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Thursday, May 14, 2015

In the returns, the appellant claimed benefit of Section 42 of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'). Section 42 is a special provision for deductions in the case of business for prospecting, etc. for mineral oil. It provides for certain additional allowances as are specified in the agreement, details thereof would be taken note of hereinafter. We may, however, point out here itself that such allowances, as stipulated in the Section, are to be specifically mentioned in the agreement as well, which is entered into with the Central Government and it is also necessary that such an agreement has been laid on the Table of each House of Parliament. The Income Tax Authorities extended the benefit of granting deductions under the aforesaid provisions from the year 2001-02 (assessment years onwards) when the appellant commenced commercial production in the aforesaid two oil fields. However, while making assessment for the Assessment Year 2005-06, the Assessing Officer observed that there were no such provisions made in the Agreements which were signed between the Central Government and the appellant and in the absence of such stipulation in the agreement, the appellant was not entitled to the benefit of deductions under Section 42 of the Act.


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 6929 OF 2012

|VERSUS                                          |                         |
|UNION OF INDIA & ORS.                           |.....RESPONDENT(S)       |

                               J U D G M E N T

                 Present  appeal  impugnes  the  judgment  and  order  dated
28.05.2012 passed by the High Court of Delhi, thereby  dismissing  the  writ
petition which  was  filed  by  the  appellant.  It  so  happened  that  the
appellant had entered into two contracts dated 20.02.1995 with the Union  of
India, through Ministry of Petroleum and Natural Gas  (MoPNG)  in  the  year
1992 relating to exploration of certain oil fields which the Union of  India
had  selected  in  Gujarat  and  other  States.  These  contracts  were   on
production sharing basis for Dholka and Wavel Oil Fields  respectively.   It
started the production after  entering  into  the  contract  and  filed  its
income tax return on the income generated from the aforesaid production.  In
the returns, the appellant claimed benefit of Section 42 of the  Income  Tax
Act, 1961 (hereinafter referred to as the 'Act'). Section 42  is  a  special
provision for deductions in the case of business for prospecting,  etc.  for
mineral oil. It provides for certain additional allowances as are  specified
in the agreement, details thereof would be taken  note  of  hereinafter.  We
may, however, point out here itself that such allowances, as  stipulated  in
the Section, are to be specifically mentioned  in  the  agreement  as  well,
which is entered into with the Central Government and it is  also  necessary
that such an agreement  has  been  laid  on  the  Table  of  each  House  of
The Income Tax Authorities  extended  the  benefit  of  granting  deductions
under the aforesaid provisions  from  the  year  2001-02  (assessment  years
onwards)  when  the  appellant  commenced  commercial  production   in   the
aforesaid  two  oil  fields.  However,  while  making  assessment  for   the
Assessment Year 2005-06, the Assessing Officer observed that there  were  no
such provisions made  in  the  Agreements  which  were  signed  between  the
Central Government and the appellant and in the absence of such  stipulation
in the  agreement,  the  appellant  was  not  entitled  to  the  benefit  of
deductions under Section 42 of the Act. Realising that  the  Agreements  did
not contain such a provision, the appellant wrote to the MoPNG stating  that
though there was such an arrangement agreed  to  as  per  the  understanding
between the two parties, non-inclusion thereof was an  inadvertent  omission
in the Contracts that were signed. The MoPNG wrote to  Ministry  of  Finance
(MoF) accepting the aforesaid  omissions  and  requested  the  MoF  to  give
clarification in this behalf. As no clarification came  from  the  MoF,  the
Assessing Officer disallowed the claim for deduction under Section  42(1)(b)
and 42(1)(c) of the  Act.  At  this  stage,  the  appellant  preferred  writ
petition under Article 226 of the Constitution of India in  the  High  Court
of Delhi with the following prayers.
      “Therefore it is most respectfully prayed that this Hon'ble Court  may
be pleased to issue:-

(I)   A writ, direction or order declaring that the petitioner is  entitled,
in  respect  of  the  two  Production  Sharing  Contracts  dated  20.02.1995
executed with the  petitioner  for  the  Dholka  and  Wavel  Oil  Fields  in
Gujarat, to the benefit of the said deductions (set forth in Article  16  of
the MPSC and reproduced in Annexure P1) under Section 42 of  the  Income-Tax
Act, 1961, from the date of these Production Sharing Contracts, as has  been
stated and  declared  by  the  respondent  no.  1  (i.e.,  the  Ministry  of
Petroleum and Natural Gas) in several of its communications;  and  that  the
petitioner is entitled to the said Deductions on the  same  footing  as  all
other contractors who have executed PSCs with the Union of India;
(ii)  A writ, order or direction in the nature of  certiorari  quashing  the
impugned order dated 31.12.2007 issued  by  Respondent  No.  1;  the  notice
dated 28.03.2008 for re-opening of the petitioner's  income-tax  assessments
for the Assessment Years 2001-2002; 2002-2003 and 2003-2004 and  the  notice
dated 01.05.2008 for re-opening the assessment for the Assessment Year 2004-
05; and
(iii) Such other writ order or direction as  this  Hon'ble  Court  may  deem
just and proper in the circumstances of the case  and  in  the  interest  of
justice, be passed in favour of the petitioner.”

This writ petition which has been dismissed by the High Court vide  impugned
judgment dated 28.05.2012 holding that the appellant is not entitled to  any
deductions under Section 42 of the Act in the  absence  of  stipulations  to
this effect in the Contracts signed between the parties.  This  decision  is
the subject matter of challenge before us in the present appeal.
Now, the facts in detail:
                 The Union of India (“UOI”), through  the  MoPNG,  issued  a
Notice Inviting Tenders in August 1992 (“1992  NIT”),  along  with  a  Model
Production Sharing Contract  (“MPSC”),  for  “Development  of  Oil  and  Gas
Fields”  from various companies in relation to some selected oil  fields  in
Gujarat and other States. Article 16 of the above-mentioned  MPSC  contained
a  specific  provision,  which  provided  certain  financial  benefits   and
deductions  in  relation  to  taxes  etc.   that   would   be   allowed   to
contractors/developers, as per the requirements of Section 42 of the Act.
The MoF by its Office Memorandum dated  18.06.1992,  raised  an  issue  that
Section 293-A of the  Act  would  not  apply  to  contracts  of  the  nature
mentioned above, and that benefits under the special provisions  of  Section
42 of the Act would not be available  to  foreign  companies,  such  as  the
appellant, which enter into such contracts with the Central Government.  The
MoPNG by its Office Memorandum, dated 22.06.1992 (“OM”) referred  the  issue
to the Ministry of Law, Justice and  Company  Affairs  specifically  seeking
its opinion on applicability of Section 42 and Section 293-A of the  Act  to
the 1992 NIT and the MPSC.
The Ministry of Law gave its opinion dated 21.07.1992  to  the  effect  that
benefit of both Section 293A and Section 42 should be  extended  to  foreign
companies in order to make their participation in these oil fields viable.
The appellant (along with its erstwhile joint  venture  partner  Larsen  and
Toubro Ltd., whose stake was also subsequently acquired  by  the  appellant)
submitted its bid dated 29.03.1993 in response to the 1992 NIT.
The appellant was allotted the Dholka abnd Wavel Oil Fields in Gujarat  near
Ahmedabad, by the  MoPNG.  Two  production  sharing  contracts,  each  dated
20.02.1995, were executed by the appellant with the  MoPNG  for  Dholka  and
Wavel  Oil  Fields,  respectively  (the  “Two  PSCs”).  According   to   the
appellant, since no amendments to Article 16 of MPSC had been suggested  nor
contemplated b y the Union  of  India,  it  was  (and  is)  the  belief  and
legitimate expectation of the appellant that all the benefits, financial  or
otherwise, offered in Article 16 of the  MPSC  to  the  prospective  bidders
were duly included in the above two PSCs.
From 2001 the appellant commenced commercial production from the Dholka  and
Wavel Oil Fields (delayed on account of the UOI's  delay  in  handling  over
the fields) and availed the benefits of Section 42  Deductions  provided  in
Article 16 of the MPSC, which were duly allowed by the concerned Income  Tax
Officer  at  Ahmedabad.  The  UOI's  share  of  petroleum  profit  was  also
determined in accordance with the assumption that, and on the  consideration
that the appellant was entitled to the benefit of the Section 42  deductions
and the UOI consequently also enjoyed a larger quantum as petroleum  profits
that  it  otherwise  would  have.  The  accounts  and  calculations  of  the
appellant claiming the Section 42 deductions and passing on the  benefit  to
the UOI in the form of an increased quantum of petroleum profit in terms  of
the two PSCs , were duly audited and approved  by  the  MoPNG's   government
While the things proceeded in the aforesaid manner, it so  happened  in  the
case of some other Production Sharing Contracts, which did not  specifically
contain the fiscal benefits and the deduction envisaged  by  Article  16  of
the MPSC, the Income Tax Authorities questioned  the  basis  on  which  such
assesses had claimed deduction/ allowances under Section 42.  This  move  of
the Income Tax Authorities prompted the MoPNG to write OM  dated  17.06.2005
to the MoF, Department of Revenue to  clarify  to  the  relevant  Income-Tax
Authorities that the provisions of Section 42 of the  Income-Tax  Act  would
be applicable to all PSCs, including those thirteen (13)  PSCs  executed  by
the Union of India, which did not expressly contain  these  provisions,  for
the purpose of computing profits and gains, after allowing  the  Section  42
deductions. The appellant's two PSCs are  among  these  thirteen  (13)  PSCs
referred to by the MoPNG in  this Office Memorandum. The OM  noted  that  it
would not be equitable and fair if Section  42  deductions  were  denied  in
respect of these 13 PSCs.
Since the entire dispute pertains to deductions  under  Section  42  of  the
Act, at this stage we reproduce the said provisions hereunder:
“42.  Special  provision  for  deductions  in  the  case  of  business   for
prospecting, etc., for mineral oil.—[(1)] For the purpose of  computing  the
profits or gains of any  business  consisting  of  the  prospecting  for  or
extraction or production of mineral oils in relation to  which  the  Central
Government  has  entered  into  an  agreement  with  any  person   for   the
association or participation 90[of the  Central  Government  or  any  person
authorised by it in such business] (which agreement has  been  laid  on  the
Table of each House of Parliament), there shall be made in lieu  of,  or  in
addition to, the allowances admissible under this Act,  such  allowances  as
are specified in the agreement in relation—

(a)   to expenditure by way of infructuous or abortive exploration  expenses
in respect of any area surrendered prior  to  the  beginning  of  commercial
production by the assessee;

(b)   after the beginning of commercial production, to expenditure  incurred
by the assessee, whether before or  after  such  commercial  production,  in
respect of drilling or exploration activities or services or in  respect  of
physical assets used in that connection, except assets  on  which  allowance
for depreciation is admissible under Section 32:
                 [Provided that in relation to any  agreement  entered  into
after the 31st day of March, 1981, this clause shall have effect subject  to
the modification  that  the  words  and  figures  "except  assets  on  which
allowance  for  depreciation  is  admissible  under  Section  32"  had  been
omitted; and]

