THE SOUTH INDIA CORPORATION(P) LTD. versus THE SECRETARY, BOARD OF REVENUE, TRIVANDRUM & ANR.

1963

August 13

280

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[ 1964]

THE SOUTH INDIA CORPORATION(P) LTD.

ti.

THE SECRETARY, BOARD OF REVENUE. TRIVANDRUM & ANR.

(S. K. DAS, ACTING C. J., K. SUBBA RAO, RAGHUBAR DAYAL, N. RAJAGOPALA AYYANGAR AND J. R. MuoHoLKAR, JJ.)

Sales Tax-Assess1nent in respect of works contracts-Constitution ality-Afreemcnl betwun Prw'dent and Raj Pramukh of Part B St•te-V aliJity-Continuance in force of existing laws and their t!ld•ptati011J-"Subjcct to the other provisions of the Constitution" Scope and ef}ect of-Constitution of India, Arts. 277, 278, and 372- Tr.vancore-Cochio General Sales Tax Act. 11 of 1125 M.E.-Tra.. v«ncore-Cochin General S•les Tax Act 1957 (12 of 1957)-Kerala Act 11 of 1957.

On March 17, 1959 the appellant, a private limited company was aS:i;essed to sales· tax under the Travancore-Cochin General Sales Tax Act, 1125 M.E. for the assessment year 1952-53 in rc.pect of "works contr~cts". The company filed a revision petition before the 1st respondent, but it w~s rejected. Likewise, the 2nd respondent assessed the company to sales tax for the assessment year5 1956-57, 1957-58, 1958-59 in respect of '\vorks contracts". The as!;essment for the year 1952-53 was made only under the Travancorc-Cochin General Sab T.x Act (11 of 1125 M.E.) and, therefore, the subse quent alleged enhancement of the tax did not affect the as.'iessment that year. Assessment for the years 1956-57, 1957 .. 58 and of 1958-59 were m:;i.de under the Travancore-Cochin General Sales Tax (Amendment) Act, 1957(12 0£ 1957) and, therefore, the provisions if any, enhancing the rate under the Act would affect the said asM:ssments. The enhancen1ents made under the l(erala Act 11 of 1957 would not govern the assessment year 1956-57 but only the assess1nent years 1957-58 and 1958-59. The appellant moved the High Court under Arts. 226 and 227 of the Constitution for quashing the said orders of as!lessqient. The petitions were dismissed. In this Court, the appellant mainly contended : ( 1) Art. 277 can only save the levy of a tax that was being lawfully levied by a State in11r1ediately before the commencement of the Constitution and that as the Act came into force only after the Constitution, the levy made there the Article. (2) under doe~ not satisfy the condition laid do\vn by Assuming that Art. 277 saved the levy of a tax under the Act, there was an agreement betvveen the President of India and the Raj pramukh of the State of T ravancore-Cochin and under the said agree ment the Union agreed to recoup the loss in revenue incurred by the 91.id SNte by rea.5on of the constitutional transference of the B State's power of taxation in respect of certain item5 to the Union List and thati tA!:rraftcr, the State ceased to have the power to levy any tax in

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respect of the subjects so transferred. (3) Article 372 is subject to other provisions of the Constitution and a law empowering a State to impose a tax in respect of a federal subject is inconsistent 'vith the federal structure of the Constitution and, therefore, is bad; and, that apart, it is also inconsistent with the express provisions of Part XII of the Constitution and particularly with those of Arts. 277 and 278 thereof.

field: 'J'he tax under the ~i\ct would not be saved, as the necessary condition that the levy should have been lawfully made before the Constit_ation, was not satisfied.

1963

The Sot<th l ndia Corpora (P) Ltd. tion v. The Secretar'J, Board of Revenue, Trivandrum

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The effect of the provisions in Art. 278 is that to the extent c(lvered by an agreem~nt the power of the State Govcrn1nent to continue to leYy taxes under Art. 277 is superseded.

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

S.C.R. 524. applied.

The agre..:tnent in question fell squarely within the scope of the power. That would have its full force unless the Constitution (Seventh Amendment) Act, 1956, in terms avoided it. The said amend1nent was only prospective in operation and it could not have affected the validity of the agreetnent. It must be held, therefore, that the impugned assessment orders were not validly made by the sales tax authorities in exercise of the power saved under Art. 277 of the Constitution.

A- pre-Con~titution la.\V n12de by a competent authority, though it has lost its legislative competency under the Constitution, shall continue in forcr:, provided the law does not contravene the "other r>roviiions" of the Constitution.

