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New Delhi Municipal Committee v. State of Punjab [(1997) 7 SCC 339]

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NEW DELHI MUNICIPAL COMMITTEE v. STATE OF PUNJAB ETC. ETC.

DATE OF JUDGMENT:   19/12/1996

BENCH:
J.S. VERMA, S.C. AGRAWAL, B.L. HANSARIA


JUDGMENT:
           THE 19TH DAY OF DECEMBER, 1996
Present:
         Hon'ble the Chief Justice
         Hon'ble Mr. Justice J.S. Verma
         Hon'ble Mr. Justice S.C. Agrawal
         Hon'ble Mr. Justice B.P. Jeevan Reddy
         Hon'ble Dr. Justice A.S. Anand
         Hon'ble Mr. Justice B.L. Hensaria
         Hon'ble Mr. Justice S.C. Sen
         Hon'ble Mr. Justice K.S. Peripoornan
         Hon'ble Mr. Justice B.N. Kirpal
Ashok H. Desai, Attorney General, B. Sen, A.M. Singhvi, A.K.
Ganguli, A.S.  Nambiar, U.N.  Bachawat, P.P. Rao, Sr. Advs.,
(J. Chalmeswar)  Additional Advocate  General for  (State of
A.P.), Ranjit  Kumar, Ms. Binju Tamta. Yatish Mohan, Ms. Anu
Mohla, R.K. Maheshwari, R.N. Keshwani, Vineet Maheshwari, A.
Subba Rao,  B.K. Prasad, Arun K. Sharma, Ms. Vandana Sharma,
K.B. Rohatgi,  Ms.  Aparna  Rohatgi,  Praveen  Jain,  Baldev
Atreya, K.  Ram Kumar, Ms. Asha Nair, C. Balasubramaniam, A.
Mariarputham, Ms.  Aruna Mathur, G. Prakash, S.K. Agnihotri,
Sapam Biswajit  Meitei, Ashok Kr. Singh, (J.R. Das) Adv. for
M/s. Sinha  & Das  Co., Prem  Malhotra, K.R. Nambiar, C.S.S.
Rao, T.T.  Kunhikannan, T.C. Sharma, (G.M. Kawoosa) Adv. for
Ashok Mathur,  M.A. Firoz,  (Ms. Mona  Chakraverty) Adv. for
Raj Kumar  Methta, Aruneshwar  Gupa, S.K.  Ningomban,  Manoj
Swarup, Ms.  Hemantika Wahi,  Ms. S. Hazarika, Ms. N. Singh,
Ms. M.  Kaur, D.M.  Nargolkar, (Rajiv  Khanna) Adv. for Raju
Ramchandran, D.P. Mohanty, Advs. with them for the appearing
parties.
             J U D G M E N T S
     The following Judgments of the Court were delivered:
                WITH
         CMP Nos. 10327, 30308/88, 33826/84
                WITH
C.A. Nos.  92-125/80,  201/80,  1223/80,  1352/80,  2363/80,
2912/81, 47-66/84, 16881, 16882, 16883/96, SLP(C) NOS. 9533,
9416,  10628/81,   C.A.  Nos.   1941/81,  2365/80,  2366/80,
16884/96, SLP(C) No. 6971/87.
              J U D G M E N T
Ahmadi, CJI.
     These civil  appeals and  special leave  petitions have
been filed  against the judgment and order of the Delhi High
Court dated March 14, 1975 in Civil Writ Petition No. 342 of
1969 and  other  orders  which  follow  this  judgment.  The
appellant in  all these  matters is  the New Delhi Municipal
Committee (hereinafter  called "the  NDMC"). The respondents
are the  Union of  India and  the State  of Andhra  Pradesh,
Gujarat, Haryana,  Jammu &  Kashmir, Kerala, Madhya Pradesh,
Maharashtra, Orissa,  Punjab, Rajashthan,  Tripura and  West
Bengal. The  Municipal  Corporation  of  Delhi  (hereinafter
called "the MCD") appears as an intervenor.
     The Case History
     The development  that occasioned  the setting up of the
Constitution Bench  may now  be briefly  set out. The Punjab
Municipal  Act,  1911  (hereinafter  called  "the  Act")  is
applicable to  the Union  Territory of  Delhi and  under the
provisions of  this Act,  the NDMC had been levying property
tax on  the immovable  properties of  the respondent  States
situated  within   Delhi.  The  respondents  challenged  the
imposition of  such a  tax on  their properties  before  the
Delhi High Court by contending that it would fall within the
exemption  provided   for   in   Article   289(1)   of   the
Constitution. In  the  impugned  judgment,  the  Delhi  High
Court, while  accepting this  contention,  relied  upon  the
relevant observations  of the  9-Judge Constitution Bench of
this Court  in In Re The Bill to amend Section 20 of the Sea
Customs Act,  1878 and  Section 3 of the Central Excises and
Salt Act, 1944, [1964] 3 S.C.R. 787 (hereinafter called "The
Sea Customs  Case"), to  quash the assessment and demands of
house-tax in  respect of  the properties  of the  States and
restrained the  NDMC from  levying such a tax in future. The
NDMC filed  an application  under Article  133(1)(c) of  the
Constitution seeking the grant of a certificate for leave to
appeal to the Supreme Court; while granting the Certificate,
the High  Court observed  that the principal question before
it had  grave constitutional  implications which required an
authoritative decision by this Court.
     On January  1, 1976,  a Division  Bench of  this  Court
directed that  the NDMC  could continue  to make assessments
but it  was not to issue demand notices or make any attempts
towards realisation  of the  taxes.  On  October  29,  1987,
another Division  Bench of  this  Court  directed  that  the
matter be listed before a Constitution Bench. On January 14,
1993, a  5-Judge Constitution  Bench  of  this  Court  began
hearing  arguments   and   after   considering   the   rival
submissions, on  October 4,  1994, passed an order referring
the matter  to a 9-Judge Bench. In the said order, the Bench
observed that  it had  considered the  decision in  the  Sea
Customs Case  and was of the opinion that the point at issue
in these  matters was  covered therein.  The decision in the
Sea Customs  case having  been reaffirmed by the decision of
this  Court   in  Andhra   Pradesh  State   Road   Transport
Corporation v.  The Income  Tax Officer  & Another, (1969) 7
S.C.R. 17  (hereinafter called "the APSRTC case"), the Bench
considered itself  bound by the decision; however, it was of
the view  that the  arguments advanced before it, which were
not considered  by the earlier decisions, were plausible and
required consideration  which necessitated the setting up of
a 9-Judge Bench to hear the matter.
     The Impugned Judgment
     An  analysis  of  the  impugned  judgment  may  now  be
resorted to  in order  to gain  an insight  into the various
Constitutional   questions    that    will    require    our
consideration. Before  the High  Court, the  various  States
contended the  following: by virtue of Article 289(1) of the
Constitution, the property of the State is exempt from Union
Taxation; the  undefined phrase  "Union Taxation" in Article
289(1) would  mean all taxes which the Union is empowered to
impose; under  the Constitutional  scheme and,  specifically
under Part  VIII of  the Constitution, Union Territories are
to be  administered by  the President  of India  through the
laws of  Parliament; Parliament  is the  law-making body for
all Union Territories and by virtue of Article 246(4), while
legislating for  Union Territories,  the power of Parliament
to make  laws extends to all the three lists in Schedule VII
of the  Constitution pertaining  to legislative  competence;
insofar  as  the  Act  and  its  application  to  the  Union
Territory of  Delhi is  concerned, though  it relates  to  a
matter in  the State  List, it  would still amount to "Union
Taxation" because, by virtue of its application to the Union
Territory  of  Delhi,  it  would  be  deemed  to  have  been
incorporated in  law made  by Parliament and would therefore
be a  Union Law  imposing tax;  since the tax imposed by the
Act amounts  to Union  Taxation, the  exemption  in  Article
289(1) of  the Constitution  which makes the property of the
States immune  from Union  Taxation would  be attracted, and
the properties  of the  States situated  in Delhi  would  be
exempt from all taxes on property.
     For the  NDMC, it  was  contended:  the  phrase  "Union
Taxation"  would   not  extend   to  legislations  in  Union
Territories and  interpretation should be restricted to laws
made by  Parliament in respect of the entries in List I; the
Union had  no power  to impose  taxes on entries relating to
property as  they fall  under List II; the Act being a State
Legislation could  not be  treated as  a Central Legislation
for the  purpose of  attracting Article  289(1); the test to
determine whether a tax forms part of "Union Taxation" is to
check if  the proceeds thereof form part of the Consolidated
Fund of India; since the proceeds of taxes on property under
the Act  did not form part of the Consolidated Fund of India
but were  retained by the Municipality for its own purposes,
such a  tax would  not form part of "Union Taxation" and the
States were  therefore not  entitled  to  be  exempted  from
paying  it   under  Article   289(1);  the   scheme  of  the
Constitution indicates  that Part C states, which later came
to be  called Union Territories, were carved out as separate
entities and  were not  to be regarded as part and parcel of
the Union  Government; when  the Union Government legislates
for Union Territories, it does so in a special and different
capacity,  and  not  as  the  Union  Legislature;  it  would
therefore be  erroneous to treat such laws made by the Union
Government for  the Union  Territories as part of Union Laws
that  would  account  for  "Union  Taxation"  under  Article
289(1).
     To reach  its conclusion,  the High  Court conducted an
examination of  the legislative  history of  the Act and its
extension to  the Union  Territory  of  Delhi;  studied  the
scheme of  the Constitution  with regard to the distribution
of legislative  powers between  the States  and  the  Union;
considered the  historical Constitutional  position of Union
Territories; scrutinised  the series  of decisions  of  this
Court on  the issue  whether a  Union  Territory  is  to  be
regarded as  a State,  and analysed  the decision in the Sea
Customs case  to  appreciate  the  true  import  of  Article
289(1). In  arriving  at  its  conclusion,  the  High  Court
rejected the test of the proceeds of taxes being part of the
Consolidated Fund  of India  as being  determinative of  the
nature of  Union Taxation.  It accepted  the contention that
all laws  applicable in a Union Territory would be deemed to
be laws  made y  Parliament and  would therefore  be part of
"Union Taxation"  and relied  upon the following observation
in the Sea Customs case (at p. 812) for support:
     "If a State has any property in any
     Union  Territory,   that   property
     would be exempt from Union Taxation
     on property under Article 289(1)."
     The High Court rejected the contention that the Act was
a State  enactment and  stated that  under the scheme of the
Constitution, the  term "Union  Territory" was distinct from
"State" and therefore, the Union Territories could not claim
to be  States for the purpose of attracting the exemption in
Article 289(1).
     Faced  with   such  a   vast   gamut   of   issues   of
Constitutional import,  we are  of the  view that  before we
analyse the  submissions put  forth before us by the learned
counsel for  the various  parties, it would be convenient if
the historical  background of  certain aspects of the matter
could be  set out so as to provide a setting where the rival
contentions can be better understood.
     Constitutional history of the areas that are now called
"Union Territories"
     In the  pre-Constitutional era,  these territories were
called Chief  Commissioner's Provinces.  The  Government  of
India Act  of 1919  contained specific  provisions  for  the
governance  of   these  areas.   Under  the  scheme  of  the
Government of  India Act,  1935 (hereinafter  referred to as
"the 1935  Act"), the Federation of India comprised: (a) the
Provinces called Governor's Provinces; (b) the Indian States
which had  acceded to  or were  expected to  accede  to  the
Federation; and (c) the Chief Commissioner's Provinces. Part
IV of  the 1935  Act dealt  with  the  Chief  Commissioner's
Provinces  and  Section  94  listed  them  as:  (i)  British
Baluchistan, (ii)  Delhi, (iii)  Ajmer-Marwara, (iv)  Coorg,
(v) Andaman  & Nicobar  Islands, and  (vi) the area known as
Panth Piploda:  and provided  that these  areas were  to  be
administered by the Governor General, acting through a Chief
Commissioner.
