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.
Constitution of India.
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 not really taxation upon property but upon operations or movements
of property.
These authorities based on the interpretation
of analogous provisions in the Canadian and Australian Constitutions fully
support the contention raised on behalf of the Union that customs duties are
not taxes on property but are imposts by way of conditions or restrictions on
the import and export of goods, in exercise of the Union's exclusive power of
regulation of trade and commerce read along with the power of taxation and that
the general words of the exemption have to be limited in their scope so as not
to come into conflict with the power of the Union to regulate trade and
commerce and to impose duties of customs.
It is next urged on behalf of the States that
even if Art.
289 (1) only exempts the property of the States
from tax directly on property, the levy of excise on goods under item 84 of
List I is a tax on property and therefore no excise can be levied on goods
belonging to States and manufactured by them. It is further urged that duties
of customs including export duties under item 83 of List I are equally duties
on the goods imported or exported and therefore the property of the State must
be exempt under Art. 289 (1), both from excise duties and from duties of
customs including export duties. This raises the question of the nature of
duties of excise and customs. This question with respect to excise duties was
considered by this Court in the case of Amalgamated Coalfields Ltd. v. Union of
India (A.I.R. 1962 S.C: 1281). After considering the previous decisions of the
Federal Court In re. The Central Provinces and Berar Saks of Motor and
Lubricant Taxation Act (1939 F.C.R. 18) ; The Province of Madras v. M/s. Budhu
Paidanna (1942 F. C. R. 90) and of the Judicial Committee of the Privy Council
in Governor General in Council v. Province of Madras (1945 822 F.C.R. 179),
this Court observed as follows at p. 1287:"With great respect, we accept
the principles laid down by the said three decisions in the matter of levy of
an excise duty and the machinery for collection thereof. Excise duty is
primarily a duty on the production or manufacture of goods produced or
manufactured within the country. It is an indirect duty which the manufacturer
or producer passes on to the ultimate consumer, that is, ultimate incidence
will always be on the consumer.
Therefore, subject always to the legislative
competence of the taxing authority, the said tax can be levied at a convenient
stage so long as the character of the impost, that is, it is a duty on the
manufacture or production, is not lost. The method of collection does not
affect the essence of the duty, but only relates to the machinery of collection
for administrative convenience." This will show that the taxable event in
the case of duties of excise is the manufacture of goods and the duty is not
directly on the goods but on the manufacture thereof.
We may in this connection contrast sales tax
which is also imposed with reference to goods sold, where the taxable event is
the act of sale. Therefore, though both excise duty and sales-tax are levied
with reference to goods the two are very different imposts ; in one case the
imposition is on the act of manufacture or production while in the other it is
on the act of sale. In neither case therefore can it be said that the excise
duty or sales tax is a tax directly on the goods for in that event they will
really become the same tax. It' would thus appear that duties of excise,
partake of the nature of indirect taxes as known to standard works on economics
and are to be distinguished from direct taxes like taxes on property and
income.
823 Similarly in the case of duties of
customs including export duties though they are levied with reference to goods,
the taxable event is either the import of goods within the customs barriers or
their export outside the customs barriers. They are also indirect taxes like
excise and cannot in our opinion be equated with direct taxes on goods
themselves. Now, what is the true nature of an import or export duty ? Truly
speaking, the imposition of an import duty, by and large, results in a
condition which must be fulfilled before the goods can be brought inside the
customs barriers, i.e., before they form part of the mass of goods within the
country. Such a condition is imposed by way of the exercise of the power of the
Union to regulate the manner and terms on which goods may be brought into the
country from a foreign land. Similarly an export duty is a condition precedent
to sending goods out of the country to other lands. It is not a duty on property
in the sense of Art. 289 (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. The position is that
whereas the Union Parliament has been vested with exclusive power to regulate
trade and commerce, both foreign and inter State (Entries 41 and 42) 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 the States, granting
them immunity from certain kinds of Union taxation. It, therefore becomes
necessary so to construe the provisions of the Constitution as to give full
effect to both as far as may be. If it is held that the States are exempt from
all taxation in respect of their export or imports, it is not difficult to
imagine a situation where a State might import or export all varieties of
things and thus nullify to 824 a large extent the exclusive power of Parliament
to legislate in respect of those matters. The provisions of Art. 289 (1) being
in the nature of an exception to the exclusive field of legislation reserved to
Parliament, the exception has to be strictly construed, and therefore, limited
to taxes on property and on income of a State. In other words, the immunity
granted in favour of States has to be restricted to taxes levied directly on
property and income. Therefore, even though import and export duty or duties of
excise have reference to goods and commodities, they are not taxes on property
directly and are not within the exemption in Art. 289 (1).
We may in this connection refer to the
Attorney-General for British Columbia v. King come Navigation Co. Ltd. (1934 A.
C. 45), to bring out the essence of duties of customs and excise which were
held by the Privy Council to be in their essence trading taxes as distinguished
from direct taxes.
But it is contended on behalf of the States
that in the scheme of our constitution no distinction has been made between
direct and indirect tax and therefore this distinction is not relevant to the
present controversy. It is true that no such express distinction has been made
under our Constitution; even so taxes in the shape of duties of customs
(including export duties) and excise, particularly with a view to regulating
trade and commerce in so far as such matters are within the competence of
Parliament and are covered by various entries in List I to which reference has
already been made, cannot be called taxes on property; they are imposts with
reference to the movement of property by way or import or export or with
reference to production or manufacture of goods. Therefore even though our Constitution
does not make a clear distinction between direct and indirect taxes, there is
no doubt that the exemption provided in Art. 289 (1) from Union 825 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 taxes on property.
It is also contended on behalf of the States
that the narrower construction suggested on behalf of the Union would very
seriously and adversely affect activities of the States. This argument does not
take into account the more serious consequences that would follow if the wider
interpretation suggested on behalf of the States were to be adopted. For example,
a State may decide to embark upon trade and commerce with foreign countries on
a large scale in respect of different commodities. On the interpretation put
forward by the States, the Union Parliament would be powerless to regulate such
trade and commerce by the use of the power of taxation conferred on it by I
entry 83 of List I, thus largely nullifying the exclusive power of Parliament
to legislate in respect of international trade and commerce, including the
power to tax such trade. Trade and commerce with foreign countries, export and
import across the customs frontiers and inter-State trade and commerce are all
within the exclusive jurisdiction of the Union Parliament. This Court naturally
will not adopt a construction, of Art.
289(1) which will lead to such a startling
result as to nullify the exclusive power of Parliament in these matters.
Lastly, it is urged on behalf of the States
that s. 20 of the Sea Custom Act was recast and amended 'by Act. XLV of 1951
and that sub-s. (2) thereof has borrowed most of its words from the provisions
of cl. (2) of Art. 289, and therefore, Parliament itself had understood cl. (2)
of Art.
289 in the sense in which the States are
contending that it should be interpreted. But that in our opinion does not 826
conclude the matter, for we have to construe the provisions of the Constitution
in their proper setting and we are entitled to come to the conclusion that
Parliament may not have been correct in so interpreting the words of cl. (2) of
Art. 289.
For the reasons given above, it must be held
that the immunity granted to the States in respect of Union taxation does not
extend to duties of customs including export duties or duties of excise. The
answer to the three questions referred to us must, therefore, be in the negative.
Let the opinion of this Court be reported to the President accordingly.
S.K. DAS J. In exercise of the powers
conferred upon him by cl. (1) of Art. 143 of the Constitution, the President of
India has referred three questions of law to this court for consideration and a
report of its opinion thereon. These questions are (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 sub-section (1A) of section 3 of the Central Excises and
Salt Act, 1944 (Act 1 827 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 ? We have had the advantage of very full arguments on these questions.
The learned Solicitor-General of India has put forward the point of view on
behalf of the Union of India.
Several States were represented before us by
their Advocates-General or other counsel. Except for the State of Maharashtra
which has taken a stand somewhat akin to that of the Union of India, there is a
sharp conflict between the States and the Union as to the answers to be given
to the three questions. We shall presently refer in greater detail to the
points of conflict but it may be generally stated that except for the State of
Maharashtra, the States have taken the stand that under Art. 289 of the
Constitution the property of a State is exempt from the imposition of customs
duties and excise duties except to the extent permitted under clause (2) of the
said article. The Union of India has taken the stand that the amplitude of
power given to the Union Legislature to impose duties of customs (entry 83 of
List I of the Seventh Schedule) and duties of excise (entry 84 of List I of the
Seventh Schedule) can be cut down only by a. very strict interpretation of
article 289 and that strict interpretation is that cl. (1) of Art. 289 is
confined to a property tax only, namely, a tax on the goods as such and not on
their importation or exportation or on their production and manufacture, and
looked at from that point of view Art. 289 of the Constitution does not give
any protection to a State in the matter of customs duties and excise duties.
It is necessary perhaps to say something at
this stage about the constitutional background against which the questions fall
for consideration. The Sea 828 Customs Act, 1878 (8 of 1878) was enacted in
March 1878 in order to consolidate and amend the law relating to the levy of
sea customs duties. The Central Excises and Salt Act, 1944 (1 of 1944) was
enacted in February 1944 to consolidate and amend the law relating to central
duties of excise and to salt. The Government of India Act, 1915 (5 and 6 Geo.
5, c. 61) was a consolidating measure repealing and reenacting the numerous
Parliamentary Statutes relating to the administration of British India which
had been passed between the years 1770 and 1912. This Act was amended in
certain minor respects by the Government of India Amendment Act, 1916 (6 and 7
Geo. 5, c. 37) which also contained certain substantive provisions not
incorporated in the principal Act. In 1919 the Act again underwent amendment by
the passing of the Government of India Act, 1919 (9 and 10 Geo. 5, c. 101)
which was enacted for the purpose of bringing into effect the Indian
constitutional reforms based on what is commonly known as the
Montagu-Chelmsford Report.
Section 45 of the Act of 1919 provided that
the amendments made by that Act and the Act of 1916 be incorporated in the text
of the Government of India Act, 1915, and that Act as so amended be known as
the Government of India Act. This Government of India Act constituted an Indian
Legislature consisting of two Chambers, namely, the Council of States and the
Legislative Assembly. This Legislature bad the power to make laws for all
persons, for all courts and for all places and things within British India and
had also the power to repeal or alter any laws which were in force in any part
of British India. Prior to the Government of India Act, 1935 (26 Geo. V, c. 2)
the dominion and authority of the Crown, which extended over the whole of
British India, was derived from many sources, in part statutory and in part
prerogative, the former having their origin in Acts of the British Parliament
and the latter in rights based upon conquest, cession or usage 829 some of
which were directly acquired while others were enjoyed by the Crown as
successor to the rights of the East India Company. The Secretary of State for
India was the Crown's responsible agent for the exercise of all authority
vested in the Crown in relation to the affairs of India.
But the superintendence, direction and
control of the civil and military government of India was declared by the
Government of India Act to be vested in the Governor-General-in-Council; while
the government or administration of the Governors' and Chief Commissioners'
Provinces vested respectively in the local governments.
The Government of India Act, 1935 introduced
a dual system of government in the shape of autonomous Provinces and a Federation;
two sets of Legislatures were set up, one Federal Legislature and the other
Provincial Legislature.
In the Seventh Schedule were given three
Lists, Federal Legislative List called List 1 Provincial Legislative List
called List 11 and the Concurrent legislative list called List III. Legislative
power was distributed amongst the legislatures in accordance with those lists.
Duties of custom, including export duties came within item 44 of List I and
duties of excise on tobacco and other goods manufactured or produced in India
except alcoholic liquors, opium etc., came within item 45. The In Indian
Legislature amended the Sea Customs Act.. 1878 as also the Central Excises and
Salt Act, 1944 from time to time in exercise of the powers which it had either
under the Government of India Act., or the Government of India Act, 1935. The
Indian Independence Act, 1947 created the Dominion of India as from August 15,
1947 and the Secretary of State for India as the Crown's responsible agent for
Indian affairs disappeared from the Indian constitutional scene. The
Constitution of India came into force on January 26, 1950. This Constitution
envisaged India as a Sovereign 830 Democratic Republic, viz., a Union of States
but the scheme of the Government of India Act, 1935 with regard to distribution
of legislative powers between Parliament, which is the Union Legislature, and
the State Legislatures was continued. The Seventh Schedule of the Constitution
contains three lists, Union List called List 1, State List called List 11, and
Concurrent List called List III. Entry 83 of List I relates to duties of
customs including export duties and entry 84 relates to duties of excise on
tobacco and other goods manufactured or produced in India except alcoholic
liquors, opium etc. The distribution of legislative powers and the legislative
relations between the Union and the States are controlled by various articles,
namely, Arts. 245 to 258, in Chapter 1 of Part XI of the Constitution. We may
indicate here briefly the constitutional position that in normal circumstances
Parliament has exclusive power to make laws with respect to any of the matters
enumerated in List 1, and the Legislature of any State has exclusive power to
make laws for any such State with respect to any of the matters enumerated in
List 11; both Parliament and the Legislature of a State have power to make laws
with respect to any of the matters enumerated in List III.
Under Art. 245 of the Constitution, the power
of Parliament as also of the Legislature of a State to make laws is subject to
the provisions of the Constitution. Some of these provisions are contained in
Art. 285 and Art. 289 which occur in Chapter 1 of Part XII of the Constitution.
This Part deals with several subjects, such
as Finance (Chapter 1), Borrowing (Chapter 11) and Property, Contracts etc.
(Chapter 111). We may now read Art. 289 :
"289 (1) The property and income of a
State shall be exempt from Union taxation.
831 (2) Nothing in clause (i) shall prevent
the Union from imposing, or authorising the imposition of, any tax to such
extent, if any, as Parliament may be of 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."
The interpretation of this article is the main subject for consideration in
this reference.
Soon after the coming into force of the
Constitution, s. 20 of the Sea Customs Act, 1878 which stated what goods would
be dutiable under the Act, was, amended by the Union Legislature by Act XLV of
1951. The amendment took the shape of inserting a subsection in s. 20, sub-s.
(2), which said that the provisions of sub-s. (1) shall apply in respect of
goods belonging to the Government of a State and used for the purpose 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.
A similar amendment was made in s. 3 of the Central
Excises and Salt Act, 1944 by inserting sub-s. (1A) in that section.
That sub-section said that the provisions of
sub-s. (1) shall apply to all excisable goods other than salt which are
produced or manufactured in India by, or on behalf of a Government of a State
(other than a Union territory) and used for the purposes 832 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. It is obvious
that these two amendments were intented to bring the Sea Customs Act, 1878 and
the Central Excises and Salt Act, 1944 into harmony with Art. 289 of the
Constitution. In 1962 the Union Government introduced a draft Bill in
Parliament further to amend the Sea Customs Act, 1878 and the Central Excises and
Salt Act, 1944. We may quote two clauses, of this draft Bill in order to
appreciate how this reference has come to be made to this court. These two
clauses are clauses 2 and 3 of the draft Bill which run :
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 (1A) the
following subsection shall be substituted, namely :"(1A) The provisions of
sub-section (1) shall apply in respect of all excisable good 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
Government." 833 This draft Bill gave rise to a controversy and the Governments
of certain States expressed the view that the amendments proposed in the draft
Bill would not be constitutionally valid as the provisions of Art. 289 read
with the definitions of 'taxation' and 'tax' in cl. (28) of Art. 366 of the
Constitution preclude the Union from imposing or authorising the imposition of
any tax, including customs duties and excise duties, on or in relation to any
property of a State, except to the extent permitted by cl.
(2) read with cl. (3) of the said Art. 289.
The Union Government was, however, of the view that the exemption from Union
taxation granted by cl. (1) of Art. 289 was restricted to Union taxes on the
property of a State and did not extend to Union taxes in relation to the
property of a State;
therefore, customs duties being taxes on the
import or export of goods and not on goods as such and excise duties being
taxes on the production or manufacture of goods and not on goods as such did
not come within the protection of cl. (1) of Art. 289. This conflict of views
gave rise to doubts as to the true interpretation and scope of Art. 289 of the
Constitution and in particular, as to the constitutional validity of the
amendments proposed in the draft Bill. This led the President to refer the
three questions stated above to this court for consideration and a report of
its opinion thereon.
In one of the very earliest references made
to the Federal Court (In are The Central Provinces and Bert Sales of Motor
Spirit and Lubricants Taxation Act, 1938 (Central Provinces and Bert Act. No.
XIV of 1938) (1), under s. 213 of the Government of India Act, 1935 (which
corresponded to Art.
143 of the Constitution), Gwyer C. J.
observed that the rules which would apply to the interpretation of other
statutes would apply equally to the interpretation of a constitutional
enactment, but their application must be conditioned of necessity by the (1)
[1939] F.C.R. 18.
834 subject matter of the enactment itself,
namely, the nature and scope of the Act itself which is a Constitution,
"'a mechanism under which laws are to be made and not a mere Act which
declares what the law ought to be". He said that this was especially true
of a Federal Constitution, with its nice balance of jurisdictions. We recognise
that a broad and liberal spirit must inspire those whose duty it is to
interpret an organic instrument which sets up a constitutional machinery, a
machinery meant to control the life of a nation, to embody its ideals, and
facilitate the realisation of such ideals for the present and the future;
this does not however imply that those whose
duty it is to interpret the Constitution are free to stretch or pervert the
language of the enactment in the interests of any legal or constitutional
theory or even for the purpose Of supplying omissions or of correcting supposed
errors.
Keeping these principles in mind let us
consider the problem before us by an examination of the relevant articles of
the Constitution bearing on that problem. The crux of the problem is the true
scope and effect of Art. 289 of the Constitution which we have quoted earlier.
Cl. (1) of Art.
289 states that the property and income of a
State shall be exempt from Union taxation. Now, Art. 366 (28) says in clear
terms that, unless the context otherwise requires, the expression
"taxation" includes the imposition of any tax or impost whether
general or local or special and the word "tax" shall be construed
accordingly. We shall presently consider the question whether the context of
Art. 289 requires a different meaning to be given to the word "taxation".
