NDMC VS State of Punjab

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PETITIONER:
NEW DELHI MUNICIPAL COMMITTEE
Vs.
RESPONDENT:
STATE OF PUNJAB ETC. ETC.
DATE OF JUDGMENT: 19/12/1996
BENCH:
J.S. VERMA, S.C. AGRAWAL, B.L. HANSARIA
ACT:
HEADNOTE:
JUDGMENT:
THE 19TH DAY OF DECEMBER, 1996
Present:
Hon’ble the Chief Justice
Hon’ble Mr. Justice J.S. Verma
Hon’ble Mr. Justice S.C. Agrawal
Hon’ble Mr. Justice B.P. Jeevan Reddy
Hon’ble Dr. Justice A.S. Anand
Hon’ble Mr. Justice B.L. Hensaria
Hon’ble Mr. Justice S.C. Sen
Hon’ble Mr. Justice K.S. Peripoornan
Hon’ble Mr. Justice B.N. Kirpal
Ashok H. Desai, Attorney General, B. Sen, A.M. Singhvi, A.K.
Ganguli, A.S. Nambiar, U.N. Bachawat, P.P. Rao, Sr. Advs.,
(J. Chalmeswar) Additional Advocate General for (State of
A.P.), Ranjit Kumar, Ms. Binju Tamta. Yatish Mohan, Ms. Anu
Mohla, R.K. Maheshwari, R.N. Keshwani, Vineet Maheshwari, A.
Subba Rao, B.K. Prasad, Arun K. Sharma, Ms. Vandana Sharma,
K.B. Rohatgi, Ms. Aparna Rohatgi, Praveen Jain, Baldev
Atreya, K. Ram Kumar, Ms. Asha Nair, C. Balasubramaniam, A.
Mariarputham, Ms. Aruna Mathur, G. Prakash, S.K. Agnihotri,
Sapam Biswajit Meitei, Ashok Kr. Singh, (J.R. Das) Adv. for
M/s. Sinha & Das Co., Prem Malhotra, K.R. Nambiar, C.S.S.
Rao, T.T. Kunhikannan, T.C. Sharma, (G.M. Kawoosa) Adv. for
Ashok Mathur, M.A. Firoz, (Ms. Mona Chakraverty) Adv. for
Raj Kumar Methta, Aruneshwar Gupa, S.K. Ningomban, Manoj
Swarup, Ms. Hemantika Wahi, Ms. S. Hazarika, Ms. N. Singh,
Ms. M. Kaur, D.M. Nargolkar, (Rajiv Khanna) Adv. for Raju
Ramchandran, D.P. Mohanty, Advs. with them for the appearing
parties.
J U D G M E N T S
The following Judgments of the Court were delivered:
WITH
CMP Nos. 10327, 30308/88, 33826/84
WITH
C.A. Nos. 92-125/80, 201/80, 1223/80, 1352/80, 2363/80,
2912/81, 47-66/84, 16881, 16882, 16883/96, SLP(C) NOS. 9533,
9416, 10628/81, C.A. Nos. 1941/81, 2365/80, 2366/80,
16884/96, SLP(C) No. 6971/87.
J U D G M E N T
Ahmadi, CJI.
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These civil appeals and special leave petitions have
been filed against the judgment and order of the Delhi High
Court dated March 14, 1975 in Civil Writ Petition No. 342 of
1969 and other orders which follow this judgment. The
appellant in all these matters is the New Delhi Municipal
Committee (hereinafter called "the NDMC"). The respondents
are the Union of India and the State of Andhra Pradesh,
Gujarat, Haryana, Jammu & Kashmir, Kerala, Madhya Pradesh,
Maharashtra, Orissa, Punjab, Rajashthan, Tripura and West
Bengal. The Municipal Corporation of Delhi (hereinafter
called "the MCD") appears as an intervenor.
The Case History
The development that occasioned the setting up of the
Constitution Bench may now be briefly set out. The Punjab
Municipal Act, 1911 (hereinafter called "the Act") is
applicable to the Union Territory of Delhi and under the
provisions of this Act, the NDMC had been levying property
tax on the immovable properties of the respondent States
situated within Delhi. The respondents challenged the
imposition of such a tax on their properties before the
Delhi High Court by contending that it would fall within the
exemption provided for in Article 289(1) of the
Constitution. In the impugned judgment, the Delhi High
Court, while accepting this contention, relied upon the
relevant observations of the 9-Judge Constitution Bench of
this Court in In Re The Bill to amend Section 20 of the Sea
Customs Act, 1878 and Section 3 of the Central Excises and
Salt Act, 1944, [1964] 3 S.C.R. 787 (hereinafter called "The
Sea Customs Case"), to quash the assessment and demands of
house-tax in respect of the properties of the States and
restrained the NDMC from levying such a tax in future. The
NDMC filed an application under Article 133(1)(c) of the
Constitution seeking the grant of a certificate for leave to
appeal to the Supreme Court; while granting the Certificate,
the High Court observed that the principal question before
it had grave constitutional implications which required an
authoritative decision by this Court.
On January 1, 1976, a Division Bench of this Court
directed that the NDMC could continue to make assessments
but it was not to issue demand notices or make any attempts
towards realisation of the taxes. On October 29, 1987,
another Division Bench of this Court directed that the
matter be listed before a Constitution Bench. On January 14,
1993, a 5-Judge Constitution Bench of this Court began
hearing arguments and after considering the rival
submissions, on October 4, 1994, passed an order referring
the matter to a 9-Judge Bench. In the said order, the Bench
observed that it had considered the decision in the Sea
Customs Case and was of the opinion that the point at issue
in these matters was covered therein. The decision in the
Sea Customs case having been reaffirmed by the decision of
this Court in Andhra Pradesh State Road Transport
Corporation v. The Income Tax Officer & Another, (1969) 7
S.C.R. 17 (hereinafter called "the APSRTC case"), the Bench
considered itself bound by the decision; however, it was of
the view that the arguments advanced before it, which were
not considered by the earlier decisions, were plausible and
required consideration which necessitated the setting up of
a 9-Judge Bench to hear the matter.
The Impugned Judgment
An analysis of the impugned judgment may now be
resorted to in order to gain an insight into the various
Constitutional questions that will require our
consideration. Before the High Court, the various States
contended the following: by virtue of Article 289(1) of the
Constitution, the property of the State is exempt from Union
Taxation; the undefined phrase "Union Taxation" in Article
289(1) would mean all taxes which the Union is empowered to
impose; under the Constitutional scheme and, specifically
under Part VIII of the Constitution, Union Territories are
to be administered by the President of India through the
laws of Parliament; Parliament is the law-making body for
all Union Territories and by virtue of Article 246(4), while
legislating for Union Territories, the power of Parliament
to make laws extends to all the three lists in Schedule VII
of the Constitution pertaining to legislative competence;
insofar as the Act and its application to the Union
Territory of Delhi is concerned, though it relates to a
matter in the State List, it would still amount to "Union
Taxation" because, by virtue of its application to the Union
Territory of Delhi, it would be deemed to have been
incorporated in law made by Parliament and would therefore
be a Union Law imposing tax; since the tax imposed by the
Act amounts to Union Taxation, the exemption in Article
289(1) of the Constitution which makes the property of the
States immune from Union Taxation would be attracted, and
the properties of the States situated in Delhi would be
exempt from all taxes on property.
For the NDMC, it was contended: the phrase "Union
Taxation" would not extend to legislations in Union
Territories and interpretation should be restricted to laws
made by Parliament in respect of the entries in List I; the
Union had no power to impose taxes on entries relating to
property as they fall under List II; the Act being a State
Legislation could not be treated as a Central Legislation
for the purpose of attracting Article 289(1); the test to
determine whether a tax forms part of "Union Taxation" is to
check if the proceeds thereof form part of the Consolidated
Fund of India; since the proceeds of taxes on property under
the Act did not form part of the Consolidated Fund of India
but were retained by the Municipality for its own purposes,
such a tax would not form part of "Union Taxation" and the
States were therefore not entitled to be exempted from
paying it under Article 289(1); the scheme of the
Constitution indicates that Part C states, which later came
to be called Union Territories, were carved out as separate
entities and were not to be regarded as part and parcel of
the Union Government; when the Union Government legislates
for Union Territories, it does so in a special and different
capacity, and not as the Union Legislature; it would
therefore be erroneous to treat such laws made by the Union
Government for the Union Territories as part of Union Laws
that would account for "Union Taxation" under Article
289(1).
To reach its conclusion, the High Court conducted an
examination of the legislative history of the Act and its
extension to the Union Territory of Delhi; studied the
scheme of the Constitution with regard to the distribution
of legislative powers between the States and the Union;
considered the historical Constitutional position of Union
Territories; scrutinised the series of decisions of this
Court on the issue whether a Union Territory is to be
regarded as a State, and analysed the decision in the Sea
Customs case to appreciate the true import of Article
289(1). In arriving at its conclusion, the High Court
rejected the test of the proceeds of taxes being part of the
Consolidated Fund of India as being determinative of the
nature of Union Taxation. It accepted the contention that
all laws applicable in a Union Territory would be deemed to
be laws made y Parliament and would therefore be part of
"Union Taxation" and relied upon the following observation
in the Sea Customs case (at p. 812) for support:
"If a State has any property in any
Union Territory, that property
would be exempt from Union Taxation
on property under Article 289(1)."
The High Court rejected the contention that the Act was
a State enactment and stated that under the scheme of the
Constitution, the term "Union Territory" was distinct from
"State" and therefore, the Union Territories could not claim
to be States for the purpose of attracting the exemption in
Article 289(1).
Faced with such a vast gamut of issues of
Constitutional import, we are of the view that before we
analyse the submissions put forth before us by the learned
counsel for the various parties, it would be convenient if
the historical background of certain aspects of the matter
could be set out so as to provide a setting where the rival
contentions can be better understood.
Constitutional history of the areas that are now called
"Union Territories"
In the pre-Constitutional era, these territories were
called Chief Commissioner’s Provinces. The Government of
India Act of 1919 contained specific provisions for the
governance of these areas. Under the scheme of the
Government of India Act, 1935 (hereinafter referred to as
"the 1935 Act"), the Federation of India comprised: (a) the
Provinces called Governor’s Provinces; (b) the Indian States
which had acceded to or were expected to accede to the
Federation; and (c) the Chief Commissioner’s Provinces. Part
IV of the 1935 Act dealt with the Chief Commissioner’s
Provinces and Section 94 listed them as: (i) British
Baluchistan, (ii) Delhi, (iii) Ajmer-Marwara, (iv) Coorg,
(v) Andaman & Nicobar Islands, and (vi) the area known as
Panth Piploda: and provided that these areas were to be
administered by the Governor General, acting through a Chief
Commissioner.
On July 31, 1947, during the incipient stages of the
framing of the Constitution, a Committee under the
Chairmanship of Dr. B. Pattabhi Sitaramayya was established
to study and report on the Constitutional changes required
in the administrative structure existing in the Chief
Commissioner’s provinces to give to the people of these
provinces a due place in the democratic governance of free
India. After the recommendations of this Committee were
sanctioned by the Drafting Committee, they were placed
before the Constituent Assembly for its consideration.
The Constituent Assembly considered all aspects of the
issue with a view to providing an appropriate administration
for what were called Part C States, which included three
former Chief Commissioner’s Provinces - Delhi, Ajmer and
Coorg - and some erstwhile Indian States which were retained
as centrally administered areas after their merger with
India; the latter group consisted of the following areas:
Himachal Pradesh, Bhopal, Bilaspur, Cooch-Bihar, Kutch,
Tripura, Manipur and Vindhya Pradesh. It was decided that
the decision weather these territories should have
legislatures and Councils of Ministers ought to be left to
Parliament and, for this purpose, an enabling provision
should be incorporated within the Constitution. It was also
provided that these Part C States would be administered by
the President, acting to such extent as he thought fit,
through a Chief Commissioner or a Lieutenant Governor to be
appointed by him, or through the Governor of a neighboring
State, subject to certain procedural requirements.
Accordingly, Articles 239 and 240 were inserted in the final
draft of the Constitution.
Under the Constitution of India, as initially enacted,
the Sates were divided into Part A States, Part B States,
Part C States and the territories in Part D. The First
Schedule to the Constitution provided details of the States
falling within each of these categories. The Part C States
comprised: (i) Ajmer; (ii) Bhopal; (iii) Bilaspur; (iv)
Cooch-Bihar; (v) Coorg; (vi) Delhi; (vii) Himachal Pradesh;
(viii) Manipur; and (ix) Tripura. The only territory under
Part D was Andaman & Nicobar. Part VIII of the Constitution,
comprising Articles 239-242, dealt with Part C States.
Article 239 provided that Part C States were to be
administered by the President acting through a Chief
Commissioner or a Lieutenant Governor. Article 240 provided
that Parliament could, by law, create a local legislature or
a Council of Ministers or both for a Part C State and such a
law would not be construed as a law amending the
Constitution. Article 241 allowed Parliament to constitute
High Courts for the States in Part C States. Article 242 was
a special provision for Coorg. Article 243, which also
constituted Part IX of the Constitution, stated that
territories in Part D would be administered by the President
through a Chief Commissioner or other authority to be
appointed by him.
In exercise of its powers under Article 240 (as it then
stood), Parliament enacted the Government of Part C States
Act, 1951 whereunder provisions were made in certain Part C
States for a Council of Ministers to aid and advise the
Chief Commissioner and also for a legislature comprising
elected representatives. Section 22 of this legislation made
it clear that the legislative powers of such Part C States
would be without prejudice to the plenary powers of
Parliament to legislate upon any subject.
The State Reorganisation Commission which was set up in
December, 1953, while studying the working of the units of
the Union, took up to functioning of the Part C States for
examination as an independent topic. In its Report,
submitted in 1955, the Commission expressed the view that
Part C States were neither financially viable nor
functionally efficient, and recommended that each of them
should either be amalgamated with the neighboring States or
made a centrally administered territory.
Substantial changes were made by the Constitution
(Seventh Amendment) Act, 1956 (hereinafter called "the
Seventh Amendment Act"), which incorporated the
recommendations of the States Reorganisation Commission and
was to have effect in concert with the States Reorganisation
Act, 1956. The four categories of States that existed prior
to these Acts were reduced to two categories. The first of
these categories comprised one class called ‘States,’ and
there were 14 such ‘States’. The second category comprised
the areas which had earlier been included in Part C and Part
D states; these areas were called "Union Territories" and
were six in number. Some additions and deletions were made
to the existing lists. While Ajmer, Bhopal, Coorg, Bilaspur
and Kutch-Bihar became parts of other States. The Laccadive,
Minnoy and Amindivi Islands became a Union Territory. The
six Union Territories, therefore, were: (1) Delhi; (2)
Himachal Prades; (3) Manipur; (4) Tripura; (5) Andaman &
Nicobar Islands; (6) The Laccadive, Minnoy & Anindivi
Islands.
The Seventh Amendment Act also replaced Articles 239 &
240 by new provisions; the new Article 240 allowed the
President to make regulations for certain Union Territories
and this provision continues to this day. It also repealed
Article 242 & 243 of the Constitution.
Subsequently, Dadra & Nagar Haveli became a Union
Territory by the Constitution (Tenth Amendment) Act, 1961;
Goa, Daman & Diu and Pondicherry became Union Territories by
the Constitution (Twelfth Amendment) Act, 1962; Chandigargh
became a Union Territory by the Punjab (Reorganisation) Act,
1966.
