HUKUMCHAND MILLS LIMITED Vs. STATE OF MADHYA PRADESH

JUDGEMENT

(1.) This is an appeal by special leave against the judgment of the Madhya Pradesh High Court. It raises the question of the validity of certain provisions of the Indore Industrial Tax Rules, 1927, (hereinafter referred to as the Tax Rules ) and assessments made thereunder for the years 1940 to 1948. The appellant is a cotton mill and in 1927 a tax was imposed on cotton mills in Indore in Holkar State by the then Ruler in respect of profits, gains and income of such mills. This was done under the Tax Rules promulgated by the Ruler of Indore. The procedure under the Tax Rules provided for a board of assessing officers. The orders of the board were open to appeal to the Member in charge of Commerce and Industry Department. Thereafter a second appeal was provided to the Government. Rule 17 of the Tax Rules further provided that the power of making rules was vested in the Government and such power shall, except on the first occasion of exercise thereof, be subject to the condition of previous publication. Rule 18 provided that rules made under R. 17 shall be published in the State Gazette and thereafter shall have the force of law. Rule 19 provided that the Member in-charge of Commerce and Industry Department shall have power to make subsidiary rules not inconsistent with the Tax Rules. On May 28, 1948, the Holkar State merged to form the State of Madhya Bharat. On July, 19, 1948, the State of Madhya Bharat acceded to India. Ordinance No. 1 of 1948 was promulgated by the Rajpramukh of the new State of Madhya Bharat to provide for the peace and good government of the State. This Ordinance was superseded by Act 1 of 1948 which came into force on December 13, 1948. Section 4 of the Act provided for the continuance of the existing laws of any covenanting States or of any State which merged in the State of Madhya Bharat until repealed or amended under the provisions of the Act. Section 5 of the Act provided that the Government may by notification published in the Government Gazette make regulations for the peace and good government of all the territories which had already been included in the new State or which may be included in it under the provisions of S. 3 of the Act. Such regulations were to have the force of law unless they were repugnant to any Act or law or Ordinance made by the Rajpramukh, in which case to the extent of their repugnancy they would be void. Further it was provided that such regulations may repeal or amend any law already in force in any State before its administration was taken over or before it was, as the case may be, merged in the new State. Finally the section provided that the right of the Rajpramukh to make Ordinances for the peace and good government of the new State or of the States which may become merged in the said State would remain unaffected.

(2.) In view of the merger of the Holkar State of Madhya Bharat, some of the provisions of the Tax Rules had to be changed to bring them into line with the new set-up. Consequently, on December 28, 1949, the Government of Madhya Bharat issued a notification under R. 18 of the Tax Rules purporting to make rules under R. 17 thereof. These rules made certain amendments in the Tax Rules. It is not necessary to refer to all the amendments as we are concerned here only with three amendments. The first amendment was that instead of the board making the assessment, the assessment was to be made by an assessing officer. The second amendment was that the appeal from the assessing officer was to be heard by an officer appointed from time to time by the Minister-in-charge of the Finance Department in place of the Member-in-charge of Commerce and Industry Department. The third amendment was with respect to second appeals. The amendment provided that instead of the Government hearing second appeals which under the old provision lay both on facts and law, second appeals thereafter were to be heard on a point of law by the High Court. Then came the Constitution of India on January 26, 1950 and the State of Madhya Bharat became one of Part B States. In the Finance Act No. 25 of 1950, which came into force on April 1, 1950 and applied to Madhya Bharat also, a provision was made that any law relating to income-tax or super-tax or tax on profits of business in any Part B State shall cease to have effect except for the purpose of levy, assessment and collection of income-tax and super-tax in respect of any period not included in the previous year for the purpose of assessment under the Income Tax Act, No. XI of 1922 for the year ending on March 31, 1951 or for any subsequent year or , as the case may be, the levy, assessment and collection of the tax on profits of business for any chargeable accounting period ending on or before March 31, 1949. The effect of this was that the Tax Rules came to be repealed from after the accounting year ending on March 31, 1949, and assessment could only be made under the Tax Rules up to the end of the accounting period ending on or before March 31, 1949. A further provision was also made in the Finance Act, 1950, that any reference in any such law to an officer, authority, tribunal or court shall be construed as a reference to the corresponding officer, authority, tribunal or court appointed or constituted under the Income-tax Act. The result of this provision was that even the assessments for the years previous to the accounting year ending on March 31, 1949 could only be made by the corresponding authorities under the Income-tax Act, and the appeals would lie to the corresponding authorities under the Income-tax Act; no levy and assessment could be made by the authorities under the repealed law and no appeal would lie to the authorities or court under that law. It seems however that this provision of the Finance Act as to the authorities competent to make assessments was lost sight of with the result that assessments were made for the years in dispute in the present appeal which are all before the accounting year ending on March 31, 1949, by the authorities under the Tax Rules, as they were before their repeal. Consequently when this mistake was discovered, Parliament passed the Madhya Bharat Taxes on Income (Validation) Act, No. 38 of 1954 (hereinafter referred to as the Validating Act), S. 3 of which provided that "notwithstanding anything contained in the first proviso to sub-s. (1) of S. 13 of the Finance Act, all proceedings taken, assessments made and other acts and things done (including orders made) by or before any officer, authority, tribunal or court acting or purporting to act under the relevant Madhya Bharat law in connection with the levy, assessment and collection of any tax due, under any such law in respect of the relevant period shall be deemed always to have been valid and shall not be called in question on the ground only that such proceedings were not taken, assessments were not made or acts or things were not done by or before the corresponding officer, authority, tribunal or court referred to in the said proviso." Section 4 of the Validating Act further provided that "if immediately before the commencement of this act, any proceedings of the nature referred to in S. 3 are pending before any officer, authority, tribunal or court acting or purporting to act under the relevant Madhya Bharat law such proceedings may, notwithstanding anything contained in the first proviso to sub-s. (1) of S. 13 of the Finance Act, be continued and completed in accordance with the provisions of the relevant Madhya Bharat law, and the provisions of the said proviso shall not apply, and shall be deemed never to have applied, in relation to any such proceedings." What had happened in the present case and in some other cases relating to laws which corresponded to the Indian Income-tax Act was that the authorities under the Tax Rules made assessments in spite of the provisions in the Finance Act by which such assessments should thereafter have been made by the corresponding authorities under the Indian Income-tax Act, and that is why the Validating Act had to be passed.

(3.) The appellant challenged the validity of the assessments made against it under the Tax Rules by a writ petition filed in the Madhya Bharat High Court in 1955, on the following grounds:-