     On July  31, 1947,  during the  incipient stages of the
framing  of   the  Constitution,   a  Committee   under  the
Chairmanship of  Dr. B. Pattabhi Sitaramayya was established
to study  and report  on the Constitutional changes required
in  the  administrative  structure  existing  in  the  Chief
Commissioner's provinces  to give  to the  people  of  these
provinces a  due place  in the democratic governance of free
India. After  the recommendations  of  this  Committee  were
sanctioned by  the  Drafting  Committee,  they  were  placed
before the  Constituent Assembly for its consideration.
     The Constituent  Assembly considered all aspects of the
issue with a view to providing an appropriate administration
for what  were called  Part C  States, which  included three
former Chief  Commissioner's Provinces  - Delhi,  Ajmer  and
Coorg - and some erstwhile Indian States which were retained
as centrally  administered areas  after  their  merger  with
India; the  latter group  consisted of  the following areas:
Himachal  Pradesh,  Bhopal,  Bilaspur,  Cooch-Bihar,  Kutch,
Tripura, Manipur  and Vindhya  Pradesh. It  was decided that
the  decision   weather  these   territories   should   have
legislatures and  Councils of  Ministers ought to be left to
Parliament and,  for this  purpose,  an  enabling  provision
should be  incorporated within the Constitution. It was also
provided that  these Part  C States would be administered by
the President,  acting to  such extent  as he  thought  fit,
through a  Chief Commissioner or a Lieutenant Governor to be
appointed by  him, or  through the Governor of a neighboring
State,   subject   to   certain   procedural   requirements.
Accordingly, Articles 239 and 240 were inserted in the final
draft of the Constitution.
     Under the  Constitution of India, as initially enacted,
the Sates  were divided  into Part  A States, Part B States,
Part C  States and  the territories  in Part  D.  The  First
Schedule to  the Constitution provided details of the States
falling within  each of  these categories. The Part C States
comprised: (i)  Ajmer; (ii)  Bhopal;  (iii)  Bilaspur;  (iv)
Cooch-Bihar; (v)  Coorg; (vi) Delhi; (vii) Himachal Pradesh;
(viii) Manipur;  and (ix)  Tripura. The only territory under
Part D was Andaman & Nicobar. Part VIII of the Constitution,
comprising Articles  239-242,  dealt  with  Part  C  States.
Article  239   provided  that  Part  C  States  were  to  be
administered  by   the  President  acting  through  a  Chief
Commissioner or  a Lieutenant Governor. Article 240 provided
that Parliament could, by law, create a local legislature or
a Council of Ministers or both for a Part C State and such a
law  would   not  be   construed  as   a  law  amending  the
Constitution. Article  241 allowed  Parliament to constitute
High Courts for the States in Part C States. Article 242 was
a special  provision for  Coorg.  Article  243,  which  also
constituted  Part   IX  of  the  Constitution,  stated  that
territories in Part D would be administered by the President
through a  Chief  Commissioner  or  other  authority  to  be
appointed by him.
     In exercise of its powers under Article 240 (as it then
stood), Parliament  enacted the  Government of Part C States
Act, 1951  whereunder provisions were made in certain Part C
States for  a Council  of Ministers  to aid  and advise  the
Chief Commissioner  and also  for a  legislature  comprising
elected representatives. Section 22 of this legislation made
it clear  that the  legislative powers of such Part C States
would  be   without  prejudice  to  the  plenary  powers  of
Parliament to legislate upon any subject.
     The State Reorganisation Commission which was set up in
December, 1953,  while studying  the working of the units of
the Union,  took up  to functioning of the Part C States for
examination  as   an  independent   topic.  In  its  Report,
submitted in  1955, the  Commission expressed  the view that
Part  C   States  were   neither  financially   viable   nor
functionally efficient,  and recommended  that each  of them
should either  be amalgamated with the neighboring States or
made a centrally administered territory.
     Substantial  changes  were  made  by  the  Constitution
(Seventh  Amendment)  Act,  1956  (hereinafter  called  "the
Seventh   Amendment    Act"),   which    incorporated    the
recommendations of  the States Reorganisation Commission and
was to have effect in concert with the States Reorganisation
Act, 1956.  The four categories of States that existed prior
to these  Acts were  reduced to two categories. The first of
these categories  comprised one  class called  `States,' and
there were  14 such  `States'. The second category comprised
the areas which had earlier been included in Part C and Part
D states;  these areas  were called  "Union Territories" and
were six  in number.  Some additions and deletions were made
to the  existing lists. While Ajmer, Bhopal, Coorg, Bilaspur
and Kutch-Bihar became parts of other States. The Laccadive,
Minnoy and  Amindivi Islands  became a  Union Territory. The
six Union  Territories,  therefore,  were:  (1)  Delhi;  (2)
Himachal Prades;  (3) Manipur;  (4) Tripura;  (5) Andaman  &
Nicobar  Islands;  (6)  The  Laccadive,  Minnoy  &  Anindivi
Islands.
     The Seventh  Amendment Act also replaced Articles 239 &
240 by  new provisions;  the new  Article  240  allowed  the
President to  make regulations for certain Union Territories
and this  provision continues  to this day. It also repealed
Article 242 & 243 of the Constitution.
     Subsequently, Dadra  &  Nagar  Haveli  became  a  Union
Territory by  the Constitution  (Tenth Amendment) Act, 1961;
Goa, Daman & Diu and Pondicherry became Union Territories by
the Constitution  (Twelfth Amendment) Act, 1962; Chandigargh
became a Union Territory by the Punjab (Reorganisation) Act,
1966.
     The  Constitution   (Fourteenth  Amendment)  Act,  1962
replaced the  old Article  240  as  Article  293A,  enabling
Parliament to  create a  Legislature  and/or  a  Council  of
Ministers for Himachal Pradesh, Manipur, Tripura, Goa, Daman
and Diu  and Pondicherry.  Thereafter, by  the Government of
Union  Territories   Act,  1963,   Parliament   did   create
Legislative Assemblies,  comprising three nominated persons,
for these territories.
     Himachal Pradesh  ceased to  be a  Union Territories by
virtue of  the State  of Himachal Pradesh Act, 1970. Manipur
and Tripura  became States  by virtue  of the  North-Eastern
Areas (Reorganisation) Act, 1971. Arunachal Pradesh, Mizoram
and Goa,  Daman &  Diu ceased  to be  Union  Territories  by
virtue of  the State  of Arunachal  Act, 1986,  the State of
Mizoram Act,  1986 and the Goa, Daman & Diu (Reorganisation)
Act, 1987  respectively. The Laccadive, Minicoy and Amindivi
Island (Alteration  of Names)  Act, 1973 changed the name of
these Island  to `Lakshadweep'  but it continued to remain a
Union Territory.
     The present  list of  Union Territories  is as follows:
(i) Delhi;  (ii) Andaman  & Nicobar;  (iii) Lakshdweep; (iv)
Dadar & Nagar Haveli; (v) Daman & Diu; (vi) Pondicherry; and
(vii) Chandigarh.  However, it  is to  be noted that all the
Union Territories  do not  have  the  same  status.  By  the
constitution (Sixth-Ninth  Amendment)  Act,  1991,  Articles
239AA and 239AB, which are special provisions in relation to
Delhi, were  added. They  provide that Delhi, which is to be
called the National Capital Territory of Delhi, is to have a
Legislative Assembly  which will  be competent to enact laws
for matters falling in Lists II & III barring a few specific
entries. As  the position  stands at the present moment, the
Union Territories can be divided into three categories:
(i)  Union Territories without legislature - comprising
     Andaman & Nicobar, Lakshadweep, Dadar & Nagar Haveli,
     Daman & Diu and Chandigarh.
(ii) Union Territories  for  which  legislatures  have  been
     established by  Acts of Parliament under Article 239A -
     Pondicherry is the sole occupant of this category.
(iii) Union  Territories which  have legislatures created by
     the Constitution  (Articles  239AA  and  239AB)  -  The
     National  Capital   Territory  of  Delhi  is  the  sole
     occupant of this category.
     The Constitutional  History  of  the  National  Capital
Territory of Delhi and the application of the Act to it.
     The area  that is  now known  as the  National  Capital
Territory of Delhi was, until 1911, classified as a District
of the  State of  Punjab. Following  the announcement of the
decision to  transfer the  capital  of  British  India  from
Calcutta to  Delhi, Government  Notification No.  911  dated
September 17,  1912  was  issued  authorising  the  Governor
General to take under his authority the territory comprising
the Tehsil  of Delhi  and adjoining  areas. The Notification
provided for the administration of these areas as a separate
province under  the Chief  Commissioner. The Delhi Laws Act,
1912 and  the Delhi  Laws Act,  1915 made provisions for the
continuance of  laws in  force in the territories comprising
the Chief  Commissioner's Province  in  Delhi  and  for  the
extension of  other enactments  in  force  in  any  part  of
British India to Delhi by the Governor-in-Council. Under the
Government of  India Act, 1010 the Indian legislature at the
power to enact laws.
     Delhi was made by extension of laws force in Punjab and
other States  by Notifications  issued under  the Delhi Laws
Act, 1912  and 1915.  This enabled the General-in-Council to
ensure, as  far as possible, uniformity of laws with Punjab,
since a  substantial part  of Delhi had originally formed an
administrative   district    of   that    province.    After
Independence, Delhi continued to be administered directly by
the Governor  of India and the different Departments of that
Government  began   to  deal   directly  with  corresponding
Departments  in   the  Chief   Commissioner's  Office.  This
arrangement continued till shortly after the commencement of
the Constitution.
     In the period immediately after the commencement of the
Constitution, the  Part  C  States  Act,  1951  contained  a
specific provision,  Section 21,  in respect  of Delhi which
enabled it  to have  a Legislative Assembly and a Council of
Ministers with  restrictive powers to make laws. As a result
of this  provision, Delhi  continued to  have a  Legislative
Assembly and a Council of Ministers till 1956.
     The States  Reorganisation Commission  devoted  special
attention to  the needs  of the  National Capital.  It noted
that  the   dual  control   arising  from  the  division  of
responsibility between  the Union  Government and  the State
Government of Delhi had not only hampered the development of
the  capital,   but  had   also  resulted   in   a   "marked
deterioration of  administrative standards  in  Delhi".  The
Commission came  to the conclusion that the National Capital
must  remain  under  the  effective  control  of  the  Union
Government.  With  reference  to  the  plea  for  a  popular
Government, it observed: "We are definitely of the view that
municipal autonomy in the form of the Corporation which will
provide greater  local autonomy  than is the case in some of
the important  federal capitals,  is the right, in fact, the
only solution of the problem of Delhi State."
     After  the  Seventh  Amendment  Act  came  into  force,
following the  recommendations of  the States Reorganisation
Commission, the  Legislative Assembly  and  the  Council  of
Ministers  for  Delhi  ceased  to  exist  with  effect  from
November 1, 1956. Furthermore, the Delhi Municipal Act, 1957
was enacted  constituting a  Municipal Corporation  for  the
whole of  Delhi with  members elected  on the basis of adult
franchise. The  jurisdiction of  the MCD  covered almost the
entire Union  Territory of  Delhi, including  both urban and
rural areas.  The areas  within the limits of NDMC and Delhi
Cantonment Board  were kept  outside the jurisdiction of the
MCD, but  the  territorial  jurisdiction  of  the  NDMC  was
reduced. As already mentioned, the Constitution (Sixty-Ninth
Amendment) Act,  1991 introduced  Articles 239AA  and  239AB
into the  Constitution  which  provided  for  a  Legislative
Assembly and a Council of Ministers for Delhi. Subsequently,
the Government  of National  Capital Territory of Delhi Act,
1991  was   enacted  to   supplement  these   constitutional
provisions.