(c)   to the depletion of mineral oil in the mining area in respect  of  the
assessment  year  relevant  to  the  previous  year  in   which   commercial
production is begun and  for  such  succeeding  year  or  years  as  may  be
specified in the agreement;

      and  such  allowances  shall  be  computed  and  made  in  the  manner
specified in the agreement, the other provisions of this  Act  being  deemed
for this purpose to have been modified to the extent     necessary  to  give
effect to the terms of the agreement:

      [(2) Where the business of the assessee consisting of the  prospecting
for or extraction or production of petroleum and natural gas is  transferred
wholly or partly  or  any  interest  in  such  business  is  transferred  in
accordance with the agreement referred to in  sub-section  (1),  subject  to
the provisions of the said agreement and where the proceeds of the  transfer
(so far as they consist of capital sums)—
      (a)  are less than the expenditure  incurred  remaining  unallowed,  a
deduction equal to such expenditure remaining unallowed, as reduced  by  the
proceeds of transfer, shall be allowed in respect of the  previous  year  in
which such business or interest, as the case may be, is transferred;
 (b)    exceed the amount of the expenditure incurred  remaining  unallowed,
so much of the  excess  as  does  not  exceed  the  difference  between  the
expenditure incurred in connection with the business or to  obtain  interest
therein and the amount of such expenditure  remaining  unallowed,  shall  be
chargeable to income-tax as  profits  and  gains  of  the  business  in  the
previous year in which the business or interest therein, whether  wholly  or
partly, had been transferred:

            Provided that in a case where the provisions of this  clause  do
not apply, the deduction to be allowed for  expenditure  incurred  remaining
unallowed shall be arrived at by subtracting the proceeds  of  transfer  (so
far as  they  consist  of  capital  sums)  from  the  expenditure  remaining
      Explanation.—Where the  business  or  interest  in  such  business  is
transferred in a previous year in which such  business  carried  on  by  the
assessee is no longer in existence, the  provisions  of  this  clause  shall
apply as if the business is in existence in that previous year;

(c) are not less than the  amount  of  the  expenditure  incurred  remaining
unallowed, no deduction for such expenditure shall be allowed in respect  of
the previous year in which the business or  interest  in  such  business  is
transferred or in respect of any subsequent year or years:
      [Provided that where in a scheme  of  amalgamation  or  demerger,  the
amalgamating or the  demerged  company  sells  or  otherwise  transfers  the
business to the amalgamated  or  the  resulting  company  (being  an  Indian
company), the provisions of this sub-section—
(i) shall not apply  in  the  case  of  the  amalgamating  or  the  demerged
company; and
(ii) shall, as far as may be, apply to  the  amalgamated  or  the  resulting
company as they would have applied  to  the  amalgamating  or  the  demerged
company if the latter had not transferred the business or  interest  in  the
            [Explanation.—For the purposes of this  section,  "mineral  oil"
includes petroleum and natural gas.]”

Meanwhile, the Income-Tax Officer, Ward I(3)  (hereinafter  referred  to  as
the “ITO Wd I (3)) issued a notice dated 09.06.2006 under  Section  143  (2)
of the Income Tax Act to the appellant for  the  Assessment  Year  2005-2006
and asked the appellant to justify its claim for the Section 42  deductions.
The ITO Wd I(3) also issued another notice to the  appellant  under  Section
142(1) of the Income-Tax Act, seeking various details and data  relevant  to
the said Assessment Year. The case was later transferred  to  the  Assistant
Director of Income-Tax (International  Taxation),  Ahmedabad  (“ADIT”).  The
ADIT also raised the question of applicability of the Section 42  deductions
to the two PSCs executed by the appellant for the reason that such a  clause
was not specifically included in these two PSCs.
A Joint Secretary of the  MoPNG  vide  his  communication  dated  11.04.2007
wrote to the MoF specifically admitting that in  11  PSCs,  a  reference  to
Section 42 deductions had been omitted by  oversight.  It  was  also  stated
that contracts signed in respect of other fields at the same time  contained
the provision for Section 42 deductions. It  was  specifically  stated  that
“Petroleum operations are a high risk business and it may not  be  equitable
and fair if  companies  are  not  allowed  to  claim  allowances  for  their
expenditure. Besides it would be difficult to  justify  different  standards
for  different  PSCs  signed  under  one  regime.”  (emphasis  supplied).  A
clarification was also sought from the MoF to the revenue  authorities  that
the Section 42  deductions  should  be  uniformly  granted  irrespective  of
whether the PSCs contained the relevant clause or not. It  is  pertinent  to
note that in this letter, the appellant was  listed by the MoPNG  as  having
the provision for Section 42  deductions  in  its  two  PSCs,  which  though
factually incorrect, again underscores the  bona  fide  belief  of  the  UOI
through the MoPNG that  the  appellant  had  been  granted  the  Section  42
deductions in respect of its two PSCs.
However, MoF did not issue any such clarification. In the absence of such  a
clarification from the Ministry of Finance, the ADIT disallowed  appellant's
claim for deduction under Section  42(1)(b)  and  Section  42(1)(c)  of  the
Income  Tax  Act,  made  in  the  appellant's  Income-Tax  Return  for   the
Assessment Year 2005-2006, on the ground that a specific  reference  to  the
Section  42  deduction  has  not  been  made3  expressly  in  the  two  PSCs
(hereinafter the “ADIT's Order”). As a result,  the  ADIT  issued  a  demand
notice under Section 156 of the Income Tax Act to the  appellant,  demanding
payment of Rs. 1,24,45,509.00 (rupees one  crore  twenty  four  lakhs  forty
five thousand five  hundred  and  nine  only)  by  way  of  additional  tax,
interest and penalty.  The appellant preferred an appeal against the  ADIT's
order before the relevant Commissioner of Income Tax (Appeals) in  Ahmedabad
and deposited the sum  of  Rs.40,00,000/-  (rupees  forty  lakhs  only),  as
required by ADIT, while himself staying  the  demand  raised  by  Assessment
Order.  This appeal has been dismissed by the  Commissioner  of  Income  Tax
(Appeals) and a  further  appeal  is  now  pending  before  the  Income  Tax
Appellate Tribunal.
In the meanwhile, on 24.12.2007, the appellant required the Union of  India,
through   the   MoPNG   and   the   MoF,    to    issue    an    appropriate
clarification/amendment with respect to  the  two  PSCs  executed  with  the
appellant, taking a stance that it was always the intention of the Union  of
India, at all stages, to give the benefits of Section 42 Deductions  of  the
Income Tax Act, read with Article 16 of the MPSC, to all  the  entities  who
had entered into PSCs with it, including the appellant with  the  plea  that
the non-inclusion of  this  provision  in  the  two  PSCs  signed  with  the
appellant was a clerical error/oversight.  This  was  followed  by  reminder
dated 19.3.2008 again requesting the Union of India, through the  MoPNG  and
the MoF, to issue an appropriate clarification/amendment with respect o  the
two PSCs executed with the appellant.
No such clarification came forward.  On the  other  hand,  the  ADIT  issued
notice dated 28.3.2008 to the appellant under Section 148 of the Income  Tax
Act for reopening the appellant's Income  Tax  Returns  for  the  Assessment
Years 2001-2002, 2002-2003, 2003-2004 and 2004-2005.  At this juncture,  the
Secretary, MoPNG, wrote communication dated 28.04.2008 to the  MoF  pointing
about the said accidental omissions again in the  contract.   The  MoF  was,
accordingly, requested to extend the benefits of Section  42  Deductions  to
the 13 PSCs (including the appellant's two PSCs)  in  line  with  all  other
signed PSCs.
As, in the meantime, the ADIT was going ahead with the proceedings  pursuant
to the  notice  under  Section  148  of  the  Act  deciding  to  reopen  the
assessment of the appellant in respect of assessment years 2001-02 to  2004-
05, the appellant sent one more representation dated 23.06.2008 on the  same
lines on which it had been making the similar  representations  earlier.  No
positive  response  was,  however,  received.  Exasperated,  the   appellant
approached the High Court by way of writ petition under Article 226  of  the
Constitution. Counter affidavits to the  writ  petition  was  filed  by  the
respondent  –  Authorities  taking  preliminary  objection   pertaining   to
territorial jurisdiction of the High Court of Delhi  and  also  raising  the
ground of alternate remedies available in the law  in  the  form  of  appeal
before  the  ITAT  which  had  already  been  preferred  by  the  appellant.
Rejoinder thereto was filed by the appellant.  Thereafter,  another  counter
affidavit on merits was filed by the  respondent  no.  1.  In  this  counter
affidavit, stand was taken by the respondents that MPSC would not  apply  to
appellant's  two  PSCs.  The  appellant  filed  rejoinder  to  this  counter
affidavit controverting  the  stand  which  was  taken  by  the  respondent.
Thereafter, the respondent filed  another  supplementary  affidavit  stating
that MoF had not concurred with  the  proposal  to  extend  the  benefit  of
deductions under Section 42 of the  Act  vide  MoF  O.M.  dated  11.11.2009.
Short affidavits were also filed by MoF as well as ADIT taking the  position
that the appellant was not entitled to benefit of Section  42  of  the  Act.
Rejoinder to these short affidavits was filed by  the  appellant.  Rejoinder
was also filed to the  supplementary  affidavit  which  has  been  filed  by
respondent no. 1.  The  appellant  also  filed  additional  affidavit  dated
28.02.2012 giving details of other small sized discovered oil  fields  PSCs,
who were awarded  contracts  under  1992  NIT,  submitting  that  they  were
identical to the appellant and in their  case  clause  was  inserted  giving
benefit under Section 42 of the Act. It was pleaded  that  since  they  were
identically situated as the appellant herein, denying such a benefit to  the
appellant amounted to hostile discrimination. By another affidavit filed  by
the appellant, it also tried  to  demonstrate  that  respondent  no.  1  had
accepted the calculation of petroleum profits on  the  assumption  that  the
deduction under Section 42 was available to  the  appellant;  otherwise  the
appellant would have enjoyed increased profits . It was, thus, sought to  be
demonstrated that even while profit sharing, shares were calculated  keeping
in view the deductions under Section 42 of the  Act  thereby  giving  better
and increased profit sharing to the Government as well.
The matter was ultimately heard by the High Court which  has  dismissed  the
writ petition by passing detailed judgment on 28.05.2012. Before we come  to
the  arguments  of  the  appellant  challenging  the  correctness  of   this
judgment, it may be appropriate to take note of  reasons   which  have  been
given by the High Court in support of the view it has taken.
The High Court took  note  of  the  basic  and  primary  contention  of  the
appellant which was that there was a clear understanding between  the  MoPNG
and the appellant that in the contract to  be  signed  between  the  parties
benefits under Section 42 of the Act would be admissible. The NIT issued  by
the Government was based on this basic understanding but due to  inadvertent
oversight and error on the  part  of  the  MoPNG  the  contract,  which  was
ultimately signed, omitted to include such a clause. Therefore,  on  account
of mistake of the Ministry, which even it  admitted  in  its  communications
when the dispute regarding admissibility of deduction under  Section  42  of
the Act arose, the appellant should not be allowed to suffer. More so,  when
it was not responsible for the said error.
It may be pertinent to point out that the High  Court  did  not  accept  the
preliminary objections raised by the  respondent  and  after  repelling  the
same, it adverted to the subject matter  of  the  writ  petitions.   On  the
merits of the issue involved, the High  Court  formulated  two  questions  .
These are:
“(1)  Whether benefit under Section 42 of the Act was envisaged in the  1992
NIT and in the PSCs, but due to oversight  or  mistake,  the  same  was  not
included and mentioned in the  written  contract,  and  if  so,  the  effect
(2)  If the question is decided in  favour  of  the  appellant,  the  second
aspect is whether a direction can be  issued  for  grant  of  benefit  under
Section 42 of the Act to the appellant, with a further  direction  that  the
contract should be laid before the Parliament after incorporating  the  said

