In Re. The Bill to Amend S. 20 of The Sea Customs Act [1963] INSC 156 (10 May 1963)
10/05/1963 SINHA, BHUVNESHWAR P.(CJ) SINHA, BHUVNESHWAR P.(CJ) DAS, S.K.
GAJENDRAGADKAR, P.B.
SARKAR, A.K.
WANCHOO, K.N.
HIDAYATULLAH, M.
GUPTA, K.C. DAS SHAH, J.C.
AYYANGAR, N. RAJAGOPALA
CITATION: 1963 AIR 1760 1964 SCR (3) 787
CITATOR INFO:
RF 1964 SC1486 (13) R 1965 SC 745 (1) R 1967 SC1512 (20,48,64) R 1977 SC1459 (7) RF 1979 SC 478 (8,22) RF 1984 SC 420 (13) RF 1986 SC 515 (92) RF 1986 SC 649 (26) R 1986 SC 662 (53) F 1989 SC1153 (8) C 1990 SC 781 (64)
ACT:
President's Reference-Customs duties and duties of exciseParliament's power to levy such duties on the property of States-Direct and indirect taxes-Distinction, if valid under Constitution--Customs duties and duties of excise, if taxes on property-"Taxation", Definition-Sea Customs Act, 1878 (8 of 1878), s. 20-Central Excises and Salt Act, 1944 (1 of 1944). s. 3 (1)Government of India Act, 1935 (25 & 26 Geo 5, ch. 42), 88. 154, 155-Constitution of India, Arts. 245, 246, 285, 289, 366 28).
HEADNOTE:
As a result of a proposal to introduce in Parliament a Bill to amend s. 20 of the Sea Customs Act, 1878, and s. 3 of the Central Excises and Salt Act, 1944, with a view to applying the provisions of the said two Acts to goods belonging to the State Governments, in regard to which certain doubts arose as to whether the provisions of the Bill were inconsistent with Art. 289 of the Constitution of India, the President of India referred under Art. 143 of the Constitution certain questions for the opinion of the Supreme Court to ascertain if the proposed amendments would be constitutional. The question was whether the provisions of Art. 289 of the Constitution precluded the Union from imposing, or authorising the imposition of (a) Customs duties on the import or export or (b) excise duties on the production or manufacture in India: of the 788 property of a State used for purposes other than those specified in cl. (2). of that Article.
Held (S. K. Das, A. K. Sarkar, Hidayatullah and K. C. Das Gupta, JJ dissenting), that the provisions of Art. 289.(1) of the Constitution of India were in the nature of an exception to the exclusive field of legislation reserved to Parliament and were limited to taxes on property and on income of a state; that the immunity granted in favour of States had to be restricted to taxes levied directly on property and income ; and, that even though import and export duty or duties of excise had reference to goods and commodities, they were not taxes on property directly and were not within the exemption in Art. 289 (1).
Per Sinha C. J., Gajendragadkar, Wanchoo, Shah and Rajagopala Ayyangar JJ.-(1) Though the expression "taxation", as defined in Art. 366 (28), "includes the imposition of any tax or impost, whether general or local or special", the amplitude of that definition has to be cut down if the context otherwise so requires.
(2) Whereas the Union Parliament has been vested with the exclusive power to regulate trade and commerce and with the sole responsibility of imposing export and import duties and duties of excise, with a view to regulating trade and commerce and raising revenue, an exception has been engrafted in Art. 289 (1) in favour of States granting them immunity from certain kinds of Union taxation and it is necessary that the general Words of the exemption in that Article should be limited in their scope so as not to come in conflict with the power of the Union to regulate trade and commerce.
(3) Though the Constitution of India does not make a clear distinction between direct and indirect taxes, the exemption provided in Art., 289 (1) from Union taxation to property must refer to what are known to economists as direct taxes on property and not to indirect taxes like duties of customs and excise which are in their essence trading taxes and not tax on property.
Per Das, Sarkar and Das Gupta JJ.-(1) The exemption clause under Art. 289 (1) ha,; to be interpreted with the key furnished by Art. 366 (28) Under the Constitution the word "taxation" has been defined by the Constitution itself, and the Court is not free to give a different meaning to the word so as to make a distinction between direct and indirect 789 taxation, nor is the Court free to make a distinction between a tax on property and a tax in respect of it.
(2) The problem is not the nature of the impost, but rather the extent of the immunity granted by Art. 289 and the extent of the immunity really depends on the true scope and effect of Arts. 245, 285, 289, and 366 (28).
(3) The Union's power to legislate to regulate foreign trade contained in the legislative list is subject to the provisions of the Constitution, and the Union cannot, in view of Art. 289 (1), impose a customs duty on things imported by the State and seek to justify it as an exercise of its power to regulate foreign trade.
(4) The exemption given to State property from Union taxation by Art. 289 does not conflict in any way with the power of control which the Union has over foreign trade or inter-State trade.
(5) In the Constitution of India the "taxing powers is treated as different from the "regulatory power" and the classification between "direct" and "indirect" taxes has been adopted in the Constitution.
Per Hidayatullah J.-(1) The fact that the word "taxation" is used in one place only in the Constitution saves us from the task of examining the context, because the definition would become a dead letter if it were not used in Art. 289 in the sense defined.
(2) Taking the language of Art. 289 (1) by itself or even as modified by that of cls. (2) and (3) the conclusion is inescapable that properties of all kinds belonging to the States save those used or occupied fur trade or business, were meant to be exempted from taxation. The scheme of Art.
289 does not admit that the word "property" should be read in any specialized sense and goods imported and goods manufactured or produced by the States air, included in the word "property." (3) The provisions of Art, 289 preclude the Union from imposing, or authorising the imposition, of customs duties on the import or export of the property of a State used for purposes other than those, specified in cl. (2) of that Article, if the imposition is to raise revenue but not to regulate external trade.
