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TMI Blog1996 (12) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal Act, 1911 (hereinafter called the Act ) is applicable to the Union Territory of Delhi and under the provisions of this Act, the NDMC had been levying property tax on the immovable properties of the respondent States situated within Delhi. The respondents challenged the imposition of such a tax on their properties before the Delhi High Court by contending that it would fall within the exemption provided for in Article 289(1) of the Constitution. In the impugned judgment, the Delhi High Court, while accepting this contention, relied upon the relevant observations of the 9-Judge Constitution Bench of this Court in In Re The Bill to amend Section 20 of the Sea Customs Act, 1878 and Section 3 of the Central Excises and Salt Act, 1944, [1964] 3 S.C.R. 787 (hereinafter called The Sea Customs Case ), to quash the assessment and demands of house-tax in respect of the properties of the States and restrained the NDMC from levying such a tax in future. The NDMC filed an application under Article 133(1)(c) of the Constitution seeking the grant of a certificate for leave to appeal to the Supreme Court; while granting the Certificate, the High Court observed that the principal question be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter in the State List, it would still amount to Union Taxation because, by virtue of its application to the Union Territory of Delhi, it would be deemed to have been incorporated in law made by Parliament and would therefore be a Union Law imposing tax; since the tax imposed by the Act amounts to Union Taxation, the exemption in Article 289(1) of the Constitution which makes the property of the States immune from Union Taxation would be attracted, and the properties of the States situated in Delhi would be exempt from all taxes on property. For the NDMC, it was contended: the phrase Union Taxation would not extend to legislations in Union Territories and interpretation should be restricted to laws made by Parliament in respect of the entries in List I; the Union had no power to impose taxes on entries relating to property as they fall under List II; the Act being a State Legislation could not be treated as a Central Legislation for the purpose of attracting Article 289(1); the test to determine whether a tax forms part of Union Taxation is to check if the proceeds thereof form part of the Consolidated Fund of India; since the proceeds of taxes on property under the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions put forth before us by the learned counsel for the various parties, it would be convenient if the historical background of certain aspects of the matter could be set out so as to provide a setting where the rival contentions can be better understood. Constitutional history of the areas that are now called Union Territories In the pre-Constitutional era, these territories were called Chief Commissioner's Provinces. The Government of India Act of 1919 contained specific provisions for the governance of these areas. Under the scheme of the Government of India Act, 1935 (hereinafter referred to as the 1935 Act ), the Federation of India comprised: (a) the Provinces called Governor's Provinces; (b) the Indian States which had acceded to or were expected to accede to the Federation; and (c) the Chief Commissioner's Provinces. Part IV of the 1935 Act dealt with the Chief Commissioner's Provinces and Section 94 listed them as: (i) British Baluchistan, (ii) Delhi, (iii) Ajmer-Marwara, (iv) Coorg, (v) Andaman Nicobar Islands, and (vi) the area known as Panth Piploda: and provided that these areas were to be administered by the Governor General, acting throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Commissioner or a Lieutenant Governor. Article 240 provided that Parliament could, by law, create a local legislature or a Council of Ministers or both for a Part C State and such a law would not be construed as a law amending the Constitution. Article 241 allowed Parliament to constitute High Courts for the States in Part C States. Article 242 was a special provision for Coorg. Article 243, which also constituted Part IX of the Constitution, stated that territories in Part D would be administered by the President through a Chief Commissioner or other authority to be appointed by him. In exercise of its powers under Article 240 (as it then stood), Parliament enacted the Government of Part C States Act, 1951 whereunder provisions were made in certain Part C States for a Council of Ministers to aid and advise the Chief Commissioner and also for a legislature comprising elected representatives. Section 22 of this legislation made it clear that the legislative powers of such Part C States would be without prejudice to the plenary powers of Parliament to legislate upon any subject. The State Reorganisation Commission which was set up in December, 1953, while studying the working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed persons, for these territories. Himachal Pradesh ceased to be a Union Territories by virtue of the State of Himachal Pradesh Act, 1970. Manipur and Tripura became States by virtue of the North-Eastern Areas (Reorganisation) Act, 1971. Arunachal Pradesh, Mizoram and Goa, Daman Diu ceased to be Union Territories by virtue of the State of Arunachal Act, 1986, the State of Mizoram Act, 1986 and the Goa, Daman Diu (Reorganisation) Act, 1987 respectively. The Laccadive, Minicoy and Amindivi Island (Alteration of Names) Act, 1973 changed the name of these Island to `Lakshadweep' but it continued to remain a Union Territory. The present list of Union Territories is as follows: (i) Delhi; (ii) Andaman Nicobar; (iii) Lakshdweep; (iv) Dadar Nagar Haveli; (v) Daman Diu; (vi) Pondicherry; and (vii) Chandigarh. However, it is to be noted that all the Union Territories do not have the same status. By the constitution (Sixth-Ninth Amendment) Act, 1991, Articles 239AA and 239AB, which are special provisions in relation to Delhi, were added. They provide that Delhi, which is to be called the National Capital Territory of Delhi, is to have a Legislative Assembly which will be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the period immediately after the commencement of the