Dealing with the first  question,  High  Court  rejected  the  plea  of  the
appellant that 1992 NIT included and referred to the MPSC as  incorrect.  It
is pointed out that the 1992 NIT did not refer  to  the  MPSC  and  did  not
stipulate that MPSC shall form part of the tender documents. It  is  further
stated by the High Court that in 1992 NII, there was no  reference  to  MPSC
or that the terms and conditions of the MPSC shall be included in, or  be  a
part of, the PSCs. It is also observed that there is no document  or  clause
in the bid given by the appellant under the 1992 NIT to the effect that  the
MPSC or clause 16.2 of the same would be applicable and should be a part  of
the PSCs. In the tender submitted by the appellant  there  was  no  specific
stipulation to include any clause with regard to the benefit  under  Section
42 of the Act. The High Court has further observed  that  written  contracts
were signed between the appellant and MoPNG in  the  name  of  President  on
20.,02.1995.  Clause  15  of  these  contracts  which  pertain  to   “Taxes,
Royalties,  Rentals,  Customs  duties  etc.”  though  mentions   about   the
applicability of fiscal, there is no reference to Section 42 of the  Act  in
this Clause.
  The  High  Court  further  pointed  out  that  there  was  no  letter   or
correspondence written by the appellant from 1995 onwards stating that  non-
inclusion of Section 42 benefit was  due  to  oversight.  Insofar  as  three
letters written by the MoPNG, namely, letters dated  17-06-2005,  11-04-2007
and 28-04-2008 are concerned wherein this Ministry admitted that  there  was
an unintentional lapse and omission in not incorporating  the  provision  of
admissible deduction under Section  42  of  the  Act,  the  High  Court  has
brushed aside  these  communications  as  inter-ministerial  correspondence.
These letters were apparently written on the request  of  the  appellant  or
NIKO  Resources  Limited.  It  is  further  mentioned  that  these  are  not
contemporaneous letters written at the time when PSCs were signed.
The High Court has also  commented  that  though  in  these  letters  it  is
mentioned that Section 42 deductions were omitted  by  “oversight”  in  fact
there was no such oversight in as much as the MoPNG itself  in  its  counter
affidavit has specifically  stated  that  no  such  benefit  was  envisaged,
considered or granted  at  the  time  when  the  PSCs  were  negotiated  and
awarded. Averments made in this behalf in the  counter  affidavit  filed  by
the MoPNG are extensively quoted. To verify this position,  the  High  Court
also examined and went through the original files  relating  to  preparation
and finalisation of tender documents and  made  following  remarks  in  this
“In order to verify and examine the correct factual position, we  had  asked
the respondent Ministry of Petroleum and oversight in as much as  the  MoPNG
itself in its  counter  affidavit  has  specifically  stated  that  no  such
benefit was envisaged, considered or granted at  the  time  Natural  Gas  to
produce the original files  relating  to  preparation  and  finalization  of
tender documents.  They were produced before us on 21st February, 2012.   We
examined  the  original  records  and  found  that  under  the   terms   and
conditions, as well as in the notes, no benefit under Section 42 of the  Act
was envisaged  or  was  required  to  be  granted.   We  also  recorded  the
statement of  the  learned  Additional  Solicitor  General  that  the  three
letters mentioned above were factually incorrect and,  therefore,  no  legal
right on the basis of the letters accrues/arises.   Thus,  no  statement  or
promise,  that  advantage  under  Section  42  would  be  available  to  the
successful bidder, was promised or made.”

 Insofar as plea of discrimination  between  13  PSCs  (which  included  the
appellant), who are not given the benefit of Section 42 of  the  Act  vis-a-
vis other PSCs where such a benefit has been extended, the  High  Court  has
accepted the explanation put forth by the respondents  to  the  effect  that
these 13 PSCs formed a different class in as much as their contract  was  in
respect  of  small  oil  fields  which  had  already  been  discovered  and,
therefore, the risk factor was less.  On the other hand, other PSCs were  in
respect of undiscovered  oil  fields  and  for  this  reason  benefit  under
Section 42 had been granted to them.
On the aforesaid reasoning, the High  Court  concluded  that  appellant  was
fully aware of Clause 16.2 of MPSC which  specifically  makes  reference  to
benefit under Section 42 of the Act, but did not advert to and refer to  the
same in their tender bid and did not ask for  this  benefit.  Therefore,  it
was not possible to accept the contention  of  the  appellant  that  benefit
under Section 42 of the Act was inadvertently missed out, or due to  an  act
of oversight, not included in the contract. On this finding, the High  Court
chose not to examine the second issue. Post by it in para 9 of the  impugned
judgment and noted by us above.
We would also like to mention that in the penultimate para, the  High  Court
has expressed its  displeasure  and  anguish  over  the  averments  made  by
respondent  no.  1  in  the  additional  affidavit  dated  23-03-2012  where
respondent no. 1 even denied  the  fact  that  petroleum  profits  were  not
shared  between  the  Government  and  the  appellant   after   making   the
calculations with reference to benefit under Section  42  of  the  Act.   In
letter dated 11.11.2009 written by the MoF, Department of Revenue this  fact
is specifically admitted and, therefore, respondent no. 1 should  have  been
careful in making such averments in  the  said  additional  affidavit  which
were contrary to the record, even if it was uncomfortable to respondent  no.
Mr. Ganesh, learned senior counsel appearing  for  the  appellant  submitted
that the High Court had failed to appreciate and  cognise  the  basic  issue
which had arisen in the instant case about the admissibility of the  benefit
of Section 42 of the Act in respect  of  two  production  sharing  contracts
(PSCs) between the appellant and  the  Government.  He  submitted  that  the
claim for the benefit of the  aforesaid  provision  was  predicated  on  the
following grounds:
(a)  The Ministry of Petroleum & Natural Gas (MoPNG) had  invited  bids  for
the said oilfields on the basis  of  a  Model  Production  Sharing  Contract
(MPSC) which specifically and unequivocally provided  that  the  benefit  of
Section 42 would be granted.
(b)   The appellant's bids for the  said  two  oilfields  were  clearly  and
indisputably submitted on  the  footing  that  the  MPSC  would  govern  the
contract between the parties.  In fact,  in  its  bid,  the  appellant  only
referred to those clauses of the MPSC  which  the  appellant  wanted  to  be
slightly modified, to which the Government  had  no  objection.   Thus,  the
appellant's bids were on the basis of the MPSC which  provided  the  benefit
of Section 42.
(c)   Respondent no. 1 itself admitted that the contract was  entered  into,
keeping  in  view  the  stipulations/terms  contained  in  the   MPSC   and,
therefore, MPSC had to be read into the contract.  It was also  argued  that
these facts were specifically confirmed by respondent no. 1  itself  in  its
three letters dated  17-06-2005, 11-04-2007 and 28-04-2008.
(d)    It was, thus, argued that as held in the case of  Godhra  Electricity
Co. Ltd. And Another v. State of Gujarat[1], it is the mutual  understanding
of the parties to a contract which  determines  the  construction  that  the
court will place on it and this principle squarely applied  in  the  present
(e)   The accounts of the venture were drawn up  on  the  footing  that  the
deductions under Sect5ion 42  were  available  and  that,  accordingly,  the
Income Tax liability would stand reduced.  On this footing, a  significantly
higher amount was computed as the profit share payable to the Government  of
India under the PSC, which was received by the Government year after year.
(f)   The reference made by MoPNG to the Ministry of Law in June/ July  1992
and the written opinion given by the Ministry  of  Law  also  by  themselves
clearly established that the intention  of  the  Government  from  the  very
beginning was to grant the benefit of Section 42.
(g)   The I.T. Department itself granted the  deductions  under  Section  42
for several years right upto Assessment Year 2004-05 and then  suddenly  and
unaccountably changed its mind and turned a somersault.
(h)   The benefit of Section 42 was,  in  fact,  granted  to  several  other
small-sized discovered oilfields.  The appellant  had  filed  an  additional
affidavit dated 28.02.2012 giving particulars of at least  11  other  small-
sized discovered oilfields to which benefit of Section 42 was  given.   Even
though the contents of the affidavit  remained  untraversed,  the  same  has
been completely disregarded by the High Court.”
Relying on the aforesaid material on which Mr. Ganesh laid  great  emphasis,
his plea was that the High Court did not consider the aforesaid  aspects  in
its right perspective and arrived at a wrong finding that the appellant  did
not ask for the benefit of Section 42 of the Act.
He further submitted that strong reliance was placed by the  High  Court  on
the contents of a file which was produced by respondent no.  1  relating  to
the preparation of tender documents. However, this file  was  not  shown  to
the appellant or its  counsel  and  the  appellant  was,  thus,  denied  any
opportunity of dealing with the same. He pointed out that the appellant  had
specifically filed an application dated 28-02-2012 praying  that  the  Court
should not consider the contents of  the  said  file  or  alternatively  the
copies of the documents in the file  be  supplied  to  the  counsel  of  the
appellant. On this application, the Court had  made  observation  on  12.03-
2012 to the effect that  it was not going  to  place  any  reliance  on  the
contents of the  file  and  with  these  observations  the  application  was
dismissed. However, in the impugned judgment, the High Court has rested  its
conclusion on the basis of some contents in the file. He  further  submitted
that the Court should not have disregarded the  letters  of  the  respondent
no. 1 on the  ground  that  they  were  not  contemporaneous   letters.  His
submission was that right upto the year 2005, the benefit of Section 42  was
extended to the appellant and, therefore, there  was  no  occasion  for  the
appellant to approach respondent no. 1 to ask for such a clarification.   He
further submitted that reliance placed by the High Court  on  certain  paras
of the counter affidavit of respondent no. 1 was totally erroneous  as  such
a stand taken in the counter affidavit was contrary  to  the  letters  which
were addressed by the respondent no. 1 itself to the MoF  but  according  to
him, the manner in which the plea of discrimination was dealt  with  by  the
High Court was also erroneous  ignoring  the  specific  plea  taken  by  the
appellant in its additional affidavit dated  28-02-2012  giving  particulars
of a number of small-sized oil fields to which Section 42 benefit was  given
and the Government had not controverted those averments. He  submitted  that
apart from the plea, 13 oil fields (which included the appellant) all  other
oil fields, whether large, medium or small sized, and whether discovered  or
exploratory, were given the benefit of Section 42  of  the  Act.  Therefore,
the respondents had acted in a grossly arbitrary and discriminatory manner.
Last submission of Mr. Ganesh was that the issue regarding  Mandamus  to  be
issued to the respondents  for  amending  the  contract  and  including  the
clause for granting the benefit of Section 42 of the Act was not  even  gone
into, though, it was specifically argued. He  further  submitted  that  when
the other contracting parties,  namely,  MoPNG  specifically  admitted  that
this provision was left our inadvertently, the Court  should  have  given  a
direction  for  amendment  of  the  Contract.   In  order  to  support   his
submission that such a  direction  can  be  issued  by  the  High  Court  in
exercise of its powers under Article 226 of the  Constitution,  he  referred
to the following judgments:
      (i)   K.N. Guruswamy Vs. State of Mysore[2]
      (ii)  GSFC Vs. Lotus Hotels Ltd.[3]
      (iii) Kumari Shrilekha Vidyarthi Vs. State of U.P.[4]

