The most important aspect of Dalhousie's administration is related to 'the great drama of annexation'. His aims for expanding the Company's territories were administrative, imperial, commercial and financial. Although he used different reasons for annexation, his main objective was to end misrule in the annexed states, as in the case of the annexation of Oudh. He aimed at providing the beneficent administration to the people of the annexed states. At the same time he had in his mind the advantages of annexation to the British such as imperial defence, commercial and financial benefits. Though Dalhousie did not come to India to follow a policy of annexation, but he was able to consolidate British rule in India by his policy of annexation. His great annexations include the Punjab, Lower Burma, most of the Central Provinces and Oudh.
At the end of the second Anglo-Sikh War in 1849, Punjab was annexed by Dalhousie. He organized the administration of Punjab very efficiently. The province was divided into small districts under the control of District Officers who were called Deputy Commissioners. These commissioners with the help of their assistants came into close contact with people. Revenue and judicial departments were combined to secure concentration of power and responsibility. The laws and procedure were simplified in accordance with the custom of the people. The overall administration of Punjab was entrusted to the Chief Commissioner. In fact, the Governor-General was the virtual ruler of Punjab. The services of Lawrence brothers in the administration of Punjab were notable. Within three years perfect order was restored in the province. It was efficiently defended from internal and external enemies. In 1859, Sir John Lawrence became the Lieutenant Governor of Punjab.
In 1852, commercial disputes in Rangoon prompted new hostilities between the British and the Burmese. After the end of the second Burmese War (1852), Dalhousie annexed Lower Burma with its capital at Pegu. Major Arthur Phayre was appointed the Commissioner of the new province. His administration also proved to be efficient. The annexation of Lower Burma proved beneficial to Britain. Rangoon, Britain's most valuable acquisition from the war became one of the biggest ports in Asia.
Dalhousie also took advantage of every opportunity to acquire territory by peaceful means. The East India Company was rapidly becoming the predominant power in India. It had concluded alliances with Indian rulers. It promised to support them and their heirs in return for various concessions. Although this type of agreement favoured the British, Dalhousie sought to acquire even more power. According to the Hindu Law, one can adopt a son in case of no male heir to inherit the property. The question arose whether a Hindu ruler, holding his state subordinate to the paramount power, could adopt a son to succeed his kingdom. It was customary for a ruler without a natural heir to ask the British Government whether he could adopt a son to succeed him. According to Dalhousie, if such permission was refused by the British, the state would 'lapse' and thereby become part of the British India. Dalhousie maintained that there was a difference in principle between the right to inherit private property and the right to govern.
The Doctrine of Lapse was applied by Dalhousie to Satara and it was annexed in 1848. Jhansi and Nagpur were annexed in 1854. As a result of these annexations, a large part of the Central Provinces came under the British rule. The new province was governed by a Chief Commissioner from 1861.
Although the Doctrine of Lapse cannot be regarded as illegal, its application by Dalhousie was disliked by Indian princes. The advantages of the annexations of Satara, Jhansi and Nagpur were substantial to the British. Dalhousie was blamed for using the Doctrine of Lapse as an instrument in pursuing his policy of annexation. After the Mutiny of 1857, the doctrine of lapse was withdrawn.
The British relations with the state of Oudh go back to the Treaty of Allahabad in 1765. Right from Warren Hastings, many Governor-Generals advised the Nawab of Oudh to improve the administration. But, misrule continued there and the Nawab was under the assumption that the British would not annex Oudh because of his loyalty to them. In 1851, William Sleeman, Resident at Lucknow, reported on the 'spectacle of human misery and careless misrule'. But Sleeman was against the policy of annexing Oudh. After surveying the situation in Oudh, Dalhousie annexed it in 1856. Nawab Wajid Ali was granted a pension of 12 lakhs of rupees per year. The annexed territory came under the control of a Chief Commissioner.
Dalhousie's annexation of Oudh, the last one among his annexations, created great political danger. The annexation offended the Muslim elite. More dangerous was the effect on the British army's Indian troops, many of whom came from Oudh, They had occupied a privileged position before its annexation. Under the British Government they were treated as equals with the rest of the population. This is a loss of prestige for them. In these various ways, the annexation of Oudh contributed to the Mutiny of 1857.