REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 6929 OF 2012
|JOSHI TECHNOLOGIES INTERNATIONAL INC. |.....APPELLANT(S) |
|VERSUS | |
|UNION OF INDIA & ORS. |.....RESPONDENT(S) |
J U D G M E N T
A.K. SIKRI, J.
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
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. 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
auditors.
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
unallowed.
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
business.]
[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.
IMPUGNED JUDGMENT
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
thereof?
(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
clause?”
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
behalf.
“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.
1.
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
case.
(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
Act.
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
agreement.
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
agreement:
“(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.
Article 32 - ENTIRE AGREEMENT, AMENDMENTS,
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
interest.
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
Contract.”
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
assessee.
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
inadvertently.
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,
namely:
(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
Government?
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
Mandamus?
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
lie.
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
jurisdiction.
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
case".
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-
exist.
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
unequal.
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
maintainable.
(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
discretion:
(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
arbitrary.
(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.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ROHINTON FALI NARIMAN)
NEW DELHI;
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
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 6929 OF 2012
|JOSHI TECHNOLOGIES INTERNATIONAL INC. |.....APPELLANT(S) |
|VERSUS | |
|UNION OF INDIA & ORS. |.....RESPONDENT(S) |
J U D G M E N T
A.K. SIKRI, J.
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
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. 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
auditors.
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
unallowed.
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
business.]
[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.
IMPUGNED JUDGMENT
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
thereof?
(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
clause?”
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
behalf.
“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.
1.
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
case.
(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
Act.
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
agreement.
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
agreement:
“(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.
Article 32 - ENTIRE AGREEMENT, AMENDMENTS,
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
interest.
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
Contract.”
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
assessee.
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
inadvertently.
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,
namely:
(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
Government?
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
Mandamus?
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
lie.
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
jurisdiction.
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
case".
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-
exist.
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
unequal.
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
maintainable.
(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
discretion:
(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
arbitrary.
(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.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ROHINTON FALI NARIMAN)
NEW DELHI;
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
