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TMI Blog1971 (10) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... effect that the Wealth-tax Act, as amended by the Finance Act, 1969, in so far as it includes the capital value of the agricultural land for the purposes of computing net wealth, was ultra vires the Constitution of India. We may mention that the majority also held that the impugned Act was not a law with respect to entry 49, List II, of the Seventh Schedule to the Constitution ; in other words, it held that this tax was not covered by entry 49, List II, of the Seventh Schedule. The Wealth-tax Act, 1957, was amended by the Finance Act 1969, to include the capital, value of agricultural land for the Purposes of computing net wealth. " Assets " is defined in section 2(e) to include property of every description, movable or immovable. The exclusions need not be mentioned here as they relate to earlier assessment years. " Net wealth " is defined in section 2(m) to mean " the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltivation, conservation, improvement or maintenance of agricultural land, or for the raising or harvesting of any agricultural or horticultural produce on such land. Explanation.---For the purposes of this clause, tools, implements and equipment do not include any plant or machinery used in any tea or other plantation in connection with the processing of any agricultural produce or in the manufacture of any article from such produce ; ". Section 7(1) deals with the evaluation of the assets and provides that subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open Market on the valuation date. Rest of the provisions are machinery provisions dealing with the authorities, assessment and special provisions dealing with special cases, like appeals, revisions, references, payment and recovery of wealth-tax, refunds and miscellaneous provisions. The submissions of Mr. Setalvad, appearing on behalf of the Union, in brief were these : That the impugned Act is not a law with respect to any entry (including ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the State Legislatures under List II or concurrently with Parliament under List III, falls within List I, including entry 97 of that List I, read with article 248. It seems to us unthinkable that the Constitution-makers, while creat- ing a sovereign democratic republic, withheld certain matters or taxes beyond the legislative competence of the legislatures in this country either legislating singly or jointly. The language of the relevant articles on the contrary is quite clear that this was not the intention of the Constituent Assembly. Chapter I of Part XI of the Constitution deals with " Distribution of Legislative Powers ". Article 246 in the Chapter reads thus : " 246. (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the ' Union List '). (2) Notwithstanding anything in clause (3), Parliament, and, subject 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 'Concu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eform, volume I, paragraph 56. The reason was that there was profound cleavage of opinion existing in India with regard to allocation of residuary legislative powers. The result was the enactment of section 104 of the Government of India Act, which provided : " 104. Residual Powers of legislation.(1) The Governor-General may by public notification empower either the Federal Legislature or a Provincial Legislature to enact a law with respect to any matter not enumerated in any of the lists in the Seventh Schedule to this Act, including a law imposing a tax not mentioned in any such list, and the executive authority of the Federation or of the Province, as the case may be, shall extend to the administration of any law so made, unless the Governor-General otherwise directs. (2) In the discharge of his functions under this section the Governor- General shall act in his discretion. " It appears from paragraph 50 of this report that " the method adopted by the white paper (following in this respect the broad lines of Dominion Federal Constitutions) is to distribute legislative power between the Central and Provincial Legislatures respectively, and to define the Central and Provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y form entry 46, List II ; duties of excise excluded in entry 84, List I, have been included in entry 51, List II ; agricultural land exempt in entry 87 has been incorporated as entry 48, List II ; and, similarly, agricultural land exempted from the incidence of duties in respect of succession to property has been made the subject-matter of duties in respect of succession in entry 47, List II. It seems to us that from this scheme of distribution it cannot be legitimately inferred that taxes on the capital value of agricultural land were designedly excluded from entry 97, List I. In this connection it is well to remember that the first draft of the three lists was attached to the report of the Union Powers Committee dated 5th July, 1947 (see volume V, Constituent Assembly Debates, page 60). List I then consisted of 87 entries and there was no residuary entry. It was on 20th August, 1947, that Mr. N. Gopalaswami Ayyangar moved that this report be taken into consideration. At that stage it was evident that in the case of Indian States the residuary subjects were to stay with the Indian States unless they were willing to cede them to the Centre. He said : " Now, Sir, when this Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and " would have been outside the powers of States ? Obviously not. If so, there can be no reason for excluding it from the residuary powers ultimately conferred on Parliament. The content of the residuary power does not change with its conferment on Parliament. It may be that it was thought that a tax on capital value of agricultural land was included in entry 49, List II. This contention will be examined a little later. But if on a proper interpretation of entry 49, List II, read in the light of entry 86, List I, it is held that tax on the capital value of agricultural land is not included within entry 49, List II, or that the tax imposed by the impugned statute does not fall either in entry 49, List II, or entry 86, List I, it would be arbitrary to say that it does not fall within entry 97, List, I. We find it impossible to limit the width of article 248 and entry 97, List I, by the words " exclusive of agri- cultural land " in entry 86, List I. We do not read the words " any other matter " in entry 97 to mean that it has any reference to topics excluded in entries 1 to 96, List I. It is quite clear that the words " any other matter " have reference to matters on which the Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t II or in List III or is the tax sought to be levied mentioned in List II or List III ? No question has to be asked about List I. If the answer is in the negative then it follows that Parliament has power to make laws with respect to that matter or tax. It must be remembered that the function of the lists is not to confer powers ; they merely demarcate the legislative field. The Federal Court, while interpreting the Government of India Act in Governor-General in Council v. Raleigh Investment Co., observed : " It would not be right to derive the power, to legislate on this topic merely from the reference to it in the List, because the purpose of the Lists was not to create or confer powers, but only to distribute between the federal and the provincial legislatures the powers which had been conferred by sections 99 and 100 of the Act. " In Harakchand Ratanchand Banthia v. Union of India Ramaswami J., speaking on behalf of the court, while dealing with the Gold (Control) Act, 1968 (45 of 1968), observed : " Before construing these entries it is useful to notice some of the well- settled rules of interpretation laid down by the Federal Court and by this court in the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary powers are vested in the Centre in the new Constitution so far as the Provinces are concerned, and in the States so far as the States are concerned, is it necessary that any additional specific taxes should be entered in the Provincial List, and if so, what ? " The Committee reported in paragraph 72 as follows : " It appears that under the new Constitution, residuary powers will be vested in the Centre, so far as the Provinces are concerned, while the corresponding residuary powers in respect of the States will be vested in the States themselves. The question has therefore been raised whether, as a consequence, as many specific taxes as possible should not be entered in the Provincial List of subjects. We cannot think of any important new tax that can be levied by the Provinces, which will not fall under one or the other of the existing categories included, in the Provincial List. We think that the chance of any practical difficulty arising out of the proposed constitutional position is remote, and, in any case, it seems to us that if a tax is levied by the Centre under its residuary powers, there will be nothing to prevent the proceeds of the whole or a part of this tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rged so as to include Use Tax as well, going undoubtedly on the experience of the American State Use Tax which, I think, is a pernicious recommendation. I think, it finds a reflection in the mention of sales tax in item 58 which ought not to be there. " If Parliament were to levy a use tax, it could hardly be thrown out on the ground that it cannot be included in the residuary powers because the tax was known at the time of the framing of the Constitution. Indeed it does not seem to be a sound principle of interpretation to adopt to first ascertain whether a tax was known to the framers of the Constitution and include it in the residuary powers only if it was not known. This would be an impossible test to apply. Is the court to ask members of the Constituent Assembly to give evidence or is the court to presume that they knew of all the possible taxes which were being levied throughout the world ? In our view the only safe guide for the interpretation of an article or articles of an organic instrument like our Constitution is the language employed, interpreted not narrowly but fairly in the light of the broad and high purposes of the Constitution, but without doing violence to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is not mentioned in Lists II and III is to go to the Centre what is the point