     The Act,  which  was  enacted  in  1911,  was  directly
applicable to  Delhi since  at that  point of time, it was a
district of  the State of Punjab. In 1912, when Delhi became
a Chief  Commissioner's Province,  the provisions of the Act
and various  other Punjab enactments were made t continue in
force in  the territory of Delhi by virtue of the Delhi Laws
Act of  1912 and  the Delhi  Laws Act  of  1915.  After  the
Constitution came  into being,  the Act was made to continue
by virtue of the provisions of the Part C States Laws Act of
1950 and the Union Territories Laws Act of 1950.
     Therefore, at  the time when the present dispute arose,
the  Act   was  still   in  force.  However,  in  1994,  the
Legislative Assembly  of the  National Capital  Territory of
Delhi enacted  the New  Delhi Municipal  Committee Act, 1994
which is the law in force today. The MCD levied property tax
on properties  situated  within  the  local  limits  of  its
jurisdiction by  virtue  of  the  provisions  of  the  Delhi
Municipal Corporation  Act, 1957.  However, for the purposes
of deciding  the  case,  we  are  concerned  only  with  the
provisions of the Act.
     Before this  Court, a  number of  parties have advanced
arguments on the various issues involved in the case. Mr. B.
Sen,  council   for  the   appellants,  NDMC,  as  also  the
intervenor, MCD, began by challenging the essential premises
of the impugned judgment and advanced elaborate arguments on
the manner  in which  the various  Constitutional provisions
that are  germane to  the case, ought to be interpreted. The
learned Attorney  General for India, appearing for the Union
of India,  supported the  stance adopted  by the NDMC. These
submissions  were  strenuously  opposed  by  Mr.  P.P.  Rao,
learned  counsel  for  the  State  of  Punjab  and  in  this
endeavour, he  was assisted  by Mr.  A.K.  Ganguli,  learned
counsel for the State of Tripura who buttressed the position
of the  States with his own submissions. The learned counsel
appearing for  the State  of Rajashthan  lent support to the
same.
     The Central Issues
     As before the High Court, so before us, the controversy
between the  parties has,  in the  main, centred  around the
question whether  the properties  owned and  occupied by the
various States  within the  National  Capital  Territory  of
Delhi are  entitled to  be exempted  from the  levy of taxes
under the Act by virtue of the provisions of Article 289(1).
The  larger   question  involved,  which  will  consequently
require our  consideration, is  whether by virtue of Article
289(1), the  States are  entitled to exemption from the levy
of taxes  imposed by  laws made  by Parliament under Article
246(4)  upon   their  properties   situated   within   Union
Territories.
     At this  stage, we  may set out the provisions that are
central to  the adjudication  of the  present matter. In the
following  table,   for  the   purposes   of   clarity   and
convenience,  Articles   285  and   289   of   the   present
Constitution have  been contrasted  against their  immediate
predecessors, viz., Sections 154 & 155 of the 1935 Act.
------------------------------------------------------------
GOVERNMENT OF INDIA ACT, 1935         CONSTITUTION
                      OF INDIA
------------------------------------------------------------
Sec. 154
4. Exemption of certain public Art.285 Exemption of property
property from taxation-        of the Union from State
Property vested in His         taxation - (1) The property
Majesty for purposes of the    of the Union shall, save in
government of the Federation   so far as Parliament may by
shall, save in so far as any   law otherwise provide, be
Federal law may otherwise      exempted from all taxes
provide, be exempt from all    improve by a State or by any
taxes imposed by, or by any    authority within a State.
authority within, a Province
or Federated State:
Provided until any Federal   (2) Nothing in clause(1) shall,
law otherwise provides,      until Parliament by law
any property so vested       otherwise provides, prevent any
which was immediately        authority within a State from
before the commencement      levying any tax on any property
of Part III of this Act      of the Union to which such
liable, or treated as        such property was immediately
liable, to any such tax,     before the commencement of this
shall so long as that tax    Constitution liable or treated
continues, continue to       as liable, so long as that tax
be liable, or to be treated  continues to be levied in that
as liable, thereto.      State.
Sec. 155
5. Exemption of Provincial Art.289 Exemption of property and
Governments and Rulers of     income of a State from Union
Federated States in respect   taxation - (1) The property
of Federal taxation-          and income of a State shall be
(1) Subject as hereinafter    exempt from Union taxation.
provided, the Government
of a Province and the Ruler  (2) Nothing in clause (1) shall
of a Federated State shall   prevent the Union from imposing
not be liable to Federal     or authorising the imposition
taxation in respect of       if, any tax to such extent,
lands or buildings situate   if any, as Parliament may be
in British India or income   law provide in respect of a
accruing, arising or         trade or business of any kind
received in British India;   carried on by,
------------------------------------------------------------
GOVERNMENT OF INDIA ACT, 1935  CONSTITUTION OF INDIA
------------------------------------------------------------
Provided that-
(a) where a trade or business   or on behalf of, the
of any kind is carried on by    Government of a State, or
or on behalf of the Government  any operations connected
of a Province in any part of   therewith, or any property
British India outside that     used or occupied for the
Province or by a Ruler in any  purposes of such trade or
part of British India, nothing business, or any income
in this sub-section shall      accruing or arising in
exempt that Government or      connection therewith.
Ruler from any Federal
taxation in respect of that
trade or business, or any
operations connected therewith,
or any income arising in
connection occupied for the
purposes thereof;
(b) nothing in this sub-section  (3) Nothing in clause (2)
shall exempt a Ruler from any     shall apply to any trade
Federal taxation in respect   or business, or to any
of any lands, buildings or   class of trade or business,
income being his personal    which Parliament may be law
property or personal income.    declare to be incidental to
                 the ordinary functions of
                 government.
(2) Nothing in this Act affects
any exemption from taxation
enjoyed as of right at the
passing of this Act by the
Ruler of an Indian State in
respect of any Indian
Government securities issued
before that date.
     Submissions of Counsel
     Mr. Sen  prefaced his  submissions for the NDMC and the
MCD by pointing out that the phrase "Union Taxation" used in
Article 289(1)  of the  Constitution has  not  been  defined
either in  the text  of the  Constitution or  in any  of the
decisions  rendered   by  this   Court.  Pointing   out  the
differences between  Article 285  & 289, Mr. Sen stated that
(i) the former exempts "all taxes" whereas the latter limits
its exemption  to taxes  relating to  "property and income";
and (ii) the former uses the words "imposed by a State or by
any authority  within a  State" whereas  the latter uses the
phrase "Union  Taxation".  Thereafter,  Mr.  Sen  contrasted
Article 289(1)  and Section  155 of the 1935 Act by pointing
out that  while Section  155(1)  uses  the  words  "lands  &
buildings", Article  289(1) uses  the word "property". This,
he explained,  was on account of the strong position adopted
by representatives of the States in the Constituent Assembly
who had  insisted that  the ambit  of the exemptions be cast
wider.
     At this  juncture, we  may refer  to article  246 which
reads as follows:
     "246. Subject-matter  of laws  made
     by   Parliament    and    by    the
     Legislatures  of   States  --   (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 (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 `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."
     Mr. Sen then submitted that two possible meanings could
be ascribed  to the  phrase "Union Taxation": (i) Taxes that
are levied  by Parliament  in exercise  of its  powers under
Article 246(1)  and pertain only to entries in List I of the
Seventh Schedule; (ii) Any tax that is levied as a result of
a  law   passed  by  Parliament  including  those  that  are
relatable to  entries in List II and List III of the Seventh
Schedule.  Mr.   Sen  vehemently   urged  that   the  former
interpretation be  adopted by  this Court. According to him,
acceptance of the latter would lead to anomalous results. He
submitted that when Parliament makes laws in exercise of its
powers under  Article 246(4)  and in doing so, legislates on
entries in  List-II, it  is doing so in a different capacity
and the  character of  these laws is different from ordinary
Union legislations.  To drive home the argument, Mr. Sen led
us through  certain other  provisions of  the  Constitution,
such as, Articles 249, 250, 252 and the Emergency Provisions
in Part  XVIII of  the Constitution which empower Parliament
to make  laws on  entries in  List II,  but the  nature  and
effect of  these legislations  requires  that  they  be  not
treated as ordinary Union legislations.
     Thereafter, he  took us  through various  provisions in
Part XII  of the  Constitution with  a view to analysing the
distribution of  revenues between  the Union and the States.
Having done  so, he  invited our attention to the provisions
of Part VIII of the Constitution to support his stand that a
Union Territory is an independent Constitutional entity akin
to a State and that it has an identity separate from that of
the Union  Government. To  this end,  he drew  our attention
towards several  decisions of  this Court  on  the  question
whether a  Union Territory is a State and sought to convince
us that,  in the  present context,  the answer to this query
must be in the affirmative.
     Referring to  the two  decisions of  this Court  on the
interpretation of Article 289(1) rendered in the Sea Customs
case and  the APSRTC  case, Mr. Sen contended that the issue
arising before  this Court  in the  present matter  had  not
arisen for  adjudication in  either of  these two  cases. He
submitted that  the observation  made by  Sinha, C.J. in the
former case  would, therefore, have to be regarded as obiter
dicta since  the issue of laws relating to Union Territories
was  not  before  the  Court.  He  explained  that  such  an
observation was  made in  the context  of  situations  where
Parliament can  directly impose a tax on property to counter
the argument  that only  States could levy taxes directly on
property under  the Constitution.  Mr. Sen  stated that  the
observation was  founded on  misconcenived premises and that
there  were   other,  more   appropriate  situations   where
Parliament could impose taxes directly on property, such as,
in the  case of Entry 3, List I which deals with Cantonments
and the  Cantonments Act,  1924 which  allows Parliament  to
levy taxes for Cantonments. Mr. Sen then contended that such
a power would be available to Parliament even when it enacts
a legislation  by using  Entry 49,  List I  which relates to
patents, inventions  and designs,  and also in the case of a
few other entries in List I.
     Thereafter, Mr.  Sen contended  that, in any event, the
taxes levied  by NDMC  would not  amount to  Union  Taxation
because they  are in  the nature  of a  Municipal  Tax.  Our
attention  was  drawn  towards  the  Constitution  (Seventh-
Fourth) Amendment  Act, 1992  which incorporated  Part  IXA,
dealing with  Municipalities in  our Constitution. He argued
that Municipalities  now  have  an  elevated  Constitutional
status and  that since  they have  their own  machinery  for
collecting taxes  besides having control over the fixing and
charging of  the taxes,  these taxes  cannot be  regarded as
part of  "Union Taxation".  He  then  took  us  through  the
relevant provisions  of the  Act, the  New  Delhi  Municipal
Corporation Act,  1994 and  the Delhi  Municipal Corporation
Act, 1957  to indicate  that each  of these  bodies has been
vested with  wide powers  of  fixing  the  rates  of  taxes,
collecting them  and then  using the  proceeds, which  go to
specially created  municipal funds,  towards securing  their
objectives. Drawing  sustenance from the language of Article
285, which  specifically  exempts  taxes  imposed  by  local
authorities, Mr.  Sen submitted  that since  such an express
exemption is  not referred  to in  Article 289(1), Municipal
Taxes were not meant to be covered within its exemption and,
therefore, the  States are  bound to  pay these taxes to the
NDMC and the MCD.