Constitution, the Part C States Act, 1951 contained a specific provision, Section 21, in respect of Delhi which enabled it to have a Legislative Assembly and a Council of Ministers with restrictive powers to make laws. As a result of this provision, Delhi continued to have a Legislative Assembly and a Council of Ministers till 1956. The States Reorganisation Commission devoted special attention to the needs of the National Capital. It noted that the dual control arising from the division of responsibility between the Union Government and the State Government of Delhi had not only hampered the development of the capital, but had also resulted in a marked deterioration of administrative standards in Delhi . The Commission came to the conclusion that the National Capital must remain under the effective control of the Union Government. With reference to the plea for a popular Government, it observed: We are definitely of the view that municipal autonomy in the form of the Corporation which will provide greater local autonomy than is the case in some of the important federal capitals, is the right, in fact, the only solution of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he impugned judgment and advanced elaborate arguments on the manner in which the various Constitutional provisions that are germane to the case, ought to be interpreted. The learned Attorney General for India, appearing for the Union of India, supported the stance adopted by the NDMC. These submissions were strenuously opposed by Mr. P.P. Rao, learned counsel for the State of Punjab and in this endeavour, he was assisted by Mr. A.K. Ganguli, learned counsel for the State of Tripura who buttressed the position of the States with his own submissions. The learned counsel appearing for the State of Rajashthan lent support to the same. The Central Issues As before the High Court, so before us, the controversy between the parties has, in the main, centred around the question whether the properties owned and occupied by the various States within the National Capital Territory of Delhi are entitled to be exempted from the levy of taxes under the Act by virtue of the provisions of Article 289(1). The larger question involved, which will consequently require our consideration, is whether by virtue of Article 289(1), the States are entitled to exemption from the levy of taxes imposed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , arising or received in British India (2) Nothing in clause (1) shall prevent the Union from imposing or authorising the imposition if, any tax to such extent, if any, as Parliament may be law provide in respect of a or trade business of any kind; carried on by Submissions of Counsel Mr. Sen prefaced his submissions for the NDMC and the MCD by pointing out that the phrase Union Taxation used in Article 289(1) of the Constitution has not been defined either in the text of the Constitution or in any of the decisions rendered by this Court. Pointing out the differences between Article 285 289, Mr. Sen stated that (i) the former exempts all taxes whereas the latter limits its exemption to taxes relating to property and income ; and (ii) the former uses the words imposed by a State or by any authority within a State whereas the latter uses the phrase Union Taxation . Thereafter, Mr. Sen contrasted Article 289(1) and Section 155 of the 1935 Act by pointing out that while Section 155(1) uses the words lands buildings , Article 289(1) uses the word property . This, he explained, was on account of the strong position adopted by represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e laws on entries in List II, but the nature and effect of these legislations requires that they be not treated as ordinary Union legislations. Thereafter, he took us through various provisions in Part XII of the Constitution with a view to analysing the distribution of revenues between the Union and the States. Having done so, he invited our attention to the provisions of Part VIII of the Constitution to support his stand that a Union Territory is an independent Constitutional entity akin to a State and that it has an identity separate from that of the Union Government. To this end, he drew our attention towards several decisions of this Court on the question whether a Union Territory is a State and sought to convince us that, in the present context, the answer to this query must be in the affirmative. Referring to the two decisions of this Court on the interpretation of Article 289(1) rendered in the Sea Customs case and the APSRTC case, Mr. Sen contended that the issue arising before this Court in the present matter had not arisen for adjudication in either of these two cases. He submitted that the observation made by Sinha, C.J. in the former case would, therefore, have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rminative of the issue of Union Taxation . According to him, to determine the true character of Union Taxation, the subject of the levy must be analysed. He submitted that when Parliament makes use of its power under Article 246(4), it does so in an unusual circumstance where the `theme' of the legislation undergoes a change. He, therefore, stressed that in determining the scope of Union Taxation , attention must be paid to the `theme', (i.e., the context and the specific circumstances in which the tax is levied) rather than to the `author' (i.e. the body which is levying the tax). He, therefore, submitted that the interpretation of Union Taxation should be restricted to situations where Parliament makes laws imposing taxes under Article 246(1). His next submission was that Articles 285 and 289 do not exhaust the entire area of taxation under the Constitution. Referring to certain other provisions where Parliament is required to make laws for subjects in List II, the learned Attorney General drew our attention towards Articles 249, 250, 252, 253 and 357. He then submitted that these provisions envisage unusual situations where, although Parliament is the law maki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely on the Union Parliament and these territories would form an important part of the reciprocal tax immunities. He then drew our attention to Article 265 which incorporates an important constitutional limitation on the power of taxation when it states