      (iv)  ABL International Ltd. Vs. Export Credit Guarantee Corpn.[5]
Mr. Arijit Prasad, Advocate, who appeared for all the respondents  countered
the aforesaid submissions emphatically and  passionately.   He  argued  that
insofar as income tax department is concerned it could  extend  the  benefit
of deductions  admissible  under  Section  42  of  the  Act  only  when  the
assessee,  namely,  the  appellant  in  the  instant  case,  fulfilled   the
conditions  for  such  deductions  stipulated  in  that  Section.  For  this
purpose, the income tax authorities were supposed  to  look  into  the  PSCs
only and as far as the contracts between the Government  and  the  appellant
are concerned, admittedly there was no such stipulation therein.  Nor  these
contracts were placed before both the House of  Parliament.  Therefore,  the
order of the  Assessing  Authorities  in  tune  with  legal  provisions.  He
further submitted that in any case the appeal of the appellant  was  pending
before the ITAT and it was for the ITAT to go into the submissions  made  by
the appellants on the admissibility of deduction under  Section  42  of  the
In respect of the three letters which were written by the respondent no.  1,
his submission was that no reliance could have been placed on those  letters
and the matter had to be examined on the basis of  record.  The  High  Court
had, for this purpose, examined the original files on the basis of which  it
was clearly found that the averments made in  the  three  letters  ware  not
born out of records.
He also made detailed submissions to support the findings of the High  Court
that there was no inadvertent omission in failing to  make  any  stipulation
with regard to extending the benefits of Section 42 of the Act  and  on  the
contrary  insofar  as  the  appellant  and  12  other  similar  parties  are
concerned, there was a deliberate decision not to extend such a benefit.  He
also argued that in any case plea of discrimination could not  be  taken  in
the matters of contract in private law field.
Reacting  to  the  relief  of  mandamus  sought  by  the  appellant  seeking
directions against Respondent No. 1 to amend  the  contract,  his  plea  was
that such a prayer, in the realm of  contractual  relationship  between  the
parties, was inadmissible. He  pleaded  that  PSCs  are  in  the  nature  of
contract agreed to be between two independent contracting parties  and  each
of the PSCs are distinct from the other and is not a copy of MPSC.  He  also
pointed out that before signing the  PSC, the approval  of  the  Cabinet  is
obtained, which reflects that the PSCs as submitted to the Cabinet, has  the
approval of  one  of  the  contracting  party,  i.e.  Government  of  India.
Therefore, the appellant could not claim to be oblivious of  the  provisions
of law or the contents of the contract  at  the  time  of  signing  and  was
precluded from seeking retrospective amendment as a matter of right when  no
such right is conferred under the contract. In  support  of  his  submission
that the doctrine  of  fairness  and  reasonableness  applies  only  in  the
exercise of statutory or administrative actions of a State and  not  in  the
exercise of a contractual obligation and that  the  issues  arising  out  of
contractual  matters will have to be decided on the  basis  of  the  law  of
contract and not on the basis of the administrative  law,   he  referred  to
and relied upon the judgments  in  Pradeep  Kumar  Sharma  v.  U.P.  Finance
Corporation[6] and A.B.L. International Limited (supra).
From the reading of the writ petition filed in the High Court, the  impugned
judgment rendered by the High Court thereupon, and  also  having  regard  to
the arguments advanced before us which have already been taken note  of,  it
is apparent that the fulcrum of the issue, which has to be  focused  and  to
be answered, pertains to the benefit of  the  deductions  permissible  under
Section 42 of the Act. In fact, as is clear from the  prayers  made  by  the
appellant  in  the  writ  petition,  the  very  first  direction  which  the
appellant sought was to declare that  the  appellant  is  entitled  to  such
deductions in terms of the two PSCs  dated  20-02-1995.  Incidental  issues,
while deciding the aforesaid primary  issue,  which  arises  relate  to  the
construction of the terms of the said  PSCs  and  also  the  nature  of  the
contracts which the parties intended  to.   Another  issue  relates  to  the
jurisdiction of the High Court  under Article 226  of  the  Constitution  to
pass Mandamus for amending the PSCs. All these issues are formulated in  the
precise form hereunder:
(i)   Whether in  terms  of  the  provisions  contained  in  two  Production
Sharing Contracts (PSCs) dated 20-02-1995  executed  between  the  appellant
and the Central Government, appellant is entitled to the special  allowances
stipulated under Section 42 of the Act?
(ii)  Whether Model Production Sharing Contract (MPSC) can be read  as  part
of and incorporated in the PSCs?
(iii) Whether there was  any  intention  between  the  contracting  parties,
namely, the MoPNG and the appellant for giving benefit of  deductions  under
Section 42 of the Act?
(iv)  If so, whether non-inclusion of such a provision in the  contract  can
be treated as accidental and unintentional omission.
(v)   If the answer to question no. (iv)  is  in  the  affirmative,  whether
mandamus can be issued by the Court to the parties  to  amend  the  contract
and incorporate provisions to this effect?
We would now proceed to answer these questions seriatum.
Answer to question No. (i) – First and foremost aspect which has to be  kept
in mind while answering this issue is that the Income Tax Authorities  while
making assessment of income of any assessee have to apply the provisions  of
the Income Tax Act and make  assessment  accordingly.  Translating  this  as
general proposition contextually, what we  intend  to  convey  is  that  the
Assessing Officer is supposed to focus on Section  42  of  the  Act  on  the
basis of which he is to decide as to whether  deductions  mentioned  in  the
said provision  are  admissible  to  the  assessee  who  is  claiming  those
deductions. In other words, the Assessing Officer is supposed  to  find  out
as to whether the assessee fulfills the eligibility conditions in  the  said
provision to be entitled to such deductions.   We  have  already  reproduced
the  language  of  Section  42,  which  deals  with  special  provisions  of
deductions in the case of business for prospecting, etc.  for  mineral  oil.
Since, the appellant herein, in its income tax returns  for  the  assessment
year in question, i.e., Assessment Year 2005-06, had claimed the  deductions
mentioned in Section 42(1)(b) and (c) of the Act, we  should  take  note  of
the nature of these deductions. Section 42(1)(b) provides for deductions  of
expenditure incurred in respect of drilling  or  exploration  activities  or
services or in respect of physical assets used in  that  connection,  except
for those assets on which allowance for  depreciation  is  admissible  under
Section 32.   Section  42(1)(c)  speaks  of  allowances  pertaining  to  the
depletion of mineral oil in the mining area.  In order  to  be  eligible  to
the deductions, certain conditions  are  stipulated  in  this  very  section
which have to be satisfied by the assessees.  As is clear from  the  reading
of this Section, these conditions are as under:
(a)  it grants such special allowances  to  those  assessees  who  carry  on
business in association with the  Central  Government  or  with  any  person
authorized by it;
(b)  business should relate to  prospecting  for,  extracting  or  producing
mineral oils, petroleum or natural gas;
(c)  there has to be an agreement in writing between the Central  Government
and the assessees in this behalf;
(d)  it is also a requirement that such an agreement has been  laid  on  the
Table of each House of Parliament;
(e)  the allowances which are claimed are to  be  necessarily  specified  in
the agreement entered into between the two contracting parties; and
(f)  allowances are to be computed and made in the manner specified  in  the
From the nature of allowances specified in this provision, it is clear  that
such allowances are otherwise inadmissible on general principles,  for  e.g.
allowances relating to diminution or exhaustion of  wasting  capital  assets
or allowances in respect of  expenditure  which  would  be  regarded  as  on
capital account on the ground that it brings an asset  of  enduring  benefit
into existence or constitutes initial expenditure  incurred  in  setting  up
the profit earning machinery in motion.  It is for this reason this  Section
itself clarifies that the provisions of this Act would  be  deemed  to  have
been modified to the extent necessary to give effect to  the  terms  of  the
agreement, as otherwise, the other provisions of the Act  specifically  deny
such deductions. A fortiorari, the PSC  entered  into  between  the  parties
becomes an independent accounting regime and  its  provisions  prevail  over
generally accepted principles of accounting that are used  for  ascertaining
taxable income (See – Commissioner of Income Tax, Dehradun & Anr.  v.  Enron
Oil and Gas India Limited[7]).  Thus, by virtue of this Section, it  is  the
PSC which  governs  the  field  as  without  it,  such  deductions  are  not
permissible under the Act.  IF PSC also does  not  contain  any  stipulation
providing for such allowances, the Assessing  Officer  would  be  unable  to
give the benefit of these deductions to the assesee.
We would also like to point out, at this juncture itself,  that  this  Court
held in CIT v. Enron Expat Service Inc.[8]  that  the  mere  fact  that  the
assessee had offered to pay tax under Section 44 (BB) of the Act in some  of
the earlier years will not operate as an estoppel to claim  the  benefit  of
Double Taxation Avoidance Agreement  (DTAA),  where  the  assessee  operates
under the same PSC which was before the Court. While holding so,  the  Court
had followed its earlier judgment in the case of Enron  Oil  and  Gas  India
Limited (Supra).
In the present case, it is an admitted fact  that  conditions  mentioned  in
Section 42 of the Act are not fulfilled. In the two PSCs,  no  provision  is
made for making admissible the aforesaid allowances to the assessee.  It  is
obvious  that  the  Assessing  Officer  could   not   have   granted   these
allowances/deductions to the assessee in the absence of  such  stipulations,
a mandatory requirement, in the PSCs.
The appellant is conscious of this position.  It  is  for  this  reason  the
attempt of the appellant was  to  read  the  provisions  of  MPSC  into  the
agreement.  That bring us to the second issue.
Answer to question no. (ii) -  Endeavour of Mr. Ganesh, on this aspect,  was
to show that the bids were invited on the basis of terms stated in the  MPSC
which specifically mentioned about deductions under Section 42 of  the  Act.
He also endeavored to demonstrate that thee appellant had submitted its  bid
keeping  in view such  a  categorical  stipulation  in  the  MPSC.  He  also
pointed out that on MPSC, opinion of Law Ministry was  solicited  vide  Memo
dated 22-06-1992 and that the Ministry of Law gave its opinion dated  21-07-
1997 opining that benefit of both Sections 293(A) and Section 42 of the  Act
should be  extended  to  the  foreign  companies  in  order  to  make  their
participation in these oil fields viable.  As  per  the  appellant,  it  was
also made abundantly clear by the Ministry of Law that it  was  in  relation
to  “foreign  companies  to  be  engaged  in  exploration,  development  and
production of oil ion small sized oil and  gas  fields  under  the  proposed
Production Sharing Contract”, thus, drawing no  distinction  between  fields
to be explored  and  those  already  discovered  and  also  making  specific
reference to the MPSC. Taking sustenance  from  the  aforesaid  material,  a
passionate plea was made by Mr. Ganesh to read the provisions of Section  42
contained in MPSC, as opined by the Ministry of Law,  into  the  PSCs  which
were ultimately signed between the parties.
In order to appreciate this argument, we shall have to traverse through  the
PSCs dated 20-02-1995 which were ultimately signed  between  the  Government
and the appellant. We would like to mention here  that  when  this  argument
was being advanced by the learned  senior  counsel  for  the  appellant  the
Court asked him to produce the  copy  of  PSCs,  which  were  otherwise  not
brought on the record as the Court wanted to find out as  to  whether  there
was any such intention expressed in the agreement,  namely,  to  incorporate
the provisions of MPSC or the correspondence exchanged between  the  parties
earlier to the signing of this agreement. On our asking, the  appellant  has
placed on record the  copy of these PSCs. On  going  through  the  same,  we
find that intention expressed is just to the contrary.  It  is  rather  made
crystal clear in the agreement that this agreement is  the  sole  repository
of the terms on which it is signed and nothing else  would  be  looked  into
for this purpose.  It is so  reflected  in  the  following  clauses  in  the
“(5)  The Government has  agreed  to  enter  into  this  Contract  with  the
Companies with respect to the area referred to in Appendices A & B  of  this
Contract on the terms and conditions herein set forth.”