     The learned Attorney General for India began by stating
that it  is not  the identification  of the legislature that
imposes the  law which  is determinative  of  the  issue  of
"Union Taxation".  According to  him, to  determine the true
character of Union Taxation, the subject of the levy must be
analysed. He submitted that when Parliament makes use of its
power under  Article  246(4),  it  does  so  in  an  unusual
circumstance where  the `theme' of the legislation undergoes
a change.  He, therefore,  stressed that  in determining the
scope of  "Union Taxation",  attention must  be paid  to the
`theme', (i.e.,  the context  and the specific circumstances
in which  the tax  is levied)  rather than  to the  `author'
(i.e. the  body which  is levying  the tax).  He, therefore,
submitted that the interpretation of "Union Taxation" should
be restricted  to situations  where  Parliament  makes  laws
imposing taxes under Article 246(1).
     His next  submission was  that Articles  285 and 289 do
not  exhaust   the  entire   area  of   taxation  under  the
Constitution. Referring  to certain  other provisions  where
Parliament is required to make laws for subjects in List II,
the learned  Attorney General  drew  our  attention  towards
Articles 249,  250, 252, 253 and 357. He then submitted that
these provisions envisage unusual situations where, although
Parliament is  the law  making body,  the resulting laws are
not Union  laws in  the ordinary sense and the taxes imposed
by these  laws  cannot  be  said  to  form  part  of  "Union
Taxation". He  then contended  that similarly,  laws made by
Parliament under  Article 246(4) are not the norm and cannot
be said  to form  part of  "Union Taxation". Thereafter, the
learned Attorney  General took us through the constitutional
history of  Union Territories and more specifically, that of
the National  Capital Territory of Delhi. Having done so, he
stated that  such an analysis would reveal that though Union
Territories are  not States,  they are akin to States, being
nascent States.  He explained  that  the  practice  in  this
regard shows  that, in  most  cases,  when  a  territory  is
acquired by  the Union  and before  it is  admitted  to  the
Indian Union  as a  full-fledged States,  it is  groomed for
statehood by  being nurtured  as a  Union Territory. He then
referred us to the decision of this Court in Ramesh Birch v.
Union of  India, (1989)  Supp. 1 SCC 430 at 471, to buttress
his stance  that Parliament  cannot  be  expected  to  draft
legislations for Union Territories on a regular basis and to
explain how it meets with its obligations in this regard.
     Mr. P.P.  Rao, learned counsel for the States of Punjab
& Haryana,  began his submissions by explaining the doctrine
of immunity  of instrumentalities,  which is  said to be the
legal basis  for the  incorporation of  Articles 285 and 289
into our  Constitution, and  also mentioned  the comparative
positions  in   the  American,   Canadian   and   Australian
jurisdictions. He  submitted that  the doctrine  positulates
that in a federal set up, there should be inter-governmental
tax immunities  between the federal and State wings. Such an
immunity is  a Constitutional  limitation on  the low-making
power of the respective legislature in the field of taxation
as a  whole. After its genesis in the U.S., the doctrine has
come to  be  accepted  in  Canada  and  Australia.  Mr.  Rao
conceded that  though both  the 1935  Act  as  well  as  the
Constitution   had    incorporated   such   reciprocal   tax
immunities, they  were not  adopted to the same extent as in
Canada and  Australia. However,  unlike in  these countries,
the Union  of India  has a  sizeable territory  of  its  own
comprising all  the Union Territories specified in the First
Schedule. The  power to make laws including laws authorising
levy or  collection of  taxes  of  all  kinds  is  conferred
exclusively on  the Union  Parliament and  these territories
would  form   an  important   part  of  the  reciprocal  tax
immunities.
     He  then  drew  our  attention  to  Article  265  which
incorporates an  important constitutional  limitation on the
power of  taxation when  it states  that "no  tax  shall  be
levied or  collected except  by authority of law". In India,
there are  only two  legislatures that are competent to tax:
`Parliament for the Union' and the `Legislature of a State'.
Therefore, all  taxation must  fall  within  either  of  the
categories   -    Union   Taxation    or   State   Taxation.
Municipalities and  other local  authorities cannot  have an
independent power  to tax  and that  is why  there can be no
exemption for  Municipal taxes  independent of the exemption
for State or Union Taxation. To that extent, he submits, the
contention of  Mr. Sen,  that Article 289 exempts only Union
Taxation without  mentioning  municipal  taxes  which  would
imply that  the States  would not  be exempt from paying the
latter, cannot be accepted.
     Moving  on   to  the  definition  of  the  term  "Union
Taxation", Mr.  Rao pointed out that in Article 285 the term
"State Taxation" has been defined as "all taxes imposed by a
State or  by any  authority within  a State". He urged us to
adopt a  similar interpretation  for "Union  Taxation"  even
though Article  289 does  not contain any such definition by
pointing out  that being  corollaries of  each other,  these
terms would  have been  used to convey a similar meaning. If
this definition  were to be accepted, "Union Taxation" would
mean "all  taxes imposed  by the  Union" and, therefore, the
State would be entitled for exemption from the taxes imposed
by NDMC.  To explain  the language and ambit of Articles 285
and 289,  Mr. Rao  took us through a detailed examination of
the provisions  of the  1935 Act with a view to appreciating
the true import of the predecessors of these two provisions,
namely, Sections  154 and  155 of the said Act. To this end,
we were  taken through  section 5,  6, 94, 99, 100, 104, 154
and 155 and Lists I & II of the Seventh Schedule to the 1935
Act. Mr. Rao, thereafter, contended that under the scheme of
the 1935  Act, it  was quite clear that by virtue of Section
155, the  Provinces (predecessors of "States") were entitled
to exemption  from taxes  on `lands  and buildings'  in  the
chief  Commissioner's   Provinces  (predecessors  of  "Union
Territories"). He  contends that  that position continues in
the present  Article 289  and, in fact, the immunity is much
wider in  scope since  `property' is  wider than  `lands and
buildings'.  Mr.  Rao  also  led  us  through  the  relevant
passages of  the Sea Customs case and stressed that both the
minority and  the majority  opinions in  that case had taken
the view  that the  properties of  States situated  in Union
Territories were  exempt from  taxation. To  sum up, Mr. Rao
put forth  his submissions to counter those put forth by Mr.
Sen and  the learned  Attorney General  towards establishing
that, even while exercising its powers under Article 246(1),
Parliament can levy taxes directly on property.
     Mr. A.K.  Ganguli, learned  counsel for  the  State  of
Tripura, lent  support to  the submissions of Mr. Rao on the
issue  of  Parliamentary  laws  being  applicable  to  Union
Territories; he  emphasised that even after the introduction
of Articles  239AA and  239AB in the Constitution, the Delhi
Legislature could  not be said to be a legislative body with
plenary powers.  The legislative  powers conferred on such a
body are  restricted and  limited to certain spheres and are
subject to  the powers  of the  Parliament to make laws with
respect to  any matter  for  the  Union  Territories,  which
obviously refers  to Article  246(4) of the Constitution. By
way of  an analogy,  he referred  us to  Article 244 and the
Sixth Schedule  to the Constitution which contain provisions
for the  administration of  Tribal areas  in the  States  of
Assam, Meghalaya, Tripura and Mizoram and provide for bodies
with legislative powers. He led us through decisions of this
Court on  the point  that the  law making  powers  of  these
bodies, though conferred by the Constitution itself, are not
plenary powers  as those  of  Parliament  or  of  the  State
Legislatures.
     Counsel submitted that the provisions contained in Part
XII of  the Constitution relating to distribution of revenue
between the  Union and  the States  are not determinative of
the scope  of the  expression "Union  Taxation"  in  Article
289(1) as  they only  indicate that though a large number of
taxes are  levied by  the Parliament  and collected  by  the
Union Government,  eventually, a substantial portion thereof
is distributed amongst the States.
     After submitting that the main controversy in this case
is squarely covered by the decision in the Sea Customs case,
Mr. Ganguli  pointed out  that the Customs case, Mr. Ganguli
pointed out  that the  Government of  India, while preparing
its Receipt  Budget, has  always treated  taxes  imposed  by
Parliament and  collected from the Union Territories as part
of the  total tax  revenue of  the Union Government in which
other taxes  such  as  corporation  tax,  taxes  on  income,
customs duties and union excise duties are also included. He
submitted that  even in  respect  of  non-tax  revenue,  the
receipts from  the Union Territories are treated as receipts
of the  Union Government. He, therefore, contended that even
the Union  Government was  of the view that "Union Taxation"
included taxes levied by Parliament in Union Territories.
     Learned counsel for the State of Rajashthan, Mr. Gupta,
sought to  bring to  our notice a wider comparative position
of the  manner in  which countries  around  the  world  have
adopted the American doctrine of reciprocal immunity.
     Having noticed  the submissions  of the counsel for the
various parties before us, we may now proceed to express our
opinion on the diverse points raised in the present case.
     Analysis of  the decisions  rendered in the Sea Customs
case and the APSRTC case
     The decision in the Sea Customs' case was occasioned by
the emanation  of a  proposal to  introduce in  Parliament a
Bill to  amend Section  20 of the Sea Customs Act, 1878, and
Section 3  of the  Central Excise  and Salt Act, 1944. These
amendments would  have led  to the  imposition  of  indirect
taxes, namely, excise and customs duties upon the properties
of various  States which  were being used for purposes other
than those  specified in  Article 289(2), i.e., for purposes
not relating  to  trade  or  business.  A  number  of  State
Governments objected  that such a law would fall foul of the
interdiction  in   Article  289(1),  and,  in  view  of  the
resulting controversy, the President referred, under Article
143, the  issue of  the constitutionality  of  the  proposed
amendments to  this  Court.  The  issue  was  decided  by  a
majority of  5 : 4. It was held that the immunity granted to
States in  respect  of  Union  Taxation  under  Article  289
extends only  to those taxes that are directly leviable upon
the property  and income  of the  States; since  excise  and
customs duties  are indirect  taxes,  they  would  not  fall
within the  ambit  of  the  exemption  in  Article  289  and
Parliament could  impose such  duties upon  the property and
income of  the States. There were two opinions outlining the
majority view  and an  equal number for the minority. Sinha,
C.J. delivered the first of the majority judgments on behalf
of himself,  Gajendragadkar, Wanchoo  and  Shah,  JJ.  while
Rajagopala Ayyangar,  J. delivered  a  separate,  concurring
opinion. S.K.  Das, J.  delivered the  first of the minority
opinions on  behalf of  himself, sarkar  and Das  Gupta, JJ.
while Hidayatullah, J. rendered a separate minority opinion.
     A number  of submissions were advanced before the Court
with a  view to  facilitating a true construction of Article
289(1). In  this regard,  comparisons were  drawn  with  its
corollary,  Article   285  and  with  the  provisions  which
inspired the  adoption  of  these  two  provisions,  namely,
Section 154  and 155  of the  1935 Act.  The Court  was also
required to  analyse the scheme of the Constitution relevant
to the  issue. For the moment, it is not necessary for us to
analyse those  aspects of  the decision since, in any event,
we will be required to give our independent consideration to
these matters. We can, therefore, confine ourselves to those
observations that  have a  direct bearing  upon the point at
issue with  which we  are presently  concerned; this  aspect
was, however,  not specifically  adverted to in all the four
opinions.
     In his  opinion  for  the  majority,  Sinha,  C.J.  has
referred to  the  essential  contentions  urged  before  the
Court. The  Upon urged  that the  exemption in clause (1) of
Article  289  be  interpreted  restrictively,  limiting  its
applicability to direct taxes on the property and the income
of States;  the States,  on the other hand, canvassed for an
expansive interpretation  which would exempt them from taxes
having any relation whatsoever to their property and income.