that no tax shall be levied or collected except by authority of law . In India, there are only two legislatures that are competent to tax: `Parliament for the Union' and the `Legislature of a State'. Therefore, all taxation must fall within either of the categories - Union Taxation or State Taxation. Municipalities and other local authorities cannot have an independent power to tax and that is why there can be no exemption for Municipal taxes independent of the exemption for State or Union Taxation. To that extent, he submits, the contention of Mr. Sen, that Article 289 exempts only Union Taxation without mentioning municipal taxes which would imply that the States would not be exempt from paying the latter, cannot be accepted. Moving on to the definition of the term Union Taxation , Mr. Rao pointed out that in Article 285 the term State Taxation has been defined as all taxes imposed by a State or by any authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Union Territories, which obviously refers to Article 246(4) of the Constitution. By way of an analogy, he referred us to Article 244 and the Sixth Schedule to the Constitution which contain provisions for the administration of Tribal areas in the States of Assam, Meghalaya, Tripura and Mizoram and provide for bodies with legislative powers. He led us through decisions of this Court on the point that the law making powers of these bodies, though conferred by the Constitution itself, are not plenary powers as those of Parliament or of the State Legislatures. Counsel submitted that the provisions contained in Part XII of the Constitution relating to distribution of revenue between the Union and the States are not determinative of the scope of the expression Union Taxation in Article 289(1) as they only indicate that though a large number of taxes are levied by the Parliament and collected by the Union Government, eventually, a substantial portion thereof is distributed amongst the States. After submitting that the main controversy in this case is squarely covered by the decision in the Sea Customs case, Mr. Ganguli pointed out that the Customs case, Mr. Ganguli pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the minority. Sinha, C.J. delivered the first of the majority judgments on behalf of himself, Gajendragadkar, Wanchoo and Shah, JJ. while Rajagopala Ayyangar, J. delivered a separate, concurring opinion. S.K. Das, J. delivered the first of the minority opinions on behalf of himself, sarkar and Das Gupta, JJ. while Hidayatullah, J. rendered a separate minority opinion. A number of submissions were advanced before the Court with a view to facilitating a true construction of Article 289(1). In this regard, comparisons were drawn with its corollary, Article 285 and with the provisions which inspired the adoption of these two provisions, namely, Section 154 and 155 of the 1935 Act. The Court was also required to analyse the scheme of the Constitution relevant to the issue. For the moment, it is not necessary for us to analyse those aspects of the decision since, in any event, we will be required to give our independent consideration to these matters. We can, therefore, confine ourselves to those observations that have a direct bearing upon the point at issue with which we are presently concerned; this aspect was, however, not specifically adverted to in all the four opinions. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, so far as Union territories are concerned, Parliament has power to impose a tax directly on property as such. It cannot therefore be said that the exemption of States' property under Article 289(1) would be meaningless as Parliament has no power to impose any tax directly on property. If a State has any property in any Union territory that property would be exempt from Union taxation on property under Article 289(1). The argument therefore that Article 289(1) cannot be confined to tax directly on property because there is no such tax provided in List I cannot be accepted. (Emphasis added) Thereafter, having referred to the language of Article 285 and the intention of the framers as perceived by him, the learned Chief Justice came to the conclusion that immunity granted by Articles 285 and 289 was of similar ambit and extended only to direct taxes without exempting indirect taxes such as excise and customs duties. Das, J., in his dissenting opinion, noted the objection of the States that List I had no entry which would enable Parliament to levy a tax directly on property. He took note of the counter-arguments advanced by the learned Solicitor General in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessarily required consideration. The observations of Sinha, C.J. are unequivocally in favour of the position adopted by the States before us, who find themselves in the enviably advantageous position of being able to draw sustenance from even the observations in the dissenting judgment of Das, J. The decision in the Sea Custom's case was reaffirmed by a Constitution Bench of this Court in the APSRTC case was a matter relating to assessment of income-tax. The facts of that case are not directly relevant for our purpose but, what is of considerable interest to us is the manner in which the scheme of Article 289 and its three clauses were construed. Speaking for the Court, Gajendragadkar, C.J. outlined the scheme of Article 289 (at p.25) which can be stated as follows: The general proposition that flows from clause (1) is that ordinarily, the income derived by a State both from governmental and non-governmental or commercial activities shall be immune from income-tax levied by the Union. Clause (2) then provides an exception and empowers Parliament to make a law imposing a tax on the income derived by the Government of a State from trade or business carried on by it, or on it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule . The Seventh Amendment Act brought about a number of changes affecting Union Territories, some of which have already been noticed by us. The other changes brought about by it are also relevant; it caused Article 246 to be changed to its present form where Parliament is empowered to make laws with respect to any part of the territory of India not included in a State . The word State has not been defined in the Constitution. Article 