It!/!. Cannon Dunkerlay & Co. v. Sales Tax Officer, Maatan- ckmy, l.L.R [1957] Kerala 462, Sagar Mall v. State, I.L.R. f1952J 1 All 062, Kanpur Oil Mills v. fudge (Appeals) Sales Tax, Kanpur, A.LR. 1955 All 99, The Amalgamated Coalfields Ltd. v. The fanapada Sabha, Chhindwara, [1962] I S.C.R. 1, fagdish Prasad •. SaharanpNr Municipality A.I.R. 1961 All. 583; Sheoshankar v. M. P. State, AJ,R. 1951 Nag. 58, State v. Yash Pal, A.I.R. 1957 Punj. 91 and Bmoy Bhusan v. State of Bihar, A.LR. 1954 Pat. 346, followed.

Article 372 ~annot be constr~ed in such a way as to enlarge the scope of the saving of taxes, duties, cesses or fees. Article 372 must be read subject to Art. 277.

. While Art .. 372. is subject to Art. 278, Article 278 operates in ir_s own sphere m Sj11te of Art. 372. The result is that Art. 278 over r~de~ Art. 372; that is to say, notwithstanding the fact that a pre-Cons titotion taxation law continues in force under Art. 372, the Union •nd 11-2 S. C. Indiaj6~

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the State Governments can enter into an agree1nent in terms of Art. 278 in respect of Part B States depriving the State law of its efficacy. In one vie\V Art. 277 excludes the operation of Art. 372, and in the other view, an agreement in tenns of Art. 278 overrides Art. 372. In either view, the result is the same, namely, that at any rate during the period covered by the agreement the States ceased to have anv power to impose the tax in respect of "works_ contracts". ~fhe said orders of assessment, therefore, muSt be set aside.

Chicago, Rock Island and Pacific Railway Company v. William Moglim, (1884) 29 L. Ed. 270 and Vilas v. City of Manila, (1910) 55 L. Ed. 491, distinguished.

C1v1L APPELLATE JuR1so1cTION : Civil Appeals Noi:. 295

to 298 of 1962.

Appeals from the judgment and order dated February 3, 1961, of the Kerala High Court in 0. Ps. Nos. 232 of 1957, 70, 71 and 673 of 1960.

M. K. Nambyar, J. B. Dadachanji, 0. C. Mathur and

Ravinder Narain, for the appellant.

V. P. Gopalan Nambyar, Advocate-General for the State of Kerala and Sardar Bahadur, for the respondents.

August 13, 1963. The Judgment of the Court was delivered by SuBBA RAo J.-These four companion appeals arise out of a common judgment of the High Court of Kerala dismissing the four petitions filed by the appellant seeking to quash. the orders of assessment made by the Sales Tax authorities imposing sales tax in respeet of "works contracts"·

The undisputed facts may briefly be stated. The: appel lant is a private limited company incorporated under the Indian Companies Act. The principal office of the Com pany is at Mattancherry. It carries on business in iron, hardware.. electrical goods, timber, coir, engineering con tracts etc. In the course of its business, the Company acted as engineering contractor for the State and Central Govern ment departments and also for private parties. On March 17, 1959, the Sales Tax Officer, special Circle, Ernakulam assessed the Company to sales tax under the Travancore Cochin General Sales Tax Act, 1125 M.E. for the assessment year 1952-53 in respect of "works contracts". The Company filed a revision petition before the 1st respondent, but it was rejected. Likewise the 2nd respondent assessed the Com-

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The South India Corpora (P) Ltd. tion v. The Secretary, Board of Revenue, Trivandrum

Subba Raa J.

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4 S.C.R. pany w sales tax by his orders dated 7-1-1960, 4-1-1960 and 31-3-1%0 for the assessment years 1956-57, 1957-58 and 1958-59 in respect of "works contracts". The appellant filed four petitions in the High Court of Kcrala under Arts. 226 and 227 of the Constitution for quashing the said orders of assessment. The main contention advanced on behalf of the appellant-Company before the High Court was that, after the Constitution came into force the relevant Sales Tax Acts imposing sales tax on "works contracts" were uncons titutional and, therefore, void. The High Court rejected the petitions with costs. the contention and dismissed Hence the appeals.

Before adverting to the rival contentions it would be convenient at the outset to give briefly the historical back ground of the sales tax legislation in Kerala.