But let us first see what happens if we read Art. 289 (1) by substituting for
the expression "taxation" the words which Art. 366 (28) says the
expression "taxation" includes. GI. (1) of Art. 289 will then read as
follows :
"The property and income of a State
shall be exempt from the imposition of any tax or 835 impost, whether general
or local or special, by the Union." There can be no manner of doubt that
customs duty or excise duty is an impost within the meaning of Art. 366 (28),
and this the learned Solicitor-General has not contested. If therefore Art. 289
(1) is interpreted with the key furnished by Art. 366 (28), then it seems to us
that however broad and liberal a spirit may inspire those whose duty it is to
interpret the article, it would be impossible to stretch or pervert the
language (of the article which in the clearest of terms says that the property
and income of a State shall be exempt from any impost, whether general or local
or special, by the Union.
So far as the property of the Union is
concerned the counter part of Art. 289 is Art. 285 which reads :
"(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 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." Now'
the words of Art. 285 (1) are still more clear and emphatic. It says that 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. The expression "all taxes" must mean all taxes whether they
be on property or in relation to property.
836 Neither in Art. 289 (1) nor in Art. 285
(1) do we see any restricting words which would cut down the full meaning of
the expression "taxation" in Art. 289 or "all taxes" in
Art.
285. The distribution of legislative powers
under Art. 245 is in express terms subject to the provisions of the
Constitution. The result therefore is that Parliament cannot legislate to take
away the exemption given by Art.
289 (1), nor can a State Legislature
Legislate to take away the exemption given by Art. 285 (1). If one follows the
principles of interpretation to which we have earlier referred the plain effect
of Arts. 245, 285 (1), 289 (1) and 366 (28) appears to be this : under Art. 285
(1) the property of the Union shall be exempt from all taxes imposed by the
State or by any authority within a State, save in so far as Parliament may by
law otherwise provide ; the property and income of a State shall be exempt from
Union taxation save in so far as cl. (2) Of Art. 289 allows or authorises the
imposition of any tax. on the property of a State.
Let us now consider whether' the context of
Art. 289 or any of the other articles in the Constitution requires that a
different meaning should be given to the expression "taxation" or
"'taxes" in Art. 289 (1) or Art. 285 (1).
The learned Solicitor-General has emphasised
the use of the words 'property' and 'income' in Art. 289 and has further
submitted that the word 'income' was not necessary in Art. 285 (1) and has not
been mentioned there, because "taxes on income other than agricultural
income" is an item in List I of the Seventh Schedule of the Constitution
and a State, or an authority within a State, has no legislative competence to
impose a tax on income. From the use of the two words property' and ,income' in
cl. (1) of Art. 289, the learned Solicitor. General has argued that the
intention of the makers 837 of the Constitution must have been to restrict cl.
(1) to a direct tax on property or income, that is, a tax on property as such
or a tax on income as such, He has elaborated this argument in this way: as
'income shall be exempt from tax' means that income shall be exempt from
income-tax, in the same way the expression 'property shall be exempt from tax'
means that property shall be exempt from property tax In other words, he
contends, that the word 'property must control the word 'taxation' and must be
interpreted as modifying the comprehensive connotation of the word
"taxation'.
We are wholly unable to accept this line of
argument as correct. The learned Solicitor-General has indeed conceded that the
word "property' in cl. (1) of Art. 289 has a comprehensive connotation and
refers to all property and assets of a State. Article 294 which occurs in the
same Part of the Constitution states that as from the commencement of the
Constitution all property and assets which immediately before such commencement
were vested in His Majesty for the purposes of the Government of the Dominion
of India and all property and assets which immediately before such commencement
were vested in His Majesty for the purposes of the Government of each
Governor's Province shall vest respectively in the Union and the corresponding
State. It is clear therefore that in the Constitution the word 'property' is
used in a comprehensive sense to include all assets, movable or immovable.
Apart from those assets which vested in the Union or a State at the
commencement of the Constitution, the Union or a State may acquire new assets.
This is also provided for in Arts.
296 to 298 of the constitution. Therefore, in
both Arts.
285 and 289 the word 'property' means all
property and assets which vested in the Union or a State at the commencement of
the Constitution and all property and assets which may thereafter be acquired
by the Union or a State.
838 In cl. (1) of Art. 289, the subject of
the sentence is ' property and income' and the predicate is 'shall be exempt
from Union taxation'. Grammatically, the clause can only mean this: all
property and income of a State shall be exempt from all taxation by the Union,
giving the word 'taxation' its comprehensive meaning, as required by Art.
366 (28). It is necessary to emphasis here
that the word 'property' used in the sentence is not used as a word qualifying
the word 'taxation'; rather it is used as a subject which gets the benefit of
exemption from Union taxation. One can understand that when one says that State
income shall be free from Union tax he means that such income shall be free
from Union income-tax, particularly when there is only one legislative item
with regard to a tax on income (.other than agricultural income) which is entry
82 in List I. But we fail to appreciate how the word ' property' can be used as
qualifying the word 'taxation' and thereby restricting the ambit of its
comprehensive connotation. The Union power of taxation on or in relation to
property of various kinds ranges over a wide field; see entries 82 to 92A of
the Constitution. Why then should the use of the word 'property' in Arts. 285
and 289 refer only to those items which enable the imposition of a direct tax
on property and not to other,,,? We find no legitimate ground for such a
restriction in the context of Art. 289.
Such a restriction would, in our opinion, be
clearly against the plain language of the article.
The learned Solicitor-General has conceded
that Art. 285 (1) and 289 (1) are analogous and complementary articles and bear
the same meaning. In Art. 285 (1) the word 'income' does not occur, but the
word 'property' occurs. It states that the property of the Union shall be
exempt from all taxes imposed by a State etc. We fail to see how in Art.
285 (1) the word 'property' can be taken to
qualify and cut down the expression "all taxes" 839 occurring
therein. It should be obvious that the expression 'all taxes' means all taxes,
and the clear intention as expressed in Art. 285 (1) is that the property of
the Union shall be exempt from all taxes imposed by a State or by any authority
within a State, including even a tax on agricultural income derived from Union
property. It is worthy of note here that the items in List II which deal with
taxes or duties which can be imposed by a State Legislature are those contained
in items 46 to 62 thereof Some of these items are indeed taxes on property as
such, e. g., item 49, "taxes on lands and buildings"; item 56,
"taxes on goods and passengers carried by road or on inland
waterways"; item 57, "taxes on vehicles, whether mechanically
propelled or not, suitable for use on roads etc"; and item 58, "taxes
on animals and boats". Some other items are in relation to property, but
are not on property as such; e.g., item 51, "duties of excise on the
manufacture or production of alcoholic liquors for human consumption
manufactured in the State and countervailing duties at the same or lower rates
on similar goods manufactured or produced elsewhere in India"; item 52,
"taxes on the entry of goods into a local area for consumption. use or
sale therein"; item 54, "taxes on the sale or purchase of goods other
than newspapers"; and item 55, "taxes on advertisements other than
advertisements published in the newspapers". If the argument of the
learned Solicitor General is correct, then the property of the Union will be
exempt from such taxes imposed by a State, or by an authority within a State,
as are property taxes, that is, taxes on property as such, but not exempt from
taxes which are on the manufacture or production of goods, entry of goods, sale
or purchase of goods etc. This would mean that the expression 'all taxes'
occurring in Art. 285(1) would lose its meaning, and we must read the article
as though when the Constitution makers used the expression 'all taxes'. they
meant some taxes only and not all taxes. It is to be 840 noticed that under
Art. 366(28) the word 'tax' has also to be construed in the same comprehensive
way as the word 'taxation'. It is necessary to state here that fortunately for
us, neither under the Government of India Act, 1935 nor under our present
Constitution, it is necessary to examine the niceties of distinction between
direct and indirect taxation, as no such division exists in the Government of
India Act, 1935 or in the Constitution. There are several taxes like taxes on
luxuries or trade which can be indirect;
and some taxes like succession duties (and
even excise) have in part been assigned to both.
In M. P. V. Sundararamier & Co. v. The
State of Andhra Pradesh (1), this court observed that our Constitution was not
written on a tabula rasa; and that a Federal Constitution had been established
under the Government of India Act, 1935, and though that has undergone
considerable change by way of repeal, modification and addition, it still
remains the frame work on which the present Constitution is built. On an
analysis of the subjects in List I and List II of the Seventh :Schedule of the
Constitution, this court observed :
"The above analysis and it is not exhaustive
of the Entries in the Lists leads to the inference that taxation is not
intended to be comprised in the main subject in which it might on an extended
construction be regarded as included, but is treated as a distinct matter for
purposes of legislative competence.
And this distinction is also manifest in the
language of Art. 248, Cls. (1) and (2), and of Entry 97 in List I of the
Constitution." The distinction is between the main subject of legislation
and a tax in relation thereto; the main subject of legislation figures in one
group and a tax in relation thereto is separately mentioned in a (1) [1956] S.
C4 R. 1422, 941 second group, but no distinction is drawn between direct and
indirect taxation. There are several taxing items in List I and List II which
will take in both direct and indirect taxation. In re The Central Provinces and
Berar Sales of Motor spirit and Lubricant,s Taxation Act, 1938 (Central
Provinces and Berar Act No. XIV of 1938 (1)), Sulaiman J., after referring to
the Canadian Constitution as embodied in the British North America Act, 1867,
and the Australian Constitution as embodied in the Commonwealth of Australia
Constitution Act, 1900, observed that unlike those Constitutions the Government
of India Act, 1935, did not make any distinction between direct and indirect
taxation and in the matter of legislative competence the ultimate incidence of
the tax was not necessarily a crucial test and there was no justification for
adopting any such principle as that certain classes of duties which were to be
regarded as direct had been assigned to the Provinces, and other classes
regarded as indirect had been reserved for the Federation (see the observations
at page 73). As in the Government of India Act, 1935, so also in our
Constitution the distinction for purposes of legislative competence is between
the main subject of legislation and a tax in relation thereto.
If this be the correct position, then it is
impossible to accept the argument advanced on behalf of the Union that the word
'property' in cl. (1) of Art. 289 or cl. (1) of Art.
285 makes a distinction between direct and
indirect taxation, namely, a tax on property as such and a tax in relation to
property.
If we examine cls. (2) and (3) of Art. 289
and cl. (2) of Art. 285, the position becomes still more clear. It seems clear
to us that cl. (2) of Art. 289 carves out an exception to cl. (1) in the sense
that it states that nothing in cl.
(1) shall prevent the (1) [1939] F.C.R. 18,
842 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; a 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. Cl. (3) says that, nothing in cl. 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. Cf. (2)
creates an exception to cl. (1) and cl.
(3) creates an exception upon an exception.
The broad distinction drawn in these two clauses is between trading or business
activities of the Government of a State and its governmental functions. In
respect to its trading or business activities a tax may be imposed and if any
property is used or occupied for the purpose of trade or business, it is liable
to tax. If however the trade or business is declared by Parliament to be
incidental to the ordinary functions of a Government, the exemption given by
cl. (1) will operate and cl. (2) will not defeat that operation.
The combined effect of cls. (1), (2) and (3)
appears to be this: under cl. (1) the property and income of a State is exempt
from Union taxation; cl. (2) however says that the income of a State derived
from commercial activities or the property of a State in respect of a trade or
business of any kind carried on by or on behalf of a Government of a State or any
operations connected therewith or any property. used or occupied for the
purpose of such trade or business shall not be immune from Union taxation;
under cl. (3) however Parliament may by law declare any trade or business or
any class of trade or business of a State to be incidental to the ordinary
functions of Government and if Parliament so declares, cl. (2) will not apply
and the operation of cl.
(1) will not be arrested. What 843 is a
governmental function or what is a trading or business function is not always
easy 'to determine? Thus, in Australia, activities of the Government have been
held to be 'industrial' even though nothing is charged for the services,, e. g.
municipal road construction, harbour dredging. piloting and ferries. Our
Constitution, avoids this difficulty by empowering Parliament to declare by law
that any trade or business carried on by a State shall not come within the
scope of cl. (2) of the article but shall be deemed to be 'incidental to the
ordinary functions of government'. Upon such declaration no taxation by the
Union of such trade or business or property or income connected therewith will
be possible. This seems to us to be the true effect of the three clauses of
Art. 289.
If cl. (1) of Art. 289 has a restricted
meaning as is contended for by the learned Solicitor-General on behalf of the
Union, then the distinction drawn between trading or business activities on one
hand and governmental functions on the other in cl. (2) and cl. (3) of Art. 289
loses its full significance; for cls. (1) and (2) distinguish between trading
and other functions and cls. (2) and (3) distinguish between ordinary trading
and trading which is really governmental function. If all that the Union is
prevented from doing is to put a tax on property as such, what was the purpose
of drawing a distinction between the trading or business activities of
Government And its governmental functions ? If the tax is to be levied on
property as such, then obviously there cannot be any impost on a trading or
business activity, as for example, on the production or manufacture of goods
etc. Why was it necessary then to make a reference to trading or business
activities or operations in cls. (2) and (3) of Art. 289 ? It would have been
enough merely to say that property used or occupied in connection with a trade
or business will be liable to a tax, but not other property. But 844 the ambit
of cl. (2) is much wider than the mere use or occupation of property in
connection with trade or business.
It has reference to trading or business
activities, such as, the production and manufacture of goods., transportation
of goods etc. Why was it necessary for the Constitution-makers to refer to such
trading or business activities in cl. (2) if all that they had in mind in cl. (1)
was a direct tax on property ? In our opinion, the learned Solicitor-General
has given no satisfactory explanation with regard to this aspect of the case.
He suggested at first that cl. (2) was not an exception, but merely explanatory
of cl. (1). It is difficult to understand why there should be a reference to
business or trading activities in cl. (2) if the entire intendment was to
confine the exemption to a direct tax on property. The learned
Solicitor-General then said that even if cl. (2) was an exception, it was an
exception only in the matter of property tax. That would mean that only the
last portion of cl. (2) which refers to property used or occupied for the
purpose of trading or business activities of a State Government has any
significance and not the other parts which relate to trading or business
activities, such as, production or manufacture of goods etc.
We have noticed earlier that the amendments
which Parliament itself made in 1951 in s. 20 of Sea Customs Act, 1878 and s. 3
of the Central Excises and Salt Act, 1944 by inserting two subsections thereto
showed that Parliament understood cl. (2) of Art. 289 as creating an exception
to cl. (1). Those two amendments, sub-s. (3) of s. 20 of the Sea Customs Act,
1878 and sub-s. (1A) of s. 3 of the Central Excises and Salt Act, 1944, draw a
distinction between the trading activities of the Government of a State and its
governmental functions; no exemption is given in respect of goods belonging to
a State Government and used for the purpose of a trade or business of any kind
carried on 845 by or on behalf of that Government or of any operations
connected with such trade or business, but exemption is granted in respect of
other goods belonging to Government.
If, therefore, we look to the context of Art.
289, particularly cls. (2) and (3) thereof, it becomes manifest that there is
nothing in Art. 289 which restricts the comprehensive meaning to be given to
the word 'taxation' in Art. 289. Similar is the position with regard to cl. (2)
of Art. 285. That again creates an exception to cl. (1) of Art. 285 and saves
any tax on any property of the Union to which such property was immediately
before the commencement of the Constitution liable or treated as liable to tax,
so long as that tax continues to be levied in that State.
One very serious objection to the contention
of the learned Solicitor-General, an objection which appears to us to be almost
fatal, is that in the taxing entries in List I (from entry 82 to entry 92A)
there is no entry which would enable the Union to impose a tax on property as
such, that is, a direct tax on property as property in the sense suggested by
the learned Solicitor-General for his interpretation of Art. 289 (1). There are
however, entries in List II to some of which we have referred carrier, which
would enable the State Legislature to impose a direct tax on property, such as,
'lands and buildings' and animals and boats' etc. If the learned
Solicitor-General is right in his contention, then the only tax from which the
property of a State can claim exemption under cl. (1) of Art. 289 is 'Property
tax' to be imposed by the Union, and yet under the legislative entries in List
I the Union cannot impose a 'property tax" on State property at all. To
this aspect of the case the reply of the learned Solicitor-General has been two
fold ; he has first referred us to entry 89 (terminal taxes on goods and
passengers carried by 846 railway, sea or air), entry 86 (taxes on the capital
value of the assets, exclusive of agricultural land, of individuals and
companies) and entry 97, the residuary entry; secondly, he has referred us to
Art. 246 (4) under which 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. His
argument is that the Union can impose a property tax under any of the aforesaid
three entries; secondly, under Art. 246 (4) the Union can impose a property tax
on State property if that property is situate in a territory riot included in a
State. It appears to us that the argument does not really meet the objection
raised on behalf of the States. Entry 86 relates to capital value of the assets
of individuals and companies and has nothing to do with State property, for the
State is neither an individual nor a company. Entry 89 relates to a terminal
tax which is essentially different from a property tax in the sense contended
for by the learned Solicitor-General.
We find it difficult to believe that the
exemption given by cl. (1) of Art. 289 was meant as a safeguard against the
exercise of power under the residuary entry. Apart from that, we have
considerable doubt if the residuary entry will take in a " property tax'
when there are entries relating to such tax in List If. It would be a case of
much ado about nothing if the Constitution solemnly provided for an exemption
against 'property tax' on Stea 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 widsr
interpretation of cl. (1) of Art. 289 is accepted, sue property would also be
exempt from Union taxatioch except in cases covered by cl. (2) of the article.
We 847 find it difficult to accept the contention that cl. (1) of Art. 289 was
meant only for cases covered by Art. 246 (4);
for that would be the result of the
interpretation canvassed for on behalf of the Union.
We proceed now to consider the problem from
three other aspects : (1) against the background of similar provisions in the
Government of India Act, 1935; (2) in the light of the scheme under the
Constitution of the financial relations between the States and the Union; and
(3) the distribution of taxing powers between the States and the Union.