Article 1 – In this Contract, unless the  context  requires  otherwise,  the
following terms shall have the meaning ascribed to the then hereunder:

                            xxx         xxx  xxx

Article  1.18      ”Contract”  means  this  agreement  and  the   Appendices
mentioned herein and attached hereto and made an integral  part  hereof  and
any amendments made thereto pursuant to the terms hereof.

                          WAIVER AND MISCELLANEOUS

32.1  This Contract  supersedes  and  replaces  any  previous  agreement  of
understanding between the Parties, whether oral or written, on  the  subject
matter hereof, prior to the Effective Date of this Contract.

32.2  This Contract shall not be amended, modified, varied  or  supplemented
in any respect except  by  an  instrument  in  writing  signed  by  all  the
Parties,  which  shall  state  the  date  upon  which   the   amendment   or
modification shall become effective.

32.3  No waiver by any Party of any one or more obligations or  defaults  by
any other Party in the performance of this  Contract  shall  operate  or  be
construed as a waiver of any other obligations  or  defaults  whether  of  a
like or of a different character.

32.4  The provisions of this Contract shall inure to the benefit of  and  be
binding upon the Parties and  their  permitted  assigns  and  successors  in

32.5  In the event of any conflict between any provisions in the  main  body
of this Contract and any provision in the Appendices, the provision  in  the
main body shall prevail.

32.6  The headings of this Contract are for convenience  of  reference  only
and shall not be taken into  account  in  interpreting  the  terms  of  this

Intention behind the aforesaid clauses is more than  apparent,  namely,  not
to look into any other document or correspondence which took  place  between
the parties prior to the signing of this agreement. Not only this, even  the
so-called “understanding” between the parties is to be ignored as  well.  It
is, therefore, impermissible for the appellant to take the aid  of  MPSC  or
the  clauses  contained  therein  while  construing  the  terms   of   PSCs.
Therefore, it was not even open to the Income Tax Authorities to  go  beyond
the stipulations contained in the PSCs while making the assessment  and  had
to exclusively remain within  the  provisions  of  the  Agreement.  On  that
touchstone, the Assessing Officer had no option but to deny the  benefit  of
deductions/allowances claimed by the appellant in  its  income  tax  returns
filed for the Assessment Year 2005-06. This bring us to the next question.
Answer to question no. (iii) -  We have  already  noted  that  Article  32.2
categorically provides that this Contract shall not  be  amended,  modified,
varied or supplemented in any respect except by  an  instrument  in  writing
signed by all the parties,  which  shall  state  the  date  upon  which  the
amendment or modification shall become effective. In  continuation  to  what
has been observed by us while answering point no.  (ii)  above,  it  becomes
apparent that the question of any intention  to  the  contrary  between  the
parties does not arise. It is because of the reason that Article 32  of  the
Agreement specifically supersedes  any  understanding  between  the  parties
prior to the effective date of this contract.
The matter is, however, compounded by certain acts of respondent no.  1  and
made complex to some extent by the Income Tax Authorities in giving  benefit
of these allowances/deductions under Section 42 of the Act to the  appellant
under these very PSCs in respect of earlier assessment years. Further,  this
very state of affairs continued for few  years  insofar  as  giving  such  a
benefit by the Income Tax  Authorities  is  concerned  it  may  not  pose  a
serious problem. We have already held above that on proper  construction  of
the provisions of Section 42 of the Act and application of these  provisions
to the instant case, the appellant was not entitled to any  such  deductions
under the PSCs. Thus, when in law no such deduction was permissible  as  per
the PSCs in the present form, even if such deduction was  given  wrongly  in
the earlier years that would not amount to a wrong act on the  part  of  the
Income Tax Authorities and, therefore, would not enure  to  the  benefit  of
the appellant in the Assessment Year in question  as  well.   The  appellant
cannot say that merely because this benefit  is  extended  in  the  previous
years; albeit wrongly, this wrong act should continue to  perpetuate.  There
is no estoppel against law. We have taken  note  of  the  judgment  of  this
Court in Enron Expat Service Inc. (Supra) where the assessee had offered  to
pay tax under Section 44(BB) of the Act in the  earlier  years  wrongly  and
the Court held that it would  not  operate  as  an  estoppel  to  claim  the
benefit of DTAA for the Assessment Year in question when it was  found  that
the assessee was otherwise entitled to it. Same  principle  applies,  though
it is a converse situation  where  assessee  has  not  offered  to  pay  tax
wrongly [which was the situation in Enron Expat Service  Inc.  (Supra)]  and
instead the tax  authorities  have  extended  the  benefit  wrongly  to  the
With this, we come  to  more  crucial  aspect,  namely,  the  three  letters
written by the MoPNG in response to the appellant's  communications  seeking
its clarification.  Undoubtedly,  in  these  three  letters  the  MoPNG  has
accepted that intention between the parties  was  to  give  the  benefit  of
allowances under Section 42 of the Act to the appellant herein. So much  so,
the MoPNG even requested the MoF to give its nod for amending  the  contract
by  incorporating  such  a  provision   which   was   allegedly   left   out
Our first remark is that the approach of the  High  Court  in  dealing  with
this aspect may not be entirely correct.  In  the  first  instance,  it  has
embarked upon the issue as to  whether  such  an  omission  was  by  way  of
“oversight” or it was unintentional. While undertaking this enquiry, it  has
side tracked the language of the three  letters  and  instead  gone  by  the
stand taken in the counter affidavit filed by respondent  no.  1  where,  in
para 4 of the counter affidavit, respondent no. 1 pleaded to  the  contrary.
Clearly, the said stand taken in the counter affidavit  filed  in  the  High
Court was contrary to the contents of the three  letters  dated  17.06.2005,
11.04.2007 and 28.04.2008. Significantly, respondent no. 1 neither  disowned
those letters nor tried to explain away those letters. No  plea  was  raised
to the effect that the person who wrote those letters was not authorized  to
do so or he had taken the said stand in the letters which  was  contrary  to
the records. No doubt, the High Court has observed that it had  looked  into
original  record  in  order  to  verify  and  examine  the  correct  factual
position. However, as demonstrated by Mr. Ganesh, on an application made  by
the appellant in the High Court for giving the copies of such  records,  the
High Court had observed that those records would not be seen nut  ultimately
relied upon these records. We do not know whether the High Court is  correct
in its conclusion as to whether  the  contents  of  the  three  letters  are
contrary to records and  the  averments  made  in  para  4  of  the  counter
affidavit are in conformity with the records, in as much  as  these  records
have not been produced for our perusal. However, on going through the  terms
of the PSCs it becomes apparent that such an exercise is not even  required.