Originally, Travancore and Cochin were two separate sovereign States having plenary powers of taxation. In the Cochin State, the Cochin General Sales Tax Act 15 of 1121 M.E. and in the Travancore State, the Travancore General Sales Tax Act 18 of 1124 M.E. imposed tax on "works con tracts". As a result of the merger of the two States, the United State of Travancore-Cochin was formed with a common Legislature. The said Legislature enacted the T ra vancore-Cochin General Sales Tax Act 11 of 1125 M.E. (1950), hereinafter called the Act. The said Legislature also had plenary powers of taxation and, therefore, it validly imposed sales tax on "works contracts". The Act was publi shed in the Gazette on January 17, 1950, but s. 1 (3) there of provided that it would come into force on such date as the Government migllt, by notification in the Gazette, appoint. The requisite notification was issued by the Gov vernment in May 30, 1950. Rules were framed under pow ers conferred by s. 24 of the Act prescribing the mode, inter alia, for ascertaining the amounts for which goods were sold in relation to "works contracts". Rules 4(3) provided that, "For the purposes of sub-rule (I), the amount for which goods are sold by a dealer shall, in relation to a works contract, be deemed to be the amount payable to the dealer for carrying out such contract less a sum not exceeding such percentage of the amount payable as may be fixed by the Board of Revenue from time to time for different areas, representing the usual propor-

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tion in such areas of the cost of labour to the cost of . materials used in carrying out such contract, subject to the following maximum percentages:- * *

*

*

*

But, it is statetl that the Board of Revenue did uot fix the percentage for deduction from the amount payable to the dealer for carrying out a works contract. This fact was not denied in the High Court, but before ns an appli cation is made to produce the Travancore-Cochin Gazette to establish that such a percentage was fixed. The Rules also were notified on May 30, 1950. The earlier Acts of Tra vancore and Cochin were repealed from May 30, 1950. Till May 30, 1950, sales tax was levied on works contr~cts in Travancore and Cochin areas under the respective Acts and the rules framed thereunder. As from the said date the said Acts were repealed, thereafter the said tax was imposed under the Act and the rules framed therrnnder. On November 1, 1956, the States Reorganization Act of 1956 came into force and the new State of Kerala was thereunder. The newly formed Kerala State formed comprised the area covered by the Travancore-Cochin State, excepting a small part thereof, and the district of the Keula Malabar in the Madras State. Thereafter, Legislature passed the Travancore-Cochin General s~b Tax (Amendment) Act, 1957 (12 of 1957) ~mending the Act and extending its provisions to the whole State of Kerala. The new Act practically contained the provisions of the earlier Act. The said Act came into force on October 1, 1957. By the provisions of Act 12 of 1957, among other things, the tax on electric goods was enhanced from 3 n.p. to 4 n.p. in the rupee and in regard to cement, this item was freshly added and charged to sales tax at 5 n.p. in the rupee. The State of Kerala does not admit that either there was ;my enhancement of tax in the case of electrical 'goods or that any tax was imposed in regard to cement involved in a works contract. Further, the· sales tax leviable under the Act was enhanced by the Kerala Surcharge on Taxes Act, 1957 ( 11 of 1957) and again by the Kerala Surcharge on Taxes Act, 1%0. We are not concerned with the latter Act as no assessment was made under that Act in respect of any of the transactions in question.

.

The factual position may, therefore, be stated thm :

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The assessment for the year 1952-53 was made only under the Travancore-Cochin General Sales Tax Act (11 of 1125 M.E.) and, therefore, the subsequent alleged enhancement of the tax does not affect the assessment of that year. Ass essments for the years 1956-57, 1957-58 and 1958-59 were made under the Travancore-Cochin General Sales Tax (Amendment) Act, 1957 ( 12 of 1957) and, therefore, the provisions, if any, enhancing the rate under the Act would, affect the said assessments. The enhancements made under the Kerala Act 11 of 1957 would not govern the assessment year 1956-57, but only the assessment years 1957-58 and 1958- 59.

inconsistent with

The material contentions of Mr. Nambiar, appearing for the appellant may be summarised thus : ( 1) The Travancore-Cochin Act of 1125 would not continue in force under Art. 372 of the Constitution inasmuch as its provisions were the structure of the Constitution as well as with the provisions of Part XII thereof. (2) Art. 277 of the Constitution cannot be relied the respondent, as it can be availed of only : upon by (a) if a particular tax was lawfully levied by the Govern ment of the State immediately before the commencement of the Constitution and is expressly mentioned in the Un ion List, and {b) if there is an identity between the tax im •posed bv the State before the Constitution and that continu ed by it thereafter in respect of rate, area, State and purpose. It is said that the said two conditions are not satisfied. (3) Assuming that Art. 277 applied, the said provision could not be relied upon by the appellant in view of the agree ment entered into between the Rajpramukh of Travancore and the \Jnion Government under Art. 278 of the Constitu tion. ( 4) The impugned Act, in so far as it imposed tax in respect of "works contracts", would offend Art. 14 of the Constitution inasmuch as it was not applied to areas other than those covered by the Travancore-Cochin States and, in therefore, discriminatory in its application. And (5) any view, in respect of the assessment year 1952-53 the non fixation of the percentage by the Board of Revenue under r. 4(3) of the Rules made under the Act renders the said assessment illegal.

