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TMI Blog2022 (3) TMI 1093X X X X Extracts X X X X X X X X Extracts X X X X ..... AGARATHNA J. INDEX 1. Bird's Eye View of Controversy ..........................................4 2. Submissions ......................................................................5 2.1. Submissions on behalf of Appellants: 2.1.1. Submissions on behalf of State of Karnataka....5 2.1.2. Submissions on behalf of State of Kerala..........9 2.2. Submissions on behalf of Respondents : 2.2.1. Submissions on behalf of State of Nagaland ......11 2.2.2. Submissions on behalf of State of Sikkim .........22 2.2.3. Submissions on behalf of State of Meghalaya...26 3. Reply Arguments.............................................................29 4. Points for Consideration..................................................34 5. Constitutional Scheme....................................................35 6. Acts under consideration : 6.1. The Lotteries (Regulation) Act, 1998..................62 6.2. The Karnataka Tax on Lotteries Act, 2004..........64 6.3. Kerala Tax on Paper Lotteries Act, 2005..............67 7. Parameters of Taxation.....................................................69 8. Meaning of 'betting and gambling' and 'lotteries' ............73 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of the power to levy tax on the said subject? In other words, whether the subject covered in Entry 40 of List I restricts the scope and ambit of Entries 34 and 62 of List II? If the answer is in the affirmative, whether the State Legislatures have no legislative competence to levy tax on lotteries organised by the Government of India or Government of a State. Consequently, the question in these cases is, whether, the legislature of States of Karnataka and Kerala had the legislative competence to enact Karnataka Act, 2004 and Kerala Act, 2005 respectively. Further, whether these Acts are unconstitutional as being extra territorial in operation? Submissions on behalf of Appellants: Submissions on behalf of State of Karnataka: 5. Sri N. Venkataraman, learned Senior Counsel and Additional Solicitor General appearing on behalf of the appellant-State of Karnataka contended that the impugned legislation passed by the Karnataka State Legislature does not seek to impose a tax on the sale of lottery tickets. He referred to the following two cases in support of his contention: (i) Sunrise Associates vs. Govt. of NCT of Delhi - [(2006) 5 SCC 603] wherein it was held that lottery tickets a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ph 6 of Govind Saran Ganga Saran vs. Commissioner of Sales Tax - [AIR 1958 SC 1041] to state that when the source of taxation and occurrence of taxable event, along with the measure are available to tax a person, such a levy cannot be questioned. 10. Sri Venkataraman next urged that where a regulatory power and taxing power are traceable to different sources and are kept distinct under the Constitutional scheme, in such a case, the regulatory entry cannot subsume a taxing entry as was held in M.P.V Sundararamier and Co. vs. State of Andhra Pradesh - [AIR 1958 SC 468] and State of West Bengal vs. Kesoram Industries Limited - [(2004) 10 SCC 201]. He further relied upon a Seven Judge Bench decision in Synthetics and Chemicals Ltd. vs. State of Uttar Pradesh - [(1990) 1 SCC 109] wherein it was held that the power to regulate, develop or control would not include within its ken a power to levy tax or fee except when the said impost is only for a regulatory purpose. That it is permissible for the power to levy tax or fee for augmenting revenue to continue to vest with the State Legislature despite the regulatory power being with the Union. That ratio in synthetics and chemicals (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07 and thereafter affirmed by the Division Bench on 30th March, 2007. The matter came up to this Court and vide Order dated 16th July, 2014 the High Court's finding was affirmed in respect of accepting advance tax; however, it did not accept the challenge to the aforesaid section. 14. Sri Shishodia, learned Senior Counsel, contended that opportunity was granted to the respondents to prove that the burden of tax paid during the period 2006-2010 was not passed on to consumers/purchasers of lottery tickets. That the same is contrary to law and was completely unwarranted in the present case. In support of his argument, he fervently relied on Mafatlal Industries Ltd. vs. Union of India - [(1997) 5 SCC 536] where it was held that there is a rebuttable presumption that an indirect tax borne by an assessee is passed on to consumers. Even when challenge to constitutionality of a tax succeeds, the relief of refund can be granted only when the assessee makes a claim to allege and establish that as a fact, the burden of tax collected in the interregnum was not passed on to consumers. 15. Lastly, Sri Shishodia, learned Senior Counsel, contended that the tax period in the instant case is limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be construed as the genus, within which 'lotteries' is a species, the specific field of lotteries organised by the Government of India or by the Government of any State, has been carved out of the genus of 'betting and gambling' and been placed under Entry 40 of List I, meaning thereby, that the same may be regulated or subjected to tax, only by the Parliament. In other words, it was contended that taxes on betting and gambling as envisaged under Entry 62 of List II, would be limited to those lotteries which are neither organised by the Government of India nor by the Government of any State. It was submitted that since the Act in question, enacted by the Legislature of the State of Karnataka, seeks to impose tax on the lotteries organised by the Central Government or by the Government of a State, it is beyond the legislative competence of State of Karnataka. That the State of Karnataka by enacting the impugned Act has attempted to legislate on an aspect which lies within the exclusive legislative domain of the Parliament and therefore the said Act is ultra vires the Constitution and is liable to be declared so. 19. In order to buttress the above contentions, learned Senior Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts a more specific power of taxation over 'betting and gambling' with the State Legislature. Once it has been held that a given expression, as appearing in a general entry would be construed to exclude a certain item, then it would naturally follow that such item would also be excluded from a specific entry which employs the said expression. In the instant case, lotteries organised by the Government of India or the Government of any State have been specifically excluded from the ambit of 'betting and gambling' as appearing in Entry 34 of List II, therefore, it would follow that it would also be excluded from Entry 62 of List II which is a narrower power, only dealing with taxation. Reference was made to Prof. Yashpal vs. State of Chhattisgarh - [2005 (5) SCC 420] wherein it was held that a narrow or restrictive interpretation would generally not be accorded to a legislative heading which is general in nature. In this regard it was contended that although a general entry is not usually given a restrictive meaning, when in exceptional cases a restrictive interpretation is given, such interpretation should be given effect to not only in connection with the general entry, but should a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promoter." It was submitted that while the statement of objects and reasons has been worded in a manner as if the legislation would seek to regulate the quantum of betting and gambling activities or the number of draws held by a lottery promoter, in effect, the tax sought to be imposed by the impugned legislation is in the nature of sales tax. That tax was being levied on the proceeds from the sale of lottery tickets and this would point to the tax being in the nature of sales tax. It was submitted that the impugned Act does not expressly employ the term 'sale of lottery tickets' but seeks to tax the same under the guise of regulating the number of draws held by a promoter. 