It is stated at the cost of repetition  that  Article  32  of  the  contract
supersedes any understanding between  the  parties.  Thus,  even  if  it  is
presumed  that  there  was  an  understanding  between  the  parties  before
entering into an  agreement  to  the  effect  that  benefit  of  Section  42
deduction shall be extended to the appellant,  that  understanding  vanished
into thin air with the execution of the two PSCs. Now, for  all  intent  and
purpose, it is only the PSCs  signed  between  the  parties,  which  can  be
looked into. We answer this question accordingly.
Undoubtedly, the appellant is also conscious of such  a  limitation  and  is
aware of the fact that unless there is a clear stipulation in the  PSCs  for
grant of benefit of special allowances under  Section  42  of  the  Act,  it
would be difficult, nay impossible, for the appellant to  sail  through.  It
is for this reason Mr. Ganesh, learned  senior  counsel  for  the  appellant
made a  fervent  plea  that  respondents   be  directed  to  carry  out  the
amendment in the contract to include stipulation with regard to  Section  42
as well. That bring us to the next  question  about  the  permissibility  of
such a prayer.
Answer to question no.  (iv)  &  (v)  –  These  issues  have  three  facets,
(i)   Whether there is a prayer to this effect in the writ petition?
(ii)  If it was intended to give such a benefit  before  entering  into  the
agreement, whether this intention gives any right to the appellant  to  seek
an amendment?
(iii) Whether the Court has the power to issue Mandamus or direction to  the
We have reproduced the prayers made in  the  writ  petition.  Obviously,  no
prayer for issuance of Writ of Mandamus  or  direction  of  this  nature  is
specifically made. Prayer clause shows that there are two  prayers  made  in
the writ petition. First relates  to  directing  the  Authorities  to  grant
benefit under Section 42 of the Act in terms of PSCs dated 22.02.1995,  i.e.
it is confined  within  the  scope  of  the  said  contracts.   Though,  the
appellant wants that  while  construing  these  contracts  MPSCs  and  other
several communications between the parties should be looked into  and  given
effect to. We have already  held  that  all  such  communications  would  be
extraneous and it is only the terms of PSCs dated 20.02.1995  which  can  be
looked into.  Second  prayer  aims  at  seeking  quashing  of  orders  dated
31.12.2007 and notices dated 28.03.2008 and  01.05.2008  vide  which  income
tax assessments for Assessment Years 2001-02, 2002-03, 2003-04; AND  2004-05
respectively are sought to be re-opened.
Mr. Ganesh, however, submitted that such a prayer should be culled out  from
prayer no. (iii) which is  residual  in  nature.  Ordinarily,  it  would  be
difficult to read into this prayer clause a relief of substantive nature  of
issuing the writ of mandamus.  However, we  find  that  there  are  specific
averments to this effect in the body of the writ petition as well as in  the
grounds.  More  pertinently this relief was specifically pressed and  argued
in the High Court which was even entertained by the High Court  without  any
objections from the respondent to the contrary.  Therefore, we are  inclined
to examine the plea on merits, though reluctantly.
Let us presume that there was such an intention. In fact, it  is  so  stated
in the three letters dated  17-06-2005, 11-04-2007 and 28-04-2008 which  are
written by MoPNG and not disowned by it. Still such an intention  would  not
make any difference and for this purpose we again revert back to Article  32
which has already  been  reproduced  above.  Not  only  prior  understanding
between the parties stood superseded as mentioned in Article  32.1,  Article
32.2  which  is  crucial  to  answer  this  question,  bars  any  amendment,
modification etc. to the said contract except by an  instrument  in  writing
signed by all the parties. Thus, unless respondents agree to  amend,  modify
or varied/supplemented the terms of the contract, no right  accrues  to  the
appellant in this behalf.
We have to keep in mind that the contract in question  is  governed  by  the
provisions of Article 299 of the Constitution. These  are  formal  contracts
made in the exercise of the Executive power of the Union (or of a State,  as
the case may be) and are  made  on  behalf  of  the  President  (or  by  the
Governor, as the case may be). Further, these contracts are to  be  made  by
such persons and in such a manner as  the  President  or  the  Governor  may
direct or authorize. Thus, when a particular contract is entered  into,  its
novation has to be on fulfillment of all procedural requirements. No  doubt,
there is an exception to this principle, viz.  even  in  the  absence  of  a
contract according to the requirements of Article 299 of  the  Constitution,
doctrine  of  promissory  estoppel  can  still  be   invoked   against   the
Government.  However, no such case is pleaded by the  appellant.  To  dilate
upon the aforesaid proposition further, we take along third  facet  of  this
issue as, to some extent, they are  over-lapping.  Fact  remains  that  even
when MoPNG requested MoF for giving consent to amend the contract,  no  such
authorisation came from MoF. Whether, in such a case, can the Court issue  a
As noted above, the contention of the respondent is that  PSCs  are  in  the
nature of a contract agreed  to  between  the  two  independent  contracting
parties. It is also mentioned that before  the  signing  of  the  PSCs,  the
approval of Cabinet is obtained which reflects that the PSC as submitted  to
the Cabinet has the approval of one  of  the  contracting  parties,  namely,
Government of India in this case. When it is signed by the  other  party  it
means  that  it  has  the  approval  of  both  the  parties.  Therefore,   a
contracting party cannot claim to be oblivious of the provisions of the  law
or the contents of the contract at  the  time  of  signing  and,  therefore,
later on cannot seek retrospective amendment as a matter of  right  when  no
such right is conferred under the contract. Even the  doctrine  of  fairness
and  reasonableness  applies  only  in  the   exercise   of   statutory   or
administrative actions of the State and not in the exercise  of  contractual
obligation and issues arising out of contractual matters are to  be  decided
on the basis of law of contract and not on the basis of  the  administrative
law. No doubt, under certain situations, even in respect  of  contract  with
the State relief can be granted  under  Article  226.  We  would,  thus,  be
dealing with this aspect in some detail.
Law in this aspect has developed through catena of judgments of  this  Court
and from the reading of  these  judgments  it  would  follow  that  in  pure
contractual matters extraordinary  remedy  of  writ  under  Article  226  or
Article 32 of the Constitution cannot be  invoked.  However,  in  a  limited
sphere such remedies are available only when the non-Government  contracting
party is able to demonstrate that its a public law remedy which  such  party
seeks to invoke, in contradistinction to the private law remedy  simplicitor
under the contract. Some of  the  case  law  to  bring  home  this  cardinal
principle is taken note of hereinafter.
Significantly, in Andi Mukta Sadguru Shree  Muktajee  Vandas  Swami  Suvarna
Jayanti Mahotsav Smarak Trust & Ors. v. R. Rudani & Ors.[9]  as  well,  this
Court made it clear that if the rights are purely of private  character,  no
mandamus can be issued.  Thus, even if the respondent is  a  'State',  other
condition which has to be satisfied for issuance of a writ  of  mandamus  is
the public duty.  In a matter of private  character  or  purely  contractual
field, no such public duty element is involved and, thus, mandamus will  not
First case which needs to be referred is Bareilly Development Authority  Vs.
Ajai Pal Singh and others[10]. That was the case where  Appellate  Authority
had undertaken construction  of  dwelling  units  for  people  belonging  to
different income groups and  the  cost  at  which  such  flats  were  to  be
allotted to the allottees. However, it was mentioned that  the  cost  stated
was only estimated cost and subject to increase  or  decrease  according  to
rise or fall in the price  at  the  time  of  completion  of  property.  The
authority  increased  the  cost  and  monthly  installment  rates  which  it
demanded from the allottees were  almost  doubled  and  cost  and  rates  of
installments initially stated in the brochure.  Respondents/allottees  filed
writ  petition  challenging  the  same  and  in  this  context  question  of
maintainability of the writ petition arose. High  Court,  relying  upon  the
judgment of the Supreme Court in the  case  of  Ramana  Dayaram  Shetty  Vs.
Airport Authority of India[11] allowed the writ  petition  by  observing  as
under :-
"It has not been disputed that the contesting  opposite  party  is  included
within the  term  `other  authority'  mentioned  under  Article  12  of  the
constitution.  Therefore,  the  contesting  opposite   parties   cannot   be
permitted to act arbitrarily with the principle  which  meets  the  test  of
reason and relevance. Where an authority appears acting  unreasonably,  this
court is not powerless and a writ of mandamus can be issued  for  performing
its duty free from arbitrariness or unreasonableness.”

In appeal filed by the Authority, this  Court,  on  facts,  noted  that  the
respondents had applied for registration only by  acceptance  of  terms  and
conditions contained in the  brochure.  Moreover,  subsequently  letter  was
written  by  the  Authority  about  the  enhancement  of  the  cost  of  the
houses/flats as well as increase in monthly  installments.  Rate  of  yearly
interest requesting allottees to  give  their  written  acceptance  and  the
respondents except respondent No.4 had sent their written acceptance and  it
was on the basis of the written acceptance that  name  of  first  respondent
was included in the draw and he was successful in  getting  allotment  of  a
particular  house.  The  court  observed  that  respondents  were  under  no
obligation to seek allotment of house/ flats even  if  they  had  registered
themselves.  Notwithstanding,  the  voluntarily  registered  themselves   as
applicants only after fully understanding the terms and  conditions  of  the
brochure including relating to variance in prices. On  the  basis  of  these
facts, this Court observed that  the  aforesaid  observations  of  the  High
Court relying upon  Ramana  Dayaram  Shetty  case  were  not  correct.  Thus
observed the Court, speaking through Ratnavel Pandian. J.:
“The finding in our view, is not correct in  the  light  of  the  facts  and
circumstances of this case because in Ramana Daya Shetty case, there was  no
concluded contract as in this case. Even conceding  that  the  BDA  has  the
trappings of a state or would be comprehended in 'other authority'  for  the
purpose of Article 12 of the constitution, while determining  price  of  the
houses/flats constructed by it and the rate of monthly  installments  to  be
paid, the Authority or its agent after entering into the field  of  ordinary
contract acts purely in its executive  capacity.  Thereafter  the  relations
are no longer governed by the constitutional provisions but by  the  legally
valid contract which determines the rights and obligations  of  the  parties
inter se. In this sphere they can only claim rights conferred upon  them  by
the contract in the absence of any statutory obligations on the part of  the
authority (i.e. BDA in this case) in the said contractual field.

22.  There is a line of decisions where the contract  entered  into  between
the state and the persons aggrieved is non-statutory and purely  contractual
and the rights are governed only by the terms of the contract,  no  writ  or
order can be issued under Article 226 of the Constitution of India so as  to
compel the authorities to remedy  a  breach  of  contract  pure  and  simple
Radhakrishna Agarwal Vs. State of  Bihar  (Supra),  Premi  Bhai  Parmar  Vs.
Delhi Development Authority and DFO Vs. Biswanath Tea Company Ltd."

Next case of relevance is the Divisional Forest officer Vs.  Bishwanath  Tea
Co. Ltd.[12] In that case respondents took on lease certain  land  from  the
Government. Initially, period of lease was 15 years. The  lease  was  to  be
extended  for  cultivation  and  raising  tea  garden  and  was  subject  to
condition set out in the Lease Agreement  and  generally  to  Assam  Land  &
Revenue Regulation and Rules made thereunder. Respondent Company  approached
appellant seeking permission to cut 7000 cub.ft. of timber.  Appellant  took
the stand that as the timber was required for a  particular  use  which  was
not within the Grant, full royalty will be payable  on  timber  so  cut  and
removed. Respondent company paid the amount of  royalty  under  protest  and
filed writ petition under Article 226 of the Constitution in the High  Court
alleging that upon a true construction of the relevant clauses of the  Grant
as also proviso to Rule 37 of the Settlement Rules, it was entitled  to  cut
and remove timber without payment of royalty and,  therefore,  the  recovery
of royalty being unsupported by law, the appellant was liable to refund  the
same.  A  preliminary  objection  was  taken  by  the   appellant   to   the
maintainability of the writ  petition  on  the  ground  that  claim  of  the
respondent flows from  terms  of  lease  and  such  contractual  rights  and
obligations can  only  he  enforced  in  a  civil  court.  This  preliminary
objection was overruled by the  High  Court  which  proceeded  to  hear  the
matter and allowed writ petition of the respondent  company.  In  appeal  by
the appellant to this Court, the decision of the  High  Court  was  reversed
holding that writ as not maintainable. Following observations  may  usefully
be quoted:-
"8.  It  is  undoubtedly  true  that  High  Court  can  entertain   in   its
extraordinary jurisdiction a petition to issue any of the prerogative  writs
for any other purpose. But such writ can be issued where there is  executive
action unsupported by law or even in  respect  of  corporation  there  is  a
denial of equality before law or equal protection of  law.  The  Corporation
can also file a writ petition for enforcement of a right  under  a  statute.
As pointed out earlier, the respondent company was merely trying to  enforce
a contractual obligation.  To  clear  the  ground  let  it  be  stated  that
obligation to  pay  royalty  for  timber  cut  and  felled  and  removed  is
prescribed by the relevant regulations, the validity of regulations  is  not
challenged. Therefore, the demand for royalty is supported by law. What  the
respondent claims is an exception that in view of  a  certain  term  in  the
indenture of lease, to writ, Clause 2, the  appellant  is  not  entitled  to
demand and  collect  royalty  from  the  respondent.  This  is  nothing  but
enforcement of a term of a contract of lease. Hence,  the  question  whether
such contractual obligation can be enforced by the High Court  in  its  writ

9.     Ordinarily, where a breach of contract  is  complained  of,  a  party
complaining  of  such  breach  may  sue  for  specific  performance  of  the
contract, if contract is capable of being  specifically  performed,  or  the
party may sue for damages. Such a suit would  ordinarily  be  cognizable  by
the Civil Court. The High Court  in  its  extraordinary  jurisdiction  would
entertain a petition either for specific  performance  of  contract  or  for
recovering damages. A right to relief flowing from  a  contract  has  to  be
claimed in a Civil Court where a suit for specific performance  of  contract
or for damages could be filed....".