in enumerating entries 1 to 90 of List I ? That would amount to absolutely needless, cumbersome detail. All complications would be avoided and matters simplified by redrafting article 217 to say that all matters enumerated in List II must belong to the States and all matters enumerated in List III are assigned to the Centre and the States concurrently and that every other conceivable subject must come within the purview of the Centre. There was nothing more simple or logical than that. Instead, a long elaborate List has been needlessly incorporated. This was because List I was prepared in advance and entry No. 91 was inserted by way of after-thought. As soon as entry 91 was accepted, the drafting should have been altered accordingly. Article 217 should have been re-written on the above lines and matters would have been simplified. May I suggest even at this late stage that these needless entries be scrapped and article 217 be re-written and things made simple ? I had an amendment to that effect but I did not move it because I know that any reasons behind an amendment would not be deemed fit for cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted if not openly at least whispered as to why we are having these 91 entries in List I when, as a matter of fact we have an article such as 223 which is called residuary article which is Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List '. Theoretically, I quite accept the proposition that when anything which is not included in List II or List III is by a specific article of the Constitution handed over to the Centre, it is unnecessary to enumerate these categories which we have specified in List I. The reason why this is done is this. Many States people, and particularly the Indian States at the beginning of the labours of the Constituent Assembly, were very particular to know what are the legislative powers of the Centre. They wanted to know categorically and particularly ; they were not going to be satisfied by saying that the Centre will have only residuary powers. Just to allay the fears of the Provinces and the fears of the Indian States, we had to particularise what is included in the symbolic phrase 'residuary powers'. That is the reason why we had to undergo this labour, notwithstanding the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd allocation of legislative power, this Assembly has taken into account the political and economic conditions obtaining in the country at present and has not proceeded on any a priori theories as to the principles of distribution in the constitution of a Federal Government. In regard to distribution, the Centre is invested with residuary power, specific subjects of national and all-India importance being expressly mentioned. " Shri T T. Krishinamachari (Constituent Assembly Debates, vol. 11, pages 952-954) : " I would in this connection deal with a point raised regarding the vesting of the residuary powers. I think more than one honourable Member mentioned that the fact that the residuary power is vested in the Centre in our Constitution makes it a unitary Constitution. It was, I think, further emphasised by my honourable friend Mr. Gupta in the course of his speech. He said : The test is there. The residuary power is vested in the Centre.' I am taking my friend Mr. Gupta quite seriously, because he appears to be a careful student who has culled out this particular point from some text book on federalism. I would like to tell honourable Members that it is not a very importan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minion on the one hand and the provinces on the other hand cover the whole area of self-government within the whole area of Canada. It would be subversive of the entire scheme and policy of the Act to assume that any, point of internal self-government was withheld from Canada. ' " The last sentence applies much more to the Constitution of a sovereign democratic republic. It is true that there are some limitations in Part III of the Constitution on the legislatures in India but they are of a different character. They have nothing to do with legislative competence. If this is the true scope of residue powers of Parliament, then we are unable to see why we should not, when dealing with a Central Act, enquire whether it is legislation in respect of any matter in List II for this is the only field regarding which there is a prohibition against Parliament. If a Central Act does not enter or invade these prohibited fields there is no point in trying to decide as to under which entry or entries of List I or List III a Central Act would rightly fit in. It was accepted that this test had been applied in Canada, but it was argued that the Canadian Constitution is completely different fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion will remain, for it cannot be contended, and indeed was not contended at their Lordships' bar, that, if the Act does not come within one of the classes of subjects assigned to the provincial legislatures, the Parliament of Canada had not, by its general power ' to make laws for the peace, order, and good Government of Canada' full legislative authority to pass it. " In Halsbury's Laws of England (Third Edition, volume 5, page 498), the rule is put thus : " In determining the validity of legislation the general method of inquiry is to ask first, whether the matter comes within the classes expressed by statute to be exclusively within the powers of the provinces ; if it does not, the power belongs exclusively to Parliament, but even if it does appear to come within those classes, the exclusive power still belongs to Parliament if it also falls within an enumerated class within the legislative authority of Parliament. In Attorney-General for Canada v. Attorney-General for British Columbia, Lord Tomlin, after referring to sections 91 and 92 of the Canadian Constitution, observed as follows : " Questions of conflict between the jurisdiction of the Parliament of the Dom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 91 and 92 of the Canadian Constitution is that section 91 gives general powers and then gives certain specific powers by way of illustration, and that apparently was the interpretation placed on the Act by the Privy Council before Attorney-General for Ontario v. Attorney-General for the Dominion '. But whatever the interpretation, the same test was applied by the Privy Council before 1896 in Russel v. Queen and after this case. The learned counsel referred to five cases of this court and the Federal Court to show that the Canadian cases should not be relied on as the Canadian Constitution was different. It is true that the Canadian Constitution is different in many respects and for some purposes it would be misleading to rely on the Canadian cases. In Chhotabhai Jethabhai Patel v. Union of India the question was the interpretation of entry 84, List I (Duties of excise on tobacco ... ) and entry 60, List II (Taxes on professions, trades, callings and employments). This court held that the Canadian cases which were cited before it did not afford any assistance because in Canada analogous problems are always concerned with questions of direct and indirect taxation. We agree t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mittee, the British North America Act presents an exact analogy to the Indian Act, even to the overriding provisions in section 100(1) of the latter : ' The rule of construction is that general language in the heads of section 92 yields to particular expressions in section 91, where the latter are unambiguous,' per Lord Haldane in Great West Saddlery Co. v. The King. The principles laid down by the judicial Committee in a long series of decisions for the interpretation of the two sections of the British North America Act may therefore be accepted as a guide for the interpretation of similar provisions in the Government of India Act. " It is true that Gwyer C.J. was dealing with the question of " pith and substance" and the " true nature and character of the legislation " for the purpose of determining whether it is a legislation with respect to matters in this list or that list but at least his judgment shows that where the provisions are similar, the principles laid down by the judicial Committee should be accepted as a guide. Similarly, Varadachariar J. observed at page 235 : It seems to me necessary to point out that the assumption in the Patna case that the scheme o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of entries in List II, and subject to legislation by Parliament on matters in List III. It was also said that if this was the intention of the Constitution-makers they need not have formulated List I at all. This is the point which was taken by Sardar Hukam Singh and others in the debates referred to above and was answered by Dr. Ambedkar. But, apart from what has been stated by Dr. Ambedkar in his speech extracted above, there is some merit and legal effect in having included specific items in List I for when there are three lists it is easier to construe List II in the light of Lists I and II. If there had been no List I, many items in List II would perhaps have been given much wider interpretation than can be given under the present scheme. Be that as it may, we have the three Lists and a residuary power and therefore, it seems to us that in this context if a Central Act is challenged as being beyond the legislative competence of Parliament, it is enough to enquire if it is a law with respect to matters or taxes enumerated in List II. If it is not, no further question arises. In view of this conclusion, we now come to the question, i.e. whether the impugned Act is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital value of the lands and buildings. But the adoption of the annual or capital value of lands and buildings for determining tax liability will not, in our judgment, make the fields of legislation under the two entries overlapping. " It was urged on behalf of the respondent that in Assistant Commissioner of Urban Land Tax v. Buckingham Carnatic Co. Ltd., this court held that a tax on the capital value of land and buildings could be imposed under entry 49, List II, but it seems to us that this is not a correct reading of that decision. Reliance is placed on the following sentence at page 277 : We see no reason,therefore, for holding that entries 86 and 87 of List I preclude the State legislature from taxing capital value of lands and buildings under entry 49 of List II." The above observations