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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 ..... t the contention of the States that the center has such a power to levy a tax on occupation or use of property where it is in connection with a trade or business. This would at least show that it is not justifiable to imply from clause (2) to the construction of clause (1) of Art. 289 that but for that provision Parliament would be entitled to impose such a tax. The other points urged have been dealt with in the opinion of my Lord the Chief Justice and I do not propose to cover the same ground. The questions referred to this Court for its opinion should be answered as they have been by the Chief Justice i.e. in the negative. - Special Reference No. 1 of 1962 - - - Dated:- 10-5-1963 - SINHA, BHUVNESHWAR P.(CJ), DAS, S.K., GAJENDRAGADKAR, P.B., SARKAR, A.K., WANCHOO, K.N., HIDAYATULLAH, M., GUPTA, K.C. DAS, SHAH, J.C. And AYYANGAR, N. RAJAGOPALA,JJ. JUDGMENT Sinha, C.J. The main question, on this reference by the President of India under Art.143(1) of the Constitution depends upon the true scope and interpretation of Art. 289. of the Constitution relating to the immunity of States from Union taxation. On receipt of the reference notices were issued to the Attorney-Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or of any operations connected with such trade or business as they apply in respect of goods which are not produced or manufactured by any Government; And whereas it is proposed to amend sub-section (1A) of section 3 of the said Act so as to apply the provisions of sub-section (1) of that section in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of the Government of a State, irrespective of whether such goods are goods are used or not for the purposes set out in the said sub-section (1A) as at present in force; And whereas it is proposed to introduce in Parliament a Bill, the draft of which is annexed here to and marked 'Annexure', to amend for the purpose aforesaid 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 1 of 1944); And whereas Governments of certain States have expressed the view that the amendments as proposed in the said draft of the Bill may not be constitutionally valid as the provisions of article 289. read with the definitions of 'taxation' and 'tax' in clause (28) of article 366 of the Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1 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 ?" New Delhi : Sd/- Rajendra Prasad, Dated the 19-4-1962. President of India. Annexure DRAFT BILL A BILL Further to amend the Sea Customs Act, 1878, and the Central Excises and Salt Act, 1944. Be it enacted by Parliament in the year of the Republic of India as follows :- 1. Short title - This Act may be called the Sea Customs and Central Excises (Amendment) Act, 19. 2. Amendment of section 20, Act 8 of 1878, - In section 20 of the Sea Customs Act, 1878 for 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 Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to duties of customs, including export duties and duties of excise on certain goods manufactured or produced in India, the Union is competent to impose or to authorise the imposition of custom duties on the import or export of goods by a State which may be its property or excise duty on the production or manufacture of goods by a State; if clause (1) of Art. 289. were to be interpreted as including the exemption of a State in respect of customs duties or excise duty, it will amount to a restriction on the exclusive competence of Parliament to make laws with respect to trade and commerce - a restriction which is not warranted in view of the scheme of the Constitution; that the term "taxation" has been used in a very wide sense, as per Art. 366(28); the wide sweep of that expression has to be limited with respect to the words "property" or "income"; the juxtaposition of the words "property" and "income" in clause (1) of Art. 289. would show that the exemption of the States from Union taxation was only in respect of tax on property and tax on income; in other words, the exemption granted by Art. 289(1). is in respect of property taxes properly so called in the sense of taxes direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of Art. 289. is not explanatory, as contended on behalf of the Union, but is an exception or in the nature of a proviso to clause (1) of the Article; clause (2) really carves out something which is included in clause (1) and similarly clause (3) is an exception to clause (2) and carves out something which is included in clause (2). It should be noted that all the States which were represented before us were agreed in their contention, a set out above, except the State of Maharashtra. The learned Counsel for the State of Maharashtra agreed with the contention on behalf of the Union that there was a clear distinction between tax on property and excise duties. In other words, excise duty is not within the immunity granted by clause (1) of Art. 289. , which is in the nature of an exception to the general power of a State to regulate trade and commerce and its right to tax, and as such it should be very strictly construed. But he supported the other States in so far as they contended that duties of import and export were within the exemption granted by clause (1) of Art. 289. . It will thus be seen that whereas the Union is for interpreting clause (1) of Art. 289. in the restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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) nothing in this sub-section shall exempt a Ruler from any Federal taxation in respect of any lands, buildings or income being his personal property or personal income. (2) Nothing in this Act affects any exemption from taxation enjoyed as of right at the passing of this Act by the Ruler of an Indian State in respect of any Indian Government securities issued before that date. It will thus appear that both s. 154 and Art. 285 set out above speak only of "property" and lay down that property vested in the Unions shall be exempt from all taxes imposed by a State or by any authority within a State, subject to one exception of saving the pre-existing taxes on such property until Parliament may by law otherwise provide. Similarl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject to the provisions of Part XI which deals with the relations between the Union and the States, particularly Chapter I relating to legislative relations and distribution of legislative powers, with special reference to Art. 246. Under that Article the legislature of a State has exclusive powers to make laws with respect to the matters enumerated in List II and Parliament and the Legislature of a State have powers to make laws with respect to the matters enumerated in List III (the Concurrent List), and notwithstanding those two lists, Parliament has the exclusive power to make laws with respect to any of the matters enumerated in List I (the Union List). Parliament also has power to make laws with respect to any of the matters enumerated in the State List with respect to any part of the territory of India which is not included in a State. By Art. 248 Parliament has been vested with exclusive power to make laws with respect to any matters not enumerated in the State list or the Concurrent list, including the power of making a law imposing a tax not mentioned in either of those lists. It is not necessary to refer to the extended power of legislation vested in Parliament in abnorm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer of Parliament to legislate with respect to trade and commerce with foreign countries; import and export duties across customs frontiers; definition of customs frontiers (Entry 41); inter-State trade and commerce (Entry 42). As the regulation of trade and commerce with foreign countries, as also inter-State, is the exclusive responsibility of the Union, Parliament has the power to legislate with respect to those matters, alongwith the power to legislate by way of imposition of duties of customs in respect of import and export of goods as also to impose duties of excise on the manufacture or production in any part of India in respect of goods other than alcoholic liquors and opium, etc., referred to above. Further, the imposition of customs duties or excise duties may be either (1) with a view to raise revenue or (2) to regulate trade and commerce, both in land and foreign, or (3) both to regulate trade and commerce and to raise revenue. If therefore Art. 289(1) completely exempts all property of the States from all taxes the power of Parliament to regulate foreign trade by the use of its power of taxation would be seriously impaired and this consideration will have to be kept in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment of India and which form part of the Consolidated Fund of India may also be distributed amongst the States, in accordance with the principles laid down by Parliament in accordance with the provisions of Art. 272. Express provision has been made by Article 273 in respect of grants-in-aid of the revenue of the States of Assam, Bihar, Orissa and West Bengal in lieu of assignment of any share of the net proceeds of export duty on jute and jute products. Further a safeguard has been laid down in Art. 274 that no bill or amendment which imposes or varies any tax or duty in which States are interested or which affects the principles of distribution of duties or taxes amongst the States as laid down in Arts. 268 - 273 shall be introduced or moved in either House of Parliament except on the recommendation of the President. Parliament has also been authorised to lay down that certain sums may be charged on the Consolidated Fund of India in each year by way of grants-in-aid of the revenues of such States as it may determined to be in need of assistance. This aid may be different for different States, according to their needs, with particular reference to schemes of development for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous difficulties in the way of the Union if we were to adopt the very wide interpretation suggested on behalf of