The learned  Chief Justice  noted that  it was  not disputed
that the exemption in Article 289(1) was, as far as taxes on
income are  concerned, restricted  to "Taxes  other than  on
agricultural income",  which is the only entry (Entry 82) in
List I  of the  Seventh Schedule which enables Parliament to
legislate on  taxes relating  to income.  The learned  Chief
Justice considered this to be a significant fact as it meant
that if  the income  of State  was exempt only from taxes on
income, the juxtaposition of the words "property and income"
in Article  289(1) would lead to the inference that property
is also  exempt only from direct taxes on property. However,
it was  pointed out  by the  States that  List  I  does  not
contain any  specific tax  on property  which  would  enable
Parliament to  pass a law relating to taxes on property and,
that  being   so,  the  intention  of  the  framers  of  the
Constitution must have been to exempt the property of States
from all  taxes, be  they direct  or indirect.  To meet this
argument, the  learned Solicitor  General, appearing for the
Union, put  forth several arguments, one of which came to be
accepted by the learned Chief Justice as the main plank upon
which he  based his  rejection  of  the  contention  of  the
States. Since  these observations  are directly  relevant to
the present case, they may be extracted here (at p. 812):
     "It is true that List-I contains no
     tax directly on property like List-
     II, but  it does  not  follow  from
     that that the Union has no power to
     impose a  tax directly  on property
     under  any  circumstances.  Article
     246(4) gives power to Parliament to
     make  laws   with  respect  to  any
     matter  for   any   part   of   the
     territory of  India not included in
     a State  notwithstanding that  such
     matter is  a matter  enumerated  in
     the State  List. This means that so
     far  as   Union   territories   are
     concerned Parliament  has power  to
     legislate not  only with respect to
     items  in  List  I  but  also  with
     respect  to   items  in   List  II.
     Therefore,   so    far   as   Union
     territories     are      concerned,
     Parliament has  power to  impose  a
     tax directly  on property  as such.
     It cannot  therefore be  said  that
     the exemption  of States'  property
     under  Article   289(1)  would   be
     meaningless as  Parliament  has  no
     power to impose any tax directly on
     property.  If   a  State   has  any
     property  in  any  Union  territory
     that property  would be exempt from
     Union taxation  on  property  under
     Article   289(1).    The   argument
     therefore   that   Article   289(1)
     cannot be  confined to tax directly
     on property  because  there  is  no
     such tax  provided in List I cannot
     be accepted."
              (Emphasis added)
     Thereafter, having  referred to the language of Article
285 and  the intention  of the  framers as perceived by him,
the learned  Chief  Justice  came  to  the  conclusion  that
immunity granted  by Articles  285 and  289 was  of  similar
ambit and  extended only  to direct  taxes without exempting
indirect taxes such as excise and customs duties.
     Das, J., in his dissenting opinion, noted the objection
of the  States that  List I  had no entry which would enable
Parliament to  levy a tax directly on property. He took note
of the  counter-arguments advanced  by the learned Solicitor
General in  relation to  this aspect  but  could  not  bring
himself to agree with the correctness of those propositions.
While refereeing to the argument on Article 246(4), he noted
(at p.843):
     "... It would be a case of much ado
     about nothing  if the  Constitution
     solemnly provided  for an exemption
     against  `property  tax'  on  State
     property only  for such  rare cases
     as are contemplated in Art. 246(4),
     the situation  of state property in
     territory not  included in a State.
     Such situation  would be very rare,
     and could  have hardly necessitated
     a solemn safeguard at the inception
     of the Constitution when the States
     were classed under Part A or Part b
     of the First Schedule. If the wider
     interpretation  of  clause  (1)  of
     Article  289   is  accepted,   such
     property  would  also  be  excepted
     from Union taxation except in cases
     covered  by   clause  (2)   of  the
     article. We  find it  difficult  to
     accept the  contention that  clause
     (1) of  Article 289  was meant only
     for  cases   covered   by   Article
     246(4)..."
        (Emphasis added)
     At this juncture, we may note that both Mr. Rao and Mr.
Ganguli were  at pains  to point  out that  though  Das,  J.
rejected the  overall contention  of the  learned  Solicitor
General, he  had, by  stating that  the exemption  could not
have  been  provided  "only  for  such  rare  cases  as  are
contemplated in  Article 246(4)",  implicitly accepted  that
these cases  would fall  within  the  exemption  in  Article
289(1).
     Rajagopala  Ayyangar,  J.,  in  his  separate  majority
judgment, makes  a specific  reference to this contention of
the leaned Solicitor General (at pp. 918-19) but, aside from
stating  that  "the  submission  of  the  learned  Solicitor
General not  without force"  (at p.919), he did not make any
further reference  to the  matter. Hidayatullah,  J., in his
separate minority opinion, did not advert to this issue.
     The preceding  analysis reveals  that the issue at hand
was specifically  answered by this Court in the Sea Custom's
case. We  find it  difficult to  accept Mr. Sen's contention
that the  observations of  Sinha, C.J.  were made  by way of
obiter dicta. Though the issue of legislations applicable in
Union Territories  was not specifically before the Court, it
did arise for consideration during its analysis of the power
of Parliament  to levy  taxes directly  upon  property.  The
latter question  was squarely  before the  the Court and the
issue relating  to Union  Territories, though  incidental to
the main  question, necessarily  required consideration. The
observations of  Sinha, C.J.  are unequivocally in favour of
the position  adopted by  the States  before  us,  who  find
themselves in  the enviably  advantageous position  of being
able to  draw sustenance  from even  the observations in the
dissenting judgment of Das, J.
     The decision in the Sea Custom's case was reaffirmed by
a Constitution  Bench of this Court in the APSRTC case was a
matter relating  to assessment  of income-tax.  The facts of
that case  are not  directly relevant  for our  purpose but,
what is  of considerable  interest to  us is  the manner  in
which the  scheme of  Article 289 and its three clauses were
construed. Speaking  for  the  Court,  Gajendragadkar,  C.J.
outlined the  scheme of  Article 289  (at p.25) which can be
stated as  follows: The  general proposition that flows from
clause (1) is that ordinarily, the income derived by a State
both from  governmental and  non-governmental or  commercial
activities shall  be immune  from income-tax  levied by  the
Union. Clause  (2) then  provides an  exception and empowers
Parliament to  make a  law imposing  a  tax  on  the  income
derived by  the Government of a State from trade or business
carried on  by it, or on its behalf. If clause (1) had stood
by itself, it would not have been possible to include within
its purview  income  derived  by  a  State  from  commercial
activities but since clause (2) empowers Parliament to enact
a law  levying taxes  on such  activities of  a  State,  the
inescapable conclusion  is that  these  activities  must  be
deemed to  have been  included in  clause (1) and that alone
can be the justification for the onwards in which clause (2)
has been couched in the Constitution. Thereafter, clause (3)
empowers Parliament  to declare  by law  that any  trade  or
business would be taken out of the purview of clause (2) and
restore it  to the  area covered  by clause (1) by declaring
that the  said  trade  or  business  is  incidental  to  the
ordinary functions of Government. In other words, clause (3)
is an  exception to  the exception prescribed by clause (2).
Whatever trade  or business  is declared to be incidental to
the ordinary  functions of  Government, would  cease  to  be
governed by  clause (2)  and would then be exempt from Union
taxation.
     These observations  of Gajendragadkar, C.J. having been
made in  the context  of income  tax levied  in the facts of
that case,  mention only  taxes relating to income. They are
equally  applicable   to  the  taxes  relating  to  property
referred to  in Article 289. The essence of this analysis is
that clause  (3) of  Article 289  is an  exception to clause
(2), which  in turn  is an  exception to the first clause of
the Article.
     Analysis  of  this  Court's  previous  rulings  on  the
Constitutional status of Union Territories
     We may now refer to a catena of decisions of this Court
on the  seemingly innocuous  issue whether  or not  a  Union
Territory has,  under the  scheme  of  our  Constitution,  a
status distinct  from that  of the Union and the States. The
fact that so many decisions of this Court exist on the issue
would indicate  that the  matter is  not  one  that  can  be
disposed of  by simply pointing to the separate parts of the
Constitution which  deal with  Union Territories as distinct
units.
     Before dealing  with the  specific circumstances of and
the decision in, each of these cases, it is necessary that a
few provisions  which  figure  prominently  be  dealt  with.
Article 246(4)  of the  Constitution, as it stood on January
26, 1950,  allowed Parliament  to "make laws with respect to
any matter  for any  part of  the  territory  of  India  not
included in  Part A  or Part  B of  the First Schedule". The
Seventh Amendment  Act brought  about a  number  of  changes
affecting Union Territories, some of which have already been
noticed by  us. The  other changes  brought about  by it are
also relevant;  it caused  Article 246  to be changed to its
present form where Parliament is empowered to make laws with
respect to  "any part of the territory of India not included
in a  State". The  word "State"  has not been defined in the
Constitution. Article 1(3) defines the territory of India as
comprising: (a) the territories of the States; (b) the Union
Territories specified  in the  First Schedule;  and (c) such
other territories  as  may  be  acquired.  The  word  `Union
Territory' has  been defined in Article 366(30) to mean "any
Union Territory specified in the First Schedule and includes
any other  territory comprised within the territory of India
but not specified in that Schedule".
     Tho not  defined in  the Constitution, the word "State"
has  been   defined  in   the  General   Clauses  Act,  1897
(hereinafter called  "the General Clauses Act"). Article 367
of the  Constitution states  that the  General Clauses  Act,
1897  shall,  unless  the  context  otherwise  requires  and
subject  to  any  adoptions  and  modifications  made  under
Article  372,   apply  for   the   interpretation   of   the
Constitution.  Therefore,   on  a   plain  reading   of  the
provisions involved,  it would appear that the definition of
"State" in  the General  Clauses Act would be applicable for
the purposes  of interpreting  the Constitution. Article 372
is the  saving clause  of the Constitution which enables all
laws in force before the commencement of the Constitution to
continue in  the territory  of India.  Article 372A,  which,
once again,  owes its  origin to  the Seventh Amendment Act,
empowers  the  President  to  make  further  adaptations  in
particular situations.
     Section 3(58)  of the  General Clauses Act, having been
amended by the Seventh Amendment Act, reads as follows:
     "3. Definitions.  -- In  this  Act,
     and  in   all  General   Acts   and
     Regulations    made    after    the
     commencement of  this  Act,  unless
     there is  anything repugnant in the
     subject or context, --
     (58) "State", --
     (a) as  respects any  period before
     the     commencement     of     the
     Constitution  (Seventh   Amendment)
     Act, 1956,  shall  mean  a  Part  A
     State, a  Part B  State or a Part C
     State; and
     (b) as  respects any  period  after
     such  commencement,  shall  mean  a
     State  specified   in   the   First
     Schedule to  the  Constitution  and
     shall include a Union territory;"
        (Emphasis added)
     The latter  part of the definition, which states that a
Union Territory  is included  within  the  definition  of  a
State, has  introduced an  element  of  controversy  in  the
interpretation of the Constitution.