As to the Government of India Act, 1935 the
relevant provisions are contained in ss. 154 and 155. They read as follows (so
far as relevant for oar purpose) :
"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 Ruler of a Federated State shall not be
liable to Federal taxation in respect of lands or buildings situate in British
India or income 848 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 subsection
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) x x x (2) x x X" Before the
Government of India Act, 1935 the scheme of government was essentially unitary
though there were local legislatures with limited powers. For the purpose of
distinguishing the functions of the local governments and local legislatures of
Governor's Provinces from the functions of the Governor-General in Council and
the Indian Legislature, subjects were classified in relation to the functions
of Government as Central and Provincial subjects in accordance with the Lists
set on in Schedule 1 of the Devolution Rules made under ss. 45-A and 129-A of
the Government of India Act, 1919. All Government property then vested in His
Majesty for the purpose of the Government of India and there was no necessity
for any special provision granting immunity to that property from taxation. The
Government of India Act, 1935 introduced a dual system of Government. Part III
of the Government of India Act, 1935 came into force on April 1, 1937.
Properties belonging to the Crown and in existence prior to that date were 849
governed by the general law enunciated by the courts, judicial opinion was
however not uniform. In some cases it was held that statutes imposing duties of
taxes bind Government unless the very nature of the duty or tax is such as to
be inapplicable to Government. On the other hand, in some cases it was held
that the law was the same in India as in England, where the principle of
immunity of Crown property from taxation followed from the prerogative that the
Crown was not bound by any statutes unless expressly named. When the dual
system of Government was first introduced by the Government of India Act, 1935
the question of immunity of taxation of property of one Government by the other
arose.
The doctrine of Immunity of Instrumentalities
was propounded by the Supreme Court of the United States in the case of
McCulloch v. Maryland (s), to mean that when two separate Governments are
established as in a Federal Constitution, each with a limited jurisdiction, the
power of each Government shall be construed as being under an implied
limitation that it shall be so exercised as not to impair the functions
allotted to the other Government. Hence, any incidental or indirect
interference with the functions of the Federal Government would make a State
legislation bad even though the legislation might relate to a subject allotted
to the State Legislature and conversely. It was held that a State could not tax
the agencies or instrumentalities of the Federal Government and a similar
limitation would apply as regards the Federal Legislature.
This doctrine has had many vicissitudes of
fortune in the decisions of the courts in America. We do not think that it is
necessary to deal with the history of those vicissitudes.
The Government of India Act, 1935 as also the
Constitution of' 1950 contained provisions which accepted the principle with a
limited application as regards the exemption from mutual taxation,, in (1)
[1819] 4 Wh. 316.
850 ss. 154 and 155 of the Act of 1935 and
Arts. 285 and 289 of the Constitution. In the words of the Judicial Committee
in Webb v. Outrim (1), it may be stated that the very inclusion of the
aforesaid provisions shows that the question of interference on the part of the
Federal and State powers as a against each other was not left to an 'implied
prohibition or limitation' but the provisions themselves define the extent of
the immunity. Outside those provisions the State and Union Legislatures have
the full power to legislate on the matters included within their respective
Lists, subject always to the other provisions of the Constitution.
Like Arts. 085 and 289 of the Constitution,
the aforesaid ss. 154 and 155 are complementary to each other and provide for
the mutual exemption of the property of the Federation and the Provinces from
taxation imposed by the other: this is consistent with the general practice of
federal constitutions to exempt the governments of the units from Federal
taxation, that being part of a reciprocal arrangement under which the Federal
Government also is exempt from taxation by the several units (see Parliamentary
Debates, Vol. 302, Cols. 523 and 524). One noticeable feature of the two
sections is that whereas s. 154 speaks of the ""property vested in
His Majesty for the purpose of the Federation" so as to include movable
property also (see Bell v. Municipal Commissioner of Madras (2), s. 155 which
confers exemption on the property of the "units" is confined to lands
and buildings. The result would be that movable property belonging to the
Federation would be exempt from duties like octroi which might be levied under
the Provincial law, while, goods of the Provincial Governments and
"units" would be subject to the customs and excise duties levied by the
Federal Government. Income from commercial undertakings and operations in the
nature of trade carried on by the units, so long as they are confined (1)
[1907] A.C. 81.
(2) 25 Madras 457.
851 within the territory of that unit is not
liable to Federal income-tax. This, in short, was the scheme of ss. 154 and 155
of the Government of India Act, 1935. Now, if ss. 154 and 155 of the Government
of India Act, 1935 are contrasted with Arts. 285 and 289 of the Constitution,
one noticeable difference strikes one at once. The expression lands and
buildings' in s. 155 is changed to "property' in Art. 289;
in other words, the Union and the States are
practically put on the same footing so far as exemption from taxation of one by
the other is concerned. Both Arts. 285 and 289 mention 'property' in a
comprehensive sense, and the distinction between movable property and immovable
property drawn in ss.
154 and 155 is done away with. The inevitable
conclusion is that the Constitution makers consciously made the departure.
They must have been aware of the distinction
made in ss. 154 and 155 and also of +,he interpretation of courts that
'property$ in s. 154 was used in a comprehensive sense so as to get exemption
for the property of the Federation from all Provincial taxation. With that
knowledge they used the word 'property' in Art. 289 and put State 'property' on
a par with Union 'property'. It is impossible to accept in these circumstances
the contention that the word 'property' or the juxtaposition of the words
'property and income' in Art. 289 was intended to qualify the word Taxation and
thereby the plain meaning of the language used.
Now, as to the financial relations between
the Union and the States. Chapter 1 of Part XII contains provisions which
control and govern these relations. Put briefly the scheme is that there is a
distribution of revenues between the Union and the States, even though the
collection may be made in some cases by the State and in other cases by the
Union ;
some taxes collected by the Union are
assigned to the States (Art. 269); some taxes levied and collected by the Union
are distributed between the 852 Union and the States (Arts. 270 and 272), there
are provisions for grants in aid of the revenues of some States, in which jute
is extensively grown, in lieu of assignment of any share of the net proceeds in
each year of export duty on jute and jute products (Art. 273); there are also
provisions for grants in aid of the revenues of such States as Parliament may
determine to be in need of assistance (Art.
275), etc. These provisions indicate clearly
that there is an attempt at adjustment on a financial integration so that
neither the Union nor the States may be starved for want of financial resources
to carry on the essential and expanding activities of a welfare State. We do
not see in these provisions. any determining consideration which would bear
upon the exemption granted to Union property by Art. 285 and that granted to
State property by Art. 289. We fail to see how a restricted meaning given to
the aforesaid two articles will facilitate the financial adjustment referred to
in the earlier articles in the same chapter or how it will retard the said
adjustment if a wider meaning is given to them. We repeat that Arts. 285 and
289 must be construed on their own terms, and it is not open to us to pervert
or change the language used therein unless there are compelling reasons to be
gathered from other relevant articles of the Constitution. We find no such
compelling reasons in the other article of Part XII which deal with the
financial relations between the States and the Union.
We have earlier referred briefly to the
distribution of legislative power between the States and the Union. We have
also pointed out that so far as the taxing powers are concerned, the
legislative entries in the Seventh Schedule make a distinction, for purposes of
legislative competence, between the main subject of legislation and a tax in
relation thereto. Taxes on income other than agricultural income (entry 82),
duties of customs including export duties (entry 83), and duties of excise on
853 tobacco and other goods manufactured or produced in India except alcoholic
liquors for human consumption, opium, hemp and other narcotic drugs (entry 84)
are in List 1.
Therefore, under Art. 246 Parliament alone
has power to make laws imposing the aforesaid taxes. This power, it has been
argued on behalf of the Union, will be seriously curtailed if a wider meaning
is given to Art. 289. We do not think that this argument is any answer to the problem
posed before us. The power to make laws given to Parliament is subject to the
provisions of the Constitution. Art. 289 is one of such provisions. Therefore,
it is no answer to the problem to say that if a wider meaning is given to Art.
289, it will curtail the powers of Parliament. If Art. 289 in its true scope
and effect is capable of bearing only the wider meaning, then it must control
the power of Parliament. Art.
245 says so in express terms.
Another argument on this aspect of the case
is that the Union has exclusive power to regulate trade and commerce with
foreign countries, import and export across customs frontiers, and definition
of customs frontiers (entry 41 of List I) and inter-State trade and commerce
(entry 42 of the same List), and the power to regulate trade and commerce with
foreign countries or inter State trade includes the power to regulate by
imposing customs duties or duties of excise. This power, it is contended, will
be very seriously affected if the exemption from taxation given by Art. 289 is
held to extend to customs duties and excise duties in respect of goods imported
or exported by a State or goods produced or manufactured by a State. We are not
impressed by the argument. The power to control trade and commerce with foreign
countries and inter-State trade is with the Union, and in exercise of that
power the Union can impose regulatory measures on the activities of a State. We
are familiar now with control measures like the Import Control Order, 854
Essential Supplies Act, etc. Through these regulatory measures the Union can
carry into effect its power of control, and under Art. 302 Parliament may by
law impose such restrictions on the freedom of trade, commerce or intercourse
between one State and another or within any part of the territory of India as
may be required in the public interest. Under Art. 256 the executive power of
every State shall be so exercised as to ensure compliance with the laws made by
Parliament, and the executive power of the Union shall extend to the giving of
such directions to a State as may appear to the Union Government to be
necessary for that purposes, Under Art. 257 the executive power of every State
shall be so exercised as not to impede or projudice the exercise of the
executive power of the Union, and the Union Government can give necessary
directions in the matter to the State Government. So far as trade and commerce
within the State is concerned, the State has power to make laws (entry 26 of
List 11). We think, therefore, that nothing serious is likely to happen, either
with regard to foreign trade or inter State trade, if we hold on the terms of
Art.
289 that State property is exempt from Union
taxation including customs duties or excise duties. Such an interpretation is
not likely to result in any interference with the power of control which the
Union undoubtedly has over foreign trade or inter-State trade.
The contention that the Union has the power
to regulate trade by imposition of customs duties and that power would be'
annulled if the State has immunity from them in respect of things imported or
exported by it seems to us to be fallacious. The Union's power to legislate to
regulate foreign trade contained in the legislative list is subject to the
provisions of the Constitution one of which is contained in Art. 289(1).
Therefore in the case of a conflict between Art. 289(1) and the legislative 855
power to regulate foreign trader the former must prevail.
The Union, therefore, 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. Then,
again,it seems to us that as stated in M.P.V. Sundararamier & Co's case(1)
an item in the legislative list not giving expressly the power of taxation does
not confer such a power. It would follow that the power in List I to regulate
foreign trade cannot be exercised by imposition of a tax. That has to be done
otherwise and without the imposition of a tax.
It is to be remembered that a striking feature
of our Constitution, which perhaps distinguishes it from some other
Constitutions, is its attempt to harmonise the interests of the individual with
those of the community and the interests of a State with those of the Union.
Our Constitution does not set up the States as rivals to one another or to the
Union. Each is intended to work harmoniously in its own sphere without
impediment by the other, with an over-riding power to the Union where it is
necessary in the public interest. It is a nice balance of jurisdictions which
has worked satisfactorily so far and, it is to be hoped will continue to so
work in times to come with good sense prevailing on all sides. We are not
prepared to say that the exemption given to State property from Union taxation
by Art. 289 conflicts in any way with the power of control which the Union has
over foreign trade or inter-State trade or disturbs the balance of
jurisdictions referred to above.
It is to be remembered in this context that
under cl. (2) of Art. 289 the trading activities of a State and property used
for such trading activities cannot claim any exemption from Union taxation,
unless Parliament declares by law that the trading activities are incidental to
the ordinary functions of government.
(1) [1958] S.C.R. 1422, 856 We have so far
dealt with the problem on the relevant articles of our Constitution. It may be
helpful now to consider how a similar problem under other Federal Constitutions
has been dealt with by the courts.
It is necessary here to strike a note of
warning. Each Constitution must be interpreted on its own terms and in its own
setting of history, geography and social conditions of the country and nation
for which the Constitution is made; a decision on a constitutional problem
having an apparent similarity with a problem arising under a different
Constitution may not be sure guide as a solution of the problem. Basically, the
problem must be solved on the terms of the Constitution under which it arises.
Remembering this warning, we turn first to certain Canadian decisions on which
the learned Solicitor-General has relied. The vital core of a federal
constitution, it is said, is the division of legislative powers between the
central authority and the component states or provinces. In Sections 91 to 95 of
the British North America Act, 1867 the main lines of this division in Canada
were set forth. In section 92 certain classes of subjects were enumerated and
the provinces were given exclusive power to make laws in relation to matters
coming within these classes of subjects. The opening paragraph of s. 91 gave
the Dominion power "'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. "
That is to say, the residue of powers not expressly given to the Provinces was
reserved to the Dominion The section then proceeded with a specific enumeration
of twenty nine classes of subjects, illustrating but not restricting the scope
of the general words used earlier in the section. Section 125 said, "No
lands or property belonging to Canada or any province 857 shall be liable to
taxation." In The Attorney-General of British Columbia v. The
Attorney-General for Canada(1), the facts were these. The Government of the
province of British Columbia in the exercise of its powers of control and sale
of alcoholic liquors embarked on the business of dealing in alcoholic liquors and
found itself under the necessity of importing 'Johnnie Walker Black Label"
whiskey; it claimed it was exempt from payment of the usual customs duties
imposed by the Dominion Parliament and rested its claim on s. 12.5. The Supreme
Court of Canada held by a majority decision that the levying of customs duties on
the goods in question was not "taxation" on "property"
belonging to a province within the purview of s. 125. The ratio of the
decision, as expressed by Duff, J., was that customs duties as an instrument
for regulation of external trade came within the second enumerated head under
s. 91; and customs duties when levied for the purpose of raising a revenue
were, speaking broadly add in the general view of them, taxes on consumable
commodities, taxes on consumption; while the taxation of capital, of assets, of
property was a very different matter. Duff, J. then said :
"Our first duty in construing the
section is, of course. to ascertain the ordinary and grammatical meaning of the
words but it is with the ordinary and grammatical meaning of the words in the setting
in which they are found and as applied to the subject matter that we are
concerned. What the section is dealing with is not taxation in general but the
liability of "property" to "taxation" and the word
"taxation" when used in this association has, I think prima facie a
much less comprehensive import than that which would be ascribed to it standing
by itself or in some other connections." (1) 64 Canada Supreme Court
Reports 377, 858 It is pertinent to note here that the Canadian Constitution did
not contain a key to the word 'taxation' as is contained in Art. 366 (28) of
our Constitution. It was permissible, therefore, in the setting of the Canadian
Constitution to draw a distinction between "taxation of property" and
the "levying of customs duties" for purposes of raising, revenue, Our
Constitution says in express terms that 'taxation' includes the imposition of
any tax or impost, whether general, local or special. It is reasonable to think
that the makers of our Constitution were aware of the distinction between the
more comprehensive and less comprehensive meaning that can be attached to the
word 'taxation', and deliberately chose to mention expressly the more
comprehensive meaning in the interpretation article, instead of leaving it to
judicial determination. One may well speculate if the decision in Canada would
have been the same if there were such a provision in the Canadian Constitution
and if, as Duff, ,J. said, our first duty in construing a provision is to
ascertain the ordinary and grammatical meaning of the words used. The aforesaid
decision of the Supreme Court was approved by the Privy Council in
Attorney-General of Britsh Columnbia v. Attorney-General of Canada (1).
Referring to s.125 of the British North America Act, Lord Buckmaster said :
"Taken alone and read without
consideration of the scheme of the statute, this section undoubtedly creates a
formidable argument in support of the appellant's case. It is plain however,
that the section cannot be regarded in this isolated and disjunctive way. It is
only a part of the general scheme established by the statute with its different
allocations of powers and authorities to the Provincial and Dominion
Governments. Sect. 91, which assigns powers to the Dominion, provides, among
other things, that it shall enjoy exclusive legislative (1) [1924] A.C. 222.
859 authority over all matters enumerated in
the Schedule, included among which are the regulation of trade and commerce and
raising of money by any mode or system of taxation. The imposition, of customs
duties upon goods imported into any country may have many objects; it may be
designed to raise revenue or to regulate trade and commerce by protecting
native industries, or it may have the two fold purpose of attempting to secure
both ends; in either case it is a power reserved to the Dominion. It has not
indeed been denied that such a general power does exist, but it is said that a
breach is created in the tariff wall, which the Dominion has the power to
erect, by s. 125, which enables goods of the Province or the Dominion to pass
through, unaffected by the duties. But s. 125 cannot, in their Lordships'
opinion, be so regarded. It is to be found in a series of sections which,
beginning with s. 102, distribute as between the Dominion and the Province
certain distinct classes of property, and confer control upon the Province with
regard to the part allocated to them. But this does not exclude the operation
of dominion laws made in exercise of the authority conferred by s. 91. The
Dominion have the power to regulate trade and commerce throughout the Dominion,
and, to the extent to which this power applies, there is no partiality in its
operation. Sect. 125 must, therefore, be so considered as to prevent the
paramount purpose this declared from being defeated." It is obvious that
the observations made by Lord Buckmaster have reference to the special
characteristics of the Canadian Constitution, particularly the paramountcy of
Dominion Power to regulate trade and commerce throughout the Dominion to which
860 s. 125 was' made to yield. The scheme of our Constitution is different :
(1) the legislative power of Parliament is expressly subject to other
provisions of the Constitution (2) the power to regulate trade and commerce is
assigned both to the Union and the States; and (3) there is a distinction
between the main subject of legislation and a tax in relation thereto. We are
not emphasising the fact that in s. 91 of the British North America Act, 1867
occurs the expression "notwithstanding anything in this Act", because
that expression may be said to relate to the enumeration of subjects rather
than to s. 125. In our view the decision turned upon the peculiar
characteristics of the Constitution under which the problem arose and is no
safe guide for the interpretation of our Constitution. It may perhaps be added
that if the Canadian case fell to be decided under our Constitution, cl. (2) of
Art. 289 would have been given an adequate answer to the problem, for a State
can claim no exemption in respect of its business activities and when British
Columbia imported whiskey to embark on a business of alcoholic liquors, it
could not claim any exemption under cl. (1) of Art. 289.
We now turn to certain Australian decisions.