the States. It will thus be seen that the powers of taxation assigned to the Union are based mostly on considerations of convenience of imposition and collection and not with a view to allocate them solely to the Union; that is to say, it was not intended that all taxes and duties imposed by the Union Parliament should be expended on the activities of the center and not on the activities of the States. Sources of revenue allocated to the States, like taxes on land and other kind of immovable property, have been allocated to the States alone. The Constitution makers realised the fact that those sources of revenue allocated to the States may not be sufficient for their purposes and that the Government of India would have to subsidise their welfare activities out of the revenues levied and collected by the Union Government. Realising the limitations on the financial resources of the States and the growing needs of the community in a welfare State, the Constitution has made, as already indicated, specific provisions empowering Parliament to set aside a portion of its revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is no specific tax on property in List I and it is therefore contended on behalf of the States that when property of a State was exempted from Union taxation, the intention of the Constitution makers must have been to exempt it from all such taxes which are in any way related to property. Therefore, it is urged that the exemption is not merely from taxes directly on property as such but from all taxes which impinge on property of a State even indirectly, like customs duties, or export duties or excise duties. It is true that List I contains no tax directly on property like List II, but it does not follow from that that the Union has no power to impose a tax directly on property under any circumstances. Article 246(4) gives power to Parliament 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. This means that so far as Union territories are concerned Parliament has power to legislate not only with respect to items in List I but also with respect to items in List II. Therefore, so far as Union territories are concerned, Parliament has power to imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (2) of Art. 285 the nature of taxes from which the property of the Union would be exempt is clearly indicated as a tax on property. Clause (2) provides that "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". It will in our opinion be permissible in view of clause (2) to read clause (1) of Art. 285 when it speaks of all taxes as relating to taxes of the nature of taxes directly on property. We have already pointed out, when dealing with the general considerations which should govern the interpretation of Art. 289(1) that the power of the Union would be crippled if Art. 289 is interpreted as exempting the property of a State from all Union taxes. We have also pointed out that even though the taxes may be collected and levied by the Union, there are provisions in Part XII for the assignment or distribution of many Union taxes to the States. There are also provisions for grants-in-aid by the Union from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be liable to Federal taxation in respect of lands or buildings. Art. 289 on the other hand refers not only to lands and buildings but to all property of a State, whether movable or immovable and exempts it from Union taxation. Even so, we find no warrant for interpreting clause (1) of Art. 289 as if it exempts all property of a State from all Union taxation. We are therefore of opinion reading Art. 289 and its complementary Art. 285 together that the intention of the Constitution makers was that Art. 285 would exempt all property of the Union from all taxes on property levied by a State or by any authority within the State while Art. 289 contemplates that all property of the States would be exempt from all taxes on property which may be leviable by the Union. Both the Articles in our opinion are concerned with taxes directly either on income or on property and not with taxes which may indirectly affect income or property. The contention therefore on behalf of the Union that these two Articles should be read in the restricted sense of exempting the property or income of a State in one case and the property of the Union in the other from taxes directly either on property or on incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in s. 125 included property of all kinds. The answer given by the Dominion was that customs duties did not constitute taxes within the meaning of the expression used in s. 125 but were merely in the nature of regulation of trade and commerce, and secondly, assuming that customs duties were included in the expression "taxation", they did not constitute taxation on property. It was also contended on behalf of the Dominion that the word "taxation" on s. 125 was not intended to comprehend customs duties inasmuch as the prohibition indicated by the section was intended to be reciprocal prohibition and did not extend as regards the Dominion to indirect taxation. The Supreme Court of Canada, by majority judgment, upheld the decision of the Exchequer Court of Canada, which had held that the import by the Province was liable to pay import duty to the Dominion. Thus the contention raised on behalf of the Dominion was accepted that customs duties were not taxes imposed on property as such but were levied on the importation of certain goods into Canada as a condition of their importation. This decision of the Supreme Court was challenged before the Privy Council, by special leave. The Judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xemption from taxation. The question of the interpretation of those provisions of the Australian Constitution came before the High Court of Australia in the case of the Attorney-General of New South Wales v. The Collector of Customs for New South Wales (1907-8) 5 C.L.R. 818. In this case an action was brought by the State of New South Wales to recover the amount of customs duties realised by the Collector of Customs in respect of certain steel rails imported by the plaintiff from England for use in the construction of the railways of the State. The State claimed that those rails were not liable to customs duties on the ground that they were the property of the Government and as such exempt from customs duties by virtue of s. 114 of the Constitution. The majority of the Court decided that the imposition of customs duties being a mode of regulating trade and commerce with other countries as well as of exercising the taxing power, the goods imported by a State Government were subject to the customs laws of the Commonwealth. They also laid it down that the levying of the duties of customs is not an imposition of a tax on property within the meaning of s. 114 aforesaid. The Court added ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng export duties. This raises the question of the nature of duties of excise and customs. This question with respect to excise duties was considered by this Court in the case of Amalgamated Coalfields Ltd. v. Union of India . After considering the previous decisions of the Federal Court In re. The Central Provinces and Berar Sales of Motor and Lubricant Taxation Act (1939 F.C.R. 18); The Province of Madras v. M/s. Budhu Paidanna (1942 F.C.R. 90) and of the Judicial Committee of the Privy Council in Governor General in Council v. Province of Madras (1945 F.C.R. 179), this Court observed as follows at p. 1287 :- With great respect, we accept the principles laid down by the said three decisions in the matter of levy of an excise duty and the machinery for collection thereof. Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, ultimate incidence will always be on the consumer. Therefore, subject always to the legislative competence of the taxing authority, the said tax can be levied at a convenient stage so long as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition is that whereas the Union Parliament has been vested with exclusive power to regulate trade and commerce, both foreign and inter-State (Entries 41 and 42) and with the sole responsibility of imposing export and import duties and duties of excise, with a view to regulating trade and commerce and raising revenue, an exception has been engrafted in Art. 289(1) in favour of the States, granting them immunity from certain kinds of Union taxation. It, therefore, becomes necessary so to construe the provisions of the Constitution as to give full effect to both, as far as may be. If it is held that the States are exempt from all taxation in respect of their export or imports, it is not difficult to imagine a situation where a State might import or export all varieties of things and thus nullify to a large extent the exclusive power of Parliament to legislate in respect of those matters. The provisions of Art. 289(1) being in the nature of an exception to the exclusive field of legislation reserved to Parliament, the exception has to be strictly construed, and therefore, limited to taxes on property and on income of a State. In other words, the immunity granted in favour of States has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on it by entry 83 of List I, thus largely nullifying the exclusive power of Parliament to legislate in respect of international trade and commerce, including the power to tax such trade. Trade and commerce with foreign countries, export and import across the customs frontriers and inter-State trade and commerce are all within the exclusive jurisdiction of the Union Parliament. This Court naturally will not adopt a construction of Art. 289(1) which will lead to such a startling result as to nullify the exclusive power of Parliament in these matters. Lastly, it is urged on behalf of the States that s. 20 of the Sea Customs Act was recast and amended by Act. XLV of 1951 and that sub-s. (2) thereof has borrowed most of its words from the provisions of clause (2) of Art. 289, and therefore, Parliament itself had understood clause (2) of Art. 289 in the sense in which the States are contending that it should be interpreted. But