     While appreciating  the  reasoning  of  this  Court  in
dealing with cases where it had to confront the issue of the
status of  Union Territories, the time-frame and the history
of the  Union Territories  which we  have adverted to in the
earlier part  of this  judgment, must  be borne in mind. The
first of  these cases was that of Satya Dev Bushhri v. Padam
Deo and  Ors., [1955]  1 S.C.R. 549 This was a case relating
to election  law and one of the contention of the appellant,
who was  seeking to  disqualify the  respondents  under  the
provisions of  the Representation of Peoples' Act, 1951, was
that contracts entered into by the respondents with the Part
C States  were, in  effect, contracts  entered into with the
Central  Government.   This  contention  was  based  on  the
reasoning  that   the  executive   action  of   the  Central
Government is vested in the President; the President is also
the  Executive   Head  of  the  Part  C  States;  therefore,
contracts with  the Part  C States  are contracts  with  the
Central Government. The Court, speaking through Venkataraman
Ayyar, J., rejected this contention and stated that when the
President exercised  functions as  the Head  of the  Part  C
States, he  occupied a position analogous to the Governor in
Part A States. Furthermore, Section 38(22) of the Government
of Part  C  States  Act,  1951  clearly  provided  that  all
executive action  of the State would be taken in the name of
the  Chief   Commissioner.  It  was,  therefore,  held  that
contracts with  the Part  C States  could not  be said to be
contracts with  the Central  Government. Analysing  Articles
239, 240 and 241 of the Constitution, the Court held that it
could not  be said  that these  had the effect of converting
Part C States into the Central Government and that they have
a distinct  status. However,  when  the  case  came  up  for
review, in  Satya Dev Bushahri v. Padam Deo and Ors., [1955]
1 S.C.R. 561, the Court, after having been directed towards,
and having taken note of the provisions of, Section 3(8) and
Section 3(60)  of  the  General  Clauses  Act  which  define
"Central Government"  and "State  Government"  respectively,
and stipulate  that for  Part C States, references to "State
Government" would mean the "Central Government", held that a
contract with  the Chief Commissioner in a Part C State is a
contract with  the Central  Government. It,  however,  added
that this  would not  affect the  status of Part C States as
independent units,  distinct from the Union Government under
the Constitution.
     The State  of Madhya  Pradesh v. Shri Maula Bux & Ors.,
[1962] 2  S.C.R. 794,  a decision rendered by a Constitution
Bench, concerned  the State of Vindhya Pradesh which, at the
relevant time,  was a  Part C  State and  raised  the  issue
whether, in  a civil  suit, the State of Vindhya Pradesh was
the proper  party to be sued under Section 79(a) of the Code
of Civil  Procedure, 1908.  The argument of the respondents,
based on Sections 3(8) and 3(60) of the General Clauses Act,
was  that   if,  in  case  of  the  Part  C  States,  "State
Government" means the "Central Government", the proper party
to be  sued would be the Union of India instead of the State
of Vindhya  Pradesh.  Hidayatullah,  J.,  speaking  for  the
Constitution  Bench,   at  pp.   798-802,  relied   on   the
observations in  the first  of the  Satya Dev  cases to  the
effect that  Part C States had a separate existence and were
not merged  with the  Central Government and went on to hold
that  the  State  of  Vindhya  Pradesh,  having  a  distinct
identity, was  the proper  party to  be sued.  Although  the
reviewed decision  in Satya  Dev's case was not referred to,
since the proposition relied upon by Hidayatullah, J. was in
fact reaffirmed  in the  review, the relevant proposition of
law  laid  down  in  the  case  does  not  suffer  from  any
infirmity.
     These cases  are useful  for our purpose to the limited
extent that they declare that Union Territories are not part
of the  Central Government and are, to that extent, distinct
Constitutional entities.  However, the  issue whether  Union
Territories are  distinct from  States was not considered in
these cases;  it did  however arise for consideration in the
following cases.
     In Ram  Kishore Sen  v. Union of India, [1966] 1 S.C.R.
430, the Court had to consider whether the word "State" used
in article  3(c) of  the Constitution  would  include  Union
Territories; the Constitution Bench followed the stipulation
in Articles  367 and 372 to notice the definition of "State"
in Section  3(58) of the General Clauses Act and the context
of Article  3 to  hold that the word `State' in Article 3(c)
would have  to be  interpreted in the light of Section 3(58)
of  the   General  Clause   Act  and   would  include  Union
Territories. The correctness of this proposition was doubted
by Hidayatullah, J. in a subsequent case which we will refer
to  in  due  course.  The  fact  however  remains  that  the
definition in  Section 3(58)  of the General Clauses Act has
been utilised  for interpreting  a Constitutional provision.
The question  that therefore  arises is  whether  this  will
affect the  status of  Union Territories in matters relating
to Article  246, to  which  an  answer  was  provided  in  a
subsequent case to which we shall immediately advert.
     T.M. Kanniyan  v.  Income-Tax  Officer,  Pondicherry  &
Anr.,  [1968]  2  S.C.R.  103,  was  a  case  in  which  the
petitioners had  challenged the  vires of  a  regulation  by
which the President had, in exercise of powers under Article
240, repealed  the laws  in force  in relation to Income-Tax
within the  Union Territory  of Pondicherry and had made the
Income-Tax Act,  1961  applicable  to  it.  Explaining  that
Parliament, and through it the President, had plenary powers
to make laws for Union Territories on all matters, Bachawat,
J., speaking  for the  Constitution Bench, stated as follows
(at pp. 108-109):
     "Parliament has  plenary  power  to
     legislate for the Union Territories
     with regard  to any  subject.  With
     regard to  Union Territories  there
     is no  distribution of  legislative
     powers...      [The]      inclusive
     definition [in Section 3(58) of the
     General Clauses  Act] is  repugnant
     to  the   subject  and  context  of
     Article 246.  There, the expression
     "State" means  the States specified
     in the  First Schedule.  There is a
     distribution of  legislative  power
     between    Parliament    and    the
     legislatures   of    the    States.
     Exclusive power  to legislate  with
     respect to  the matters  enumerated
     in the  State List  is assigned  to
     the  legislatures   of  the  States
     established by Part VI. There is no
     distribution of  legislative  power
     with respect  to Union Territories.
     That is  why  Parliament  is  given
     power   by    Article   246(4)   to
     legislate  even   with  respect  to
     matters  enumerated  in  the  State
     List. If  the inclusive  definition
     of "State"  in Section 3(58) of the
     General Clause Act were to apply to
     Article  246(4),  Parliament  would
     have no  power to legislate for the
     Union Territories  with respect  to
     matters  enumerated  in  the  State
     List  and   until   a   legislature
     empowered  to  legislate  on  those
     matters is  created  under  Article
     239A  for  the  Union  Territories,
     there  would   be  no   legislature
     competent  to  legislate  on  those
     matters;  moreover,   for   certain
     territories such as the Andaman and
     Nicobar Islands, no legislature can
     be created  under Article 239A, and
     for such  territories there  can be
     no authority competent to legislate
     with respect  to matters enumerated
     in   the   State   List.   Such   a
     construction is  repugnant  to  the
     subject and context of Article 246.
     It follows  that in view of Article
     246(4),  Parliament   has   plenary
     powers  to   make  laws  for  Union
     Territories on all matters."
     The  Court,   therefore,  held   that  Parliament   was
empowered to  make laws for Union Territories on all matters
and the  regulation made by the President in exercise of his
powers under  Article 240  was  valid.  The  ratio  of  this
decision, therefore,  is  that  the  definition  of  "State"
provided by  Section 3(58)  of the General Clauses Act would
not apply  for the  purposes of  Article 246.  This ratio is
equally  applicable  at  the  present  moment  for,  despite
several  changes  having  been  made  in  respect  of  Union
Territories since  the decision  in Kanniyan's  case, of the
seven existing  Union Territories,  as many  as five  do not
have Legislature  of their  own. The  controversy  was  not,
however, put to rest by the decision in Kanniyan's case.
     In Management of Advance Insurance Co. Ltd. v.
     Shri Gurudasmal  & Ors.,  [1970] 3 S.C.R. 881, the main
issue before another Constitution Bench was whether the word
"State" used  in Entry  80 of List I of the Seventh Schedule
could be  said to  exclude the application of the definition
in Section  3(58) of the General Clauses Act. Relying on the
decision in  Kanniyan's case,  Hidayatullah, J.  held  that,
ordinarily, the definition would apply in the interpretation
of the Constitution unless it is repugnant to the subject or
context.  However,   the  noted,   that  after  the  Seventh
Amendment Act where Union Territories have been mentioned as
separate   entities,    the   distinction   between   "Union
Territories" and  "States"  cannot  be  lost  sight  of.  He
expressly approved  the reasoning of Bachawat, J. in holding
that in  the context of Article 246, the definition provided
in Section  3(58) would not apply; however, on the facts and
in the  circumstances of  the case  before him, he felt that
the subject  and context  of Entry  80  of  the  Union  List
required the  application of the definition given in Section
3(58). While  referring to  the decision  in  Ram  Kishore's
case, Hidayatullah,  J. noted  that this  decision  was  per
incuriam for  the reason  that it  referred to  Article  372
whereas the  proper reference  ought to have been to Article
372A.
     The  same   issue  was   thereafter  considered   by  a
Constitution Bench in S.K. Singh v. Shri V.V. Giri, [1971] 2
S.C.R.  197,  wherein  Bhargava,  J.,  while  delivering  an
opinion concurring with the majority, reached the conclusion
that the  definition in Section 3(58) of the General Clauses
Act would  not apply  to matters involving interpretation of
the Constitution.  The case,  which involved  a challenge to
the election  of Shri  V.V. Giri  as the President of India,
required the  Court to  consider the issue in the context of
Article 54 which provides that the electoral college for the
President consists  of the elected members of both Houses of
Parliament, and  the  elected  members  of  the  Legislative
Assemblies of  the States.  Relying  on  the  definition  of
"State" in  Section 3(58) of the General Clauses Act, it was
argued  that   Union  Territories   are  also   States  and,
consequently,  the   elected  members   of  the  Legislative
Assemblies of the Union Territories must also be included in
the electoral  college; their  omission was  said  to  be  a
material irregularity  which  would  vitiate  the  election.
Responding to  this contention,  the learned  Judge held  as
follows (at pp. 313-314):
     "Article 54,  no doubt,  lays  down
     that all  elected  members  of  the
     legislative   assemblies   of   the
     States are  to be  included in  the
     electoral  college;  but  the  word
     `States' used  Territories.  It  is
     true that,  under Article  367, the
     General  Clauses  Act  applies  for
     interpretation of  the Constitution
     as    it     applies    for     the
     interpretation of  an  Act  of  the
     legislature  of   the  Dominion  of
     India;  but   that  Act   has  been
     applied  as   it  stood   on   26th
     January,     1950,     when     the
     Constitution   came   into   force,
     subject only  to any  adoptions and
     modifications  that   may  be  made
     therein  under   Article  372.  The
     General Clausers  Act, as it was in
     1950 and  as  adapted  or  modified
     under Article  372, did  not define
     "State" so  as to  include a  Union
     Territory.  The   Constitution  was
     amended   by    the    Constitution
     (Seventh  Amendment)   Act,   1956,
     which introduced  Article  372A  in
     the     Constitution     permitting
     adoptions and  modifications of all
     laws  which  may  be  necessary  or
     expedient  for   the   purpose   of
     bringing the  provisions of the law
     into accord  with the  Constitution
     as amended by the Seventh Amendment
     Act, 1956.  It was  in exercise  of
     this power  under Article 372A that
     Section  3(58)   of   the   General
     Clauses Act  was amended,  so that,
     thereafter,  "State"   as   defined
     include Union Territories also. The
     new  definition   of   "State"   in
     Section  3(58)   of   the   General
     Clauses  Act   as   a   result   of
     modifications and  adoptions  under
     Article 372A would, no doubt, apply
     to the  interpretation of  all laws
     of Parliament,  but it cannot apply
     to  the   interpretation   of   the
     Constitution, because  Article  367
     was not amended and it was not laid
     down that  the General Clauses Act,
     as adapted  or modified  under  any
     Article  other  than  Article  372,
     will    also     apply    to    the
     interpretation of the Constitution.