(4) The intention being to raise revenue the amendment if made would be hit by Art. 289.
790 Per Rajagopala Ayyangar J. -Though no express distinction has been made in the Constitution between direct and indirect taxes, taxes in the shape of duties of customs including export duties, and excise, particularly when imposed with a view to regulating trade and commence in so far as such matters are within the competence of Parliament being covered by various entries in List I, cannot be called taxes on property ; for they are imposts with reference to the movement of property by way of import or export or with reference to the production or manufacture of goods.
American, Australian and Candian cases reviewed.
ADVISORY JURISDICTION : Special Reference No. 1 of 1962.
Reference by the President of India under Art. 143 (1) of the Constitution regarding the proposed amendments to subsection (2) of Section 20 of the Sea Customs Act, 1878 (Act 8 of 1878) and subsection 1 (a) of Section 3 of the Central Excise and Salt Act, 1944 (Act 1 of 1944).
C. E. Daphtary, Solicitor-General of India,H. N. Sanyal, Additional Solicitor General of India, G.N. Joshi and R.H.
Dhebar, for the Union of India.
D. Narsa Rajuu, Advocate-General for the State of Andhra Pradesh and T. V. R. Tatachari, for the State of Andhra pradesh.
B. C. Barua, Advocate-General for the State of Assam and Naunit Lal, for the State of Assam.
Mahabir Prasad, Advocate-General for the State of Bihar and S. P. Varma, for the State of Bihar.
A. V. Viswanatha Sastri, J. B. Dadachanji,O. C. Mathur and Ravinder Narain, for the State of Maharashtra.
J. M. Thakore, Advocate-General the State of Gujaratand H.L.Hathi,for the State for Gujarat.
791 D. Sahu, Advocate-General for the State of Orissa and K. L. Hathi, for the State of Orissa.
V. P. Gopalan Nambyar, Advocate-General for the State of Kerala and Sardar Bahadur, for the State of Kerala.
A. Ranganadham Chetty and A. V. Rangam, for the State of Madras.
G. R. Ethirajulu Naidu, Advocate-General for the State of Mysore and R. Gopalakrishnan, for the State of Mysore.
S. M. Sikri, Advocate-General for the State of Punjab, S. K. Kapur and Gopal Singh, for the State of Punjab.
G. C. Kasliwal, Advocate-General for the State Of Rajasthan, S. K. Kapur, V. N. Sethi and K. K. Jain, for the State of Rajasthan.
B. Sen, M. K. Banerjee and P. K. Bose, for the State of West Bengal.
M. Adhikari, Advocate-General for the State of Madhya Pradesh and I. N. Shroff, for the State of Madhya Pradesh.K. S. Hajela and C. P. Lal, for the State of Uttar Pradesh.
1963. May 10. The opinion of B. P. Sinha, C.J., P. B. Gajendragadkar, K. N. Wanchoo and J. C. Shah JJ. was delivered by Sinha, C. J. The opinion of S. K. Das, A. K. Sarkar and K. C. Das Gupta JJ., was delivered by Das, J. M. Hidayatullah, J., and N. Rajagopala Ayyangar, J., delivered separate opinions.
SINHA C. T.-The main question, on this reference by the President of India under Art. 143 (1) of 792 the Constitution, depends upon the true scope and interpretation of Art. 289 of the Constitution relating to the immunity of States from Union taxation. On receipt of the reference notices were issued to the Attorney General 'of India and to the Advocates General of the States. In pursuance of that the case of the Union Government has been placed before us by the learned Solicitor-General and that of the States of Andhra Pradesh, Assam, Bihar, Gujarat, Kerala, Madhya Pradesh, Madras, Maharashtra, Mysore, Orissa, Punjab and West Bengal was presented to us by their respective counsel. On the date the hearing of this case started, an application was made on behalf of the State of Uttar Pradesh also to be heard, but no statement of case had been put in on behalf of that State, and as no grounds were made out for condoning the delay, we refused the application.
The reference is in these terms "Whereas sub-section (1) of section 20 of the Sea Customs Act, 1878 (Act 8 of 1878), provides for the levy of customs duties on goods imported or exported by sea to the extent and in the manner specified in the said sub-section ;
And whereas sub-section (2) of section 20 of the said Act applies the provisions of sub-section (1) of that section in respect of all goods belonging to the Government of a State and used for the purposes of a trade or business of any kind carried on by, or on behalf of, that Government, or of any operations connected with such trade or business as they apply in respect of goods not belonging to any Government;
And whereas it is proposed to amend sub-section (2) of section 20 of the said Act so as to apply the provisions of sub-section (1) of that section in respect of all goods belonging to the Government of a State;
793 irrespective of whether such goods are used or not for the purposes set out in the said subsection (2) as at present in force;
And whereas sub-section (1) of section 3 of the Central Excises and Salt Act, 1944 (Act 1 of 1944), provides for the levy of duties of excise on all excisable goods other than salt which are produced or manufactured in India and a duty on salt manufactured in, or imported by land into any part of India in the manner specified in the said sub-section;
And whereas sub-section (IA)of section 3 of the said Act applies the provisions of sub-section (1) of that section in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of, the Government of a State and used for the purposes of a trade or business of any kind carried on by, or on behalf of, that Government, or of any operations connected with such trade or business as they apply in respect of goods which are not produced or manufactured by any Government;
And whereas it is proposed to amend sub-section (IA) of section 3 of the said Act so as to apply the provisions of sub section (1) of that section in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of the Government of a State, irrespective of whether such goods are used or not for the purposes set out in the said sub-section (IA) as at present in force;
And whereas it is proposed to introduce in Parliament a Bill, the draft of 'which is annexed here to and marked "Annexure', to amend for the purpose aforesaid sub-section (2) of section 20 of the Sea Customs Act, 1878 (Act 8 of 1878) and sub-section -(IA) of section 3 of the Central Excises and Salt Act, 1944 (Act 1 of 1944);
794 And whereas Governments of certain States have expressed the view that the amendments as proposed in the said draft of the Bill may not be constitutionally valid as the provisions of article 289 read with the definitions of 'taxation' and -tax' in clause (28) of article 366 of the Constitution of India preclude the Union from imposing or authorising the imposition of any tax, including customs duties and excise duties; or in relation to any property of a State except to the extent permitted by clause (2) read with clause (3) of the said article 289;
And whereas the Government of India is on the other hand inclined to the view(i) that the exemption from Union taxation granted by clause (1) of article 289 is restricted to Union taxes on the property of a State and does not extend to Union taxes in relation to the property of a State and that clauses (2) and (3) of that article have also to be construed accordingly;