that in our opinion does not conclude the matter, for we have to construe the provisions of the Constitution in their proper setting and we are entitled to come to the conclusion that Parliament may not have been correct in so interpreting the words of clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the amplitude of power given to the Union Legislature to impose duties of customs (entry 83 of List I of the Seventh Schedule) and duties of excise (entry 84 of List I of the Seventh Schedule) can be cut down only by a very strict interpretation of article 289. and that strict interpretation is that clause (1) of Art. 289 is confined to a property tax only, namely, a tax on the goods as such and not on their importation or exportation or on their production and manufacture, and looked at from that point of view Art. 289 of the Constitution does not give any protection to a State in the matter of customs duties and excise duties. It is necessary perhaps to say something at this stage about the constitutional background against which the questions fall for consideration. The Sea Customs Act, 1878 (8 of 1878) was enacted in March 1878 in order to consolidate and amend the law relating to the levy of sea customs-duties. The Central Excises and Salt Act, 1944 (1 of 1944) was enacted in February 1944 to consolidate and amend the law relating to central duties of excise and to salt. The Government of India Act, 1915 (5 and 6 Geo. 5, c. 61) was a consolidating measure repealing and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature and the other Provincial Legislature. In the Seventh Schedule were given three Lists, Federal Legislative List called List I, Provincial Legislative List called List II and the Concurrent legislative list called List III. Legislative power was distributed amongst the legislatures in accordance with those lists. Duties of custom, including export duties came within item 44 of List I and duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors, opium etc., came within item 45. The Indian Legislature amended the Sea Customs Act, 1878 as also the Central Excises and Salt Act, 1944 from time to time in exercise of the powers which it had either under the Government of India Act, or the Government of India Act, 1935. The Indian Independence Act, 1947 created the Dominion of India as from August 15, 1947 and the Secretary of State for India as the Crown's responsible agent for Indian affairs disappeared from the Indian constitutional scene. The Constitution of India came into force on January 26, 1950. This Constitution envisaged India as a Sovereign Democratic Republic, viz., a Union of States but the scheme of the Government of India A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the main subject for consideration in this reference. Soon after the coming into force of the Constitution, s. 20 of the Sea Customs Act, 1878 which stated what goods would be dutiable under the Act, was, amended by the Union Legislature by Act XLV of 1951. The amendment took the shape of inserting a sub-section in s. 20, sub-s. (2), which said that the provisions of sub-s. (1) shall apply in respect of goods belonging to the Government of a State and used for the purpose 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. A similar amendment was made in s. 3 of the Central Excises and Salt Act, 1944 by inserting sub-s. (1-A) in that section. That sub-section said that the provisions of sub-s. (1) shall apply to all excisable goods other than salt which are produced or manufactured in India by, or on behalf of a Government of a State (other than a Union territory) 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 busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds and not on goods as such did not come within the protection of clause (1) of Art. 289. This conflict of views gave rise to doubts as to the true interpretation and scope of Art. 289 of the Constitution and in particular, as to the constitutional validity of the amendments proposed in the draft Bill. This led the President to refer the three questions stated above to this court for consideration and a report of its opinion thereon. In one of the very earliest references made to the Federal Court (In re The Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 (Central Provinces and Berar Act No. XIV of 1938) [[1939] F.C.R. 18], under s. 213 of the Government of India Act, 1935 (which corresponded to Art. 143 of the Constitution), Gwyer C.J. observed that the rules which would apply to the interpretation of other statutes would apply equally to the interpretation of a constitutional enactment, but their application must be conditioned of necessity by the subject matter of the enactment itself, namely, the nature and scope of the Act itself which is a Constitution, "a mechanism under which laws are to be made, and not a mere Act which declares what t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impost, whether general or local or special, by the Union. So far as the property of the Union is concerned the counter-part of Art. 289 is Art. 285 which reads : "(1) The property of the Union shall, save in so far as Parliament may by 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." Now, the words of Art. 285(1) are still more clear and emphatic. It says that the property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State. The expression "all taxes" must mean all taxes whether they be on property or in relation to property. Neither in Art. 289(1) nor in Art. 285(1) do we see any restricting words which would cut down the full meaning of the expression "taxation" in Art. 289 or "all ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eded that the word 'property' in clause (1) of Art. 289 has a comprehensive connotation and refers to all property and assets of a State. Article 294 which occurs in the same Part of the Constitution states that as from the commencement of the Constitution all property and assets which immediately before such commencement were vested in His Majesty for the purposes of the Government of the Dominion of India and all property and assets which immediately before such commencement were vested in His Majesty for the purposes of the Government of each Governor's Province shall vest respectively in the Union and the corresponding State. It is clear therefore that in the Constitution the word 'property' is used in a comprehensive sense to include all assets, movable or immovable. Apart from those assets which vested in the Union or a State at the commencement of the Constitution, the Union or a State may acquire new assets. This is also provided for in Arts. 296 to 298 of the Constitution. Therefore, in both Arts. 285 and 289 the word 'property' means all property and assets which vested in the Union or a State at the commencement of the Constitution and all property and assets which may t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l with taxes or duties which can be imposed by a State Legislature are those contained in items 46 to 62 thereof. Some of these items are indeed taxes on property as such, e.g., item 49, "taxes on lands and buildings"; item 56, "taxes on goods and passengers carried by road or on inland waterways"; item 57, "taxes on vehicles, whether mechanically propelled or not, suitable for use on roads etc"; and item 58, "taxes on animals and boats". Some other items are in relation to property, but are not on property as such; e.g., item 51, "duties of excise on the manufacture or production of alcoholic liquors for human consumption manufactured in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India"; item 52, "taxes on the entry of goods into a local area for consumption, use or sale therein"; item 54, "taxes on the sale or purchase of goods other than newspapers"; and item 55, "taxes on advertisements other than advertisements published in the newspapers". If the argument of the learned Solicitor-General is correct, then the property of the Union will be exempt from such taxes imposed by a State, or by an authority wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I which will take in both direct and indirect taxation. In re The Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 (Central Provinces and Berar Act No. XIV of 1938 [[1939] F.C.R. 18]), Sulaiman J., after referring to the Canadian Constitution as embodied in the British North America Act, 1867, and the Australian Constitution as embodied in the Commonwealth of Australia Constitution Act, 1900, observed that unlike those Constitutions the Government of India Act, 1935, did not make any distiction between direct and indirect taxation and in the matter of legislative competence the ultimate incidence of the tax was not necessarily a crucial test and there was no justification for adopting any such principle as that certain classes of duties which were to be regarded as direct had been assigned to the Provinces, and other classes regarded as indirect had been reserved for the Federation (see the observations at page 73). As in the Government of India Act, 1935, so also in our Constitution the distinction for purposes of legislative competence is between the main subject of legislation and a tax in relation thereto. If this be the correct position, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or business of a State to be incidental to the ordinary functions of Government and if Parliament so declares, clause (2) will not apply and the operation of clause (1) will not be arrested. What is a governmental function or what is a trading or business function is not always easy to determine ? Thus, in Australia, activities of the Government have been held to be 'industrial' even though nothing is charged for the services, e.g. municipal road construction, harbour dredging, piloting and ferries. Our Constitution, avoids this difficulty by empowering Parliament to declare by law that any trade or business carried on by a State shall not come within the scope of clause (2) of the article but shall be deemed to be 'incidental to the ordinary functions of government'. Upon such declaration no taxation by the Union of such trade or business or