25. Alternatively, it was contended that even if it is assumed for the sake of argument that the tax was being imposed, not on the sale of lottery tickets but on the conduct of lottery activities, including formulation and notification of scheme of lotteries, printing of lottery tickets, transportation of lottery tickets, conducting of the draw, declaration of winners, no taxable event relatable to activities listed hereinabove had occurred within the State of Karnataka. That in order for a tax to be imposed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to control and levy tax on lotteries and prize competitions in the State of Bombay. In the said case, two conditions were laid down by this Court in order to establish territorial control: (a) real and not illusory connection; (b) the liability sought to be imposed must necessarily pertain to the said connection. In this context, it was urged that the State Acts impugned in these cases would satisfy the aforestated conditions only qua the sale and distribution of lottery tickets, which activity is in any case not taxable. Therefore, reliance placed by the appellants on the said case was misplaced. Contentions pertaining to the exigencies faced by North-Eastern States in generating revenue: 28. It was submitted that Section 10 of the impugned legislation requires the State which organises the lottery sought to be taxed, to deposit taxes in advance. This has resulted in a situation which is detrimental to the economic necessities of the State of Nagaland. Learned Senior Counsel explained the difficulty that may arise if the said scheme is permitted to continue: The State of Karnataka collects the tax amount in advance. The amount of tax to be paid is calculated having no re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R.M.D. Chamarbaugwala (supra) wherein a co-relation was established by the Court between the expression 'betting and gambling' as appearing under Entry 34 of List II and Entry 62 of List II, by holding that once it is held that a legislation falls under the topic of 'betting and gambling' under Entry 34 of List II, it would follow that the tax imposed by the same legislation would fall under Entry 62 of List II. In this context, it was contended that since it has been unequivocally declared that the tax imposed on 'betting and gambling' under Entry 62 of List II seeks to tax the same activity which is regulated under Entry 34 of List II, it logically follows that the expression 'betting and gambling' must be given the same meaning and interpretation in both these entries. In other words, an interpretation which suggests that 'lotteries' has been carved out of 'betting and gambling,' should be made equally applicable to Entry 62, as is applicable to Entry 34 of List II. 32. It was next contended that the impugned Act, namely, the Kerala Lotteries Act, makes no distinction between the taxing event and the measure of tax, i.e., a distinction between the subject matter of tax and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed on to the consumer and therefore, the State of Sikkim was not entitled to claim refund of tax imposed even in the event that the impugned Act was struck down, as receiving a refund would amount to unjust enrichment, it was urged that the doctrine of unjust enrichment was not applicable to a State vide Mafatlal Industries Ltd. (supra). Therefore, the amount of tax collected by the State of Kerala without jurisdiction is liable to be refunded. Submissions on behalf of the State of Meghalaya: 35. Sri Arvind P. Datar, learned Senior Counsel appearing for the State of Meghalaya and Sri Amit Kumar, learned Advocate General for the State of Meghalaya adopted the contentions of Sri C. Aryama Sundaram, learned Senior Counsel appearing for the State of Nagaland. He made an additional argument as regards the exclusive Parliamentary power to impose taxation on lotteries organised by the Government of a State. It was submitted that in determining the legislative competence pertaining to the legislative field of 'State Lotteries' reference must be made to the Government of India Act, 1935. The said Act provided in Entry 47 of List I for the regulation of 'State Lotteries.' The said Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the doctrine of pith and substance is employed by a Court to save a statute from being declared ultra-vires, when the main purpose of the statute is to legislate on an aspect which is within the legislative competence of the legislature that has enacted it, while an incidental or ancillary purpose sought to be achieved by the statute has the effect of branching into another list. However, in the instant case, the impugned Statutes have only one purpose viz. taxing Central and State organised lotteries. Therefore, they are in their entirety encroaching on the exclusive legislative domain of the Parliament. In a similar vein, it was contended that the aspects doctrine cannot be pressed into service in order to uphold the vires of the impugned Legislations as the said doctrine may be employed only when two aspects are found in the statute and each of such aspects is traceable to a legislative field in a different List. However, in the instant case, the impugned legislations only have one aspect, traceable to the legislative field covered by a single Entry, viz. Entry 40 of List I. Reply Arguments: 39. Learned Senior Counsel, Sri Venkataraman, appearing for the State of Karnataka, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any activity conducted per se by the State, in this case conducting State Lotteries, cannot be taxed under Article 289. 44. Learned Senior Counsel then addressed the submission raised by the State of Nagaland that since the Union is imposing tax on lotteries under the GST regime, the power of taxation would vest with the Union even under the pre-GST era. He stated that the aforesaid submission was not right as it was incorrect to say that the Union is taxing under the GST regime. It was urged that GST is a unique tax traceable to Article 246A both in terms of power and field of legislation, under which the taxable event is one, namely supply and the taxing power vests both with the Union and the States. However, in the present case at hand, Article 246 is the source of power and Entries in List I and II are fields of legislation which have to be interpreted. 