1998 (9) TMI 610 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the property of the Union of India is exempt from State taxation.
2. Whether the Government of India could be a trade tax assessee under the U.P. Trade Tax Act.
3. Whether a Federal Government, like the Government of India, can be taxed by a Provincial Government under the Constitution of India.

Issue-wise Detailed Analysis:

1. Exemption of Union Property from State Taxation:
The primary issue was whether the property of the Union of India is exempt from State taxation. The State of U.P. argued that it could tax the Union of India under the U.P. Trade Tax Act. The court referred to Article 285 of the Constitution of India, which clearly stipulates that the property of the Union shall be exempt from all taxes imposed by a State unless Parliament provides otherwise. The court emphasized that the Constitution grants immunity to the Union from State taxation, making any such tax by the State of U.P. unconstitutional.

2. Government of India as a Trade Tax Assessee:
The State of U.P. contended that the Government of India, specifically its Department of Telecommunication, was a "dealer" under the U.P. Trade Tax Act and thus liable to file returns and pay trade tax. The court examined the definition of "dealer" under Section 2(c) of the Act, which includes a government engaged in the business of buying, selling, supplying, or distributing goods. However, the court found that the Department of Telecommunication was not engaged in such activities and that the provision of telephone services did not constitute a sale or transfer of goods. Consequently, the court held that the Government of India could not be considered a "dealer" under the Act.

3. Federal Government Taxation by Provincial Government:
The court addressed whether a Federal Government could be taxed by a Provincial Government. It referred to the Supreme Court's judgment in New Delhi Municipal Committee v. State of Punjab, which established that a State cannot tax an instrumentality of the Federal Government. The court reiterated that the Constitution provides a clear separation of powers and immunity from taxation for the Union. The court also cited Article 285, which exempts Union property from State taxation, and Article 289, which provides limited circumstances under which the Union can tax State property. The court concluded that the State of U.P.'s attempt to tax the Union of India was unconstitutional and violated the principles of federalism.

Conclusion:
The court quashed the assessment orders and any appeals filed by the Union of India, holding that the Government of India could not be taxed by the State of U.P. The writ petitions were allowed with costs, and the court emphasized the need for the State of U.P. to respect the constitutional balance and immunity provisions. The judgment underscored the principle that a State cannot interfere with the exercise of Federal power and that the Union enjoys immunity from State taxation.