Marrh 12

SUPREME COURT REPORTS [1901 l

STATE OF RAJASTHAN v.

SHYAM LA)'.,

[P. B. GAJENDRAGADKAR, c. J., K. N. WANCHOO, J. c. SHAH,

N. RAJAGOPALA AYYANGAR AND S. M. SIKRI, JJ.]

State-Liability of-Merger of one State into another-- Liability incurred before merger-Merger agreement providing

for taking over liability of the merging State- Whether suit against new State maintainable-Constitution of India, Art. 295(2).

In 1947, the Dholpur State acceded to the Dcminion of India.

Later on, it was merged with other States and as a result of that merger, the Matsya Union was formed on March 18, 1948. One of the provisions of the merger agreement was that the existing laws in the Covenanting States were to be continued till such time as they were modified or repealed by the new State ·•nd that all the assets and liabilities of the Covenanting States were taken over by the new State. Later on, the Matsya

Union was merged with the United State of Rajasthan which had come into existence from April 7, 1949. A similar provision with regard to the recognition of the liabilities of tbe Covenanting States by the new State was also provided. On January 26, 1950, Part B State of Rajasthan came into existence.

In the four appeals the respondents secured permits from the Dholpur State for the export of certain commodities and they had to pay export duties in advance. As the respondents could not export the full quantity for which they had secured permits they asked the appellant to refund the excess export duty and when the latter refused to do so, filed suits for refund of the same with interest. The defence taken up by the appellant was that it was not bound by any liability which might have arisen against the former State of Dholpur. lt was " new Sovereign and was not bound by any liability of the former State of Dholpur unless it .chose to recognise the obligation but no such obligation was recognised in the present case. One suit was dismissed by the trial court and other three were decreed.

The appeals of the State to the District Judge were substantially dismissed while the appeal in the first suit by the plaintiff was substantially allowed. The State filed appeals to the High Court . . After referring the matter to the Full Bench, a Division Bench 'of the High Court dismissed the appeals filed by the State. The appellant came to this Court after obtaining certificate of fitness from the High Court.

The only question raised before this Court was about the liability of the State of Rajasthan under Art. 295(2) of the Constitution in respect of the obligations of the former State of Dholpur which came to be included in the State of Rajasthan.

Dismissing the appeals, Held, that the new State by continuing the old laws without change till they were repealed or altered, recogirised that it was liable in the same way as the merging State would have been in any case. Throughout the process of integration from 1948 to 1950, the new Sovereign must be taken to have recognised the rights of the subjects and lindertaken the liabilitil!tl

of the old State. So under Art. 295(2) of the Constitution, the State of Rajasthan was liable to meet the liabilities of all old States which eventually were merged into it. Moreover, there was nothing to show that the right to claim the refund was taken away by any law competently passed.

M / s Dalmia Dadri Cement Co. Limited v. The Commissioner of Income-tax [1959], S.C.R. 729 and Maharaj a Shree Umaid Mil!

Limited v. Union of India, A.LR. 1953, S.C. 953 referred to.

Civ1L APPELLATE

JURISDICTION: Civil Appeals Nos. 884-887 of 1962.

Appeals from the judgment and decree dated May 2, 1960, of the Ra.jasthan High Court in Civil Second Appeal Nos. 268 of 1954, 203 of 1955, 4 of 1954 and 27 of 1954.

S. K. Kapur and B. R. G. ](. Achar, for the appellant (in all the appeals).

R. P. Modi and R. K. Garg, for the respondents (in C.A.

No. 887I1962).

March 12, 1964. The Judgment of the Court was delivered by-

WAN CHOO, J .-These four appeals arise out of four certificates granted by the High Court of Rajasthan and raise a common question. We therefore, propose to set out facts in one of the present appeals (No. 887), as the facts in other appeals are similar, except that the commodity involved was different and so was the amount in dispute. The suit out of which appeal No. 887 has arisen was filed by the respondent against the State o1' Rajasthan. The respondent was a resident of the former Dholpur State and the dispute which led to the suit related to a time before the merger of former Dholpur State into the Matsya Union. The cse of the respondent was that in 1947 certain commodities including chuni with which appeal No. 887 is concerned could only be exported from the former Dholpur State on export permits issued by the customs department of the said State. It was also the practice in that State that when permits for export were issued, xport duties had to be paid in advance, though the actual export was made later. Consequently, in June 1947 the respondent applied for and was granted a permit for export of 15,000 maunds of chuni, and in connection therewith he deposited Rs. 30,0001a.s export duty in advance. This permit had been granted on June 28, 1947 and remained in force upto December 2. 1947.

The respondent however was not able to export the entire quantity of 15,000 maunds for which the permit was granted; he could only export 4.572 maunds and 20 seers of chuni before December 2, 194 7. Thereafter he could not export further as his permit was not extended. It was alleged on behalf of the respondent that the reason why he failed to export the entire

Stale of Raj"'IAa•

Shya"' Lal

Wanckoo, J ..

State of Rajculhan

Shyr...m Lal

Wanclwo, J.

SUPREME COURT HEPOHTS [1964]

quantity of the commodity before December 2, 1947 was due to market conditions and inability to get allotment. of railway wagons. The respondent's case further was that as he could not exprt the entire quantity of 15,000 maunds for which he had paid export duty in advance at the rate of Rs. 2 /- per maund, he ws entitled to refund of the proportionate export duty for the quantity of 10,427 maunds and 20 seers, which he could not export. His case further was that though he asked the State for refund of this advance duty, the State did not .pay back the same to him. In the meantime, rapid constitutional changes took place after August 15, 1947. By May 15, 1949, the United State of Rajasthan was formed including the Matsya Union into which the former State of Dholpur had merged on March 17, 1948. The United State of Rajasthan eventually became the Part B State of Rajasthan on January 26, 1950 wheJ1 the Constitution came into force. Eventually when the State refused to refund the amount, the suit was filed, out of which appeal No. 887 has arisen, in January 1952. The respondent claimed refund of Rs. 20,855 /- along with interest and costs.

The suits were resisted by the State of Rajasthan on various grounds; but we are concerned now only with one ground which alone has been urged before us, namely, that

t!ie State of Rajasthan was not bound by any liability which might have arisen against the former State of Dholpur. It was a new sovereign and was not bound by any obligation against the old sovereign of the former State of Dholpur unless it chose to recognise the obligation. As the United State of Rajasthan into which the former State of Dholpur came to be merged in 1949 never recognised the obligations of the former State of Dholpur it was not bound to refund the amount due to the respondents.

Jn reply to this contention of the State, the respondent relied on Art. 295(2) of the Constitution and other provisions made during the period when mergers were taking place after August 15, 1947 and contended that in view of Art. 295(2) of the Constitution the State of Rajasthan was bound by the obligation of the former State of Dholpur.

Before we refer to the decisions of the courts below with regard to this controversy it would be convenient to clear the ground by indicating the admitted position, which resulted in the inclusion of the former Dholpur State into the Part B State of Rajasthan, which came into existence on January 26,

1950 and which would be bound by Art. 295(2) of the Constitution. The former Dholpur Sta.le remained a separate entity till March 17, 1948, though it had acceded to the Dominion of India after August 15, 1947 with respect to three subjects, namely, communications, defence and external allairs. In 1948, however, the process of merger in Rajasthan began and the

first merger that took place was of the former States of Alwar,

19G.J- Bharatpur, Dholpur and Karauli, which formed the Matsya 81,,1, of Raj,.athan Union as from March 18, 1948 by a Covenant entered on '"· February 28, 1948. It is not in dispute that on this merger, Shyaml.<•l provision was made for the continuance of the laws in the Jl'mi:hoo, J. covenanting State till such time as they were modified by the new State. Provision was also made in the Covenant that all

tht> assets and liabilities CJf the covenanting States shall be the assets and liabilities of the new State of Matsya. Then came another union of certain other Rulers in Rajasthan in March 1948 by which these Rulers united under the Ruler of Udaipur to form what later came to be known as the Former State of Rajasthan. Tn March 1949, the United State of Rajasthan was formed by Covenant entered into by fourteen Rulers of Rajasthan, including these who had formed the Former State of Rajasthan, and this State came into existence from April 7.