The Constitution (Fourteenth Amendment) Act, 1962
replaced the old Article 240 as Article 293A, enabling
Parliament to create a Legislature and/or a Council of
Ministers for Himachal Pradesh, Manipur, Tripura, Goa, Daman
and Diu and Pondicherry. Thereafter, by the Government of
Union Territories Act, 1963, Parliament did create
Legislative Assemblies, comprising three nominated persons,
for these territories.
Himachal Pradesh ceased to be a Union Territories by
virtue of the State of Himachal Pradesh Act, 1970. Manipur
and Tripura became States by virtue of the North-Eastern
Areas (Reorganisation) Act, 1971. Arunachal Pradesh, Mizoram
and Goa, Daman & Diu ceased to be Union Territories by
virtue of the State of Arunachal Act, 1986, the State of
Mizoram Act, 1986 and the Goa, Daman & Diu (Reorganisation)
Act, 1987 respectively. The Laccadive, Minicoy and Amindivi
Island (Alteration of Names) Act, 1973 changed the name of
these Island to ‘Lakshadweep’ but it continued to remain a
Union Territory.
The present list of Union Territories is as follows:
(i) Delhi; (ii) Andaman & Nicobar; (iii) Lakshdweep; (iv)
Dadar & Nagar Haveli; (v) Daman & Diu; (vi) Pondicherry; and
(vii) Chandigarh. However, it is to be noted that all the
Union Territories do not have the same status. By the
constitution (Sixth-Ninth Amendment) Act, 1991, Articles
239AA and 239AB, which are special provisions in relation to
Delhi, were added. They provide that Delhi, which is to be
called the National Capital Territory of Delhi, is to have a
Legislative Assembly which will be competent to enact laws
for matters falling in Lists II & III barring a few specific
entries. As the position stands at the present moment, the
Union Territories can be divided into three categories:
(i) Union Territories without legislature - comprising
Andaman & Nicobar, Lakshadweep, Dadar & Nagar Haveli,
Daman & Diu and Chandigarh.
(ii) Union Territories for which legislatures have been
established by Acts of Parliament under Article 239A -
Pondicherry is the sole occupant of this category.
(iii) Union Territories which have legislatures created by
the Constitution (Articles 239AA and 239AB) - The
National Capital Territory of Delhi is the sole
occupant of this category.
The Constitutional History of the National Capital
Territory of Delhi and the application of the Act to it.
The area that is now known as the National Capital
Territory of Delhi was, until 1911, classified as a District
of the State of Punjab. Following the announcement of the
decision to transfer the capital of British India from
Calcutta to Delhi, Government Notification No. 911 dated
September 17, 1912 was issued authorising the Governor
General to take under his authority the territory comprising
the Tehsil of Delhi and adjoining areas. The Notification
provided for the administration of these areas as a separate
province under the Chief Commissioner. The Delhi Laws Act,
1912 and the Delhi Laws Act, 1915 made provisions for the
continuance of laws in force in the territories comprising
the Chief Commissioner’s Province in Delhi and for the
extension of other enactments in force in any part of
British India to Delhi by the Governor-in-Council. Under the
Government of India Act, 1010 the Indian legislature at the
power to enact laws.
Delhi was made by extension of laws force in Punjab and
other States by Notifications issued under the Delhi Laws
Act, 1912 and 1915. This enabled the General-in-Council to
ensure, as far as possible, uniformity of laws with Punjab,
since a substantial part of Delhi had originally formed an
administrative district of that province. After
Independence, Delhi continued to be administered directly by
the Governor of India and the different Departments of that
Government began to deal directly with corresponding
Departments in the Chief Commissioner’s Office. This
arrangement continued till shortly after the commencement of
the Constitution.
In the period immediately after the commencement of the
Constitution, the Part C States Act, 1951 contained a
specific provision, Section 21, in respect of Delhi which
enabled it to have a Legislative Assembly and a Council of
Ministers with restrictive powers to make laws. As a result
of this provision, Delhi continued to have a Legislative
Assembly and a Council of Ministers till 1956.
The States Reorganisation Commission devoted special
attention to the needs of the National Capital. It noted
that the dual control arising from the division of
responsibility between the Union Government and the State
Government of Delhi had not only hampered the development of
the capital, but had also resulted in a "marked
deterioration of administrative standards in Delhi". The
Commission came to the conclusion that the National Capital
must remain under the effective control of the Union
Government. With reference to the plea for a popular
Government, it observed: "We are definitely of the view that
municipal autonomy in the form of the Corporation which will
provide greater local autonomy than is the case in some of
the important federal capitals, is the right, in fact, the
only solution of the problem of Delhi State."
After the Seventh Amendment Act came into force,
following the recommendations of the States Reorganisation
Commission, the Legislative Assembly and the Council of
Ministers for Delhi ceased to exist with effect from
November 1, 1956. Furthermore, the Delhi Municipal Act, 1957
was enacted constituting a Municipal Corporation for the
whole of Delhi with members elected on the basis of adult
franchise. The jurisdiction of the MCD covered almost the
entire Union Territory of Delhi, including both urban and
rural areas. The areas within the limits of NDMC and Delhi
Cantonment Board were kept outside the jurisdiction of the
MCD, but the territorial jurisdiction of the NDMC was
reduced. As already mentioned, the Constitution (Sixty-Ninth
Amendment) Act, 1991 introduced Articles 239AA and 239AB
into the Constitution which provided for a Legislative
Assembly and a Council of Ministers for Delhi. Subsequently,
the Government of National Capital Territory of Delhi Act,
1991 was enacted to supplement these constitutional
provisions.
The Act, which was enacted in 1911, was directly
applicable to Delhi since at that point of time, it was a
district of the State of Punjab. In 1912, when Delhi became
a Chief Commissioner’s Province, the provisions of the Act
and various other Punjab enactments were made t continue in
force in the territory of Delhi by virtue of the Delhi Laws
Act of 1912 and the Delhi Laws Act of 1915. After the
Constitution came into being, the Act was made to continue
by virtue of the provisions of the Part C States Laws Act of
1950 and the Union Territories Laws Act of 1950.
Therefore, at the time when the present dispute arose,
the Act was still in force. However, in 1994, the
Legislative Assembly of the National Capital Territory of
Delhi enacted the New Delhi Municipal Committee Act, 1994
which is the law in force today. The MCD levied property tax
on properties situated within the local limits of its
jurisdiction by virtue of the provisions of the Delhi
Municipal Corporation Act, 1957. However, for the purposes
of deciding the case, we are concerned only with the
provisions of the Act.
Before this Court, a number of parties have advanced
arguments on the various issues involved in the case. Mr. B.
Sen, council for the appellants, NDMC, as also the
intervenor, MCD, began by challenging the essential premises
of the impugned judgment and advanced elaborate arguments on
the manner in which the various Constitutional provisions
that are germane to the case, ought to be interpreted. The
learned Attorney General for India, appearing for the Union
of India, supported the stance adopted by the NDMC. These
submissions were strenuously opposed by Mr. P.P. Rao,
learned counsel for the State of Punjab and in this
endeavour, he was assisted by Mr. A.K. Ganguli, learned
counsel for the State of Tripura who buttressed the position
of the States with his own submissions. The learned counsel
appearing for the State of Rajashthan lent support to the
same.
The Central Issues
As before the High Court, so before us, the controversy
between the parties has, in the main, centred around the
question whether the properties owned and occupied by the
various States within the National Capital Territory of
Delhi are entitled to be exempted from the levy of taxes
under the Act by virtue of the provisions of Article 289(1).
The larger question involved, which will consequently
require our consideration, is whether by virtue of Article
289(1), the States are entitled to exemption from the levy
of taxes imposed by laws made by Parliament under Article
246(4) upon their properties situated within Union
Territories.
At this stage, we may set out the provisions that are
central to the adjudication of the present matter. In the
following table, for the purposes of clarity and
convenience, Articles 285 and 289 of the present
Constitution have been contrasted against their immediate
predecessors, viz., Sections 154 & 155 of the 1935 Act.
------------------------------------------------------------
GOVERNMENT OF INDIA ACT, 1935 CONSTITUTION
OF INDIA
------------------------------------------------------------
Sec. 154
4. Exemption of certain public Art.285 Exemption of property
property from taxation- of the Union from State
Property vested in His taxation - (1) The property
Majesty for purposes of the of the Union shall, save in
government of the Federation so far as Parliament may by
shall, save in so far as any law otherwise provide, be
Federal law may otherwise exempted from all taxes
provide, be exempt from all improve by a State or by any
taxes imposed by, or by any authority within a State.
authority within, a Province
or Federated State:
Provided until any Federal (2) Nothing in clause(1) shall,
law otherwise provides, until Parliament by law
any property so vested otherwise provides, prevent any
which was immediately authority within a State from
before the commencement levying any tax on any property
of Part III of this Act of the Union to which such
liable, or treated as such property was immediately
liable, to any such tax, before the commencement of this
shall so long as that tax Constitution liable or treated
continues, continue to as liable, so long as that tax
be liable, or to be treated continues to be levied in that
as liable, thereto. State.
Sec. 155
5. Exemption of Provincial Art.289 Exemption of property and
Governments and Rulers of income of a State from Union
Federated States in respect taxation - (1) The property
of Federal taxation- and income of a State shall be
(1) Subject as hereinafter exempt from Union taxation.
provided, the Government
of a Province and the Ruler (2) Nothing in clause (1) shall
of a Federated State shall prevent the Union from imposing
not be liable to Federal or authorising the imposition
taxation in respect of if, any tax to such extent,
lands or buildings situate if any, as Parliament may be
in British India or income law provide in respect of a
accruing, arising or trade or business of any kind
received in British India; carried on by,
------------------------------------------------------------
GOVERNMENT OF INDIA ACT, 1935 CONSTITUTION OF INDIA
------------------------------------------------------------
Provided that-
(a) where a trade or business or on behalf of, the
of any kind is carried on by Government of a State, or
or on behalf of the Government any operations connected
of a Province in any part of therewith, or any property
British India outside that used or occupied for the
Province or by a Ruler in any purposes of such trade or
part of British India, nothing business, or any income
in this sub-section shall accruing or arising in
exempt that Government or connection therewith.
Ruler from any Federal
taxation in respect of that
trade or business, or any
operations connected therewith,
or any income arising in
connection occupied for the
purposes thereof;
(b) nothing in this sub-section (3) Nothing in clause (2)
shall exempt a Ruler from any shall apply to any trade
Federal taxation in respect or business, or to any
of any lands, buildings or class of trade or business,
income being his personal which Parliament may be law
property or personal income. declare to be incidental to
the ordinary functions of
government.
(2) Nothing in this Act affects
any exemption from taxation
enjoyed as of right at the
passing of this Act by the
Ruler of an Indian State in
respect of any Indian
Government securities issued
before that date.
Submissions of Counsel
Mr. Sen prefaced his submissions for the NDMC and the
MCD by pointing out that the phrase "Union Taxation" used in
Article 289(1) of the Constitution has not been defined
either in the text of the Constitution or in any of the
decisions rendered by this Court. Pointing out the
differences between Article 285 & 289, Mr. Sen stated that
(i) the former exempts "all taxes" whereas the latter limits
its exemption to taxes relating to "property and income";
and (ii) the former uses the words "imposed by a State or by
any authority within a State" whereas the latter uses the
phrase "Union Taxation". Thereafter, Mr. Sen contrasted
Article 289(1) and Section 155 of the 1935 Act by pointing
out that while Section 155(1) uses the words "lands &
buildings", Article 289(1) uses the word "property". This,
he explained, was on account of the strong position adopted
by representatives of the States in the Constituent Assembly
who had insisted that the ambit of the exemptions be cast
wider.
At this juncture, we may refer to article 246 which
reads as follows:
"246. Subject-matter of laws made
by Parliament and by the
Legislatures of States -- (1)
Notwithstanding anything in clauses
(2) and (3), Parliament has
exclusive power to make laws with
respect to any of the matters
enumerated in List I in the Seventh
Schedule (in this Constitution
referred to as the ‘Union List’).
(2) Notwithstanding anything in
clause (3), Parliament, and,
subject to clause (3), Parliament,
and, subject to clause (1) the
Legislature of any State also, have
power to make laws with respect to
any of the matters enumerated in
list III in the Seventh Schedule
(in this Constitution referred to
as the ‘Concurrent List’).
(3) Subject to clauses (1) and (2),
the Legislature of any State has
exclusive power to make laws for
such State or any part thereof with
respect to any of the matters
enumerated in List II in the
Seventh Schedule (in this
Constitution referred to as the
‘State List’).
(4) Parliament has power to make
laws with respect to any matter for
any part of the territory of India
not included in a State
notwithstanding that such matter is
a matter enumerated in the State
List."
Mr. Sen then submitted that two possible meanings could
be ascribed to the phrase "Union Taxation": (i) Taxes that
are levied by Parliament in exercise of its powers under
Article 246(1) and pertain only to entries in List I of the
Seventh Schedule; (ii) Any tax that is levied as a result of
a law passed by Parliament including those that are
relatable to entries in List II and List III of the Seventh
Schedule. Mr. Sen vehemently urged that the former
interpretation be adopted by this Court. According to him,
acceptance of the latter would lead to anomalous results. He
submitted that when Parliament makes laws in exercise of its
powers under Article 246(4) and in doing so, legislates on
entries in List-II, it is doing so in a different capacity
and the character of these laws is different from ordinary
Union legislations. To drive home the argument, Mr. Sen led
us through certain other provisions of the Constitution,
such as, Articles 249, 250, 252 and the Emergency Provisions
in Part XVIII of the Constitution which empower Parliament
to make laws on entries in List II, but the nature and
effect of these legislations requires that they be not
treated as ordinary Union legislations.
Thereafter, he took us through various provisions in
Part XII of the Constitution with a view to analysing the
distribution of revenues between the Union and the States.
Having done so, he invited our attention to the provisions
of Part VIII of the Constitution to support his stand that a
Union Territory is an independent Constitutional entity akin
to a State and that it has an identity separate from that of
the Union Government. To this end, he drew our attention
towards several decisions of this Court on the question
whether a Union Territory is a State and sought to convince
us that, in the present context, the answer to this query
must be in the affirmative.
Referring to the two decisions of this Court on the
interpretation of Article 289(1) rendered in the Sea Customs
case and the APSRTC case, Mr. Sen contended that the issue
arising before this Court in the present matter had not
arisen for adjudication in either of these two cases. He
submitted that the observation made by Sinha, C.J. in the
former case would, therefore, have to be regarded as obiter
dicta since the issue of laws relating to Union Territories
was not before the Court. He explained that such an
observation was made in the context of situations where
Parliament can directly impose a tax on property to counter
the argument that only States could levy taxes directly on
property under the Constitution. Mr. Sen stated that the
observation was founded on misconcenived premises and that
there were other, more appropriate situations where
Parliament could impose taxes directly on property, such as,
in the case of Entry 3, List I which deals with Cantonments
and the Cantonments Act, 1924 which allows Parliament to
levy taxes for Cantonments. Mr. Sen then contended that such
a power would be available to Parliament even when it enacts
a legislation by using Entry 49, List I which relates to
patents, inventions and designs, and also in the case of a
few other entries in List I.