The learned Advocate-General of Kerala counters some of the said arguments. We shall refer to his arguments in

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the course of the judgment at appropriate places. It may be metioned at this stage that the learned Advocate-General conceded that the assessment orders for the years 1956-57, 1957-58 and 1958-59 made under the Travancore-Cochin General Sales Tax (Amendment) Act, 1957 (12of1957) and the Kerala Surcharge on Taxes Act (11 of 1957) were bad, but prayed that the State might be given liberty to assess the appellant de nova for the said years under the Act.

The main contention of learned counsel for the appel lant centres on the provisions of Arts. 277 and 278 of the Constitution. Under Art. 277, any taxes that were being lawfully levied by the Government of any State before the Constitution could be continued to be levied thereafter, notwithstanding that the s~id t;ixes were mentioned in the Union List, till Parliament made a law to the contrary. Article 278 enables the Government of India and a State Government specified in Part B of the First Schedule to the Constitution to enter into an agreement with respect to levy and collection of any tax leviable by the Government of India in such State and for the distribution of the pro ceeds thereof and also in respect of the grant of any financial assistance by the Government of India to such State if it incurred any loss of revenue derived by it from any source. Under cl. (2) thereof. such an agreement shall continue in force for a period of ten years from the commencement 1 of the Constitution. We are not concerned here with the legal position after the expiry of the said period, and w~ do not propose to express our view thereon.

The first contention of learned counsel for the appel lant is that Art. 277 of the Constitution can only save the levy of a tax that was being lawfully levied by a State immediately before the commencement of the Constitution and that, as the Act came into force only after the Constitu tion, the levy made thereunder does not satisfy t11e condi tion laid down by the article. To appreciate this contention some relevant facts may be recapitulated. The Act was published in the Gazette on January 17, 1950, hut was brou ght into force only on May 30, 1950, i.e., after the commen- . If so, it follows that the tax cement of the Constitution. under the Act would not be saved, as necessary condition that the levy should have been lawfully made before the Constitution was not satisfied.

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The South India Corpora ( P) Ltd. tion v. The Secretary, Bo«rd of Revenue, Trivandrum

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On the assumption that Art. 277 saved the levy of tax under the Act, the turther contention of the appellant is that there was an agreement dated February 25, 1950 bet ween the President of India and the Rajpramukh of the State of Travancore-Cochin in the matter of the federal financial integration in the said State and that under the said agreement the ·Union agreed to recoup the loss in revenue incurred by the said State by reason of the consti tutional transfrrance of the B State's power of taxation in respect of certain items to the Union List and that, there after, the State ceased to have the power to levy tax in res pect of the subjects so transferred. The learned Ad vocate-General, on the other hand, contends that Art. 278(2) enables the Union and a B State to enter into an agreement only in respect of a tax leviable by the Government of India in the said State and in respect whereof a loss has been incurred by the State by reason of the fact that under the Constitution it has ceased to have the power to levy and collect the said tax, and that, as in the instant case by reason of Art. 277 the State would continue to have the power to levy the tax in respect of "works con tracts" till Parliament made appropriate law, it did not in cur any loss in respect of the said tax and, therefore, no va lid agreement could be entered into between the State Gov ernment and the Union in respect thereof. To state it differ ently, Art. 278 does not come into play unless the Govern ment of India acquires the power to levy a particular tax saved by Art. 277 by Parliament making an appropriate for, it is said, with some force, there cannot be an law; agreement to recoup any loss of revenue when there is no such loss. But this question is covered by a decision of this Court in Union of India v. Maharaja Krishnagarh Mills Ltd.('). There, the question for determination was whether the Union of India was entitled to levy and recover arrears of excise duty on cotton cloth for the period April 1, 1949 to March 31, 1950, payable by the respondent, a cloth mill in the State of Rajasthan, under the Rajasthan Excise duties Ordinance, 1949. By reason of Art. 277 of the Constitution, the State of Rajasthan became entitled to recover the said duty notwithstanding the fact that it was transferred to the Union_List The pro~isi_on to the contrary contemplated by

(1) [1961] 3 S.C.R. 524.

