SINHA, C.J.:(on behalf of himself and Gajendragadkar, Wanchoo and Shah JJ.) - (1.) THE following opinions of the court were delivered by 1766
(2.) .The main question, on this reference by the President of India under Art. 143 (1) of 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 Ss. (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 Ss. ; And whereas Ss. (2) of section 20 of the said Act applies the provisions of Ss. (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 Ss. (2) of section 20 of the said Act so as to apply the provisions of Ss. (1) of that section in respect of all goods belonging to the government of a State; 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 Ss. (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 Ss. (IA)of section 3 of the said Act applies the provisions of Ss. (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 Ss. (IA) of section 3 of the said Act so as to apply the provisions of Ss. (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 Ss. (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 Ss. (2) of section 20 of the Sea Customs Act, 1878 (Act 8 of 1878) and Ss. -(IA) of section 3 of the central Excises and Salt Act, 1944 (Act 1 of 1944); 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 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 Ss. (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 Annx. be inconsistent with the provisions of article 289 of the Constitution of India? New Delhi Sd.00 Rajendra Prasad Dated the 19-4-1962. President of India Annx. 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 Ss. (2) the following Ss. shall be substituted, namely :- '(2) The provisions of Ss. (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 Ss. (IA) the following subsection shall be substituted, namely :'(1A) The provisions of Ss. (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 government. 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 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 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 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.
(3.) 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 all embracing 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 and 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 after- 1947. The language of the two parellel provisions may be set out below in order to bring out the points of similarity and contrast: JUDGEMENT_1760_AIR(SC)_1963Html1.htm 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) and (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). 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. ;