1949. It may be mentioned here that when this State came into existence on April 7, 1949, it provided for the continuance of all laws till they were repealed or amended by the new State. There was also a provision in the Covenant by which. the assets and liabilities of the covenanting States became the assets and liabilities of the new State. In this State of United State of Rajasthan, the State of Matsya. merged in May 1949. and thus the former State of Dholpur came to be included in the United State of Rajsthan through the Matsya Union.

When this merger took place it is not in dispute that the existing laws were to continue till they were repealed or altered by the new State. It is also not in dispute that the assets and liabilities of the Matsya Union were taken over as the assets and liabilities of the United State of Rajasthan in which the Matsya Union merged. Finally the United State of Rajasthan in which the State of Sirohi was also merged became the Part B State of Rajasthan on January 26, 1950. At this time also Art. 372 of the Constitution continued the existing laws subject to their being altered or repealed by the new State. Further Art. 295(2) provided that the Government of each State specified in Part B of the First Schedule shall, as from the commencement of the Constitution, be the successor of the Government of the corresponding Indian State as regards all property ai:i~ assets and all rights, liabilities and obligations, whether ansmg out of any contract or otherwise, other than those ref_erre~ to in cl. (!). This was subject to any agreement entered into m that behalf by the Government of India with the G?vernment o~ _the State concerned. This completes the narrallon of the pohtical changes that took place till the Constitution came into force on January 26, 1950.

We have already indicated that a number of defences were raised on behalf of the State of Rajasthan and these defences were negatived by the trial court in three suits. One

SUPREJ\IIE COURT REPORTS

[1964J

1964 of the suits, out of which appeal No. 886 has arisen, was dis- Slate of Rojasthan missed by the trial Court. The State went in appeal in two of .v. the suits to the District Judge and in one (out of which appeal Shyam Lal No. 887 has arisen) to the High Court direct in view of the Wanchoo, J. valuation. In the fourth suit, the plaintiff went in appeal to the District Judge. The appeals of the State to the District Judge were substantially dismissed while the appeal in the fourth suit by the plaintiff was substantially allowed. Then followed. three second appeals to the High Court by the State.

These second appeals were heard along with the first appeal in the High Court. It seems that in the High Court for the first time a point was raised that the liability of the former Dholpur State did not fasten on the State of Rajasthan as it emerged on January 26, 1950. The High Court permitted the point to be raised as it was a pure question of law. AU the appeals came before a Division Bench of the High Court. The two learned Judges composing the Division Bench disagreed on this question of. the' liability of the State of Rajasthan under Art. 295(2) in respect of the liability of the former State of Dholpur. Thereupon there was a reference to a Full Bench on the question of liability which was formulated by the learned Judgesthus:-

"Whether the expression 'Government of the corresponding State' used in Art. 295(2)_ of the Constitution with reference to Rajasthan properly means the Government of the United State of Rajasthan which was the only Indian State in existence at the time of the commencement of the Constitution or it also includes the Government of any of the Covenanting States which had integrated with the United State before the Constitution came into operation." The three learned Judges who heard the reference were unanimously of the opinion that the expression "Government of the corresponding State" used in Art. 295(2) of the Constitution with reference to Rajasthan meant not only the Government of the United State of Rajasthan, but also the United State of Rajasthan including its component units. The matter thel)' went back to the Division Bench. The three second appeals were dismissed by the High Court. The first appeal out of which appeal No. 887 had arisen was also dismissed except that no interest was allowed upto the date of decree and the amount was reduced to the actual excess export duty, which had been deposited in advance ancl it was ordered to be re-· funded.

The only question that has been raised before us on be- ., half of the appellant is about the liability of the State of Rajasthan under Art. 295(2) of the Constitution in respect of the

obligatibns of the former Sta.te of Dholpur, which came to be

• ""'

included in the State of Rajasthan on account of political 19u changes to which we have already referred. In this connection, - the appellant relies on the decision of this Court in M / s. Dal- State of aja111"'" mia Dadri Cement Co. Ltd. v. The Commissioner of Income- Shyam Lal tax. (')That case dealt with the Covenant creating the State of Pepsu and particularly Art. VI thereof. The covenant in the

State of Pepsu was more or less similar in terms to the Covenant in the United State of Ra jasthan. This Court reviewed certain cases relating to the acquisition of territory by cession or by conquest, and held that it made no difference whether acquisition of new territory was by an existing State by conquest or by cession or a new State came into existence by agreement out of territories belonging to some former States. In either case, it was held that there was establishment of new sovereignty over the territory in question and that was an act of State. In consequence this Court further held that the Covenant by which the new State of Pepsu came into existence was in its entirety an act of State and that Art. VI therein could not operate to confer any righfon the company as against the new State, for the principle was well settled that clauses in treaties entered into by sovereigns of independent States whereunder sovereignty in territories passed from one to the other providing for the recognition by the new sovereign of the existing rights of the residents of those territories must be regarded as invested with the character of an act of State and no claim based thereon could be enforced in a court of law. This Court also negatived the argument which was urged in that case that part of the Covenant was an interim Constitution and held that the Covenant was in whole or in part an act of State and could not be treated as an interim Constitution. Strong reliance is placed on behalf of the appellant on that decision in support of the contention that even if there was any liability of the former State of Dholpur to refund the amoUI\t of tax collected in advance for no export was made, that liability did not devolve on the Part B State of Rajasthan under Art. 295(2) of the Constitution, as there was no recognition of this li'ability by the new State at any time and in that respect the present case was on all fours with that decision.

After laying down the above principles, this Court proceeded to consider in that decision the particular point raised before it. That point was with respect to a clause in an agreement between the Ruler of the former Jind State and the Dalmia Dadri Cement Company with respect to income-tax and certai.n concessions given to the company in that behalf. The question that arose in that connection was whether there had been ay recognition of the concessions by the new sovereign; and this Court held that there was no recognition of the concessions. In that connection reference was made to Pepsu Ordinance No. I of 2005. dated August 20, 1948 by s. 3 of which

(') [1959] S.C.R. 729. ·

,,.anclwo, J.

1964 all la.ws in all Covenanting States were repealed and the laws Rha in force in the State of Patiala were to apply mutatis mutan- Stale ofv. "J"'1 n dis to the entire territories of the new State. This Ordinance

Shyam Lal was repealed and replaced by Ordinance XVI of Samvat 200!) which came into force on February 5, 1949 and which contain- Wanchoo, J, ed an exactly similar provision. This Court therefore held that if the agreement was treated as a special law, it must be deemed to have been repealed by s. 3 of Ordinance No. I. It further held that the repeal of all laws in the covenanting States other tha:n Patiala and their replacement by the Patiala laws showed that the new sovereign did not recognise the rights of the subjects of the covenanting States arising from any law in force thereafter the State of Pepsu came into existence. Therefore it was held in that case that the concessions in the agreement came to an end when Ordinance No. 1 was passed as they were never recognised by the new sovereign and could not be availed of by the company.

It would be noticed that the decision that the new sovereign had not recognised the rights in Sta.tes other than Patiala was 'based on the fact that Ordinance No. 1 repealed all laws in all States other than Patiala and applied the Patiala laws to the entire territory. This was the basis of the particular decision arrived at in that case (apart from the general principles laid down in connection with the cession of territory to which we have already referred), and we shall refer to it when dealing with the facts in the present cae. Further though in that case it was held that Art. VI could not be enforced by citizens against the new sovereign as it was part of the Covenant, which was an act of State, this Court went on to point out that Art. VI of the Covenant would be valuable evidence from which affirmance of the rights mentioned therein cauld be inferred and added tha.t such inference must relate to act or conduct of the new State after it came into existence. If there were any acts of the new State which were equivocal in character, it would have been possibfo to hold in the light of Art. VI of the Covenant that its intention was to assume the liabilities. In tha.t case, however, this Coun refused to treat Art. VI even as. evidence because it pointed out that the first act of the new sovereign was the application of the Patiala State laws, including the Patiala Income-tax Act, to .the territories of Jind involving negation of the rights claimed m that case. But apart from the particular decision in that case, we have to proceed on the basis of the general proposition enunciated in that case as to the effect of the com .. ing into existence of a new State even in the manner in which the State of Pepsu or the United State of Rajasthan came into existence after their respective Covenants, and it is to this aspect of the matter we shall now turn.