     Since, until its amendment in 1956,
     Section  3(58)   of   the   General
     Clauses Act  did not define "State"
     as including  Union Territories for
     purposes   of   interpretation   of
     Article 54,  the Union  Territories
     cannot be  treated as  included  in
     the word "State"."
     The view  of  the  learned  Judge  does  seem  to  have
considerable force  and it  is also  to be  remembered  that
Hidayatullah,  J.   had  doubted   the  correctness  of  the
proposition laid  down in  Ram Kishore's  case on the ground
that the  proper reference in it should have been to Article
372A, rather  than to  Article 372. However, we must refrain
from making any comment because the issue whether or not the
General Clause  Act applies  to the  interpretation  of  the
Constitution is  not properly  before us  in the  facts  and
circumstances  of   the  present  case;  what  is  more,  no
arguments have  been canvassed  before us on this issue. For
the present,  we can  draw support  from the observations in
Kanniyan's case as affirmed in the Advance Insurance case to
the effect  that the  definition in  Section  3(58)  of  the
General Clauses  Act is repugnant to the subject and context
of Article 246. We can, therefore, proceed on the assumption
that for  our purposes, a Union Territory is not a State; we
must, however,  hasten to  add that  this assumption will be
open to  reconsideration subsequent  to our  analysis of the
Constitutional scheme regarding the issues before us.
     Interpretation of  "Union Taxation"  in Article  289(1)
and scope of its ambit.
     We may  now address the central issue in the case which
involves the  determination of  the ambit of Article 289(1).
In order  to appreciate the true import of the words used in
this provision,  it will  be to  our benefit  to examine the
Constitutional history of Article 289 as well as that of its
corollary, Article 285.
     Articles 285  and 289 are modified versions of Sections
154  and  155  of  the  1953  Act,  as  in  obvious  from  a
comparative study made in the earlier part of this judgment.
While Articles  285  and  289  seek  to  provide  reciprocal
immunities within the Republic of India to the Union and the
States from each other's taxing powers, Sections 154 and 155
strove to  achieve the  same result  within British India in
respect of  the Federal  Government on the one hand, and the
Governments of  the Provinces  and the Federal States on the
other. However, in the process of adopting the provisions of
the 1935  Act for  our Constitution,  a  number  of  changes
occurred and we must analyse some of these in greater detail
for they are extremely relevant for our purposes.
     To appreciate  the true import of Sections 154 and 155,
it will  be necessary  to refer  to a  few provisions of the
1935 Act  so as  to obtain  an understanding  of its general
scheme. Section 5 of the 1935 Act stated that the Federation
of India  would comprise  the Provisions,  the Indian States
and the  Chief Commissioner's Provinces. Section 6 defined a
`Federated States'  as an  Indian State which had acceded to
or might  accede to  the Federation.  Section 94  provided a
list of  the Chief  Commissioner's Provinces and stated that
they would  be administered  by the  Governor General acting
through a Chief Commissioner. Section 99, which provided the
manner in  which legislative  powers were  to be distributed
between the Federal and Provincial legislatures, stated that
the Federal  Legislature was  empowered to make laws for the
whole or  any part  of British  India or  for any  Federated
States, while  the Provincial Legislatures were empowered to
make laws for the provinces. Section 311(1) defined `British
India' as  "All territories   or the  time  being  comprised
within the Governor's Provinces and the Chief Commissioner's
Provinces". Section 100, which dealt with the subject matter
of Federal  and Provincial  laws, provided  that the Federal
Legislature would  have power  to make  laws with respect to
matters enumerated  in List I of the Seventh Schedule to the
1935 Act,  which was  to be  called the "Federal Legislative
List"; the  Provincial Legislature would have powers to make
laws in  respect of  matters  in  List  II  of  the  Seventh
Schedule, called  "the Provincial Legislative List"; and, in
respect of  Matters provided  in List  III  of  the  Seventh
Schedule, called "the Concurrent Legislative List", both the
Provincial  and   the   Federal   Legislature   would   have
jurisdiction.  Clause  (4)  of  Section  100,  which  is  of
considerable importance for our purpose, provided in express
terms that the Federal Legislature would have "power to make
laws with  respect to  matters enumerated  in the Provincial
Legislative List except for a Province or any part thereof".
It was,  therefore, clearly  contemplated that  the  Federal
Legislature would have the power to make laws for matters in
the Provincial  Legislative List  in respect  of  the  Chief
Commissioner's Provinces and the Federated States. Under the
scheme  of  the  1935  Act,  situations  where  the  Federal
Legislature could  enact laws with respect to matters in the
Provincial Legislative  List were, therefore, not considered
to be rare or unusual.
     While  both   the  Federal  Legislative  List  and  the
Provincial Legislative  List contained  entries allowing the
levy of  taxes, the Federal Legislative List did not contain
any entry  which allowed  the Federal  Legislature  to  levy
taxes directly  on property.  Entry  42  of  the  Provincial
Legislative List  empowered the  Provincial Legislatures  to
levy  taxes   specifically  on   lands  and  buildings.  The
Concurrent  Legislative   List  contained   only  one  entry
relating to  taxes, namely, Entry 13 which referred to stamp
duties.
     Section 154,  in  material  terms,  provided  that  the
property of  the Federal Government would be exempt from all
taxes imposed  by Provinces  and Federated  States  and  the
local authorities  within them.  The proviso  added that, in
the absence  of any Federal law stipulating otherwise, those
properties of  the Federal  Government which were subject to
the levy  of taxes  before the  commencement of  Part III of
that Act  would continue  to be  liable  to  pay  them.  The
exemption in  Section 154,  therfore, did not extend to such
taxes, including taxes levied under Municipal laws. It is to
be noted  that Section  154 did not provide for an exemption
in respect of the income of the Federal Government primarily
because the  Provinces lacked  the legislative competence to
enact laws levying taxes on income.
     Section 155(1) stated that the Government of a Province
and the  ruler of  a Federated  State would not be liable to
"Federal  Taxation"   in  respect  of  "lands  or  buildings
situated in  British India". Proviso (a) stipulated that all
the trading  and business activities carried on by Provinces
and  the   Federated  States   outside   their   territorial
jurisdiction would  be  subjected  to  Federal  Taxation  in
British India.  Provision (b)  stipulated that  the personal
property and  income of  a Ruler  of a Federated State would
also be  subject to  Federal Taxation.  Clause  (2)  of  the
Section   being    self-explanatory,   does    not   require
elucidation. In  response to a query from us, Mr. Sen sought
to find  the reason  for the  existence of  the exemption in
Section 155(1); it appears that the purpose was to avoid the
liabilities imposed  by Sections  3 and  9 of the Income Tax
Act, 1912 upon the Provinces.
     Comprising the text of Sections 154 and 155, it becomes
clear that  even under the scheme of the 1935 Act, the ambit
of the  reciprocal immunities  was not  equal in  length and
breadth; while  Section 154  exempted the  property  of  the
Federal  Government   from  "all   taxes",  the   Provincial
Governments and  Rulers of Federated States were entitled to
an  exemption  only  in  respect  of  "lands  or  buildings"
situated in  British India  and "income"  accruing  thereof.
This feature will gain some importance when we deal with the
comparative Constitutional position at a later stage.
The term  "Federal Taxation" was not defined in the 1935 Act
but some  clue to  its meaning can be discerned by referring
to Sections  99 and  100  which  described  the  legislative
powers of  the Federal Legislature. As we have already seen,
the Federal  Legislative List  did  not  allow  the  Federal
Legislature to  levy taxes  on lands  and buildings; in fact
this  subject  was  expressly  included  in  the  Provincial
Legislative List.  On the  face of  it, this  would make the
exemption in  Section 155  otiose.  However,  the  confusion
clears when  one notices  Clause (4)  of Section  100  which
expressly enables  the Federal  Legislature to  legislate in
respect of  matters in  the Provincial  Legislative List for
territories  apart   from  the  Provinces.  Viewed  in  this
context, and  taking into account the definition of "British
India" in  Section 311(1), Section 155 would have to be read
as exempting  the Governments of Provinces and the rulers of
Federated States from "Federal Taxation" in respect of lands
or buildings situated in the Chief Commissioner's Provinces.
This is  the only  possible interpretation  which will  give
meaning to  the words  of Section 155. Since, at the time of
the enactment  of  the  legislation,  there  were  only  six
territories classified  as Chief  Commissioner's  Provinces,
the exemption  could not  be said  to be  at  par  with  the
exemption provided  in Section  154 but,  all the  same,  in
terms of  the revenue  amount  involved,  it  could  not  be
considered insignificant  either. It therefore becomes clear
that, under  the scheme  of the 1935 Act, "Federal Taxation"
included taxes  leviable by  the Federal  Government in  the
Chief Commissioner's  Provinces and  that the  properties of
the  Provinces  and  the  Rulers  of  the  Federated  States
situated within these Chief Commissioners Provinces would be
exempt from  such "Federal  Taxation". It remains to be seen
whether the  position came  to be changed during the process
of  transformation  of  these  sections  into  the  existing
provisions of the Constitution.
     In  the   earlier  stages   of  the   framing  of   the
Constitution, the  issue of  financial relations between the
Centre and  the units  was addressed by two Committees - the
Union Powers Committee and the Union Constitution Committee.
These Committees  recommended that  the schemes envisaged by
the 1935  Act should  be generally  followed. In  the  Draft
Constitution prepared  by the  Constitutional  Adviser,  Sir
B.N. Rau, in October 1947, Clauses 205 and 207 were modified
versions of  Sections 154  and 155.  On October  2, 1947, an
Expert Committee  on Financial  Provisions was  appointed to
make recommendations  as to the provisions on the subject to
be embodied  in  the  new  Constitution  after  taking  into
account the  views of the States and also the Draft prepared
by the Constitutional Adviser. The Drafting Committee of the
Constitution took up the issue in January 1948 and took into
consideration the  Drafts  prepared  by  the  Constitutional
Adviser as also the Expert Committee on Financial Provision.
Thereafter, these provisions came to be numbered as Articles
264 and  266 of the Draft Constitution. After the Constitute
Assembly had  considered the  matter at  length and formally
approved these  provisions, they  came to  be renumbered  as
Articles 285 and 289.
     The present  Article  285  is  much  the  same  as  its
predecessor Section  154 and, though there were some changes
in its  text as the provision charted its course through the
stages  enumerated   above,  not   being  relevant  for  our
purposes, we shall ignore its discussion.
     The present  Article 289  was Clause  207 in  the Draft
Constitution prepared  by  the  Constitutional  Adviser.  It
provided that  the Government  of a unit would not be liable
to  Federal  Taxation  in  respect  of  lands  or  buildings
situated within  the territories of the Federation or income
accruing, arising  or received  within such territories; the
two exceptions  provided were  in favour  of (a)  any income
accruing to  a unit's  Government through  trade or business
and (b)  the personal property or the personal income of the
Ruler of  Indian State.  As we  have observed, under Section
155, the  Provinces and  Federated  States  were  liable  to
taxation only  in respect  of trade  and business operations
carried on  by them  outside their  own territories. To that
extent Clause  207 had  made a  substantial  departure.  The
Constitutional  Adviser  relied  on  the  decisions  of  the
Supreme Court  of the  United States of America in McCulloch
v. Maryland,  4 L.  Ed 579  (1890), and  South  Carolina  v.
United States,  199 U.S.  437 (1905), to buttress his stance
that the  Federation should have the power to tax the units,
but not  vice versa  for the reason that when the Federation
taxed the  instrumentalities of  the  units,  it  taxed  its
constituents, whereas  when a  unit taxed  the operations of
the Federal  Government,  it  acted  upon  instrumentalities
created, not  by its  own constituents,  but by  people over
whom it could claim no control.
