Page:White Paper on Indian States (1950).pdf/99

 discussed with the Governments concerned, is whether, upon the integration of their present "federal" functions and finances with those of the Union of India, States are entitled to "compensation", in the form of payment of market value or capital invested according to accounts, for the "federal" assets transferred to the Central Government. The most important of these assets are the Railway systems in States.

"We have no doubt whatever that the question of compensation in this form does not arise and cannot be raised.

"We shall first take the case of a State like Baroda, which is being "merged" in the Bombay Province. The constitutional position here is that the Ruler of Baroda, by agreement with the Dominion Government, cedes to the Dominion "full and exclusive authority and jurisdiction and powers for and in relation to the governance of the State". The Dominion Government thereupon takes over all the "federal" or "Central" functions appertaining thereto and by an order under Section 290A of the Government of India Act, 1935, as adapted by the India (Provisional Constitution) Order, 1947, directs that Baroda State "shall be administered in all respects as if the State formed part" of the Governor's Province of Bombay. When such an order is made the Government of Bombay assumes only the "Provincial" functions in the area, with all the revenues, assets and liabilities appertaining thereto. It is obvious that there can be no question in this case of the Government of India paying compensation to the Bombay Government for any federal assets.

"Essentially similar is the case in respect of States which retain their individuality. Like Baroda, before its "merger", they now have "composite" Governments, comprised of two functional entities—one with "federal" functions and the other "provincial" functions. Complete "federal integration" means a "functional" bifurcation, the "federal" portions of the State Governments are to become integrated with the Government of the Union of India, leaving behind "provincial" State Governments with purely "provincial functions". There can, therefore, be no question of the revenues of the Union of India paying compensation of the nature indicated, to the "provincial" section of the States Governments, when the Railways and other services, which are to be "federally" administered for the benefit of the people in these areas, are taken over by the Union Government of India.