EXEMPTION OF PROPERTY OF THE UNION FROM STATE TAXATION

[Mr. M. GOVINDARAJAN]

Article 285(1) of the Constitution provides that the property of the Union shall, save insofar as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State.  Article 285(2) provides that nothing in clause (2) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying 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 the tax continues to be levied in that State.

Article 289 of the Constitution of India bars the Union of India to levy tax on property and income of the State. The Supreme Court in a Presidential reference in Re. The bill to amend S.20 of the Sea Customs Act, 1878 and Sec. 3 of the Central Excise and salt Act, 1944 – AIR 1963 SC 1760 = 1963 (5) TMI 57 - SUPREME COURT held that the provisions of Article 289 of the Constitution of India does not apply to indirect tax like customs duty, central excise duty, sales tax, etc.,  The Supreme Court laid down the following propositions-

• Article 289(1) provides for exemption of property and income of the States only fromt axes imposed directly upon them; it has no application to indirect taxes like duties of excise and customs;
• Duties of excise and customs are not taxes on property or income; they are taxes on manufacture/production of goods and on import/export of goods, as the case may be, and hence, outside the purview of Article 289 (1).

In ‘Collector of Customs and another V. State of West Bengal and another’ – 1998 (7) TMI 94 - SUPREME COURT OF INDIA the Supreme Court examined the issue whether the Collector of Customs was found to be a ‘dealer’ within the meaning of the Bengal Finance (Sales Tax) Act, 1941 after the Customs sold goods confiscated under the provisions of the Customs Act, 1962 because of nonpayment of customs duty thereon.  The Supreme Court held that held that the Court may 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 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..

In ‘Karya Palak Engineer,CPWD V. Rajasthan Taxation Board’ – 2004 (8) TMI 114 - SUPREME COURT OF INDIA the Supreme Court held that the bar of Article 289 of the Constitution of India does not apply to indirect tax like customs duty, Central Excise, Sales tax etc.,

In ‘Customs Department, Patna V. State of Bihar’ – 2016 (4) TMI 785 - PATNA HIGH COURT the petitioner in discharge of its functions, sells confiscated goods which have been imported in contravention of the Customs laws.  The said goods are being sold by the Department by public auction etc., Usually the confiscated goods are sold by public auction, giving advertisement in newspapers.  The interested persons would participate in tender process.  The highest bidder is required to deposit the bid money along with the sales tax on concerned treasured and on production of treasury.  On production of treasury receipt, the goods are released by the Assistant Commissioner, Customs.  The present writ petition has been filed by the Department by virtue of an ex-parte order passed by the State Government.   The Customs Department submitted the following before the High Court-

• The Customs Department is not liable for payment of sales tax;
• The petitioner is not a dealer in terms of Section 2(e) of Bihar Finance Act, 1981;
• Act of the State Department to saddle the Customs Department with liability of tax is illegal;
• The sold goods are property of the Union of India and therefore exempted from State taxes in terms of Article 285 of the Constitution of India.

The State Government submitted the following-

• The petitioner is a dealer registered under Section 14 of the Bihar Finance Act, 1981 and also under Central Sales Tax Act,1956;
• It carries out the business of sale of confiscated goods through auction;
• As dealer the petitioner is required to furnish the return and deposit tax as per Section 16 of the Bihar Finance Act,1981;
• The petitioner is also required to produce books of accounts relating to its transactions and get assessed under Section 17 of the Act;
• The petitioner neither filed return nor produced books of accounts as required under Section 16(1) and Section 17(2) of the Bihar Finance Act, 1981 in spite of notice;
• Therefore an ex-parte order was passed;
• The action against the petitioner is in accordance with law and there is no infirmity in raising demand of levied tax, interest and penalty.

The High Court relied on the judgments of the Supreme Court as discussed above.  The High Court found that the petitioner is a dealer within the meaning of Section 2(e) of the Bihar Finance Act,1981 read with 2^nd explanation and thus it is eligible to sales tax. 

The High Court upheld the levy of sales tax.  However, in respect of interest and penalty for non filing of interest etc., the High Court remanded the matter back to the assessing authority keeping in view the fact that the petitioner is Customs Department of the Government of India and there could be ambiguity in understanding the provisions of the Bihar Finance Act, 1981. 

From the above it is clear that the Union Government as well as Statement Government is not exempted in levying and paying the indirect taxes levied by the Union Government such as Central Excise, customs duty etc., and by the State Government, the sales tax etc.,