45. In response to the argument that lottery is the main source of income for the North - Eastern States and grave prejudice would be caused to State revenue if the appellant-States are permitted to tax, learned Senior Counsel urged that there is no equity is taxation laws. It was submitted that the respective North - Ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cribes the legislative field of taxation on 'betting and gambling' by States. Learned Senior Counsel for the State of Kerala emphasized upon the judgment of this Court in Kesoram Industries Limited (supra) and stated that the principles in the aforesaid case have also been approved in the case of Jindal Stainless Limited (supra). 50. Learned Senior Counsel submitted that there were several examples where regulatory powers are with the Centre and the taxing power is with the States. To fortify his argument, he relied upon State of Uttar Pradesh vs. Vam Organic Chemicals Limited and Ors. - [2004 (1) SCC 225] wherein it was held that the tax or fee imposed for regulatory purposes must not be mistaken as tax under taxing entry. The regulatory power cannot be used for plenary taxation. However, the levy of some regulatory charges under the Lotteries Act, 1998 is not a tax and does not in any manner whittle down the scope of Entry 62 of List II. To conclude, learned Senior Counsel for the State of Kerala submitted that one transaction can have several aspects to attract both central and state taxes as was held in Federation of Hotel and Restaurant Association of India (supra). 51. Furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the 'Concurrent List'). (3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the 'State List'). (4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included (in a State) notwithstanding that such matter is a matter enumerated in the State List. 246A. Special provision with respect to goods and services tax - 1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State. (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are concerned with Entry 40 of List I, which deals with Lotteries organised by the Government of India or the Government of a State. (b) Clause (2) of Article 246 of the Constitution, states that notwithstanding anything in clause (3), the Parliament and the Legislature of any State also have the power to make laws with respect to any matters enumerated in List-III (Concurrent List). (c) Clause (3) thereof, states that the Legislature of any State has exclusive power to make laws for the State with respect to any matters enumerated in List-II (State List). However, clause (3) of Article 246, is subject to clauses (1) and (2) which begin with a non-obstante clause. 56. The power to legislate which is dealt with under Article 246 has to be read in conjunction with the Entries in the three Lists which define the respective areas of legislative competence of the Union and State Legislatures. While interpreting these entries, they should not be viewed in a narrow or myopic manner but by giving the widest scope to their meaning, particularly, when the vires of a provision of a statue is assailed. In such circumstances, a liberal construction must be given to the Entry by looking at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he impugned legislation is relatable. When a question of legislative competence is raised, the test is to look at the legislation as a whole and if it has a substantial and not merely a remote connection with the Entry, the same may well be taken to be a legislation on the topic vide Ujagar Prints vs. Union of India - [AIR 1989 SC 516]. 59. The expression used in Article 246 is 'with respect to' any of the matters enumerated in the respective Lists. The said expression indicates the ambit of the power of the respective Legislature to legislate as regards the subject matters comprised in the various Entries included in the legislative Lists. Hence, where the Entry describes an object of tax, all taxable events pertaining to the object are within that field of legislation unless the event is specifically provided for elsewhere under a different legislative head. Thus, the Court has to discover the true character and nature of the Legislation while deciding the validity of the Legislation. Applying the doctrine of pith and substance while interpreting the legislative Lists what needs to be seen is whether an enactment substantially falls within the powers expressly conferred by the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is beyond its legislative competence, it is a nullity ab-initio. The Legislation is rendered null and void for want of jurisdiction or legislative competence vide RMDC vs Union of India - [AIR 1957 SC 628]. 64. Since these appeals concern interpretation, inter alia, of Entry 62 of List II, which is a taxation entry, it would be useful to refer to certain other articles of the Constitution. Article 265 of the Constitution of India states that no tax shall be levied or collected except by authority of law. That means not only the levy but also the collection of a tax must be authorized by law. The tax to be levied must be within the competence of the Legislature imposing the tax and the validity of the tax has to be adjudged with reference to the competence of the Legislature at the time the statute authorizing the tax was enacted. Further, the law imposing the tax must have been validly enacted. Thus, power to tax cannot be inferred by implication. The source of power which does not specifically speak of taxation cannot be interpreted by expanding its width as to include therein the power to tax by implication or by necessary inference. There must be a charging section specifically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax which is without authority of law is payment made under a mistake within the meaning of Section 72 of the Indian Contract Act. Then, in such a case, question would arise, whether, the government to whom the payment had been made by mistake must repay it. Thus, the principle of restitution or repayment of the tax simpliciter has been considered in light of the doctrine of unlawful enrichment. The doctrine envisages that when the State collects a tax from the tax payer without authority of law, but if the taxpayer has already passed on the burden of the tax money paid by him to the State to someone else and has recouped the money then the taxpayer is not entitled to ask for the restitution from the State the money paid by him as unauthorised tax. In such circumstances, the State cannot be asked to refund the tax money to the taxpayer on the principle of unlawful enrichment. The Court may refuse the relief to the concerned taxpayer who had ultimately paid the above but not to the intermediary to collect the amount from them and paid the same to the government. It would all depend upon the facts and circumstances of each case. With the passage of time, it has been held that no ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... General Sales Tax Act, 1939; 'Madras Act', for short) and the amendment made thereof by the Madras General Sales Tax (Amendment) Act No.25 of 1947, was in consequence bad, as it authorized the State to levy the sales tax. 73. The contention was that Entry 42 of List I dealt with inter-State trade and commerce and under that Entry, the Parliament had