1(3) defines the territory of India as comprising: (a) the territories of the States; (b) the Union Territories specified in the First Schedule; and (c) such other territories as may be acquired. The word `Union Territory' has been defined in Article 366(30) to mean any Union Territory specified in the First Schedule and includes any other territory comprised within the territory of India but not specified in that Schedule . The not defined in the Constitution, the word State has been defined in the General Clauses Act, 1897 (hereinafter called the General Clauses Act ). Article 367 of the Constitution states that the General Clauses Act, 1897 shall, unless the context otherwise requires and subject to any adoptions and modificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts with the Part C States are contracts with the Central Government. The Court, speaking through Venkataraman Ayyar, J., rejected this contention and stated that when the President exercised functions as the Head of the Part C States, he occupied a position analogous to the Governor in Part A States. Furthermore, Section 38(22) of the Government of Part C States Act, 1951 clearly provided that all executive action of the State would be taken in the name of the Chief Commissioner. It was, therefore, held that contracts with the Part C States could not be said to be contracts with the Central Government. Analysing Articles 239, 240 and 241 of the Constitution, the Court held that it could not be said that these had the effect of converting Part C States into the Central Government and that they have a distinct status. However, when the case came up for review, in Satya Dev Bushahri v. Padam Deo and Ors., [1955] 1 S.C.R. 561, the Court, after having been directed towards, and having taken note of the provisions of, Section 3(8) and Section 3(60) of the General Clauses Act which define Central Government and State Government respectively, and stipulate that for Part C States, refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to be interpreted in the light of Section 3(58) of the General Clause Act and would include Union Territories. The correctness of this proposition was doubted by Hidayatullah, J. in a subsequent case which we will refer to in due course. The fact however remains that the definition in Section 3(58) of the General Clauses Act has been utilised for interpreting a Constitutional provision. The question that therefore arises is whether this will affect the status of Union Territories in matters relating to Article 246, to which an answer was provided in a subsequent case to which we shall immediately advert. T.M. Kanniyan v. Income-Tax Officer, Pondicherry Anr., [1968] 2 S.C.R. 103, was a case in which the petitioners had challenged the vires of a regulation by which the President had, in exercise of powers under Article 240, repealed the laws in force in relation to Income-Tax within the Union Territory of Pondicherry and had made the Income-Tax Act, 1961 applicable to it. Explaining that Parliament, and through it the President, had plenary powers to make laws for Union Territories on all matters, Bachawat, J., speaking for the Constitution Bench, stated as follows (at pp. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir own. The controversy was not, however, put to rest by the decision in Kanniyan's case. In Management of Advance Insurance Co. Ltd. v. Shri Gurudasmal Ors., [1970] 3 S.C.R. 881, the main issue before another Constitution Bench was whether the word State used in Entry 80 of List I of the Seventh Schedule could be said to exclude the application of the definition in Section 3(58) of the General Clauses Act. Relying on the decision in Kanniyan's case, Hidayatullah, J. held that, ordinarily, the definition would apply in the interpretation of the Constitution unless it is repugnant to the subject or context. However, the noted, that after the Seventh Amendment Act where Union Territories have been mentioned as separate entities, the distinction between Union Territories and States cannot be lost sight of. He expressly approved the reasoning of Bachawat, J. in holding that in the context of Article 246, the definition provided in Section 3(58) would not apply; however, on the facts and in the circumstances of the case before him, he felt that the subject and context of Entry 80 of the Union List required the application of the definition given in Section 3(58). While ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law into accord with the Constitution as amended by the Seventh Amendment Act, 1956. It was in exercise of this power under Article 372A that Section 3(58) of the General Clauses Act was amended, so that, thereafter, State as defined include Union Territories also. The new definition of State in Section 3(58) of the General Clauses Act as a result of modifications and adoptions under Article 372A would, no doubt, apply to the interpretation of all laws of Parliament, but it cannot apply to the interpretation of the Constitution, because Article 367 was not amended and it was not laid down that the General Clauses Act, as adapted or modified under any Article other than Article 372, will also apply to the interpretation of the Constitution. Since, until its amendment in 1956, Section 3(58) of the General Clauses Act did not define State as including Union Territories for purposes of interpretation of Article 54, the Union Territories cannot be treated as included in the word State . The view of the learned Judge does seem to have considerable force and it is also to be remembered that Hidayatullah, J. had doubted the correctness of the proposition laid down in Ram Kis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Chief Commissioner's Provinces. Section 6 defined a `Federated States' as an Indian State which had acceded to or might accede to the Federation. Section 94 provided a list of the Chief Commissioner's Provinces and stated that they would be administered by the Governor General acting through a Chief Commissioner. Section 99, which provided the manner in which legislative powers were to be distributed between the Federal and Provincial legislatures, stated that the Federal Legislature was empowered to make laws for the whole or any part of British India or for any Federated States, while the Provincial