We have already indicated when dealing with the history of the political changes which eventually culminated in the

7 S.C.R.

SUPREl\IE COURT REPORTS 181

Part B State of Rajasthan after the coming into force of the Constitution that two matters were always provided for there

durin" all this process of merger. The first was that each time a merger took place the new State by a provision in the Cove nant 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 decisions in Dalmia Dadri Cement Co.'.1 case(') the Covenant in whole or in part was a.n 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, if there are any acts of the new State which are equivocal in character.

Now we find from the history we have already narrated above that every time 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. We are of opinion 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. Otherwise we see no sense or purpose in continuing the old laws till they are altered or repealed if the intention was that the obligations and liabilities flowing from the continuance of the old bws would notwithstanding the Covenant not be assumed by the new State.

If the intention was otherwise. we should have found a provision s; milar to that in the Pepsu case by which all the old laws were repealed in the merging States except Patiala and the Patiala laws were to continue in the entire territory giving rise to such rights only as the Patiala Laws recognised or conferred. But where1s in the present c~.se 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 cont'nuc 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 Jaws.

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 irt the Dalmia Dadri Cement Co.'s case(') look to Art. VI of the Covenant to come to the conclusion that on continuing the old laws, until they were altered, repealed or modified, the

(') [1959] S.C.R. 729.

State of Rujr18tl1an ,., Rltyam Lal

Jl'anclioo, J.

.State of .lfaja&than

Shyam Lal

Wanchoo, J,

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. This is the basic difference between the Dalmia Dadri Cement Company's case(') and thepresent case, for in that case the old laws were repealed and thus repudiated in areas other than Patiala State while in the present case-the old laws were continued till they were repealed or altered; and in view of that basic difference between that case and the present case we can legitimately call in aid Art. VI of the Covenant and similar provisions which were always made throughout this process of merger in Rajasthan and treat them as evidence from which to come to the conclusion that the new State, by continuing the old laws, without change till they were repealed or altered, recognised that it was liable in the same' way as would have been the merging State if there was any liability on the merging Sta.tc.

But this was of course subject to any law made by the new State repealing the old laws and the liabilities arising thereunder or even otherwise, provided the law so made was within the competence of the new State and after the Constitution came into force it did not transgress the constitutional limitations. The result would be that the new State would be bound by the liabilities of the merging States and as similar provisions were there always throughout till we reach the Part B State of Rajasthan, it follows that there was always recognition of the rights of the subjects and that the new State assumed liabilities of the old State, throughout this process. This was of course subject to any law passed by the New State provided that law was within its competence and after the Constitution came into force did not transgress the limitations contained therein. In these circumstances we are of opinion that the new sovereign throughout this process of integration from 1948 to 1950 must be taken to have recognised the rights of the subjects and undertaken the liability, if any, of the old States.

It follows therefore that the State of Rajasthan will be liable under Art. 295(2) of the Constitution to meet the liabilities of all old States which eventually were included in it subject always to this tliat if the new State passed any law repealing the old law which would affect the liability or even otherwise that law would prevail and the liability may disappear provided the new law is within the competence of the State legislature and does not transgress the constitutional limitations after the Constitution came into force. We are therefore of opinion t)lat 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. In this view of the matter we consider that it is unn, ecessary to decide whether the. particular words used in Art. 295(2) include not only the United State of Rajasthan as it was iust before January 26. 1950 but also the

old States which came to be merged into it through the process 196~ to which we have already referred. Whether that is so or not, State of Rajasthat> it follows in view of the history to which we have referred v. that ther~ was always recognition by the new State of its liab!- Shyoin L<ility in the manner already referred to with respect to the hab1- Wan<hoo, J. lities of the merging States, and if there is any doubt about it that doubt in our opinion is resolved by the existence of Art.

VI or similar provision throughout the process of these political changes.

In this connection we may also refer to s. 3 of the Rajasthan Administration Ordinance No. 1 of 1949, which continued existing laws of the old States till they were altered by the competent legislature or other competent authority in the new State. Section 3 further said that the old laws will continue in )'orce in the State concerned subject to the modification that reference therein to the Ruler or Government of that 5tate shall be construed as a reference to the Ra jpramukh or, as the case may bi<. to the Government of Rajasthan. These words also indicate that whatever could be enforced under the laws in force in a State against the Ruler or the Government ot the merging State could be enforced against the Rajpramukh or the Government of the new State. This further bears out the conclusion that the new State recognised the rights of the subjects of the old States flowing from the old laws and was prepared to undertake the liability that may lie on it in consequence thereof. We therefore agree with the Full Bench that the liability lay upon the State of Rajasthan because there was recognition of the liability even on the principles enunciated in the Da/mia Dadri Cement Company's case('). !n this view of the matter we need not express any view on the question whether the expression "Government of the corresponding Indian State" used in Art 295(2) would mean only the United State of Rajasthan as it was on January 26, 1950 or would also include all the former States which came to be mern:ed in the United State of Rajasthan as it was on January 26,-1950.

It _only remai.ns now tl refr to .anote~ decision of this Court m Mahara1a Shree Ummd Mt// Ltmlfed v. Union of India('). In that case there was an agreement between the Ruler of the former State of Jodhpur and the Maharaja Shree Umaid Mills Limited by which certain exemptions from income-tax and excise duty were granted to the Mills. Two questions arose for decisiQn there. The first was whether excise could be levied on the cloth manufactured and the second was whether income-tax could be levied on the income of the Mills, in view of the agreement between the Mills and the former Ruler of Jodhpur. The first question that was raised in that case was . whether the agreement was a law; and this Court held that

(') (1959] S.C.R. 729.

(') A.I.R. 1963 S.C. 953.

Blatt of Raja-9than

Shyam Lal

Wanchoo, J.

the agreement was not a Jaw,. With that aspect of the matter we are not concerned in the present appeals. The next question that arose was whether the agreement had been recognized by thr new sovereign and reliance was placed on the continuance of laws and Art. VI of the Covenant in that connection, and it was urged that in view of Art. 295 of the Constitution the exemption as provided in the agreement continued. In that case, however, there was one vital difference; even thryugh the old Jaws were continued for the time being by Rajasthan Ordinance No. 1 of 1949 the new State passed the Rajasthan Excise Duties Ordinance 1949 some time after. That Ordinance clearly applied to the Mills and there was no doubt as to the State's competence to enact it. In view of that Jaw, the exemption in the agreement was held not to have been affirmed by the new State of Rajasthan. The facts of that case are thus different from the facts in the present case, for there was a competent law which clearly negatived the recognition of such an agreement and which clearly provided for excise duties. So far as income-tax was concerned it was imposed as from April 1, 1950 after the Constitution had come into force.

Here again we find a law which was competently passed by Parliament and which did not transgress any of the constitutional limitations. Such a Jaw therefore must prevail and in the presence of such a Jaw there can be no question of recognition by the Union of the right to exemption, if any, under the agreement with the Ruler of the former Jodhpur State.

Therefore, with respect to both the claims raised in that case there was a law which clearly applied to the Mills and it was held that there was no recognition by the new sovereign. In the present case we have only the continuance of the old laws and the valuable evidence afforded by Art. VI of the Covenant and there is nothing to show that the right to claim refund was taken away by any Jaw competently passed. In this view of the matter we are of opinion that the appellant can derive no assistance from the case of Maharaja Shree Umaid Mills(').