Thereafter, Mr. Sen contended that, in any event, the
taxes levied by NDMC would not amount to Union Taxation
because they are in the nature of a Municipal Tax. Our
attention was drawn towards the Constitution (Seventh-
Fourth) Amendment Act, 1992 which incorporated Part IXA,
dealing with Municipalities in our Constitution. He argued
that Municipalities now have an elevated Constitutional
status and that since they have their own machinery for
collecting taxes besides having control over the fixing and
charging of the taxes, these taxes cannot be regarded as
part of "Union Taxation". He then took us through the
relevant provisions of the Act, the New Delhi Municipal
Corporation Act, 1994 and the Delhi Municipal Corporation
Act, 1957 to indicate that each of these bodies has been
vested with wide powers of fixing the rates of taxes,
collecting them and then using the proceeds, which go to
specially created municipal funds, towards securing their
objectives. Drawing sustenance from the language of Article
285, which specifically exempts taxes imposed by local
authorities, Mr. Sen submitted that since such an express
exemption is not referred to in Article 289(1), Municipal
Taxes were not meant to be covered within its exemption and,
therefore, the States are bound to pay these taxes to the
NDMC and the MCD.
The learned Attorney General for India began by stating
that it is not the identification of the legislature that
imposes the law which is determinative of the issue of
"Union Taxation". According to him, to determine the true
character of Union Taxation, the subject of the levy must be
analysed. He submitted that when Parliament makes use of its
power under Article 246(4), it does so in an unusual
circumstance where the ‘theme’ of the legislation undergoes
a change. He, therefore, stressed that in determining the
scope of "Union Taxation", attention must be paid to the
‘theme’, (i.e., the context and the specific circumstances
in which the tax is levied) rather than to the ‘author’
(i.e. the body which is levying the tax). He, therefore,
submitted that the interpretation of "Union Taxation" should
be restricted to situations where Parliament makes laws
imposing taxes under Article 246(1).
His next submission was that Articles 285 and 289 do
not exhaust the entire area of taxation under the
Constitution. Referring to certain other provisions where
Parliament is required to make laws for subjects in List II,
the learned Attorney General drew our attention towards
Articles 249, 250, 252, 253 and 357. He then submitted that
these provisions envisage unusual situations where, although
Parliament is the law making body, the resulting laws are
not Union laws in the ordinary sense and the taxes imposed
by these laws cannot be said to form part of "Union
Taxation". He then contended that similarly, laws made by
Parliament under Article 246(4) are not the norm and cannot
be said to form part of "Union Taxation". Thereafter, the
learned Attorney General took us through the constitutional
history of Union Territories and more specifically, that of
the National Capital Territory of Delhi. Having done so, he
stated that such an analysis would reveal that though Union
Territories are not States, they are akin to States, being
nascent States. He explained that the practice in this
regard shows that, in most cases, when a territory is
acquired by the Union and before it is admitted to the
Indian Union as a full-fledged States, it is groomed for
statehood by being nurtured as a Union Territory. He then
referred us to the decision of this Court in Ramesh Birch v.
Union of India, (1989) Supp. 1 SCC 430 at 471, to buttress
his stance that Parliament cannot be expected to draft
legislations for Union Territories on a regular basis and to
explain how it meets with its obligations in this regard.
Mr. P.P. Rao, learned counsel for the States of Punjab
& Haryana, began his submissions by explaining the doctrine
of immunity of instrumentalities, which is said to be the
legal basis for the incorporation of Articles 285 and 289
into our Constitution, and also mentioned the comparative
positions in the American, Canadian and Australian
jurisdictions. He submitted that the doctrine positulates
that in a federal set up, there should be inter-governmental
tax immunities between the federal and State wings. Such an
immunity is a Constitutional limitation on the low-making
power of the respective legislature in the field of taxation
as a whole. After its genesis in the U.S., the doctrine has
come to be accepted in Canada and Australia. Mr. Rao
conceded that though both the 1935 Act as well as the
Constitution had incorporated such reciprocal tax
immunities, they were not adopted to the same extent as in
Canada and Australia. However, unlike in these countries,
the Union of India has a sizeable territory of its own
comprising all the Union Territories specified in the First
Schedule. The power to make laws including laws authorising
levy or collection of taxes of all kinds is conferred
exclusively on the Union Parliament and these territories
would form an important part of the reciprocal tax
immunities.
He then drew our attention to Article 265 which
incorporates an important constitutional limitation on the
power of taxation when it states that "no tax shall be
levied or collected except by authority of law". In India,
there are only two legislatures that are competent to tax:
‘Parliament for the Union’ and the ‘Legislature of a State’.
Therefore, all taxation must fall within either of the
categories - Union Taxation or State Taxation.
Municipalities and other local authorities cannot have an
independent power to tax and that is why there can be no
exemption for Municipal taxes independent of the exemption
for State or Union Taxation. To that extent, he submits, the
contention of Mr. Sen, that Article 289 exempts only Union
Taxation without mentioning municipal taxes which would
imply that the States would not be exempt from paying the
latter, cannot be accepted.
Moving on to the definition of the term "Union
Taxation", Mr. Rao pointed out that in Article 285 the term
"State Taxation" has been defined as "all taxes imposed by a
State or by any authority within a State". He urged us to
adopt a similar interpretation for "Union Taxation" even
though Article 289 does not contain any such definition by
pointing out that being corollaries of each other, these
terms would have been used to convey a similar meaning. If
this definition were to be accepted, "Union Taxation" would
mean "all taxes imposed by the Union" and, therefore, the
State would be entitled for exemption from the taxes imposed
by NDMC. To explain the language and ambit of Articles 285
and 289, Mr. Rao took us through a detailed examination of
the provisions of the 1935 Act with a view to appreciating
the true import of the predecessors of these two provisions,
namely, Sections 154 and 155 of the said Act. To this end,
we were taken through section 5, 6, 94, 99, 100, 104, 154
and 155 and Lists I & II of the Seventh Schedule to the 1935
Act. Mr. Rao, thereafter, contended that under the scheme of
the 1935 Act, it was quite clear that by virtue of Section
155, the Provinces (predecessors of "States") were entitled
to exemption from taxes on ‘lands and buildings’ in the
chief Commissioner’s Provinces (predecessors of "Union
Territories"). He contends that that position continues in
the present Article 289 and, in fact, the immunity is much
wider in scope since ‘property’ is wider than ‘lands and
buildings’. Mr. Rao also led us through the relevant
passages of the Sea Customs case and stressed that both the
minority and the majority opinions in that case had taken
the view that the properties of States situated in Union
Territories were exempt from taxation. To sum up, Mr. Rao
put forth his submissions to counter those put forth by Mr.
Sen and the learned Attorney General towards establishing
that, even while exercising its powers under Article 246(1),
Parliament can levy taxes directly on property.
Mr. A.K. Ganguli, learned counsel for the State of
Tripura, lent support to the submissions of Mr. Rao on the
issue of Parliamentary laws being applicable to Union
Territories; he emphasised that even after the introduction
of Articles 239AA and 239AB in the Constitution, the Delhi
Legislature could not be said to be a legislative body with
plenary powers. The legislative powers conferred on such a
body are restricted and limited to certain spheres and are
subject to the powers of the Parliament to make laws with
respect to any matter for the Union Territories, which
obviously refers to Article 246(4) of the Constitution. By
way of an analogy, he referred us to Article 244 and the
Sixth Schedule to the Constitution which contain provisions
for the administration of Tribal areas in the States of
Assam, Meghalaya, Tripura and Mizoram and provide for bodies
with legislative powers. He led us through decisions of this
Court on the point that the law making powers of these
bodies, though conferred by the Constitution itself, are not
plenary powers as those of Parliament or of the State
Legislatures.
Counsel submitted that the provisions contained in Part
XII of the Constitution relating to distribution of revenue
between the Union and the States are not determinative of
the scope of the expression "Union Taxation" in Article
289(1) as they only indicate that though a large number of
taxes are levied by the Parliament and collected by the
Union Government, eventually, a substantial portion thereof
is distributed amongst the States.
After submitting that the main controversy in this case
is squarely covered by the decision in the Sea Customs case,
Mr. Ganguli pointed out that the Customs case, Mr. Ganguli
pointed out that the Government of India, while preparing
its Receipt Budget, has always treated taxes imposed by
Parliament and collected from the Union Territories as part
of the total tax revenue of the Union Government in which
other taxes such as corporation tax, taxes on income,
customs duties and union excise duties are also included. He
submitted that even in respect of non-tax revenue, the
receipts from the Union Territories are treated as receipts
of the Union Government. He, therefore, contended that even
the Union Government was of the view that "Union Taxation"
included taxes levied by Parliament in Union Territories.
Learned counsel for the State of Rajashthan, Mr. Gupta,
sought to bring to our notice a wider comparative position
of the manner in which countries around the world have
adopted the American doctrine of reciprocal immunity.
Having noticed the submissions of the counsel for the
various parties before us, we may now proceed to express our
opinion on the diverse points raised in the present case.
Analysis of the decisions rendered in the Sea Customs
case and the APSRTC case
The decision in the Sea Customs’ case was occasioned by
the emanation of a proposal to introduce in Parliament a
Bill to amend Section 20 of the Sea Customs Act, 1878, and
Section 3 of the Central Excise and Salt Act, 1944. These
amendments would have led to the imposition of indirect
taxes, namely, excise and customs duties upon the properties
of various States which were being used for purposes other
than those specified in Article 289(2), i.e., for purposes
not relating to trade or business. A number of State
Governments objected that such a law would fall foul of the
interdiction in Article 289(1), and, in view of the
resulting controversy, the President referred, under Article
143, the issue of the constitutionality of the proposed
amendments to this Court. The issue was decided by a
majority of 5 : 4. It was held that the immunity granted to
States in respect of Union Taxation under Article 289
extends only to those taxes that are directly leviable upon
the property and income of the States; since excise and
customs duties are indirect taxes, they would not fall
within the ambit of the exemption in Article 289 and
Parliament could impose such duties upon the property and
income of the States. There were two opinions outlining the
majority view and an equal number for the minority. Sinha,
C.J. delivered the first of the majority judgments on behalf
of himself, Gajendragadkar, Wanchoo and Shah, JJ. while
Rajagopala Ayyangar, J. delivered a separate, concurring
opinion. S.K. Das, J. delivered the first of the minority
opinions on behalf of himself, sarkar and Das Gupta, JJ.
while Hidayatullah, J. rendered a separate minority opinion.
A number of submissions were advanced before the Court
with a view to facilitating a true construction of Article
289(1). In this regard, comparisons were drawn with its
corollary, Article 285 and with the provisions which
inspired the adoption of these two provisions, namely,
Section 154 and 155 of the 1935 Act. The Court was also
required to analyse the scheme of the Constitution relevant
to the issue. For the moment, it is not necessary for us to
analyse those aspects of the decision since, in any event,
we will be required to give our independent consideration to
these matters. We can, therefore, confine ourselves to those
observations that have a direct bearing upon the point at
issue with which we are presently concerned; this aspect
was, however, not specifically adverted to in all the four
opinions.
In his opinion for the majority, Sinha, C.J. has
referred to the essential contentions urged before the
Court. The Upon urged that the exemption in clause (1) of
Article 289 be interpreted restrictively, limiting its
applicability to direct taxes on the property and the income
of States; the States, on the other hand, canvassed for an
expansive interpretation which would exempt them from taxes
having any relation whatsoever to their property and income.
The learned Chief Justice noted that it was not disputed
that the exemption in Article 289(1) was, as far as taxes on
income are concerned, restricted to "Taxes other than on
agricultural income", which is the only entry (Entry 82) in
List I of the Seventh Schedule which enables Parliament to
legislate on taxes relating to income. The learned Chief
Justice considered this to be a significant fact as it meant
that if the income of State was exempt only from taxes on
income, the juxtaposition of the words "property and income"
in Article 289(1) would lead to the inference that property
is also exempt only from direct taxes on property. However,
it was pointed out by the States that List I does not
contain any specific tax on property which would enable
Parliament to pass a law relating to taxes on property and,
that being so, the intention of the framers of the
Constitution must have been to exempt the property of States
from all taxes, be they direct or indirect. To meet this
argument, the learned Solicitor General, appearing for the
Union, put forth several arguments, one of which came to be
accepted by the learned Chief Justice as the main plank upon
which he based his rejection of the contention of the
States. Since these observations are directly relevant to
the present case, they may be extracted here (at p. 812):
"It is true that List-I contains no
tax directly on property like List-
II, but it does not follow from
that that the Union has no power to
impose a tax directly on property
under any circumstances. Article
246(4) gives power to Parliament to
make laws with respect to any
matter for any part of the
territory of India not included in
a State notwithstanding that such
matter is a matter enumerated in
the State List. This means that so
far as Union territories are
concerned Parliament has power to
legislate not only with respect to
items in List I but also with
respect to items in List II.
Therefore, so far as Union
territories are concerned,
Parliament has power to impose a
tax directly on property as such.
It cannot therefore be said that
the exemption of States’ property
under Article 289(1) would be
meaningless as Parliament has no
power to impose any tax directly on
property. If a State has any
property in any Union territory
that property would be exempt from
Union taxation on property under
Article 289(1). The argument
therefore that Article 289(1)
cannot be confined to tax directly
on property because there is no
such tax provided in List I cannot
be accepted."
(Emphasis added)
Thereafter, having referred to the language of Article
285 and the intention of the framers as perceived by him,
the learned Chief Justice came to the conclusion that
immunity granted by Articles 285 and 289 was of similar
ambit and extended only to direct taxes without exempting
indirect taxes such as excise and customs duties.
Das, J., in his dissenting opinion, noted the objection
of the States that List I had no entry which would enable
Parliament to levy a tax directly on property. He took note
of the counter-arguments advanced by the learned Solicitor
General in relation to this aspect but could not bring
himself to agree with the correctness of those propositions.
While refereeing to the argument on Article 246(4), he noted
(at p.843):
"... It would be a case of much ado
about nothing if the Constitution
solemnly provided for an exemption
against ‘property tax’ on State
property only for such rare cases
as are contemplated in Art. 246(4),
the situation of state property in
territory not included in a State.
Such situation would be very rare,
and could have hardly necessitated
a solemn safeguard at the inception
of the Constitution when the States
were classed under Part A or Part b
of the First Schedule. If the wider
interpretation of clause (1) of
Article 289 is accepted, such
property would also be excepted
from Union taxation except in cases
covered by clause (2) of the
article. We find it difficult to
accept the contention that clause
(1) of Article 289 was meant only
for cases covered by Article
246(4)..."
(Emphasis added)
At this juncture, we may note that both Mr. Rao and Mr.
Ganguli were at pains to point out that though Das, J.
rejected the overall contention of the learned Solicitor
General, he had, by stating that the exemption could not
have been provided "only for such rare cases as are
contemplated in Article 246(4)", implicitly accepted that
these cases would fall within the exemption in Article
289(1).
Rajagopala Ayyangar, J., in his separate majority
judgment, makes a specific reference to this contention of
the leaned Solicitor General (at pp. 918-19) but, aside from
stating that "the submission of the learned Solicitor
General not without force" (at p.919), he did not make any
further reference to the matter. Hidayatullah, J., in his
separate minority opinion, did not advert to this issue.