the exclusive power to enact laws in respect of inter-State trade and commerce which also included the power to impose a tax on inter-State sales and the State Legislature had therefore no competence under the Constitution to enact a law imposing tax on such sales and the laws passed by the States after the enactment of the Constitution, imposing such a tax were ultra vires and void and therefore, the Act impugned in the said case was also ultra vires. It was contended that the content of Entry 42 in List I was the same as that of the Commerce Clause of the American Constitution and it must therefore be construed as having the same effect. It was also argued that the power to impose tax on inter-State sales did not vest with the State. That after the enforcement of the Constitution, no law of a State could impose a tax on inter-State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding up of corporations. Entry 85 provides separately for corporation tax. Turning to List II, Entries 1 to 44 form one group mentioning the subjects on which the States could legislate. Entries 45 to 63 in that List form another group, and they deal with taxes. Entry 18, for example, is "Land" and Entry 45 is "Land revenue". Entry 23 is "Regulation of mines" and Entry 50 is "Taxes on mineral rights". The above analysis - and it is not exhaustive of the Entries in the Lists - leads to the inference that taxation is not intended to be comprised in the main subject in which it might on an extended construction be regarded as included, but is treated as a distinct matter for purposes of legislative competence. And this distinction is also manifest in the language of Article 248, clauses (1) and (2) and of Entry 97 in List I of the Constitution. Construing Entry 42 in the light of the above scheme, it is difficult to resist the conclusion that the power of Parliament to legislate on inter-State trade and commerce under Entry 42 does not include a power to impose a tax on sales in the course of such trade and commerce." On the above analysis, it was categorically inferred that taxatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of legislative power under a general Entry vis-à-vis taxation Entry was discussed in paragraph 31 which is reproduced as under: "31. Article 245 of the Constitution is the fountain source of legislative power. It provides - subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State. The legislative field between Parliament and the legislature of any State is divided by Article 246 of the Constitution. Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule, called the "Union List". Subject to the said power of Parliament, the legislature of any State has power to make laws with respect to any of the matters enumerated in List III, called the "Concurrent List". Subject to the abovesaid two, the legislature of any State has exclusive power to make laws with respect to any of the matters enumerated in List II, called the "State List". Under Article 248 the exclusive power of Parliament to make laws extends to any matter not enumerated in the Concurrent List or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llary matters. (5) Where the legislative competence of the legislature of any State is questioned on the ground that it encroaches upon the legislative competence of Parliament to enact a law, the question one has to ask is whether the legislation relates to any of the entries in List I or III. If it does, no further question need be asked and Parliament's legislative competence must be upheld. Where there are three lists containing a large number of entries, there is bound to be some overlapping among them. In such a situation the doctrine of pith and substance has to be applied to determine as to which entry does a given piece of legislation relate. Once it is so determined, any incidental trenching on the field reserved to the other legislature is of no consequence. The court has to look at the substance of the matter. The doctrine of pith and substance is sometimes expressed in terms of ascertaining the true character of legislation. The name given by the legislature to the legislation is immaterial. Regard must be had to the enactment as a whole, to its main objects and to the scope and effect of its provisions. Incidental and superficial encroachments are to be disrega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correct approach to the question is to see, whether, it is possible to effect a reconciliation between the two entries so as to avoid a conflict and overlapping. It was reiterated that in the event of a dispute arising it should be determined by applying the doctrine of pith and substance in order to find out whether between two Entries or legislative fields assigned to two different legislatures, the particular subject of the legislation falls within the ambit of the one or the other. Where there is a clear and irreconcilable conflict of jurisdiction between the Union and a State Legislature, it is the law of the Union that must prevail. 80. Reliance was placed on the words of Sabyasachi Mukharji, J. (as His Lordship then was), speaking for six out of the seven Judges constituting the Bench in Synthetics and Chemicals Ltd. (supra). It was held that under the constitutional scheme of division of powers in the Seventh Schedule, there are separate entries pertaining to taxation and other laws. A tax cannot be levied under a general entry. It was observed that the above principles continued to hold the field and have been followed in cases after cases. 81. Delving further on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commerce, before the insertion of Entry 92A in List I and such power belonged to the States under Entry 54 in List II subject to Article 286 of the Constitution. 84. Delving further on the distinction between the power to regulate and control and the power to tax, it was observed by this Court that there is a significant distinction between the two primary purposes of legislation. The primary purpose of taxation is to collect revenue. Power to tax may be exercised for the purpose of regulating an industry, commerce or any other activity. The purpose of levying such tax is the exercise of sovereign power for the purpose of effectuating regulation although incidentally, the levy may contribute to the revenue. Taking a leaf from Cooley on his work on taxation, it was observed that the distinction between a demand of money under the police power and one made under the power to tax, is not so much one of form as of substance. 85. The aforesaid principle was alluded to in Synthetics and Chemicals Ltd. (supra) by holding that regulation is a necessary concomitant of the police power of the State which is actually an American principle but in India it means the 'sovereign' power. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of many for throwing light on determining the general character of the tax. (4) The entries in List I and List II must be so construed as to avoid any conflict. If there is no conflict, an occasion for deriving assistance from non obstante clause "subject to" does not arise. If there is conflict, the correct approach is to find an answer to three questions step by step as under: One - Is it still possible to effect reconciliation between two entries so as to avoid conflict and overlapping? Two - In which entry the impugned legislation falls by finding out the pith and substance of the legislation? and Three - Having determined the field of legislation wherein the impugned legislation falls by applying the doctrine of pith and substance, can an incidental trenching upon another field of legislation be ignored? (5) The primary object and the essential purpose of legislation must be distinguished from its ultimate or incidental results or consequences, for determining the character of the levy. A levy essentially in the nature of a tax and within the power of the State Legislature cannot be annulled as unconstitutional merely because it may have an effect on the price of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k; (i) the draws of all kinds of lotteries shall be conducted between such period of the day as may be prescribed by the State Government; (j) the number of bumper draws of a lottery shall not be more than six in a calendar year; (k) such other conditions as may be prescribed by the Central Government." 88. The Central Government may also prescribe any other condition. Section 5 deals with prohibition of sale of ticket in a State which means that a State Government may, within the State, prohibit the sale of tickets of a lottery organised, conducted or promoted by every other State. The Central Government can also by an order published in the Official Gazette, prohibit lottery organised, conducted or promoted in contravention of the provisions of Section 4 of the said Act or where tickets are sold in a contravention of the provisions of Section 5 thereof. Penalty clause is in Section 7. Section 10 of the said Act enables the Central Government to give directions to State Governments as to carrying into execution in the State, of any of the provisions of the said Act or of any rule or order made thereunder. The Central Government has the power to make rules under the said Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... country, where such Government or country is not directly selling lottery tickets in the country or a State. The Karnataka Act, 2004 enables payment of tax in advance by the registered promoter. Section 8 of the Act deals with registration of promoters and sellers. 92. The Karnataka Act, 2004 is a comprehensive legislation on levy and collection of tax on lotteries (gambling). In fact, the preamble of the Act itself states that the Act is to provide for levy and collection of tax on lottery (gambling). Thus, in the Karnataka Act, 2004, the Legislature has clearly indicated that the expression lottery means gambling. 93. The Act seeks to provide for all matters incidental and ancillary to the levy of taxation, including provisions for filing return, assessment thereof and schedule for payment of tax in advance. Additionally, the said Act also provides for a machinery to effect recoveries of tax and/or penalties from the assessee. Chapter VI of the Act provides for the right of an assessee to prefer an appeal; and the powers of the Commissioner and Joint Commissioner to initiate revisional proceedings in relation to any assessment made or pending under the Act. 94. Section 20 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 2005 provides for payment of tax on every draw, in advance. 100. The Kerala Act, 2005 is a comprehensive legislation and also provides for all matters incidental to the levy and collection of tax on paper lotteries such as, the procedures for assessment of tax due, the right of the assessee to prefer appeals, powers of the tax authorities to conduct search and make seizure, penal provisions to be resorted to for default in payment of tax prescribed under the said Act. The legislation also empowers the State Government to enact Rules to give effect to any of the provisions of the Act. Parameters of Taxation : 101. A legislative enactment which provides for the imposition of a tax must specify the following parameters of taxation: i) The taxable event which forms the basis of levy, also referred to as 'subject' of a tax; ii) The measure of the tax; iii) The rate/s of taxation; iv) The incidence of the tax, 102. The said parameters are each distinct and must not be conflated with the others. The components of tax, as stated above have been characterized in Govind Saran Ganga Saran (Supra). In the said case, it was also laid down that a legislative scheme which seeks to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, in the Kerala Act, 2005, the rate of tax is Rupees ten lakhs in respect of a bumper draw and Rupees two lakhs and fifty thousand in respect of any other draw. (iv) The incidence of the tax is on the promoters of the lotteries, i.e. on the Government of India or a Government of a State or a Union Territory or any Country organizing, conducting or promoting a lottery, within the State of Karnataka or Kerala, or any person or entity appointed by the said Government or Country in this behalf. The impugned Acts require registration of promoters and all provisions requiring filing of the returns of draws and payment of tax, are to operate in relation to promoters. Therefore, the incidence of the tax, falls on the promoters of the lotteries. 104. The expression 'betting and gambling' finds a mention in Entry 34 of List II of the Seventh Schedule of the Constitution and taxes on, inter alia, betting and gambling are leviable having regard to Entry 62 of List II of the Seventh Schedule. Thus, the activity of betting and gambling and taxes on betting and gambling are subjects falling within List II of the Seventh Schedule i.e. they are State subjects. If conduct of lotteries is held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the distribution for the distribution of prizes by chance." (iv) In Advanced Law Lexicon, P. Ramanatha Aiyar (1997 Edition) 'Lottery' has been defined as follows: "Scheme for disposal or distribution of property by chance. The term 'lottery' has no technical meaning in the law distinct from its popular signification." (v) Similarly, in Black's Law Dictionary (6th Edn.) at p. 947 the meaning of 'lottery' has been pithily given as under: "A chance for a prize for a price." (vi) The Concise Oxford English Dictionary [Oxford University Press, 11 Edn., 2004] at p. 844, defines the term "lottery" as follows: "Lottery a means of raising money by selling numbered tickets and giving prizes to the holders of numbers drawn at random - something whose success is governed by chance." (vii) The Webster's New American College Dictionary (1981) defines as: "A method of selling numbered tickets and awarding prizes to the holders of certain numbers drawn by lot." 106. From the above Dictionary meanings what emerges is that 'lottery' is one of the many gambling schemes. That 'gambling' is the genus of which a species is 'lottery'. It is evident that 'lotteries' and 'gambling' activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department of Economics, College of the Holy Cross, Worcester respectively) in their Article 'The Economics of Lotteries: A Survey of the Literature', published in August, 2011, have stated that lotteries represent one of the oldest and most common forms of gambling around the world. That lotteries involve the sale by an organising body, typically the government but also occasionally private businesses or charities, of a ticket, giving the possessor, a potential monetary reward. Lotteries differ from casinos in that lottery ticket sales generally do not take place at a location specifically set aside for gambling, and modern lotteries are usually operated by governments instead of private firms. It is further observed that lotteries are of particular interest to scholars for a variety of reasons. First, they represent an important source of government revenue in many States and countries, so they are of interest to public finance economists. Second, lotteries provide researchers interested in micro-economic theory and consumer behavior with a type of experimental lab that allows economists to explore these topics. 