have to be understood in the context of what was stated later Ramaswami J. later observed in that judgment as follows : " The basis of taxation under the two entries is quite distinct. As regards entry 86 of List I, the basis of the taxation is the capital value of the asset. It is not a tax directly on the capital value of assets of individuals and companies on the valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s lands and buildings separately as units. (2) The tax cannot be a tax on totality, i.e., it is not a composite tax on the value of all lands and buildings. The tax is not concerned with the division of interest in the building or land. In other words, it is not concerned whether one person owns or occupies it or two or more persons own or occupy it. In short, the tax under entry 49, List II, is not a personal tax but a tax on property. It seems to us that this court definitely held and we agree with the conclusion that the nature of the wealth-tax imposed under the Wealth-tax Act, as it originally stood, was different from that of a tax under entry 49, List II, and it did not fall under this entry. The distinction between a "net wealth-tax" and "tax on property" is clearly brought out in the following extracts, and supports the conclusion arrived at by this court. Readings on Taxation in Developing Countries by Fird and Oldman elucidates the concept of wealth-tax as follows, at page 281 : " The term 'net wealth-tax' is usually defined as a tax annually imposed on the net value of all assets less liabilities of particular,tax-payers---especially individuals. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital are deemed to be imposed on the person of the taxpayer while others are deemed to be imposed on an object. Examples of the former are the net worth-tax and the capital levy under the Equalization of Burdens Law, while the real property tax and the trade tax on business capital are classified in the latter category. The main importance of this distinction is that taxes in the first group presuppose a taxpayer with independent legal existence, that is, an individual or a legal entity (juridical person), while in the case of taxes in the second group, the taxable object itself is deemed liable for the tax, in addition to its owner, so that the taxpayer can be a partnership, association of the civil law, or other combination of persons without separate legal existence. Taxes of the first type give consideration to the taxpayer's ability to pay, while those of the second type consider merely the value of the taxable object, such as the capital of a business, in the case of the trade tax on business capital, or the assessed value of real property, in the case of the real property tax. " In our view the High Court was right in holding that the impugned Act was not a law with respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion whether the impugned Act falls within entry 86, List I, read with entry 97, List I, or entry 97, List I, alone, as some of our brethren are of the view that the original wealth-tax Act fell under entry 86, List I, we might express our opinion on that point. It seems to us that there is a distinction between a true net wealth-tax and a tax which can be levied under entry 86, List I . While legislating in respect of entry 86, List I, it is not incumbent on Parliament to provide for deduction of debts in ascertaining the capital value of assets. Similarly, it is not incumbent on State legislatures to provide for deduction of debts while legislating in respect of the entry 49, List II. For example, the State legislature need not while levying tax under entry 49, List II, provide for deduction of debts owed by the owner of the property. It seems to us that the other part of entry, i.e., " tax on the capital of companies " in entry 86, List I, also seems to indicate that this entry is not strictly concerned with taxation of net wealth because capital of a company is in one sense a liability of the company and not its asset. Even if it is regarded as an asset, there is nothing in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent but we are unable to see any difference in principle. Residuary power is as much a power as the power conferred under article 246 of the Constitution in respect of a specified item. In In re the Regulation and Control of Aeronautics in Canada, the Privy Council upheld the validity of a parliamentary statute after supplementing the powers under the specified items in section 91 with the residuary powers. It observed : " To sum up, having regard (a) to the terms of section 132 ; (b) to the terms of the Convention which covers almost every conceivable matter relating to aerial navigation ; and (c) to the fact that further legislative powers in relation to aerial navigation reside in the Parliament of Canada by virtue of section 91, items 2, 5 and 7, it would appear that substantially the whole field of legislation in regard to aerial navigation belongs to the Dominion. There may be a small portion of the field which is not by virtue of specific words in the British North America Act vested in the Dominion ; but neither is it vested by specific words in the Provinces. As to that small portion it appears to the Board that it must necessarily belong to the Dominion under i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven if that was not so, Parliament had no competence to enact an Act imposing such a tax on agricultural land either under article 246 read with entry 86 in List I or under its residuary power under article 248 read with entry 97 in that list. In view of the importance of the issues involved, the writ petition was heard by a Full Bench of the High Court, which, by a majority of four to one, allowed it holding that section 24 of the Finance Act, 1969, to the extent that it included agricultural land within the definition of assets for the purposes of the Wealth-tax Act, 1957, was beyond the competence of Parliament, and was, therefore, ultra vires the Constitution. So far as the first question raised the responent was concerned, the High Court held, in view of the decisions of this court in Sudhir Chandra Nawn Wealth-tax Officer, Calcutta, Assistant Commissoner Urban Land Tax v. Buckingham Carnatic Co. Ltd. and Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality to which we shall presently come, that a tax levied on the capital value of all assets taken in their totality under entry 86 in List I, read with article 246 or one which included agricultural land and lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d was derived from article 248 and entry 97 in List I, as it was not a matter enumerated in Lists II and III, and, therefore, fell squarely under entry 97. That in brief was the sum total of his contentions. He did not argue on the first question as it was decided by the High Court in his favour. Counsel for the respondent contested the correctness of the contentions urged on behalf of the Union of India and, after an elaborate analysis of the relevant entries and the articles, supported the majority judgment of the High Court. Before we proceed to examine these rival contentions it is necessary to set out broadly the scheme of distribution of legislative powers between the Union and the States laid down in Chapter I of Part XI of the Constitution. Under article 245, Parliament can make laws for the whole or any part of the territory of India and the State legislatures for the whole or part of their respective States. The different topics or matters of legislation are set out in the three Lists in the Seventh Schedule. List I, known as the Union List, enumerated topics of legislation in respect of which Parliament has exclusive power to make laws. List II, known as the State Lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent under article 248 " exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List ". Such power includes also the power " of making a law imposing a tax not mentioned in either of those Lists ". The expression " any matter not enumerated in the Concurrent List or State List" in article 248 must mean, in the context of clause (1) of article 246, which gives Parliament exclusive power in respect of matters in List I, any matter other than those enumerated in any of the three Lists. Obviously, the residuary power given to Parliament in article 248 cannot include power which is exclusively given to Parliament on matters in List I already conferred under clause (1) of article 246, so that an attempt to distinguish the words " any matter " in article 248 and " any other matter " in entry 97 in List I, is a distinction without difference. There had to be difference in language in the two provisions in the context of the content of entry 97 as that entry speaks about matters other than those enumerated before in List I and those enumerated in the other Lists. Notwithstanding the fact that the residuary power has been vested in the Cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... text is conclusive, alike in what it directs and what it forbids ". If the text is ambiguous, i.e., where the words establishing two mutually exclusive jurisdictions are wide enough to bring a particular power within either, recourse must be had to the context and the scheme of the Act. The presumption, unless there is anything to the contrary, is that the power is not withheld or that it does not exist at all ; it is there in some quarter. To ascertain where it is, it becomes necessary at the very threshold to know the nature of the impugned tax. ' The Act is designated by its first section-the Wealth-tax Act, 1957. Though it is the substance and not the form or designation which matters, the Act was passed, as conceded by Mr. Setalvad, in exercise of the power contained in article 246(1) read with entry 86 of List I. Under section 3, what was originally charged was the capital value of the net wealth of an assessee, such net wealth having to be arrived at by taking into consideration the total assets excluding the agricultural land held by him as defined by section 2(e) and section 2(m). The fact that it is the capital value of the net wealth, computed after deducting from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act is different from the tax on the capital value of the assets as con- templated by entry 86 in List I for two reasons ; (a) that it does not take in all the assets inasmuch as it excludes agricultural land, and (b) that it computes net wealth by deducting the debts and liabilities