The preceding analysis reveals that the issue at hand
was specifically answered by this Court in the Sea Custom’s
case. We find it difficult to accept Mr. Sen’s contention
that the observations of Sinha, C.J. were made by way of
obiter dicta. Though the issue of legislations applicable in
Union Territories was not specifically before the Court, it
did arise for consideration during its analysis of the power
of Parliament to levy taxes directly upon property. The
latter question was squarely before the the Court and the
issue relating to Union Territories, though incidental to
the main question, necessarily required consideration. The
observations of Sinha, C.J. are unequivocally in favour of
the position adopted by the States before us, who find
themselves in the enviably advantageous position of being
able to draw sustenance from even the observations in the
dissenting judgment of Das, J.
The decision in the Sea Custom’s case was reaffirmed by
a Constitution Bench of this Court in the APSRTC case was a
matter relating to assessment of income-tax. The facts of
that case are not directly relevant for our purpose but,
what is of considerable interest to us is the manner in
which the scheme of Article 289 and its three clauses were
construed. Speaking for the Court, Gajendragadkar, C.J.
outlined the scheme of Article 289 (at p.25) which can be
stated as follows: The general proposition that flows from
clause (1) is that ordinarily, the income derived by a State
both from governmental and non-governmental or commercial
activities shall be immune from income-tax levied by the
Union. Clause (2) then provides an exception and empowers
Parliament to make a law imposing a tax on the income
derived by the Government of a State from trade or business
carried on by it, or on its behalf. If clause (1) had stood
by itself, it would not have been possible to include within
its purview income derived by a State from commercial
activities but since clause (2) empowers Parliament to enact
a law levying taxes on such activities of a State, the
inescapable conclusion is that these activities must be
deemed to have been included in clause (1) and that alone
can be the justification for the onwards in which clause (2)
has been couched in the Constitution. Thereafter, clause (3)
empowers Parliament to declare by law that any trade or
business would be taken out of the purview of clause (2) and
restore it to the area covered by clause (1) by declaring
that the said trade or business is incidental to the
ordinary functions of Government. In other words, clause (3)
is an exception to the exception prescribed by clause (2).
Whatever trade or business is declared to be incidental to
the ordinary functions of Government, would cease to be
governed by clause (2) and would then be exempt from Union
taxation.
These observations of Gajendragadkar, C.J. having been
made in the context of income tax levied in the facts of
that case, mention only taxes relating to income. They are
equally applicable to the taxes relating to property
referred to in Article 289. The essence of this analysis is
that clause (3) of Article 289 is an exception to clause
(2), which in turn is an exception to the first clause of
the Article.
Analysis of this Court’s previous rulings on the
Constitutional status of Union Territories
We may now refer to a catena of decisions of this Court
on the seemingly innocuous issue whether or not a Union
Territory has, under the scheme of our Constitution, a
status distinct from that of the Union and the States. The
fact that so many decisions of this Court exist on the issue
would indicate that the matter is not one that can be
disposed of by simply pointing to the separate parts of the
Constitution which deal with Union Territories as distinct
units.
Before dealing with the specific circumstances of and
the decision in, each of these cases, it is necessary that a
few provisions which figure prominently be dealt with.
Article 246(4) of the Constitution, as it stood on January
26, 1950, allowed Parliament to "make laws with respect to
any matter for any part of the territory of India not
included in Part A or Part B of the First Schedule". The
Seventh Amendment Act brought about a number of changes
affecting Union Territories, some of which have already been
noticed by us. The other changes brought about by it are
also relevant; it caused Article 246 to be changed to its
present form where Parliament is empowered to make laws with
respect to "any part of the territory of India not included
in a State". The word "State" has not been defined in the
Constitution. Article 1(3) defines the territory of India as
comprising: (a) the territories of the States; (b) the Union
Territories specified in the First Schedule; and (c) such
other territories as may be acquired. The word ‘Union
Territory’ has been defined in Article 366(30) to mean "any
Union Territory specified in the First Schedule and includes
any other territory comprised within the territory of India
but not specified in that Schedule".
Tho not defined in the Constitution, the word "State"
has been defined in the General Clauses Act, 1897
(hereinafter called "the General Clauses Act"). Article 367
of the Constitution states that the General Clauses Act,
1897 shall, unless the context otherwise requires and
subject to any adoptions and modifications made under
Article 372, apply for the interpretation of the
Constitution. Therefore, on a plain reading of the
provisions involved, it would appear that the definition of
"State" in the General Clauses Act would be applicable for
the purposes of interpreting the Constitution. Article 372
is the saving clause of the Constitution which enables all
laws in force before the commencement of the Constitution to
continue in the territory of India. Article 372A, which,
once again, owes its origin to the Seventh Amendment Act,
empowers the President to make further adaptations in
particular situations.
Section 3(58) of the General Clauses Act, having been
amended by the Seventh Amendment Act, reads as follows:
"3. Definitions. -- In this Act,
and in all General Acts and
Regulations made after the
commencement of this Act, unless
there is anything repugnant in the
subject or context, --
(58) "State", --
(a) as respects any period before
the commencement of the
Constitution (Seventh Amendment)
Act, 1956, shall mean a Part A
State, a Part B State or a Part C
State; and
(b) as respects any period after
such commencement, shall mean a
State specified in the First
Schedule to the Constitution and
shall include a Union territory;"
(Emphasis added)
The latter part of the definition, which states that a
Union Territory is included within the definition of a
State, has introduced an element of controversy in the
interpretation of the Constitution.
While appreciating the reasoning of this Court in
dealing with cases where it had to confront the issue of the
status of Union Territories, the time-frame and the history
of the Union Territories which we have adverted to in the
earlier part of this judgment, must be borne in mind. The
first of these cases was that of Satya Dev Bushhri v. Padam
Deo and Ors., [1955] 1 S.C.R. 549 This was a case relating
to election law and one of the contention of the appellant,
who was seeking to disqualify the respondents under the
provisions of the Representation of Peoples’ Act, 1951, was
that contracts entered into by the respondents with the Part
C States were, in effect, contracts entered into with the
Central Government. This contention was based on the
reasoning that the executive action of the Central
Government is vested in the President; the President is also
the Executive Head of the Part C States; therefore,
contracts with the Part C States are contracts with the
Central Government. The Court, speaking through Venkataraman
Ayyar, J., rejected this contention and stated that when the
President exercised functions as the Head of the Part C
States, he occupied a position analogous to the Governor in
Part A States. Furthermore, Section 38(22) of the Government
of Part C States Act, 1951 clearly provided that all
executive action of the State would be taken in the name of
the Chief Commissioner. It was, therefore, held that
contracts with the Part C States could not be said to be
contracts with the Central Government. Analysing Articles
239, 240 and 241 of the Constitution, the Court held that it
could not be said that these had the effect of converting
Part C States into the Central Government and that they have
a distinct status. However, when the case came up for
review, in Satya Dev Bushahri v. Padam Deo and Ors., [1955]
1 S.C.R. 561, the Court, after having been directed towards,
and having taken note of the provisions of, Section 3(8) and
Section 3(60) of the General Clauses Act which define
"Central Government" and "State Government" respectively,
and stipulate that for Part C States, references to "State
Government" would mean the "Central Government", held that a
contract with the Chief Commissioner in a Part C State is a
contract with the Central Government. It, however, added
that this would not affect the status of Part C States as
independent units, distinct from the Union Government under
the Constitution.
The State of Madhya Pradesh v. Shri Maula Bux & Ors.,
[1962] 2 S.C.R. 794, a decision rendered by a Constitution
Bench, concerned the State of Vindhya Pradesh which, at the
relevant time, was a Part C State and raised the issue
whether, in a civil suit, the State of Vindhya Pradesh was
the proper party to be sued under Section 79(a) of the Code
of Civil Procedure, 1908. The argument of the respondents,
based on Sections 3(8) and 3(60) of the General Clauses Act,
was that if, in case of the Part C States, "State
Government" means the "Central Government", the proper party
to be sued would be the Union of India instead of the State
of Vindhya Pradesh. Hidayatullah, J., speaking for the
Constitution Bench, at pp. 798-802, relied on the
observations in the first of the Satya Dev cases to the
effect that Part C States had a separate existence and were
not merged with the Central Government and went on to hold
that the State of Vindhya Pradesh, having a distinct
identity, was the proper party to be sued. Although the
reviewed decision in Satya Dev’s case was not referred to,
since the proposition relied upon by Hidayatullah, J. was in
fact reaffirmed in the review, the relevant proposition of
law laid down in the case does not suffer from any
infirmity.
These cases are useful for our purpose to the limited
extent that they declare that Union Territories are not part
of the Central Government and are, to that extent, distinct
Constitutional entities. However, the issue whether Union
Territories are distinct from States was not considered in
these cases; it did however arise for consideration in the
following cases.
In Ram Kishore Sen v. Union of India, [1966] 1 S.C.R.
430, the Court had to consider whether the word "State" used
in article 3(c) of the Constitution would include Union
Territories; the Constitution Bench followed the stipulation
in Articles 367 and 372 to notice the definition of "State"
in Section 3(58) of the General Clauses Act and the context
of Article 3 to hold that the word ‘State’ in Article 3(c)
would have to be interpreted in the light of Section 3(58)
of the General Clause Act and would include Union
Territories. The correctness of this proposition was doubted
by Hidayatullah, J. in a subsequent case which we will refer
to in due course. The fact however remains that the
definition in Section 3(58) of the General Clauses Act has
been utilised for interpreting a Constitutional provision.
The question that therefore arises is whether this will
affect the status of Union Territories in matters relating
to Article 246, to which an answer was provided in a
subsequent case to which we shall immediately advert.
T.M. Kanniyan v. Income-Tax Officer, Pondicherry &
Anr., [1968] 2 S.C.R. 103, was a case in which the
petitioners had challenged the vires of a regulation by
which the President had, in exercise of powers under Article
240, repealed the laws in force in relation to Income-Tax
within the Union Territory of Pondicherry and had made the
Income-Tax Act, 1961 applicable to it. Explaining that
Parliament, and through it the President, had plenary powers
to make laws for Union Territories on all matters, Bachawat,
J., speaking for the Constitution Bench, stated as follows
(at pp. 108-109):
"Parliament has plenary power to
legislate for the Union Territories
with regard to any subject. With
regard to Union Territories there
is no distribution of legislative
powers... [The] inclusive
definition [in Section 3(58) of the
General Clauses Act] is repugnant
to the subject and context of
Article 246. There, the expression
"State" means the States specified
in the First Schedule. There is a
distribution of legislative power
between Parliament and the
legislatures of the States.
Exclusive power to legislate with
respect to the matters enumerated
in the State List is assigned to
the legislatures of the States
established by Part VI. There is no
distribution of legislative power
with respect to Union Territories.
That is why Parliament is given
power by Article 246(4) to
legislate even with respect to
matters enumerated in the State
List. If the inclusive definition
of "State" in Section 3(58) of the
General Clause Act were to apply to
Article 246(4), Parliament would
have no power to legislate for the
Union Territories with respect to
matters enumerated in the State
List and until a legislature
empowered to legislate on those
matters is created under Article
239A for the Union Territories,
there would be no legislature
competent to legislate on those
matters; moreover, for certain
territories such as the Andaman and
Nicobar Islands, no legislature can
be created under Article 239A, and
for such territories there can be
no authority competent to legislate
with respect to matters enumerated
in the State List. Such a
construction is repugnant to the
subject and context of Article 246.
It follows that in view of Article
246(4), Parliament has plenary
powers to make laws for Union
Territories on all matters."
The Court, therefore, held that Parliament was
empowered to make laws for Union Territories on all matters
and the regulation made by the President in exercise of his
powers under Article 240 was valid. The ratio of this
decision, therefore, is that the definition of "State"
provided by Section 3(58) of the General Clauses Act would
not apply for the purposes of Article 246. This ratio is
equally applicable at the present moment for, despite
several changes having been made in respect of Union
Territories since the decision in Kanniyan’s case, of the
seven existing Union Territories, as many as five do not
have Legislature of their own. The controversy was not,
however, put to rest by the decision in Kanniyan’s case.
In Management of Advance Insurance Co. Ltd. v.
Shri Gurudasmal & Ors., [1970] 3 S.C.R. 881, the main
issue before another Constitution Bench was whether the word
"State" used in Entry 80 of List I of the Seventh Schedule
could be said to exclude the application of the definition
in Section 3(58) of the General Clauses Act. Relying on the
decision in Kanniyan’s case, Hidayatullah, J. held that,
ordinarily, the definition would apply in the interpretation
of the Constitution unless it is repugnant to the subject or
context. However, the noted, that after the Seventh
Amendment Act where Union Territories have been mentioned as
separate entities, the distinction between "Union
Territories" and "States" cannot be lost sight of. He
expressly approved the reasoning of Bachawat, J. in holding
that in the context of Article 246, the definition provided
in Section 3(58) would not apply; however, on the facts and
in the circumstances of the case before him, he felt that
the subject and context of Entry 80 of the Union List
required the application of the definition given in Section
3(58). While referring to the decision in Ram Kishore’s
case, Hidayatullah, J. noted that this decision was per
incuriam for the reason that it referred to Article 372
whereas the proper reference ought to have been to Article
372A.
The same issue was thereafter considered by a
Constitution Bench in S.K. Singh v. Shri V.V. Giri, [1971] 2
S.C.R. 197, wherein Bhargava, J., while delivering an
opinion concurring with the majority, reached the conclusion
that the definition in Section 3(58) of the General Clauses
Act would not apply to matters involving interpretation of
the Constitution. The case, which involved a challenge to
the election of Shri V.V. Giri as the President of India,
required the Court to consider the issue in the context of
Article 54 which provides that the electoral college for the
President consists of the elected members of both Houses of
Parliament, and the elected members of the Legislative
Assemblies of the States. Relying on the definition of
"State" in Section 3(58) of the General Clauses Act, it was
argued that Union Territories are also States and,
consequently, the elected members of the Legislative
Assemblies of the Union Territories must also be included in
the electoral college; their omission was said to be a
material irregularity which would vitiate the election.
Responding to this contention, the learned Judge held as
follows (at pp. 313-314):
"Article 54, no doubt, lays down
that all elected members of the
legislative assemblies of the
States are to be included in the
electoral college; but the word
‘States’ used Territories. It is
true that, under Article 367, the
General Clauses Act applies for
interpretation of the Constitution
as it applies for the
interpretation of an Act of the
legislature of the Dominion of
India; but that Act has been
applied as it stood on 26th
January, 1950, when the
Constitution came into force,
subject only to any adoptions and
modifications that may be made
therein under Article 372. The
General Clausers Act, as it was in
1950 and as adapted or modified
under Article 372, did not define
"State" so as to include a Union
Territory. The Constitution was
amended by the Constitution
(Seventh Amendment) Act, 1956,
which introduced Article 372A in
the Constitution permitting
adoptions and modifications of all
laws which may be necessary or
expedient for the purpose of
bringing the provisions of the law
into accord with the Constitution
as amended by the Seventh Amendment
Act, 1956. It was in exercise of
this power under Article 372A that
Section 3(58) of the General
Clauses Act was amended, so that,
thereafter, "State" as defined
include Union Territories also. The
new definition of "State" in
Clauses Act as a result of
modifications and adoptions under
Article 372A would, no doubt, apply
to the interpretation of all laws
of Parliament, but it cannot apply
to the interpretation of the
Constitution, because Article 367
was not amended and it was not laid
down that the General Clauses Act,
as adapted or modified under any
Article other than Article 372,
will also apply to the
interpretation of the Constitution.
