Article 278

Article 278 of the original Constitution of India was a transitional provision designed to regulate financial agreements between the Union Government and the former princely states that had become Part B states following independence. Although it played an important role in the early financial integration of the Indian Union, the Article was repealed by the Constitution (Seventh Amendment) Act, 1956, as part of a wider reorganisation and rationalisation of the federal structure.

Historical Background and Purpose

In the aftermath of independence in 1947, the Indian subcontinent consisted of British provinces directly administered by the Crown and over 560 princely states that acceded to the Indian Union through Instruments of Accession. While the former provinces were easily integrated into the new constitutional system, the princely states—later grouped as Part B states under the First Schedule of the Constitution—possessed distinct fiscal and administrative arrangements.
Article 278 was incorporated to facilitate temporary financial agreements between the Union Government and these Part B states, ensuring a smooth fiscal transition. It aimed to provide a legal framework for adjusting issues such as the:

• Sharing of revenue and taxation rights,
• Payment of grants or compensation to Part B states, and
• Settlement of financial obligations arising out of pre-constitutional arrangements.

Structure and Provisions of the Original Article

The original text of Article 278 provided for:

• The continuation or modification of existing financial agreements between the Dominion of India and the princely states, until new arrangements were made under the Constitution.
• The power of the President of India to enter into or modify such agreements with the governments of the Part B states, as necessary for maintaining financial order and administrative continuity.
• The ability of such agreements to cover matters relating to taxation, grants-in-aid, and the allocation of revenues between the Union and the Part B states.

These agreements were crucial to managing the diverse fiscal conditions prevailing among the newly integrated states, many of which had operated under different systems of taxation, revenue collection, and fiscal management before accession.

Who Were the Part B States?

Part B states were primarily former princely states or unions of princely states that acceded to India after independence. Under the First Schedule of the original Constitution (1950), these included:

• Hyderabad,
• Jammu and Kashmir,
• Madhya Bharat,
• Mysore,
• Patiala and East Punjab States Union (PEPSU),
• Rajasthan,
• Saurashtra, and
• Travancore-Cochin.

Each of these states had a distinct administrative history, often governed under covenants or agreements with the Union Government, necessitating constitutional provisions like Article 278 to formalise their fiscal integration.

Repeal of Article 278

Article 278 was formally repealed by the Constitution (Seventh Amendment) Act, 1956, through Section 29 and the Schedule of that amendment. The repeal coincided with the States Reorganisation Act, 1956, which abolished the earlier classification of states into Part A, Part B, Part C, and Part D categories, replacing it with a uniform structure of states and union territories.
The removal of Article 278 was intended to:

• Simplify fiscal relationships between the Union and the States by bringing all States under a single constitutional framework,
• Eliminate the special financial arrangements that had been temporarily necessary during the integration of princely states, and
• Unify the system of revenue distribution and taxation across India in line with the federal structure envisaged by the Constitution.

Reason and Rationale for Repeal

The repeal of Article 278 represented a maturing of India’s constitutional and fiscal system. By 1956, the transitional period for the integration of Part B states had effectively concluded. The continued existence of Article 278 and similar transitional provisions had become unnecessary and potentially inconsistent with the principle of equality among States.
The key reasons for repeal were:

• The abolition of the classification of States into Parts A, B, and C.
• The need to standardise financial arrangements and eliminate disparities in Union–State fiscal relations.
• The introduction of a single Finance Commission mechanism under Article 280 to recommend the distribution of revenues and grants across all States.

Thus, the removal of Article 278 marked a move towards a more cohesive federal financial structure, ensuring uniform treatment of all States.

Lack of Judicial Precedent

Since Article 278 was repealed relatively early in the constitutional period, there are no significant Supreme Court judgments or High Court decisions interpreting it. Its limited lifespan and transitional character meant that most issues arising under it were resolved administratively rather than judicially.

Broader Constitutional Context

Article 278 was closely linked with several other provisions that dealt with transitional and financial arrangements:

• Article 260 and 261 – Provided for jurisdiction and the recognition of existing legal arrangements.
• Article 269–275 – Governed the distribution of revenues between the Union and the States.
• Article 278 and 291 (now repealed) – Addressed special fiscal agreements and privy purse payments to rulers of former princely states.

Together, these provisions reflected the temporary but necessary measures required during India’s post-independence integration process.

Historical Significance

Although Article 278 no longer forms part of the active Constitution, it occupies an important place in the constitutional evolution of India’s federalism. It represents the transitional phase during which the Union sought to harmonise diverse financial systems inherited from British India and princely states.
The Article’s existence and eventual repeal highlight the gradual shift from transitional arrangements to permanent constitutional mechanisms, such as the Finance Commission and uniform taxation principles, which today regulate Union–State fiscal relations.

Legacy and Continuing Relevance

While Article 278 is repealed, its underlying purpose—to ensure fiscal unity amidst diversity—continues to resonate in India’s federal system. The experience gained from managing financial agreements with Part B states helped shape later constitutional and legislative frameworks, including:

• The regularisation of fiscal devolution under Articles 270 and 275,
• The establishment of Finance Commissions to institutionalise financial transfers, and
• The creation of uniform revenue-sharing arrangements applicable to all States.