Speaking generally, the Commonwealth of Australia Constitution Act, 1900
creates a federation which resembles the United States in a manner in which
powers are assigned to the Federal Government with a residue in the States or
the people.' It resembles the Canadian Constitution in the attempt to adapt the
machinery of responsible government to a federal system, but differs from the
Canadian and our Constitution in the division of powers. As regards the
Commonwealth, s. 51 contains a list of thirty nine enumerated powers with which
it is vested. It says inter alia that, subject to the Constitution, the
Parliament shall have power to make laws for the peace 861 order and good
government of the Commonwealth with respect to (i) Trade and commerce with
other countries, and among the States; and (ii) Taxation, but so as not to
discriminate between the States or parts of States.
Section 52 defines the cases in which the
power of the Commonwealth is to be exclusive. As regards the State, the broad
principle of the division is found in s. 107 which in effect says that the
powers of the States are left unaffected by the Constitution except in so far
as the contrary is expressly provided; subject to that each State remains
sovereign within its own sphere. Now, s. 114 of the Commonwealth of Australia
Act, 1900 says :
"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." The decision on which the learned Solicitor-General has placed
the greatest reliance is Attorney-General of New South Wales v. Collector of
Customs for N.S.W. (1). That was a case in which an action was brought by the
Attorney-General of New South Wales to recover from the Collector of Customs
for New South Wales a particular sum being the amount of duties of customs
demanded by the defendant upon the importation into the Commonwealth of certain
steel rails, and paid under protest by the Government of the State of New South
Wales The rails in question were purchased in England by the State or use in
the construction of the railways of (1) 5C.L.R.818.
862 the State. On their arrival at the port
of Sydney the defendant claimed that they were liable to Customs duties.
The State disputed its liability to pay duty
and deposited the amount claimed under protest. A case was stated for the
opinion of the High Court of Australia on two main questions : (1) whether the
provisions of the Customs 1901 and the Customs Tariff 1922, affected the Crown
as representing the community of New South Wales; and (2) whether the steel
rails were exempt from duty by virtue of s. 114 of the Constitution. So far as
the first question was concerned Griffith C. J. said that it was concluded by
the decision in The King v. Sutton (1). So far as the second question was
concerned, the majority of judges held that customs duties whether capable or
not of being included in the word "tax", are not a tax upon property
in the sense in which that expression is used in s. 114. Isaacs J. held that
duties of customs, as ordinarily understood and as enacted in the Customs Act,
were imposed on the goods themselves, and, therefore, "on property"
within the meaning of s. 114, but they did not come within the meaning of the
word "tax" as used in that section and the Constitution generally.
Griffith C. J. not only drew a distinction
between direct and indirect taxation but also held that s. 1 14 applied only to
property within the limits of the Commonwealth and did not apply to goods in
process of coming within those limits. He further held that the power to impose
taxation conferred by s. 51 (ii) as well as the power to regulate importation
conferred by s. 51 (1) were paramount and unlimited and a construction which
would make the words of s. 114 consistent with giving full effect to the plain
intention of s. 51 should be preferred. He proceeded on the footing that the
words of s. 114 were capable of two constructions. Then he observed :
"There is no doubt that in some contexts
the words "impose any tax" might be capable of (1) SC.L.R. -89.
863 application to duties of Customs. Nor is
there any doubt that the word "taxation" in sec. 51 (ii) includes the
levying of duties;
of Customs. But these duties arc nowhere in
the Constitution described as a "tax", unless the use of the word
"taxation" in sec. 51 (ii) is such a description of them; nor is the
levying of them ever spoken of as the imposition of a tax on property. Sec. 86
speaks of "'the collection and control of duties of Customs and of
Excise". Ss. 88, 89, 90, 92, 93, 94, 95, all speak of the
"imposition" of duties of Customs. Such duties are imposed in respect
of "$goods" and in one sense, no doubt, "upon" goods,,
which is only another way of saying that the word "upon" is sometimes
used as synonymous with "in respect of." In the same way the word
"'upon" or "'on" is used colloquially in speaking of stamp
duties, succession duties, and other forms of indirect taxation, as taxes on
deeds, etc., or on real and personal property. Yet it is recognised that these
forms of taxation are not really taxation upon property but upon operations or
movements of property." Higgins J. based his decision on a somewhat different
ground. He said that he could not confidently take the ground that a customs
duty could not be a tax within the meaning of the word "tax" in s.
114. He said that s. 114 did not use the expression "tax of any
kind", but spoke of "any tax on property of any kind belonging to a
State". He derived the idea of ownership as the crucial test by reason of
the use of the expression "property of any kind belonging etc." The
learned judge observed :
"The prohibition as to State taxation
was, no doubt, suggested by the British North America Act, sec. 125. But by
substituting the word "property" for "lands or property",
the 864 intention-if it was the intention to confine the prohibition to what
are known as ','property taxes" has been somewhat obscured.
Property is, by the Constitution, subject to
be taxed at the instance of the State as well as of the Commonwealth; Customs
taxation is solely a matter for the Commonwealth (sec.
90). Taxes of retaliation, as between the
States and the Commonwealth, are possible as to property taxes; but are
impossible as to Customs taxes. But whatever may have been the motive which led
to this express prohibition, in addition to the prohibition which this Court
has held to be implied from the nature of the Constitution as to the taxation of
State or Commonwealth agents, the phraseology is such as to point to taxation
of property as property as being the subject of this express prohibition.
"A State shall not, without the consent of the Parliament or the
Commonwealth,... ... 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"." We are of the view that the considerations
which led the learned judges to the conclusion at which they arrived are not
considerations which are available to us under our Constitution. We are dealing
with an exemption clause under Art. 289 (1); that exemption clause has to be
interpreted with the key furnished by Art. 366 (2s) Under our Constitution the
word 'taxation' has been defined by the Constitution itself and we are not free
to give a different meaning to the word so as to make a distinction between
direct and indirect taxation, or between taxation on property within the limits
of the Commonwealth and property in the process of coming within those limits;
nor are we free to make a distinction between a tax 865 on property and a tax
in respect of property. It is further significant that s. 1 If of the
Commonwealth of Australia Act, 1900 uses the expression "tax on
property". Our exemption clause in Art. 289 uses a different phraseology,
a phraseology which does not qualify the word "tax' in any way, but says
that the property and income of a State shall be exempt from any tax or impost
whether general, local or special, to be imposed by the Union. Even in the
matter of s. 11 4 of the Commonwealth of Australia Act, 1900 there was a
difficulty in drawing the distinction between property, and the imporation of
property, because of the use of the expression "of any kind" in s.
114. This difficulty is pointed out by Nicholas in The Australian Constitution
(second edition, page 1433). He says :
"The solution was found in
distinguishing between property and the importation of property, and between
duties and taxation as those terms are used in the Constitution.
Both distinctions involved some difficulties,
for s. 114 uses the words "of any kind" and the only express
authority to impose duties is to be found in s. 51 (ii). The policy thus
sanctioned has not been approved in all States alike. States have been
compelled to pay duties on imported materials, including locomotives of a type
not made in Australia, so that the proceeds of their loans have been reduced
for the benefit of the Commonwealth revenue and the power of exemption has not
been used where it might have been (Report of the Royal Commission, p.
361)." Apropos of the Australian case it may perhaps be pointed out that
under our Constitution the 'taxing power' is treated as different from the
'regulatory power'. Again, as we have stated earlier, the classification
between 'direct' and "indirect' taxes has 866 not been adopted by our
Constitution. Moreover the problem which falls for our consideration under Art.
289 is not one which has to be examined from the point of view of legislative
power. The problem before us is really the extent of the immunity or exemption
granted by Art. 289. In Attorney-General for Saskatchewan v. Canadian Pacific
Railway Company (1), the question arose of construing an exemption granted to
the Canadian Pacific Railway Company by clause 16 of a contract between the
Canadian Government and the said company. The exemption clause provided inter
alia that "the Canadian Pacific Railway, and all stations and station
grounds, workshops, buildings, yards and other property etc., shall be forever
free from taxation by the Dominion, or by any province hereafter to be
established, or by any municipal corporation therein." The Province of
Saskatchewan was constituted in 1905 and in purported compliance with its
obligations under the aforesaid exemption clause, the Dominion Parliament
provided in section 24 of the Saskatchewan Act of 1905 that ,the powers hereby
granted to the said Province shall be exercised subject to the provisions of
clause 16 of the contract".
The Canadian Pacific Railway Company raised
the question that it was free from business tax imposed by the City Act, 1947,
of Saskatchewan by reason of the exemption clause.
Before the judicial Committee of the Privy
Council it was argued on behalf of the Province of Saskatchewan that the
exemption was limited to taxes imposed upon the owner in respect of the
ownership of the property liable to taxation, but the exemption did not extend
to taxes levied upon the company in respect of its business of operating it.
Dealing with this argument the Judicial Committee said :
"While the language of clause 16 is that
the property shall be 'forever free from taxation' by any Province thereafter
to be established, (1) [1953] A.C. 594.
867 it is said that to tax the company in
respect to the use of the property (itself a term of the exemption), is not to
tax the property and that alone is prohibited." Their Lordships construed
the exemption on its own terms and held that a tax upon the owner in respect of
the use of the property was as much within the exemption as a tax on the
property itself. In our View the exemption clause in Art. 289 must similarly be
construed on its own terms. We further consider that no question of paramountcy
of legislative power arises in that connection.
On behalf of the States, except the State of
Maharashtra which has supported the stand of the Union in the matter of excise
duties only, it has been very strongly contended before us that for the purpose
of the exemption clause in Art. 289 nothing turns upon the distinction between
a tax on property as such and a tax in relation to property. Both affect
property and if property is to be free from Union taxation, it makes no
difference whether the tax is on the ownership or possession of property or is
on its production or manufacture or its importation or exportation. A large
number of decisions were cited before us as to the true nature of customs
duties and excise duties. There are a number of decisions of this court where it
has been held that a duty of excise is a tax on goods produced or manufactured
in the taxing country; similarly customs or export duty is a duty imposed on
goods which are the subject of importation or exportation. This is also clear
from the provisions relating to "draw back" in the matter of customs
duties and refund rules in the matter of excise duty. We consider it
unnecessary to examine these decisions in detail for the purpose of the problem
before us. It is enough to point out that in order to determine whether an
impost, be it a tax, duty or fee, falls under one item or the other 868 of the
Legislative Lists in the Seventh Schedule, it may be necessary to examine the
nature of the tax, duty or fee. As the judicial Committee pointed out in
Governor-General in Council v. Province of Madras (1), a duty of excise is
primarily a duty levied on a manufacturer or producer in respect of the
commodity manufactured or produced; it is however a tax on goods, to be
distinguished from tax on sales or the proceeds of sales of goods; the two
taxes, the one levied on the manufacturer in respect of his goods, the other on
a vendor in respect of his sales may in one sense overlap. But in law there is
no overlapping, the taxes being separate and distinct imposts But as we have
said earlier, the problem before us is not the nature of the impost but rather
the extent of the immunity granted by Art.
289 of the Constitution. The extent of that
immunity, as we have indicated earlier, really depends on the true scope and
effect of Arts. 245, 285, 289 and 366(28) of the Constitution. In the matter of
the extent of the immunity the distinction between a tax on property as such or
in relation to property is really of no materiality. A tax on property as such
and a tax in relation to property both affect property and if the true scope
and effect of the articles which we have mentioned is that state property must
be exempt from imposition of any tax or impost, whether general or local or
special, by the Union, then the distinction drawn between a tax on property as
such and a tax in relation to property loses its significance.
For the reasons given above our opinion is
that the answers to the three questions referred to this court must be in the
affirmative and against the stand taken by the Union.
HIDAYATULLAH J.-As a result of a proposal to
introduce in Parliament a Bill to amend s. 20 of the Sea Customs Act, 1878 (Act
8 of 1878) and s. 3 of the Central Excises and Salt Act, 1944 (Act 1 of (1) 72
I.A. 91, 103.
869 1944) with a view to applying the
provisions of these two Acts to goods belonging to the State Governments, the
President of India has been pleased to refer under Art. 143 of the
Constitution, three questions for the opinion of this Court to ascertain if the
proposed amendments would be constitutional. These questions are :
"(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 of that article ? (3)
Will sub-section of section 20 of the Sea Customs Act, 1878 (Act 8 of 1878) and
sub-section (1A) 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 ?" The sections
of the two Acts as they stand today provide for the levy of customs duties and
duties of excise on all goods belonging to a State but only if used for
purposes of 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 870 to any Government. These two
sections as at present read :
"20. (1) Except as hereinafter provided,
customs duties shall be levied at such rates as may be prescribed by or under
any law for the time being in force, on (a) goods imported or exported by sea
into or from any customs-port from or to any foreign port;
(b) opium, salt or salted fish imported by
sea from any customs-port into any other customs-port;
(c) goods brought from any foreign port to
any customs-port, and, without payment of duty, there transshipped for, or
thence carried to, and imported at, any other customs-port;
and (d) goods brought in bond from one custom
sport to another.
(2) The provisions of sub-section (1) shall
apply 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.
Explanation....In this sub-section 'State'
does not include a Union territory".
"3 (1) There shall be levied and
collected in such manner as may be prescribed duties 871 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 as,
and at the rates, set forth in the First Schedule.
(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 of a State other than
a Union terri tory 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".
x x x x The proposal is to amend the two
sections as follows :
"AMENDMENT OF SECTION 20, ACT 8 OF
1878.-In
section 20 of the Sea Customs Act, 1878, for
sub-section (2) the following sub-sections 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.' AMENDMENT OF SECTION 3, Act 1 OF 1944.-In section 3 of the Central
Excises and Salt Act, 1944, for sub-section (1A) the following subsection shall
be substituted, namely :'(1A) The provisions of sub-section (1) shall apply in
respect of all excisable' goods 872 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
Government'." The question is one of great importance not only to the
States but also to the Union. What the Union wishes to do is to put the State
Governments on its tax-payers' list, not only in respect of their trading
activities but also in respect of their governmental functions. If the
Constitution does not prohibit it their can be no doubt about the power. The sole
question thus is whether the Constitution has not prohibited this by Art. 289
to which reference will be made presently.
Our Republic is composed of States with their
own Governments. These Governments possess and exercise their own powers like
any other Government. Then there is the Union Government which within its own
sphere is supreme but its supremacy is not a general or undefined supremacy. It
is in certain respects curtailed to give supremacy to the State Governments.
One such curtailment is to be found in Art. 289(1) and the only question that
can really arise is to what extent does that restriction go ? We are concerned
here with the taxing power of Parliament which admittedly extends to the
levying of duties of customs including export duties (entry 83, List I, 7th
Schedule) and duties of excise on tobacco and other goods manufactured in India
except those expressly mentioned in the entry (entry 84, ibid). In addition to
the powers of taxation, Parliament has exclusive regulatory power over "trade
and commerce with foreign countries; import and export across customs
frontiers" (entry 41, ibid) and also over "inter State trade and
commerce" (entry 42, ibid). The power derive from these 873 entries is
plenary and can only be the subject of restraint if the Constitution so
provides. Under Art. 245, this power is expressly stated to be subject to the
provisions of the Constitution. By Art. 246, which divides the subject matter
of laws to be made by Parliament and by the Legislatures of the States, exclusive
power is given to Parliament in respect of matters enumerated in the Union
list. Similarly, exclusive power is conferred on State Legislatures in respect
of matters enumerated in the State List. There is a third list called the
"Concurrent list" and it contains matters over which Parliament and
the Legislature of the States have power to make laws. Inconsistency between
the laws is avoided by Art. 254 which makes the law made by Parliament, whether
before or after the law made by the State Legislature, to prevail over the
latter. In addition to these provisions, Parliament has power to make laws for
the territory of India not included in a State even on matters enumerated in
the State List and also exclusive power to make any law with respect to any matter
not enumerated in the concurrent or the State Lists. This, in brief, is the
scheme of legislative relations and the distribution of legislative power under
our Constitution.
The three Lists contain entries which enable
the raising of money by way of taxes, duties and fees. The taxation entries are
to be found in the Union and State Lists only.
There are only two entries in the Concurrent
List which deal with (a) stamp duties other than duties or fees collected by
means of judicial stamps, but not including rates of stamp duties (entry 44,
Concurrent List,) and (b) fees in respect of any of the matters in that List
but not including fees taken in any court (entry 47, ibid). The other two lists
contain entries which enable the Union and the States to impose taxes, duties
and fees to raise revenue for their respective purposes. These entries, as far
as human ingenuity could achieve, attempt to make a clear cut and fair 874
division. There is an elaborate procedure for distribution of the proceeds of some
of the taxes raised by the Union among the States to finance their activities
but we are not presently concerned with it.
The powers of taxation being plenary except
in so far as the exercise of the power could be said to trench upon the
exclusive domain outlined and demarcated in a rival list, there was a danger in
the dual form of government, which has been adopted in our Republics of one
Government taxing another whether to start with or as a retaliatory measure.
Such a possibility had earlier been envisaged
by other Federal Constitutions either expressly or as an implication of the
dual form and immunity of some kind had been conferred in respect of property,
etc., between the respective Governments. Our Constitution has also made
provision in that behalf. Those provisions are to be found in Parts XII and
XIII. The latter part has been the subject of much anxious thought recently in
this Court, and it provides for freedom of trade, commerce and intercourse
within the territory of India. Articles 285-289 of Part XII provide for
immunity from tax in certain other circumstances. Of these, Art. 286, which
involves restrictions on the imposition of tax on the gale and purchase of
goods, has been before this Court on many occasions and need not be considered.
Article 285 provides for exemption of the property of the Union from State
taxes, and Article 289, for exemption of property and income of a State from
Union taxation. We are primarily concerned with Art. 289 in this Reference.
Articles 287 and 288 provide for special exemption from taxes on electricity in
certain cases and are not relevant to the present purpose.
Putting aside Articles 286, 287 and 288, 1
set out below Articles 285 and 289 :
"285. (1) The property of the Union
shall, 875 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 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."
"289. (1) The property and income of a State shall be exempt from Union
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 accuring 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."
These are the provisions of the Constitution which the President of India has
in mind in making this reference to determine whether the proposed extension
876 of customs and excise duties to all goods belonging to the State
Governments, imported or exported in the one case and manufactured or produced
in the other, would not offend Art.