Since, until its amendment in 1956,
Clauses Act did not define "State"
as including Union Territories for
purposes of interpretation of
Article 54, the Union Territories
cannot be treated as included in
the word "State"."
The view of the learned Judge does seem to have
considerable force and it is also to be remembered that
Hidayatullah, J. had doubted the correctness of the
proposition laid down in Ram Kishore’s case on the ground
that the proper reference in it should have been to Article
372A, rather than to Article 372. However, we must refrain
from making any comment because the issue whether or not the
General Clause Act applies to the interpretation of the
Constitution is not properly before us in the facts and
circumstances of the present case; what is more, no
arguments have been canvassed before us on this issue. For
the present, we can draw support from the observations in
Kanniyan’s case as affirmed in the Advance Insurance case to
the effect that the definition in Section 3(58) of the
General Clauses Act is repugnant to the subject and context
of Article 246. We can, therefore, proceed on the assumption
that for our purposes, a Union Territory is not a State; we
must, however, hasten to add that this assumption will be
open to reconsideration subsequent to our analysis of the
Constitutional scheme regarding the issues before us.
Interpretation of "Union Taxation" in Article 289(1)
and scope of its ambit.
We may now address the central issue in the case which
involves the determination of the ambit of Article 289(1).
In order to appreciate the true import of the words used in
this provision, it will be to our benefit to examine the
Constitutional history of Article 289 as well as that of its
corollary, Article 285.
Articles 285 and 289 are modified versions of Sections
154 and 155 of the 1953 Act, as in obvious from a
comparative study made in the earlier part of this judgment.
While Articles 285 and 289 seek to provide reciprocal
immunities within the Republic of India to the Union and the
States from each other’s taxing powers, Sections 154 and 155
strove to achieve the same result within British India in
respect of the Federal Government on the one hand, and the
Governments of the Provinces and the Federal States on the
other. However, in the process of adopting the provisions of
the 1935 Act for our Constitution, a number of changes
occurred and we must analyse some of these in greater detail
for they are extremely relevant for our purposes.
To appreciate the true import of Sections 154 and 155,
it will be necessary to refer to a few provisions of the
1935 Act so as to obtain an understanding of its general
scheme. Section 5 of the 1935 Act stated that the Federation
of India would comprise the Provisions, the Indian States
and the Chief Commissioner’s Provinces. Section 6 defined a
‘Federated States’ as an Indian State which had acceded to
or might accede to the Federation. Section 94 provided a
list of the Chief Commissioner’s Provinces and stated that
they would be administered by the Governor General acting
through a Chief Commissioner. Section 99, which provided the
manner in which legislative powers were to be distributed
between the Federal and Provincial legislatures, stated that
the Federal Legislature was empowered to make laws for the
whole or any part of British India or for any Federated
States, while the Provincial Legislatures were empowered to
make laws for the provinces. Section 311(1) defined ‘British
India’ as "All territories or the time being comprised
within the Governor’s Provinces and the Chief Commissioner’s
Provinces". Section 100, which dealt with the subject matter
of Federal and Provincial laws, provided that the Federal
Legislature would have power to make laws with respect to
matters enumerated in List I of the Seventh Schedule to the
1935 Act, which was to be called the "Federal Legislative
List"; the Provincial Legislature would have powers to make
laws in respect of matters in List II of the Seventh
Schedule, called "the Provincial Legislative List"; and, in
respect of Matters provided in List III of the Seventh
Schedule, called "the Concurrent Legislative List", both the
Provincial and the Federal Legislature would have
jurisdiction. Clause (4) of Section 100, which is of
considerable importance for our purpose, provided in express
terms that the Federal Legislature would have "power to make
laws with respect to matters enumerated in the Provincial
Legislative List except for a Province or any part thereof".
It was, therefore, clearly contemplated that the Federal
Legislature would have the power to make laws for matters in
the Provincial Legislative List in respect of the Chief
Commissioner’s Provinces and the Federated States. Under the
scheme of the 1935 Act, situations where the Federal
Legislature could enact laws with respect to matters in the
Provincial Legislative List were, therefore, not considered
to be rare or unusual.
While both the Federal Legislative List and the
Provincial Legislative List contained entries allowing the
levy of taxes, the Federal Legislative List did not contain
any entry which allowed the Federal Legislature to levy
taxes directly on property. Entry 42 of the Provincial
Legislative List empowered the Provincial Legislatures to
levy taxes specifically on lands and buildings. The
Concurrent Legislative List contained only one entry
relating to taxes, namely, Entry 13 which referred to stamp
duties.
Section 154, in material terms, provided that the
property of the Federal Government would be exempt from all
taxes imposed by Provinces and Federated States and the
local authorities within them. The proviso added that, in
the absence of any Federal law stipulating otherwise, those
properties of the Federal Government which were subject to
the levy of taxes before the commencement of Part III of
that Act would continue to be liable to pay them. The
exemption in Section 154, therfore, did not extend to such
taxes, including taxes levied under Municipal laws. It is to
be noted that Section 154 did not provide for an exemption
in respect of the income of the Federal Government primarily
because the Provinces lacked the legislative competence to
enact laws levying taxes on income.
Section 155(1) stated that the Government of a Province
and the ruler of a Federated State would not be liable to
"Federal Taxation" in respect of "lands or buildings
situated in British India". Proviso (a) stipulated that all
the trading and business activities carried on by Provinces
and the Federated States outside their territorial
jurisdiction would be subjected to Federal Taxation in
British India. Provision (b) stipulated that the personal
property and income of a Ruler of a Federated State would
also be subject to Federal Taxation. Clause (2) of the
Section being self-explanatory, does not require
elucidation. In response to a query from us, Mr. Sen sought
to find the reason for the existence of the exemption in
Section 155(1); it appears that the purpose was to avoid the
liabilities imposed by Sections 3 and 9 of the Income Tax
Act, 1912 upon the Provinces.
Comprising the text of Sections 154 and 155, it becomes
clear that even under the scheme of the 1935 Act, the ambit
of the reciprocal immunities was not equal in length and
breadth; while Section 154 exempted the property of the
Federal Government from "all taxes", the Provincial
Governments and Rulers of Federated States were entitled to
an exemption only in respect of "lands or buildings"
situated in British India and "income" accruing thereof.
This feature will gain some importance when we deal with the
comparative Constitutional position at a later stage.
The term "Federal Taxation" was not defined in the 1935 Act
but some clue to its meaning can be discerned by referring
to Sections 99 and 100 which described the legislative
powers of the Federal Legislature. As we have already seen,
the Federal Legislative List did not allow the Federal
Legislature to levy taxes on lands and buildings; in fact
this subject was expressly included in the Provincial
Legislative List. On the face of it, this would make the
exemption in Section 155 otiose. However, the confusion
clears when one notices Clause (4) of Section 100 which
expressly enables the Federal Legislature to legislate in
respect of matters in the Provincial Legislative List for
territories apart from the Provinces. Viewed in this
context, and taking into account the definition of "British
India" in Section 311(1), Section 155 would have to be read
as exempting the Governments of Provinces and the rulers of
Federated States from "Federal Taxation" in respect of lands
or buildings situated in the Chief Commissioner’s Provinces.
This is the only possible interpretation which will give
meaning to the words of Section 155. Since, at the time of
the enactment of the legislation, there were only six
territories classified as Chief Commissioner’s Provinces,
the exemption could not be said to be at par with the
exemption provided in Section 154 but, all the same, in
terms of the revenue amount involved, it could not be
considered insignificant either. It therefore becomes clear
that, under the scheme of the 1935 Act, "Federal Taxation"
included taxes leviable by the Federal Government in the
Chief Commissioner’s Provinces and that the properties of
the Provinces and the Rulers of the Federated States
situated within these Chief Commissioners Provinces would be
exempt from such "Federal Taxation". It remains to be seen
whether the position came to be changed during the process
of transformation of these sections into the existing
provisions of the Constitution.
In the earlier stages of the framing of the
Constitution, the issue of financial relations between the
Centre and the units was addressed by two Committees - the
Union Powers Committee and the Union Constitution Committee.
These Committees recommended that the schemes envisaged by
the 1935 Act should be generally followed. In the Draft
Constitution prepared by the Constitutional Adviser, Sir
B.N. Rau, in October 1947, Clauses 205 and 207 were modified
versions of Sections 154 and 155. On October 2, 1947, an
Expert Committee on Financial Provisions was appointed to
make recommendations as to the provisions on the subject to
be embodied in the new Constitution after taking into
account the views of the States and also the Draft prepared
by the Constitutional Adviser. The Drafting Committee of the
Constitution took up the issue in January 1948 and took into
consideration the Drafts prepared by the Constitutional
Adviser as also the Expert Committee on Financial Provision.
Thereafter, these provisions came to be numbered as Articles
264 and 266 of the Draft Constitution. After the Constitute
Assembly had considered the matter at length and formally
approved these provisions, they came to be renumbered as
Articles 285 and 289.
The present Article 285 is much the same as its
predecessor Section 154 and, though there were some changes
in its text as the provision charted its course through the
stages enumerated above, not being relevant for our
purposes, we shall ignore its discussion.
The present Article 289 was Clause 207 in the Draft
Constitution prepared by the Constitutional Adviser. It
provided that the Government of a unit would not be liable
to Federal Taxation in respect of lands or buildings
situated within the territories of the Federation or income
accruing, arising or received within such territories; the
two exceptions provided were in favour of (a) any income
accruing to a unit’s Government through trade or business
and (b) the personal property or the personal income of the
Ruler of Indian State. As we have observed, under Section
155, the Provinces and Federated States were liable to
taxation only in respect of trade and business operations
carried on by them outside their own territories. To that
extent Clause 207 had made a substantial departure. The
Constitutional Adviser relied on the decisions of the
Supreme Court of the United States of America in McCulloch
v. Maryland, 4 L. Ed 579 (1890), and South Carolina v.
United States, 199 U.S. 437 (1905), to buttress his stance
that the Federation should have the power to tax the units,
but not vice versa for the reason that when the Federation
taxed the instrumentalities of the units, it taxed its
constituents, whereas when a unit taxed the operations of
the Federal Government, it acted upon instrumentalities
created, not by its own constituents, but by people over
whom it could claim no control.
The Expert Committee on Financial Provisions approved
the Constitutional Adviser’s recommendation that the trading
operations of the units, as also of local bodies, whether
carried on within or without their jurisdiction should be
liable to central taxation; they, however, suggested that
quasi-trading operations incidental to the normal functions
of Government should be exempt from such taxation.
When the Drafting Committee took up the matter, it duly
noted the recommendations of the Constitutional Adviser and
the Expert Committee and, in July 1949, convened a Premier’s
Conference to discuss these provisions. Draft Article 266
came in for a lot of criticism and a number of States
suggested that insofar as Article 266 did not exempt the
trading and business operations of State Governments from
Union Taxation, it be dispensed with altogether. Other
suggestions were also forwarded to the Drafting Committee: a
number of States were of the view that the provision was
inequitable and one-sided insofar as it sought to subject
trade and business operations of the State Governments to
Union Taxation, while under Article 264, States were
debarred from taxing the property of the Union. Such a
provision, it was felt, was bound to retard the industrial
development of the Provinces, taking away the incentive for
State enterprise.
Reconsidering the provision in the light of the
comments of the Provincial Governments, the Drafting
Committee decided, in consultation with the Central Ministry
of Finance, to introduce some important changes in Article
266. The ambit of the exemption in Clause (1) was expanded
by including ‘property’ instead of ‘lands or buildings’
thereby bringing within its purview, movable property as
well. On the issue of trade and business, a provision
similar to the present Article 289(2) was included. This
provision would enable Parliament to pass a law to declare
which of the trading and business activities of the States
were to be classified as ordinary functions of the
Government allowing them to be exempted, and making the rest
of the activities liable to tax. Drafting Article 266 was
considered by the Constitutent Assembly on September 9,
1949. Some members representing the States of Tranvancore-
Cochin and Mysore expressed apprehensions that Union
Taxation of industrial and commercial activities would check
the expansion of industrialisation and would reduce the
capacity of States to discharge their ordinary governmental
functions. Mr. P.T. Chacko from Travancore-Cochin referred
to the principle of immunity from inter-governmental
taxation as it stood in the United States of America and the
fact of its incorporation in Draft Article 264; he sought
the extension of the doctrine to States as well. While
allaying their apprehensions, Mr. Alladi Krishnaswami Ayyar
noted the fact that the Australian, Canadian and American
Constitutions had incorporated the principle of inter-
governmental immunities. He stated that the Australian and
Canadian experiences were irrelevant for the purposes of the
Indian Constitution for, when they were drafted, it was not
envisaged that large schemes of socialisation would be
implemented. referring to the American position, he pointed
out that even within that jurisdiction, the doctrine had
begun to lose favour and was in the process of being
discarded. Thereafter, he observed that under the provision
as it was placed before the Constituent Assembly, Parliament
was left with the option of making the law which would
declare those trading and business operations of the States
which would be liable to Union Taxation after taking into
account the general interests of trade and industry of the
whole country and other democratic factors. He therfore felt
that the provision was "very salutary". Subsequently,
following the reassurances given by the Central Finance
Minister, the amendments were withdrawn and Draft Article
266 was accepted in toto. [Note: For a study of the
evolution of Articles 285 and 289 within the Constituent
Assembly, See B. Shiva Rao, The Framing of the Indian
Constitution: A Study, N.M. Tripathi Pvt. Ltd., Bombay
(1968) pp. 649-99; for reference to original documents, See
B. Shiva Rao, ibid, Vols. III & IV].
Mr. P.P. Rao and the other learned counsel appearing
for the States have argued before us that the present
Articles 285 and 289 are based on the U.S. doctrine of
reciprocal immunity of instrumentalities which has also been
incorporated in the Canadian and Australian Constitution,
apart from certain other Constitutions. Before we begin to
examine the text of Articles 285 and 289 with to finding a
solution to the Constitutional conundrum posed by the case
before us, we must analyse this proposition closely.
The doctrine of inter-governmental immunity has been
the subject to some controversy in the country of its
origin, the United States of America. The origin of this
doctrine is ascribed to the judgment of Chief Justice John
Marshall in the case of McCulloch v. Maryland (supra).
However, as pointed out by commentators, on the facts of the
case, where a State Tax sought to be levied on a Federal
Bank was held to be void, the decision was more in favour of
declaring the supremacy of the Federal Government than of
upholding the rights of States. It was, therefore, the basis
for establishing federal immunity from State Taxation.
However, later decisions interpreted the judgment to hold
that its corollary, that the property of States would be
exempt from Federal Taxation was equally applicable; more
than 50 years after the decision in McCulloch’s case, the
Supreme Court, in Collector v. Day, [[11. Wall. 113 (1871)]
made the theory of inter-governmental immunity reciprocal.