property or income connected therewith will be possible. This seems to us to be the true effect of the three clauses of Art. 289 . If clause (1) of Art. 289 has a restricted meaning as is contended for by the learned Solicitor-General on behalf of the Union, then the distinction drawn between trading or business activities on one hand and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and s. 3 of the Central Excises and Salt Act, 1944 by inserting two sub-sections thereto showed that Parliament understood clause (2) of Art. 289 as creating an exception to clause (1). Those two amendments, sub-s. (3) of s. 20 of the Sea Customs Act, 1878 and sub-s. (1-A) of s. 3 of the Central Excises and Salt Act, 1944, draw a distinction between the trading activities of the Government of a State and its governmental functions; no exemption is given in respect of goods belonging to a State Government and used for the purpose 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, but exemption is granted in respect of other goods belonging to Government. If, therefore, we look to the context of Art. 289 , particularly cls. (2) and (3) thereof, it becomes manifest that there is nothing in Art. 289 which restricts the comprehensive meaning to be given to the word 'taxation' in Art. 289 . Similar is the position with regard to clause (2) of Art. 285 . That again creates an exception to clause (1) of Art, 285 and saves any tax on any property of the Union to which such property was immediately b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... believe that the exemption given by clause (1) of Art. 289 was meant as a safeguard against the exercise of power under the residuary entry. Apart from that, we have considerable doubt if the residuary entry will take in a 'property tax' when there are entries relating to such tax in List II. It would be a case of much ado about nothing if the Constitution solemnly provided for an exemption against 'property tax' on State property only for such rare cases as are contemplated in Art. 246(4), the situation of State property in territory not included in a State. Such situation would be very rare, and could have hardly necessitated a solemn safeguard at the inception of the Constitution when the States were classed under part A or Part B of the First Schedule. If the wider interpretation of clause (1) of Art. 289 is accepted, sue property would also be exempt from Union taxation except in cases covered by clause (2) of the article. We find it difficult to accept the contention that clause (1) of Art. 289 was meant only for cases covered by Art. 246(4); for that would be the result of the interpretation canvassed for on behalf of the Union. We proceed now to consider the problem from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty then vested in His Majesty for the purpose of the Government of India and there was no necessity for any special provision granting immunity to that property from taxation. The Government of India Act, 1935 introduced a dual system of Government. Part III of the Government of India Act, 1935 came into force on April 1, 1937. Properties belonging to the Crown and in existence prior to that date were governed by the general law enunciated by the courts. Judicial opinion was however not uniform. In some cases it was held that statutes imposing duties of taxes bind Government unless the very nature of the duty or tax is such as to be inapplicable to Government. On the other hand, in some cases it was held that the law was the same in India as in England, where the principle of immunity of Crown property from taxation followed from the prerogative that the Crown was not bound by any statutes unless expressly named. When the dual system of Government was first introduced by the Government of India Act, 1935 the question of immunity of taxation of property of one Government by the other arose. The doctrine of Immunity of Instrumentalities was propounded by the Supreme Court of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions is that whereas s. 154 speaks of the "property vested in His Majesty for the purpose of the Federation" so as to include movable property also (see Bell v. Municipal Commissioner of Madras [25 Madras 457], s. 155 which confers exemption on the property of the "units" is confined to lands and buildings. The result would be that movable property belonging to the Federation would be exempt from duties like octroi which might be levied under the Provincial law, while, goods of the Provincial Governments and "units" would be subject to the customs and excise duties levied by the Federal Government. Income from commercial undertakings and operations in the nature of trade carried on by the units, so long as they are confined within the territory of that unit is not liable to Federal income-tax. This, in short, was the scheme of ss. 154 and 155 of the Government of India Act, 1935. Now, if ss. 154 and 155 of the Government of India Act, 1935 are contrasted with Arts. 285 and 289 of the Constitution, one noticeable difference strikes one at once. The expression 'lands and buildings' in s. 155 is changed to 'property' in Art. 289 ; in other words, the Union and the States are practical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to the aforesaid two articles will facilitate the financial adjustment referred to in the earlier articles in the same chapter or how it will retard the said adjustment if a wider meaning is given to them. We repeat that Arts. 285 and 289 must be construed on their own terms, and it is not open to us to pervert or change the language used therein unless there are compelling reasons to be gathered from other relevant articles of the Constitution. We find no such compelling reasons in the other articles of Part XII which deal with the financial relations between the States and the Union. We have earlier referred briefly to the distribution of legislative power between the States and the Union. We have also pointed out that so far as the taxing powers are concerned, the legislative entries in the Seventh Schedule make a distinction, for purposes of legislative competence, between the main subject of legislation and a tax in relation thereto. Taxes on income other than agricultural income (entry 82), duties of customs including export duties (entry 83), and duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumpt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such directions to a State as may appear to the Union Government to be necessary for that purposes, Under Art. 257 the executive power of every State shall be so exercised as not to impede or prejudice the exercise of the executive power of the Union, and the Union Government can give necessary directions in the matter to the State Government. So far as trade and commerce within the State is concerned, the State has power to make laws (entry 26 of List II). We think, therefore, that nothing serious is likely to happen, either with regard to foreign trade or inter State trade, if we hold on the terms of Art. 289 that State property is exempt from Union taxation including customs duties or excise duties. Such an interpretation is not likely to result in any interference with the power of control which the Union undoubtedly has over foreign trade or inter-State trade. The contention that the Union has the power to regulate trade by imposition of customs duties and that power would be annulled if the State has immunity from them in respect of things imported or exported by it seems to us to be fallacious. The Union's power to legislate to regulate foreign trade contained in the leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpreted on its own terms and in its own setting of history, geography and social conditions of the country and nation for which the Constitution is made; a decision on a constitutional problem having an apparent similarity with a problem arising under a different Constitution may not be sure guide as a solution of the problem. Basically, the problem must be solved on the terms of the Constitution under which it arises. Remembering this warning, we turn first to certain Canadian decisions on which the learned Solicitor-General has relied. The vital core of a federal constitution, it is said, is the division of legislative powers between the central authority and the component states or provinces. In Sections 91 to 95 of the British North America Act, 1867 the main lines of this division in Canada were set forth. In section 92 certain classes of subjects were enumerated and the provinces were given exclusive power to make laws in relation to matters coming within these classes of subjects. The opening paragraph of s. 91 gave the Dominion power "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of our Constitution. It was permissible, therefore, in the setting of the Canadian Constitution to draw a distinction between "taxation of property" and the "levying of customs duties" for purposes of raising revenue. Our Constitution says in express terms that 'taxation' includes the imposition of any tax or impost, whether general, local or special. It is reasonable to think that the makers of our Constitution were aware of the distinction between the more comprehensive and less comprehensive meaning that can be attached to the word 'taxation', and deliberately chose to mention expressly the more comprehensive meaning in the interpretation article, instead of leaving it to judicial determination. One may well speculate if the decision in Canada would have been the same if there were such a provision in the Canadian Constitution and if, as Duff, J. said, our first duty in construing a provision is to ascertain the ordinary and grammatical meaning of the words used. The aforesaid decision of the Supreme Court was approved by the Privy Council in Attorney-General of British Columbia v. Attorney-General of Canada [[1924] A.C. 222]. Referring to s. 125 of the British North America Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Parliament is expressly subject to other provisions of the Constitution; (2) the power to regulate trade and commerce is assigned both to the Union