107. According to these learned authors, lotteries have a revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade to the Bombay Lotteries and Prize Competition Control and Tax Act, 1948 ('Bombay Act' for short) was unconstitutional and that the taxes imposed under the provisions of the Bombay Act were hit by Article 301 of the Constitution. The result of that judgment was that though the prize competitions could be controlled by the State within their respective borders, their ramifications beyond those borders could only be dealt with by any action under Article 252(1) of the Constitution. It was for that reason that the States of Andhra Pradesh, Bombay, Madras, Uttar Pradesh, Hyderabad, Madhya Bharat, Pepsu and Saurashtra passed resolutions under Article 252(1) of the Constitution authorizing Parliament to legislate for the control and regulation of prize competitions and in pursuance thereof, the Parliament passed the Prize Competitions Act, 1955 (Act 42 of 1955) (Central Act) which came into force on 1st April, 1956. On 24th February, 1956, the Mysore Legislature passed a resolution adopting the said Central Act. Petitions were filed under Article 32 of the Constitution before this Court challenging the validity of the Central Act but the same were dismissed vide R.M.D.C. vs. Union of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en control and regulation of prize competitions was surrendered to Parliament by the resolutions passed by the States, the power to tax under Entry 62 of List II, which is a separate head, cannot be said to have been surrendered. The observations of Das, C.J. in R.M.D. Chamarbaugwala (supra) were reiterated as under:- "For the reasons stated above, we have come to the conclusion that the impugned law is a law with respect to betting and gambling under Entry 34 and the impugned taxing section is a law with respect to tax on betting and gambling under Entry 62 and that it was within the legislative competence of the State legislature to have enacted it. There is sufficient territorial nexus to entitle the State legislature to collect the tax from the petitioners who carry on the prize competitions through the medium of a newspaper printed and published outside the State of Bombay." (c) In H. Anraj (supra), the petitioner therein questioned the ban sought to be imposed by the Government of Maharashtra on sale within the State of Maharashtra of tickets of lotteries conducted by the Government of other States. While considering the said question, it was observed that Entry 40 of List I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sold in the market, is transferred. (e) In M/s Suman Enterprises and Others (supra) an executive order dated 6th October, 1989, was issued by the State of Tamil Nadu prohibiting the sale of lottery tickets of other States. The said Government order categorized lotteries as (a) Lotteries organized by the Government of India; (b) Lotteries organized by the Government of Tamil Nadu; (c) Lotteries organized by the other State Governments; (d) Private lotteries authorized by Government of Tamil Nadu; and (e) Private lotteries authorized by other Governments but not authorized by this Government. The Government order stated that sale of lottery tickets of Government of Tamil Nadu and lotteries organized by the Government of India or other State Governments alone would be permitted within the said State. This Court observed that a lottery 'organised' by a State would require certain basic and essential concomitants to be satisfied as members of the public when investing their money in such a lottery proceed on a trust and on certain assumptions as to the genuineness, bona fides, safety, security, the rectitude of administration etc. associated with governmental functioning. As to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingredients of a contract of lottery tickets were considered and reference was made to Anraj II (supra), wherein it had been held that sale of lottery tickets was transfer of 'Goods' and hence liable for sales tax, by observing thus:- "49. ...."A sale of a lottery ticket confers on the purchaser thereof two rights (a) a right to participate in the draw and (b) a right to claim a prize contingent upon his being successful in the draw. Both would be beneficial interests in moveable property. Lottery tickets, not as physical articles, but as slips of paper or memoranda evidence not one but both these beneficial interests in moveable property which are capable of being transferred, assigned or sold and on their transfer, assignment or sale both these beneficial interests are made over to the purchaser for a price. *** The right to participate in the draw under a lottery ticket remains a valuable right till the draw takes place and it is for this reason that licensed agents or wholesalers or dealers of such tickets are enabled to effect sales thereof till the draw actually takes place and as such till then the lottery tickets constitute their stock-in-trade and therefore a merc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credited to the public accounts of the State and would not be in the hands of any individual group or association and thus to bring about a transparency in the organisation of the lottery by the State, subject to the regulation. Even then, the activity of conduct of the lottery would remain in the realm of gambling. With respect to the nature of lotteries conducted by a State vis-à-vis lotteries conducted by any individual group or association, this Court further observed as follows:- "In this regard, there is no difference between lotteries under Entry 34 List II and a lottery organised by the State under Entry 40 List I. When character of both the State organised lotteries and other lotteries remains the same, by merely placing the apparel of the State with authority of law, would not make any difference; it remains gambling as element of chance persists with no element of skill. Even other lotteries under Entry 34 List II could only be run under the authority of the State or the law of the State. The only difference is in one case, authority is that of State and in the other, Parliament." This Court further held that even a lottery, though not organised by the State, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of NCT of Delhi - [(2006) 5 SCC 603] (h) In Sunrise Associates vs. Government of NCT of Delhi - [(2006) 5 SCC 603], which is a judgment of a Constitution Bench of this Court authored by Ruma Pal, J., the question, whether, sales tax could be levied by a State on