When jurisdiction of High court can be invoked in case of contractual dispute between state and private party?

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.

69)

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.

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)

Dated;MAY 14, 2015.

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

Civil Appeal No. 6929 of 2012

Page 1 of 66

Page 1

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.

2)

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

Civil Appeal No. 6929 of 2012

Page 2 of 66

Page 2

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)

(ii)

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;

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

Civil Appeal No. 6929 of 2012

Page 3 of 66

Page 3

(iii)

3)

the assessment for the Assessment Year 2004-05; and

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.

4)

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.

5)

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

Civil Appeal No. 6929 of 2012

Page 4 of 66

Page 4

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.

6)

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.

7)

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.

8)

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

Civil Appeal No. 6929 of 2012

Page 5 of 66

Page 5

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.

9)

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.

10)

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

Civil Appeal No. 6929 of 2012

Page 6 of 66

Page 6

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.

11)

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

agreement has been

House of Parliament),

of, or in addition to,

Civil Appeal No. 6929 of 2012

it in such business] (which

laid on the Table of each

there shall be made in lieu

the allowances admissible

Page 7 of 66

Page 7

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;

Civil Appeal No. 6929 of 2012

Page 8 of 66

Page 8

(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.]”

12)

Meanwhile, the Income-Tax Officer, Ward I(3) (hereinafter referred

Civil Appeal No. 6929 of 2012

Page 9 of 66

Page 9

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.

13)

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.”

Civil Appeal No. 6929 of 2012

Page 10 of 66

Page 10

(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.

14)

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

Civil Appeal No. 6929 of 2012

Page 11 of 66

Page 11

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.

15)

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.

16)

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

Civil Appeal No. 6929 of 2012

Page 12 of 66

Page 12

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.

17)

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

Civil Appeal No. 6929 of 2012

Page 13 of 66

Page 13

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

Civil Appeal No. 6929 of 2012

Page 14 of 66

Page 14

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.

18)

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

19)

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

Civil Appeal No. 6929 of 2012

Page 15 of 66

Page 15

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.

20)

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?”

21)

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

Civil Appeal No. 6929 of 2012

Page 16 of 66

Page 16

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.

22)

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

Civil Appeal No. 6929 of 2012

Page 17 of 66

Page 17

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.

23)

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

Civil Appeal No. 6929 of 2012

Page 18 of 66

Page 18

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.”

24)

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.

25)

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

Civil Appeal No. 6929 of 2012

Page 19 of 66

Page 19

of the impugned judgment and noted by us above.

26)

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.

27)

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

Civil Appeal No. 6929 of 2012

Page 20 of 66

Page 20

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 Gujarat1, 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.

1

(1975) 1 SCC 199

Civil Appeal No. 6929 of 2012

Page 21 of 66

Page 21

(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.”

Civil Appeal No. 6929 of 2012

Page 22 of 66

Page 22

28)

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.

29)

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

Civil Appeal No. 6929 of 2012

letters. His

Page 23 of 66

Page 23

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.

30)

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

Civil Appeal No. 6929 of 2012

Page 24 of 66

Page 24

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) (ii) GSFC Vs. Lotus Hotels Ltd.3

(iii) Kumari Shrilekha Vidyarthi Vs. State of U.P.4

(iv) 

31)

K.N. Guruswamy Vs. State of Mysore2

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

2

3

4

5

1955 (1) SCR 305

(1983) 3 SCC 379

(1991) 1 SCC 212

(2004) 3 SCC 553

Civil Appeal No. 6929 of 2012

Page 25 of 66

Page 25

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.

32)

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.

33)

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

Civil Appeal No. 6929 of 2012

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Page 26

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.

34)

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

Civil Appeal No. 6929 of 2012

Page 27 of 66

Page 27

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 Corporation6 and A.B.L. International

Limited (supra).

35)

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:

6

(2012) 100 SCC 424

Civil Appeal No. 6929 of 2012

Page 28 of 66

Page 28

(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?

36) We would now proceed to answer these questions seriatum.

37) 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

Civil Appeal No. 6929 of 2012

Page 29 of 66

Page 29

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

Civil Appeal No. 6929 of 2012

Page 30 of 66

Page 30

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.

38)

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

Civil Appeal No. 6929 of 2012

Page 31 of 66

Page 31

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.

39)

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

7

8

(2008) 15 SCC 33

(2010) 327 ITR 626

Civil Appeal No. 6929 of 2012

Page 32 of 66

Page 32

India Limited (Supra).

40)

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.

41)

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.

42)

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

Civil Appeal No. 6929 of 2012

Page 33 of 66

Page 33

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.

43)

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

Civil Appeal No. 6929 of 2012

Page 34 of 66

Page 34

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

Civil Appeal No. 6929 of 2012

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Page 35

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 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 

44)

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.

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

Civil Appeal No. 6929 of 2012

Page 36 of 66

Page 36

returns filed for the Assessment Year 2005-06. This bring us to

the next question.

45)

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.

46)

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

Civil Appeal No. 6929 of 2012

Page 37 of 66

Page 37

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.

47)

With this, we come to more crucial aspect, namely, the three

Civil Appeal No. 6929 of 2012

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Page 38

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.

48)

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

Civil Appeal No. 6929 of 2012

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Page 39

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.

49)

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

Civil Appeal No. 6929 of 2012

Page 40 of 66

Page 40

question accordingly.

50)

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.

51)

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?

52)

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

Civil Appeal No. 6929 of 2012

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Page 41

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.

53)

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.

Civil Appeal No. 6929 of 2012

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Page 42

54)

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.

55)

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.

Civil Appeal No. 6929 of 2012

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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?

56)

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.

Civil Appeal No. 6929 of 2012

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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.

57)

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.

58)

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

9

(1989) 2 SCC 691

Civil Appeal No. 6929 of 2012

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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.

59)

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

10 [1989] 1 SCR 743

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India11 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.”

60)

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

11 (1979) IILLJ 217 SC

Civil Appeal No. 6929 of 2012

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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."

61) Next case of relevance is the Divisional Forest officer Vs.

Civil Appeal No. 6929 of 2012

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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

12 [1981] 3 SCR 662

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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....".

Civil Appeal No. 6929 of 2012

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Page 50

62)

The question came up for consideration again in the case of

Kumari Shrilekha Vidyarthi etc. etc. v. State of U.P. and

others13. 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".

13 AIR 1991 SC 537

Civil Appeal No. 6929 of 2012

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Page 51

63)

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

Civil Appeal No. 6929 of 2012

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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

Civil Appeal No. 6929 of 2012

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Page 53

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

Civil Appeal No. 6929 of 2012

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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"

64)

Similarly, in State of Gujarat v. M.P. Shah Charitable Trust14,

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,

14 (194) 3 SCC 552

Civil Appeal No. 6929 of 2012

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where the matter is governed by a non-statutory contract.

65)

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

15 (1986) 1 SCC 264

Civil Appeal No. 6929 of 2012

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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."

66)

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

Civil Appeal No. 6929 of 2012

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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."

67)

The Court thereafter summarized the legal position in the

Civil Appeal No. 6929 of 2012

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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."

68)

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

Civil Appeal No. 6929 of 2012

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.

69)

Further legal position which emerges from various judgments of

this Court dealing with different situations/aspects relating to the

Civil Appeal No. 6929 of 2012

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

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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

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Page 62

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.

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(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.

70)

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.

71)

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,

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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.

72)

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

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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.

Civil Appeal No. 6929 of 2012

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