It may be mentioned at this stage that under
the Government of India Act, 1935, sections 154 and 155 also provided for
similar immunity, but these sections were slightly differently worded. I quote
these sections for future comparison :
"154. Exemption of certain public
property from taxation. 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 other.
wise 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." "155.
Exemption of Provincial Governments and Rulers of Federated States in respect
of Federal taxation. (1) Subject as hereinafter provided, the Government of a
Province and the Ruler of a Federated State shall not be liable to Federal
taxation in respect of lands 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 877 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 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." As I have said already, dual government in a Federation requires
the protection of one government from taxation by the other. In the United
States of America, there is no specific provision but such an immunity is held
to be implied in the nature of dual government. In Canada, s. 125 of the
British North America Act, 1867, provides : , "No lands or property
belonging to Canada or any province shall be liable to taxation." In the
Australian Constitution, which, one of its framers (Mr. Justice Higgins)
described as a "pedantic imitation" of the American Constitution, s.
114 provides :
"A State shall not without the consent
of the Parliament of the Commonwealth raise or 878 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." Even in Constitutions which are comparatively
recent, like those of Argentina and Brazil we find similar provisions.
Article 32 of the Constitution of Brazil
provides:
"The Union, the States and the
Municipalities are forbidden* * * * (c) to tax goods, income or services of
each other." In the arguments before us at which the Solicitor General of
India for the Union and Advocates-General of some of the States and other
learned counsel assisted, two distinct lines of thought were discernible. One
line was to rely upon certain American, Canadian and Australian decisions where
restrictions under the respective Constitutions were either upheld or
negatived, and then to reason from anology. The other line was to take the
words of the Constitution and to see what the Constitution has meant to say.
These two lines represent the classic approach to the interpretation and
construction of a written Constitution. Cooley explained the difference between
them ('Constitutional Limitations, p. 97) by saying that interpretation
"is the art of finding out the true sense of any form of words; that is,
the sense which their author intended to convey", while construction is
"the drawing of conclusions, respecting subjects that lie beyond the
direct expression of the text, from elements known from and given in the
text;Conclusions which are in the spirit, though not 879 within the letter of
the text". With a written Constitution, such as we have, the task in most
cases must be one of interpretation, but where the language' Of the
Constitution suggests that what was previously passed upon by the Superior
Courts of other countries in parallel matters has obviously been taken as a
guide, one may have to go a little further than the text to find out what was
being sought to be achieved and what was being avoided. I am aware that in Webb
v. Outtrim (1), Lord Halsbury observed that it was impossible to say of the
framers of the Australian Constitution what their supposed preferences were. I
am also conscious of the fact that the Indian Constitution is a document framed
by the Indian people for the Indian people. In interpreting the Constitution,
one must not completely cast off the moorings to the text of the Constitution
and drift into alien seas. I may say, however, that there are indications in
the Constitution itself of compelling force which show that the framers were
desiring to avoid some of the implications of these rulings of the Superior
Courts of the United States, Canada and Australia..
The observations of these learned Courts have
been pressed into service by counsel before us, as they form the historical
background of the provisions of our Constitution.
I also find it convenient to deal with them
first as they prepare us to understand our own Constitution. Perhaps by seeing
the problem in other settings and environments, one is able to see it better in
one's own.
I shall begin with the United States of
America, because the doctrine had its first beginnings there. In the United
States, the immunity of one Government from taxation by the other arose as an
indispensible implication of the dual system. It had its roots in what Mr.
justice Frankfurter described as a 'seductive cliche" of Chief justice
Marshall in McCulloch v. Maryland (2), that the power to tax involves the power
to destroy by the tax. But the (1) [1907] A. C. 81.
(2) 4 Wheaton 316, 880 doctrine was more
that) a mere cliche; it was stated by Chief.' justice Marshall to be
fundamental to dual government. Let me recall his words :
"If we measure the power of taxation
residing in a State, by the extent of sovereignty which the people of a single
State possess, and can confer on its government, we have an intelligible
standard, applicable to every case to which the power may be applied. We have a
principle which leaves the power of taxing the people and property of a State
unimpaired, which leaves to a State the command of all its resources, and which
places beyond its reach, all those which are conferred by the people of the
United States on the Government of the Union, and all those means which are
given for the purpose of carrying those powers into execution. We have a
principle which is safe for the States, and safe for tile Union. We are
relieved, as we ought to be, from clashing sovereignty; from interfering
powers; from a repugnancy between a right in one Government to pull down what
there is an acknowledged right in another to build up; from the incompatibility
of a right in one government to destroy what there is a right in another to
preserve. We are not driven to the perplexing inquiry, so unfit for the
judicial department, what degree of taxation is the legitimate use and what degree
may amount to the abuse of the power".
The. Chief justice, therefore, concluded in
these famous words :
"The Court has bestowed on this subject
its most deliberate consideration. The result is a conviction that, the States
have no power, by taxation or otherwise, to retard, impede, burden or in any
manner control, the operations 881 of the Constitution laws enacted by Congress
to carry into execution the powers vested in the general government. This is we
think, the unavoidable consequence of that supremacy which the Constitution has
declared".
This doctrine had early dissenters and chief
among them was Mr. justice Bradley who described it as founded on a fallacy
which would lead to mischievous consequences. Collector v. Day (1). McCulloch's
case involved a State tax which was really discriminatory against the
operations of a national bank and could have been decided without laying down
any such proposition. But the doctrine was accepted and it grew and grew. It
took in not only the property and activities of a Government within its
protection but also all means, agencies and instrumentalities by which
Government acts. It was only after, many years that the reach of the doctrine
began to be curtailed. In the Panhandle Oil Co. v. Missippi (2), Mr. justice
Holmes did away with the cliche by the trenchant observation ",the power
to tax is not the power to destroy while this Court sits". But it was only
the increasing dissents which led to the overthrow of a good dozen cases in
Gravess v. New York I need not enter into the history of the process by which
the doctrine was curtailed. I shall refer to that part only which has withstood
the attrition to which the doctrine was subjected. In the State of South
Carolina v. U. S. (4), (a case relied upon by the States to explain Art.
289), the State had taken over the business
of selling intoxicating liquors in the exercise of its sovereign powers. The
dispensing and selling agents of the State were charged, under a Federal
Revenue Statute, an excise licence tax which was imposed on all sellers of
intoxicating liquors. It was held that the agents were not (1) 11 Wall. 113 :
20 L. Ed. 122.
(2) 277 U.S 218, 223:72 L. Ed 857, 859.
(3) 306 U.S, 466. 83 L.Bd. 927.
(4) 199 U.S. 437 .50 L. Ed. 261, 882
protected by the doctrine because they were doing business and not carrying on
functions of Government. Mr. Justice Brewer gave the reason in these words :
"Mingling the thought of profit with the
necessity of regulation may induce the State to take possession, in like
manner, of tobacco, oleomargarine and all other objects of internal revenue
tax. If one State finds it thus profitable other States may follow, and the
whole body of internal revenue tax be thus stricken down".
Mr. justice Brewer pointed out that in this
way control of all public utilities, of gas. of water and of the rail-road
systems would pass to the States and the States would become owner of all
property and business and then what would the States contribute to the revenues
of the nation ? He held that the tax was not imposed on any property belonging
to the State, but was a charge on a business before any profits were realized
there from, or in other words, upon the means by which that property was
acquired but before it was acquired. In that case, the distinction between
State as a trader and State as Government was made. This distinction was
emphasized later in Ohio Helvering(1), where it was observed :
"When a State enters the market place
seeking customers it divests itself of its quasi sovereignty pro tanto and
takes on the character of a trader, so far at least, as the taxing power of the
federal government is concerned".
In subsequent cases this distinction between
governmental functions and functions as a trader was preserved. The term 'governmental
functions' was (1) 292 U.S.360.78L.Ed.1307.
883 further qualified by the words
'strictly'. 'essential' or ,usual'. It was even said that these functions must
be those in which State Governments must be 'traditionally engaged', otherwise
they would not be able to withdraw from the taxing power of the general
government. A certain amount of strictness in the application of the doctrine
was noticeable in the University of Illinois v. U.S.A. (1). In that case, the
University imported scientific apparatus for use in one of its departments.
Customs duties were exacted which were paid under protest, the University
claiming to be an instrumentality of the State of Illinois, discharging a
governmental function. The Tariff Act of 1922, under which the impost was made.
was an Act to provide revenue, to regulate commerce with foreign countries, and
to encourage the industries of the U.S.A. Relying on Gibbons v. Ogden (1), it
was pointed out in the case that the power to regulate was plenary and
exclusive and its exercise could not be limited, qualified or impeded to any
extent by State action and that there was a denial to the States to lay imposts
or duties on imports and exports without the concert of the Congress (Articles
1, 10, 2). It was, therefore, laid down that the principle of duality did not
touch regulation of commerce with foreign countries. It was argued that the
Tariff Act laid a tax and the tax fell upon an instrumentality. It was conceded
that it nigh be so, but it was pointed out that the imposition of customs
duties could be for purposes of regulation and that the provisions took into
account foreign trade and regulated it and revenue was incidental and the
protection did not go beyond governmental functions. Chief justice Hughes then
observed:
" The fact that the. State in the
performance of State functions may use imported articles does not mean that the
imporation is a function (1) 289 U.S. 48: 77 L. Ed. 1025.
(2) 9 Wheaton 1.
884 of the State Government independent of
federal power." * * * * "To permit the States or their
instrumentalities to import commodities for their own use, regardless of the
requirements imposed by the Congress, would undermine, if not destroy, the
single control which it was one of the dominant purposes of the Constitution to
create. It is for the Congress to decide to what extent if at all, the States
and their instrumentalities shall be relieved of the payment of duties on imported
articles." The regulatory aspect of taxes on commerce was again recently
the subject of discussion in the United States Supreme Court in what is
popularly called the 'Soft drink case'. Natural mineral waters in the State
were bottled and sold and it was held by majority that a non-discriminatory tax
on all persons was payable by the Government of the State because in selling
mineral waters, even though a part of the natural resources of the State, it
was not carrying on a governmental function and the tax did not affect its
sovereignty. Mr. justice Frankfurter said "Surely the power of Congress to
lay taxes has impliedly no less a reach than the power of the Congress to
regulate commerce. There are of course State activities and State owned
property that partake of uniqueness from the point of view of
inter-governmental relations.
These inherently constitute a class by
themselves. Only a State can own a State house; only a State can get income by
taxing.
These could not be included for purposes of
federal taxation in any abstract category of tax payers without taxing the
State as a State, But so long as Congress 885 generally taps a source of
revenue by whomsoever earned and not uniquely capable of being earned only by a
State, the Constitution of the United States does not forbid it merely because
its incidence falls also on a State.
If Congress desires, it may of course leave
untaxed enterprises pursued by States for the public good while it taxes such
enterprises organised for private ends".
Mr. justice Frankfurter rejected as untenable
such criteria as "proprietary' against 'governmental' activities of the
State or historically sanctioned activities of Government ' or ' activities
conducted mostly for profit' and found no restriction upon Congress to include
the States in levying a tax exacted casually from private persons upon the same
subject-matter". Mr. justice Rutledge did not agree with the last
extention but chose not to differ.
Chief justice Stone, with whom justices Read,
Murphy and Burton agreed, pointed out that in the United States the cases were
divisible into two parts those in which there was taxing of property, income or
activities of the State, and those in which the tax was laid on agents and
instrumentalities of the State, which tax was said to impede or cripple
indirectly the State. They held that the distinction between governmental and
proprietary interests was untenable, and agreed that a non-discriminatory tax
could sometimes be laid on the State, provided it did not affect its
sovereignty, but the essence of the matter was not that the tax was
non-discriminatory but because it unduly interfered with the performance of the
State's functions of Government. Holding, therefore, that the tax in question
there did not curtail the State Government in its functions, it was point out
that the Constitution could not be read to give "immunity to the State's
mineral water business from federal taxation" or to deny to the federal
government power to levy the tax. Mr. justice Jackson took no 886 part but
justices Douglas and Black entered a powerful dissent. The opinion was based on
the theory that the taxing power of either Government if exercised against the
other was likely to affect the cost of its operation and "if the federal
Government can place the local Governments on its tax collectors' list, then,
capacity to serve the needs of their citizens is at once hampered or
curtailed." From the above analysis of the American cases (and all of them
were within the ken of our Constituent Assembly), we gather that the immunity
now does not extend to agents, means or instrumentalities as it did previously,
and that it does not extend to any trading or business activity of the State
even though the trading involves natural resources (though it is conceded that
the Congress may excuse trading in a suitable case). It extends to the property
of the State owned as State but not in the course of trading. The marginal
cases are those where the tax which is laid, interferes unduly with the State
as a State, and it is held by narrow majority that except for such marginal
cases, the States are not immune. The contention on behalf of some of the
States is that the distinction made by Brewer, J., in the South Carolina case
(1) has' been preserved in the scheme of Art. 289, and if' import and export
are in the discharge of essential governmental functions, there must be
exemption from customs duty but not if there is trading.
Similarly, it is contended that there is
exemption from excise duty based on the same or similar considerations. In
other words, the claim is that Our Constitution reproduces in its broad
features the doctrine ,is understood in the United States till the time of' the
framing of our Constitution.
There can be no doubt that the broad features
of Art.
289 correspond to the American doctrine as
understood before our own Constitution was framed. Article 289 grants an
exemption from taxation to (1) 199 U.S. 437: 50 L.Ed. 261.
887 the property and income of the States.
What that comprehends I am leaving over for discussion till after I have
touched upon the Canadian and Australian Constitutions and referred to cases
decided in connection therewith.
Article 289, however, quite clearly limits
the exemption against taxation in such a way as to make the trading activities
of the States and the property used or occupied for the purposes of such trade
or business liable to taxation. This follows indubitably from cl. (2). Without
attempting to expound exegetically the words of that clause and its relation to
clauses (1) and (3) I find it sufficient to say that cl. (2) put outside the exemption
granted by cl.
(1) all trading activities of the State and
property used in that connection. The force of the opening words "Nothing
in clause (1)" does not make cl. (2) an exception to cl. (1).
Those words emphasize that the existence of
the power declared by cl. (2) is really unaffected by cl. (1). This is the
trend of opinion in the U.J.S.A., as I have pointed out. The same opening words
are repeated in cl. (3) and the final words "incidental to the ordinary
functions of government" show that even trading can be regarded, if
Parliament so declares by law, as "incidental to the ordinary functions of
Government." This is again recognized in the U.S.A., where statutes
sometimes include special exemptions in favour of the trading activities of the
States.
It follows, therefore, that the general
outline of Art.
289 is based upon the American pattern that
the property and income of the States are not to be taxed, that trading is not
an ordinary function of Government though Parliament may by law declare that
any trade or business or any class of trade or business is incidental to
functions of Government.
So far I have dealt with the general pattern
only and traced its similarity to the American 888 doctrine. It may be pointed
out even at this stage that there is no immunity in respect of the agents or
instrumentalities of Government in our Constitution. The exemption is in
respect of the "property and income of a State". The force of these
words appears from other cases under the Canadian and Australian Constitutions.
I shall deal with Australia first, because the leading case under that
Constitution was decided before the leading case under the Canadian
Constitution.
I have already quoted s. 114 of the
Commonwealth of Australia Constitution Act. The material portion of it may be
reproduced here.:
"A State shall not.....................
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 the
State".
The doctrine of immunity of instrumentalities
as an implied prohibition in the Constitution was held inapplicable to
Australian Constitution by the Supreme Court of Victoria before the High Court
was constituted but the High Court in the first case applied the doctrine. See
D'Emden v. Pedder (1). It is hardly necessary to trace the history of the
doctrine as it was rejected in what is called the Engineers' case (2). It was,
However, held in D'Emden v. Pedder(1), that s. 1 14 only referred to "tax
on property" as such and was a prohibition different from that contained
in the American Doctrine. The matter came to a head in two cases in 1908. In
King v. Sutton(3), a quantity of wire netting purchased in England and imported
into the Commonwealth by the Government of New South Wales was landed at the
port of Sydney. Without any entry having been made or passed and without the
permission of the customs officers, it was removed under the executive (1)
(1904) I C.L.R. 91.
(2) (1920) 28 C.L.R. 129.
(3) (1908) 5 C.L.R. 786.
889 authority of the State. The customs
authorities proceeded against the defendant under ss. 36 and 236 of the Customs
Act of 1901. It was held that the Customs Act, 1901, was a valid exercise of
the exclusive power of the Commonwealth conferred by ss. 52(ii), 86 and 90 of
the Constitution Act, to impose, collect and control duties of customs and
excise, and the Act applied to goods imported by the Government of a State just
as it applied to private persons and the goods which were subject to the control
of the Customs authorities under s. 30 could not be removed contrary to the
provisions of the Act. On the following day, the High Court delivered judgment
in the Attorney-General of New South Wales v. The Collector of Customs (1), in
which s. 114 was considered.
That was an action brought to recover from
the defendant the amount of customs duties demanded and paid under protest in
respect of the importation into the Commonwealth of certain steel rails by the
Government of the State of New South Wales. The rails were purchased in England
and were shipped to the Secretary for Public Works of the State. At that time
the current of authority in Australia was in favour of applying the American
doctrine of immunity of instrumentalities as laid down by the High Court in
D'Emden v. Pedder ( 2), though in that case, it was already held that s. 114
dealt with "tax on property", and it was a very different matter. The
State sought the protection of s. 114. It was held that the doctrine had no
application to powers expressly granted to the Commonwealth which by their very
nature involved control of some operations of the State Government and one such
grant was the power to make laws with respect to external trade. It was further
held that the imposition of customs duties being a mode of regulating trade and
commerce with other countries as well as an exercise of the taxing power, the
right of the States to import goods must be subject to the (1) (1908) 5 C. L.
P. 818.
(2) (1904) 1 C.t.R. 91.
890 Commonwealth power. The Commonwealth
power was said to flow from s. 51 [(i) and (ii)] which read :
"51. The Parliament shall, subject to
the Constitution, have power to make laws for the peace, order and good
government of the Commonwealth with respect to (i) Trade and commerce with
other countries, and among the States, (ii) Taxation; but so as not to
discriminate between States or parts of States".