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Art. 277 of the Constitution was made by Finance Act XXV of 1950 s. 11 whereof extended the Cen'tral Excise and Salt Act, 1944, along with other Acts, to the whole of India except the State of J ammu and Kashmir. That section had effect only from April 1, 1950 and did not apply to arrears of duty of excise in regard to the earlier period. The Un:,on pleaded that an agreement envisaged by Art. 278 w<is en tered into on February 25, 1950 which conceded to the Centre the right to levy and collect the arrears of duty in question. The question now raised before us, namely, whe ther there can be a valid agreement under Art. 278 of the Constitution in respect of taxes leviable by the State and leviable by the Government of India till an appropriate law is made by Parliament arose for consideration in that case. The learned Chief Justice, speaking for the Court came to the following conclusion, at p. 535 :

"Thus, the combined operation of Arts. 277 and 278 read with the agreement vests the power of levy and collection of the duty in the Union of India". The reasons for the conclusion are found at p. 533:

"It is note)"orthy that the provisions of Art. 278 over ride ·pro tan to other provisions of the Constitution in cluding Art. 277 and the terms of the agreement over ride the provisions of the Chapter, namely Chapter 1 of Part XII .... Article 277, therdore, is in the nature of a saving provision permitting the States to levy a tax or a duty which, after the Constitution, could be levied only by the Centre. But Art. 277 must yield to any agreement made between the Government of In dia and the Government of a State in Part B in respect of such taxes ~r duties, etc."

The. learned Chief Justice proceeded to state thus at p. 535: "That a duty of the kind now in controversy on the date of the agreement after coming into force of the Constitution is leviable only by the Government of In dia even in respect of the State of Rajasthan is clear beyond all doubt. The Union List only, namely, entry 84 in the Seventh Schedule, authorises the levy and col- lection of the duty in question ..................... . It is true that Art. 277 has saved, for the time being, until Parliament made a provision to the contrary, the power of the State of Rajasthan to levy such a duty,

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but that is only a saving provision, in terms subject to the provisions of Art. 278."

This Court, therefore, held that after the coming into force of the Constitution the excise duty in question in that case was leviable only by the Government of India, though there was a saving provision in favour of the State of Rajasthan till Parliament made an appropriate law; and on that rea soning it held that the agreement under Art. 278 coulcl be made in respect of such a levy notwithstanding the tem porary reservation made in favour of the State. The only difference between that case and the present one is that at the time the agreement was entered into between the Union and the State, Parliament had not made the appropriate law depriving the State of its power to levy taxes in respect of "works contracts". llut that cannot make any difference in principle, for, even the earlier decision related only to the validity of the agreement in respect of arrears leviable by the State before the appropriate law was made. The effect of the provisions in Art. 278 is that to the extent covered by an agreement the power of the State Government to continue to levy taxes under Art. 277 is superseded.

The next question is whether there was any such agree ment whereunder the State agreed to give up its right to kvy the said tax as a part of the agreement entered into by it with the Union. This leads us to consider the terms of the agreement dated February 25, 1950, entered into between the President of India and the Rajpramukh of the State of It would be convenient to read the Travancore-Cochin. relevant clauses of the agreement. It reads:

"WHEREAS provision is made by Articles 278, 291, 295 and 306 of the Constitution of India for certain matters to be governed by agreement between the Gov ernment of India and the Government of a State speci fied in Part B of the First Schedule to the Constitution: * * Now, therefore, the President of India and the Rajpra mukh of Travancore-Cochin, have entered into the following agreement, namely: ·

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The recommendations of the Indian States Finan ces Enquiry Commission, 1948-49 (hereafter referred to 2s the Committee) contained in Part I of its Report read with Chapters I, II and III of Part II of its Report,

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in so far as they apply to Travancore-Cochin (herein after referred to as the State) together with the recom the Committee's Second mendations contained Interim Report, are accepted by the parties thereto sub ject to the following modifications, namely:-

in

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( 1) With reference to paragraph 6 of the Commit tee's Second Interim Report, the date of federal finan cial integration of the State shall be 1st April 1950. *

* (2) (3) The Committee's formula of guaranteeing the 'federal' revenue-gap for the first five years after federal financial integration and of tapering it down over the next five years will be applied to the combined 'federal' revenue-gap of the former Indian States, Travancorc.· and Cochin, taken together, computed as in (2) above. * * Subject to the provisions of the Constitution of India, this agreement shall, except where the context of the Committee's Report and of this agreement otherwise require, remain in force for a period of ten years from the commencement of the Col;lstitution of India". It will be seen from the said agreement that it incorpora ted the recommendations made by the Indian States Finances Enquiry Committee with some modifications and that the Union of India agreed to recoup the State for the loss caused to it by reason of the federal financial integration in the manner described thereunder. It was not a piecemeal agree ment confined to a few items, but a comprehensive one to fill up the entire revenue-gap caused to the State by reason of some of its sources of revenue having been taken away by the Union or otherwise lost to it. A perusal of the main recommendations made by the Indian States Finance En quiry Committee and incorporated in the agreement also indicates the completeness of the agreement. The Committee was asked to examine and report, inter alia, whether, and if so, the extent to which, the process of so integrating Federal Finance in the Indian States and Union with that of the rest of India should be gradual and the manner in which it should be brought about. One of the general prin ciples followed by the Committee was that federal finan cial integration in States involved not merely the taking over of all their "federal" revenues by die Centre, but also the