The doctrine, as propounded in Collector Vs. Day, was never
applied widely and, in subsequent years, underwent
significant modifications. In The South Carolina case, which
was the second case relied upon the Constitutional Adviser
in preparing Clause 207 of his Draft Constitution, the
Supreme Court dealt a further blow to the concept of
immunity of States from Federal Taxation, when it held that
South Carolina was bound to pay a National Excise Tax on
liquor-dealers which was being levied by the Federal
Government. The Supreme Court drew a distinction between
State functions which were strictly governmental and those
which were commercial in nature; it was held that the
governmental functions of State would be immune from
taxation but when the States entered into ordinary business,
no immunity would exist. This created fresh problems and
over time, several Judges of the Supreme Court protested
against the illogical distinction between governmental and
business activities, calling for a complete reexamination of
the entire doctrine. In later years, the doctrine was
considerably modified. In recent years, the Supreme Court
has come to recognise a narrower tax immunity for the States
than for the National Government on the basis of a theory
that combines the principle of national supremacy with the
argument that the interests of States received more
representation in Congress than national interest received
in State Legislature. It is to be noted that we have had
this position from the time that the Constitution was
originally enacted.
As we have already noticed, the Constitutional Adviser
relied upon the decisions in McCulloch’s case and The South
Carolina case, for justifying the reduction in the ambit of
the immunity of States from Union Taxation rather than for
establishing reciprocal immunity between the States and the
Union. Furthermore, in the Constituent Assembly, Mr. Alladi
Krishanswami Ayyar had doubted the applicability of the
doctrine to the Indian Constitution and had instead
commended the present scheme whereby the troublesome issue
of determining which of the trading and business operations
of State should be subject to Union Taxation has been left
to Parliament; while enacting such a law Parliament would be
forced to cater to the interests of the States on account of
the presence of their representatives in it. The usefulness
of any further discussion on the applicability of this
doctrine to the Indian Constitution is rendered questionable
by virtue of the fact that this Court had, on earlier
occasions, rejected it. In State of West Bengal v. Union of
India, [1964] 1 S.C.R. 371, Sinha, C.J., speaking for the
majority in a six-Judge Constitution Bench expressly held
(at p. 407) that the doctrine of immunity of
instrumentalities had been rejected by the Privy Council as
inapplicable to the Canadian and Australian Constitutions
and having practically been given up in the United States,
it was equally inapplicable to the Indian Constitution. In
the APSRTC case (supra, at p. 24), the Court rejected the
contention of the Advocate-General of Andhra Pradesh urging
it to adopt the American doctrine, by relying upon these
observations of Sinha, C.J.
It is, therefore, clear that in seeking a solution to
the problem faced by us, we must rely primarily on the bare
text of Articles 285 and 289. Comparing these provisions, it
becomes evident that the Constitution does envisage some
form of inter-governmental immunity. Article 285(1), while
exempting the property of the Union from all taxes, does not
attempt to provide an exemption in respect of income as the
States do not possess legislative competence to levy taxes
on income as such; however, taxes relating to income that
have a bearing on property such as the taxes on agricultural
income levied by using Entry 46 of the State List will also
be exempt in view of the wide-ranging, all-embracing nature
of the exemption. Article 285(2) saves, until Parliament by
law decides otherwise, all pre-Constitutional taxes
applicable to Union property.
With respect to Article 289, we have already examined
the manner in which this provision was analysed by this
Court in the APSRTC case. We are in agreement with the
proposition that the three clauses of Article 289 are
interlinked, in that, Clause (3) is an exception to Clause
(2) which in turn is an exception to Clause (1). As we have
noticed for ourselves, the framers of the Constitution had
consciously conferred Parliament with the option of deciding
which of the trading and business activities of the States
would be subject to the levy of Union taxes. So, while
Article 289(1) generally exempts the property and income of
the States from Union taxation, Clauses (2) and (3) grant to
Parliament the aforementioned prerogatives.
Having understood the scheme of Articles 285 and 289,
we must sharply focus on the specific wording of Article
289(1) and, in particular, on the meaning of the phrase
"Union Taxation". It may be noted that the phrase "Union
Taxation" appears in only two places in the entire
Constitution - in the marginal heading of Article 289 and in
the main text of Article 289(1). It is suggested that some
guidance may be obtained by analysing the term "State
Taxation" which appears in the marginal heading of Article
285 and has been described in the text of Article 285(1) as
"all taxes imposed by a State". On that reasoning, "Union
Taxation" would mean "all taxes imposed by the Union".
The word "taxation" has been defined in Article 366(28)
which states that unless the context otherwise requires, the
word "taxation" includes "the imposition of any tax or
impost, whether general or local or special and, ‘tax’ shall
be construed accordingly". This definition was accepted by
Das, J. and Hidayatullah, J. in their minority opinions (at
pp. 834-35 and 893-94 respectively) in the Sea Customs case
for interpreting Article 289(1). However, Sinha, C.J., in
his majority opinion (at pp. 923-34), rejected the
application of this definition to Article 289(1) as, in his
opinion, the context of Article 289(1) precluded the
application of the definition. Rajagopala Ayyangar, J., in
his separate majority opinion (at pp. 921-93), also felt
that the definition would not apply. We concur with the
majority view in the Sea Customs case that the definition of
"taxation" provided in Article 366(28) will not apply for
the purpose of interpreting Article 289(1).
Our attention has been drawn towards the provisions
contained in Part XII of the Constitution which has a
bearing on the scheme of the Constitution with respect to
financial relations between the Union and the States. Since
this aspect and its relevance to Article 289(1) was
discussed at length in the Sea Customs case, we may advert
to those observations. Das, J. (at p. 852), was of the
opinion that the provisions of Part XII of the Constitution
would have no bearing on the import of Articles 285 and 289
which ought to be construed on their own terms. Sinha, C.J.,
however, analysed these provisions at length and the
relevant observations in this behalf may be reproduced (at
pp. 809-10):
"It will thus appear that Part XII
of the Constitution has made
elaborate provisions as to the
revenues of the Union and of the
States, and as to how the Union
will share the proceeds of duties
and taxes imposed by it and
collected either by the Union or by
the States. Sources of revenue
which have been allocated to the
Union are not meant entirely for
the purposes of the Union but have
to be distributed according to the
principles laid down by
Parliamentary legislation as
contemplated by the Articles
aforesaid. Thus all the taxes and
duties levied by the Union and
collected either by the Union or by
the States do not form part of the
Consolidated Fund of India but many
of those taxes and duties are
distributed among the States and
form part of the Consolidated Fund
of the States. Even those taxes and
duties which constitute the
Consolidated Fund of India may
constitute the Consolidated Fund of
India may be used for the purposes
of supplementing the revenues of
the States in accordance with their
needs. ....The financial
arrangement and adjustment
suggested in Part XII of the
Constitution has been designed by
the Constitution-makers in such a
way as to ensure an equitable
distribution of the revenues
between the Union and the States,
even though those revenues may be
derived from taxes and duties
imposed by the Union and collected
by it or through the agency of the
States. ....It will thus be seen
that the powers of taxation
assigned to the Union are based
mostly on considerations of
convenience of imposition and
collection and not with a view to
allocate them solely to the Union;
that is to say, it was not intended
that all taxes and duties imposed
by the Union Parliament should be
expended on the activities of the
Centre and not on the activities of
the States. ...The resources of the
Union Government are not meant
exclusively for the benefit of the
Union activities; they are also
meant for subsidising the
activities of the States in
accordance with their respective
needs, irrespective of the amounts
collected by or through them. In
other words, the Union and the
States together form one organic
whole for the purposes of
utilisation of the resources of the
territories of India as a whole."
We are of the view that an analysis of some of the
provisions in Part XI, Chapter I of the Constitution, which
deals with the legislative relations between the Union and
the States will be crucial to the determination of the
central issue in this case. We may first notice certain
provisions in the Constitution which enable Parliament to
make laws for subjects contained in the State List, to which
our attention was drawn by counsel for the appellants as
also the learned Attorney General. We must note that these
provisions conceive of extraordinary situations. Article 279
provides for a situation where, if the Council of States
declare by a resolution that it is necessary in the national
interest to do so, Parliament may make laws in respect of
matters enumerated in the State List. Article 250 empowers
Parliament to make laws for the whole or any part of India
in respect of matters enumerated in the State List while a
Proclamation of Emergency is in operation. Article 252
empowers Parliament to make laws with respect to matters
enumerated in the State List if two or more States resolve
that such a course of action is desirable. Article 253
reserves to Parliament the exclusive power to make laws for
the whole or any part of the territory of India for
implementing any treaty, agreement or convention with any
other country or any decision made at any international
conference, association or any other body. The Emergency
Provisions outlined in Part XVIII of the Constitution and
comprising Articles 352 to 360 conceive of special
situations in which Parliament is empowered to enact laws on
matters in List II.
It has been urged that when Parliament legislates for
Union Territories in exercise of powers under Article
246(4), it is a situation similar to those enumerated above
and is to be treated as an exceptional situation, not
forming part of the ordinary constitutional scheme and hence
falling outside the ambit of "Union Taxation". Having
analysed the scheme of Part VIII of the Constitution
including the changes wrought into it, we are of the view
that despite the fact that, of late, Union Territories have
been granted greater powers, they continue to be very much
under the control and supervision of the Union Government
for their governance. Some clue as to the reasons for the
recent amendments in Part VIII may be found in the
observations of this Court in Ramesh Brich’s case, which we
have extracted earlier. It is possible that since Parliament
may not have enough time at its disposal to enact entire
volumes of legislations for certain Union Territories, it
may decide, at least in respect of those Union Territories
whose importance is enhanced on account of the size of their
territories and their geographical location, that they
should be given more autonomy in legislative matters.
However, these changes will not have the effect of making
such Union Territories as independent as the States. This
point is best illustrated by referring to the case of the
National Capital Territory of Delhi which is today a Union
Territory and enjoys the maximum autonomy on account of the
fact that it has a Legislature created by the Constitution.
However, Clauses 3(b) and 3(c) of Article 239AA make it
abundantly clear that the plenary power to legislate upon
matters affecting Delhi still vests with Parliament as it
retains the power to legislate upon any matter relating to
Delhi and, in the event of any repugnancy, it is the
Parliamentary law which will prevail. It is, therefore,
clear that Union Territories are in fact under the
supervision of the Union Government and it cannot be
contended that their position is akin to that of the States.
Having analysed the relevant Constitutional provisions as
also the applicable precedents, we are of the view that
under the scheme of the Indian Constitution, the position of
the Union Territories cannot be equated with that of the
States. Though they do have a separate identity within the
Constitutional framework, this will not enable them to avail
of the privileges available to the States.
It has been urged before us that the phrase "Union
Taxation" has to be interpreted in the context of Article
246, which deals with the subject matter of laws made by
Parliament and the State Legislatures, and that the context
of "Union Taxation" should be limited to those matter
falling within Articles 246(1), where Parliament has the
legislative competence to levy taxes with respect to matters
enumerated in the Union List. We see no reason why such a
limiting principle must be read into the definition of the
phrase "Union Taxation". In our view, the term can and
should be given the widest amplitude, allowing it to
encompass all taxes that are levied by the authority of
Parliamentary laws. Though the amplitude of the term "Union
Taxation" was not expressly before the Court in the Sea
Customs case, it is clear from an analysis of the majority
judgment that the learned Judges considered the term "Union
Taxation" to mean all taxes leviable by the Union. As Clause
(4) of Article 246 itself envisages situations where
Parliament is to make laws in respect of matters in the
State List, it cannot be said that this is a rare or an
unusual circumstance. The Constitution does not contain any
provision which would indicate that the definition of "Union
Taxation" should be restrictively interpreted so as to be
within the confines of Article 246(1). The specific
situations envisaged in Articles 249, 250, 252, 253 and the
Emergency Provisions in Part XVIII of the Constitution do
not make for the creation of any anomalous situations. These
Articles, which provide for unusual exercises of
Parliamentary power involving the matters enumerated in the
State List, can be regarded as exceptions to the general
rule. We are, therefore, of the view that, unless the
context requires otherwise - as in the case of Articles 249,
250, 252, 253 and the Emergency Provisions in Part XVIII of
the Constitution - the broad definition of "Union Taxation"
embracing all taxes leviable by Parliament ought to be
accepted for the purpose of interpreting Article 289(1).
As already noticed by us, under the scheme of the 1935
Act, those lands or buildings of the Provinces and Federated
States which were situated within the Chief Commissioner’s
Provinces were, by virtue of Section 155(1), exempted from
Federal Taxation. There can be dispute about such a
construction of the provision for, otherwise, the exemption
in Section 155(1) would have no meaning. Section 155(1)
formed the basis for the present Article 289(1) and, having
closely examined the various stages by which Article 289(1)
replaced Section 155(1), we find that this position was
never sought to be deviated from. The presumption,
therefore, is that it was the intention of the framers of
the Constitution to maintain the status quo with respect to
the position regarding the Chief Commissioner’s Provinces
which are now called "Union Territories". That presumption
is further reinforced by the general scheme of the
Constitution which furthers Article 289(1) and its
applicability in respect of the Union Territories.
Unlike other Federations, the Union of India has a
sizeable territory of its own comprising the Union
Territories which have been specified in the First Schedule
to the Constitution. Therefore, the limited reciprocal
inter-governmental immunity bestowed by the Constitution in
Articles 285 and 289 is given fuller meaning by virtue of
the adoption of the wider meaning of "Union Taxation"; this
would mean that, just as the properties of the Union are
exempt from taxes on property leviable by the States, the
properties of the States will also be exempt from taxes on
property leviable by the Union in areas falling within its
territorial jurisdiction.
While attempting to demonstrate that the reasoning of
Sinha, C.J. in the Sea Customs case was incorrect insofar as
his acceptance of the contention that Article 246(4) enables
Parliament to levy taxes directly on property was concerned,
Mr. B. Sen contended that Article 246(4) was not in the
contemplation of the framers of the Constitution when they
carved out the exemption in favour of the property of the
States from Union Taxation; he then proceeded to cite
examples of specific circumstances in which Parliament can
levy taxes directly on property which, according to him, was
what the framers had intended to exempt under Article
289(1). He drew our attention to Entry 3 of the Union List
["Delimitation of Cantonment areas, local self-government in
such areas, the constitution and powers within such areas of
cantonment authorities and the regulation of home
accommodation (including the control of rents) in such
areas"] and stated that by virtue of this entry, Parliament
is rendered competent to levy taxes on the use or occupation
of properties located within areas declared as Cantonments.
He then referred to Entry 54 of the Union List ("Regulation
of mines and mineral development to the extent to which such
regulation and development under the control of the Union is
declared by Parliament by law to be expedient in the public
interest") and to the Mines and Minerals (Regulation &
Development) Act, 1956 which together empower Parliament to
levy taxes on mines and minerals which would be in the
nature of a tax on property. Referring to Entry 49 of the
Union List ("Patents, Inventions and Designs; copyright;
trade-marks and merchandise marks"), Mr. Sen contended that
since these subjects are regarded as intangible or
incorporeal properties, taxes levied by Parliament upon them
would also amount to taxes on property. Additionally, Mr.
Sen has referred to the following Entries in the Union
Lists: Entries 24 & 25 (relating to Shipping activities),
Entry 47 ("Insurance"), Entry 52 ("Industries, the control
of which by the Union is declared by Parliament by law to be
in the public interest"): to demonstrate that Parliament
does have power to levy taxes directly on property.
Mr. A.K. Ganguli controverted Mr. Sen’s contention in
this respect; he argued that Entry 3 of the Union List does
not contemplate the levy of taxes by Parliament. With
respect to Entries 47 & 54, he argued that these entries
would be covered by Article 289(2) of the Constitution. The
same contention would, presumably, be applicable in respect
of the other entries cited by Mr. Sen.