(ii) that customs duties are taxes on the import or export of property and not taxes on property as such and further that excise duties are taxes on the production or manufacture of property and not taxes on property as such; and (iii) that the union is not precluded by the pro. visions of article 289 of the Constitution of India from imposing or authorising the imposition of customs duties on the import or export of the property of a State and other Union taxes on the property of a State which are not taxes on property as such;
And whereas doubts have arisen as to the true interpretation and scope of article 289 of the Constitution of India and, in particular, as to the constitutional validity of the amendments to the Sea Customs 795 Act. 1878 (Act 8 of 1878) and the Central Excises and Salt Act, 1944 (Act 1 of 1944) as proposed in the aforesaid draft Bill;
And whereas in view of what has been hereinbefore stated, it appears to me that the questions of law hereinafter set out have arisen and are of such a nature and are of such public importance that it is expedient to obtain the opinion of the Supreme Court of India thereon;
Now, therefore, in exercise of the powers conferred upon me by clause (1) of article 143 of the Constitution of India, 1, Rajendra Prasad, President of India, hereby refer the following question to the Supreme Court of India for consideration and report of its opinion thereon;
"(1) Do the provisions of article 289 of the Constitution preclude the Union from imposing, or authorising the imposition of, customs duties on the import or export of the property of a State used for purposes other than those specified in clause (2) of that article ? (2) Do the provisions of article 289 of the Constitution of India preclude the Union from imposing, or authorising the imposition of, excise duties on the production or manufacture in India of the property of a State used for purposes other than those specified in clause (2) of that article ? (3) Will sub section (2) of section 20 of the Sea Customs Act, 1878 (Act 8 of 1878) and subsection (IA) of section 3 of the Central Excises and Salt Act, 1944 (Act 1 of 1944) as amended by the Bill set out in the Annexure be inconsistent with the provisions of article 289 of the Constitution of India New Delhi Sd/-Rajendra Prasad, Dated the 19-4-1962.
President of India.
796 Anne xure DRAFT BILL A BILL Further to amend the Sea Customs Act, 1878, and the Central Excises and Salt Act, 1944.
Be it enacted by Parliament in the year of the Republic of India as follows
1. Short title-This Act may be called the Sea Customs and Central Excises (Amendment) Act, 19.
2. Amendment of section 20, Act 8 of 1878, In section 20 of the Sea Customs Act, 1878 for sub-section (2) the following sub-section shall be substituted, namely :"(2) The provisions of sub-section (1) shall apply in respect of all goods belonging to the Government as they apply in respect of goods not belonging to the Government."
3. Amendment of section 3, Act 1 of 1944.In section 3 of the Central Excises and Salt Act, 1944, for sub-section (IA) the following subsection shall be substituted, namely :"(1A) The provisions of sub-section (1) shall apply in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of, the Government as they apply in respect of goods which are not produced or manufactured by the Govern.
797 It has been argued on behalf of the Union of India that cl.
(1) of Art. 289 properly interpreted would mean that the immunity from taxation granted by the Constitution to the States is only in respect of tax on property and on income, and that the immunity does not extend to all taxes; the clause should not be interpreted so as to include taxation in relation to property; a tax by way of import or export duty is not a tax on property but is on the fact of importing or exporting goods into or out of the country;
similarly, an excise duty is not a tax on property but is a tax on production or manufacture of goods; though the measure of the tax may have reference to the value, weight or quantity of the goods, according to the relevant provisions of the statute imposing excise duty, in essence and truly speaking import or export duties or excise duty are not taxes on property, including goods, as such, but on the happening of a certain event in relation to goods, namely, import or export of goods or production or manufacture of goods; the true meaning of Art. 289 is to be derived not only from its language but also from the scheme of the Indian Constitution distributing powers of taxation between the Union and the States in and the context of those provisions; Arts. 285 and 289 of the Constitution are complementary and the true construction of the one has a direct bearing on that of the other; those articles have to be construed in the background of the corresponding provisions of the Government of India Act 1935, ss. 154 and 155; cl. (2) of Art. 289 is only explanatory and not an exception to cl. (1) in the sense that the entire field of taxation covered by cl. (1) is also covered by the terms of cl. (2); as Parliament has exclusive power to make laws with respect to trade and commerce with foreign countries and with respect to duties of customs, including export duties and duties of excise on certain goods manufactured or produced in India, the Union is competent to impose or to authorise the, imposition of custom duties on 798 the import or export of goods by a State which may be its property or excise duty. on the production or manufacture of goods by a State; if cl. (1) of Art. 289 were to be interpreted as including the exemption of a State in respect of customs duties or excise duty, it will amount to a restriction on the exclusive: competence of Parliament to make laws with respect to trade and commercial restriction which is not warranted in view of the scheme of the Constitution; that the term "taxation" has been used in a very wide sense, as per Art. 366 (28); the wide sweep of that expression has to be limited with respect to the words "Property" or "income"; the juxtaposition of the words "'property" and "income" in cl. (1) of Art. 289 would show that the exemption of the States from Union taxation wag only in respect of tax on property and tax on income; in other words, the exemption granted by Art. ?89 (1) is in respect of property taxes properly so called in the sense of taxes directly on property; a tax on property means a tax in respect of ownership, possession or enjoyment of property, in contradistinction to customs duties and duties of excise, which in their true meaning are not taxes on property but only in relation to property, on a particular occasion Cl.. (2) of Art. 289 of the Constantine shows clearly that trade or business carried on by States will be liable to taxation;
by cl. (3) of Art. 289 Parliament has been authorised to legislate as to what trade or business would be incidental to the ordinary functions of government and which, therefore would not be subject to taxation by the Union; any trade or busines not so declared by parliament will be within the operation of cl. (-), i.e liable to Union taxation.