The appeals therefore fail and are hereby dismissed. Respondent in Appeal No. 887 will get his costs from the appellant.

Appeals dismissed.

('),...I.R. 1963 s.c. 953.

l

STATE OF RAJASTHAN

v.

SHYAM LA

P. B. GAJENDRAGADKAR

K. N. WANCHOO, J.

c. SHAH

N. RAJAGOPALA AYYANGAR

S. M. SIKRI, JJ.

Constitution of India

Art. 295(2)

Matsya

Union

United State of Rajasthan

April 7, 1949

January 26, 1950

Rajasthan

Dholpur

State of Rajasthan

Art. 295(2)

Art. 295(2)

S. K. Kapur

B. R. G. ](. Achar

R. P. Modi

R. K. Garg

March 12, 1964

WAN CHOO

High Court of Rajasthan

June 28, 1947

December 2. 1947

December 2, 194 7

Lal

Wanckoo

State of Rajculhan

Wanclwo

August 15, 1947

May 15, 1949

Matsya Union

March 17, 1948

Art. 295(2)

Art. 295(2)

January 26,

1950

Art. 295(2)

Dominion of India

Alwar

Karauli

March 18, 1948

Matsya

Udaipur

April 7.

1949

United State of Rajasthan

United State of Rajsthan

Sirohi

Art. 372

Art. 295(2)

First Schedule

Government of India

This was subject to any agreement entered into m that behalf by the Government of India with the G?vernment o~ the State concerned.

Wanchoo

Art. 295(2)

Art. 295(2)

Art. 295(2)

Art. 295(2)

Pepsu

Art. 295(2)

Dalmia Dadri Cement Company

August 20, 1948

s. 3

.anclwo

Patiala

Shyam Lal

February 5, 1949

s. 3

Income-tax Act

Dalmia Dadri Cement Co.

State of Rujr18tl1an

Rltyam Lal

.State of .lfaja&than

Shyam Lal

Art. 295(2)

Art. 295(2)

Art. 295(2)

January 26. 1950

State of Rajasthat

s. 3

Section 3

Government of Rajasthan

Rajpramukh

Da/mia Dadri Cement Company

Art 295(2)

January 26,-1950.

Jodhpur

Maharaja Shree Umaid Mills Limited

Shyam Lal

Wanchoo

Art. 295

April 1, 1950

Parliament

Maharaja Shree Umaid Mills


7 S.C.R.

SUPREME COURT REPORTS

ANDHRA PRADESH STATE ROAD TRANSPORT

CORPORATION

THE INCOME-TAX OFFICER AND ANR.

[P. B. GAJENDRAGADKAR, C. J., K. N. WANCHOO, J.C. SHAH,

N. RAJAGOPALA AYYANGAR ANDS. M. SIKRI JJ.]

Income-tax-Income of State Road Transport Corporation whether income of the State-Whether exempt-Constitution of India, Art. 289-Income-tax Act, 1922 (11 of 1922), s. 22.

The Income-tax Officer (respondent No. 1) served a notice under s. 22 of the Income-tax Act on the appellant. Upon the receipt of the notice, the appellant appeared before the Incometax Officer. The appellant pleaded before the Income-tax Officer that it did not fall under any of the five categories of assessees under s. 3 of the Income-tax Act. The appellant also raised the contention that it was a local authority exempt from incometax. All these contentions were rejected by respondent No. 1 with the result that the impugned orders of assessment came to be passed.

The appellant filed Writ Petitions before the High Court in which it challenged the impugned orders of assessment passed by respondent No. 1. In its Writ Petitions, the appellant claimed an order, writ or other appropriate direction quashing the assessment orders passed by respondent No. 1. The High Court dismiss.. ed these \vrit petitions. The High Court held that the appellant could not claim theexemption under Art. 289(1) because it was not a state-owned Corporation. The High Court grante-d a certificate under Art. 133 of the Constitution and hence the appeal.

Held: (i) Art. 289 of the Constitution cons'sts of three clauses.

The first clause confers exemption from union taxation on the property and income of a State.

Clause (2) then provides that the income from trade or business carried on bv the Government of a State or on its behalf which would not have been taxable under cl. (1), can be taxed, provided a I aw is made by Parliament in that behalf. In other words cl. (2) is an exception to cl. (1 ).

Clause (3) then empowers Parliament to declare by law that any trade or business would be taken out of the purview of cl. (2) and restored to the area covered by cl. (1) by declaring that the said trade or business is incidental to the ordinarv functions of Government. In other words, cl. (3) is an exception to the exception prescribed by cl. (2).

(ii) A trading activity carried on by the corporation (ap.J)el- Iant) is not a trading activity carried on by the State departmentlly, nor is it a trading activity carried on by a State through its agents appointe-d in that behalf because according to statute the Corporation has a personalitv of its own and this personality i• distinct from that of the State or other shareholders. ·

Ali the relevant provisions of the impugned Act also emphatically bring out the separate personality of the Corporation. Section 30 of the Act also does not suggest that the income of the

March 5

18 SUPREl\IE COURT REPORTS [1964}

1964 Corporation is the income of the State. All that s. 30 requires is Andhra Pradesh that a part of that income may be entrusted to the State Gov- State Road Tra"8porternment for a specific purpose of road development. Therefore,

Oorporation the income derived by the appellant from its trading activity Th 1 v.

T cannot be said to be the income of the State either under cl (1) o.ffic,;".':J.'An:" or cl. (2) of Art. 289.

The American doctrine of the immunity of State agencies or instrumentalities from Federal taxation has no application to the present case.

Akadasi Padhan v. State of Orissa [1963) Supp. 2 S.C.R. 691, distinguished.

Mark Graves, John J. Merrill and John P. Hennessy v. People of the State of New York Upon the Relation of James B.O'kefe, 83 Law. Ed. 927 and Clallan County v. United States of America, 68 Law Ed. 328, no application.

State of West Bengal v. Union of India [1964) 1 S.C.R. 371, relied on.

M'Culloch v. Maryland, (1819) 4 Wheat 316, Bank of Toronto

v. Lambe "(1887) 12 A.C. 575 and Webb v. Outrim [1907) A.C. 81, referred to.

Tamlin v. Hansaford, (1950] K.B. 18, relied on.

(iii) It is hardly necessary fur the Act to make a provision that tax, if chargeable would be paid. In fact, the Companies Act which deals with companies does not make such a specific provision, though no one can seriously suggest that there would be repugnancy between the provisions of the Companies Act and the Income-tax Act. There is no repugnancy between the charging section of the Income-tax Act and ss. 29 and 30 of the Act. All that ss. 29 and 30 of the impugned Act purport to do is to provide for the administration of the funds vesting in the Corporation and their disposal. These provisions are not inconsistent with the liability to pay tax which is imposed by the Income-tax Act.

C!vrL APPELLATE JURISDICTION: Civil Appeals Nos.475- 478 of 1963.

Appeal from the order dated July 14, 1961 of the Andhra Pradesh High Court in Writ Petition Nos. 516 to 519 of 1960.

D. Narsaraju, Advocate-General, Andhra Pradesh, P. R.

Ramchandra Rao and T: V. R. Tatachari, for the appellant (in all the appeals).

K. N. Rajagopala Sastri, Gopal Singh and R. N. Sachthey, for the respondents (in all the appeals).

Rajeshwari Prasad and S. P. Varma, for lhtervener No. 1 (in all the appeals).

B. Sen, S. C. Bose and P. K. Bose, for Intervener No. 2 (in all the appeals).

, M. C. Setalvad, S. C. Bose and P. K. Bose, for Intervener No. 3 (in all the appeals).

March 5, 1964. The judgment of the Court was delivered 1964 by-- Andhra Praduh GAJENDRAGADKAR, C.J .-These four appeals arise from four State Road Trnsporl writ petitions filed by the appellant, the Andhra Pradesh State Corllan Road Transport Corporation, in the High Court of Andhra The Incom< Tax .

Pradesh against the Income-tax Officer, and the Appellate Officer and Anr.

