's case (AIR 1958 SC 816) lock to Art. 6 of the Covenant to come to the conclusion that on continuing the old laws, until they were altered, repealed or modified, the new State intended to affirm the rights of the subjects which they had against the merging State and to assume itself the liability if any arising against the merging State. We are therefore of opinion that there was recognition of liability by the new State throughout this process and under the circumstances the suit was maintainable against the Part-B State of Rajasthan in view of Art. 295 (2) of the Constitution. " We accordingly hold that the Part-B State of Rajasthan against whom the present suit was brought was bound by agreement Ex A In view of this finding it is not necessary to consider whether the conduct of the Government of Rajasthan amounted to express recognition of the contract or not. We now come to the last finding of the learned District Judge that the amount of royalty payable under Cl. 18 in excess of the minimum amount of Rs. 1,50,000 is attributable to the consideration of exemption from income-tax etc. Under agreement Ex. A the Company agreed to pay the royalty specified in cl 18 in lieu of the following consideration - (1) right to exploit the stone quarries in the two Tehsils, (2) exclusive right to do so in these two Tehsils, (3) the long term of the lease 15 years, (4) exemption from income tax etc. It was not specified in the agreement what portion of the royalty was payable in respect of each of the above considerations. In our opinion it is not possible to apportion any part of the royalty payable under cl 18 as consideration for exemption from income tax etc. At the time of the agreement there was no income tax etc. in force in Kota State. We are unable to arrive at a finding on the basis of the material on record as to what amount of royalty would have been settled between the parties if exemption from income-tax etc, had not been granted. Income-tax had been imposed in the neighbouring State of Bundi. The agreement shows that the possibility of imposing this tax in the near future was in the minds of the parties when the agreement was entered into. We are however of the opinion that the effect of the Union of India extending the Finance Act to Rajasthan with effect from 1-4-50 was to make void agreement Ex. A under sec. 56 of the Contract Act. ;