The question  came  up  for  consideration  again  in  the  case  of  Kumari
Shrilekha Vidyarthi etc. etc. v. State  of  U.P.  and  others[13].  In  that
case, State of U.P. had  issued  Government  order  dated  6.2.1990  whereby
appointments of all Government Counsels (Civil, Criminal,  Revenue)  in  all
the Districts of  the  State  of  U.P.  were  terminated  w.e.f.  28.2.1990,
irrespective of the fact whether the term of the incumbents had  expired  or
was subsisting. Validity of this  G.D.  was  challenged  by  many  of  these
Government Counsels whose  appointments  were  terminated  and  one  of  the
issues to be determined by the court was as to  whether  writ  petition  was
maintainable challenging this G.D., as according  to  the  Respondent  State
the appointment of these Government Counsel was purely contractual and  writ
petition to enforce the contract was not maintainable.  After noticing  this
argument of the respondents, the Supreme Court formulated  the  question  to
be decided in the said case, in the following words:
“The learned Additional Advocate General did not dispute that if Art. 14  of
the Constitution of India is attracted to this case all State  actions,  the
impugned circular would be liable to be quashed if it suffers from the  vice
of arbitrariness. However, his argument is that there is no  such  vice.  In
the ultimate analysis, it  is  the  challenge  of  arbitrariness  which  the
circular must challenge of arbitrariness  withstand  in  order  to  survive.
This really is the main point evolved for decision  by  us  in  the  present

The Court then examined the nature of appointment of the Government  counsel
in the Districts with reference to the various  legal  provisions  including
legal Remembrance Manual and Section 24 Code of Criminal procedure  as  well
as decision  of  Supreme  Court  in  which  character  of  engagement  of  a
Government counsel was considered.  After  analyzing  these  provisions  and
case law, the Supreme Court concluded in the  following  manner,  describing
the nature of appointment of District Government counsel:
“17.  We are, therefore, unable to accept the  argument  of  the  Ld.  Addl.
Advocate General that the appointment of District Government Counsel by  the
State Government is only a  professional  engagement  like  that  between  a
private client and his lawyer, or that it  is  purely  contractual  with  no
public element attaching to it, which may be terminated at any time  at  the
sweet will of the Government excluding  judicial  review.  We  have  already
indicated the presence of public element attached to the  'office'  or  post
of District Government Counsel of every category  covered  by  the  impugned
circular. This is sufficient to attract Article 14 of the  Constitution  and
bring the question of validity of the impugned circular within the scope  of
judicial review.

18. The scope of judicial review permissible in the present case,  does  not
require any elaborate consideration since even the minimum  permitted  scope
of judicial review on the ground of  arbitrariness  or  unreasonableness  or
irrationality, once Art. 14 is attracted, is sufficient  to  invalidate  the
impugned circular as indicated  later.  We  need  not,  Therefore,  deal  at
length with the scope of judicial review permissible  in  such  cases  since
several nuances of that ticklish question do not arise for consideration  in
the present case.

19. Even otherwise and sans the element so obvious in these appointment  and
its concomitants viewed as purely contractual matters after the  appointment
is made, also attract Art. 14 and exclude arbitrariness permitting  judicial
review of the impugned state action. This aspect is dealt with hereafter.

20. Even apart from the premises that 'office' or  post  of  D.G.Cs.  has  a
public element which alone is sufficient to attract the  power  of  judicial
review for testing validity of the impugned circular on the  anvil  of  Art.
14, we are also clearly of the  view  that  this  power  is  available  even
without that element on the premise  that  after  initial  appointment,  the
matter is purely contractual. Applicability of  Art.  14  to  all  executive
actions  of  the  State  being  settled  and  for  the   same   reason   its
applicability at the threshold to the making of a contract  in  exercise  of
the executive power being beyond dispute, can it be said that the State  can
thereafter cast off its personality and exercise unbridled power  unfettered
by the requirements of Art. 14 in the  sphere  of  contractual  matters  and
claim to be governed therein only by private law, principles  applicable  to
private individuals whose rights flow only from the terms  of  the  contract
without  anything  more  ?  We  have  no  hesitation  in  saying  that   the
personality of the  State,  requiring  regulation  of  its  conduct  in  all
spheres by requirements of Art. 14 does not undergo such  a  radical  change
after the making of a  contract  merely,  because  some  contractual  rights
accrue to the other party in addition. It is not as if the  requirements  of
Art. 14 and contractual obligations are alien  concepts,  which  cannot  co-

21. The preamble of the Constitution of India resolves to secure to all  its
citizens Justice, social economic and political: and Equality of status  and
opportunity. Every State action must be aimed at achieving this  goal.  Part
IV of the Constitution  contains  'Directive  principles  of  State  Policy'
which are fundamental in the governance of the  country  and  are  aimed  at
securing social and economic freedoms by appropriate State action  which  is
complementary to individual fundamental rights guaranteed in  part  III  for
protection against excesses of State action, to realise the  vision  in  the
preamble. This being the philosophy of the  constitution,  can  it  be  said
that it contemplates exclusion of Art. 14 non arbitrariness which  is  basic
to rule of law from State actions is contractual field when all  actions  of
the State are meant fore public good and expected to be fair and just  ?  we
have no doubt that the Constitution does not envisage or  permit  unfairness
or unreasonableness in State actions in any sphere of its activity  contrary
to the professed ideals in the preamble. In our opinion, it would  be  alien
to the Constitutional scheme to accept the argument of exclusion of Art.  14
in contractual matters.  The  scope  and  permissible  grounds  of  judicial
review in such matters and the relief which may be available  are  different
matters but that does not justify the view of its total exclusion.  This  is
more so when the modern t rend is also to examine the unreasonableness of  a
term in such contractual where the  bargaining  power  is  unequal  so  that
these are not negotiated  contracts  but  standard  from  contracts  between

22. There is an obvious difference in the contracts between private  parties
and contracts to which the State is a party. Private parties  are  concerned
only with their personal interest whereas the  State  while  exercising  its
powers and discharging its functions, acts indubitably, as  is  expected  of
it for public good and in public interest. The impact of every State  action
is also on public interest. This factor alone is  sufficient  to  import  at
least the minimum requirements of public law obligations  and  impress  with
this character the contracts made by the State or  its  instrumentality.  It
is a different mater that  the  scope  of  judicial  review  in  respect  of
disputes scope of judicial review in respect of disputes falling within  the
domain of contractual obligations may be more limited and in doubtful  cases
the parties may be relegated to adjudication of their rights  by  resort  to
remedies provided for adjudication of purely contractual disputes.  However,
to the extent, challenge is made on the ground of violation of  Art.  14  by
alleging that the impugned act is arbitrary,  unfair  or  unreasonable,  the
fact  that  the  dispute  also  falls  within  the  domain  of   contractual
obligations would not relieve the State of its  obligation  to  comply  with
the basic requirements of Art. 14. To this extent, the obligation  is  of  a
public character invariably in every case irrespective of  there  being  any
other right or obligation in addition  thereto.  An  additional  contractual
obligation cannot divest the claimant of the guarantee under Art. 14 of non-
arbitrariness at the hands of the State in any of its actions.

                                  xx xx xx

34. In our opinion, the wide sweep of Art. 14 undoubtedly takes  within  its
fold the impugned circular issued by the State of U.P. in  exercise  of  its
executive power, irrespective of the precise nature of  appointment  of  the
Government counsel in the districts and the  other  rights,  contractual  or
statutory, which the appointees may have. It is  for  this  reason  that  we
base our decision on the ground that independent  of  any  statutory  right,
available to the appointments, and assuming for the  purpose  of  this  case
that the rights flow only from the contract  of  appointment,  the  impugned
circular, issued in exercise of the  executive  power  of  the  State,  must
satisfy Art. 14 of the Constitution and if it is shown to be  arbitrary,  it
must be struck  down.  However,  we  have  referred  to  certain  provisions
relating to  initial  appointment,  termination  or  renewal  of  tenure  to
indicate that the action is  controlled  at  least  by  settled  guidelines,
followed by the State of U.P. for a long time.  This  too  is  relevant  for
deciding the question of arbitrariness alleged in the present case"

Similarly, in State of Gujarat  v.  M.P.  Shah  Charitable  Trust[14],  this
Court reiterated the  principles  that  if  the  matter  is  governed  by  a
contract, the writ petition is not maintainable since it  is  a  public  law
remedy and is not available in private law field,  for  example,  where  the
matter is governed by a non-statutory contract.
At this stage, we would like to discuss  at  length  the  judgment  of  this
Court in ABL International Ltd. (supra), on which strong reliance is  placed
upon by the counsel for both the parties.  In  that  case,  various  earlier
judgments right from the year 1954 were taken note  of.  One  such  judgment
which the Department in support of  their  case  had  referred  to  was  the
decision of Apex Court in case LIC of India v. Escorts Ltd.[15] wherein  the
Court  had  held  that  ordinarily  in  matter   relating   to   contractual
obligations, the Court would not examine  it  unless  the  action  has  some
public law character attached to it. The following  passage  from  the  said
judgment was relied upon by the respondents:
“If the action of  the  State  is  related  to  contractual  obligations  or
obligations arising out of the tort, the court may  not  ordinarily  examine
it unless the action has some public law character attached to  it.  Broadly
speaking, the court will examine actions of State if  they  pertain  to  the
public law domain and refrain from examining them if  they  pertain  to  the
private law field. The difficulty  will  lie  in  demarcating  the  frontier
between the public law domain and the private law field.  It  is  impossible
to draw the line with precision and we  do  not  want  to  attempt  it.  The
question must be decided in each  case  with  reference  to  the  particular
action, the activity in which the State or the instrumentality of the  State
is engaged when performing  the  action,  the  public  law  or  private  law
character of the action and a host of  other  relevant  circumstances.  When
the State or an instrumentality of the State  ventures  into  the  corporate
world and purchases the shares of  a  company,  it  assumes  to  itself  the
ordinary role of a shareholder, and dons the robes of  a  shareholder,  with
all the rights available to such a shareholder. There is no reason  why  the
State as a shareholder should be expected  to  state  its  reasons  when  it
seeks to change the management, by a resolution of  the  company,  like  any
other shareholder."

      This Court dealt with this judgment in the following manner:
“We do not think Court in the above case has, in any manner,  departed  from
the view expressed in the earlier judgments in the case  cited  hereinabove.
This Court in the case  of  Life  Insurance  Corporation  of  India  (Supra)
proceeded on the facts of that case and held that a relief by way of a  writ
petition may not ordinarily be an appropriate  remedy.  This  judgment  does
not lay down that as a rule in matters of contract the court's  jurisdiction
under Article 226 of the Constitution is ousted. On the  contrary,  the  use
of the words "court may not ordinarily examine  it  unless  the  action  has
some public law character attached to it" itself indicates that in  a  given
case, on the existence  of  the  required  factual  matrix  a  remedy  under
Article 226 of the Constitution will be available."