~ Assistant Commissioner of Income-tax, Hyderabad, respon- Gajendragadl"w, c.J. dents l and 2 respectively, in which it claimed a writ of pro hi- • bition restraining them from collecting any tax, or taking any proceedings under the Indian Income Tax Act against them.

In its writ petitions, the appellant further claimed an order, writ, or other appropriate direction quashing the assessment orders passed by respondent No. l on the 29th February, 1960. for the years 1958-59 and 1959-60. For the .first year, a tax of Rs. 13,60,963.86 nP. has been imposed for the period 11-1-1958 to the 31-3-1958, and for the latter year, a tax of P Rs. 34,44,430.48 nP. has been levied for the period 1-4-1958 to 31-3-1959. After hearing the parties, the High Court has dismissed the appellant's writ petitions with costs. The appellant then applied for and obtained a certificate from the High Court and it is with the said certificate that these four appeals have been brought to this Court.

It appears that the appellant was established under the Road Transport Corporations Act, 1950 (No. 64 of 1950) (hereinafter called the Act) by a notification issued by the Andhra Pradesh Government arid it has been functioning with effect from the 11th January, 1958. Before the formation of the appellant Corporation, the road transport was a department of the Government of Hyderabad and after integration of Hyderabad with Andhra Pradesh, it was run by the Government of Andhra Pradesh. During the whole of this period, the road transport was treated as exempt from incometax. After the appellant Corporation was, however, formed the Income-tax Department took the view that the income made by the appellant was liable to tax, and so, a notice under s. 22 of the Income-Tax Act was served on the appellant on the 29th January, 1959. In pursuance of the proceedings which were taken after service of the notice, the impugned orders of assessment were passed. Before the Income-tax Officer, it was urged by the appellant that since the appellant was an inde- ndent body carrying on the business of road transport, it did not fall under any of the five categories of assessees under s. 3 of the T ncome-tax Act; it was neither an individual nor a Hindu undivided family, nor a firm, nor a company, or an association of persons, and as it was outside the said five categories of assessees, no tax could be levied against it. It was • further argued that the net income of the appellant ultimately goes to the State of Andhra Pradesh under s. 30 of the Act a.nd as such it was immune from Union taxation unde;

1964 Art. 289 of the Constitution. Yet, another contention was raised Andhra Prwleah in support of the plea that the noice issued by respondent No. 1 State Road T~"'P"'' was invalid, and that was that the appellant was a local autho-

Corporation rity exempt from income-tax, All these contentions were re- T1" 1.,;;,., Tar jected by respondent No. 1, with the result that the impugned Officer and Anr. orders of assessment came to be passed. It is the validity of Gajendraqwlkar, c.J. these orders that the appellant challenged before the Andhra

 Pradesh High Court.

The High Court has held that the appellant is not a Stateowned Corporation and that it is not carrying on business on behalf of the Government. It has also observed that the trade or business which the appellant was carrying on was not incidental to the ordinary functions of government, and since no declaration had been made to that effect under Art. 289(3), the appellant could not rely oh Art. 289(1). The contention that the appellant was a local authority which was urged before the High Court was rejected, and the argument that the charging section of the Income-tax Act was repugnant with the matedal provisions of the Act, such as sections 28, 29 and 30, was also held to be without any substance by the High Court.

Thus, since none of the arguments urged by the appellant before the High Court was accepted, the writ petitions filed by it were dismissed.

The main point urged before us by the learned Advocate- General of Andhra Pradesh on bhalf of the appellant is that the income in respect of which th~ impugned order of assess ment has been passed by respondent No. I. is exempt from Union taxation under Art. 289(]) of the Constitution, and that raises the question about the construction and effect df the provisions of the three clauses of Art. 289. Let us. thirefore. read the said article: /

"289. (I) The property and income of a State shall be exempt from Union taxation.

(2! Nothing in clause (I) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent. if any. as Parliament may by law provide in respect of a trade or business of any kind carried on by. or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied or any income accruing or arising in connection therewith. ·

(3) Nothing in clause (2) shall apply to any trade 1111 or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of government."

The learned Advocate-General concedes that the trans- 1964 port activity carried on by the appellant is strictly not inci- Andhra Pradesh dental to the ordinary functions of government. It is true that State Road T~118pQt1 in a modern democratic Welfare State, Government has to c ... poration undertake several economic 'activities some of which are trade The 1:;,,., T"" activities, while others are commercial activities, because the Officer and Anr. pursuit of the welfare policies inevitably .req.uires that Goven- Gajendragadkar, c.J. ment should help the process of economic IIllprovement of its citizens. However desirable these socio-economic activities may be and however legitimate may be the attempt of the State . Government to undertake them, there is no denying the fact that the ordinary functions of the Government to which clause

(3) of Art. 289 refers must be distin$uished from these socioeconomic activities. The Advocate-General, however, urges that though the trade activities of the appellant may thus be distinguishable from the ordinary functions of government, they are nevertheless included in Art. 289(1) and income derived by the appellant from the said activities falls within the protection of Art. 289(1).

This argument proceeds on the assumption that clause (2) • of Art. 289 is an exception or proviso to clause (!) and as such, whatever is included in clause (2) must be deemed to have been included also in clause (I); otherwise, the proviso cannot be logically explained. It is because the trading or commercia:I activities of the government of a State to which the said clause refers were originally included in clause (l) that it became necessary to provide by clause (2) that the said trading or commercial activities carried op by the Government of a State would not claim the benefit of exemption prescribed by clause (1). That is how the Advocate-General seekS to include trading or business activities mentioned in cl. (2) in cl. (I) itself. Loglcally, no exception can be taken to this approach.

The next stage in the argument urged by the Advocate- General is that clause (2) is wide enough to include the trading activities carried on by the appellant and as a result of the width of its scope, the appellant's activities can be treated as the commercial activities carried on by the Government of Andhra Pradesh itself. It will be noticed that clause (2) refers to a trade or business of any kind carried on by or on behalf of. the Government of a State. The argument is that the first part of the clause refers to the trade or business carried on by the Government and that means, carried on by the Government either departmentally or by agents appointed by the Government in that behalf. Whether the department carried on the business or an agent specifically and exclusively appointed for that purpose carries it on, it is the business carried on by the State. The latter part of the clause refers to trade or business carried on on behalf of the Government of a State and it is

_, l

1964 suggested that this part of the clause is intended to take in Andhra p,..d.,, trade or business carried on by a Corporation like the appel- 8tate RoadTmnaport !ant which is either State-owned. or State-controlled. The

0•ix:twn appellant Corporation, says the Advocate-General, is un- Tke Income Tax doubtedly State-controlled and he would suggest that it iS • Officer and Anr. also owned by the State of Andhra Pradesh. Therefore, the

Gajendragaa!Jar o.J. commercial activity carried on by the appellant must be deem- ' ed to be an activity carried on on behalf of the State of Andhra Pradesh, and it is with this postulate that the argument reverts to clause (!)of Art. 289 and urges that the income received by the appellant in respect of commercial activities carried on by it on behalf of the Government of Andhra Pradesh is exempt from Union taxation.

In support of this argument, the Advocate-General has relied on a recent decision of this Court in Akadasi Padhan

v. State of Orissa & Others.(') In that case, this Court had occasion to consider the scope and effect of the provisions contained in Art. 19(6). It will be recalled that Art. 19(6) authorises the State, inter alia, to make any Jaw relating to the carrying on by the State or by a Corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise. One of the points which fell to be considered in the Akadasi Pad/tan case was the effect of the words "a Ja:w relating to the carrying on by the State of any trade or business." Dealing with this question, this Court held that though normally, the trade specified in the clause would be carried on by the State departmentally or with the assistance of public servants appointed in that behalf, there may be cases of some trades or business in which it would be open to the State to employ the services of agents, provided the agents work on behalf of the State and not for themselves. Relying upon this decision, the Advocate-General argues that when clause (2) of Art. 289 refers to trade or business carried on by the Government of a State, it includes trade or business carried on by the Government either departmentally or with the assistance of agents appointed in that behalf, and so, he argues that these two categories of carrying on business. hving been includ~ in the first part, what the second part 1s mtended to cover 1s trade or business carried on by the Government of a State through the instrumentality of a corporation like the appellan~, and so, the trade or business cart1ed on by the appellant IS trade or business carried on on behalf of the Government of Andhra Pradesh within the meaning of Art. 289(2) and that makes the income earned out of the said trade or businesa income of the State under Art. 289(1).