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assumption of all expenditure in States upon Departments and Services of a "federal" character. In Ch. II of Part II, which dealt with "Specific matter concerning "Federal" revenues and "Federal" service departments, it was stated that with effect from the prescribed date, the Centre will take over all "federal" sources of Revenue and all "federal" items of expenditure in States, together with the administra tion of the Departments concerned, and that the Centre must also take over all the current outstandings, liabilities claims, etc. and all productive and unproductive Capital assets connected with these departments. Dealing with the States' rights, it observed:

""With effect from the prescribed date, all 'rights and immunities' enjoyed or claimed by the States, whether expressly or by usage, and whether relating to 'federal' revenues and taxes generally present or future, or to specific matters such as Railways, Customs, Posts and Telegraphs, Opium, Salt, etc. will terminate and must be extinguished. Thereafter. their constitutional position in respect of these matters should be the same as that of provinces under the new Constitution of India."

The Committee recommended that the whole body of State legislation relating to "federal" subjects should be repealed and the corresponding body of Central legislation extended proprio vi gore to the States, with effect from the prescribed date, or as and when the administration of particular •·federal"' subjects is assumed by the Centre. In its Second Interim Report, dealing with Travancore and Cochin, the following recommendations were made:

"Revenue Gap" arising out of Federal Financial Inte gration: (i) The net revenue loss to the Travancore and Cochin States, taken together, upon federal financial integra tion (on the basis of figures for their financial year 1123 M.E.) would be Rs. 330 lakhs; this includes a net loss of Rs. 100 lakhs by abolition of internal Customs

. Duties in Travancore State. (ii) We recommend that-

( a) the loss resulting from the immediate aboli tion of Internal Customs Duties of Travancore must be borne by the State Government:

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(b) as regards the residual net "Central" Rcvenue Gap of the two States taken together (Rs. 230 lakhs), there should be a guaranteed reimbursement by the Central Government to the _following extent during ~ transitional period:- From the date of

financial intcgratior.

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Rs. 230 lakhs per annum to 31st March 1955.

The agreement, read with the Report, makes the following position clear : The loss arising to the State on account or the federal financial integration in the State was ascertain ed and a provision was made for subsidizing the State by filiing up the said revenue-gap. The agreement ex facie appears to be a comprehensive one. It takes into considera tion the entire loss caused to the State by reason of some of its sources of revenue being transferred under the Constitu tion to the Union. It would be unreasonable to construe the agreement as to exclude from its operation certain taxes which the State was authorized to levy for a temporary per iod. As we have said, that saving was subject to an agree ment and, as by the agreement effective adjustments were made to meet the loss which the State would have incurred but for the agreement, there was no longer any nece,.sity for the continuance of the saving and, it ceased to have any force thereafter between the parties to the agreement. \¥ e are not called upon in this case to decide whether the sai<l power revived after the expiry of ten years from the com mencement of the Constitution, for all the impugned as.ess ments fall within the said period. Nor do we find any forcr in the contention that as Art. 278 was omitted by the Cons titution (Seventh Amendment) Act, 1956, the agreement entered into in exercise of a power thereunder automati cally came to an end and thereafter the power of the State to levy the tax came into life again. An obvious fallacv underlies this ingenious argument. The validity of an agree ment depends upon the existence of power at the time it was entered into. Its duration will be limited bv its terms or by the conditions imposed on the power its~lf. Artic!t 278 conferred a power upon the Union and the B State to enter into an agreement which would continue in force for a period not exceedfng ten years from the commencement of the Constitution. The agreement in question.fell squar ely within the scope of the power. That agreement, there-

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fore, would have its full force unless the Constitution (Seve nth Amendment) Act, 1956, in terms avoided it. The said amendment was only prospective in operation and it could not have affected the validity of the agreement. We, there fore, hold that the impugned assessment orders were not validly made by the sales tax authorities in exercise of the power saved under Art. 277 of the Constitution.

Learned Advocate-General for the State of Kerala raises an intertsting point, namely, that the impugned law, i.e., the .Tr2vancore-Cochin General Sales Tax Act of 1125 M. E. continued in force after the Constitution under the express provisions of Art. 372 thereof till the said law was altered, repealed or amended by the competent authority and, there fore, even if there was an agreement between the Union and the State as aforesaid, it could not affect the power of the State to impose the tax under the said law.