On the other hand. it is argued on behalf of the States that in interpreting Art. 289 of the Constitution, on which the answer to the question referred by the President depends, it has to be borne in mind that our Constitution does not make a distinction 799 between direct and indirect taxation; that trade and commerce and industry have been distributed between the Union and the States; that the power of taxation is different from the power to regulate trade and commerce;
that the narrower construction of the Article, contended for and on behalf of the Union, will seriously and adversely affect the activities of the States and their powers under the Constitution; that a comparison and contrast between the terms of s. 155 of the Government of India Act and those of Art. 289 of the Constitution would clearly emphasize that the wider meaning contended for on behalf of the States should be preferred; that the legislative practice in respect of excise and customs duties is a permissible guide to the interpretation of the Article in question and would support the wider construction, an that even on a narrower construction, insisted upon by the Union, customs duties and duties of excise affect property and are, therefore, within the immunity granted by Art. 289 (1); properly construed Art. 289 (1) grants complete immunity from all taxation on any kind of property; and any kind of tax on property or in relation to property is within the immunity; therefore, the distinction sought to be made on behalf of the Union between tax on property and tax in relation to property is wholly irrelevant; cl. (2) of Art. 289 is not explanatory, as contended on behalf of the Union, but is an exception or in the nature of a proviso to cl. (1) of the Article; cl. (2) really carves out something which is included in cl. (1) and similarly cl. (3) is an exception to cl. (2) and carves out something which is included in cl. (2).
It should be noted that all the States which were represented before us were agreed in their contention, as set out above, except the State of Maharashtra. The learned Counsel for the State of Maharashtra agreed with the contention on behalf of the Union that there was a clear distinction between 800 tax on property and excise duties. In other words, excise duty is not within the immunity granted by cl. (1) of Art.
289, which is in the nature of an exception to the general power of a State to regulate trade and commerce and its right to tax, and as such it should be very strictly construed. But he supported the other States in so far as they contended that duties of import and export were within the exemption granted by cl. (1) of Art. 289.
It will thus be seen that whereas the Union is for interpreting cl. (1) of Art. 289 in the restricted sense of the immunity being limited to a direct tax on property and on the income of a State, the States contend for an allem bracing exemption from Union taxes which have any relation to or impact on State property and income. In spite of this wide gulf between the two view points, both are agreed that the terms "property", "income' and "tax" have been used in their widest sense. 'They are also agreed that the immunity granted to the Union in respect of its property by Art. 285 corresponds to the immunity granted to the States by Art.
289, and that, therefore, the term "property" "taxation" and "tax" have to be interpreted in the same comprehensive sense in both the Articles. It will be noticed that whereas not only the term ("property" but also "income" occurs in Art.
289, in Art. 285 the term "income' is not used apparently because the Constitution makers were aware of the legal position that tax on "income" (as distinct from agricultural income) is exclusively in the Union List and was so even before the advent of the Constitution. It was agreed, and it is manifest that the terms of Art. 285 and 289 are very closely parallel to those of ss. 154 and 155, respectively, of the Government of India Act, 1935 (25 & 26 Geo. VC. 42), except for the differences in expression occasioned by the change in the constitutional position and the integration of the Indian States after801 1947. The language of the two parellel provisions may be set out below in order to bring out the points of similarity and contrast.
Government of India Act.
S. 154 : Property vested in His Majesty for purposes of the Government of the Federation shall, save in so far as any Federal law may otherwise provide, be exempt from all taxes imposed by, or by any authority within, a Province or Federated State;
Provided that, until any Federal law otherwise provides, any property so vested which was immediately before the commencement of Part III of this Act liable, or treated as liable., to any such tax, shall, so long as that tax continues, continue to be liable, or to be treated as liable.. thereto.
S. 155 (1) Subject as hereinafter provided.. the Government of a Province and the Constitution of India.
Art. 285. (1) The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any Authority within a State.
(2) Nothing in clause (1) shall, until Parliament by law otherwise provides., prevent I any authority within a State from levying any 'tax on any property of the Union to which such property was immediately before' the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State.
Art. 289. (1) The property and income of a State shall be exempt from Union 802 Government of India Act.
Ruler of a Federated State &hall not be liable to Federal taxation in respect of land & or buildings situate in British India, or income accruing, arising or received in British India :
Provided that(a) where a trade or business of any kind is carried on by or on behalf of the Government of a Province in any part of British India outside that Province or by a Ruler in any part of British India, nothing in this sub-section shall exempt that Government or Ruler from any Federal taxation in respect of that trade or business, or any operations connected therewith, or any income arising in connection therewith, or any property occupied for the purposes thereof, (b) nothing in this sub-section shall exempt Constitution of India.
taxation.
(2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of any tax to such extent, if any as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or 'business, or any income accruing or arising in connection therewith.
(3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business which Parliament may by law declare to be incidental to the ordinary functions of government.
803 Government of India Act.
a Ruler from any Federal taxation in respect of any lands, buildings or income being his personal property or personal income.
(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.
It will thus appear that both s. 154 and Art. 285 set out above speak only of "property" and lay down that property vested in the Union shall be exempt from all taxes imposed by a State or by any authority within a State, subject to one exception of saving the pre-existing taxes on such property until Parliament may by law otherwise provide.
