2022 (3) TMI 1093 - SC - Indian Laws

Power of State Government to levy tax on Lotteries - Legislative competence to enact the Kerala Tax on Paper Lotteries, Act, 2005 - interpretation to the expression betting and gambling in Entries 34 and 62 of List II of the Seventh Schedule of the Constitution of India - whether the lotteries organised by the Government of India or Government of a State , which is a subject in Entry 40 of List I also encompasses the power to levy tax on the said lotteries? - whether under Entry 62 of List II the State Legislature is denuded of the power to levy tax on the said subject? - whether, the legislature of States of Karnataka and Kerala had the legislative competence to enact Karnataka Act, 2004 and Kerala Act, 2005 respectively? HELD THAT - Following summary of conclusions are arrived at - (i) That the subject betting and gambling in Entry 34 of List II is a State subject. (ii) From the judgments of this Court, it is now clear that lotteries is a species of gambling activity and hence lotteries is within the ambit of betting and gambling as appearing in Entry 34 List II. (iii) The expression betting and gambling is relatable to an activity which is in the nature of betting and gambling . Thus, all kinds and types of betting and gambling fall within the subject of Entry 34 of List II. The expression betting and gambling is thus a genus it includes several types or species of activities such as horse racing, wheeling and other local variations/forms of betting and gambling activity. The subject lotteries organised by the Government of India or the Government of a State in Entry 40 of List I is a Union subject. It is only lotteries organised by the Government of India or the Government of State in terms of Entry 40 of List I which are excluded from Entry 34 of List II. In other words, if lotteries are conducted by private parties or by instrumentalities or agencies authorized, by Government of India or the Government of State, it would come within the scope and ambit of Entry 34 of List II. (iv) Thus, the State legislatures are denuded of their powers under Entry 34 of List II only to the extent of lotteries organised by the Government of India or the Government of a State, in terms of Entry 40 of List I. In other words, except what is excluded in terms of Entry 40 of List I, all other activities which are in the nature of betting and gambling would come within the scope and ambit of Entry 34 of List II. Thus, betting and gambling is a State subject except to the extent of it being denuded of its powers insofar as Entry 40 of List I is concerned. (v) Entry 62 of List II is a specific taxation Entry on luxuries, including taxes on entertainments, amusements, betting and gambling . The power to tax is on all activities which are in the nature of betting and gambling, including lotteries. Since, there is no dispute that lotteries, irrespective of whether it is conducted or it is organised by the Government of India or the Government of State or is authorized by the State or is conducted by an agency or instrumentality of State Government or a Central Government or any private player, is betting and gambling , the State Legislatures have the power to tax lotteries under Entry 62 of List II. This is because the taxation contemplated under the said Entry is on betting and gambling activities which also includes lotteries, irrespective of the entity conducting the same. Hence, the legislations impugned are valid as the Karnataka and Kerala State Legislatures possessed legislative competence to enact such Acts. (vi) Thus, the scope and ambit of lotteries organised by Government of India or Government of State under Entry 40 of List I is only in the realm of regulation of such lotteries. The said Entry does not take within its contours the power to impose taxation on lotteries conducted by the Government of India or the Government of State. (vii) We also hold that lottery schemes by the Government of other States are organised/conducted in the State of Karnataka or Kerala and there are express provisions under the impugned Acts for registration of the agents or promoters of the Governments of respective States for conducting the lottery schemes in the State of Karnataka and the State of Kerala. This itself indicates sufficient territorial nexus between the respondents States who are organising the lottery and the States of Karnataka and Kerala. (viii) In view of the aforesaid conclusions, we find that Division Benches of the High Courts of Kerala and Karnataka were not right in holding that the respective State Legislatures had no legislative competence to impose tax on the lotteries conducted by other States in their State (in the State of Karnataka and Kerala respectively). The appeals filed by the State of Karnataka and State of Kerala and others are allowed.

Summary

Issues Involved:
1. Legislative Competence of States to Impose Tax on Lotteries.
2. Interpretation of Entries 34 and 62 of List II and Entry 40 of List I.
3. Nature and Scope of Betting and Gambling.
4. Territorial Nexus and Extra-Territorial Operation.
5. Validity of the Karnataka and Kerala State Legislations.

Analysis:

1. Legislative Competence of States to Impose Tax on Lotteries:
The Supreme Court examined whether the State Legislatures of Karnataka and Kerala had the legislative competence to impose tax on lotteries organized by the Government of India or other States. The Court held that the power to tax on "betting and gambling" under Entry 62 of List II includes lotteries, irrespective of the entity conducting them. The Court emphasized that taxation is a distinct matter for legislative competence and cannot be implied under a general legislative entry.

2. Interpretation of Entries 34 and 62 of List II and Entry 40 of List I:
The Court analyzed the scope of "betting and gambling" under Entries 34 and 62 of List II, and "lotteries organized by the Government of India or the Government of a State" under Entry 40 of List I. It concluded that while Entry 40 of List I allows Parliament to regulate lotteries organized by the Government, it does not include the power to tax such lotteries. The power to tax remains with the States under Entry 62 of List II, which covers all activities of betting and gambling, including lotteries.

3. Nature and Scope of Betting and Gambling:
The Court reiterated that lotteries are a species within the genus of "betting and gambling." It referred to previous judgments, including RMD Chamarbaugwala and B.R. Enterprises, to establish that lotteries inherently involve an element of chance and are thus a form of gambling. The Court also noted that the sale of lottery tickets involves a transfer of an actionable claim, not goods.

4. Territorial Nexus and Extra-Territorial Operation:
The Court addressed the issue of territorial nexus, stating that when a State permits the organization and conduct of lotteries within its territory, it establishes a sufficient nexus to impose tax on such activities. The Court rejected the argument that the impugned laws had extra-territorial operation, affirming that the States of Karnataka and Kerala had the competence to tax lotteries conducted within their territories.

5. Validity of the Karnataka and Kerala State Legislations:
The Court upheld the validity of the Karnataka Tax on Lotteries Act, 2004, and the Kerala Tax on Paper Lotteries Act, 2005. It concluded that both Acts were within the legislative competence of the respective State Legislatures under Entry 62 of List II. The Court set aside the judgments of the High Courts of Karnataka and Kerala, which had held that the State Legislatures lacked the power to impose such taxes.

Summary of Conclusions:
1. "Betting and gambling" in Entry 34 of List II is a State subject.
2. Lotteries are a species of gambling and fall within "betting and gambling" in Entry 34 of List II.
3. The expression "betting and gambling" includes all forms of gambling activities.
4. State Legislatures are denuded of their powers under Entry 34 of List II only to the extent of lotteries organized by the Government of India or a State.
5. Entry 62 of List II allows States to tax all activities of "betting and gambling," including lotteries.
6. Entry 40 of List I pertains to regulation, not taxation, of lotteries organized by the Government of India or a State.
7. There is sufficient territorial nexus for States to tax lotteries conducted within their territories.
8. The impugned judgments of the High Courts of Karnataka and Kerala were incorrect in holding that the State Legislatures lacked competence to impose such taxes.

Conclusion:
The appeals filed by the States of Karnataka and Kerala are allowed, and the judgments of the High Courts are set aside. The respective State Legislatures have the legislative competence to impose tax on lotteries conducted by other States within their territories.