In our opinion, there is no warrant for an
authoritative pronouncement upon this aspect for, even if we
assume that Mr. Sen’s contention is correct and that all
these Entries do in fact empower Parliament to levy taxes
directly on property, it would not in any way detract from
the correctness of our interpretation that the levy of taxes
under Article 246(4) is covered by the phrase "Union
Taxation" in Article 289(1); these Entries would then
provide additional areas in respect of which the States can
claim exemption from Union Taxation under Article 289(10,
thus lending greater weight to the solemnity and the actual
worth, in real terms, of the phraseology of Article 289(1).
However, we find ourselves unable to agree with Mr. Sen
when he contends that the entries cited by him were the only
instances kept in contemplation by the framers at the time
of the drafting of Article 289(1). If that were so, the
ambit of the exemption would traverse an extremely narrow
field which would then lend credence to the observation of
Das, J. in the Sea Customs case, albeit made in the converse
context, that the exemption in Article 289(1) would amount
to "much ado about nothing".
Classification of taxes imposed by Municipalities
We may now turn to Mr. Sen’s alternatives submission
that the taxes levied by the NDMC under the Act would not be
covered by the exemption in Article 289(1) as that provision
cannot be construed to encompass Municipal Taxes.
To appreciate this contention, we will be required to
analyse certain provisions of the Act as also those of the
Constitution. Section 61 of the Act, which is the charging
section, at the relevant time, empowered the Municipality to
levy a tax payable by the owner on lands and buildings
subject to, and to the extent of, the qualifying conditions
provided therein. It is clear from an analysis of this
provision that it provides for the levy of a consolidated
tax, combining within it the tax element and the service
element. Section 51 of the Act provides for the constitution
of a Municipal fund and states that all sums received by the
Municipal Committee are to be credited to it. Section 52 of
the Act provides the manner in which the sums collected in
the Municipal Fund are to be applied by the Municipal
Committee. Our attention has also been drawn towards
analogous provisions in the New Delhi Municipal Committee
Act and the Delhi Municipal Committee Act to form the
foundation of the argument that, under all these
legislations, the Municipalities have been vested with a
great deal of financial autonomy; they have the power to fix
their own budgets, levy taxes within prescribed limits,
collect the proceeds of such imposition which are to be
diverted to Municipal Funds which function entirely under
the supervision of the Committees. It is argued that such a
stance is further reinforced by the introduction of Part IXA
into the Constitution which allows for Municipalities to be
vested with substantial powers, including the power to tax,
thereby providing Constitutional support. The argument,
therefore, is that now that the Constitution itself
recognises Municipal taxes as a separate category of taxes,
they should not be construed to fall within the exemption
provided by Article 289(1). Another limb of this submission
is that while under Article 285, taxes imposed by any
"authority within a State", which would necessarily include
Municipal taxes, have been expressly exempted, Article 289
does not provide for any such facility and, to that extent,
taxes levied by Municipalities within the Union Territories
are not covered by the exemption in Article 289(1).
We have great difficulty in accepting this assertion.
Article 265 of the Constitution emphatically mandates that
"no tax shall be levied or collected except by authority of
law". Under the framework of the Constitution there are two
principal bodies which have been vested with plenary powers
to make laws, these being the Union Legislature, which is
described by Article 79 as "Parliament for the Union" and
the State Legislatures, which are described by Article 168
in the singular as "Legislature of a State". While certain
other bodies have been vested with legislative power,
including the power of levying taxes, by the Constitution
for specific purposes, as in the case of District Committees
and Regional Councils constituted under the aegis of the
Sixth Schedule to the Constitution, the plenary power to
legislate, especially in matters relating to revenue, still
vests with the Union and the State Legislatures. Even if the
submission that Municipalities now possess, under Part IXA
of the Constitution, a higher juridical status is correct,
the extension of that logic to the proposition that they
have plenary powers to levy taxes is not, as is clear from a
perusal of the relevant part of Article 243X of the
Constitution which reads as under:
"243X. Power to impose taxes by,
and Funds of, the Municipalities.--
The Legislature of a State may, by
law,--
(a) authorise a Municipality to
levy, collect and appropriate such
taxes, duties, tolls and fees in
accordance with such procedure and
subject to such limits;
(b) ... ...
...
(c) ... ...
...
(d) ...
...
...
as may be specified in law."
Article 243ZB provides that this provision will be
applicable to Union Territories and the reference to the
legislature of a State would apply, in relation to a Union
Territory having a Legislative Assembly, to that Legislative
Assembly.
It is, therefore, clear that even under the new scheme,
Municipalities do not have an independent power to levy
taxes. Although they can now be granted more substantial
powers than ever before, they continue to be dependent upon
their parent Legislatures for the bestowal of such
privileges. In the case of Municipalities within States,
they have to be specifically delegated the power to tax by
the concerned State Legislature. In Union Territories which
do not have Legislative Assemblies of their own, such a
power would have to be delegated by Parliament. Of the rest,
those which have Legislative Assemblies of their own would
have to specifically empower Municipalities within them with
the power to levy taxes.
We have already held that despite the fact that certain
Union Territories have Legislative Assemblies of their own,
they are very much under the supervision of the Union
Government and cannot be said to have an independent status.
Under our Constitutional scheme, all taxation must fall
within either of two categories: State Taxation or Union
Taxation. Since it is axiomatic that taxes levied by
authorities within a State would amount to State taxation,
it would appear that the words "or by any authority within a
State" have been added in Article 285(1) by way of abundant
caution. It could also be that these words one their
presence in the provision to historical reasons; it may be
noted that Section 154 of the 1935 Act was similarly worded.
The fact that Article 289(1), which in its phraseology is
different from Section 155 of the 1935 Act having been
drafted by the Drafting Committee to meet specific
objections, does not contain words similar to those in
Article 285(1), will not in any way further the case of the
appellant, because the phrase "Union Taxation" will
encompass Municipal taxes levied by Municipalities in Union
Territories.
Before we part, we must refer to Part IV of the
judgment of Jeevan Reddy, J. where Clause (2) of Article 289
has been invoked to validate the levy of taxes under the Act
and the Delhi Municipal Corporation Act upon those
properties of State Governments which are being occupied for
commercial or trade purposes.
At the outset, we must express our great reluctance to
deal with this proposition, for it is not based on any
contention advanced by any of the counsel who appeared
before us, either in their written pleadings or in their
oral submissions. This is not because we feel constrained to
restrict ourselves to the parameters prescribed by the
submissions of counsel, but because we feel that the
opposite side did not have a fair opportunity to answer the
line of reasoning adopted in that behalf. The view taken by
Reddy, J. has the effect of imposing considerable tax
liabilities upon the properties of the State Governments
and, in our view, it would only be proper that their views
in this behalf be obtained before visiting them with such
liability. We have only the rule of caution in mind which
warns that ordinarily, courts should, particularly in
constitutional matters, refrain from expressing opinions on
points not raised or not fully and effectively argued by
counsel on either side.
Be that as it may, we must, for the record, express
ourselves on the view taken by Reddy, J. after closely
examining it. Reddy, J. begins his examination of the issue
by noting that the Act, the Delhi Municipal Corporation Act
and the New Delhi Municipal Committee Act contain specific
provisions exempting the properties of the Union from local
taxation in accordance with Article 285. It is then stated
that since none of these Acts contain similar exemptions in
favour of the properties of States, it is clear that they
purport to levy taxes on them. This is followed by the
observation that though the States seek an exemption from
such levies on the basis of clause (1) of Article 289, as
per the ratio of the APSRTC Case, clause (1) has to be read
in the context of clauses (2) and (3) of that Article. This
would, it is stated, lead to the consequence that if a
Parliamentary law within the meaning of clause (2) of
Article 289 is made, the area covered by that law would be
removed from the field occupied in clause (1); for support,
an analogy is drawn from the decision in R.C. Cooper v.
Union of India [1970] 1 SCR 248.
Thereafter, the meaning and scope of Article 289 as
well as its underlying objective are ascertained by
contrasting it with Section 155 of the 1935 Act. The use of
the words "lands and buildings" in Section 155(1) is
analysed to arrive at the conclusion that these words were
included to empower the federal legislature to levy taxes on
lands and buildings situated within the Chief Commissioner’s
Provinces. It is then noted that Article 289 uses the wider
expression ‘property’, but that the same reasoning holds
good for the preset Union Territories, making the property
and income of State situated within Union Territories exempt
from "Union Taxation". With respect to the provision to
Section 155(1), it is observed that the provision was
automatically applicable on its own force. It did not define
the trading and business operations of Provincial
Governments, nor did it specify which of these operations
would be subject to Federal Taxation. It is then stated that
the same position continues in Article 289 with the only
difference being the requirement of a the enactment of a law
by Parliament in this behalf. Thereafter, it is observed
that the exemption in clause (1) of Article 289 is subject
to clause (2) of Article 289. Clause (2) is analysed and
interpreted as clarifying clause (1) to the extent that the
exemption upon the income of Provincial Government operates
only when such income is carried on for the purpose of
governmental functions and not for trade and business
activities, carried on with the profit motive. It is stated
that though "trade and business" ordinarily has a very wide
and ambiguous meaning (certain English and Indian
authorities are cited to illustrate this point), but, for
the purposes of clause (2) of Article 289, they have to be
given a restricted meaning. It is, therefore, stated that
under Article 289(2), the trading and business activities of
State Governments, which are carried on with the profit
motive, will be liable to tax and cannot avail of the
exemptions in Article 289(1).
Clause (2) is further analysed and is interpreted as
having been included for the purpose of removing the trading
and business activities of State Governments from the
purview of the exemption in clause (1). However, it is
stated, such a removal is not automatic and is dependent
upon the enactment of a Parliamentary Law which imposes
taxes on specified trading and business activities of State
Governments.
Thereafter, the question whether Parliament has, in
exercise of powers under Article 289(2), imposed taxes on
the trading and business activities of State Governments, is
sought to be addressed. In this respect, the Act, the New
Delhi Municipal Committee Act and the Delhi Municipal
Corporation Act, which are deemed to be post-Constitutional
enactments, are examined. It is noted that while these
enactments contain specific exemptions in favour of
properties of the Union and also exempt properties used for
‘charitable purposes’ and ‘public worship’, they do not
exempt properties of State Governments. It is stated that
the latter omission must be deemed to be deliberate.
Thereafter, it is stated that two views are possible in this
regard. The first is to adopt the position that since
neither of these enactments are purported to have been made
under Article 289(2), they should not be treated as having
been enacted for that purpose and, consequently, should be
held to be incapable of levying taxes on any property,
whether occupied for governmental or trading purposes, of
the State Governments. The second view, which Reddy, J.
adopts, is to take the position that the Doctrine of
Presumption of Constitutionality of Legislations points in
favour of holding that the Act and the Delhi Municipal
Corporation Act are laws made by Parliament under Article
289(2), and taxes imposed by them upon the properties
occupied for trading and business activities by State
Governments would be valid and effective. A number of
decisions of this Court are cited to show the
jurisprudential basis of this tool of Constitutional
interpretation. It is pointed out that though neither of
these legislations purport to have been made under Article
289(2), but, since this is normal practice in that no
legislation specifies the provision of the Constitution that
it is enacted under, this fact need not be over-emphasised.
It is, therefore, held that the levy of property taxes by
these enactment is valid to the extent that it relates to
lands and buildings owned by State Governments and used by
them for trade and business purposes. [In an earlier part of
the opinion, the difficulty in drawing a distinction between
governmental and business functions is noted and an example
in respect of gues-touses maintained by State Governments is
supplied]. Thereafter, it is stated that it is for the
"appropriate assessing authority" to determine "which
land/building falls within which category in accordance with
law and take appropriate further action". It is then stated
that since, under these enactments, the assessing
authorities are required to decide several difficult
questions as to what amounts to ‘charitable purpose’ etc.,
the obligation imposed by such directions would not prove to
be too onerous to discharge. Reddy, J. sums up the issue by
recommending to the Union that it consider granting a total
exemption in favour of all properties of State Governments.
We are of the opinion that of the two possible views
expressed by Reddy, J., it is the first which ought to be
preferred. We think that the second view is fraught with
several difficulties. Such a construction, while being
violative of the scheme envisaged by the Framers of the
Constitution, may well result in a situation that was sought
to be avoided by them. The directions may also lead to grave
practical difficulties; moreover, since the effect of the
directions would be to vest the executive authorities with
substantial policy making powers, their issuance might well
be offensive to established principles of delegation of
powers.
We shall now set out the reasons which cause us to so
think; in doing so, we may have to revisit some of the
ground that has already been traversed by us, but the
repetition can be justified by the narrower focus that will
now be imparted to those aspects.
Articles 285 and 289, and their predecessors in the
1935 Act, owe their origin to the American doctrine of
Inter-governmental Tax Immunity. This doctrine was
enunciated n the case of McCulloch Vs. Maryland (supra).
However, the doctrine was substantially modified by the
decision in South Carolina Vs. United States (supra) which
drew a distinction between strictly governmental and
business functions of governments. In the latter case, it
was held that the governmental functions of State
Governments would be exempt from Federal Taxation but their
commercial functions would be subject to the levy of Federal
Taxes. This case imposed upon Courts the heavy burden of
determining in specific cases when a particular function was
or was not governmental. A number of conflicting decisions
were rendered and caused a great deal of confusion as to
which of the activities of governments were to be classified
as ’business’ or ’proprietary’ and were, therefore, to be
liable to Federal Taxation. The controversy was set at rest
by a unanimous decision of the U.S. Supreme Court in new
York Vs. United States [326 U.S. 572; 90 L.ED. 326 (1946)]
wherein it was concluded that the artificial distinction
between governmental and proprietary/business functions of
States was unworkable and required to be abandoned.
The difficulty in determining the distinction between a
governmental function and a trading or business function of
the State has also been felt and recognised in Australia. In
South Australia Vs. Commonwealth [(1942) 65 C.L.R. 373], the
changing character of government functions of the State was
noted and it was held that, "In a fully self-government
country when a Parliament determines legislative policy and
an executive government carries it out, any activity may
become a function of government if Parliament so determines"
[supra at p.423]. The Court in this decision come to the
conclusion that the best way to avoid the controversy was to
allow Parliament to decide, by law, which of the activities
of the State would be classified as relating to business and
would consequently be liable to taxation.
Under the predecessor of Article 289, i.e., under
proviso (a) to Sections 155 (1) of the 1935 Act, the Federal
government was empowered to levy taxes on lands and
buildings of Provincial Governments used by them for trade
or business. The provision itself vested the Federal
Government with the power to levy such taxes and there was
no requirement for the enactment of a specific law in that
behalf. This position continued till the Constitution came
into force.
When Sir B.N. Rau prepared his Draft Constitution,
Clause 207 (present Article 289) was drafted on the basis of
Section 155 of the 1935 Act. An attempt was made to
incorporate the U.S. position prevailing after the decision
in the South Carolina case (supra) by stipulating that all
trading activities of State Governments would be liable to
Union Taxation. However, even under this provision, the
power to tax was automatic and did not require a specific
law. [See : A Note on certain clauses by the Constitutional
Adviser, B. Shiva Rao, Vol. III, p.197 at PP. 204-205].