Similarly, whereas s. 155 of the Government of India Act exempts from federal taxes the Government of a Province in respect of lands or buildings situate in British India or income accruing, arising or received in British India, Art.
289(1) says "the property and income of a State shall be exempt from Union taxation". Section 156 aforesaid has two provisos (a) & (b); (a) relating to trade or business of any kind carried on by or on behalf of the Government of a Province, and (b) which is not relevant, relating to a Ruler. It will be seen that "'income" is repeated in both the provisions, but what was "'lands" or "'buildings" has become simply "property" in Art. 289(1).
804 The question naturally arises why "income" was at all mentioned when it is common ground that "income" would be included in the generic term " property". It was suggested on behalf of the Union that the a position of the terms "property" and "income "of a State which have been declared to be exempt from Union taxation would indicate that the tax from which they were to be immune was tax on ,(property" and on "Income", i.e., in both cases a direct tax, and not an indirect tax, which may be levied in relation to the property of a State, namely, excise duty, which is a tax on the manufacture or production of goods and customs duty which is a tax on the event of importation or exportation of goods.
Before dealing with the argument on either side, whether the restricted meaning attributed to the words of Art. 289(1) on behalf of the Union, or the wider significance claimed for these words on behalf of the States, was intended by the Constitution makers, it is necessary to bear in mind certain general considerations and the scheme of the constitutional provisions bearing on the power of the Union to impose the taxes contemplated by the proposed legislation. Neither the Union nor the States can claim unlimited right as regards they are area of taxation. The right has been hedged in by considerations of respective powers and responsibilities of the Union in relation to the States, and those of the States in relation to citizens or inter se or in relation to the Union. Part XII of the Constitution relates to "Finances etc." at the outset Art. 265 lays down that no tax shall be levied or collected except by authority of law.
That authority has to be found in the three lists in the Seventh Schedule, subject to the provisions of Part Xi which deals with the relations between that Union and the States, particularly Chapter 1 relating to legislative relations and distribution of legislative powers, with special reference, to Art.' 246. Under that Article the legislature of a State has exclusive powers to make laws with respect 805 to the matters enumerated in List 11 and Parliament and the Legislature of a State have powers to make laws with respect to' the matters enumerated in List III (the Concurrent List), and notwithstanding those two lists, Parliament has the exclusive power to make Laws with respect to any of the matters enumerated in List I (the Union List). Parliament also has power to make laws with respect to any of the matters enumerated in the State List with respect to any part of the territory of India which is not included in a State. By Art. 248 Parliament has been vested with exclusive power to make laws with respect to any matters not enumerated in the State list or the Concurrent list, including the power of making a law imposing ?. tax 'nut mentioned in either of those lists. It is not necessary to refer to the extended power of legislation vested in Parliament in abnormal circumstances, as contemplated by Arts. 249 250 and 252. In short, though the State have been vested with exclusive powers of Legislation with respect to the matters enemurated in List II, the authority of Parliament to legislate in respect of taxation in List I is equally exclusive. The scheme of distribution of powers of legislation, with particular reference to taxation, is that Parliament has the exclusive power to legislate imposing taxes on income other than agricultural income (Entry 82):
duties of customs including export duties (Entry 83); duties of excise an tobacco another goods, manufactured or produced in India, except alcoholic liquors for human consumption and opium, Indian hemp and other narcotic drugs and narcotics, which by entry 51 of List II is vested in the State legislature (Entry 84). It is not necessary to refer to the other taxes which Parliament may impose because they have no direct bearing on the questions, in controversy in this case. Similarly, the State legislatures have the power to impose taxes on agricultural income (Entry 46), taxer,on lands and buildings (Entry 49) and duties of excise on alcoholic liquors and opium etc., manufactured or 806 produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India (Entry 51). It is also not necessary to refer to other heads of taxes which arc contained in the State List. It would, thus appear that whereas all taxes on income other than agricultural income are within the exclusive power of the Union, taxes on agricultural income only are reserved for the States. All customs duties, including export duties, relating as they do to transactions of import into or export out of the country are within the powers of Parliament. The States are not concerned with those. They are only concerned with taxes on the entry of goods in local areas for consumption, use or sale therein, covered by entry 52 in the State List. Except for duties of excise on alcoholic liquors and opium and other narcotic drugs, all duties of excise are leviable by Parliament.
Hence, it can be said that by and large, taxes on income, duties of customs and duties of excise are within the exclusive power of legislation by Parliament.
Those exclusive powers of taxation, as aforesaid vested in Parliament, have to be correlated with the exclusive power of Parliament to legislate with respect to trade and commerce with foreign countries; import and export duties across customs frontiers; definition of customs frontiers (Entry 41); inter-State trade and commerce (Entry 42). As the regulation of trade and commerce with foreign countries, as also inter-State, is the exclusive responsibility of the Union, Parliament has the power to legislate with respect to those matters, along with the power to legislate by way of imposition of duties of customs in respect of import and export of goods as also to impose duties of excise on the manufacture or production in any part of India in respect of goods other than alcoholic liquors and opium, etc , referred to above. Further, the imposition of customs duties 807 or excite duties may be either (1) with a view to raise revenue or (2) to regulate trade and commerce, both in land and foreign, or (3) both to regulate trade and commerce and to raise revenue. If therefore Art. 289 (1) completely exempts all property of the States from all taxes the power of Parliament to regulate foreign trade by the use of its power of taxation would be seriously impaired and this consideration will have to be kept in mind when interpreting Art. 289(1).
