1962 (11) TMI 43 - SC - Income Tax

Whether by virtue of the grant, exhibit A, the Indian Income-tax Act, 1922, is invalid so far as the plaintiff company is concerned during the continuance of the grant? Whether in view of article 295 and clause 18 of the grant, it can be said that the legislative power of the Union of India contained in article 245 is in any way fettered so that the Union of India cannot pass any law which would take away the exemption in clause 18, assuming it to be there? Held that - Appeal dismissed. As relying on Maharaja Shree Umaid Mills Ltd. v. Union of India 1962 (11) TMI 51 - SUPREME COURT Grant dated May 2, 1945, was not law and did not continue as such in Kotah and, secondly, article 295(1)(b) did not in any way invalidate the Finance Act, 1950, which extended the Indian Income-tax Act, 1922, to the territories of the State of Rajasthan including Kotah.

Summary

Issues:
- Interpretation of the grant dated May 2, 1945, and its impact on the applicability of income tax laws.
- Validity of the Finance Act, 1950, in extending the Indian Income-tax Act, 1922, to the territories of the State of Rajasthan.

Analysis:
The case involved an appeal regarding the interpretation of a grant dated May 2, 1945, and its implications on the imposition of income tax laws. The appellant, a company incorporated under the Indian Companies Act, 1913, claimed that the grant exempted it from income tax, super-tax, and excess profits tax during its validity period. The grant was issued by the Sovereign Ruler of Kotah State, and the appellant argued that it constituted a legal obligation not to levy such taxes. However, following the integration of Kotah State into the United State of Rajasthan and subsequently into the Union of India, the Finance Act, 1950, extended the Indian Income-tax Act, 1922, to the territories, including Kotah.

The District Judge framed eleven issues, with the crucial question of the validity of applying the Income-tax Act to the appellant being central. The District Judge opined that the application of the Income-tax Act to the appellant was invalid, prompting a reference to the High Court of Rajasthan. The High Court, after deliberation, raised a constitutional question regarding the legislative power of the Union of India in light of the grant's provisions. The High Court concluded that the Union of India was not restricted from passing laws that could affect the exemption granted under the grant.

The appellant appealed to the Supreme Court, focusing on two key arguments: the continued legal effect of the grant and the limitations imposed by Article 295 of the Constitution on legislative actions. However, the Supreme Court, referencing a previous judgment, held that the grant did not constitute law after the integration of Kotah State and that Article 295 did not invalidate the Finance Act, 1950. Consequently, the appeal was dismissed, affirming the High Court's decision on the constitutional questions and upholding the applicability of income tax laws to the appellant.

In conclusion, the Supreme Court's judgment clarified the legal status of the grant in question, emphasizing the primacy of legislative actions in extending tax laws to integrated territories and dismissing the appellant's arguments based on the grant's exemptions and constitutional provisions.