In this connection, one other section may be
quoted "55. Tax Bill.--Laws imposing taxation shall deal only with the
imposition of taxation, and any provision therein dealing with any other matter
shall be of no effect.
Laws imposing taxation, except laws imposing
duties of customs or of excise, shall deal with one subject of taxation only;
but laws imposing duties of customs shall deal with duties of customs only, and
laws imposing duties of excise shall deal with ditties of excise only".
In deciding that the State Government was
required to pay customs duties on import by it, the provisions of s. 114
notwithstanding, the learned judges gave widely different reasons. Those
reasons were pressed into service in the arguments before us, and I shall
briefly notice them. Chief justice Griffith found entinomy in the power of
taxation and regulation conferred by s. 51 on the one hand and the exemption
granted by s. 114 on the other, and held that if a construction was possible
which would harmonise the two, it was to be preferred. The 891 learned Chief
justice, therefore, examined the scheme of the Constitution Act and found that
though the word 'taxation' in s. 51 (ii) included customs duties, the latter
were not described as 'tax' in the Constitution or as 'tax on property He held
that customs duties were a tax on the movement of goods and the word 'tax' ins.
114 could riot be held to include customs duties because the section mentioned
a tax con property' 'belonging to a State'. He was of opinion that such
property must be within the geographical boundaries of the State and customs
duties being collected at the confines of the State were collected before the
goods became the property of the State. He concluded, therefore, that the
levying of duties of customs on importation was not an imposition of the tax
upon property within the literal meaning of s. 114, and even if it was, the section
must be differently construed in the light of the general provisions of the
Constitution Act. Barton and O'Connor, JJ., in separate judgments followed the
same line of thought.
Higgins, J. , pointed out that before the
prohibition applied, taxation of property must be 'as property'. His conclusion
,nay be stated in his own words :
"I prefer to base my judgment on the
ground which I have stated. I cannot confidently, take the ground that customs
duty cannot be a tax within the meaning of the word tax' in section 114. It is
true that 'duties of customs' and 'duties of excise' are the usual expressions;
but phraseology, such as is used in s. 55, shows that the Constitution treats
the imposing of such duties as being the imposing of taxes. 'Laws imposing
taxation, except laws imposing duties of customs or excise, shall deal with one
subject of taxation only'. However the fact that section 114 uses the mere word
"tax'not 'tax of any kind' although it speaks of (property of any kind
strengthens the view 892 that the framers of the section could not have had
customs duties in their minds at the time.
They lay the emphasis on the thought on
ownership "property of any kind belonging' etc." (p. 855).
Isaacs,J., on the other hand, held that
duties of customs as ordinarily understood or in the Customs Act, were imposed
on the goods themselves and were therefore, 'on property' within the meaning of
s. 114, but did not come within the meaning of 'tax' as used in that section
and the Constitution generally. He cited certain authorities to show that
though the word 'taxation', when used to confer on Government a power, might
carry the amplest meaning.. being a generic word, the word tax might or might
not be as wide in meaning when used in, one other context. The learned judge
found that the word 'tax' was used only in s. 114 and did not carry the wide
meaning, and coupled with the word 'property' could not be read to include
customs duties.
This decision of the Australian High Court
was strongly relied upon by the learned Solicitor-General. It will, however, be
seen that the construction of the words used ins. 114 is so intimately
connected with the scheme and language of the other parts of the Constitution
Act as to be of little assistance to us. The words 'tax' and 'taxation' were
not defined in the Australian Constitution, whereas they are, in our own.
Further, the distinction between 'tax' and 'taxation' with all due respects is
somewhat difficult to apprehand. I can only say in the words of Cassels, J., in
a Canadian case to which I shall refer presently that :
"I agree with the Attorney-General for
British Columbia in his Statement before me as to the difference between
taxation and a tax. As the Attorney.General states 'I am not relying very 893
strongly upon that phase of the argument'. He thinks the distinction is rather
subtle and thin, so do I." We shall soon that the Privy Council (lid not
rely upon this distinction when this case was cited before it.
The decision in the Australian case laws down
certain general propositions which may be stated. It recognizes that customs
duties have the dual aspect of raising revenue and of regulating external
trade. This proposition, of course, is valid. It was also accepted in the
American cases to which I have already referred and also in the Privy Council
case from Canada to which I shall make reference.
It also decided that the word 'taxation' is
sufficiently wide to take in customs duties. This was laid down by Isaacs, J.,
and cannot be said to be dissented from by the other learned judges. This
proposition is hardly necessary as an aid to construction of our Constitution
which uses the word 'taxation', as I pointed out during the course of arguments
only, in Art. 289, and defines the term :
"Art. 366 (28). 'Taxation' includes the
imposition of any tax or impost, whether general or local or special, and tax'
shall be construed accordingly".
This gets over the difficulty felt in
Australian case generally and particularly by Higgins J., in the extract I have
made from his judgment. The fact that the word taxation is used in one place
only in our Constitution saves us from the task of examining the context,
because the definition would become a dead letter if it were riot used in, that
place in the sense defined. As regards the scheme of the Australian
Constitution, there is some similarity in that the powers of taxation conferred
by s. 51 of the Australian 894 Constitution Act on Parliament are subject to
the provisions of that Constitution just as they are in our Constitution but
unlike those conferred by the Constitution of Canada. I shall refer to these
points which were used in arguments when I deal with our Constitution. I shall
now refer to the Canadian case relied upon by the learned Solicitor-General.
Before dealing with the Canadian precedent or
the decision on appeal by the judicial Committee, I find it necessary to refer
to a few cases in which the Privy Council explained the general scheme of the
British North America Act and the principles on which that Act is to be
construed, particularly ss. 91 --95 of the Act, which deal with the powers of
legislation in the Dominion and their distribution between the Dominion
Parliament and the Legislatures of the Provinces. Without leaving those
principles before one, there is a danger of misapprehending the implications of
the cases relied upon by the learned Solicitor-General. It is not necessary to
reproduce sections 91 and 92 in their entirety beyond the opening words which
have a direct bearing upon the problem decided in the Privy Council case.
Section 91, in so far as material to our
purpose, reads Section 91 "It shall be lawful for the Queen, by and with
the advice and consent of the Senate and House of Commons, 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 for greater certainty but not so as to
restrict the 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 895 coming within the classes of subjects next
hereinafter enumerated, that is to say,-" "Then follows an enumeration
of twenty nine classes of subjects".
* * * * * * "And any matter coming
within any of the classes of subjects enumerated in this section shall not be
deemed to come within the class of matters of a local or private nature
comprised in the enumeration of the classes of subjects by this Act assigned
exclusively to the legislatures of the provinces." Section 92 is as
follows "In each province the legislature may exclusively make laws in
relation to matters coming within the classes of subjects next hereinafter
enumerated, that is to say,-" "Then follows an enumeration of sixteen
classes of subjects." In dealing with the general scheme of the Act, the
Board in The Citizens Insurance Company of Canada v. William Parsons and The
Queen Insurance Company v. Williams Parsons (1), pointed out that the scheme
was to give primacy to the Dominion Parliament in cases of conflict of power
notwithstanding anything in the Act and explained how the exclusiveness of the
spheres of the two legislatures was intended to work. The position was again
summed up the next year in Russel v. Queen, the report of which is to be found
in the same volume at p. 829. Again, in Tennant v Union Bank of Canada (2), it
was held that s. 91 (No. 15) of the British North America Act gave the Dominion
(1) (1881-82) 7 App. Cas. 96.
(2) (1894) A.C. 31 at 41.
896 Parliament power to legislate over every
transaction within the legitimate business of a banker, notwithstanding that
the exercise of such power interfered with property and civil rights in the
province (ss. 92, 20, 13) and conferred upon the bank privileges as a lender
which the provincial law did not recognise. The decision was rested once again
on the doctrine of paramountcy of Dominion Parliament notwithstanding anything
in the Act so long as it did not fall within the exclusive power of the
Provincial Legislature under section 91. Lord Watson observed :
".......... But sect. 91 expressly
declares that, notwithstanding anything in this Act,' the exclusive legislative
authority of the Parliament of Canada shall extend to all matters coming,
within the enumerated classes;
which plainly indicates that the legislation
of that Parliament, so long as it strictly relates to these matters, is to be
of paramount authority. To refuse effect to the declaration would render
nugatory some of the legislative powers specially assigned to the Canadian
Parliament." This primacy of Dominion Parliament wag in all matters
legislative, subject, of course, to what was assigned exclusively to the
Provincial Legislatures. But the primacy of Parliament of Canada was
untrammelled by anything elsewhere to be found in the same Act.
From the above citations, it is obvious that
the general scheme of the British North America Act assigns certain subjects to
the exclusive and plenary power of the Dominion Parliament, and certain other
subjects exclusively to the Provincial Legislatures. By s. 91, the Imperial
Parliament has unequivocally placed everything not assigned to the local
legislatures within the jurisdiction of the Dominion Parliament notwithstanding
anything in the 897 Act. The British North America Act thus has to be construed
as a whole and with reference first to the exclusive domain of the Provincial
Legislatures, next, with reference to the Paramountcy of the Dominion
Parliament and the general scheme of the Act. Unless a matter falls within s.
92 and does not fall within s. 91, the action of the Dominion Parliament is
subject to no restraint by anything elsewhere to be found in the Act.
We are now in a position to consider the case
so strongly relied upon by the learned Solicitor-General. To Understand that
case, the facts must be seen first. It was a test case by way of an action by
the Crown in the right of the Province to have it declared that it could import
liquor into Canada for purposes of sale without paying customs duties imposed
by the Crown in the right of the Dominion of Canada by virtue of the Customs
Act of Canada. The action of the Province of British Columbia was based on the
provisions of Government Liquor Act which was declared intra vires by the Privy
Council in Canadian Pacific Wine Company Limited v. Tuley (1). Before the
Exchequer Court, the following admission of facts was filed by the AttorneyGeneral
of Columbia:"It is hereby admitted, for all purposes of this action, that
the case of 'Johnnie Walker' 'Black label' whiskey, which was purchased and
consigned to H.M. King George V in the right of the province of British
Columbia care of Liquor Control Board, Victoria B. C. as alleged in para 1 of
the Statement of the claim filed herein, was so purchased and consigned to meet
the requirements of the Government Liquor Stores' established in British
Columbia under the Government Liquor Act Ch. 30 of the States of British
Columbia, 1921 and for the purpose of sale at the said Government (1) [1921] 2
A.C. 417.
898 Liquor Stores pursuant to the provisions
of the said Act".
The contention on the side of the Province
was that s. 125 of the British North America Act which provides "No lands
or property belonging to Canada or any Province shall be liable to
taxation", gave protection against the customs duty. The contention on the
side of the Dominion was that the whiskey was not imported for purposes of
Government but for trade.
It was pointed out that under s. 118, large
sums were payable by the Dominion to the Provinces and reference was also made
to ss. 122, 123 and 124, under which customs and excise laws as also certain
other dues were to continue until altered by the Parliament of Canada. British
Columbia was not a part of the Dominion to start with. It was admitted 'into
the Dominion under s. 146 of the British North America Act on May 16, 1871, by
an order of Her Majesty in Council. Section 7 of the Order provided that the
existing customs tariff and excise duties would continue in force in British
Columbia for some time. The Dominion Act under which the customs duty was
sought to be levied provided as follows :"The rates and duties of customs
imposed by this Act, or the customs tariff or any other law relating to the
customs, as well as the rates and duties of customs heretofore imposed by any
Customs Act or Customs Tariff or any law relating to the Customs enacted and in
force at any time since the first day of July 1867, shall be binding, and are
declared and shall be deemed to have been always binding upon and payable by
his Majesty, in respect of any goods, which may be hereafter or have been
heretofore imported by or for His Majesty whether in the right of His Majesty's
Government of Canada or His Majesty's Government 899 of any Province of Canada,
and whether or not the goods so imported belonged at the time of importation to
His Majesty; and any and all such Acts as aforesaid shall be construed and
interpreted as if the rates and duties of customs aforesaid were and are by
express words charged upon and made payable by His Majesty.
Provided, however, that nothing herein
contained is intended to impose or to declare the imposition of any tax upon,
or to make or to declare liable to taxation, any property belonging to His
Majesty either in the right of Canada or of a Province".
In the Exchequer Court, Cassells, J., based
his decision on the fact that the whiskey was imported not for any governmental
purpose but for trade. He, therefore, rejected the claim of the Province
following Mr. justice Brewer's dictum in the South Carolina Case, and referred
to two cases of the Privy Council, Farnell v. Bowman (1) and AttorneyGeneral of
the Strait Settlement v. Wemyss (1), in which it was stated that "if a
State chooses to embark upon private business in competition with other trades,
they should be liable just as other persons engaging in trade". The
Australian case of Attorney General of New South Wales v. Collector of Customs
(3), was referred to but was not followed.
An appeal was taken to the Supreme Court of
Canada. The report of the decision is found in The Attorney-General of the
Province of British Columbia v. The Attorney-General of the Dominion of Canada
(4). It was argued on behalf of British Columbia that in s. 125, British North
America Act, the word 'taxation' included the imposition of customs duties and
the word 'property' included movable property of all kinds and not merely (1)
(1887) 12 App C.s. 613.
(2) (1188) 13 App. Cas 192.
(3) (1908) 5 C.L.R. 818.
(4) 64 Canda S.C.R. 377.
900 property as may be incidental to the
administration of the provincial government. On behalf of the Dominion, it was
contended that customs duties did not come within taxation' but were merely in
the nature of regulations of trade and commerce, and further this was not
taxation on property', and Attorney-General of New South Wales V. Collector of
Customs (1), was relied upon.
The Court consisted of five learned judges
and they delivered separate judgments. Iddington J., declined to go into the
question whether the word 'taxation' would or would not include customs duties.
He held that s. 125 was in a chapter which dealt with lands and property and
thus was confined to property as was mentioned there or in the 3rd and 4th
Schedules, and concluded that in view of this context and the nature of the
powers given by Nos. 2 and 3 of s. 91, the power to demand customs duties must
be upheld.
Ainglin J., held on the authority of
Attorney-General of New South Wales v. Collector of Customs (1), that s. 125
could not have been intended to give exemptions of this kind, and that customs
duties were not only taxes but were also regulatory and were imposed rather on
movement across the border than on the goods themselves and were thus not a tax
'on property in Canada. Mignault J., followed a similar line. Duff J., entered
into a more detailed discussion of the scheme of the British North America Act.
He observed that it was a fundamental part of
the scheme of Confederation to give amplest authority in relation to external
trade exclusively to the Dominion, and customs duties were an instrument of
regulation. He, therefore, held that the theory of Dominion primacy must on
such a construction of s. 125 postulate a power of disallowance of anything
which would weaken that control and primacy. He also held that "taxation'
in relation to property was less comprehensive in significance than 'taxation'
(1) (1908) 5 C.L.R. 818.
simpliciter, and though customs duties were
taxes on commodities in one sense, they were not 'taxes on property' as used in
s. 125 where the word 'property' was used in the sense of distribution of
'lands' and "property' between the Dominion and the Provinces. Brodeur J.,
held that customs duties in Canada both regulated and raised revenue and the
Act under which they were levied laid them 'on or upon goods' and this
attracted s. 125.
All these reasons were of course pressed into
service in the arguments before us. I shall now address myself to the Privy Council
judgment on appeal from the Supreme Court.
The Privy Council did not express any opinion
on these reasons.
Lord Buckmaster referred to the width of s.
125 but pointed out that it could not be read in an isolated and disjunctive
way. It was to be read as a part of the general scheme of the Constitution Act
by which the Dominion was to enjoy exclusive legislative authority over matters
enumerated in s. 91 which included regulation of trade and commerce all raising
of money by any mode or system of taxation. He pointed out that customs duties
had these dual functions and whether it was the one function or the other or
both, the Dominion alone had the power. The claim of the Provinces that though
the Dominion had the power to erect a tariff wall, the provinces could make a
breach in it by virtue of s. 125 through which the goods could pass unaffected
by the Customs duties, was not accepted, because s.
125 was a part of a group of sections which
distributed property between the Dominion and the Provinces and gave control to
the Provinces over properties allocated to them.
This did not affect authority conferred by s.
91, which power extended to regulation of trade and commerce throughout the
Dominion and irrespective of the area of its operation. Lord Buckmaster,
therefore, 902 held that this purpose was paramount and s. 125 must not be read
to defeat it. In other words, the primacy of Dominion Parliament in the matter
of regulation of external trade and commerce and taxation of this type was held
to be unaffected by s. 125. Lord Buckmaster referred to Attorney-General of New
South Wales v. Collector of Customs (1), but did not apply it and observed that
"the true solution is to be found in the adaptation of s. 125 to the whole
scheme of Government" which the British North America Act defined.
The Canadian decisions are based upon the
scheme of the British North America Act which gives paramountcy to the Dominion
Parliament which was unaffected by s. 125 which found place in a group of
sections dealing with the distribution of property between the Dominion and the
Provinces.
Now, the arguments in the present case follow
the lines taken in the cases I have reviewed. It is contended for the Union
that the exclusive power to levy duties of customs and regulation of external
trade belongs to Parliament, that customs duties both raise revenue and
regulate, that they are not 'taxes' much less 'taxes on property', and Art. 289
must be interpreted to preserve the exclusive and plenary power of Parliament.
On the other side, it is contended that clauses (2) and (3) indicate that the
right of Parliament is to tax the trading activities of State Governments but
to leave free the ordinary functions as the Governments of the States, and the
prohibition in cl. (1) of Art. 289 is absolute subject only to what is
expressly excluded by cl. (2). To understand the arguments and to see how the
precedents of other countries serve us to understand our Constitution, I shall
first analyse the scheme of taxation under our Constitution.
To begin with, it is a matter for reflection
whether the word 'property' in Art. 289 excludes (1) (1908) 5 C.L.R. 818.