Mr. Nambiar, on 'the other hand, argues that Art. 372 is subject to other provisions of the Constitution and a law empowering a State to impose a tax in respect of a federal subject is inconsistent with the federal structure of the Constitution and, therefore, is bad; and, that apart, it is also inconsistent with the express provisions of Part XII of the Comtitution and particularly with those of Arts. 277 and 278 tJ1creof. Article 372 reads:

"(l) Notwithstanding the repeal by this Constitu tion of the enactments referred to in article 395 but subject to the other provisions of this Constitution, all the bw in force in the territory of India immediately before the commencement of this Constitution shall continue in force therein until altered or repealed or amended by a ·competent Legislature or other com petent authority. ~

* Explanation /.-The expression "law in force" in this article shall include a law passed or made by a Legisla ture or other competent authority in the territory of India before the commencement of this Constitution wd not previously repealed, notwithstanding that it or parts of it may not be then in operation either at all or in particular areas."

*

*

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;.

The object of this article is to maintain the continuity of the pre· e.xisting laws after the Comtitution came into force

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till they were repealed, altered or amended by a competent authority. Without the aid of such an article there would be utter confusion in the field of law. The assumption under lyinp the article is that the State laws may or may not be within ·the legislative competence of the appropriate autho- rity under the Constitution. The article would become in effective and purposeless if it was held that pre-Constitu laws should be such as could be made by the appro tion priate authority under the Constitution. The words "subject to the other provisions of the Constitution" should, there fore, be given a reasonable interpretation, an interpreta tion which would carry out the intention of the makers of the Constitution and also which is in accord with the cons titutional practice in such matters. TI1e article posits the continuation of the pre-existing laws made by a competent authority notwithstanding the repeal of certain acts uru:ler Art. 395; and the expression "other"·in the article can only apply to provisions other than those dealing with legislative competence.

The learned Advocate-General relied upon the follow ing decisions for the said legal position: Messrs. Gani,on Dunkerley & Co. v. Sales Tax Officer, Mattancherry(') ; Sagar Mall v. State(2); Kanpur Oil Mills v. fudge (Ap peals) Sales Tax, Kanpur('); The Amalgamated Coalfidds Ltd. v. The fanapada Sabha, Chindwara('); fagdish Pra sad v. Saharanpur Municipality('); Sheoshankar v. M.P. State( 6 ); State v. Yash Pal('); and Binoy Bhusan v. State of Bihar('). It is not necessary to consider in detail the said decisions, as they either assume the said legal position or sustain it, but do not go further. They held that a law made by a com petent authority before the Constitution continues to be in force after the Constitution till it is altered or modified or repealed by the appropriate authority, even though it is beyond the legislative competence of the said authority under the Constitution. We give our full assent to the view and hold that a pre-Constitution law made by a competent authority, though it has lost its legislative competency un-

(') LL.R. 1957 Kerala 462. (2) LL.R. (1952) 1 AIL 862. ( 3 ) A.LR. 1955 All. 99. (') [ 1962] 1 S.C.R. I.

(') A.LR. 1961 All. 583. (') A.LR. 1951 Nag. 58. (') A.LR. 1957 Punjab 91. ( 8 ) A.LR. 1954 Pat. 346.

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der the Constitution, shall continue in force, provided the law does not contravene the "other provisions" of the Con stitution.

But the real question is whether the said impugned law is inconsistent with the provisions of the Constitution other than those dealing with its legislative competency. The words "subject to other provisions of the Constitution" mean that if there is an irreconcilable conflict between the pre existing law and provision or provisions of the Constitution the latter shall prevail to the extent of that inconsistency. An article of the Constitution by its express terms may come into conflict with a pre-Constitution law wholly or in part; the said article or articles may also, by necessary implication, come into direct conflict with the pre-existing law. It may also be that the combined operation of a series of articles may bring about a situation making the existence of the pre-existing law incongruous in that situation. Whatever it may be, the inconsistency must be spelled out from the other provisions of the Constitmion and cannot be built up on the supposed political philosophy underlying the Constitution. These observations are necessitated by the reliance of Mr. Nambiar on two decisions of the Supreme Court of the United States of America. In Chicago, Rock Island and Pacific Railway Company v. Willian McGlinn('), the facts, briefly were: An Act of Kansas purported to cede to the United States exclusive jurisdiction over the Fort Lea venworth Military Reservation. In considering the question whether the previous laws continued after the said cession, the Supreme Court of the United States of America made a distinction between laws of political character and muni cipal laws intended for the protection of private rights, but we are not concerned with that question in this case; and indeed the law of India appears to be different from that of America in that regard. But what is relied upon is the effect of cession on pre-existing laws which are in conflict with the political character, institution and Constitution of the new Government. Field J ., speaking for the Court observed, at p. 272, as follows:

"As a matter of course, all laws, ordinances and regula tions in conflict with the political cl1aracter, institution and Constitution of the new government are at once (') (1884) 29 L. ed. 270.