Legislatures were empowered to make laws for the provinces. Section 311(1) defined `British India' as All territories or the time being comprised within the Governor's Provinces and the Chief Commissioner's Provinces . Section 100, which dealt with the subject matter of Federal and Provincial laws, provided that the Federal Legislature would have power to make laws with respect to matters enumerated in List I of the Seventh Schedule to the 1935 Act, which was to be called the Federal Legislative List ; the Provincial Legislature would have powers to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d State would not be liable to Federal Taxation in respect of lands or buildings situated in British India . Proviso (a) stipulated that all the trading and business activities carried on by Provinces and the Federated States outside their territorial jurisdiction would be subjected to Federal Taxation in British India. Provision (b) stipulated that the personal property and income of a Ruler of a Federated State would also be subject to Federal Taxation. Clause (2) of the Section being self-explanatory, does not require elucidation. In response to a query from us, Mr. Sen sought to find the reason for the existence of the exemption in Section 155(1); it appears that the purpose was to avoid the liabilities imposed by Sections 3 and 9 of the Income Tax Act, 1912 upon the Provinces. Comprising the text of Sections 154 and 155, it becomes clear that even under the scheme of the 1935 Act, the ambit of the reciprocal immunities was not equal in length and breadth; while Section 154 exempted the property of the Federal Government from all taxes , the Provincial Governments and Rulers of Federated States were entitled to an exemption only in respect of lands or buildings situate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tees recommended that the schemes envisaged by the 1935 Act should be generally followed. In the Draft Constitution prepared by the Constitutional Adviser, Sir B.N. Rau, in October 1947, Clauses 205 and 207 were modified versions of Sections 154 and 155. On October 2, 1947, an Expert Committee on Financial Provisions was appointed to make recommendations as to the provisions on the subject to be embodied in the new Constitution after taking into account the views of the States and also the Draft prepared by the Constitutional Adviser. The Drafting Committee of the Constitution took up the issue in January 1948 and took into consideration the Drafts prepared by the Constitutional Adviser as also the Expert Committee on Financial Provision. Thereafter, these provisions came to be numbered as Articles 264 and 266 of the Draft Constitution. After the Constitute Assembly had considered the matter at length and formally approved these provisions, they came to be renumbered as Articles 285 and 289. The present Article 285 is much the same as its predecessor Section 154 and, though there were some changes in its text as the provision charted its course through the stages enumerated abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Committee: a number of States were of the view that the provision was inequitable and one-sided insofar as it sought to subject trade and business operations of the State Governments to Union Taxation, while under Article 264, States were debarred from taxing the property of the Union. Such a provision, it was felt, was bound to retard the industrial development of the Provinces, taking away the incentive for State enterprise. Reconsidering the provision in the light of the comments of the Provincial Governments, the Drafting Committee decided, in consultation with the Central Ministry of Finance, to introduce some important changes in Article 266. The ambit of the exemption in Clause (1) was expanded by including `property' instead of `lands or buildings' thereby bringing within its purview, movable property as well. On the issue of trade and business, a provision similar to the present Article 289(2) was included. This provision would enable Parliament to pass a law to declare which of the trading and business activities of the States were to be classified as ordinary functions of the Government allowing them to be exempted, and making the rest of the activities liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustralian Constitution, apart from certain other Constitutions. Before we begin to examine the text of Articles 285 and 289 with to finding a solution to the Constitutional conundrum posed by the case before us, we must analyse this proposition closely. The doctrine of inter-governmental immunity has been the subject to some controversy in the country of its origin, the United States of America. The origin of this doctrine is ascribed to the judgment of Chief Justice John Marshall in the case of McCulloch v. Maryland (supra). However, as pointed out by commentators, on the facts of the case, where a State Tax sought to be levied on a Federal Bank was held to be void, the decision was more in favour of declaring the supremacy of the Federal Government than of upholding the rights of States. It was, therefore, the basis for establishing federal immunity from State Taxation. However, later decisions interpreted the judgment to hold that its corollary, that the property of States would be exempt from Federal Taxation was equally applicable; more than 50 years after the decision in McCulloch's case, the Supreme Court, in Collector v. Day, [[11. Wall. 113 (1871)] made the theory of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ives in it. The usefulness of any further discussion on the applicability of this doctrine to the Indian Constitution is rendered questionable by virtue of the fact that this Court had, on earlier occasions, rejected it. In State of West Bengal v. Union of India, [1964] 1 S.C.R. 371, Sinha, C.J., speaking for the majority in a six-Judge Constitution Bench expressly held (at p. 407) that the doctrine of immunity of instrumentalities had been rejected by the Privy Council as inapplicable to the Canadian and Australian Constitutions and having practically been given up in the United States, it was equally inapplicable to the Indian Constitution. In the APSRTC case (supra, at p. 24), the Court rejected the contention of the Advocate-General of Andhra Pradesh urging it