and the States; and (3) there is a distinction between the main subject of legislation and a tax in relation thereto. We are not emphasising the fact that in s. 91 of the British North America Act, 1867 occurs the expression "notwithstanding anything in this Act", because that expression may be said to relate to the enumeration of subjects rather than to s. 125. In our view the decision turned upon the peculiar characteristics of the Constitution under which the problem arose and is no safe guide for the interpretation of our Constitution. It may perhaps be added that if the Canadian case fell to be decided under our Constitution, clause (2) of Art. 289 would have been given an adequate answer to the problem, for a State can claim no exemption in respect of its business activities and when British Columbia imported whiskey to embark on a business of alcoholic liquors, it could not claim any exemption under clause (1) of Art. 289 . We now turn to certain Australian decisions. Speaking generally, the Commonwealth of Australia Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt claimed under protest. A case was stated for the opinion of the High Court of Australia on two main questions : (1) whether the provisions of the Customs Act 1901 and the Customs Tariff 1922, affected the Crown as representing the community of New South Wales; and (2) whether the steel rails were exempt from duty by virtue of s. 114 of the Constitution. So far as the first question was concerned Griffith C.J. said that it was concluded by the decision in The King v. Sutton [5 C.L.R. 589]. So far as the second question was concerned, the majority of Judges held that customs duties whether capable or not of being included in the word "tax", are not a tax upon property in the sense in which that expression is used in s. 114. Isaacs J. held that duties of customs, as ordinarily understood and as enacted in the Customs Act, were imposed on the goods themselves, and, therefore, "on property" within the meaning of s. 114, but they did not come within the meaning of the word "tax" as used in that section and the Constitution generally. Griffith C.J. not only drew a distinction between direct and indirect taxation but also held that s. 114 applied only to property within the limits of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n - to confine the prohibition to what are known as "property taxes" has been somewhat obscured. Property is, by the Constitution, subject to be taxed at the instance of the State as well as of the Commonwealth; Customs taxation is solely a matter for the Commonwealth (section 90). Taxes of retaliation, as between the States and the Commonwealth, are possible as to property taxes; but are impossible as to Customs taxes. But whatever may have been the motive which led to this express prohibition, in addition to the prohibition which this Court has held to be implied from the nature of the Constitution as to the taxation of State or Commonwealth agents, the phraseology is such as to point to taxation of property as property as being the subject of this express prohibition. "A State shall not, without the consent of the Parliament of the Commonwealth,.......... 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"." We are of the view that the considerations which led the learned Judges to the conclusion at which they arrived are not considerations which are available to us under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h falls for our consideration under Art. 289 is not one which has to be examined from the point of view of legislative power. The problem before us is really the extent of the immunity or exemption granted by Art. 289 . In Attorney-General for Saskatchewan v. Canadian Pacific Railway Company [[1953] A.C. 594], the question arose of construing an exemption granted to the Canadian Pacific Railway Company by clause 16 of a contract between the Canadian Government and the said company. The exemption clause provided inter alia that "the Canadian Pacific Railway, and all stations and station grounds, workshops, buildings, yards and other property etc., shall be forever free from taxation by the Dominion, or by any province hereafter to be established, or by any municipal corporation therein." The Province of Saskatchewan was constituted in 1905 and in purported compliance with its obligations under the aforesaid exemption clause, the Dominion Parliament provided in section 24 of the Saskatchewan Act of 1905 that "the powers hereby granted to the said Province shall be exercised subject to the provisions to clause 16 of the contract". The Canadian Pacific Railway Company raised the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oblem before us. It is enough to point out that in order to determine whether an impost, be it a tax, duty or fee, falls under one item or the other of the Legislative Lists in the Seventh Schedule, it may be necessary to examine the nature of the tax, duty or fee. As the Judicial Committee pointed out in Governor-General in Council v. Province of Madras [72 I.A. 91, 103], a duty of excise is primarily a duty levied on a manufacturer or producer in respect of the commodity manufactured or produced; it is however a tax on goods, to be distinguished from tax on sales or the proceeds of sales of goods; the two taxes, the one levied on the manufacturer in respect of his goods, the other on a vendor in respect of his sales may in one sense overlap. But in law there is no overlapping, the taxes being separate and distinct imposts. But as we have said earlier, the problem before us is not the nature of the impost but rather the extent of the immunity granted by Art. 289 of the Constitution. The extent of that immunity, as we have indicated earlier, really depends on the true scope and effect of Arts. 245, 285 , 289 and 366(28) of the Constitution. In the matter of the extent of the immuni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness as they apply in respect of goods not belonging to any Government. These two sections as at present read : "20. (1) Except as hereinafter provided, customs-duties shall be levied at such rates as may be prescribed by or under any law for the time being in force, on - (a) goods imported or exported by sea into or from any customs-port from or to any foreign port; (b) opium, salt or salted fish imported by sea from any customs-port into any other customs-port; (c) goods brought from any foreign port to any customs-port, and, without payment of duty, there transhipped for, or thence carried to, and imported at, any other customs-port; and (d) goods brought in bond from one customs-port to another. (2) The provisions of sub-section (1) shall apply 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. Explanation. - In this sub-section 'State' does not include a Union territory". "3. (1) There shall be levied and collected i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect curtailed to give supremacy to the State Governments. One such curtailment is to be found in Art. 289(1) and the only question that can really arise is to what extent does that restriction go ? We are concerned here with the taxing power of Parliament which admittedly extends to the levying of duties of customs including export duties (entry 83, List I, 7th Schedule) and duties of excise on tobacco and other goods manufactured in India except those expressly mentioned in the entry (entry 84, ibid). In addition to the powers of taxation, Parliament has exclusive regulatory power over "trade and commerce with foreign countries; import and export across customs frontiers" (entry 41, ibid) and also over "inter-State trade and commerce" (entry 42, ibid). The power derived from these entries is plenary and can only be the subject of restraint if the Constitution so provides. Under Art. 245, this power is expressly stated to be subject to the provisions of the Constitution. By Art. 246, which divides the subject matter of laws to be made by Parliament and by the Legislatures of the States, exclusive power is given to Parliament in respect of matters enumerated in the Union List. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Governments. Our Constitution has also made provision in that behalf. Those provisions are to be found in Parts XII and XIII. The latter part has been the subject of much anxious thought recently in this Court, and it provides for freedom of trade, commerce and intercourse within the territory of India. Articles 285-289 of Part XII provide for immunity from tax in certain other circumstances. Of these, Art. 286, which involves restrictions on the impositions of tax on the sale and purchase of goods, has been before this Court on many occasions and need not be considered. Article 285 provides for exemption of the property of the Union from State taxes, and Article 289. , for exemption of property and income of a State from Union taxation. We are primarily concerned with Art. 289 in this Reference. Articles 287 and 288 provide for special exemption from taxes on electricity in certain cases and are not relevant to the present purpose. Putting aside Articles 286, 287 and 288, I set out below Articles 285 and 289. : "285(1) The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided, 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 situation 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) nothing in this sub-section shall exempt a Ruler from any Federal taxation in respect of any lands, buildings or income being his personal property or personal income. (2) Nothing in this Act affects any exemption from taxation enjoyed as of right at the passing of this Act by the Ruler of an Indian State in respect of any Indian Government securities issued before that date." As I have said already, dual government in a Federal requires the protection of one governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Courts of other countries in parallel matters has obviously been taken as a guide, one may have to go a little further than the text to find out what was being sought to be achieved and what was being avoided. I am aware that in Webb v. Outtrim [[1907] A.C. 81], Lord Halsbury observed that it was impossible to say of the framers of the Australian Constitution what their supposed preferences were. I am also conscious of the fact that the Indian Constitution is a document framed by the Indian people for the Indian people. In interpreting the Constitution, one must not completely cast off the moorings to the text of the Constitution and drift into alien seas. I may say, however, that there are indications in the Constitution itself of compelling force which show that the framers were desiring to avoid some of the implications of these rulings of the Superior Courts of the United States, Canada and Australia. The observations of these learned Courts have been pressed into service by counsel before us, as they form the historical background of the provisions of our Constitution. I also find it convenient to deal with them first as they prepare us to understand our own Constitution. