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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 6929 OF 2012

JOSHI TECHNOLOGIES INTERNATIONAL INC. .....APPELLANT(S)

VERSUS

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

J U D G M E N T

A.K. SIKRI, J.

Present  appeal  impugnes  the  judgment  and  order  dated

28.05.2012 passed by the High Court of Delhi, thereby dismissing

the writ petition which was filed by the appellant. It so happened

that  the  appellant  had  entered  into  two  contracts  dated

20.02.1995 with the Union of India, through Ministry of Petroleum

and Natural Gas (MoPNG) in the year 1992 relating to exploration

of  certain  oil  fields  which  the  Union  of  India  had  selected  in

Gujarat  and  other  States.  These contracts  were on production

sharing basis for  Dholka and Wavel  Oil  Fields  respectively.  It

started the production after entering into the contract and filed its

income tax return on the income generated from the aforesaid

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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

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wrote  to  the  MoPNG  stating  that  though  there  was  such  an

arrangement agreed to as per the understanding between the two

parties, non-inclusion thereof was an inadvertent omission in the

Contracts  that  were  signed.  The  MoPNG  wrote  to  Ministry  of

Finance (MoF) accepting the aforesaid omissions and requested

the MoF to give clarification in this behalf. As no clarification came

from  the  MoF, the  Assessing  Officer  disallowed  the  claim  for

deduction under Section 42(1)(b) and 42(1)(c) of the Act. At this

stage, the appellant preferred writ petition under Article 226 of the

Constitution of India in the High Court of Delhi with the following

prayers.  

“Therefore it is most respectfully prayed that this Hon'ble Court may be pleased to issue:-

(I) A writ,  direction or  order  declaring that  the petitioner  is entitled,  in  respect  of  the  two  Production  Sharing Contracts dated 20.02.1995 executed with the petitioner for  the  Dholka  and  Wavel  Oil  Fields  in  Gujarat,  to  the benefit of the said deductions (set forth in Article 16 of the MPSC and reproduced in Annexure P1) under Section 42 of  the  Income-Tax  Act,  1961,  from  the  date  of  these Production  Sharing  Contracts,  as  has  been  stated  and declared  by  the  respondent  no.  1  (i.e.,  the  Ministry  of Petroleum  and  Natural  Gas)  in  several  of  its communications; and that the petitioner is entitled to the said  Deductions  on  the  same  footing  as  all  other contractors who have executed PSCs with the Union of India;

(ii) A  writ,  order  or  direction  in  the  nature  of  certiorari quashing the impugned order dated 31.12.2007 issued by Respondent  No.  1;  the  notice  dated  28.03.2008  for re-opening of the petitioner's income-tax assessments for the  Assessment  Years  2001-2002;  2002-2003  and 2003-2004 and the notice dated 01.05.2008 for re-opening

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the assessment for the Assessment Year 2004-05; and  (iii) Such other writ  order or  direction as this  Hon'ble Court

may deem just  and proper  in  the  circumstances  of  the case and in the interest of justice, be passed in favour of the petitioner.”  

3) 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

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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

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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

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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 it  in  such business]  (which agreement  has  been  laid  on  the  Table  of  each House of Parliament), there shall be made in lieu of,  or  in  addition  to,  the  allowances  admissible

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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;

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(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

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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.”

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(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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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(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 23

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   letters.  His

Civil Appeal No. 6929 of 2012 Page 23 of 66

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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

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Section 42 of  the Act  was not  even gone into,  though,  it  was

specifically  argued.  He  further  submitted  that  when  the  other

contracting parties, namely, MoPNG specifically admitted that this

provision was left our inadvertently, the Court should have given a

direction for amendment of the Contract.  In order to support his

submission that such a direction can be issued by the High Court

in exercise of its powers under Article 226 of the Constitution, he

referred to the following judgments:

(i) K.N. Guruswamy Vs. State of Mysore2

(ii) GSFC Vs. Lotus Hotels Ltd.3

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

(iv) ABL International Ltd. Vs. Export Credit Guarantee Corpn.5

31) 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 1955 (1) SCR 305 3 (1983) 3 SCC 379 4 (1991) 1 SCC 212 5 (2004) 3 SCC 553

Civil Appeal No. 6929 of 2012 Page 25 of 66

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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

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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

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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

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(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

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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

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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

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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 Limited7).  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 (2008) 15 SCC 33 8 (2010) 327 ITR 626

Civil Appeal No. 6929 of 2012 Page 32 of 66

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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

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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

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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

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the  performance  of  this  Contract  shall operate or be construed as a waiver of any other  obligations  or  defaults  whether  of  a like or of a different character.

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

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

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

44) 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

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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

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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

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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

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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

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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

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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.

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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.

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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.

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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

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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 others10. 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

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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.

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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....".

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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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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.

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