There is another general consideration which has also to be borne in mind in view of the provisions contained in Part XII of the Constitution. Though various taxes have been separately included in List I or List II and there is no overlapping in the matter of taxation between the two lists and there is no tax provided in the Concurrent List except stamp duties (Item 44), the constitution embodies an elaborate scheme for the distribution of revenue between the Union and the States in Part XII, with respect to taxes imposed in List 1. The scheme of the Constitution with respect to financial relations between the Union and the States. devised by the Constitution makers, is such as to ensure an equitable distribution of the revenue between the Centre and the States. All revenues received by the Government of India normally form part of the Consolidated Fund of India, and all revenues received by the Government of a State shall form part of the Consolidated Fund of the State. This general rule is subject to the provision of the Chapter I of Part XII in which occur Arts. 266 to 277.
Though stamp duties and duties of excise on medicinal and toilet preparations which are' covered by the Union List are to be levied by the Government of India, they have to be collected by the States within which such duties are leviable and are not to form part of the Consolidated Fund of India, but stands assigned to the State which has.
collected them (Art. 268). Similarly, duties and taxes 808 levied and collected by the Union in respect of Succession Duty, Estate Duty, Terminal Taxes on goods and passengers carried by Railway, sea or air, taxes on rail fares and freights, etc. as detailed in Art. 269 shall be assigned to the States and distributed amongst them in accordance with the principles of distribution as may be formulated by Parliamentary legislation, as laid down in cl. (2) of Art.
269. Art. 270 provides that taxes on income, other than agricultural income shall be levied and collected by the Government of India and distributed between the Union and the States. The taxes and duties levied by the Union and collected by the Union or by the States as contemplated by Arts. 268, 269 and 270 and distributed amongst the States shall not form part of the Consolidated Fund of India.
Further Excise duties which are levied and collected by the Government of India and which form part of the Consolidated Fund of India may also be distributed amongst the States, in accordance with the principles laid down by Parliament in accordance with the provisions of Art. 272. Express provision has been made by Article 273 in respect of granting-aid of the revenue of the States of Assam, Bihar, Orissa and West Bengal in lieu of assignment of any share of the net proceeds of export duty on jute and jute products.
Further a safeguard has been laid down in Art. 274 that no bill or amendment which imposes or varies any tax or duty in which States are interested or which affects the principles of distribution of duties or taxes amongst the States as laid down in Arts. 268-273 shall be introduced or moved in either House of Parliament except on the recommendation of the President. Parliament has also been authorised to lay down that certain sums may be charged on the Consolidated Fund of India in each year by way of grants-in-aid of the revenues of such States as it may determine to be in need of assistance. This aid may' be different for different States, according to their needs, with particular reference to schemes of 800 development for the purposes indicated in Art. 275 (1).
Provision has also been made by Art. 280 for the appointment by the President of a Finance Commission to make, recommendations to the President as to the distribution amongst the Union and the States of the net proceeds of taxes and duties as aforesaid, and as to the principles which should govern the grants-in-aid of the revenue of the States out of the Consolidated Fund of India.
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 Found of India but many of those taxes and duties are distributed amongst 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 be used for the purposes of supplementing the revenues of the States in accordance with their needs.
The question of the distribution of the aforesaid taxes and duties amongst the States and the principles governing them, as also the principles governing grants-in-aid of revenues of the States out of the Consolidated Fund of India, are matters which have to be decided by a high-powered Finance Commission, which is a responsible body designated to determine those matters in an objective way. It cannot, therefore, be justly 810 contended that the construction of Art. 289 suggested on behalf of the Union will have the effect of seriously and adversely affecting the revenues of the States. 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. On the other hand, there may be more serious difficulties in the way of the Union if we were to adopt the very wide interpretation suggested on behalf 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. Sources of revenue allocated to the States, like taxes on land and other kinds of immovable property, have been allocated to the States alone. The Constitution makers realised the fact that those sources of revenue allocated to the States may not be sufficient for their purposes and that the Government of India would have to subsidise their welfare activities out of the revenues levied and collected by the Union Government. Realising the limitations on the financial resources of the States and the growing needs of the community in a welfare State, the Constitution has made, as already indicated, specific provisions empowering Parliament to set aside a portion of its revenues, whether forming part of the Consolidated Fund of India or not, for the benefit of the States, not in stated proportions but according to their needs. It is clear, therefore, that considerations which may apply to those Constitutions which recognise 811 water-tight compartments between the revenues of the federating States and those of the federation do not apply to our Constitution which does not postulate any 'conflict of interest between the Union on the one hand and the States on the other. The resources of the Union Government are not meant exclusively for the benefit of the Union activities ;
they are also meant for subsidizing 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.
Bearing the scheme of our Constitution in mind let us now turn to the words of Art. 289 and also its complementary article, namely, Art. 285. The contention on behalf of the Union is that when Art. 289 provides for exemption of the property and income of a State from Union taxation, it only provides for exemption from such tax as may be levied directly on property and income and not from all Union taxes, which may have some relation to the property or income of a State. On the other hand, the contention on behalf of the States is that when Art. 289 (1) provides for exemption of the property and income of a State from Union taxation, it completely exempts the property and income of a State from all Union taxation of whatsoever nature it may be. So far as exemption of income is concerned, there is no serious dispute that the exemption there is with respect to taxes on income other than agricultural income (item 82, List I), for the simple reason that the only tax provided in List I with respect to income is in item 82 of List I. The dispute is mainly with respect to taxes on "property". Now this fact in our opinion has an important bearing on the nature of taxation of "'property" which is exempt under Art.
289 (1). If the income 812 of a State is exempt only from taxes on income, the juxtaposition of the words "property and income" in Art.