to adopt the American doctrine, by relying upon these observations of Sinha, C.J. It is, therefore, clear that in seeking a solution to the problem faced by us, we must rely primarily on the bare text of Articles 285 and 289. Comparing these provisions, it becomes evident that the Constitution does envisage some form of inter-governmental immunity. Article 285(1), while exempting the property of the Union from all taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J., in his majority opinion (at pp. 923-34), rejected the application of this definition to Article 289(1) as, in his opinion, the context of Article 289(1) precluded the application of the definition. Rajagopala Ayyangar, J., in his separate majority opinion (at pp. 921-93), also felt that the definition would not apply. We concur with the majority view in the Sea Customs case that the definition of taxation provided in Article 366(28) will not apply for the purpose of interpreting Article 289(1). Our attention has been drawn towards the provisions contained in Part XII of the Constitution which has a bearing on the scheme of the Constitution with respect to financial relations between the Union and the States. Since this aspect and its relevance to Article 289(1) was discussed at length in the Sea Customs case, we may advert to those observations. Das, J. (at p. 852), was of the opinion that the provisions of Part XII of the Constitution would have no bearing on the import of Articles 285 and 289 which ought to be construed on their own terms. Sinha, C.J., however, analysed these provisions at length and the relevant observations in this behalf may be reproduced (at pp. 809-10) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion and the States will be crucial to the determination of the central issue in this case. We may first notice certain provisions in the Constitution which enable Parliament to make laws for subjects contained in the State List, to which our attention was drawn by counsel for the appellants as also the learned Attorney General. We must note that these provisions conceive of extraordinary situations. Article 279 provides for a situation where, if the Council of States declare by a resolution that it is necessary in the national interest to do so, Parliament may make laws in respect of matters enumerated in the State List. Article 250 empowers Parliament to make laws for the whole or any part of India in respect of matters enumerated in the State List while a Proclamation of Emergency is in operation. Article 252 empowers Parliament to make laws with respect to matters enumerated in the State List if two or more States resolve that such a course of action is desirable. Article 253 reserves to Parliament the exclusive power to make laws for the whole or any part of the territory of India for implementing any treaty, agreement or convention with any other country or any decision made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicable precedents, we are of the view that under the scheme of the Indian Constitution, the position of the Union Territories cannot be equated with that of the States. Though they do have a separate identity within the Constitutional framework, this will not enable them to avail of the privileges available to the States. It has been urged before us that the phrase Union Taxation has to be interpreted in the context of Article 246, which deals with the subject matter of laws made by Parliament and the State Legislatures, and that the context of Union Taxation should be limited to those matter falling within Articles 246(1), where Parliament has the legislative competence to levy taxes with respect to matters enumerated in the Union List. We see no reason why such a limiting principle must be read into the definition of the phrase Union Taxation . In our view, the term can and should be given the widest amplitude, allowing it to encompass all taxes that are levied by the authority of Parliamentary laws. Though the amplitude of the term Union Taxation was not expressly before the Court in the Sea Customs case, it is clear from an analysis of the majority judgment that the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the limited reciprocal inter-governmental immunity bestowed by the Constitution in Articles 285 and 289 is given fuller meaning by virtue of the adoption of the wider meaning of Union Taxation ; this would mean that, just as the properties of the Union are exempt from taxes on property leviable by the States, the properties of the States will also be exempt from taxes on property leviable by the Union in areas falling within its territorial jurisdiction. While attempting to demonstrate that the reasoning of Sinha, C.J. in the Sea Customs case was incorrect insofar as his acceptance of the contention that Article 246(4) enables Parliament to levy taxes directly on property was concerned, Mr. B. Sen contended that Article 246(4) was not in the contemplation of the framers of the Constitution when they carved out the exemption in favour of the property of the States from Union Taxation; he then proceeded to cite examples of specific circumstances in which Parliament can levy taxes directly on property which, according to him, was what the framers had intended to exempt under Article 289(1). He drew our attention to Entry 3 of the Union List [ Delimitation of Cantonment ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Taxation under Article 289(10, thus lending greater weight to the solemnity and the actual worth, in real terms, of the phraseology of Article 289(1). However, we find ourselves unable to agree with Mr. Sen when he contends that the entries cited by him were the only instances kept in contemplation by the framers at the time of the drafting of Article 289(1). If that were so, the ambit of the exemption would traverse an extremely narrow field which would then lend credence to the observation of Das, J. in the Sea Customs case, albeit made in the converse context, that the exemption in Article 289(1) would amount to much ado about nothing . Classification of taxes imposed by Municipalities We may now turn to Mr. Sen's alternatives submission that the taxes levied by the NDMC under the Act would not be covered by the exemption in Article 289(1) as that provision cannot be construed to encompass