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the

the

laws of

the United States,

displaced. Thus, upon a cession of political jurisdiction and legislative power-and the latter is involved in the former-to the country in support of an established religion or abridg ing the freedom of the press, or authorising cruel and unusual punishments, and like, would at once cease to be of obligatory force without any declaration to that effect; and the laws of the country on other subjects would necessarily be superseded by existing laws of the new government upon the same matters." The same view was reiterated by the Supreme Court of the United States of America in a later decision in Vilas v. City of Manila('). We are· not concerned in this case with the the general principles enunciated by the law of America, but only with the express provisions of Art. 372 of our Cons titution. That apart, it may also be inappropriate to rely upon the legal consequences of a cession of a State under the American law for the interpretation of Art. 372 of our Constitution, which deals with different situation and l:iys down expressly the legai position to meet the same. \l{e would, therefore, confine our attention to the express pro visions of the Constitution in considering the question rai sed before us.

integration

The relevant provisions which have a bearing on the said question are found in Part XII of the Constitution. Chapter I deals with finance; and this' chapter contains :i. scheme of federal financial in the States. Though the Constitution conferred upon the Union and the States independent powers of taxation and constituted separate consolidated funds, it evolved a procedure for an equitable readjustment of the taxes collected between the Union and the States. But before the Constitution came in to force the States were !~vying and collecting certain taxei which, under the Constitution, were allotted to the Union. The immediate exercise of the Union power of taxation in respect of such taxes would dislocate the finances of the States and introduce difficulties in the administration. To avoid this, Art. 277 saved the existing taxes levied by the States, though they have been transferred to the Union List by the Constitution, till Parliament made appropriate law. But the Constitution was also made applicable to P:i.rt B

( 1 ) (1910) 55 L. Ed. ~91.

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States. They had plenary powers of taxation. Their relation ship with the paramount power differed from State to State. Further, most of the States were in a state of finan cial instability and required substantial help from the Union to bring them up to the standard of Part A States. There would be a serious dislocation in the administration of the said States by a sudden withdrawal of the federal sources of revenues. The provisions of Part XII of the Constitution with the saving embodied in Art. 277, may have met the situation obtaining in Part A States, but they were inade quate for Part B States. Therefore, a special provision under Art. 278 was made in respect of Part B States enabl ing them to enter into an agreement with the Union embo dying terms contrary to the other provisions of the Consti tution in respect of levy and collection of taxes and the grant of any financial assistance to such State or States.

With this background let us now consider the following two questions raised before us: (1) Whether Art. 372 of the Constitution is subject to Art. 277 thereof; and (2) whether Art. 372 is subject to Art. 278 thereof. Article 372 is a general provision and Art. 277 is a special provision. It is settled law that a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where the special provision does not apply. The earlier discussion makes it abundantly clear that the Constitution gives a separate treatment to the subiect of finan ce, and Art. 277 saves the existing taxes etc. levied bv States if the conditions mentioned therein are complied with. While Art. 372 saves all pre-Constitution valid laws, Art. 277 is confined onlv to taxes, duties, cesses, or fees lawfully levied immediately before the Constitution. Therefore, Art. 372 cannot be construed in such a way as to enlarge the scope of the saving of taxes, duties, cesses or fees. To state it differently, Art. 372 must be read subject to Art. 277. We have already held that an agreement can he entered into the Union and the States in terms of Art. 278 between abrogating or modifying the power preserved to the States under Art. 277.

That apart, even if Art. 372 continues the pre-Constitu tion laws of taxation, that provision is expressly made sub ject to the other provisions of the Constitution. The exnres sion "subject to" conveys the idea of a provision yielding »-2 S C lndia/64

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place to another provision or other provisions to which it is made subject. Further Art. 278 opens out with a non obstante clause. The phrase "notwithstanding anything in the Constitution" is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of Art. 278. While Art. 372 is subject to Art. 278, Art. 278 operates in its own sphere in spite of Art. 372. The result is that Art. 278 over rides Art. 372; that is to say, notwithstanding the fact that a pre-Constitution taxation law continues in force under Art. 372, the Union and the State Governments can enter into an agreement in terms of Art. 278 in respect of Part B States depriving the State law of its efficacy. In one view Art. 277 excludes the operation of Art. 372, and in the other view, an agreement in terms of Art. 278 overrides Art. 372. In either view, the resnlt is the same, namely, that at any rate during the period covered by the agreement the States ceased to have any power to impose the tax in respect of "works contracts",

In this view we need not express our opinion on the

other contentions raised by Mr. Nambiar.

In the result, the said orders of assessment are set aside and the appeals are allowed with costs here and in the High Court. One set of hearing fee.

Appeals· allowed.

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