The Expert Committee on Financial Provisions, however,
recommended that quasi-trading activities of State
Governments should be exempt from Union Taxation. [See :
Report of the Expert Committee, B. Shiva Rao, Vol. III,
p.260 at p.266].
Even when the Drafting Committee incorporated the
provision as Draft Article 266 and subsequently modified it,
there was no stipulation for a law before the power to tax
could be exercised. [See the text of Draft Article 266, B.
Shiva Rao, Vol. IV, p.676]. At the Premier’s Conference held
in July, 1949, the provision met with severe criticism. The
Premier of the United Province suggested that all trading
and business activities of State Governments be exempt from
Union Taxation. Several other Provinces also made similar
representations. Based on these representations, the
Drafting Committee made a substantial change in the text of
Draft Article 266. A provision similar to the present
Article 289(2), whereby Parliament would have the power to
determine which of the trading and business activities of
State Governments would be liable to Union Taxation was
incorporated. [See : Revised draft by the Ministry of
Finance, B. Shiva Rao, Vol. IV, pp.731-732].
When Draft Article 266 was discussed in the Assembly, a
number of members expressed fears that Union Taxation of
commercial activities of State Governments would check the
expansion of industrialisation and reduce the capacity of
States to perform their ordinary functions. They, therefore,
demanded that the trading and business activities of State
Governments be exempt from Union Taxation. Alladi
Krishnaswamy Ayyar sought to allay these apprehensions by
making an elaborate statement, the relevant part of which is
quoted below [Constituent Assembly Debates, Vol. IX, pp.
1167-69]:
"....It is a permissive power that
is given to Parliament under the
section. There is no duty case upon
Parliament to levy a tax and I am
sure in the larger interest of
trade and industry, Parliament will
certainly not go to the length of
taxing ... industries which have
been thriving. .... So far as the
United States is concerned in the
early days though there was no
express provision through the
medium of the doctrine of
Instrumentality, they held that the
State cannot tax the Federal
Government and the Federal
Government cannot tax the State
instrumentality because both are
parts of a single composite
mechanism and if you permit one to
tax the other, it may destroy the
whole mechanism. Later, the
doctrine of instrumentality itself
was felt to be not n the large
interest of the State, and quite
recently the swing of the pendulum
is the other way. The other day one
of the most enlightened of Supreme
Court Judges held in what is known
as the Spring of the State of New
York, in regard to certain springs
which were worked by the State of
New York - for this part of
business they held that there is no
immunity of the State from tax.
They said ’You have to draw some
line between one kind of activity
of a State and another kind of
activity. Of course it cannot be a
rigid definition. What may be in
one sphere may easily pass into
another sphere with the progress of
the State and with the development
of the polity in the particular
State’. [In all probability, this
is a reference to the opinion of
Frankfurter, J. in new York Vs.
United States (supra) which upheld
the application of a Federal Excise
Tax to the sale of mineral waters
bottled by the State of New York
with a view to providing funds for
a State health resort]. ....
[N]ormally speaking, you cannot
regard at the present day under
existing conditions the carrying on
of trade and business as a normal
or ordinary function of the
Government. It may develop into
ordinary function - certain aspects
of it, especially the transport
service and certain key industries,
may soon become the parts of the
State enterprise. .... The
Parliament will take note of the
progressive tendency of the
particular times and may at once
declare accordingly. It might not
have been the ordinary function of
Government before. Now it may
become an ordinary function. There
will be sufficient elasticity in
clause (3) to enable the Government
to exempt from taxation particular
trades or industries which are
started as public utility services
or declare them as regular State
industries. Nobody can question a
law made by Parliament because the
Parliament has stated that a
particular industry is an ordinary
function of the State whereas
according to the notions of an
individual economist A or B it is
not a ordinary function of a
Government. Parliament will lay
down the law of the land and it
will be the sole arbiter of the
question as to whether it is an
ordinary function of Government or
not.
Therefore having regard:
(a) to the plenary power of
Parliament to exempt and particular
industries, and particular business
from the operation of the tax
provision.
(b) having regard to the fact that
it is not obligatory on Parliament
to levy any tax.
(c) that the very conception of
State industry may change with the
further evolution of the State and
changing times, and
(d) to the inter-connection between
one State and another.
it will be very difficult to
differentiate between particular
States, between States which have
been working certain industries and
other States. .... [T]o lay down a
general principle of law that even
at the present day before the
provinces are on their feet every
trade or business is exempt from
taxation will lead to wild-goose
schemes being started by various
provinces. They may not take into
account the general interests of
the trade and industry in the whole
country. They may not of industry
and another. Under those
circumstances the particular
provision which has been inserted
by Dr. Ambedkar is a very salutary
one and is consistent with the most
advanced principles of democratic
and federal policy in all the
countries."
(Comment and Emphasis supplied)
It is, therefore, clear that clause (2) of Article 289
was a well-considered compromise which was arrived at after
balancing the demands of those who sought complete exemption
of commercial activities of State Governments from Union
Taxation and those who were in favour of levying such Union
Taxes. The Framers desired that the issue whether the
trading and business activities of State governments should
be subject to Union Taxation, be left to the wisdom of
Parliament. As is evident from the reference to New York Vs.
United States (supra) in the extracted portion, the Framers
were conscious of the difficulty in drawing a line between
the governmental and commercial functions of State
Governments and they hoped that Parliament would take into
account a shot of relevant factors before enacting a law
which would specify the trading activities of State
Governments making them liable to Union Taxation. It is
important to note that the Framers did not expressly confer
upon the Union the power to tax commercial activities of
State governments. The exercise of such a power is made
conditional upon the enactment of a special, duly
considered, legislation. It is also important to note that
clause (2) of Article 289 has made a departure from the
proviso to Section 155(1). Under the present scheme, the
power to tax is not automatic and the responsibility of
specifying the trading and business activities of State
Governments which would be liable to Union Taxation is
expressly vested in Parliament.
Neither the Act, which is a 1911 enactment, nor the
Delhi Municipal Corporation Act, can qualify as laws under
Article 289. They do not specify which of the trading
activities of State Governments are liable to taxation;
indeed, by their very nature, they cannot purport to do so.
It must be remembered that the Act and the Delhi Municipal
Corporation Act are not Parliamentary Laws in the sense
envisaged by Article 289(2). Though the Act is sought to be
construed as a post-Constitutional, Parliamentary enactment,
the fact remains that it is a pre-Constitutional, colonial
legislation. As for the Delhi Municipal Corporation Act, it
is, in essence, an ordinary Municipal legislation. What
makes it special is the fact, occasioned in its case by
geographical and historical factors, that it was enacted by
Parliament instead of by a State legislature. In this
regard, we may recall the submissions of the learned
Attorney General n respect of how Parliament discharges its
obligation towards enacting laws for Union Territories.
After stating that Parliament cannot afford to undertake
threadbare discussions before legislating for Union
Territories, the learned Attorney General referred us to the
following passage of the decision of chis Court in Ramesh
Birch v. Union of India (1989) Supp.1 SCC 430 at 471:
"[Union Territories] are
territories situated in the midst
of contiguous territories which
have a proper legislature. They are
small territories falling under the
legislative jurisdiction of
Parliament which has hardly
sufficient time to look after the
details of all their legislative
needs and requirements. To require
or expect Parliament to legislate
for them will entail a
disproportionate pressure on its
legislative schedule. It will also
mean the unnecessary utilisation of
the time of a large number of
members of Parliament for, except
the few (less than ten) members
returned to Parliament from the
Union territory, none else is
likely to be interested in such
legislation. In such a situation,
the most convenient course of
legislating for them is the
adaptation, by extension, of laws
in force in other areas of the
country. As Fazal Ali, J. pointed
out in the Delhi Laws Act case, it
is not a power to make laws that is
delegated but only a power to
’transplant’ laws already in force
after having undergone scrutiny by
Parliament or one of the State
legislatures, and that too, without
any material change."
It is, therefore, clear that it would be quite
dangerous to assume that when Parliament enacted the Delhi
Municipal Corporation Act, it had intended that the
enactment should secure the purpose enshrined in Article
289(2). If any safe assumption is to be drawn, it is this:
in all probability, while enacting tee Delhi Municipal
Corporation Act, Parliament must have ’transplanted’ a
municipal legislation existing in a certain State, made the
necessary changes and completed the procedural formalities.
That would explain why the Delhi Municipal Corporation Act
(as also the new Delhi Municipal Committee Act) contains an
exemption on the lines of the one prescribed by Article 285
- this is a typical feature of ordinary Municipal
legislations, which are enacted by State legislatures who
are conscious of the mandate of Article 285. Moreover, such
legislations do not contain exemptions in favour of
properties of State Governments because, within the
territory of a State, the properties of other State
Governments are liable to taxation. So, when such a
legislation is ’transplanted’ almost verbatim into a Union
Territory, it will obviously not contain an exemption in
favour of properties of State Governments. In the face of
the actual conditions which govern the enactment of laws for
Union Territories by Parliament, (these conditions have been
statutorily provided; moreover this Court has already taken
notice of them) it is difficult to assume that the omission
of an exemption in the Delhi Municipal Corporation Act in
favour of State Governments, is deliberate. The Act and the
Delhi Municipal Corporation Act cannot, therefore, be said
to meet the special requirements which have been expressed
by the Framers to be necessary for complying with the spirit
of Article 289(2).
Reddy, J. has taken the view that the Doctrine of
Presumption of Constitutionality of Legislations requires
the saving of the taxes which these Acts impose upon the
commercial activities of State Governments. The Act is a
pre-Constitutional enactment. The basis of this doctrine is
the assumed intention of the legislators not to transgress
Constitutional boundaries. It is difficult to appreciate how
that intention can be assumed when, at the time that the law
was passed, there was no such barrier and the limitation was
brought in by a Constitution long after the enactment of the
law. (This Court has in a Constitution Bench decision,
Gulabbhai Vs. Union of India, AIR 1967 SC 1110 at 1117,
raised doubts along similar lines). The Framers obviously
wanted the law under Article 289(2) to be of a very high
standard. Can these laws, which are silent on the most
important aspect required by Article 289(2), i.e., the
specification of the trading activities of State Governments
which would be liable to Union Taxation, be said to meet
with that standard?
The Doctrine of Presumption of Constitutionality of
Legislations is not one of infinite application; it has
recognised limitations. It is settled law that if any
interpretation is possible which will save an Act from the
attack of unconstitutionality, that interpretation should
always be accepted in preference to an alternative
interpretation that might also be possible, under which the
statute would be void. However, this Court has consistently
followed a policy of not putting an unnatural and forced
meaning on the words that have been used by the legislature
in the search for an interpretation which would save the
statutory provisions. We are not "free to stretch or pervert
the language of the enactment in the interests of any legal
or Constitutional theory" See In Re the Central Provinces &
Berar Act No. XIV of 1938, (1939) FCR 18 at p. 37; also see
: Diamond Sugar Mills Ltd. Vs. The State of U.P. [1961] 3
SCR 242 at 248-249.
The Act and the Delhi Municipal Corporation Act are
ordinary Municipal legislations. They do not, and cannot,
purport to be laws made by Parliament under Article 289(2).
There is no reason why such a strained reasoning should be
employed to save some of the taxes that may be capable of
being imposed on certain properties of State Governments.
There seems to be no pressing reason for invoking the
doctrine. Reddy, J. has, in the earlier part of his opinion,
held that a large number of properties of State Governments
would be exempt from taxes leviable under these Acts due to
the operation of Article 289(1). To employ such reasoning to
construe Article 289(2) in a bid to save what would only be
a reduced amount, does not seem justified.
The practical effect of the directions recommended by
Reddy, J. is also worth noticing. It is abundantly clear
that the task of determining which of the activities of
Governments are governmental and which are commercial, is an
extremely difficult one. Reddy, J. entrusts this assignment
to the "assessing authorities under the Acts" who can only
be municipal authorities. This is an issue which has
confounded courts in the U.S. and in Australia for several
years. This issue was considered to be so troublesome by the
Framers that they entrusted it to Parliament in the hope
that it would fully deliberate the matter before enacting a
comprehensive legislation.
In the In Re: The Delhi Laws Act case, AIR 1951 SC 324,
this Court authoritatively held that the legislature cannot
delegate its essential policy-making function. Over the
years, this Court has elaborated this proposition to hold
that the legislature can delegate some of its legislative
functions provided it lays down the policy in clear terms.
The legislature is required to declare the policy of law in
unambiguous terms, lay down elaborate legal principles and
provide illuminating standards for the guidance of the
delegate. Even though this Court has, on occasions,
sanctioned very broad delegations of taxing power to
municipal bodies, to delegate the task of carving out the
distinction between governmental and business functions of
State Governments to municipal authorities would clearly be
against the interdiction in the Delhi Laws Act case as the
assignment requires not only the making of policy, but
indeed, the making of very difficult and challenging policy
choices. Reddy, J. has noted that the Delhi Municipal
Corporation Act provides exemptions in favour of activities
that are capable of being classified as ’charitable
purpose’, ’public worship’ etc. and states that to ascertain
the ambit of these categories is an equally difficult task
which is already being discharged by the assessing
authorities. However, the point that needs to be emphasised,
is that Section 115 of the Delhi Municipal Corporation Act
defines these terms and provides guidelines in respect
thereof. However, there is no provision in the Delhi
Municipal Corporation Act which states that the trading and
business operations of State Governments would be subject to
property taxes. The Act is equally silent on this aspect.
Consequently, no guidelines in this behalf are to be found
within the parameters of these legislations. Under these
circumstances, in the complete absence of any statutory
policy or any guidelines for the delegation of such a
policy, we believe that it would be impermissible and
hazardous to directly assign such a function, nay power, to
executive Municipal authorities.
The decision whether the properties of State
Governments occupied for commercial purposes should be
subject to the levy of Union Taxes is one that is required
by Article 289(2) to be made by a legislation which
specifies the activities which would be liable to tax. This
decision cannot be entrusted to municipal functionaries. For
these reasons, we find ourselves unable to agree with Reddy,
J. in his finding that the properties of State Governments
occupied by them for trade or business purposes are subject
to the levy of taxes under the Act and the Delhi Municipal
Corporation Act.
we may now summarise our conclusions:
i) The central issue in the present matter, namely,
whether the properties owned by the States which are
situated within Union Territories are exempt from
paying property taxes, was specifically answered in the
affirmative in the Sea Customs case; the observations
in this regard are part of the ratio decidendi of the
case and having been re-affirmed by a Constitution
Bench which was bearing a litigation inter partes in
the APSRTC case, they constitute good law;
ii) The definition of ’State’ provided in Section 3(58) of
the General Clauses Act, which declares that the word
’State’ would include ’Union Territory’, is
inapplicable to Article 246 (4);
iii) The term "Union Taxation" used in Article 289(1) will
ordinarily mean "all taxes leviable by the Union" and
it includes within its ambit taxes on property levied
within Union Territories; therefore, the States can
avail of the exemption provided in Article 289(1) in
respect of their properties situated within Union
Territories;
iv) Property taxes levied by municipalities within Union
Territories are properly within the ambit of the
exemption provided in Article 289(1) and the States can
avail of the exemption.
In the result, the Civil Appeals and the Special leave
Petitions are dismissed. There shall be no order as to
costs.

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http://JUDIS.NIC.

IN SUPREME COURT OF INDIA Page 1 of 46

DATE OF JUDGMENT: 19/12/1996

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