(') [1963] Supp. 2 S.C.R 691.

7 S.C.R.

SUPREl\IE COURT REPORTS 23

In substance, this argument is really based on the Ameri- 1961 can doctrine of the immunity of State agencies <ir instru- Andh;;; Pradesh mentalities from Federal taxation. When this doctrine was ac-StateRoadTransporl. cepted by American decisions, it was normally confined to Gorporatfon such State agencies as were concerned with functiol)s which The In; me Ta, were essentially governmental in character. But, says the Advo- Officer and Ant. cate-General, since Art. 289(2) takes in trade activities carriedaajendraaadkar, G.J, on by a corporation like the appellant, the question as to whether the trade is a function which is essentially governmental in character is irrelevant. In support of his contention, the Advocate-General has relied upon two American decisions; first of these is the decision in the case of Mark Graves. John J. Merrill and John P. Hennessy v. People of the State of New York Upon the Relation of James B. O'keefe('). In tha.t case Stone J. who spoke for the Supreme Court of America, has observed that when the national government lawfully acts • through a corporation which it owns and controls, those activities are governmental functions entitled to whatever tax immunity attaches to those functions when carried on by the government itself through its departments. In other words, this observation shows that the Court was inclined to take the view that for the purpose of claiming exemption from taxation, it did not make a material difference whether the operation was carried on by the State departmentally or with the assistance of a corporation.

In Clallan County v. United States of America, (') it was held by the Supreme Court of America that a State cannot tax the property of a corporation or.ganised by the Federal government to produce material for war purposes, the property of which is conveyed to it by, or bought with the money of, the United States, and used solely for the purposes of its creation.

Holmes J. who delivered the opinion of the Court emphasised the fact that in the case before the Court not only the agent was created, but all the agent's property was acquired and used for the sole purpose of producing a weapon for the war. "This is not like the case of a corporation," added the learned Judge. "having its own purposes as well as those of the United Sta.tes, and interested in profit on its own account. The incorporation and formal erection of a new personality was only for the convenience of the United States, to carry out its ends and so,. it is unnecessary to consider wh.ether the fact that the

Urnted States °'.vned all the stck and furnished all the property to the corporation, taken by itself, would be enough to bring the cas~ within the policy of the rule that exempts property of the Urnted States." ·

(') 83 Law. Ed. 927. (') 68 Law. Ed. 328, 331.

1961 Both these decisions would not_ assist us in determining Alldhra Pradesh the question as to whether the income received by the appell- -State Road Transpon ant is the incomeof the State of Andhra Pradesh within the

Carpo; atian meaning of Art. 289(1), because the decision of the problem The 1,.,,,,;., Ta• raised before us by the appellant must be reached not on :!ny OfficerandAnr;·--academic considerations of the claims for exemption from aajendragadkar, c.J. taxation which the State instrumentalities can put forward, but on the construction of Art. 289 itself. Art. 289(1) exempts from Union taxation the property and income of a State, and the Advocate-General can succeed only if he is able to establish that the income derived by the appellant in respect of which the impugned assessment order has been passed is the income of the State of Andhra Pradesh. Therefore, the American doctrine on which -strong reliance was placed by the Advocate-General would be of.no assistance to his case. If the trading activity carried on by the appellant is sought to be brought into Art. 289(1) solely as a result of the construction of Art. 289(2), the test on which the validity of the Advocate-General's argument must necessarily be judged, is whether or not the requirement of Art. 289(1) is satisfied and that requirement clearly is that the income like the property for which exemption from Union taxation is claimed must be the income or property of a State.

Besides, there is another reason why the Advocate- General cannot derive any assistance from the American doctrine of the exemption from taxation in regard to State instrumentalities.· The saiddoctrine has been categorically rejected by this Comt .in State of West Bengal v. Union of India(') Speaking for the majority of the Court, Sinha C. J. observed that ''it was futile to attempt the resuscitation of the now exploded doctrine of the immunity of instrumentalities which originating from the observations of Marshall, C. J., in M' Cu/loch v. Maryland,(') has been decisively rejected by the Privy Council as inapplicable to the interpretation of the respective powers of the States and the Centre under the Canadian and Australian Constitutions (vide Bank ofTormzto

v. Lambe,(') and Webb v. Outrim(') and has practically been given up even in the United States." Thus, it.is necessary to revert to the construction of Art. 289 _in deciding whether the appellant is right in claiming immunity from Union tax- _ -ation. -

We have already seen that Art. 289 consists of three clauses, the first clause confers exemption from Union taxation on the property and income of a State. In Special Refer-

:ence No. 1 cf 1962. In re. Sea Customs Act (1878), Section

(') [1964] 1 S.C.R. 371, 407.

_ (') (1887) 12 A.C. 575. (') (1819) 4 Wheat, 316 at p. 436. (') [1907]c A.C. 81

7 S.C.R.

SOPRBl\IE COURT REPORTS 25

20(2),(') a Special Bench of this Court by a majority has held 1964 that the immunity granted to the States. in respect of Union Andhra Pra, resh taxation, under Art. 289(1) does not extend to duties of cus-Statc Road Tranaporl tom> including export duties or duties of excise. In that case, Oorpomtion the question which directly arme for decision, was to determine 1'he 1.,;~" Tax the scope and effect of the nature of taxation from which ex- Officer and Anr. emption could be claimed by the property and income of a Gajendr(l!Jadko.r, o.J.

State under Art. 289(]). With that aspect of the matter, however, we are not concerned in the present appeals.

The scheme of Art. 289 appears to be that ordinarily, the income derived by a State both from governmental and nongovernmental or commerc:al activities shall be immune from income-tax levied by the Union, provided, of course, the income in question can be said to be the income of the State.

This general proposition flows from clause (1). '

Clause (2) then provides an exception and authorises the Union to impose a tax in respect of the income derived by the Government of a State from trade or business carried on by it, or on its behalf; that is to say, the income from trade or business carried on by the Government of a State or on its behalf which would not have been taxable under clause (!), can be taxed, provided a law is made by Parliament in that behalf.

If clause (I) had stood by itself, it may not have been easy to •. 'include within its purview income derived by a State from commercial activities, but since clause (2), in terms, empowers Parliament to make a law levying a tax ort commercial activities carried on by or on behalf of a State, the conclusion is inescapable that these activities were deemed to have been included in cl.(!) and that alone can be the justification for the words in which cl. (2) has been adopted by the Constitution.

It is plain that cl. (2) proceeds on the basis that but for its provision, the trading activity which is covered by it would have claimed exemption from Union taxation under cl. (!).

That is the result of reading clauses (1) and (2) together.

Clause (3) then empowers Parliament to declare by law that any trade Qlr business would be taken out of the purview of cl. (2) and restored to the area covered by cl. (1) by declaring that the said trade or business is incidental to the ordinary functions of government. In 'other words, cl. (3) is an exception to the exception prescribed by cl. (2). Whatever trade or business is declared to be incidental to the-ordinary functions of government, would cease to be governed by cl. (2) and --" would then be exempt from Union taxation. That, broadly

ted, appears to be the result of the scheme adopted by the three clauses of Art. 289.

(') [1964] 3 C.S.R. 787.