Municipal Taxes. To appreciate this contention, we will be required to analyse certain provisions of the Act as also those of the Constitution. Section 61 of the Act, which is the charging section, at the relevant time, empowered the Municipality to levy a tax payable by the owner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gular as Legislature of a State . While certain other bodies have been vested with legislative power, including the power of levying taxes, by the Constitution for specific purposes, as in the case of District Committees and Regional Councils constituted under the aegis of the Sixth Schedule to the Constitution, the plenary power to legislate, especially in matters relating to revenue, still vests with the Union and the State Legislatures. Even if the submission that Municipalities now possess, under Part IXA of the Constitution, a higher juridical status is correct, the extension of that logic to the proposition that they have plenary powers to levy taxes is not, as is clear from a perusal of the relevant part of Article 243X of the Constitution which reads as under: 243X. Power to impose taxes by, and Funds of, the Municipalities.-- The Legislature of a State may, by law,-- (a) authorise a Municipality to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits; (b) ... ... (c) ... ... (d) ... as may be specified in law. Article 243ZB provides that this provision will be applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpress our great reluctance to deal with this proposition, for it is not based on any contention advanced by any of the counsel who appeared before us, either in their written pleadings or in their oral submissions. This is not because we feel constrained to restrict ourselves to the parameters prescribed by the submissions of counsel, but because we feel that the opposite side did not have a fair opportunity to answer the line of reasoning adopted in that behalf. The view taken by Reddy, J. has the effect of imposing considerable tax liabilities upon the properties of the State Governments and, in our view, it would only be proper that their views in this behalf be obtained before visiting them with such liability. We have only the rule of caution in mind which warns that ordinarily, courts should, particularly in constitutional matters, refrain from expressing opinions on points not raised or not fully and effectively argued by counsel on either side. Be that as it may, we must, for the record, express ourselves on the view taken by Reddy, J. after closely examining it. Reddy, J. begins his examination of the issue by noting that the Act, the Delhi Municipal Corporation Act an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness activities, carried on with the profit motive. It is stated that though trade and business ordinarily has a very wide and ambiguous meaning (certain English and Indian authorities are cited to illustrate this point), but, for the purposes of clause (2) of Article 289, they have to be given a restricted meaning. It is, therefore, stated that under Article 289(2), the trading and business activities of State Governments, which are carried on with the profit motive, will be liable to tax and cannot avail of the exemptions in Article 289(1). Clause (2) is further analysed and is interpreted as having been included for the purpose of removing the trading and business activities of State Governments from the purview of the exemption in clause (1). However, it is stated, such a removal is not automatic and is dependent upon the enactment of a Parliamentary Law which imposes taxes on specified trading and business activities of State Governments. Thereafter, the question whether Parliament has, in exercise of powers under Article 289(2), imposed taxes on the trading and business activities of State Governments, is sought to be addressed. In this respect, the Act, the New De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are required to decide several difficult questions as to what amounts to `charitable purpose' etc., the obligation imposed by such directions would not prove to be too onerous to discharge. Reddy, J. sums up the issue by recommending to the Union that it consider granting a total exemption in favour of all properties of State Governments. We are of the opinion that of the two possible views expressed by Reddy, J., it is the first which ought to be preferred. We think that the second view is fraught with several difficulties. Such a construction, while being violative of the scheme envisaged by the Framers of the Constitution, may well result in a situation that was sought to be avoided by them. The directions may also lead to grave practical difficulties; moreover, since the effect of the directions would be to vest the executive authorities with substantial policy making powers, their issuance might well be offensive to established principles of delegation of powers. We shall now set out the reasons which cause us to so think; in doing so, we may have to revisit some of the ground that has already been traversed by us, but the repetition can be justified by the narrower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them for trade or business. The provision itself vested the Federal Government with the power to levy such taxes and there was no requirement for the enactment of a specific law in that behalf. This position continued till the Constitution came into force. When Sir B.N. Rau prepared his Draft Constitution, Clause 207 (present Article 289) was drafted on the basis of Section 155 of the 1935 Act. An attempt was made to incorporate the U.S. position prevailing after the decision in the South Carolina case (supra) by stipulating that all trading activities of State Governments would be liable to Union Taxation. However, even under this provision, the power to tax was automatic and did not require a specific law. [See : A Note on certain clauses by the Constitutional Adviser, B. Shiva Rao, Vol. III, p.197 at PP. 204-205]. The Expert Committee on Financial Provisions, however, recommended that quasi-trading activities of State Governments should be exempt from Union Taxation. [See : Report of the Expert Committee, B. Shiva Rao, Vol. III, p.260 at p.266]. Even when the Drafting Committee incorporated the provision as Draft Article 266 and