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TMI Blog1963 (5) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... esh 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; irrespective of whether such goods are used or not for the purposes set out in the said sub-section (2) as at present in force; And w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions 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 constitution 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Government." It has been argued on behalf of the Union of India that clause (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 re 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade 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 business not so declared by parliament will be within the operation of clause (-), 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 legislativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 after 1947. The language of the two parallel 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 Federation law may otherwise provide, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 juxta-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 a 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 those 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including export duties (Entry 83); duties of excise on tobacco and other 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), taxes on lands and buildings (Entry 49) and duties of excise on alcoholic liquors and opium etc., manufactured or 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 are 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, taxed on agricultural income only are reserved for the States. All customs duties, including export duties, relating as they do to transactions of imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Part XII, with respect to taxes imposed in List I. 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 center and the States. All revenue 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 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 detaile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Fund 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment are not meant exclusively for the benefit of the Union activities; they are also meant for subsidising 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accepted. 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 words "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. 289(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 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 clause (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 autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 clause (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 "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 clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 for greater certainty, but not so as to restrict the generality of the foregoing 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 : ... ... ... (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 Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and held that "s. 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 decidendi 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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" 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 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 U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale. 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. 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., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 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 contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration 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 I 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 counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms 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 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 had 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 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islative relations between the Union and the States are controlled by various articles, namely, Arts. 245 to 258, in Chapter I 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 I, 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 II; 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 I of Part XII of the Constitution. This Part deals with several subjects, such as Finance (Chapter I), Borrowing (Chapter II) and Property, Contracts etc. (Chapter III). We may now read Art. 289 : "289(1) The property and income of a State shall be exempt from Union taxation. (2) Nothing in clause (1) shall prevent the Union fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 I of 1944, - In section 3 of the Central Excises and Salt Act, 1944, for sub-section (1A) the following sub-section 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 Government." 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 clause (28) of Art. 366 of the Constitution preclude the Union from imposing or authorising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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. Clause (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. Clause (1) of Art. 289 will then read as follows : The property and income of a State shall be exempt from the imposition of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 clause (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 clause (1) of Art. 289, the learned Solicitor-General has argued that the intention of the makers of the Constitution must have been to restrict clause (1) to a direct tax on property or incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 others ? 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary 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 [[1958] S.C.R. 1422], 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 framework 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 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition 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. Clause (3) says that 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. Clause (2) creates an exception to clause (1) and clause (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 clause (1) will operate and clause (2) will not defeat that operation. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to occupied in connection with a trade or business will be liable to a tax, but not other property. But the ambit of clause (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 clause (2) if all that they had in mind in clause (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 clause (2) was not an exception, but merely explanatory of clause (1). It is difficult to understand why there should be a reference to business or trading activities in clause (2) if the entire intendment was to confine the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t II to some of which we have referred earlier, 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 clause (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 referred us to entry 89 (terminal taxes on goods and passengers carried by 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 entri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise 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 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) x x x (2) x x x Before the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 [[1907] A.C. 81], 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 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. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l taxation. With the 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 I 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 125. 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 what 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 and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hedule, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment 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 board 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. [5 C.L.R. 818]. That was a case in which an action was brought by the Attorney-General of New South Wales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is there any doubt that the word "taxation" in section 51(ii) includes the levying of duties of Customs. But these duties are nowhere in the constitution described as a "tax", unless the use of the word "taxation" in section 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. Section 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 of 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 114 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. 114 of the Commonwealth of Australia Act, 1900 there was a difficulty in drawing the distinction between property, and the importation 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 143). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter to be established, 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irmative 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 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 (2) of that article ? (3) Will sub-section (2) of section 20 of the Sea Customs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness as they apply in respect of goods which are not produced or manufactured by any Government". x 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 sub-section 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 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 power of taxation being plenary ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 289 . 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, by e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommonwealth, 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 analogy. 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. 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 the 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 therefrom, 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 [292 U.S. 360 : 78 L.Ed. 1307], where it was observed : When a State enters the market place seeking customers it divests itself of its quasi sovereignty pro tanto and takes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to 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 St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernments 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 [199 U.S. 437 : 50 L.Ed. 261] 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. Simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trine. 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 [(1904) 1 C.L.R. 91]. It is hardly necessary to trace the history of the doctrine as it was rejecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 exercise, 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 duties of excise only". In deciding that the State Government was required to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 some 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 in s. 114 is so intimately connected with the scheme and language of the other parts of the Constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitution 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 having 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 section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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 was 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 jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 sometime. 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 G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Anglin J., held on the authority of Attorney-General of New South Wales v. Collector of Customs [(1908) 5 C.L.R. 818], 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t "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 their ordinary functions as the Governments of the States, and the prohibition in clause (1) of Art. 289 is absolute subject only to what is expressly excluded by cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 is Rates of stamp duties, and No. 92, taxes on the sale or purchase of newspapers and on advertisements published therein, and No. 92-A, taxes on the sale and purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce, are again not taxes such as may be considered to be 'on property'. The net proceeds of these taxes are again to be given to the States. When the question 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 superfluous or nugatory. The Government of India Act, 1935, granted exemption in respect of lands and buildings only. The present Article changed the words of '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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. This Article is in the part dealing with "Finance" and is included in a sub-chapter entitled "Miscellaneous Financial Provisions". Its significance is thus not made less 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 I, 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty on imported goods and on merchandise. See Pacific Ins. Co. v. Sonle [7 Wall. (U.S.) 433 : 19 L.Ed. 95]. In Ward v. Maryland [12 Wall. (U.S.) 418 : 20 L.Ed. 449], 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. [158 U.S. 601, 622 : 39 L.Ed. 1108]. 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" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usually secured before the importer is allowed to exercise his rights of ownership over them, because evasions 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 [9 Haward (U.S.) 619 at 632 : 12 L.Ed. 282], later approved in Lawder v. Stone [187 (U.S.) 281 : 47 L.Ed. 178], it was laid down that customs are duties charged upon commodities on their being imported into or exported from a country. It follows, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "land and buildings" of a 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. I, 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 Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clause (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 imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect tax, whereas if the connection between the property and the tax-payer 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 center 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 are 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 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpression - 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 be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir 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 on 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 clause (2) of Art. 289 on the import of clause (1). The argument was this : The non-obstante clause with which clause (2) opens should be taken to indicate that but for that clause, the exemption would be operative so as the 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s but I consider that it is not necessary to deal with this rather technical point for in my view the history of clause (2) throws considerable light on its significance and place in the scheme of tax exemption. At the Imperial Economic Conference of 1923 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 Brit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a man-date 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 appears to me that it would not be proper to read the scope of the saving in favour of the Union in clause (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 te ..... X X X X Extracts X X X X X X X X Extracts X X X X
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