289(1)must lead to the inference that property is also exempt only from direct taxes on property. But it is said that there is no specific tax on property in List I and it is therefore contended on behalf of the States that when property of a State was exempted from Union taxation, the intention of the Constitution makers must have been to exempt it from all such taxes which are in any way related to property. Therefore, it is urged that the exemption is not merely from taxes directly on property as such but from all tax which impinge on property of a State even indirectly, like customs duties, or export duties or excise duties. It is true that List I contains no tax directly on property like List II, but it does not follow from 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 from Union taxation directly on property under Art. 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 Art. 289 (1). The argument therefore that Art. 289 (1) cannot be confined to tax directly on property because there is no such tax provided in List I cannot be accepted, 813 Now the words in Art. 289, confining ourselves to "property", are that "the property of a State shall be exempt from Union taxation". It is remarkable that the word "all" does not govern the woods "Union taxation" in Art.289(1). It does not provide that the property of a State shall be exempt from all Union taxation. The question therefore is whether when Art. 289 provides for the exemption of State property from Union taxation, it only provides for exemption from that kind of Union taxation which is a tax directly on property. It is true that Art.
299(1) does not specifically say that the property of a State shall be exempt from Union taxation on property. It may however be properly inferred that was the intention if one looks to the language of Art. 289 (2). That clause mainly deals with income accruing or arising to a State from trade or business carried on by it. At the same time it provides that where the State is carrying on a trade or business nothing in cl. (1) shall prevent the Union from imposing any tax to such extent as Parliament may by law provide in respect of any property used or occupied for the purposes of such trade or business, and the authority thus given to Parliament to tax property used or occupied in connection with trade or business can only refer to a tax directly on property as such, which is used or occupied for business, the tax being related to the use or occupation of the property. The meaning will be clearer if we look to Art.285. Clause (1) of that Article provides that the property 'of the Union shall be exempt from all taxes imposed by a State or by any authority within a State.
Prima facie the use of the words "all taxes" in cl. (1) would suggest that the property of the Union would be exempt from all taxes of whatsoever nature, which a State can impose. But if one looks to cl. (2) of Art. 285 the 'nature of taxes from which the property of the Union' would be exempt is clearly indicated as a tax on property. Clause (2) provides that "nothing in clause (1) shall,until 814 Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State". It will in our opinion be permissible in view of cl. (2) to read cl. (1) of Art. 285 when it speaks of all taxes as relating to taxes of the nature of taxes directly on property. We have already pointed out, when dealing with the general considerations which should govern the interpretation of Art. 289 (1) that the power of the Union would be crippled if Art. 289 is interpreted as exempting the property of a State from all Union taxes. We have also pointed out that even though the taxes may be collected and levied by the Union, there are provisions in Part XII for the assignment or distribution of many Union taxes to the States. I here are also provisions for grants maid by the Union from the Consolidated Fund of India to a State. In these circumstance's it would in our opinion be in consonance with the scheme of the Constitution relating to taxation to read Art. 289 (1) as laying down that the property and income of a State shall be exempt from Union taxation on property and income. There is in our opinion better warrant for reading these words "'on property and income" after the words "'Union taxation" in Art. 289(1) in view of the scheme of our Constitution relating to taxation and also the provisions of Part XII thereof than to read the word "all" before the words "Union taxation" in that clause.
The effect of reading the word "all" before the words "'Union taxation" would in our opinion be so serious, and so crippling to the resources, which the Constitution intended the Union to have, as to make it impossible to give that intention to the words of cl. (1) of Article 289. On the other hand, the States would not be so seriously affected if we read the words "'on property and income" after the words 815 "Union taxation" in Art. 289 (1), for unlike other Constitutions there is provision in Part XII of our Constitution for assignment or distribution of taxes levied and collected by the Union to the States and also for grants-in-aid from the Union to the States, so that the burden which may fall on the States by giving a restrictive meaning to the words used in cl. (1) of Art, 289 would be alleviated to a large extent in view of the provisions in Part XII of the Constitution for assignment and distribution of taxes levied by the Union to the States and also for grants-in-aid from the Union to the States.
Further it must not be forgotten that Arts. 285 and 289 are successors of ss. 154 and 155 of the Government of India Act, though there are differences in detail between them, in particular cl. (2) of Art. 289, which corresponds to the proviso to s. 154 seems in our opinion to make it clear by the change in the language, that cl. (1) of Art. 285 when it speaks of all taxes is referring to taxes on property of which cl. (2) definitely permits continuance provided such property of the Union immediately before the commencement of the Constitution was liable or was treated as liable to such tax. As to Art. 289 (1), a change has been made in the words, for s. 155(1), which corresponded thereto, provided that the Government of a Province shall not be liable to Federal taxation in respect of lands or buildings. Art. 289 on the other hand refers not only to lands and buildings but to all property of a State, whether movable or immovable and exempts it from Union taxation. Even so, we find no warrant for interpreting cl. (1) of Art. 289 as if it exempts all property of a State from all Union taxation. We are therefore of opinion reading Art. 289 and its complementary Art.
285 together that the intention of the Constitution makers was that Art. 285 would exempt all property of the Union from all taxes on property levied by a State or by any authority within the 816 State while Art. 289 Contemplates that all property of the States would be exempt from all taxes on property which may be leviathan by the Union. both the Articles in our opinion are concerned with taxes directly either on income or on property and not with taxes which may indirectly affect income or property. The contention therefore on behalf of the Union that these two' Articles should be read in the restricted sense of exempting the property or income of a State in one case and the property of the Union in the other from taxes directly either on property or on income as the case may be, is correct.
In this connection, it is pertinent to refer to certain decision of the High Court of Australia, the Supreme Court of Canada, and the Privy Council bearing on the construction of similar, though not identical, provisions in the Constitutions of Australia and Canada.
The corresponding provisions of the Canadian Constitution are contained in ss. 91, 92 and 125 of the British North America Act, 1867 (30-31 Vict. Ch. 3). The relevant portion of s. 91 is as follows :"It shall be lawful for the Queen...... to make laws for the peace, order and good Government of Canada, in relation to all matters not coming within the classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces; and the greater certainty, but not so as to restrict the generality of the fore going terms of this Section, it is hereby declared that (notwithstanding anything in this Act) the exclusive legislative authority of the Parliament of Canada extends to all matters coming within the classes of subjects next hereinafter enumerated; that is to say:
... .... .....