J964 Reading the three clauses together, one consideration

Andh Pad h emerges beyond all doubt and that is that the property as well .state R::a Tranpvrt as the income in respect of which exemption is claimed under

Corporation

cl. (!), must be the property and income of the State, and so, The In;~'"' Tax the same question faces us again: is the income derived by O.fficer an4 Anr. the appellant from its transport activities the income of the ,-; . n4~ 0 J State? If a trade or business is carried on by the State departaJ• r, mentally and income is derived from it, there would be no difficulty in holding that the said income is the income of the State. If a trade or business is carried on by a State through its agents appointed exclusively for that purpose, and the agents carry it on entirely on behalf of the State and not on their own account, there would be no difficulty in holding that the income made from such trade or business is the income of the State. But difficulties arise when we are dealing with trade or business carried on by a corporation established by a State by issuing a notification under the relevant provisions of the Act. The corporation, though statutory, has a personality of its own and this personality is distinct from that of the State or other shareholders. It cannot be said that a shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The doctrine that a corporation has a separate legal entity of its own is so firmly rooted in our notions derived from common law that it -is hardly necessary to deal with it elaborately; and so, primiz

facic, the income derived by the appellant from its trading activity cannot be claimed by the State which is one of the shareholders of the corporation. It may that the statute under which the notification has been issued constituting the appellant corporation may provide expressly or by necessary implication that the income derived by the corporation from its trading activity would be the income of the State. The doctrine of the separate entity or personality of the corporation is always subject to the exceptions which statutes may create, and if there is a statutory provision which clearly indicates that despite the concept of tire separate personality of the corporation, the trade carried on by it belongs to the shareholders who brought the corporation into existel1ce and the income, received from the said trade likewise belongs to them, that' would be another matter. It would then be possible to hold that as a result of the specific statutory provisions the income received from the trade carried on by the corporation belongs to the shareholders who have constituted the said corporation, and so, we must look to the Act to determine whether the income in the present case can be said to be the income of the State of Andhra Pradesh.

In this connection, we may usefully refer to the observations made by Lord Denning in Tamlin v. Hansaford: tl. "In

(') [1950] K.B. 18.

the eye of the law," said Lord Denning. "the corporation is its l9G4 own master and is answerable as fully as any other person or Andhra Pr., desh corporation. It is not the Crown and has none of the immunities Slate Road T".'nsport .. , f h c It t t . 1 a t Corpora/wn or pnv1 eges o t e rown. s servan s are no c1v1 serv n s, v. and its property is not Crown property. It is as much bound 7'hc Income Tax by Acts of Parliament as any other subject of tbe King. It is, Offic" and Anr. of course, a public authority and its purposes, no doubt, are Gajcndragadkar, c.J. public purposes, but it is not a government department nor do its powers fall within the province of government." These observations tend to show that a trading activity carried on by the corporation is not a trading activity carried on by the State departmentally, nor is it a trading activity carried on by a State through its agents appointed in that behalf.

That takes us to the provisions of the ct which will assist us in determining the question as to whether the income in question can legitimately be held to be the income of the State of Andhra Pradesh. The Act was passed to provide for the incorporation and regulation of Road Transport Corporations. Section 3 authorises the State Government to issue a notification in the Official Gazette establishing a Road Transport Corporation for the whole or any part of the State under such name as may be specified in the notification, after taking into account considerations specified by clauses (a), (b) and. (c). Section 4 then provides that every corporation shall be a body corporate by the name notified under s. 3 having perpetual succession and a common seal, and shall sue or be sued by the said name. Section 5 deals with the constitution of Road Transpot Corporation; sub-section (3) provides for the representation both of the Central Government and of the State Government in the Corporation in such proportion as may be agreed to by both the Governments and of nomination by each Government of its own representatives therein; it also contemplates that if capital is raised by the issue of shares to other parties, provision has to be made for the representation of such shareholders. Section 17 authorises the appointment of Advisory Councils. Section 18 prescribes the general duty of the corporation. Section 23(1) provides for the capital of the corporation; under this sub-section, the capital contributed by the Central Government and the State Government is in the proportion of 1 : 3. Sub-section (3) authorises the division of the capital of the corporation into such number of shares as the State Government may determine; and it provides that the number of shares which shall be subscribed by the State Government, the Central Government and other parties shall also be determined by the State Government in consultation with the ~~tral Government. This provision contemplates the poss1b1hty of other shareholders joining the State Government and_ the Central Government. Section 24 permits additional capital of the corporation to be raised. Section 25 requires that

1964 the shares of the corporation shall be guaranteed by the State Andh'a bade&h Government as to the payment of the' principal and the pay- S1ate Rowl Trm., port ment of the annual dividend at such minimum rate as mav be CorpDralion .., • J v. fixed by the State Government. Section 26 confers powers of The I=m• Tax borrowing on the corporation. Section 27 constitutes a fund

Office,· and Anr. of the Corporation. Section 28 provides for the payment of Oajendragadkar, O.J. interest and dividend. Section 29(1) requires the Corporation to make such provisions for depreciation and for reserve and other funds as the State Government may, from time to time, direct. Section 29(2) provides that the management of the said funds, the sums to be carried from time to time to the credit thereof and the applicaon of the moneys comprised therein shall be dete1mined by the Corporation. There is a proviso to this sub-section which prohibits the utilisation of these funds for any purpose other than that for which it was created without the previous approval of the State Government. Section 30 deals with the disposal of net profits: it says that after provision is made as required by sections 28 and 29, the Corporation may utilise such percentage of its net annual profits as may be specified in this behalf by the State Government for the purposes therein specified, and it adds that out of the balance, such amount as may, with the previous approval of the State Government and the Central Government, be specified in this behalf by the Corporation, may be utilised for financing the expansilln programmes of the Corporation and the remainder, if any, shall be made over to the State Government for the purpose of road development. Section 31 gives power to the Corporation to spend such sums as it thinks fit on objects authorised by the Act. Section 32 deals with the budget; s. 33 with accounts and audit; and s. 34 provides that the directions issued by the State Government after consultation with the Corporation shall be followed by the Corporation, and it adds that such directions may include instructions relating to the recruitment, conditions of service and training of its employees, wages to be paid to the employees, reserves to be maintained by it itnd disposal of its profits or stocks.

Under Section 38, power is conferred on the State Government to supersede the Corporation for reasons specified by s. 38(1). On supersession, all property vested in the Corporation vests during the period of supersession, in the State Government; that is the effect of s. 38(2)(c). Section 39 deals with the liquidation of a Corporation and clause (2) of this section provides that in the event of such liquidation, the assets of the Corporation, after meeting the liabilities, if any, shall be divided among the Central and the State Government and such other parties, if any, as may have subscribed to the capital in proportion to the contribution made by each of them to the total capital of the Corporation. That, in brief, is the position -of the relevant provisions of the Act.

There is no doubt that the bulk of the capital is contribut- 1964 ed by the State Government and a small proportion by the Andhra Prad"h Central Government, and in that sense, the majority of sharesH1ateRoadTrn.•p0rt .are at present owned by the State Government. There is also Corpo~w• no doubt that the Corporation is a State-controlled corpora- Thr Income Tax tion in the sense that at all material stages and in all material Officer and Anr. particulars, the activity of the Corporation is controlled by a,, jrndrogadkar, G.J. the State; but it is c:ear that other citizens may be admitted to the group of shareholders, and from that point of view, the Act contemplates contribution of the capital for the Corporation not only by the Central and the State Governments, but .also by the citizens. The main point which we are examining at this stage is: is the income derived by the appellant from its trading activity, income of the State under Art. 289(1)? In our opinion, the answer to this question must be in the negative.