the sale of lottery tickets as considered in H. Anraj II (supra) was reconsidered. This Court came to the conclusion about the transfer of lottery tickets in the following manner:- "14. The Court in H. Anraj [(1986) 1 SCC 414 : 1986 SCC (Tax) 190] came to the conclusion that the transfer of a lottery ticket upon consideration paid by the purchaser was not a mere contract creating an obligation or right in personam between the parties, but was in the nature of a grant. The Court noted the various definitions of the word "lottery" in dictionaries and authoritative text books and decisions of the courts and held that a lottery was composed of three essential elements, namely, (1) chance, (2) consideration; and (3) prize. As we have mentioned earlier, according to the learned Judges a sale of a lottery ticket conferred on the purchaser two rights viz. (a) the right to participate in the draw, and (b) the right to claim a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omposite right of the chance to win and it does not feature separately in the definition of the word 'lottery'. It is an inseparable part of the chance to win and not a different right, and therefore, the separation between the two was not right. In other words, a draw without a chance to win is meaningless; and one cannot claim a prize without participating in a draw. In fact, the transfer of the chance to win assumes participation in the draw. The consideration is paid for the chance to win after participating in the draw and not merely for the right to participate. The right to participate being an inseparable part of the chance to win, is therefore part of an actionable claim. It was also observed that the right to participate and the chance to win are both rights in futuro. It was thus emphasized that there is no sale of goods within the meaning of sales tax statutes when the right to participate in a draw is transferred by sale of a lottery ticket and that the object of right to participate would be to win a prize. Hence, the right to participate in a lottery is an actionable claim or what is called as chose in action. In view of the above discussion, it was held that H. Anra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r noting that the CGST Act, 2017, being an Act of Parliament in exercise of power of Parliament as conferred under Article 246A of the Constitution, this Court considered a catena of judgments of this Court touching upon the activity of organising and conducting lotteries, levy of taxes on lotteries, etc. and answered Question I by holding that the Writ Petition filed under Article 32 of the Constitution was maintainable. Question II and III were also answered by holding that the inclusion of actionable claim in the definition 'Goods' as given in Section 2(52) of the CGST Act, 2017 is not contrary to the legal meaning of 'goods' and is neither illegal nor unconstitutional. It was further held that in Sunrise Associates, the Constitution Bench had laid down that lottery is an actionable claim and the same was not an obiter dicta. With regard to question IV as to whether there was any hostile discrimination in the exclusion of lottery, betting and gambling from Item No. 6 Schedule III of CGST Act, 2017, it was held that there was no violation of the equality clause. The relevant observations of this Court are extracted as under: "69. In a later decision, Union of India v. Martin Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there is any hostile discrimination in taxing the lottery, betting and gambling and not taxing other actionable claims. The rationale to tax the aforesaid is easily comprehensible as noted above. Hence, we do not find any violation of Article 14 in Item No. 6 of Schedule III of the Act, 2017. " It is clear from the paragraphs extracted above that this Court has held that for the purpose of levy of taxation, the actionable claims arising out of participation in a lottery or on placing a bet or via gambling in any other form, may be placed in a class distinct from the rest of the actionable claims and be subjected to taxation accordingly. Such acknowledgment by this Court establishes a corelation between 'lotteries' and 'betting and gambling' and places them in the same category/class. In answering Question V, it was held that having regard to the statutory provisions of the CGST Act, 2017, the value of taxable supply is a matter of statutory regulation and when the value is to be the transaction value which is to be determined as per Section 15, it is not permissible to compute the value of taxable supply by excluding the prize money which has been contemplated in the statuto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following approach is being adopted with regard to the interpretation of the Entries of the Lists of the Seventh Schedule of the Constitution: 1. The Entries in the different Lists should be read together without giving a narrow meaning to any of them. The powers of the Union and the State Legislatures are expressed in precise and definite terms. Hence, there can be no broader interpretation given to one Entry than to the other. Even where an Entry is worded in wide terms, it cannot be so interpreted as to negate or override another Entry or make another Entry meaningless. In case of an apparent conflict between different Entries, it is the duty of the Court to reconcile them in the first instance. 2. In case of an apparent overlapping between two Entries, the doctrine of pith and substance has to be applied to find out the true nature of a legislation and the Entry within which it would fall. 3. Where one Entry is made 'subject to' another Entry, all that it means is that out of the scope of the former Entry, a field of legislation covered by the latter Entry has been reserved to be specially dealt with by the appropriate Legislature. 4. When one item is general and ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lative competence of the Parliament or Legislature of any State to enact laws on the subjects mentioned in the Entry. It is reiterated that taxation is not intended to be comprised in the main subject of an entry in the Lists but being a distinct matter for the purpose of legislative competence must be relatable to the specific entry dealing with taxation. 