817 (2) The regulation of Trade and Commerce;
(3) The raising of money by any mode or system of taxation." S. 92 provides for exclusive powers of the province including direct taxation within the Province in order to the raising of revenue for Provincial purposes.
Section 125 is in these terms ",No lands or property belonging to Canada or any Province shall be liable to taxation." It will thus be seen that the above quoted section runs very parallel to the provisions of Art. 289 (1) of our Constitution. These provisions of the Canadian constitution have come up for consideration before the Supreme Court of Canada, as also before the judicial Committee of the Privy Council on a number of occasions. In the case of the Attorney-General of The Province of British Columbia v. The Attorney-General of the Dominion of Canada (64 Can. S.C.R. 377) the question arose whether the Province of British Columbia could import liquors into Canada for the purposes of sale, pursuant to the provisions of the Government Liquor Act (11 Geo. V, c. 30) without payment of customs duties imposed by the Dominion of Canada. It was argued, as has been argued before us, that the word "tax" was wide enough to include the imposition of customs duties, and that the word "'property" in s. 125 included property of all kinds.
The answer given by the Dominion was that customs duties did not constitute taxes within the meaning of the expression used in s, 125 but were merely in the nature of regulation of trade and commerce, and secondly, assuming that customs duties were included in the expression "taxation", they did not constitute taxation 818 on property. It was also contended on behalf of the Dominion that the word "taxation" in s. 125 was not intended to comprehend customs duties inasmuch as the prohibition indicated by the section was intended to be reciprocal prohibition and did not extend as regards the Dominion to indirect taxation. The Supreme Court of Canada, by majority judgment, upheld the decision of the Exchequer Court of Canada which had held that the import by the Province was liable to pay import duty to the Dominion. Thus the contention raised on behalf of the Dominion was accepted that customs duties were not taxes imposed on property as such but were levied on the importation of certain goods into Canada as a condition of their importation.
This decision of the Supreme Court was challenged before the Privy Council, by special leave. The judgment of the Privy Council is reported in Attorney-General of British Columbia v. Attorney-General of Canada (1924 'A. C. 222).
The Privy Council upheld the decision appealed from and held that import duties imposed by the Dominion upon alcoholic liquors imported into Canada by the Government of British Columbia for the purposes of trade was valid. The Privy Council based its decision on a consideration of the whole scheme of the Canadian Constitution under which the Dominion had the power to regulate trade and commerce throughout the Dominion, and held that 'Is. 125 must therefore be so considered as to prevent the paramount purpose thus declared being defeated". The Privy Council further observed that "the true solution is to be found in the adaptation of s. 125 to the whole scheme of Government which the statute defines". The ratio decided in the case just mentioned fully supports the contention raised on behalf of the Union in the present case and the interpretation of Art 289 (1) must also be adapted to the whole scheme of the Constitution.
819 Turning now to the Constitution of Australia and the relevant cases decided by the High Court ,of Australia, it is necessary to set out the relevant part of s. 51 of the Commonwealth of Australia Constitution Act, 1900 (63 and 64 Vict. c. 12) :"The Parliament shall, subject to this Constitution, have power to make laws for the peace, order and good Government of Commonwealth with respect to(i) Trade and Commerce with other countries, and among the States;
(ii) Taxation; but so as not to discriminate between the States or parts of States." This closely follows that part of s. 91 of the British North America Act, which has vested the Federal Parliament with the†exclusive power to legislate in respect of such trade and commerce and taxation in respect thereof. Section 114 of the Commonwealth of Australia Constitution grants immunity from taxation in the following terms :"A State shall not, without the consent of the Parliament of the Commonwealth, raise or maintain any naval or military force, or impose any tax on property of any kind belonging to the Commonwealth nor shall the Commonwealth impose any tax on property of any kind belonging to a State." This corresponds to the provision of s. 125 of the Canadian Constitution and Arts. 285 and 289 of our Constitution, which have laid down the provisions as to exemption from taxation. The question of the interpretation of those provisions of the Australian Constitution came before the High Court of Australia in the case of the Attorney-General of New South 820 Wales v. The Collector of Customs for New South Wales (19078) 5 C.L.R. 818. In this case an action was brought by the State of New South Wales to recover the amount of customs duties realised by the Collector of Customs in respect of certain steel rails imported by the plaintiff from England for use in the construction of the railways of the State.
The State claimed that those rails were not liable to customs duties on the ground that they were the property of the Government and as such exempt from customs duties by virtue of s. 114 of the Constitution. The majority of the Court decided that the imposition of customs duties being a mode of regulating trade and commerce with other countries as well as of exercising the taxing power, the goods imported by a State Government were subject to the customs laws of the Commonwealth. They also laid it down that the levying of the duties of customs is not an imposition of a tax on property within the meaning of s. 114 aforesaid. The Court added that even if the words of the section were capable of bearing that comprehensive meaning, that was not the only or necessary meaning and should be rejected as inconsistent with the provisions of the Constitution conferring upon the Commonwealth exclusive power to impose duties of customs and to regulate trade and commerce.
Isaacs I came to the same conclusion though on somewhat different grounds. In the result, the Court unanimously held, though not for the same reasons, that the goods imported by the State were liable to import duty. The High Court held that the words "impose any tax" might be capable of application to duties of customs. But it pointed out that the levying of customs duties was not within the comprehension of the expression "imposition of a tax on property." It also pointed out that customs duties were imposed in respect of goods and in a sense "'upon 19 goods, even as the expression Stamp duties, Succession Duties and other forms of indirect taxes are said to be taxes on deeds and other real or personal property. The 821 Court recognised the legal position that customs duties are n