Insofar as the argument of the  respondents  in  the  said  case  that  writ
petition on contractual matter was not maintainable unless it is shown  that
the authority performs a public function or discharges  a  public  duty,  is
concerned, it was answered in the following manner:
“22.  We do not think the above judgment  in  VST  Industries  Ltd.  (supra)
supports  the  argument  of  the  learned  counsel  on   the   question   of
maintainability of the present writ petition. It is to  be  noted  that  VST
Industries Ltd. against whom the writ petition was filed was not a State  or
an instrumentality of a State  as  contemplated  under  Article  12  of  the
Constitution, hence, in the normal course, no writ could  have  been  issued
against the said industry. But it was the contention of the writ  petitioner
in that case that the  said  industry  was  obligated  under  the  concerned
statute to perform certain public functions, failure to  do  so  would  give
rise to a  complaint  under  Article  226  against  a  private  body.  While
considering such argument, this Court held that when  an  authority  has  to
perform a public function or a public duty if there  is  a  failure  a  writ
petition under Article 226 of  the  Constitution  is  maintainable.  In  the
instant case, as to the fact that the respondent is an instrumentality of  a
State, there is no  dispute  but  the  question  is:  was  first  respondent
discharging a public duty or a public function while repudiating  the  claim
of the appellants arising out of a contract ? Answer to  this  question,  in
our opinion, is found in the judgment of this Court in the  case  of  Kumari
Shri Lekha Vidyarthi & Ors. vs. State of U.P.&  Ors.  [1991]  (1)  SCC  212]
wherein this Court held:
“The impact of every State action is also on public interest. It  is  really
the nature of its  personality  as  State  which  is  significant  and  must
characterize all its actions, in whatever  field,  and  not  the  nature  of
function, contractual or otherwise  which  is  decisive  of  the  nature  of
scrutiny permitted for examining the validity of its  act.  The  requirement
of Article 14 being the duty to act fairly, justly and reasonably, there  is
nothing which militates against the concept of requiring  the  State  always
to so act, even in contractual matters."

23.  It is clear from the above observations of this Court,  once  State  or
an instrumentality  of  State  is  a  party  to  the  contract,  it  has  an
obligation in law  to  act  fairly,  justly  and  reasonably  which  is  the
requirement of Article 14 of the Constitution of  India.  Therefore,  if  by
the  impugned  repudiation  of  the  claim  of  the  appellants  the   first
respondent as an instrumentality of the State has acted in contravention  of
the above said requirement of Article 14 then we have no hesitation  that  a
writ court can issue suitable directions to set right the arbitrary  actions
of the first respondent."

The Court thereafter summarized the legal position in the following manner:
“27.  From the above discussion of ours, following legal  principles  emerge
as to the maintainability of a writ petition :-

(a) In an appropriate case, a  writ  petition  as  against  a  State  or  an
instrumentality of a State  arising  out  of  a  contractual  obligation  is

(b)  Merely  because  some   disputed   questions   of   facts   arise   for
consideration, same cannot be  a  ground  to  refuse  to  entertain  a  writ
petition in all cases as a matter of rule.

(c) A writ petition involving a consequential relief of  monetary  claim  is
also maintainable.

28. However, while entertaining an objection as to the maintainability of  a
writ petition under Article 226 of the  Constitution  of  India,  the  court
should bear in mind the fact that  the  power  to  issue  prerogative  writs
under Article 226 of the Constitution  is  plenary  in  nature  and  is  not
limited by any other provisions of the Constitution. The High  Court  having
regard to the facts of the case, has a discretion to  entertain  or  not  to
entertain a writ  petition.  The  Court  has  imposed  upon  itself  certain
restrictions in the exercise of this power [See: Whirlpool  Corporation  vs.
Registrar of Trade Marks, Mumbai & Ors. [1998 (8) SCC 1]. And  this  plenary
right of the High Court to issue a prerogative writ  will  not  normally  be
exercised by the Court to the exclusion of other available  remedies  unless
such  action  of  the  State  or  its  instrumentality  is   arbitrary   and
unreasonable so as to violate the constitutional mandate of  Article  14  or
for other valid and legitimate  reasons,  for  which  the  court  thinks  it
necessary to exercise the said jurisdiction."

The  position  thus  summarized  in  the  aforesaid  principles  has  to  be
understood in the context of discussion that preceded which we have  pointed
out above. As  per  this,  no  doubt,  there  is  no  absolute  bar  to  the
maintainability of the writ petition even in contractual  matters  or  where
there are disputed questions of fact or even when monetary claim is  raised.
At the same time, discretion lies with the High Court  which  under  certain
circumstances, can refuse to  exercise.  It  also  follows  that  under  the
following circumstances, 'normally', the Court would  not  exercise  such  a
(a) the Court may not examine the issue unless the action  has  some  public
law character attached to it.
(b) Whenever a particular mode of settlement of dispute is provided  in  the
contract, the High Court would  refuse  to  exercise  its  discretion  under
Article 226 of the Constitution and relegate the party to the said  made  of
settlement, particularly when settlement of disputes is to  be  resorted  to
through the means of arbitration.
(c) If there are very serious  disputed  questions  of  fact  which  are  of
complex nature and require oral evidence for their determination.
(d) Money claims per se particularly arising out of contractual  obligations
are normally not to be entertained except in exceptional circumstances.

Further legal position which emerges from various judgments  of  this  Court
dealing with different situations/aspects relating to the contracts  entered
into by the State/public Authority with private parties, can  be  summarized
as under:
(i)   At the stage of entering into a contract, the  State  acts  purely  in
its executive capacity and is bound by the obligations of fairness.
(ii)  State in its executive capacity, even in  the  contractual  field,  is
under obligation to act fairly and cannot practice some discriminations.
(iii) Even in  cases  where  question  is  of  choice  or  consideration  of
competing claims before entering into the field of contract, facts  have  to
be investigated and found before the question of a violation of  Article  14
could arise. If those facts are disputed and require assessment of  evidence
the correctness of  which  can  only  be  tested  satisfactorily  by  taking
detailed  evidence,  Involving  examination  and   cross-   examination   of
witnesses, the case could not be conveniently or satisfactorily  decided  in
proceedings under Article 226 of the Constitution. In such cases  court  can
direct the aggrieved party to resort to alternate remedy of civil suit etc.
(iv) Writ jurisdiction of High Court under Article 226 was not  intended  to
facilitate avoidance of obligation voluntarily incurred.
(v) Writ petition was not  maintainable  to  avoid  contractual  obligation.
Occurrence  of  commercial  difficulty,   inconvenience   or   hardship   in
performance of the conditions agreed to  in  the  contract  can  provide  no
justification in not complying with the terms of contract which the  parties
had accepted with open eyes. It cannot ever be that a licensee can work  out
the license if he finds it profitable to do so: and  he  can  challenge  the
conditions under which he agreed  to  take  the  license,  if  he  finds  it
commercially inexpedient to conduct his business.
(vi) Ordinarily, where a breach of contract  is  complained  of,  the  party
complaining  of  such  breach  may  sue  for  specific  performance  of  the
contract,  if  contract  is  capable  of   being   specifically   performed.
Otherwise, the party may sue for damages.
(vii) Writ can be issued where there is executive action unsupported by  law
or even in respect of a corporation there is denial of equality  before  law
or equal protection of law or if can be shown  that  action  of  the  public
authorities was without giving any hearing and violation  of  principles  of
natural justice after holding that action could not have been taken  without
observing principles of natural justice.
(viii) If the contract between private party and  the  State/instrumentality
and/or agency of State is under the realm of a private law and there  is  no
element of public law, the normal course for  the  aggrieved  party,  is  to
invoke  the  remedies  provided  under  ordinary  civil  law   rather   than
approaching the High Court under Article 226 of the Constitutional of  India
and invoking its extraordinary jurisdiction.
(ix) The distinction between public law  and  private  law  element  in  the
contract with State is getting blurred. However, it  has  not  been  totally
obliterated and where the matter falls purely in private field of  contract.
This  Court  has  maintained  the  position  that  writ  petition   is   not
maintainable. Dichotomy between public  law  and  private  law,  rights  and
remedies  would  depend  on  the  factual  matrix  of  each  case  and   the
distinction between public law remedies and private  law,  field  cannot  be
demarcated with precision. In fact, each case has to  be  examined,  on  its
facts whether the contractual relations between the  parties  bear  insignia
of public element. Once on the facts of a particular case it is  found  that
nature of the activity or controversy involves public law element, then  the
matter can be examined by the High Court in  writ  petitions  under  Article
226 of the Constitution of India to see whether action of the  State  and/or
instrumentality or agency of the State is fair, just and equitable  or  that
relevant factors are taken into consideration and  irrelevant  factors  have
not gone into the decision making  process  or  that  the  decision  is  not
(x) Mere reasonable or legitimate  expectation  of  a  citizen,  in  such  a
situation, may not by itself be a distinct enforceable  right,  but  failure
to consider and give due weight to it may  render  the  decision  arbitrary,
and this is how the  requirements  of  due  consideration  of  a  legitimate
expectation forms part of the principle of non-arbitrariness.
(xi) The scope of judicial review in respect of disputes falling within  the
domain of contractual obligations may be more limited and in doubtful  cases
the parties may be relegated to adjudication of their rights  by  resort  to
remedies provided for adjudication of purely contractual disputes.

Keeping  in  mind  the  aforesaid  principles  and  after  considering   the
arguments of respective parties, we are of the view that  on  the  facts  of
the present case, it is not a fit case where  the  High  Court  should  have
exercised discretionary jurisdiction under Article 226 of the  Constitution.
First, the matter is in the realm of pure contract. It is not a  case  where
any statutory contract is awarded.

As pointed out earlier as well, the contract in question  was  signed  after
the approval of Cabinet was obtained. In the said  contract,  there  was  no
clause pertaining to Section 42 of the Act. The  appellant  is  presumed  to
have knowledge of the legal provision, namely, in  the  absence  of  such  a
clause, special allowances under Section 42 would  impermissible.  Still  it
signed the contract without such a clause, with open  eyes.  No  doubt,  the
appellant claimed these deductions in its income  tax  returns  and  it  was
even allowed these deductions by the Income  Tax  Authorities.  Further,  no
doubt, on this  premise, it shared the profits with the Government as  well.
However, this conduct  of  the  appellant  or   even  the  respondents,  was
outside the scope of the contract and that by itself may not give any  right
to the appellant to claim a relief in the nature of Mandamus to  direct  the
Government to incorporate such a clause in the contract, in the face of  the
specific provisions  in  the  contract  to  the  contrary  as  noted  above,
particularly, Article 32 thereof. It was purely a  contractual  matter  with
no element of public law involved thereunder.

Having considered the matter in the aforesaid prospective, we  come  to  the
irresistible conclusion that the appellant is not  entitled  to  the  relief
claimed. Though it may be somewhat harsh on the appellant  when  it  availed
the benefit of Section 42 for few years and acted on the understanding  that
such a benefit would be given to it, but we have no option but to hold  that
PSCs did not provide for this benefit to be given to the appellant  and  the
contract can be amended only if both the parties agree to  do  so,  and  not
otherwise. Therefore, we are constrained  to  dismiss  the  appeal  for  the
reasons given above.
                 There shall, however, be no orders as to costs.

                                                                (A.K. SIKRI)

                                                     (ROHINTON FALI NARIMAN)

MAY 14, 2015.
[1]   (1975) 1 SCC 199
[2]   1955 (1) SCR 305
[3]   (1983) 3 SCC 379
[4]   (1991) 1 SCC 212
[5]   (2004) 3 SCC 553
[6]   (2012) 100 SCC 424
[7]   (2008) 15 SCC 33
[8]   (2010) 327 ITR 626

[9]   (1989) 2 SCC 691
[10]     [1989] 1 SCR 743
[11]  (1979) IILLJ 217 SC
[12]  [1981] 3 SCR 662
[13]  AIR 1991 SC 537
[14]  (194) 3 SCC 552
[15]  (1986) 1 SCC 264

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