114. As a sequitur, it is observed that Entry 97 in List I which is the residuary entry relatable to Article 248 of the Constitution cannot be invoked or pressed into service when a specific entry empowering the Parliament or the Legislature of a State to pass laws regarding the taxation on any subject is specifically enumerated either in List I or List II. 115. It would also be useful to mention that since the legislative competence to pass a law relating to taxation being specific and distinct in List I or List II, such an entry is not found in List III. In other words, both the Parliament as well as the Legislature of a State cannot have the competence to levy tax on a particular subject and hence, there is no specific entry regarding taxation in List III or the Concurrent List. In fact, Entry 47 of List III refers only to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments of this Court in the said context. Thus, the term 'lotteries' being a species of the activity of 'betting and gambling' is carved out of Entry 34 of List II and placed in Entry 40 of List I only to the extent of lotteries organised by the Government of India or the Government of a State. That means lotteries organised by private parties or entities in a State or lotteries authorised by government of a State continue to remain within the scope and ambit of Entry 34 of List II dealing with 'betting and gambling'. The inference is that in so far as lotteries organised by the Government of India or the Government of any State is concerned, in order to have uniformity of laws throughout the country governing such lotteries the framers of the Constitution have intentionally included the said activity in Entry 40 of List I. Consequently, the Parliament has legislative competence to pass laws on lotteries organised by the Government of India or the Government of any State. This means the Parliament can pass laws to regulate organisation of lotteries by the Government of India or the Government of a State uniformly throughout the country, as indubitably the conduct of such lotteries b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onducted by any of the above entities, Government or private is an activity falling within the nomenclature of 'betting and gambling' which is the subject in Entry 34 List II. But what has been carved out of Entry 34 of List II is only lotteries conducted by the Government of India or the Government of any State. Therefore, all other types of lotteries continue to remain within the scope and ambit of 'betting and gambling' as an activity in Entry 34 of List II. (c) Hence under Entry 62 of List II, the specific power to tax an activity which is 'betting and gambling' is reserved with the State legislature and cannot be read within the scope and ambit of Entry 40 of List I which is inherently restricted in its scope. We say so for the following reasons: (i) First, when a specific entry regarding taxation is provided in List II empowering the State Legislature to levy tax on a subject, namely, 'betting and gambling' amongst other similar activities, the same cannot be read by implication in an entry of List I namely Entry 40 of List I. This is because a taxation entry is separate and distinct from an entry dealing on a particular subject. This principle has been adequately explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia or Government of a State. Therefore, the State Legislature has the competence to tax lottery scheme which is gambling being conducted not only by the Government of India or the Government of any State or by any other agency or instrumentality of a particular State but also by a private entity within the State as gambling. (v) Fifth, the contention of respondents-States that the subject, 'lotteries organised by the Government of India or the Government of a State' being placed in Entry 40 of List I would also empower only the Parliament to impose a tax on the same by way of implication under the said Entry itself is not a correct interpretation of the Entries in the Lists. (vi) Sixth, Entry 97 of List I can be invoked only when any matter is not enumerated in List II or List III including any tax not mentioned in the said Lists. There is no specific Entry for levy of tax on betting and gambling in List I. It is only in Entry 62 of List II. Thus, Entry 62 of List II gives legislative competence to a State Legislature to levy a tax on 'betting and gambling'. This would also include a tax on organisation and conduct of lotteries, whether by the Central Government or Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Government of India or for Government of a State on the strength of Entry 40 of List I. It may however regulate the said activity. Any impost strictly for the purpose of regulation of lotteries is permissible so long as it is not a tax on gambling which is only within the ambit of only Entry 62 of List II. In other words, in order to have uniformity in the regulation of lotteries organised by the Government of India or the Government of a State throughout the territory of India, Entry 40 is found in List I and the Parliament is vested with the power to regulate the same. (xi) Eleventh, any betting and gambling activity conducted by a private entity in a State or is authorized by a State Government can be regulated only by the State Legislature. This is because of Entry 34 in of List II which deals with betting and gambling which also includes lotteries and the same does not fall within Entry 40 of List I. (xii) Twelfth, when a Government of a State permits organisation or conduct of lotteries either by the Government of India or the Government of any State thereby enabling participation in the scheme of lottery by those persons who have purchased the lottery tickets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It only implies that for regulatory purposes, having regard to the need for uniform legislation throughout the territory of India, the Parliament has been conferred with exclusive jurisdiction to regulate the conduct of lotteries, throughout the territory of India. 120. In the instant case, the tax imposed is on the 'gambling' nature of lotteries, which field is covered in its entirety under Entry 62 of List II and the power to impose tax under this Entry extends in relation to lottery of every kind, with no distinction as to the entity organizing the same. 121. Thus, in the context of lotteries, the organisation and conduct of a lottery scheme being a pan India activity, when any State Government permits the Government of India or any other State Government to organise the lottery scheme in that State, Entry 62 of List II would enable the Legislature of that State to levy taxes on the same. 122. Hence, in our view, the Legislatures of the State of Karnataka and Kerala were fully competent to enact the impugned Acts and levy taxes on the activity of 'betting and gambling' being organised and conducted in the said respective States, including lotteries conducted by the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d gambling' is a State subject except to the extent of it being denuded of its powers insofar as Entry 40 of List I is concerned. (v) Entry 62 of List II is a specific taxation Entry on 'luxuries, including taxes on entertainments, amusements, betting and gambling'. The power to tax is on all activities which are in the nature of 'betting and gambling,' including lotteries. Since, there is no dispute that lotteries, irrespective of whether it is conducted or it is organised by the Government of India or the Government of State or is authorized by the State or is conducted by an agency or instrumentality of State Government or a Central Government or any private player, is 'betting and gambling', the State Legislatures have the power to tax lotteries under Entry 62 of List II. This is because the taxation contemplated under the said Entry is on 'betting and gambling' activities which also includes lotteries, irrespective of the entity conducting the same. Hence, the legislations impugned are valid as the Karnataka and Kerala State Legislatures possessed legislative competence to enact such Acts. (vi) Thus, the scope and ambit of lotteries organised by Government of India or Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X
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