of the assessee. The fallacy in such an argument lies in the confusion between the basis of the tax and its incidence. The basis of the tax is the capital value of the assets except agricultural land. Agricultural land had to be excepted from the tax by reason of the restricted legislative power granted in respect of the subject-matter in entry 86. The power in respect of that subject-matter in its turn was restricted by a definite policy in distributing power under which the field of legislation in agriculture was left to the States as was also the case under the Government of India Act, 1935. The exclusion of agricultural land from entry 86 would not by itself, therefore, mean that the tax is not one on the capital value of assets. In determining the incidence, the legislature may as well take into account various factors such as fairness to the assessee and tax the capital value of his net wealth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which accrued during the accounting year, (ii) that it could not have been the intention of Parliament to charge the same assets or wealth year after year, and (iii) that since the " net wealth " as defined by the Act included non-agricultural lands and buildings and entry 49 in List II reserved the power to impose tax on lands and buildings to the States, the tax suffered from legislative incompetence. This court rejected all the three contentions and held that section 3 of the Act charged the capital value of net wealth on the corresponding valuation date, and was not on accretion of wealth only during the accounting year and since the last valuation date, i.e., that it was not on accrual basis, that the Constitution did not contain any inhibition against the same subject-matter being charged from year to year, that the tax was imposed under entry 86 in List I, that it was not a tax directly on lands and buildings as it was on the capital value of the assets of an assessee on the valuation date and not on the different components of those assets, that that being so, it was a tax different from the one which could be imposed under entry 49 of List II, and, therefore, there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articles 14 and 19(1)(f). In the appeal to this court against that judgment, the contention was that the impugned Act fell under entry 86 of List I and not under entry 49 of List II. Ramaswami J., who spoke for the Bench, which had on it both Shah J. (as he then was) and Mitter J., who were also parties to the earlier judgment, rejected the contention holding that in pith and substance the impugned Act, in imposing the tax on urban land at a percentage of, the market value, fell within entry 49 and did not entrench upon the field of legislation of entry 86, List I. What is important for the present appeal is that he held that there was no conflict between entry 86 of List I and entry 49 of List II, inasmuch as the basis of the tax under entry 86 would be the principle of aggregation and the tax would be imposed on the totality of the net capital value of all assets, while entry 49 in List II contemplated a levy on lands and buildings or both as units. He also held that in a tax levied under entry 49 of List II, the Madras legislature, by the amplitude of power in that entry, was competent to levy it on the capital value of lands and buildings, but because that could also be done u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ground that, since none of the three lists enumerated such a tax, there was no question of Parliament having entrenched upon the State's power under entries 18 and 49 of List II. The Act was held to have been enacted under the residuary power vested in Parliament by article 248 read with entry 97 in List I. The aforesaid analysis of the three decisions clearly demonstrates that the discussion therein over the ambits of the Centre's power under entry 86 of List I, and States' power under entry 49, in List II, was neither obiter nor was it on any assumption, and that in deciding upon the ambit of the respective powers, the court made a distinction between a tax directly upon lands and buildings as units by reason of ownership in such lands and buildings (which would fall under entry 49 of List II), and a tax on the capital value of the total assets barring agricultural land which would fall under entry 86, of List I, which, in the words of Ramaswami J, in the case of the Madras Urban Land Tax Act, was conceptually different by reason of its characteristic of aggregation as held in Nawn's case and different in its subject-matter as well as incidence. In all the three cases, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87 and 88 in List I dealing with taxes on income, on capital value of assets, estate and succession duties, all uniformly exclude agricultural land. Likewise, entries 6 and 7 in List III, dealing with transfer of property and contracts, exclude from their fields of operation agricultural land. On the other hand, entry 41 of the List dealing with custody, management and disposal of evacuee property expressly includes agricultural land. That is for the obvious reason that, involving as it does Indo-Pakistan relations, such a subject could not be left exclusively to the individual States. Entries 14, 18, 28, 30, 45, 46, 47, 48 and 49, in List II, which deal with agricultural land, directly or even incidentally, leave power relating to them to the States. Thus, tax-on agricultural income is left to the States and cannot, therefore, be included in any Income-tax Act enacted by Parliament under entry 82 of List I, by reason of exclusion from that entry of agricultural income although such an Act is on the totality of the assessee's whole income, and its inclusion in entry 46 of List II. A similar result is achieved in the matter of a tax on capital value of assets under entry 86, of List ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the power to tax on the capital value of all assets including agricultural land is neither in entry 49 of List II nor in entry 86 of List I, the power falls within the residuary power independently granted under article 248(2). Mr. Setalvad conceded that Nawn's case and the two cases following it had been correctly decided in so far as they hold that the Wealth-tax Act, as passed in 1957, fell under entry 86 of List I. But he urged that since a tax on the capital value of assets including agricultural land cannot fall under that entry and the States obviously have no power to impose such a tax on the total assets of a person under entry 49 of List II or any other entry in that List, the amending Act must fall under article 248(2) and/or entry 97 of List I. Counsel for the respondent refuted the correctness of both the contentions and argued (a), that the power to impose a tax on the capital value of agricultural land is reserved in entry 49 in List II, (b) that the power to impose a tax on the capital value of assets held by a person has been enumerated, mentioned and dealt with in entry 86 of List I, which in doing so expressly excludes agricultural land from its ambit, and tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80, which confer on Parliament restricted power, either because the topics they deal with are distributed between the Central legislature and the State legislatures or because it was thought proper to confer power with restrictions. Thus, entry 9 of List I, which deals with the head of preventive detention, confers power to make a law on that subject only on the grounds of defence, foreign affairs or the security of India, and entry 9 in List III for reasons connected with the security of a State, maintenance of order or maintenance of supplies and services essential to the community. The power to make a law authorising preventive detention is thus restricted to the six reasons set out in the two entries and not for any other reason. The power having been so dealt with, it is impossible to say that the matter of preventive detention is not enumerated or that that which is excluded therefrom was intended to or must fall under a provision or an entry dealing with residuary power. If counsel for the Union were to be right, the Union can claim the power to make a law for preventive detention on grounds other than those specified in the two entries on the ground that it has residuary p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that instead of the residuary power being in the Governor-General, the Constitution has vested it in Parliament. The two provisions are similar and bear the same interpretation especially as the language of article 248 closely follows that of section 104 of the 1935 Act. In Second Gift-tax Officer v. Nazareth, Hidayatullah C.J., dealing speci- fically with entry 97 in List I, because of his conclusion that the Gift-tax Act, 1958, fell under the residuary field of legislation under that entry, analysed first the scheme of distribution of power under articles 245, 246 and 248, and then the impact of the three lists on such distribution. Dealing with article 248 and entry 97 in List I, he construed them at pages 197 and 198 of the report as follows : " Then there is the declaration in article 248 of the residuary powers of legislation. Parliament has exclusive power to make any law in respect to any matter not enumerated in the Concurrent List or State List and this power includes the power of making any law imposing a tax not mentioned in either of those lists. For this purpose, and to avoid any doubts, an entry has also been included in the Union List to the following effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that a tax on the capital value of assets including agricultural land is one such tax, not mentioned in any of the three Lists, and, therefore, falls under entry 97 of List I ? When counsel for the Union opened his case, his contention was that since entry in List I excluded agricultural land therefrom, that field of legislation and tax must be said to be one not enumerated and not mentioned in that List and being tax on aggregation, conceptually different from one which can be levied by the States under entry 49 in List II, it is not also enumerated in List II, and, therefore, that part of it must be said to fall under the residuary entry 97. The answer to that contention depends on the interpretation which entry 86 in List I bears. In a distributive system of power, whenever a question arises whether a statute is within the power of the appropriate legislature, regard must be had to its