903 property imported from foreign countries
which has to bear a tax before it can enter the territory of India. The Article
bans taxation of property belonging to the Government of the by property is
meant only that prod the geographical limits of outside those limits and set
across customs frontiers may duty. Similarly, if customs duties in the word
'taxation', the Article is to save the property of the State Governments. Union
claims that customs duty is neither nor a 'tax on property'. It is a tax on the
movement of goods across the customs frontier and the protection given by
Article 289(1) does not apply. The scheme of the Constitution clearly shows
that neither claim of the Union can be upheld.
The Union List does not include any tax which
in the technical or popular sense can be said to be 'property tax' or a tax
laid on property as property. These tax entries begin at No. 82 which is
"taxes on income other than agricultural income". Then follow Nos. 83
and 844 which deal with duties of customs and duties of excise. It is these
entries which are the subject of controversy. If these are not to be regarded
as taxes on 'property', then, no other tax can be remotely connected with the
property of "he State in the sense suggested by the learned SolicitorGeneral,
Nos. 85 and 86 deal with companies, and Nos. 87 and 88, with death duties. In
extremely rare cases, a State might be the legatee as in U. S. v. Perkins (1)
and Snyder v. Bettman (1), but it is difficult to imagine that such a case was
in contemplation. Terminal taxes and taxes on railway fares and freights of No.
89 may fall upon the States, but under Art. 269, the proceeds have to be
assigned to the States. No. 90 deals with taxes other than stamp duties oil
transactions in stock exchanges and future markets. They are seldom, if at all,
likely to (1) 163 U.S. 62541 L.Ed. 287.
(2) 190 U. R. 24947 L.Ed. 103 5.
904 fall on the States and the proceeds are
also assignable to the States. No. 91 is Rates of stamp duties, and No. 92,
taxes in the sale or purchase of newspaper, assements published therein, and he
sale and purchase of goods where such sale or purchase jurse of inter-State
trade or not taxes such as may be con property'. The net proceeds of gain to be
given to the States. When ..J" was put to the learned Solicitor-General as
to which tax on property was in contemplation, he could only point to the
residuary power of Parliament. This shows that unless Art.
289(1) took in entries relating to customs
duties and excise duties, the protection granted by the clause would be largely
superflaous or nugatory.
The Government of India Act, 1935, granted
exemption in respect of lands and buildings only, The present Article changed
the words to "property and income'. The pharse is exhaustive of all the
assets and income of the States.
Clause (2) of the Article indicates that the
exemption is not to apply to the trade or business carried on by the State and
any tax can be imposed in respect of such trade or business of any kind or any
operations connected therewith and any property used or occupied for the
purpose of such trade or business and any income accuring or arising in connection
therewith. The repeated use of the word 'any' shows that the distinction sought
to be made in Australia from the use of the word in one place and its omission
in another is not admissible. The words "used or occupied' show that
movable and immovable properties are included.
Clause (3) shows that power is reserved to
Parliament to declare by law which trade or business or class of trade or
business is incidental to the ordinary functions of Government, thus, taking
the matter out of the 905 jurisdiction of courts. Till Parliament so declares,
all trade and business of any kind must remain subject to taxation.
From the above, it follows that the three
clauses of Art. 289 must be read together and harmoniously together their
correct import. It is not possible to read cl. (1) with the assistance of
rulings of other Courts. The problem to be faced is : What is included in the
expression 'property of a State' ? It must obviously include all property to
which the State can lay claim. The word "property' is wide enough to
include immovable as well as movable varieties. Art. 289 departed from the
language of the Government of India Act, 1935 by discarding 'lands or
buildings' and using the more comprehensive expression "property', and in
cl. (2) qualified that word by 'any' and by 'used or occupied'. The collocation
of these expressions clearly indicates that the property of the State in
whatever circumstances situated, was meant and was exempt from taxation and the
only property which was made subject to taxation was any property used or
occupied for business.
Property, which is brought into ownership and
possession abroad, or property, which is produced or manufactured by the State,
is property of the State. If not, the question may be asked, "Whose property
is it then ?", and no answer to such a question can be given. I am,
therefore, of the opinion that taking the language of Art. 289 (1) by itself or
even as modified by that of clauses (2) and (3), the conclusion is inescapable
that properties of all kinds belonging to the States save those used or
occupied for trade or business, were meant to be exempted from 'taxation'. Such
property may be immovable or movable and need not be within the geographical
limits. This Article is in the part dealing with "Finance" and is
included in a subchapter entitled "Miscellaneous Financial
Provisions". Its significance is thus not made less 906 by any special
considerations as was the case with s. 125 of the British North America Act.
The powers of legislation, which Parliament enjoys by virtue of the taxation
entries in List 1, are expressly subject to the provisions of the Constitution,
and Art. 289 must, therefore, override unless it be inapplicable. The Scheme of
Art. 289 does not admit that the word 'property' should be read in any
specialized sense. I am, therefore, of opinion that goods imported and goods
manufactured or produced by the States are included in the word 'property'.
It is next contended that neither customs
duties nor excise duties can be said to be "taxation' and even if they can
be described as "'taxation" or "'tax", they are not tax on
property. They are said to be taxes on movement of goods in the one case, and
taxes on production or manufacture, in the other. Many rulings were cited to
show that this is the way in which judges have described these levies. I shall
deal with customs duties first, because, in my opinion, excise duties are
simpler to deal with. Some judges have described excise duties as "on
goods produced", and some, as "on production and manufacture",
and it is easy to cite an equal number of cases on either side.
The definition of the word 'taxation' in our
Constitution is the most significant fact. It serves to distinguish the
Australian cases and it tells us what kind of levy would be hit by Art. 289
(1). This is what it states :
"Taxation' includes the imposition of
any tax or impost, whether general or local or special, and 'tax' shall be
construed accordingly".
Though it is not an exhaustive definition and
only shows what is included in the word, one is struck 907 immediately by its
width of language. Though it speaks of any tax or impost, it goes a step
further and adds "whether general, or local or special" indicating
thereby that no special or local considerations are relevant and even a general
non-discriminatory levy must be regarded as taxation. I have already stated
that the word "taxation" is used only in Art. 289 (1) and it must be
read with all its wealth of meaning into the first clause of the Article. Not
to do so would be to make the definition entirely redundant.
When the clause is expanded in the light of
the definition, it reads :
"The property and income of a State
shall be exempt from any Union tax or impost, whether general or local or
special".
The underlined portion represents the
definition.
The question thus arises why use the word and
define it in this comprehensive way if there was no tax in the legislative
entries in List I which could be said to fall on the property of the States
unless one thought in terms of customs duties and excises ? According to Wells
(1).
"Scientifically considered taxation is
the taking or appropriating such portions of the product or property of a
country or community as is necessary for the support of its Government by
methods that are not in the nature of extortions, punishments or
confiscations".
Viewed in this broad way and having in mind
that the term 'taxation' as used in the Article was specially defined with
great width, the answer to the question posed by me is obvious. But that is not
all. The definition speaks of "impost". The word "impost"
in its general sense means a tax or tribute or duty and may be on persons or on
goods.
In a (1) Theory and Practice of
Taxation,p.204.
908 special sense it means a duty on imported
goods and on merchandise. See Pacific Ins. Co. v. Sonle(1). In Ward v.
Maryland (2), it is stated .
"An impost, or a duty on imports, is a
custom or tax levied on articles brought into a country".
The Oxford Dictionary does say that this special
meaning is after Cowell and that there is no evidence of the origin.
But every dictionary of legal terms will bear
out the special meaning. Indeed, the American Constitution classifies
"impost" with "duties" and "excises" as indirect
taxes in contradistinction to taxes on property or capitation. The word
"duties" is sometimes used as synonymous with tax, but in a special
sense, it means an indirect tax imposed on the importation or consumption of
goods. See Pollock v. Farmers' Loan & Trust co (3).
In Art. 289(1), property of the States is
exempted from Union taxation. One cannot go by the word "Property"
alone but must take into consideration the ambit of the word
"taxation" also. I have read the definition into the first clause of
Art. 289. Reading further into the definition the meaning of the word
"impost" not as a "tax" (which is unnecessary as the word
"tax" has already been used and there is a presumption against
tautology) but as a "duty on importation or consumption", one gets
this result :
"The property and income of a State
shall be exempt from any Union tax or duty on imported goods or merchandise of
all kinds".
In other words, property of the States shall
be free from direct taxes and indirect taxes.
It will thus be seen that both from the angle
of the word "property" as also from the angle of the (1) 7 Wall.
(U.S.) 433 :19 L.Ed. 95.
(2) 12 Wall. (U.S.) 418 :20 L.Ed. 449.
(3) 158 U.S. 601, 622: 39 L. Ed. 1108 909
word "taxation" we reach the two kinds of taxes which are the subject
matter of controversy here. On the other hand, all this width of language is
lost completely if these taxes are left out and one goes in search of other
possible taxes.
The definition may conceivably cover some of
them in very special circumstances but the proceeds of those taxes are
assignable to the States, and it seems pointless to include them for taxation
and then to hand over the proceeds to the States. The distinction between the
trading activity of the State Governments and their ordinary functions of government,
which is worked out with such elaborate care on the American pattern, also
loses its point. Clause (2) would scarcely be necessary and cl. (3), even less.
The next question is whether customs duties
and excises are in their true nature taxes on the occasion of importation in
the one case and production in the other, and cannot be described as
"taxes on property". To begin with, the expression "taxes on
property" is not used; nor is the expression "taxes in respect of property",
with which the former expression was compared. The former expression was used
in the Australian Constitution Act and the distinction was made by the High
Court of that country. We are only concerned to see whether the imports of the
States would be free from Union taxation. If by the nature of customs duties as
a tax on movement of goods, it cannot be said that the exemption has been
earned, there should be an answer in favour of the validity of the amendment.
If customs duties can be said to be "tax on property", the answer
must be the other way.
In this connection, there is the High
authority of Chief justice Marshall in Brown v. Maryland where he observed :
" An impost, or duty on imports, is a
custom or a tax levied on articles brought into a (1) 12 Wheaton 419, 437 : 6
L.Ed. 678, 685.
910 country, and is most usually secured
before the importer is allowed to exercise his rights of ownership over them,
because evasio ns of the law can be prevented more certainly by executing it
while the articles are in its custody.
It would not, however, be less an impost or
duty on the articles, if it were to be levied on them after they were landed.
The policy and consequent practice of levying or securing the duty before or on
entering the port, does not limit the power to that state of things, nor,
consequently, the prohibition, unless the true meaning of the clause so
confines it.
What, then, are 'imports' ? The lexicons
inform us, they are "things imported'. If we appeal to usage for the
meaning of the word, we shall receive the same answer. They are the articles
themselves which are brought into the country. "A duty on imports', then,
is not merely a duty on the act of importation, but is a duty on the thing
imported." In Marriot v. Brune (1), later approved in Lawder v. Stone (2),
it was laid down that customs are duties charged upon commodities on their
being imported into or exported from a country. It follows, therefore, that it
is not right to say that customs duties are on movement of goods and not upon
the goods themselves. A glance at the Sea Customs Act, 1878, which is sought to
be amended, shows that the legislative practice in our country has been to
describe customs duties as laid on the goods or commodities. Section 20 itself,
which is sought to be amended, says :
"............... customs duties shall be
levied......on (a) goods imported or exported, etc.
(b) opium, salt or salted fish imported, etc.
(1) 9 Haward (U.c.) 619 at 632 : 13 L, Ed,
282.
(2) 187 (U.S.) 281: 47 L.Ed. 178 911 (c)
goods brought from any foreign port to............ etc.
(d) goods brought in bond from one customs
port to another".
Similarly, ss. 25, 26, 27, 28, 29, 29A, 31,
32 and several others mentioned goods as being the subject of the tax.
Section 43, which deals with drawbacks, may
be seen in this connection :
"43. When any goods, having been charged
with import duty at one customs-port and thence exported to another, are
re-exported by Sea as aforesaid, drawback sha11 be allowed on such goods as if
they had been so re-exported from the former port." * * * * * The duty is
laid on goods and it is the goods which earn the drawback. It would be not wrong
to say that the whole of the Sea Customs Act speaks of goods all the time.
If then the goods be the property of the
States and those goods have to bear the tax before rights of ownership can be
exercised in respect of them, is it an error to say that the exemption of Art.
289 (1) will be available to them, regard being had to the language of the
clause read with the definition of "taxation""The property......
of a State shall be exempt from any Union tax or impost, whether general or
local or special"? Indeed, Parliament in 1951, soon after the Constituent
Assembly had adopted the Constitution, amended s. 20 of the Sea Customs Act,
1878, by inserting sub-s. (2) which read:
912 "The provisions of sub-section (1)
shall apply in respect of all goods belonging to the Government of a State and
used for the purpose of a trade or business of any kind carried on by, or on
behalf of, that Government, or of any operation; connected with such trade or
business as they apply in respect of goods not belonging to any
Government." This sub-section reproduces cl. (2) of Art. 289. It views the
goods imported as property, customs duties as "taxation", and
declares that such goods though belonging to a State Government would bear the
tax under the circumstances mentioned in the said clause. If there ever was a
perfect instance of contemporanea expositio, this must be it. It is not a case
of a modern statute being interpreted with reference to an old one. Nor is
their any judicial interpretation involved. This is a case of the same body of
men enacting a provision in an Act to carry out the intent and meaning of a
provision of the Constitution adopted earlier by them. In their understanding
of the Constitution, customs duties as levied under the Sea Customs Act, 1878,
were affected by the change from "lands and buildings" of s. 154 of
the Government of India Act, 1935, to "property" and the grant of
exemption to such property from Union taxation. If I had any doubts about the
construction of Art. 289, this would have served me to show the way. 1,
however, think that the matter hardly admits of any doubt.
The learned Solicitor-General again and again
referred to the dual purpose achieved by the imposition of customs duties,
namely, the raising of revenue and the regulation of foreign trade. He
associated excise duties with customs in the same breath and cited the Privy
Council case from Canada to argue that if the proposed amendment is declared in
either case to be unconstitutional, then, the regulatory part 913 of the same
law would fail without being in any way imperilled by Art. 289 or anything
elsewhere to be found in the Constitution. This argument needs serious
consideration.
There can be no doubt that the power of
Parliament to regulate foreign trade is plenary and is untrammelled by anything
contained in Art. 289. A similar assumption may also be made in favour of
duties of excise, though the element of regulation may be somewhat weaker there
than in the duties of customs. The question, however, is what purpose is the
proposed amendment intended to serve ? It is a little difficult to dissociate
the regulatory aspect from taxation. Even in Australia, where tax laws must
deal only with taxation and no other subject, the regulatory aspect of customs
duties was adverted to. In the United States of America also, this regulatory
aspect of customs duties did play a prominent part. Can we, therefore, say that
the combined effect of entries 83 and 41 of List 1 would sustain the proposed
amendment ? If it were a question of regulation being inextricably woven into
the tax, I would have paused to consider the matter. I am not expounding a law
already made but am giving an opinion on certain questions. These questions
definitely refer to the revenue aspect of customs duties. If the law were
framed to regulate and even to prohibit the importation, by the State
Government in common with others, of certain goods or classes of goods, I would
have no hesitation in saying that such a law would not offend the exemption in
Art. 289. Even if the law was intended to achieve 'both ends' there would be an
argument in favour of the Union. But if the advice is sought on the plain
question whether the goods of the States can be taxed to raise revenue, the
answer is equally plain that it is not permissible except in the circumstances
already mentioned respectively in the two sub-sections which are sought to be
amended.
914 Section 20 of the Sea Customs Act, and s.
3 of the Central Excises & Salt Act, do not pretend to regulate external
trade in the one case and production and manufacture, in the other. They are
provisions for raising revenue in much the traditional English way. Whatever
little pretence there might be is shed completely by the proposed amendment
which, to borrow once again from Mr. justice Douglas, is a "measure
designed to put the States on the tax collectors' list". In these
circumstances, I answer the question in respect of customs duties without
adverting to entry 41 of the Union list. It is argued that the States would
import goods not only free but also freely and, thus, lose valuable exchange.
But the question can only be answered as
posed and not on the basis of horrible imaginings. It can be argued with equal
force that the State Governments may be expected to evince a sane attitude
towards our finances.
In so far as excise duties are concerned, no'
question of regulation of trade or of production or of manufacture can really
arise except in certain rare circumstances. Much of this power of regulation of
production and manufacture (except in respect of certain essential commodities
mentioned in No. 33 of List III and those specially mentioned in List I)
belongs to the States. In entry No.
84, we are concerned with tobacco and other
goods except alcoholic liquors for human consumption, opium, Indian hemp and
other narcotic drugs and narcotics. If regulation can serve the purpose, power
will have first to be found either in List I or List III. But if it were a case
of pure taxation, then, the excise duty is laid on goods in much the same way
as customs. We cannot treat the observations of judges, where they speak of
excises as "on production and manufacture", to be as binding as
statutes. Other judges have used other language, like "on goods produced
or manufactured". The Central Excise & Salt Act 915 uses the latter,
and so do the lists in the Constitution.
There is, therefore, no difference in this
respect between excises and customs. The case of excises is simpler and a
fortiori, because the goods produced in the States by the States for their
ordinary functions of Government and not for trade or business, are property of
the States and directly within their ownership. If such property is taxed, it
is directly hit by Art. 289 (1), and the arguments on the analogy of customs
have little place. It follows, therefore, that neither customs duties nor
excise duties can be levied on goods properly belonging to a State if the goods
are imported or produced not for the purpose of trade or business but for
purposes incidental to the ordinary functions of Government. It also follows
that the sections of the two Acts as they stand today reflect the true position
under the Constitution, I may add that if the Union Government desires to put a
curb on the excessive importation of goods by the States, the power to regulate
external trade is available and it is unaffected by Art.
289. A measure designed to achieve regulation
by a system of controls, licensing and all such-devices, would not be affected
by the exemption contained in the Article, but a pure taxing measure, which
seeks to tax property used for State or governmental purposes, is within the
exemption.
My answers to the questions are:
(1) The provisions of Art. 289 of the
Constitution preclude the Union from imposing, or authorizing 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.