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat supremacy which the Constitution has declared". This doctrine had early dissenters and chief among them was Mr. Justice Bradley who described it as founded on a fallacy which would lead to mischievous consequences. Collector v. Day [11 Wall. 113 : 20 L.Ed. 122]. McCulloch's case involved a State tax which was really discriminatory against the operations of a national bank and could have been decided without laying down any such proposition. But the doctrine was accepted and it grew and grew. It took in not only the property and activities of a Government within its protection but also all means, agencies and instrumentalities by which Government acts. It was only after many years that the reach of the doctrine began to be curtailed. In the Panhandle Oil Co. v. Missippi [277 U.S. 218, 223 : 72 L.Ed 857, 859], Mr. Justice Holmes did away with the cliche by the trenchant observation "the power to tax is not the power to destroy while this Court sits". But it was only the increasing dissents which led to the overthrow of a good dozen cases in Graves v. New York [306 U.S. 466 : 83 L.Ed. 927]. I need not enter into the history of the process by which the doctrine was curtailed. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the general government. A certain amount of strictness in the application of the doctrine was noticeable in the University of Illinois v. U.S.A. [289 U.S. 48 : 77 L.Ed. 1025]. In that case, the University imported scientific apparatus for use in one of its departments. Customs duties were exacted which were paid under protest, the University claiming to be an instrumentality of the State of Illinois, discharging a governmental function. The Tariff Act of 1922, under which the impost was made, was an Act to provide revenue, to regulate commerce with foreign countries, and to encourage the industries of the U.S.A. Relying on Gibbons v. Ogden [9 Wheatin 1], it was pointed out in the case that the power to regulate was plenary and exclusive and its exercise could not be limited, qualified or impeded to any extent by State action and that there was a denial to the States to lay imposts or duties on imports and exports without the concent of the Congress (Articles 1, 10, 2). It was, therefore, laid down that the principle of duality did not touch regulation of commerce with foreign countries. It was argued that the Tariff Act laid a tax and the tax fell upon an instrumentality. It was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the public good while it taxes such enterprises organised for private ends". Mr. Justice Frankfurter rejected as untenable such criteria as 'proprietary' against 'governmental' activities of the State or 'historically sanctioned activities of Government' or 'activities conducted mostly for profit', and found "no restriction upon Congress to include the States in levying a tax exacted casually from private persons upon the same subject-matter". Mr. Justice Rutledge did not agree with the last extention but chose not to differ. Chief Justice Stone, with whom Justices Read, Murphy and Burton agreed, pointed out that in the United States the cases were divisible into two parts - those in which there was taxing of property, income or activities of the State, and those in which the tax was laid on agents and instrumentalities of the State, which tax was said to impede or cripple indirectly the State. They held that the distinction between governmental and proprietary interests was untenable, and agreed that a non-discriminatory tax could sometimes be laid on the State, provided it did not affect its sovereignty, but the essence of the matter was not that the tax was non-discriminatory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty and income of the States. What that comprehends I am leaving over for discussion till after I have touched upon the Canadian and Australian Constitutions and referred to cases decided in connection therewith. Article 289. , however, quite clearly limits the exemption against taxation in such a way as to make the trading activities of the States and the property used or occupied for the purposes of such trade or business liable to taxation. This follows indubitably from clause (2). Without attempting to expound exegetically the words of that clause and its relation to clauses (1) and (3), I find it sufficient to say that clause (2) puts outside the exemption granted by clause (1) all trading activities of the State and property used in that connection. The force of the opening words "Nothing in clause (1)" does not make clause (2) an exception to clause (1). Those words emphasize that the existence of the power declared by clause (2) is really unaffected by clause (1). This is the trend of opinion in the U.S.A., as I have pointed out. The same opening words are repeated in clause (3) and the final words "incidental to the ordinary functions of government" show that even tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of Sydney. Without any entry having been made or passed and without the permission of the customs officers, it was removed under the executive authority of the State. The customs authorities proceeded against the defendant under ss. 36 and 236 of the Customs Act of 1901. It was held that the Customs Act, 1901, was a valid exercise of the exclusive power of the Commonwealth conferred by ss. 52(ii), 86 and 90 of the Constitution Act, to impose, collect and control duties of customs and excise, and the Act applied to goods imported by the Government of a State just as it applied to private persons and the goods which were subject to the control of the Customs authorities under s. 30 could not be removed contrary to the provisions of the Act. On the following day, the High Court delivered judgment in the Attorney-General of New South Wales v. The Collector of Customs [(1908) 5 C.L.R. 818], in which s. 114 was considered. That was an action brought to recover from the defendant the amount of customs duties demanded the paid under protest in respect of the importation into the Commonwealth of certain steel rails by the Government of the State of New South Wales. The rails were purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred. The learned Chief Justice, therefore, examined the scheme of the Constitution Act and found that though the word "taxation" in s. 51(ii) included customs duties, the latter were not described as 'tax' in the Constitution or as 'tax on property'. He held that customs duties were a tax on the movement of goods and the word 'tax' in s. 114 could not be held to include customs duties because the section mentioned a tax 'on property' 'belonging to a State'. He was of opinion that such property must be within the geographical boundaries of the State and customs duties being collected at the confines of the State were collected before the goods became the property of the State. He concluded, therefore, that the levying of duties of customs on importation was not an imposition of the tax upon property within the literal meaning of s. 114, and even if it was, the section must be differently construed in the light of the general provisions of the Constitution Act. Barton and O'Connor, JJ., in separate judgments followed the same line of thought. Higgins, J., pointed out that before the prohibition applied, taxation of property must be 'as property'. His conclusion may be stated in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en taxation and a tax. As the Attorney-General states 'I am not relying very strongly upon that phase of the argument'. He thinks the distinction is rather subtle and thin, so do I." We shall soon that the Privy Council did not rely upon this distinction when this case was cited before it. The decision in the Australian case lays down certain general propositions which may be stated. It recognizes that customs duties have the dual aspect of raising revenue and of regulating external trade. This proposition, of course, is valid. It was also accepted in the American cases to which I have already referred and also in the Privy Council case from Canada to which I shall make reference. It also decided that the word 'taxation' is sufficiently wide to take in customs duties. This was laid down by Isaacs, J., and cannot be said to be dissented from by the other learned Judges. This proposition is hardly necessary as an aid to construction of our Constitution which uses the word 'taxation', as I pointed out during the course of arguments only, in Art. 289 , and defines the term : Art. 366(28).'Taxation' includes the imposition of any tax or impost, whether general or local or special, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inafter enumerated, that is to say, -" "Then follows an enumeration of twenty nine classes of subjects". * * * * * "And any matter coming within any of the classes of subjects enumerated in this section shall not be deemed to come within the class of matters of a local or private nature comprised in the enumeration of the classes of subjects by this Act assigned exclusively to the legislatures of the provinces." Section 92 is as follows :- "In each province the legislature may exclusively make laws in relation to matters coming within