substance rather than its form. Once it is found that there is power, it can be used by the federal legislature in as plenary a manner as if it is a power in a unitary system, subject of course to the express limitations in the Constitution and to the necessary freedom of the States to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entry splits the matter into two matters, the permissible and the excluded. The matter is one,, viz., the capital value of all assets except that the power in relation to it is restricted by the exclusion therefrom of one kind of asset. Consequently, it is impossible to say that there are two matters, one permissible under entry 86 in List I and the other not enumerated anywhere else and therefore falling under article 248 and/or entry 97 in that List. If it were so, as contended, the restriction in entry 86 in regard to agricultural land had no meaning. Such a contention would mean that, though the draftsman excluded agricultural land from entry 86 of List I, his intention was to nullify that exclusion by including that exclusion in the same breath in the residuary field in article 248 and entry 97. But, it was said that if the interpretation of entries 86 and 97 in List I, we commend, were to be true, it would mean that neither Parliament nor the State legislatures can ever levy wealth-tax on the capital value of all the assets including agricultural land held by an assessee. It is true that, under entry 86 of List I, Parliament cannot include agricultural land within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n article 248(2) and entry 97, in List I. In his reply, however, he enlarged his argument and urged that once it was found that the impugned Act did not entrench on entry 49, List II, Parliament could impose it independently of entry 86, in List I, under article 248, The argument was that article 248 conferred an independent and distinct power on Parliament in all matters not enumerated in Lists II and III. Since List III did not deal with taxes, the only question was whether the impugned tax fell under any entry in the State List. The contention was that article 248 was in Pari materia with section 91 of the British North America Act, 1867, and, therefore, the proper inquiry, as under that Act, would be whether the impugned tax fell under List II and that if it did not, the power must nessarily be held to reside in Parliament. In support of this contention he emphasised the words, " Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List ", in article 248, and argued that List III not containing any entry with respect to any tax, only List II was relevant. Therefore, in dealing with a question such as the one be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic Wine Co. Ltd. v. Tuley 2 and to Lord Atkin in Proprietary Articles Trade Association v. Attorney-General for Canada, where both of them held in categorical words that it was the first part of the section which conferred power on Parliament and that the enumerated subjects in the second part merely illustrated that certain subjects fell under the general description, viz., " peace, order and good government of Canada ". The second part contains the declaration of the exclusive power of Parliament in respect of the classes of subjects there enumerated. This declaration, however, in no way affects the generality of power initially assigned to Parliament, or its exclusive power to make laws for peace, order and good government. The third part enumerates twenty-nine classes or heads of subjects. The fourth part is contained in the last paragraph which again, contains a declaration that any matter coming within any class of subjects enumerated in this section shall not be deemed to come within the class of matters of a local or private nature comprised in the enumerated classes of subjects assigned exclusively to the Provincial legislature in section 92. The result is that if a matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... General for British Columbia, and, therefore, can fairly be said to be well-settled principles of interpretation of these two sections. These are : (1) The legislation of Parliament, so long as it strictly relates to subjects expressly enumerated in section 91, is of paramount authority, even though it trenches upon matters assigned to the Provincial legislatures by section 92. (2) The general power of legislation conferred on Parliament by section 91 in supplement of the power to legislate upon the subjects expressly enumerated must be strictly confined to such matters as are unquestionably of national interest and importance. (3) It is within Parliament's competence to provide for matters which, though otherwise within the competence of Provincial legislatures, are necessarily incidental to effective legislation by it upon one of the enumerated subjects in section 91 ; and (4) There can be a domain in which Provincial and Dominion legislation may overlap, that is to say, where there is overlapping between classes of subjects or heads of legislative power, in which case neither legislation would be ultra vires if the field is clear, but if the field is not clear and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislatures under article 246 and the field of legislation delineated in the three Lists are well-defined in elaborate and precise terms, and are disjunctive and independent. The State legislatures are not the delegates of, nor do they derive their powers from the Union legislature, and enjoy within their fields of legislation plenary powers including the power to legislate on all matters incidental and subsidiary to the matters assigned to them. The question of preeminence of Parliamentary legislation by reason of the non-obstante clause in article 246 arises only where there is overlapping of jurisdictions or the law in question is in respect of any of the matters in List III. For the rest, the power of the States is as exclusive in their field as it is of Parliament within its allotted field. The contention that the first part of section 91 of the Canadian Act is analogous to article 248 and its second part to article 246(1), and, therefore, decisions on section 91 and section 92 of that Act apply for the purpose of construing the distribution of powers in our Constitution is unacceptable. It is true that in Subrahmanyan Chettiar v. Mutuswami Goundan Gwyer C.J., at page 200 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a phrase may take a colour from its context or bear different senses accordingly. " In Province of Madras v. Boddu Paidanna Sons, the Federal Court, while discussing the powers of taxation of the Centre and the Provinces in the matter of excise and sales tax, brought out the difference between the distribution of powers in the Canadian and the Indian Acts : "It is natural enough, when considering the ambit of an express power in relation to an unspecified residuary power, to give a broad interpretation to the former at the expense of the latter ; and this indeed is the principle upon which the judicial Committee have for the most part interpreted sections 91 and 92 of the British North America Act. The case, however, is different where, as in the Indian Act, there are two complementary powers, each expressed in precise and definite terms." In Manikkasundara Bhattar v. R. S. Nayudu, the Federal Court once again uttered similar words of caution, observing that in view of section 104 of the 1935 Act expressly providing for residuary power, it would be impossible to apply to the Indian Act, the Canadian principle evolved by the Privy Council that one has only to look int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the very matters therein provided for could not have been once again granted by article 248. Obviously, therefore, the residuary power conferred by article 248 means power in respect of matters not dealt with in article 246, and not to be found in any of the three Lists. In this connection, Mr. Setalvad himself pointed out to us the debates in the Constituent Assembly on entry 91 in List I (equivalent to the present entry 97 in List I) as instructive and showing the background in which and the purpose for which that entry was inserted in List I. When the entry came before the House, Sardar Hukum Singh and Mr. Naziruddin Ahmad thought that if article 231 (equivalent to the present article 248) meant that all powers not contained in Lists II and III. vested in the Centre, enumeration of powers in List I, as also the last entry 91 therein, were altogether redundant. Sardar Hukum Singh pointed out also that the word " other " preceding the words " matter " in that entry was unnecessary. " If every subject which is not mentioned in Lists II and III, is to go to the Centre", observed Mr. Naziruddin Ahmad, " what is the point of enumerating entries 1 to 90 in List I ". This con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd III . More instructive is the second report, dated July 5, 1947, of the Union Powers Committee, of which Pandit Nehru was the chairman, wherein it was stated that while the residuary powers should be with the Centre, in view " of the exhaustive nature of the three Lists drawn up by us, the residuary subjects could only be related to matters which, while they may claim recognition in the future, are not at present identifiable and cannot, therefore, be included now in the Lists". Sir Gopalaswami Ayyangar in his speech moving this report on August 20, 1947, also said that after making " three exhaustive Lists ", if there was any residue left at all, if in the future any subject cropped up which could not be accommodated in one of these three lists, then that subject should be deemed to remain with the Centre .. ." Therefore, what emerges from this discussion is that the residuary power lodged in article 248 was in respect of matters which could not be foreseen or contemplated when the three Lists were framed, and, therefore, could not then be included in any one of them. Mr. Setalvad, however, relied on a speech by Shri Krishnamachari during the debate on the Centre's residuary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets, barring agricultural land, was one field of legislation and which fell under entry 86 in List I, while the power to impose a similar tax which included agricultural land was another distinct field of legislation and fell under entry 97 in List I, and article 248(2). That being so, he said the Wealth-tax Act, as amended by the Finance Act, 1969, fell under the residuary