916 (2) The provisions of Art. 289 of the
Constitution of India preclude the Union from imposing, or authorizing the
imposition of, excise duties on the production or ma nu facture in India of the
property of a State used for purposes other than those specified in cl. (2) of
that Article.
(3) The answer is in the affirmative.
RAJAGOPALA AYYANGAR J.-I entirely agree with
the opinion expressed by my Lord the Chief justice both as regards the answers
to the questions referred to this Court as well as the reasoning on which the
same is based. My only justification for venturing to add a few words of my
own, is because of my feeling that certain matters on which great stress was
laid by learned Counsel appearing for the States, might be dealt with a little
more fully.
When the learned Solicitor-General submitted
that on a proper construction of Art. 289 (1), the immunity from Union taxation
in its relation to property was confined to a direct tax on property and did
not extend to indirect taxes which were not on property but on an incident or
an event in relation to property, it was urged by learned Counsel for the
States that this was introducing a distinction between direct and indirect taxes
which formed no part of our constitutional structure. It is true that no such
express distinction has been made by our Constitution, even so, taxes in the
shape of duties of customs (including export duties) and excise, particularly
when imposed with a view to regulating trade and commerce in so far as such
matters are within the competence of Parliament being covered by various
entries in List I, these cannot be called taxes on property; for they are 917
imposts with reference to the movement of property by way of import or export
or with reference to the production or manufacture of goods. Therefore, even
though our Constitution does not confer or distribute legislative power to tax
based on any distinction between direct and indirect taxes, it is wrong to
suggest that for construing the exemption in Art. 289 (1), the distinction
would necessarily be irrelevant. Learned Counsel for the States are perfectly
correct in their submission that the Constitution does not distribute
legislative power in regard to taxation between the Union and the States or any
distinction between direct and indirect taxes as in Canada. In passing I might
observe that even in Australia, there is no distribution of taxing power on
such a basis, for while the Commonwealth Parliament has an exclusive power to
levy duties of customs and excise (subject to the same having to be uniform) it
has power, generally speaking, to impose direct taxes also, provided they do
not discriminate, and the States have also a similar power to levy such direct
taxes. This however does not by itself eliminate the relevance of the
distinction for any particular purpose. That there is a distinction between
direct and indirect taxes cannot be disputed and I heard no submission to the
contrary. The question is whether that distinction has any materiality for
interpreting the meaning of the words 'the property of a State not being
subject to Union taxation'. The question at once arises whether when reference
is made to "property" and "'its taxation" what is meant is
merely a tax on property as such, i. e. on the beneficial ownership by the
State of the property or whether it is intended to include a tax which bears
merely some relationship to or has some impact on such property. For in
ultimate analysis the distinction between a direct and an indirect tax is a
distinction based upon the difference in impact which is also expressed as a
distinction based upon its being one not on property 918 but on a taxable event
in relation to property. If the taxable event is merely the ownership of the
property and on the beneficial interest therein, it would be a direct tax,
whereas if the connection between the property and the taxpayer is not merely
ownership but something else such as a transaction in relation to it, then it
would be an indirect tax. The argument therefore that under the Constitution
legislative power in relation to taxation is not distributed between the Union
and the States on any distinction between direct and indirect taxes as in
Canada is not very material and of course not decisive on the question under
consideration by us.
It was strenuously urged on behalf of the
States that if Art. 289 (1) were construed in the manner suggested by the
Union, i. e., confining the immunity to direct taxes on property as distinct
from taxes on property which merely impinged on or had an impact on property,
the States could derive no benefit at all from the provision, because the Union
Parliament had no legislative competence under the entries in the Union list to
impose any direct taxes on property and that if some meaning and content has to
be given to the exemption it would only be if its scope were to be held to
extend to indirect taxes on property such as excise duty and duties of customs.
The learned Solicitor General submitted that even on the construction which he
desired us to adopt there would be scope for the operation of the immunity
because the exemption might very well have been framed in view of the possible
direct taxation on certain forms of property under entry 97 of the Union List,
read with Art. 248, though such taxes had not yet been imposed. His further
argument was that the exemption might be capable of being invoked in cases
where any State owned property in the Union territories, for in such a situation
the Union Government would have under 919 Art. 246 (4) power to legislate on
the items enumerated in the State List and thus levy direct taxes on property.
On the other side, it was urged that it would not be reasonable to construe the
words as having some meaning by reference to such unlikely eventualities, but
that it would be proper to attribute to the Constitution makers an intention to
make provision for the usual and the normal.
I must say that the submissions of the
learned Solicitor-General are not without force. That apart, I consider that
the history of this clause should be sufficient to preclude an argument of the
type urged for the States having any great or decisive validity. It is common
ground that Art. 289 (1) was taken over from s. 155 (1) of the Government of
India Act, 1935, with however a variation to which I shall advert. In that
earlier statute, that section ran :
"Subject as hereinafter provided, the
Government of a Province shall not be liable to Federal taxation in respect of
lands or buildings situate in British India or income accuring or arising or
received in British India." The only change which is material which this
section has undergone is the substitution of the word 'property' for the words
"lands and buildings", thus extending the immunity not only to
immovable property of the type specified but to other forms of property,
including movable property as well.
The distribution of legislative power in
regard to taxation under the Government of India Act in the field relevant to
the present context was identical with that which is found in the Constitution.
Then as now, there was no power in the Central Legislature to levy any direct
taxes on lands and buildings, besides there being no entry like 97 in the Union
list, the residuary power remaining after the distribution in the three lists
being vested in the Governor 920 General for allocation under s. 104. It would
have been impossible to find any scope for the operation of this exemption
under the scheme of distribution of taxing power under the Government of India
Act except possibly on some such line as suggested by the learned
Solicitor-General.
The fact therefore that if one had regard
merely to the distribution of taxing power between the Centre and the Provinces
there was no scope for imparting a wider meaning to the expression "taxes
on lands and buildings" appears to me to support the view that the
circumstance that direct taxes on property arc not within Union Legislative
power is not by itself a ground for reading the exemption from taxation as
necessarily having any particular or a wider connotation.
The next question is whether the inclusion of
property other than "lands and buildings" in the Article by itself
brings within the immunity taxation not merely of the property itself but on
some incident or event in relation to property such as production or
manufacture, import or export (to refer to the incidents which are relevant to
the context) or does the Article contemplate the same type of taxes in relation
to movable property as were within the exemption under the Government of India
Act in regard to "'lands and buildings"? In other words, just in the
case of "'lands and buildings" under the Government of India Act,
1935, is the type of taxation of other species of property now brought in one
which is direct and which arises from the mere ownership of such property or
does it include a tax livied not on the property itself but on an incident or
event in relation to it ? The analogy of the immunity from direct taxes on
"lands and buildings" which formed the feature of the exemption in
regard to "property" under the Government of India Act, 1935, would
appear. to favour the view that it is also a direct taxation in relation to the
other forms 921 of property that was intended to be brought within Art. 289
(1). Of course, this view could be overborne by sufficient reason pointing the
other way.
It was in this context that a reference was
made to the use of the expression "taxation" in Art. 289, a term
which has been defined in Art. 366 (28) thus :"366. In this Constitution,
unless the context otherwise requires, the following expressions have the
meanings hereby respectively assigned to them, that is to say(28)
"Taxation" includes the imposition of any tax or impost, whether
general or local or special, and "tax" shall be construed accordingly."
There is no doubt that if this definition were applied and every "tax,
duty or impost" were within the scope of the exemption, the submissions
made on behalf of the States would be formidable. A subsidiary and related
point was also made that the expression "taxation" occurs only in
Art.
289 and that if the width of the definition
in Art. 366(28) is not held to be applicable to understand the content of that
word in Art. 289, the definition itself would be rendered wholly unmeaning.
Before considering these arguments it is necessary to advert to some matters.
It is true that the expression "taxation" occurs only in Art.
289(1) but it is also to be noted that the definition
of the term "'taxation" in Art. 366 has been bodily taken from s.
311(2) of the Government of India Act, 1935.
just as under the Constitution the word "'taxation" also occurs only
once in the Government of India Act, 1935, viz., in s. 155(1) corresponding to
Art. 289(1). The definition, it would be seen, applies to define not merely the
word ""taxation" but also to the grammatical 922 variations of
that expression for instance "taxes". In the circumstances the only
question is whether in the context in which the word occurs having regard to
the antecedent history and the form of the provision and to the other
provisions of the Constitution there is justification for the word being
understood as meaning something less than the full width of which it is capable
under the definition.
In this connection it would be pertinent to
refer to the terms of Article 285 in which the corresponding immunity of the
Union from State taxation is provided. That Article runs :"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 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." In
regard to this provision there are two matters to which attention might be
directed. The first of them is the use of the expression "all" in
clause (1)(taken from the corresponding s. 154 (1) of the Government of India
Act 1935) which is absent from Art. 289 (1). It is manifest that some
significance has to be attached to this variation.
If the definition of the word
"taxes" in Art. 366 (28) were applied to that word in Art. 285 (1),
it would be apparent that the word "all" would be wholly superfluous
and otiose, as the definition itself and that 923 is the contention urged
before us on behalf of the States-embraces all and every tax. This would
suggest that it would not be wrong to take the view that the Constitution
makers felt that notwithstanding the definition of "taxes" in Art. 366
(28), it might not always have that width of connotation, so that it was
necessary to affirm and if need be supplement its width by the addition of the
word "all".
The other matter is this. If the definition
of "taxes" were read into Art. 285 and the Article read literally, it
would be seen that property of which the Union was the owner would be entitled
to the exemption, whether or not the beneficial occupation and use of the
property was in the Union. In other words, the literal reading of the Article
would bring within the exemption a tax on a private occupier of Union land even
when imposed on the beneficial interest of such occupier. S. 125 of the British
North America Act 1867 ran :
"No lands or property belonging to
Canada...
shall be liable to taxation
(Provincial)".
A lessee of Dominion Crown lands taken on
lease for grazing purposes was assessed to lard tax under an enactment of
Saskatchewan in respect of the lessee's interest in the lands. The dominion
challenged the validity of the imposition on the ground of the land itself
being within the immunity conferred by s. 125. Rejecting this contention
Viscount Haldane speaking for the judicial Committee said :
"........... although the appellant is
sought to be taxed in respect of his occupation of land, the fee of which is in
the Crown, the operation of the Statute imposing the tax is limited to the
appellants' own interest." (1).
My object in referring to these observations
is that provisions of this sort cannot always be read literally (1) Smith v.
Vermillion Hills. [1916] 2 A.C 569, 574.
924 and that the object of the framers as
disclosed by the general scheme of distribution of powers has to be borne in
mind to arrive at their proper construction. It is in this context that the
intimate correlation between the exclusive legislative power of the Union in
regard to "trade and commerce with foreign countries", and related to
it, "import and export across customs frontiers" and the duties with
which we are now concerned and particularly import and export duties movements
across the customs frontier assume crucial importance; and pose the question
whether this power confided to the Union was intended to be broken into by
every component State imparting its requirements free of duty.
There was one other further submission made
to us by learned Counsel for the States which requires some detailed
examination and this was based upon the impact of cl. (2) of Art. 289 on the
import of cl. (1). The argument was this :
The non-obstante clause with which cl. (2)
opens should be taken to indicate that but for that clause, the exemption would
be operative so as to deprive the Union of the power to levy tax in the
converse circumstance, in other words that but for clause (2) even where the
State was engaged in a trading activity it would be entitled to claim exemption
from Union taxes. It was therefore submitted that light could be gathered from
the content of cl. (2) on the types of taxation from which exemption was
granted under cl. (1) or in other words for determining the ambit of the
immunity covered by cl. (1). The argument proceeded. Cl. (2) permits the Union
to impose the following taxes notwithstanding the blanket exemption granted by
cl. (1).
These taxes are : (1) A tax in respect of a
trade or business of any kind carried on by or on behalf of the State, The
taxes leviable in respect of a trade or business would be, having regard to the
entries in the Union 925 List-(a) income tax (item 82), (b) Possibly
corporation tax (item 85) where the State carries on business through a State
owned or State controlled corporation, (c) taxes on the capital value of
assests of companies (item 86) in cases where the State carries on business
through a State owned corporation; (2) Taxes in respect of operations connected
with a trade or business. These might include a tax on freights, sales tax, and
it was added duties of customs and duties of excise; (3) Taxes in respect of
property used or occupied in connection with such a trade or business or any
income accuring or arising in connection therewith. It was strongly pressed
upon us that not merely direct taxes on property and direct taxes on income,
but other types of taxes which were incidental to the "operations
connected" with a trade or business (and it was suggested that customs and
excise duties were such) could be imposed by the Union upon the States in cases
where the latter was carrying on a trade or business. It necessarily followed,
it was urged, that if these were not used for a trade or business, the taxes
would fall within the scope of the exemption under Art. 289 (1). In other
words, the argument was that as there was a limited power in Parliament to
impose taxation on States or on those acting on behalf of the States it
necessarily connoted that in cases not covered by cl. (2), that is in cases
where it was not connected with a trade or business the exemption under cl. (1)
would operate.
The precise relationship between clauses (2)
and (1) and the question whether the former was a proviso properly so called
which had been carved out of the main provision of cl. (1) and which but for
such carving out would be within cl. (1) was the subject of considerable debate
before us but I consider that it is not necessary to deal with this rather
technical point for in my view the history of cl. (2) throws 926 considerable
light on its significance and place in the scheme of tax exemption. At the
lmperial Economic Conference of 1923 a resolution was adopted to the effect
that the Parliaments of Great Britain, the Dominions and India should be
invited to enact a declaration that the general and particular provisions of
their respective Acts imposing taxation might be made to apply to any
commercial or industrial enterprises carried on by any other such Government in
all respects as if it were carried on by or on behalf of a subject of the
British Crown.
This resolution drew a distinction between
the trading and business activities of the several constituent units owing
allegiance to the Crown of England and their governmental activities. In
pursuance of this resolution the Imperial Parliament enacted s. 25 in the
Finance Act of 1925 (15 and 16 George V, Ch. 36) which read to quote the
material words :
"25. (1) Where a trade or business of
any kind is carried on by or on behalf of the Government of any part of His
Majesty's Dominions which is outside Great Britain and Northern Ireland, that
Government shall, in respect of the trade or business and of' all operations in
connection therewith, all property occupied in Great Britain or Northern
Ireland and all goods owned in Great Britain or Northern Ireland for the
purposes thereof, and all income arising in connection therewith, be liable, in
the same manner as in the like case any other person would be, to all taxation
for the time being in force in Great Britain or Northern Ireland.
(2) ... .... ... ...
(3) Nothing in this section shall(a) affect
the immunity of any such Government as aforesaid from 927 taxation in respect
of any income or property to which sub-section (1) of this section does not
apply ; or (b)... ... ..." A similar provision was enacted in India in the
Government Trading Taxation Act, 1926 (Act 3 of 1926). Its preamble recited :
"WHEREAS it is expedient to determine
the liability to taxation for the time being in force in British India of the
Government of any part of His Majesty's Dominions, exclusive of British India,
in respect of any trade or business carried on by or on behalf of such
Government. It is hereby enacted as follows :-" The operative provision
was s. 2 and it ran :"2. (1) Where a trade or business of any kind is
carried on by or on behalf of the Government of any part of his Majesty's
Dominions, exclusive of British India, that Government shall, in respect of the
trade or business and of all operations connected therewith, all property
occupied in British India and all goods owned in British India for the purposes
thereof, and all income arising in connection therewith, be liable (a) to
taxation under the Indian Income-tax Act, 1922, in the same manner and to the
same extent as in the like case a company would be liable;
928 (b) to all other taxation for the time
being in force in British India in the same manner as in the like case any
other person would be liable.
(2) For the purposes of the levy and
collection of income-tax under the Indian Income-tax Act, 1922, in accordance
with the provisions of sub-section (1) any Government to which that sub-section
applies shall be deemed to be a company within the meaning of that Act, and the
provisions of that Act shall apply accordingly.
(3) In this section the expression "His
Majesty's Dominions" includes any territory which is under His Majesty's
protection or in respect of which a mandate is being exercised by the
Government of any part of His Majesty's Dominions." This, it would be
seen, applied to a foreign Government carrying on a trade or business or owning
property or using property within British India. The Act has been adapted
subsequently to bring it into line with the constitutional changes that have
taken place since 1926, but it is unnecessary to refer to them. Proviso (a) to
sub-s. (1) of s. 155 enacted the exemption in the same terms as in the Act of
1926 in favour of the Provinces under the Government of India Act, 1935. This
bodily incorporation was done without any reference to the distribution of
legislative powers effected by Sch. 7 of the Government of India Act.
This being the historical origin of this
provision, it is not easy to relate it to the exemption in Art. 289. (1) or to
construe the exemption with its aid. Bearing in mind this antecedent history it
929 appears to me that it would not be proper to read the scope of the saving
in favour of the Union in cl. (2) as reflecting on the scope of Art. 289 (1).
There is also another angle from which the
relevance of clause (2) to the Construction of clause (1) of Art. 289 might be
tested. One of the more serious arguments put forward on behalf of the States
to which I have adverted was that if the expression 'taxes' in relation to the
exemption of property from tax were confined to direct taxes on property the
exemption would be unmeaning, as such taxes could not be imposed by the Union.
Now, let me take the taxes specified in Art. 289 (2). They include, for
instance, taxes on "property used or occupied for the purpose of such
trade or business". A tax on the use of property or on the property itself
which is occupied for the purpose of trade would obviously be a direct tax on
property which ex-concessis the Central legislature under the Government of
India Act and Parliament under the Constitution are incompetent to impose. It
is not the contention of the States that the Centre has such a power to levy a
tax on occupation or use of property where it is in connection with a trade or
business. This would at least show that it is not justifiable to imply from
clause (2) that but for that provision Parliament would be entitled to impose
such a tax. The other points urged have been dealt with in the opinion of my
Lord the Chief justice and I do not propose to cover the same ground. I concur
in the view that the questions referred to this Court for its opinion should be
answered as they have been by the Chief justice.
By Court: In view of the opinion of the
majority the answer to the three questions referred to is in the negative.
Questions answered accordingly.
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