subsequently modified it, there was no stip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State of New York, in regard to certain springs which were worked by the State of New York - for this part of business they held that there is no immunity of the State from tax. They said 'You have to draw some line between one kind of activity of a State and another kind of activity. Of course it cannot be a rigid definition. What may be in one sphere may easily pass into another sphere with the progress of the State and with the development of the polity in the particular State'. [In all probability, this is a reference to the opinion of Frankfurter, J. in new York Vs. United States (supra) which upheld the application of a Federal Excise Tax to the sale of mineral waters bottled by the State of New York with a view to providing funds for a State health resort]. .... [N]ormally speaking, you cannot regard at the present day under existing conditions the carrying on of trade and business as a normal or ordinary function of the Government. It may develop into ordinary function - certain aspects of it, especially the transport service and certain key industries, may soon become the parts of the State enterprise. .... The Parliament will take note of the progressive ten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss activities of State governments should be subject to Union Taxation, be left to the wisdom of Parliament. As is evident from the reference to New York Vs. United States (supra) in the extracted portion, the Framers were conscious of the difficulty in drawing a line between the governmental and commercial functions of State Governments and they hoped that Parliament would take into account a shot of relevant factors before enacting a law which would specify the trading activities of State Governments making them liable to Union Taxation. It is important to note that the Framers did not expressly confer upon the Union the power to tax commercial activities of State governments. The exercise of such a power is made conditional upon the enactment of a special, duly considered, legislation. It is also important to note that clause (2) of Article 289 has made a departure from the proviso to Section 155(1). Under the present scheme, the power to tax is not automatic and the responsibility of specifying the trading and business activities of State Governments which would be liable to Union Taxation is expressly vested in Parliament. Neither the Act, which is a 1911 enactment, nor the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, therefore, clear that it would be quite dangerous to assume that when Parliament enacted the Delhi Municipal Corporation Act, it had intended that the enactment should secure the purpose enshrined in Article 289(2). If any safe assumption is to be drawn, it is this: in all probability, while enacting tee Delhi Municipal Corporation Act, Parliament must have 'transplanted' a municipal legislation existing in a certain State, made the necessary changes and completed the procedural formalities. That would explain why the Delhi Municipal Corporation Act (as also the new Delhi Municipal Committee Act) contains an exemption on the lines of the one prescribed by Article 285 - this is a typical feature of ordinary Municipal legislations, which are enacted by State legislatures who are conscious of the mandate of Article 285. Moreover, such legislations do not contain exemptions in favour of properties of State Governments because, within the territory of a State, the properties of other State Governments are liable to taxation. So, when such a legislation is 'transplanted' almost verbatim into a Union Territory, it will obviously not contain an exemption in favour of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any legal or Constitutional theory See In Re the Central Provinces Berar Act No. XIV of 1938, (1939) FCR 18 at p. 37; also see : Diamond Sugar Mills Ltd. Vs. The State of U.P. [1961] 3 SCR 242 at 248-249. The Act and the Delhi Municipal Corporation Act are ordinary Municipal legislations. They do not, and cannot, purport to be laws made by Parliament under Article 289(2). There is no reason why such a strained reasoning should be employed to save some of the taxes that may be capable of being imposed on certain properties of State Governments. There seems to be no pressing reason for invoking the doctrine. Reddy, J. has, in the earlier part of his opinion, held that a large number of properties of State Governments would be exempt from taxes leviable under these Acts due to the operation of Article 289(1). To employ such reasoning to construe Article 289(2) in a bid to save what would only be a reduced amount, does not seem justified. The practical effect of the directions recommended by Reddy, J. is also worth noticing. It is abundantly clear that the task of determining which of the activities of Governments are governmental and which are commercial, is an extremely diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elieve that it would be impermissible and hazardous to directly assign such a function, nay power, to executive Municipal authorities. The decision whether the properties of State Governments occupied for commercial purposes should be subject to the levy of Union Taxes is one that is required by Article 289(2) to be made by a legislation which specifies the activities which would be liable to tax. This decision cannot be entrusted to municipal functionaries. For these reasons, we find ourselves unable to agree with Reddy, J. in his finding that the properties of State Governments occupied by them for trade or business purposes are subject to the levy of taxes under the Act and the Delhi Municipal Corporation Act. we may now summarise our conclusions: i) The central issue in the present matter, namely, whether the properties owned by the States which are situated within Union Territories are exempt from paying property taxes, was specifically answered in the affirmative in the Sea Customs case; the observations in this regard are part of the ratio decidendi of the case and having been re-affirmed by a Constitution Bench which was bearing a litigation inter partes in the APS ..... X X X X Extracts X X X X X X X X Extracts X X X X
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