the classes of subjects next hereinafter enumerated, that is to say, -" "Then follows an enumeration of sixteen classes of subject." In dealing with the general scheme of the Act, the Board in The Citizens Insurance Company of Canada v. William Parsons and The Queen Insurance Company v. Williams Parsons [(1881 - 82) 7 App. Cas. 96], pointed out that the scheme was to give primacy to the Dominion Parliament in cases of conflict of power notwithstanding anything in the Act and explained how the exclusiveness of the spheres of the two legislatures was intended to work. The position was again summed up the next year in Russel v. Queen, the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ewhere to be found in the Act. We are now in a position to consider the case so strongly relied upon by the learned Solicitor-General. To Understand that case, the facts must be seen first. It was a test case by way of an action by the Crown in the right of the Province to have it declared that it could import liquor into Canada for purposes of sale without paying customs duties imposed by the Crown in the right of the Dominion of Canada by virtue of the Customs Act of Canada. The action of the Province of British Columbia was based on the provisions of Government Liquor Act which was declared intra vires by the Privy Council in Canadian Pacific Wine Company Limited v. Tuley [[1921] 2 A.C. 417]. Before the Exchequer Court, the following admission of facts was filed by the Attorney-General of Columbia :- It is hereby admitted, for all purposes of this action, that the case of 'Johnnie Walker' 'Black label' whiskey, which was purchased and consigned to H. M. King George V in the right of the province of British Columbia care of Liquor Control Board, Victoria B.C. as alleged in para 1 of the Statement of the claim filed herein, was so purchased and consigned to meet the requiremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to declare liable to taxation, any property belonging to His Majesty either in the right of Canada or of a Province". In the Exchequer Court, Cassells, J., based his decision on the fact that the whiskey was imported not for any governmental purpose but for trade. He, therefore, rejected the claim of the Province following Mr. Justice Brewer's dictum in the South Carolina case, and referred to two cases of the Privy Council, Farnell v. Bowman [(1887) 12 App. Cas. 643] and Attorney-General of the Strait Settlement v. Wemyss [(1888) 13 App. Cas. 192], in which it was stated that "if a State chooses to embark upon private business in competition with other trades, they should be liable just as other persons engaging in trade". The Australian case of Attorney General of New South Wales v. Collector of Customs [(1908) 5 C.L.R. 818], was referred to but was not followed. An appeal was taken to the Supreme Court of Canada. The report of the decision is found in The Attorney-General of the Province of British Columbia v. The Attorney-General of the Dominion of Canada [64 Canada S.C.R. 377]. It was argued on behalf of British Columbia that in s. 125, British North America Act, the wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulated and raised revenue and the Act under which they were levied laid them 'on or upon goods' and this attracted s. 125. All these reasons were of course pressed into service in the arguments before us. I shall now address myself to the Privy Council judgment on appeal from the Supreme Court. The Privy Council did not express any opinion on these reasons. Lord Buckmaster referred to the width of s. 125 but pointed out that it could not be read in an isolated and disjunctive way. It was to be read as a part of the general scheme of the Constitution Act by which the Dominion was to enjoy exclusive legislative authority over matters enumerated in s. 91 which included regulation of trade and commerce and raising of money by any mode or system of taxation. He pointed out that customs duties had these dual functions and whether it was the one function or the other or both, the Dominion alone had the power. The claim of the Provinces that though the Dominion had the power to erect a tariff wall, the provinces could make a breach in it by virtue of s. 125 through which the goods could pass unaffected by the Customs duties, was not accepted, because s. 125 was a part of a group of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Government of a State. If by property is meant only that property which is within the geographical limits of a State, then, property outside those limits and seeking to enter the State across customs frontiers may have to bear customs duty. Similarly, if customs duties do not come within the word 'taxation', the Article is again ineffective to save the property of the State Governments. The Union claims that customs duty is neither 'taxation' nor a 'tax on property'. It is a tax on the movement of goods across the customs frontier and the protection given by Article 289(1) does not apply. The scheme of the Constitution clearly shows that neither claim of the union can be upheld. The Union List does not include any tax which in the technical or popular sense can be said to be 'property tax' or a tax laid on property as property. These tax entries begin at No. 82 which is "taxes on income other than agricultural income". Then follow Nos. 83 and 84 which deal with duties of customs and duties of excise. It is these entries which are the subject of controversy. If these are not to be regarded as taxes on 'property', then, no other tax can be remotely connected with the property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat power is reserved to Parliament to declare by law which trade or business or class of trade or business is incidental to the ordinary functions of Government, thus, taking the matter out of the jurisdiction of courts. Till Parliament so declares, all trade and business of any kind must remain subject to taxation. From the above, it follows that the three clauses of Art. 289 must be read together and harmoniously together their correct import. It is not possible to read clause (1) with the assistance of rulings of other Courts. The problem to be faced is : What is included in the expression 'property of a State' ? It must obviously include all property to which the State can lay claim. The word 'property' is wide enough to include immovable as well as movable varieties. Art. 289 departed from the language of the Government of India Act, 1935 by discarding 'lands or buildings' and using the more comprehensive expression 'property', and in clause (2) qualified that word by 'any' and by 'used or occupied'. The collocation of these expressions clearly indicates that the property of the State in whatever circumstances situated, was meant and was exempt from taxation and the only pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncludes the imposition of any tax or impost, whether general or local or special, and 'tax' shall be construed accordingly". Though it is not an exhaustive definition and only shows what is included in the word, one is struck immediately by its width of language. Though it speaks of any tax or impost, it goes a step further and adds "whether general, or local or special" indicating thereby that no special or local considerations are relevant and even a general non-discriminatory levy must be regarded as taxation. I have already stated that the word "taxation" is used only in Art. 289(1) and it must be read with all its wealth of meaning into the first clause of the Article. Not to do so would be to make the definition entirely redundant. When the clause is expanded in the light of the definition, it reads : The property and income of a State shall be exempt from any Union tax or impost, whether general or local or special". The underlined portion represents the definition. The question thus arises why use the word and define it in this comprehensive way if there was no tax in the legislative entries in List I which could be said to fall on the property of the States unless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the angle of the word "property" as also from the angle of the word "taxation" we reach the two kinds of taxes which are the subject matter of controversy here. On the other hand, all this width of language is lost completely if these taxes are left out and one goes in search of other possible taxes. The definition may conceivably cover some of them in very special circumstances but the proceeds of those taxes are assignable to the States, and it seems pointless to include them for taxation and then to hand over the proceeds to the States. The distinction between the trading activity of the State Governments and their ordinary functions of government, which is worked out with such elaborate care on the American pattern, also loses its point. Clause (2) would scarcely be necessary and clause (3), even less. The next question is whether customs duties and excises are in their true nature taxes on the occasion of importation in the one case and production in the other, and cannot be described as "taxes on property". To being with, the expression "taxes on property" is not used; nor is the expression "taxes in respect of property", with which the former expression was compared. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (a) goods imported or exported, etc. (b) opium, salt or salted fish imported, etc. (c) goods brought from any foreign port to.................... etc. (d) goods brought in bond from one customs port to another". Similarly, ss. 25, 26, 27, 28, 29, 29A, 31, 32 and several other mentioned goods as being the subject of the tax. Section 43, which deals with drawbacks, may be seen in this connection : "43. When any goods, having been charged with import duty at one customs-port and thence exported to another, are re-exported by Sea as aforesaid, drawback shall be allowed on such goods as if they had been so re-exported from the former port." * * * * * The duty is laid on goods and it is the goods which earn the drawback. It would be not wrong to say that the whole of the Sea Customs Act speaks of goods all the time. If then the goods be the property of the States and those goods have to bear the tax before rights of ownership can be exercised in respect of them, as it an error to say that the exemption of Art. 289(1) will be available to them, regard being had to the language of the clause read with the definition of "taxation" - The property............ of a Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led by anything contained in Art. 289 . A similar assumption may also be made in favour of duties of excise, though the element of regulation may be somewhat weaker there than in the duties of customs. The question, however, is what purpose is the proposed amendment intended to serve ? It is a little difficult to dissociate the regulatory aspect from taxation. Even in Australia, where tax laws must deal only with taxation and no other subject, the regulatory aspect of customs duties was adverted to. In the United States of America also, this regulatory aspect of customs duties did play a prominent part. Can we, therefore, say that the combined effect of entries 83 and 41 of List 1 would sustain the proposed amendment ? If it were a question of regulation being inextricably woven into the tax, I would have paused to consider the matter. I am not expounding a law already made but am giving an opinion on certain questions. These questions definitely refer to the revenue aspect of customs duties. If the law were framed to regulate and even to prohibit the importation, by the State Government in common with others, of certain goods or classes of goods, I would have no hesitation in sayi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd so do the lists in the Constitution. There is, therefore, no difference in this respect between excises and customs. The case of excise is simple and a fortiori, because the goods produced in the States by the States for their ordinary functions of Government and not for trade or business, are property of the States and directly within their ownership. If such property is taxed, it is directly hit by Art. 289(1) , and the arguments on the analogy of customs have little place. It follows, therefore, that neither customs duties nor excise duties can be levied on goods property belonging to a State if the goods are imported or produced not for the purpose of trade or business but for purposes incidental to the ordinary functions of Government. It also follows that the sections of the two Acts as they stand today reflect the true position under the Constitution. I may add that if the Union Government desires to put a curb on the excessive importation of goods by the States, the power to regulate external trade is available and it is unaffected by Art. 289 . A measure designed to achieve regulation by a system of controls, licensing and all such devices, would not be affected by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r or distribute legislative power to tax based on any distinction between direct and indirect taxes, it is wrong to suggest that for construing the exemption in Art. 289(1) , the distinction would necessarily be irrelevant. Learned Counsel for the States are perfectly correct in their submission that the Constitution does not distribute legislative power in regard to taxation between the Union and the States or any distinction between direct and indirect taxes as in Canada. In passing I might observe that even in Australia, there is no distribution of taxing power on such a basis, for while the Commonwealth Parliament has an exclusive power to levy duties of customs and excise (subject to the same having to be uniform) it has power, generally speaking, to impose direct taxes also, provided they do not discriminate, and the States have also a similar power to levy such direct taxes. This however does not by itself eliminate the relevance of the distinction for any particular purpose. That there is a distinction between direct and indirect taxes cannot be disputed and I heard no submission to the contrary. The question is whether that distinction has any materiality for interpreting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voked in cases where any State owned property in the Union territories, for in such a situation the Union Government would have under Art. 246(4) power to legislate on the items enumerated in the State List and thus levy direct taxes on property. On the other side, it was urged that it would not be reasonable to construe the words as having some meaning by reference to such unlikely eventualities, but that it would be proper to attribute to the Constitution makers an intention to make provision for the usual and the normal. I must say that the submissions of the learned Solicitor-General are not without force. That apart, I consider that the history of this clause should be sufficient to preclude an argument of the type urged for the States having any great or decisive validity. It is common ground that Art. 289(1) was taken over from s. 155(1) of the Government of India Act, 1935, with however a variation to which I shall advert. In that earlier statute, that section ran : Subject as hereinafter provided, the Government of a Province shall not be liable to Federal taxation in respect of lands or buildings situate in British India or income accuring or arising or received in Br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to it ? The analogy of the immunity from direct taxes on "lands and buildings" which formed the feature of the exemption in regard to "property" under the Government of India Act, 1935, would appear to favour the view that it is also a direct taxation in relation to the other forms of property that was intended to be brought within Art. 289(1) . Of course, this view could be over-borne by sufficient reason pointing the other way. It was in this context that a reference was made to the use of the expression "taxation" in Art. 289 , a term which has been defined in Art. 366(28) thus :- "366. In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say - (28) "Taxation" includes the imposition of any tax or impost, whether general or local or special, and "tax" shall be construed accordingly." There is no doubt that if this definition were applied and every "tax, duty or impost" were within the scope of the exemption, the submissions made on behalf of the States would be formidable. A subsidiary and related point was also made that the expression "taxation" occurs only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous and otiose, as the definition itself - and that is the contention urged before us on behalf of the States - embraces all and every tax. This would suggest that it would not be wrong to take the view that the Constitution makers felt that notwithstanding the definition of "taxes" in Art. 366(28), it might not always have that width of connotation so that it was necessary to affirm and if need be supplement its width by the addition of the word "all". The other matter is this. If the definition of "taxes" were read into Art. 285 and the Article read literally, it would be seen that property of which the Union was the owner would be entitled to the exemption, whether or not the beneficial occupation and use of the property was in the Union. In other words, the literal reading of the Article would bring within the exemption a tax on a private occupier of Union land - even when imposed on the beneficial interest of such occupier. S. 125 of the British North America Act 1867 ran : No lands or property belonging to Canada........ shall be liable to taxation (Provincial)". A lessee of Dominion Crown lands taken on lease for grazing purposes was assessed to land tax under an enactme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) A tax in respect of a trade or business of any kind carried on by or on behalf of the State. The taxes leviable in respect of a trade or business would be, having regard to the entries in the Union List - (a) income tax (item 82), (b) possibly corporation tax (item 85) where the State carries on business through a State owned or State controlled corporation, (c) taxes on the capital value of assets of companies (item 86) in cases where the State carried on business through a State owned corporation; (2) Taxes in respect of operations connected with a trade or business. These might include a tax on freights, sales tax, and it was added duties of customs and duties and excise; (3) Taxes in respect of property used or occupied in connection with such a trade or business or any income assuring or arising in connection therewith. It was strongly pressed upon us that not merely direct taxes on property and direct taxes on income, but other types of taxes which were incidental to the "operations connected" with a trade or business (and it was suggested that customs and excise duties were such) could be imposed by the Union upon the States in cases where the latter was carrying on a tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n would be, to all taxation for the time being in force in Great Britain or Northern Ireland. (2) ... ... ... (3) Nothing in this section shall - (a) affect the immunity of any such Government as aforesaid from taxation in respect of any income or property to which sub-section (1) of this section does not apply; or (b) ... ... ... A similar provision was enacted in India in the Government Trading Taxation Act, 1926 (Act 3 of 1926). Its preamble recited : WHEREAS it is expedient to determine the liability to taxation for the time being in force in British India of the Government of any part of His Majesty's Dominions, exclusive of British India, in respect of any trade or business carried on by or on behalf of such Government. It is hereby enacted as follows :-" The operative provision was s. 2 and it ran :- "2. (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, exclusive of British India, that Government shall, in respect of the trade or business and of all operations connected therewith, all property occupied in British India and all goods owned in British India for the purposes thereof, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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