power in article 248 and entry 97 of List I. We frankly concede our inability to appreciate this contention. Can it be said that the Wealth-tax Act when passed in 1957 fell under entry 86 of List I, but that it ceased to be so when it was amended in 1969 by including within its sweep agricultural land ? The subject-matter, the nature and the incidence of the tax remained the same, the only difference which the amendment made was the inclusion of agricultural land while computing the capital value of the assets of an assessee. In our opinion, the Act, even after its amendment, retained its original character and continued to be one falling under article 246(1) read with entry 86 in List I. The field of legislation under entry 86 in List I is no doubt a restricted one in the sense that the law imposing the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compel us to reject the argument that a tax on the capital value of agricultural land falls under the residuary power or that it is a field of legislation distinct from that in entry 86 not dealt with therein, or that, therefore, the amending Act does not fall under entry 86, List I. In this view, we are unable to accept the contentions urged on behalf of the Union. The amending Act, in our opinion, fell under entry 86 of List I, and not under article 248 and/or entry 97 of List I. It follows that the impugned Act, by reason of the restricted field in entry 86, List I, suffered from legislative incompetence. The majority judgment of the High Court must, consequently,be upheld and the appeal dismissed. We order accordingly but in view of the great importance of the issues involved in the appeal, we think it just that there should be no order as to costs. MITTER J.---This is an appeal from a judgment of a Bench of five Judges of the High Court of Punjab and Haryana holding by a majority of four to one that section 24 of the Finance Act of 1969 amending the definition of " net wealth " in the Wealh-tax Act, 1957 (27 of 1957), by the inclusion of agricultural land in the assets f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to be found within the ambit of entry 49, Parliament would be competent to impose such a tax. (2) In order to determine the true nature of the imposition, we must consider the pith and substance or the essential character of the tax with special reference to the unit of taxation. (3) Entry 49 of List II envisaged taxation of lands and buildings as separate units. The entry did not contemplate the aggregation of all lands, agricultural or otherwise, and buildings held by a person as one unit and consequently the State legislature was not competent to impose a tax on such aggregation. Further, the entry did not contemplate a tax which would permit the legislature to deduct the liabilities to which the ownerof the property might be subject. The unit for the purpose of taxation as described in the Wealth-tax Act as the net wealth is not contemplated by entry 49 of List II. (4) The legislative power was distributed among the Union Parliament and the State legislatures by the different provisions in Part XI of the Constitution. The objects of the exercise of powers, that is to say, the subject-matter of all legislation, was comprised within the three Lists in the Seventh Sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of article 248 and entry 97 in List I. Entry 97 in List I was meant to comprise all matters which were not to be found in List II or List III including any tax not mentioned in those two Lists. Entry 97 was really a supplement to article 248(1). The scheme of the distribution of legislative power with regard to various matters adopted in the Indian Constitution had a close parallel to sections 91 and 92 of the British North America Act and the decisions of the judicial Committee of the Privy Council on those two sections throw considerable light on the question before us in this court. The propositions put forward by Mr. Palkhivala were as follows : (1) Power to levy wealth-tax on agricultural land was not covered by article 248 read with entry 97 in the Union List. The Constitution has denied to the Union the power to levy any tax direct or indirect on the capital value of agricultural lands. (2) The judgments of this court in Sudhir Chandra Nawn v. Wealth-tax Officer, Calcutta, Assistant Commissioner of Urban Land Tax v. Buckingham Carntic Co. Ltd. and Shri Prithvi Cotton Mills Rd. v. Broach Borough Muicipality, show that : (a) a direct tax on lands and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al land could not come under entry 97. (9) The extension of wealth-tax to agricultural lands would be an encroachment on the State's power under entry 49 of List II. Taxes direct or indirect so far as agricultural lands are concerned are comprised in entry 49 of List. II. If entry 49 is so read it would be beyond the competence of Parliament to enact legislation which would have the effect of levying a tax on the value of the assets which included agricultural lands. The Wealth-tax Act, 1957, as it stood before the amendment of 1969 contained the following provisions relevant for the purpose of this appeal. Under section 2(e): " 'Assets' includes property of every description, movable or immovable, but does not include,--- (i) agricultural land and growing crops, grass or standing trees on such land ; (ii) any building owned or occupied by a cultivator or receiver of rent or revenue out of agricultural, land : Provided that the building is on or in the immediate vicinity of the land and is a building which the cultivator or the receiver of rent or revenue by reason of his connection with the land requires as a dwelling-house or a store house or an out-house ; .... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d requires as a dwelling-house or a store-house or an out-house ; (iii) animals ; (iv) certain right to annuities ; (v) certain interests in property ; (2) in relation to the assessment year commencing on the 1st day of April, 1970, or any subsequent assessment year--- (i) animals ; (ii) certain right to annuities (iii) certain interests in property. " The exemptions provided in section 5 were considerably augmented by inclusion of the following relevant clauses in sub-section (1) of section 5. These are as follows : " (iv-a) agricultural land belonging to the assessee subject to a maximum of one hundred and fifty thousand rupees in value : Provided that where the assessee owns any house or part of a house situate in a place with a population exceeding ten thousand and to which the provisions of clause (iv) apply and the value of such house or part of a house together with the value of the agricultural land exceeds one hundred and fifty thousand rupees, then the amount that shall not be included in the net wealth of the assessee under this clause shall be one hundred and fifty thousand rupees as reduced by so much of the value of such house or part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of assets of great value not to be subject to proportionately high taxation if he owes large debts to others within the meaning of the definition clause of section 2(m) on the valuation date. The overall change by the Amendment Act of 1969 lay in that in respect of assets in relation to the assessment year commencing from 1st April, 1970, and any subsequent year agricultural lands, growing crops or a building occupied by a cultivator or receiver of rent or revenue out of agricultural land ceased to be exemptible. The main question in this appeal is, whether the amendment of the definition of " assets " by withdrawing the exemption in respect of agricultural land, etc., was within the competence of Parliament. The vires of the Wealth-tax Act of 1957 was challenged before different High Courts prior to the decision appealed from and the matter also came up to this court as is to be found in at least three decisions which have come to my notice. But as no question ever arose with regard to the competency of Parliament to include agricultural assets in the definition of " net wealth " for the purpose of levying wealth-tax, the point now before us never arose in any of those pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3). By clause (3) the legislature of a State is given exclusive power to make laws for such part or any part thereof with respect to matters enumerated in List II, but this is to be subject to clauses (1) and (2). Broadly speaking, the scheme under this article is that Parliament is to have exclusive power to make laws with respect to matters in List I, the State is to have such exclusive power with regard to matters in List II, subject to the powers, of Parliament in respect of matters in List I and III, while matters in List III could be the subject matter of legislation both by Parliament and the State legislatures. By clause (4), however, Parliament is given power to make laws with respect to any matter for any part of a territory of India not included in a State, notwithstanding that such matter is a matter enumerated in the State List. Obviously the Constitution gave Parliament the power to make laws with respect to Union territories mentioned in sub-clause (b) of clause (3) of article 1 of the Constitution and other territories mentioned in sub-clause (c) of the said clause as might be acquired after the commencement of the Constitution. The Constitution-makers envisaged a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Provincial List and 36 in List III known as the Concurrent Legislative List. Even a cursory comparison between List I of the Constitution and List I of the Government of India Act will show some additions of subject-matters which either did not exist or could not be thought of at the time when the Government of India Act was enacted. For instance entry 6 in present List I reads : " Atomic energy and mineral resources necessary for its production " and entry 12 " United Nations Organisation " : atomic energy in 1935 was only in the minds of the scientists. United Nations Organisation had not come into existence. Although the League of Nations was there, probably it was not thought necessary to include any such entry in List I under the Government of India Act because it would be the Imperial Parliament which would be primarily concerned with this subject. Entry 14 in the present list reading " Entering into treaties and agreements with foreign countries and implementing of treaties, agreements and conventions with foreign countries " and entry 15 " War and peace " could not form the subject matters of legislation when the federal legislature was not a sovereign body for such purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oslems demanding it with the Provinces. " It would appear from the same speech that all attempts to bridge the difference only resulted in making the Federal List, the Provincial List and the Concurrent List each as exhaustive as possible to leave little or nothing for the residuary field. The said speaker hoped that " all that was likely to go into the residuary field were perhaps some quite unknown spheres of activity " which could not be contemplated at the moment. The matter had engaged the attention of the Constituent Assembly. The Second Report of the Union Powers Committee dated 5th July, 1947, to the President of the Constituent Assembly contains the following statement : " We think that residuary powers should remain with the Centre. In view, however, of the exhaustive nature of the three Lists drawn up by us the residuary subjects could only relate to matters which, while they may claim recognition in the future, are not at present identifiable and cannot therefore be included now in the Lists. " Moving the aforesaid report Shri Gopalaswami Aiyangar in his speech on the 20th August, 1947, said, inter alia, as follows : " We should make the Centre in this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is concerned, Parliament has the exclusive power. The competence of the State legislature to legislate with regard to preventive detention can only be under entry 3 of List III but even then it cannot encroach on the field set apart for exclusive legislation by Parliament though the two fields of legislation may, in certain circumstances, have a common border difficult of definition. So far as " lands ", whether agricultural or otherwise, agriculture, agricultural income and taxes with regard to any of these matters, the specification appears to be as follows : LIST I. Entry 82. Taxes on income other than agricultural income. Entry 86. Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies ; taxes on the capital of companies. Entry 87. Estate duty in respect of property other than agricultural land. Entry 88. Duties in respect of succession to property other than agricultural land. LIST II. Entry 18. Land, that is to say, rights in or over land, land tenures including the relation of landlord and tenant, and the collection of rents ; transfer and alienation of agricultural land ; land improvement and agricultur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 86 in List I reads " Taxes on the capital value of the assets, exclusive of agricultural land of individuals and companies ; taxes on the capital of companies there is no corresponding entry with regard to tax on capital value of agricultural lands, the nearest approach to it being entry 49 in List II " Taxes on lands and buildings." In order to find out the true nature of the Wealth-tax Act one must look at the charging section to ascertain the exact scope of the legislation. In the words of the Judicial Committee of the Privy Council in Provincial Treasurer of Alberta v. C. E. Kevr " the identification of the subject-matter of the tax is naturally to be found in the charging section of the statute, and it will only be in the case of some ambiguity in the terms of the charging section that recourse to other sections is necessary ". The scheme of the Act in substance is to treat the individual as if he was a business, ascertain the price which the said business would fetch by deducting its liabilities from its tangible assets and impose a tax on the balance which is the net wealth of an individual. Whereas, under the Wealth-tax Act as originally enacted a portion of the assets, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue or cost of construction, either of which can, with appropriate corrections, be converted into approximately equivalent terms of annual value. (See page 436 quoting the rule expressed by Scott L.J. in Robinson Brothers (Brewers) Ltd. v. Houghton and Chester-le-Street Assessment Committee). According to Farady on Rating, 5th edition, page 42 : " 'Effective capital value' is a term commonly used by valuers, but, so far, no definition of such term appears in any text-book, and, in order to determine 'effective capital value' of any building the valuer must appreciate the proper significance of the term." The learned author then goes on to discuss the positive meaning of the expression by first explaining its negative meaning and at page 43, after noting some instances, states : " The above instances are sufficient to illustrate the difficulty of defining 'effective capital value '. It is submitted that the substantive definition of this expression is 'the selling price between a willing seller and a willing purchaser of the property in question, subject to the restriction that it can only be occupied substantially in its present condition'; this takes into consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and buildings, hearths and windows ". The inclusion of hearths and windows made little difference to the entry and it was, therefore, dropped from the List in the Constitution. In Sir Byramjee Jeejeebhoy v. Province of Bombay, the scope of entry 42 in List II came to be examined in juxtaposition to that of entry 55 in List I which is identical with entry 86 of List I of the Constitution. In that case, the jurisdiction of the State legislature to levy a tax called the Urban Immovable Property Tax Act was challenged. There by Part 6. Bombay Finance Act of 1932 incorporated therein by the Bombay Finance (Amendment) Act, 1939, was impugned. Section 20 of the said Part 6 of the Bombay Finance Act directed that inclusion of the said Part was to extend to the City of Bombay and the other places therein mentioned. Section 21 defined " annual letting value " in the city of Bombay as meaning the rateable value of buildings or lands as determined in accordance with the provisions of the City of Bombay Municipal Act, 1888. Section 22 which was the charging section provided that there shall be levied and paid to the Provincial Government a tax on buildings and lands called the Urban Immovable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obviously be affected by several factors, e.g., mortgages and charges, of which the impugned tax takes no account ......... Looking at the essential character of the tax from the legal point of view, I think it may be described as a tax on lands and buildings, imposed on the owners qua owners, and assessed by a somewhat arbitrary but not inequitable standard, which is not dependent either on the income of the assessee or on the capital value of the properties." Kania J. did not think that the impugned tax was of a nature to encroach upon item 55 in List I ; under that item the tax should be on the total capital assets and not on a portion of the person's capital. In Municipal Corporation v. Gordhandas, rule 350-A framed by the Corporation of the City of Ahmedabad in respect of a rate on open lands was impugned as ultra vires. This rule laid down the manner in which the rateable area of the open lands was to be determined and provided that the rate of the area of open land thus determined was to be levied at one per cent. of the valuation based on capital and all such lands subject to " exemptions thereinafter provided shall be liable to be charged the same ". Rule 243 dealt w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d absolute. In the present case, the power of the Municipal Corporation to levy a tax on the open land is similar in extent to the power of the local legislature ............ If, by adopting this basis, the inevitable result would be that the rate which is ultimately levied amounts to a capital levy and is, therefore, ultra vires, it would be necessary to hold that not only is rule 350A ultra vires, but the Explanation to section 75 itself is ultra vires." He did not, however, feel driven to this conclusion as in his view : "...... a distinction must be made between a rate or tax which is levied on land on the basis of its capital value and a tax which is levied on the capital value of the land treating it as an asset itself. " He added : " It seems to me that it is perfectly legitimate to the taxing authority to attempt to correlate its tax to the real value of the property. It would be open to a municipality to levy a uniform tax on all the buildings ; it would similarly be open to the municipality to levy a uniform tax on all the lands. The municipality may, however, attempt to make such taxation reasonable by taking into account the areas of the lands and the size a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . All the same, the owner would not be immune from the levy of a tax upon the said land by the municipality under entry 42 of List II, for the municipality .. . is not concerned with whether the land is encumbered or unencumbered. " It must be noted that the above decision was set aside in appeal to this court but there is nothing in the judgment of this court which goes against the interpretation of the expression " capital value " by the High Court. The decision of the majority judges of this court was based on the fact that the word " rate " had not been used anywhere in the Act and when it was provided that in the case of open lands the basis of valuation may either be capital or annual letting value " the words must be held to refer to that well-known method of valuation prevailing in England with respect to levy of rates and cannot be read to mean a percentage of the capital value itself " : Patel Gordbhandas Hargobindas v. Municipal Commissioner, Ahmedabad. Entry 49 appears always to have been regarded as contemplating the levy of tax oh lands and buildings both as units. As was pointed out in Assistant Commissioner of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he difficulty which appears on the surface is removed. In our opinion, the crucial question to be answered is whether merely because the Income-tax Act has adopted the annual value as the standard for determining the income, it must necessarily follow that, if the same standard is employed as a measure for any other tax, that tax becomes a tax on income ? " Considering the pith and substance of the legislation the court said that : " There is however nothing in the impugned Act to show that there was any intention on the part of the legislature to get at or tax the income of the owner from the