Far from making any provision which would make the income of the Corporation the income of the State, all the relevant provisions emphatically bring out the separate personality of the corporation and proceed on the basis that the trading activity is run by the corporation and the profit and los that would be made as a result of the trading activity would be the profit and loss of the corporation. There is no provision in the Act which has attempted to lift the veil from the face of the corporation and thereby enable the shareholders to claim that despite the form which the organisation has taken, it is the shareholders who run the trade and who can claim the income coming from it as their own. Section 28 which provides for the payment of interest clearly brings out the duality between the Corporation on the one hand, and the State and Central Governments on the other. Take, for instance, the case of supersession of the corporation authorised by s. 38. Section 38(2)(c) emphatically brings out the fact that the property really vests in the Corporation, because it provides that during the period of supersession, it shall vest in the State Government. Similarly, s. 39(2) which deals with the distribution of assests in case of liquidation, brings out t!le same feature. Jt has been urged before us by the Advocate-General that s. 50 contemplates that after provision is made as required by sections 28 and 29 and funds are utilised as prescribed by s. 30, the balance has to. be given to the State Government for the purpose of road development, and that, it is suggested, indicates that the income belongs to the State Government. This argument is clearly not well-founded. When w~ are deciding the question as to whether the income derived by the Corporation is the income of the State, the provision made by s. 30 for making over to the State Governmnt the balance that may remain as indicated therein, is of no assistance. The. income is undoubtedly the income of the Corporation. All that s. 30 requires is that a part of that income may be entrusted to the

19~ 4 State Government for a specific purpose of road development.

Andhra Prad"'' It is not suggested or shown that .when such income is made Stale Road Tan<pvrt over to the State, it becomes a part of the general revenue of

Oor~a1wn the State. It is income which is impressed with an obligation Tiie lnwm< Tax and which can be utilised by the State Government only for Officer and Anr. the specific purpose for which it is entrusted to it. Therefore.

11aj<ndr"1J!J<lkar, o.J. we are satisfied that the income derived by the appellant from its trading activity cannot be said to be the income-'Of the State under Art. 289(1), and if that is so, the fact that the trading activity carried on by the appellant may be covered by Art. 289(2), does not really assist the appellant's case. Even if a trading activity falls under cl. (2) of Art. 289, it can sustain a claim for exemption from Union taxation only if it is shown that the income derived from the said trading activity is the income of the State. That is how ultimately, the crux of the problem is to determine whether the income in question is the income of the State, and on this vital test, the appellant fails.

There is one more point which was faintly argued before us by the learned Advocate-General. He frankly told us that he did not propose to challenge the correctness of the conclusion recorded by the High Court that the appellant is not a local authority; but he was not prepare.d to give up his contention that there is repugnancy between the charging section of the Income-tax Act and sections 29 and 30 of the Act. He suggested that in view of the repugnancy on which he relied, the Act which is Act No. 64 of 1950 should prevail over the Income Tax Act which is an enactment of 1922. None of the assumptions' made by the learned Advocate-General in support of this plea can be said to be valid. Though the original Income-tax Act was passed in 1922, as is well-known, every year a fresh Finance Act is passed and it is by virtue of such successive Finance Acts that income-tax is assessed from year to year, and so, the argument that the Act on which the appellant relies is later in point of time must fail. Besides, there is really no repugnancy at all. Basing himself on the provisions 'of sections 29 and 30, the Advocate-General contends that these two prO:. visions show that the Act did not contemplate the pa)1nent of income-tax. This argument is entirely misconceived. It is hardly necessary for the Act to make a provision that tax, if chargeable, would be paid. In fact, the Companies Act which deals with companies does not make such a specific provision, though no one can seriously suggest that there would be repugnancy between the provisions of the Companies Act and the Income Tax Act. All that sections 29 and 30 purport to do is to provide for the administration of the funds vesting in the Corporation and their disposal. It is clearly far-fetched, if not fantastic, to suggest that these provisions are inconsistent with the liability to pay tax which is imposed by the Income Tax Act. The Advocate-General, no doubt, attempted to derive some support

7 S.C.R.

SUPREl\IE COURT REPORTS 31

to his argument by relying on section 43 of the State Financial 1964 Corporations Act, 1951(No.63of1951), as well ass. 43 of the AndhraPradesh Damodar Valley Corporation Act, 1948 (No. 14 of 1948). Sec-State Road Tr.anspOl'I tion 43 which occurs in both the said Acts provides that the Cmp-0~~· 0 • Corporation shall be liable to pay any taxes on income levied Tlw Income Tax by the Central Government in the same manner and to the Officer and Anr. same extent as a company. It is urged that where the legislaaajendragadkar, O.J. ture wanted to provide for the liability of the Corporation to pay the taxes on income levied by the Central Government, it has made specific provisions in that behalf and since no such provision has been made in the Act, it follows that the legislature intended that no tax should be levied on the income earned by the Corporation established under the Act. We do not think there is any substance in the argument. The whole object which section 43 is presumably intended to achieve is to prov, ide that the tax should be levied on the basis that the Corporation is a company and nothing more. If no such provision was made. in the Act, that has no bearing on the liability of the Corporation to pay the tax on its income. Therefore, we are satisfied that the High Court was right in rejecting the argument that by virtue of the repugnancy between the materiaryrovisions of the Act and the charging section of the Income Tax Act, it should be held that the appellant was not liable to pay tax on its income.

The result is, the appeals fail and are dismissed with .costs. One hearing fee.

Appeals dismissed.

THE INCOME-TAX OFFICER AND ANR

P. B. GAJENDRAGADKAR

K. N. WANCHOO, J

C. SHAH

Constitution of India

Art. 289

Income-tax Act, 1922

s. 22

s. 22

Income-tax Act

s. 3

Income-tax Act

Art. 289(1)

Art. 133

Art. 289

Parliament

Section 30

s. 30

Andhra Pradesh

Art. 289

Mark Graves

John J. Merrill

[1964) 1 S.C.R. 371

Companies Act

Companies Act

Income-tax Act

ss. 29 and 30

ss. 29 and 30

Income-tax Act

Andhra Pradesh High Court

D. Narsaraju

P. R.

Ramchandra Rao

T: V. R. Tatachari

K. N. Rajagopala Sastri

Gopal Singh

R. N. Sachthey

Rajeshwari Prasad

S. P. Varma

B. Sen

S. C. Bose

P. K. Bose

M. C. Setalvad

Andhra Praduh GAJENDRAGADKAR

Andhra Pradesh Government

11th January, 1958

Government of Hyderabad

Government of Andhra Pradesh

s. 22

Income-Tax Act

29th January, 1959

s. 3

s. 30

Art. 289

Andhra Prwleah

Gajendraqwlkar

Andhra

 Pradesh High Court

Art. 289(3)

Art. 289(1)

Income-tax Act

sections 28, 29 and 30

Art. 289(])

Art. 289

Goven- Gajendragadkar

Art. 289

Art. 289(1)

Art. 289(1)

Art. 289

Andhra

State of Andhra Pradesh

Art. 289

Art. 19(6)

Art. 19(6)

Art. 289

Art. 289(2)

Art. 289(1)

Art. 289(2)

carriedaajendraaadkar

James B. O'keefe

Stone

Supreme Court of America

United States

Holmes

Alldhra Pradesh

Art. 289(1)

Art. 289

Art. 289(1)

Art. 289(1)

Art. 289(2)

Art. 289(1)

Sinha

Marshall

Art. 289

Art. 289

Sea Customs Act

[1964] 1 S.C.R. 371

Art. 289(1)

Art. 289(])

Art. 289

Art. 289

State of Andhra Pradesh

Denning

Income Tax by Act

Section 3

Section 4

s. 3

Section 5

Road Transpot Corporation

Central Government

Section 17

Section 18

Section 23(1)

~~tral Government

Section 24

Section 25

Section 26

Section 27

Section 28

Oajendragadkar

Section 29(1)

Section 29(2)

Section 30

sections 28 and 29

Section 31

Section 32

s. 33

s. 34

Section 38

s. 38(1)

s. 38(2)(c)

Section 39

Andhra Prad"h Central Government

jrndrogadkar

Art. 289(1)

Section 28

s. 38

Section 38(2)(c)

s. 39(2)

s. 50

sections 28 and 29

s. 30

s. 30

s. 30

lkar

Art. 289(1)

Art. 289(2)

Art. 289

Income-tax Act

sections 29 and 30

Though the original Income-tax Act

sections 29 and 30

Companies Act

Companies Act

sections 29 and 30

section 43

Corporations Act, 1951

legislaaajendragadkar

section 43