building . . . . The annual value, as has been pointed out, is at best only notional or hypothetical income and not the actual income. It is only a standard used in the Income-tax Act for getting at income, but that is not enough to bar the use of the same standard for assessing a provincial tax. If a tax is to be levied on property, it will not be irrational to correlate it to the value of the property and to make some kind of annual value on the basis of the tax without intending to tax income. " The ultimate conclusion of the court was that in substance the impugned tax was not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The other learned judge, Desai J, expressed himself similarly. In N. V. Subramanian v. Wealth-tax Officer, Eluru, the vires of the Act wits challenged by a Hindu undivided family before the Andhra Pradesh High Court, the exact contention being : " that the respondent cannot take action under the provisions of the Wealth-tax Act, 1957, with respect to a Hindu undivided family on the. ground that the Act, in so far as it enables the levy and collection of wealth-tax on the capital value of the assets of a Hindu undivided family, is beyond the legislative competence of the Union Parliament. . . ." No point appears to have been raised as to whether wealth-tax could at all be the subject of a levy under entry 86, as the High Court noted : " The principal question that falls to be determined is whether the expression 'individuals' in entry 86 can comprehend a Hindu undivided family ". Reference was made to Mahavirprasad's case as also decisions turning on the interpretation of the expression " individuals " in section 3 of the Income-tax Act of 1922 and it was held that the principle of the said decision applied to the construction of 'individual' in entry 86. Although the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase or object of the levy, According to the learned judge there was no overlapping of imposts under entry 86 and entry 49 as in his view : " To allocate the legislative power to impose a tax on the capital value of lands and buildings, treating them as assets, entirely to the field covered by entry 86 in the Union List is not, as contended, to rob entry 49 in the State List of its content, for even excluding taxes under entries 45 to 48 in the State List, which have some relation to lands or buildings or both, the field is still open under entry 49 for legislation for other taxes on lands and buildings ... There is, therefore, really no conflict and no overlapping of jurisdictions in the case of the two entries in question." The learned judge was further of the view that : :...entry 49 must be held to be a general provision for taxes on lands and buildings and to yield to entry 86 which must be held to be a special provision for a particular tax, viz., a tax on the capital value of assets. " On the other aspect of the case, e.g., that a tax on the net wealth of an assessee to the extent that it is or may be said to be made up of his agricultural income and as such pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that " land " other than agricultural land, being a part of the assets, came within the scope of entry 86. It was argued that entry 86 of List I did not empower Parliament to levy wealth-tax on undivided families. This point was decided against the assessee by the learned judges observing : " Whenever a question arises as to the source of power, the task of the court is to locate that power in one or the other of the Lists . . . As mentioned earlier, it is not the case of the assessee that the power in question can be located either in List II or List III. Therefore, it follows that Parliament has power to legislate on the subject either under entry 86, failing that under the residuary power given to it under entry 97. It makes no difference whether the source of the power is in entry 86 or in entry 97. Therefore, we hold that Parliament had competence to enact a law providing for imposing wealth-tax on undivided families. " The Madras High Court had to deal with the question in Raja Sir M. A. Muthiah Chettiar v. Wealth-tax Officer, Madras. The petitioner there asked for the issue of a writ of prohibition to direct the Wealth-tax Officer to forbear from taking procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter " mentioned in entry 97 cannot take in taxes specified in entry 86, but it refers to the subject-matter in respect of which Parliament seeks to make a law under entry 97. The bulk of the arguments there turned on the interpretation of the word " individuals " in entry 86 and as to whether the use of that word justified the levy of a tax on Hindu undivided families. According to this court : The basic assumption on which the appellants' argument rests is that the Constitution-makers wanted to exclude the capital value of the assets of Hindu undivided families from taxes. That is why their contention is that the impugned provision would not be sustained either under entry 86, or under entry 97, of List I or even under article 248 " To this the court's reaction was : " On the face of it, it is impossible to assume that while thinking of levying taxes on the capital value of assets, Hindu undivided families could possibly have been intended to be left out. " It It was further said : " The Constitution-makers were fully aware that Hindu citizens of this country normally form Hindu undivided families and if the object was to levy taxes on the capital value of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto that question as is clear from a passage at page 110 of the judgment : " Parliament enacted the Wealth-tax Act in exercise of the power under List I of the Seventh Schedule, entry 86, 'Taxes on the capital value of assets, exclusive of agricultural lands, of individuals and companies ; taxes on the capital of companies'. That was so assumed in the decision of this court in Banarsi Dass v. Wealth-tax Officer, Special Circle, Meerut and counsel for the petitioner accepts that the subject of Wealth-tax Act falls within the terms of entry 86, List I, of the Seventh Schedule. What he argued however was that since the expression 'net wealth' includes non-agricultural lands and buildings of an assessee, and power to levy tax on lands and buildings is reserved to the State legislatures by entry 49, List II, of the Seventh Schedule, Parliament is incompetent to legislate for the levy of wealth-tax on the capital value of assets which include non-agricultural lands and buildings." This was however turned down by the court observing : " The tax which is imposed by entry 86, List I, of the Seventh Schedule is not directly a tax on lands and buildings. It is a tax imposed on the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntention was that capital value of lands and buildings would fall under entry 49 and would therefore fall within the exclusive field of legislation of the State. This was turned down by the court holding that the concept of a tax on net wealth which included not only the value of the assets but excluded the general liability of the assessee to pay his debts was one entirely different from a concept of tax attributable to lands and buildings as such. With respect, this was the proper approach to the identification of the subject-matter of legislation, i.e., that the levy had no direct relationship to the aggregate value of the assets of an " individual " but his net worth which was to be determined by deducting his liabilities from the total value of the assets held by him. In Assistant Commissioner of Urban Land Tax v. Buckingham Carnatic Co. Ltd., Madras Act 12 of 1966 was, inter alia, challenged before the Madras High Court as violative of articles 14 and 19(1)(f) of the Constitution. Before this court it was contended, inter alia, on behalf of the assessee that the impugned Act fell under entry 86, List I, and not under entry 49 of List II, and as entry 49 envisaged taxes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of tax on lands and buildings or both as units. It is not concerned with the division of interest or ownership in the units of lands or buildings which are brought to tax. Tax on lands and buildings is directly imposed on lands and buildings and bears a definite relation to it. Tax on the capital value of assets bears no definable relation to lands and buildings which may form a component of the total assets of the assessee. For the purpose of levying tax under entry 49, List II, the State legislature may adopt for determining the incidence of tax the annual or the capital value of the lands and buildings. But, the adoption of the annual or capital value of lands and buildings for determining tax liability will not make the fields of legislation under the two entries overlapping. The two taxes are entirely different in their basic concept and fall on different subject matters. Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality was the aftermath of the judgment of this court in Patel Gordhandas's case. To undo the effect of that decision the Gujarat legislature passed the Gujarat Imposition of Taxes by Municipalities (Validation) Act, 1963, seeking to validate the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... word " individuals " in entry 86. The court held that " individuals " in entry 86 would include Hindu undivided families as had been the view of many High Courts. With respect, no serious attempt was made in any of the cases to properly identify the subject-matter of the legislation imposing the tax and ascertain whether capital value of assets meant the same thing as net wealth as defined in the Wealth-tax Act. The various decisions and authorities cited above which bear on the true meaning of the expression " capital value of assets " make it amply clear that the same can only mean the market value of the assets less any encumbrances charged thereon. The expression does not take in either the general liabilities of the individual owing them or in particular the debts owed in respect of them. In my view, the subject-matter of legislation by the Wealth-tax Act is not covered by entry 86 but by entry 97 of List I. The capital value of the assets of an individual is as different from his net wealth as the market value of the saleable assets of a business is from its value as a going concern ignoring the goodwill. When a business is valued as a going concern its assets and liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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