     The Expert  Committee on  Financial Provisions approved
the Constitutional Adviser's recommendation that the trading
operations of  the units,  as also  of local bodies, whether
carried on  within or  without their  jurisdiction should be
liable to  central taxation;  they, however,  suggested that
quasi-trading operations  incidental to the normal functions
of Government should be exempt from such taxation.
     When the Drafting Committee took up the matter, it duly
noted the  recommendations of the Constitutional Adviser and
the Expert Committee and, in July 1949, convened a Premier's
Conference to  discuss these  provisions. Draft  Article 266
came in  for a  lot of  criticism and  a  number  of  States
suggested that  insofar as  Article 266  did not  exempt the
trading and  business operations  of State  Governments from
Union Taxation,  it  be  dispensed  with  altogether.  Other
suggestions were also forwarded to the Drafting Committee: a
number of  States were  of the  view that  the provision was
inequitable and  one-sided insofar  as it  sought to subject
trade and  business operations  of the  State Governments to
Union  Taxation,   while  under  Article  264,  States  were
debarred from  taxing the  property of  the  Union.  Such  a
provision, it  was felt,  was bound to retard the industrial
development of  the Provinces, taking away the incentive for
State enterprise.
     Reconsidering  the   provision  in  the  light  of  the
comments  of   the  Provincial   Governments,  the  Drafting
Committee decided, in consultation with the Central Ministry
of Finance,  to introduce  some important changes in Article
266. The  ambit of  the exemption in Clause (1) was expanded
by including  `property' instead  of  `lands  or  buildings'
thereby bringing  within its  purview, movable  property  as
well. On  the issue  of  trade  and  business,  a  provision
similar to  the present  Article 289(2)  was included.  This
provision would  enable Parliament  to pass a law to declare
which of  the trading  and business activities of the States
were  to   be  classified   as  ordinary  functions  of  the
Government allowing them to be exempted, and making the rest
of the  activities liable  to tax.  Drafting Article 266 was
considered by  the Constitutent  Assembly  on  September  9,
1949. Some  members representing  the States of Tranvancore-
Cochin  and   Mysore  expressed   apprehensions  that  Union
Taxation of industrial and commercial activities would check
the expansion  of industrialisation  and  would  reduce  the
capacity of  States to discharge their ordinary governmental
functions. Mr.  P.T. Chacko  from Travancore-Cochin referred
to  the   principle  of   immunity  from  inter-governmental
taxation as it stood in the United States of America and the
fact of  its incorporation  in Draft  Article 264; he sought
the extension  of the  doctrine to  States  as  well.  While
allaying their  apprehensions, Mr. Alladi Krishnaswami Ayyar
noted the  fact that  the Australian,  Canadian and American
Constitutions  had  incorporated  the  principle  of  inter-
governmental immunities.  He stated  that the Australian and
Canadian experiences were irrelevant for the purposes of the
Indian Constitution  for, when they were drafted, it was not
envisaged that  large  schemes  of  socialisation  would  be
implemented. referring  to the American position, he pointed
out that  even within  that jurisdiction,  the doctrine  had
begun to  lose favour  and  was  in  the  process  of  being
discarded. Thereafter,  he observed that under the provision
as it was placed before the Constituent Assembly, Parliament
was left  with the  option of  making the  law  which  would
declare those  trading and business operations of the States
which would  be liable  to Union  Taxation after taking into
account the  general interests  of trade and industry of the
whole country and other democratic factors. He therfore felt
that  the   provision  was  "very  salutary".  Subsequently,
following the  reassurances given  by  the  Central  Finance
Minister, the  amendments were  withdrawn and  Draft Article
266 was  accepted  in  toto.  [Note:  For  a  study  of  the
evolution of  Articles 285  and 289  within the  Constituent
Assembly, See  B. Shiva  Rao,  The  Framing  of  the  Indian
Constitution: A  Study,  N.M.  Tripathi  Pvt.  Ltd.,  Bombay
(1968) pp.  649-99; for reference to original documents, See
B. Shiva Rao, ibid, Vols. III & IV].
     Mr. P.P.  Rao and  the other  learned counsel appearing
for the  States have  argued  before  us  that  the  present
Articles 285  and 289  are based  on the  U.S.  doctrine  of
reciprocal immunity of instrumentalities which has also been
incorporated in  the Canadian  and Australian  Constitution,
apart from  certain other  Constitutions. Before we begin to
examine the  text of  Articles 285 and 289 with to finding a
solution to  the Constitutional  conundrum posed by the case
before us, we must analyse this proposition closely.
     The doctrine  of inter-governmental  immunity has  been
the subject  to some  controversy  in  the  country  of  its
origin, the  United States  of America.  The origin  of this
doctrine is  ascribed to  the judgment of Chief Justice John
Marshall in  the case  of  McCulloch  v.  Maryland  (supra).
However, as pointed out by commentators, on the facts of the
case, where  a State  Tax sought  to be  levied on a Federal
Bank was held to be void, the decision was more in favour of
declaring the  supremacy of  the Federal  Government than of
upholding the rights of States. It was, therefore, the basis
for  establishing  federal  immunity  from  State  Taxation.
However, later  decisions interpreted  the judgment  to hold
that its  corollary, that  the property  of States  would be
exempt from  Federal Taxation  was equally  applicable; more
than 50  years after  the decision  in McCulloch's case, the
Supreme Court,  in Collector v. Day, [[11. Wall. 113 (1871)]
made the  theory of  inter-governmental immunity reciprocal.
The doctrine,  as propounded in Collector Vs. Day, was never
applied  widely   and,  in   subsequent   years,   underwent
significant modifications. In The South Carolina case, which
was the  second case  relied upon the Constitutional Adviser
in preparing  Clause 207  of  his  Draft  Constitution,  the
Supreme Court  dealt  a  further  blow  to  the  concept  of
immunity of  States from Federal Taxation, when it held that
South Carolina  was bound  to pay  a National  Excise Tax on
liquor-dealers  which   was  being  levied  by  the  Federal
Government. The  Supreme Court  drew a  distinction  between
State functions  which were  strictly governmental and those
which were  commercial in  nature;  it  was  held  that  the
governmental  functions   of  State  would  be  immune  from
taxation but when the States entered into ordinary business,
no immunity  would exist.  This created  fresh problems  and
over time,  several Judges  of the  Supreme Court  protested
against the  illogical distinction  between governmental and
business activities, calling for a complete reexamination of
the entire  doctrine.  In  later  years,  the  doctrine  was
considerably modified.  In recent  years, the  Supreme Court
has come to recognise a narrower tax immunity for the States
than for  the National  Government on  the basis of a theory
that combines  the principle  of national supremacy with the
argument  that   the  interests   of  States  received  more
representation in  Congress than  national interest received
in State  Legislature. It  is to  be noted  that we have had
this position  from  the  time  that  the  Constitution  was
originally enacted.
     As we  have already noticed, the Constitutional Adviser
relied upon  the decisions in McCulloch's case and The South
Carolina case,  for justifying the reduction in the ambit of
the immunity  of States  from Union Taxation rather than for
establishing reciprocal  immunity between the States and the
Union. Furthermore,  in the Constituent Assembly, Mr. Alladi
Krishanswami Ayyar  had doubted  the  applicability  of  the
doctrine  to   the  Indian   Constitution  and  had  instead
commended the  present scheme  whereby the troublesome issue
of determining  which of the trading and business operations
of State  should be  subject to Union Taxation has been left
to Parliament; while enacting such a law Parliament would be
forced to cater to the interests of the States on account of
the presence  of their representatives in it. The usefulness
of any  further discussion  on  the  applicability  of  this
doctrine to the Indian Constitution is rendered questionable
by virtue  of the  fact that  this  Court  had,  on  earlier
occasions, rejected  it. In State of West Bengal v. Union of
India, [1964]  1 S.C.R.  371, Sinha,  C.J., speaking for the
majority in  a six-Judge  Constitution Bench  expressly held
(at   p.   407)   that   the   doctrine   of   immunity   of
instrumentalities had  been rejected by the Privy Council as
inapplicable to  the Canadian  and Australian  Constitutions
and having  practically been  given up in the United States,
it was  equally inapplicable  to the Indian Constitution. In
the APSRTC  case (supra,  at p.  24), the Court rejected the
contention of  the Advocate-General of Andhra Pradesh urging
it to  adopt the  American doctrine,  by relying  upon these
observations of Sinha, C.J.
     It is,  therefore, clear  that in seeking a solution to
the problem  faced by us, we must rely primarily on the bare
text of Articles 285 and 289. Comparing these provisions, it
becomes evident  that the  Constitution does  envisage  some
form of  inter-governmental immunity.  Article 285(1), while
exempting the property of the Union from all taxes, does not
attempt to  provide an exemption in respect of income as the
States do  not possess  legislative competence to levy taxes
on income  as such;  however, taxes  relating to income that
have a bearing on property such as the taxes on agricultural
income levied  by using Entry 46 of the State List will also
be exempt  in view of the wide-ranging, all-embracing nature
of the  exemption. Article 285(2) saves, until Parliament by
law  decides   otherwise,   all   pre-Constitutional   taxes
applicable to Union property.
     With respect  to Article  289, we have already examined
the manner  in which  this provision  was analysed  by  this
Court in  the APSRTC  case. We  are in  agreement  with  the
proposition that  the  three  clauses  of  Article  289  are
interlinked, in  that, Clause  (3) is an exception to Clause
(2) which  in turn is an exception to Clause (1). As we have
noticed for  ourselves, the  framers of the Constitution had
consciously conferred Parliament with the option of deciding
which of  the trading  and business activities of the States
would be  subject to  the levy  of Union  taxes.  So,  while
Article 289(1)  generally exempts the property and income of
the States from Union taxation, Clauses (2) and (3) grant to
Parliament the aforementioned prerogatives.
     Having understood  the scheme  of Articles 285 and 289,
we must  sharply focus  on the  specific wording  of Article
289(1) and,  in particular,  on the  meaning of  the  phrase
"Union Taxation".  It may  be noted  that the  phrase "Union
Taxation"  appears   in  only   two  places  in  the  entire
Constitution - in the marginal heading of Article 289 and in
the main  text of  Article 289(1). It is suggested that some
guidance may  be  obtained  by  analysing  the  term  "State
Taxation" which  appears in  the marginal heading of Article
285 and  has been described in the text of Article 285(1) as
"all taxes  imposed by  a State".  On that reasoning, "Union
Taxation" would mean "all taxes imposed by the Union".
     The word "taxation" has been defined in Article 366(28)
which states that unless the context otherwise requires, the
word "taxation"  includes "the  imposition  of  any  tax  or
impost, whether general or local or special and, `tax' shall
be construed  accordingly". This  definition was accepted by
Das, J.  and Hidayatullah, J. in their minority opinions (at
pp. 834-35  and 893-94 respectively) in the Sea Customs case
for interpreting  Article 289(1).  However, Sinha,  C.J., in
his  majority   opinion  (at   pp.  923-34),   rejected  the
application of  this definition to Article 289(1) as, in his
opinion,  the   context  of  Article  289(1)  precluded  the
application of  the definition.  Rajagopala Ayyangar, J., in
his separate  majority opinion  (at pp.  921-93), also  felt
that the  definition would  not apply.  We concur  with  the
majority view in the Sea Customs case that the definition of
"taxation" provided  in Article  366(28) will  not apply for
the purpose of interpreting Article 289(1).
     Our attention  has been  drawn towards  the  provisions
contained in  Part XII  of  the  Constitution  which  has  a
bearing on  the scheme  of the  Constitution with respect to
financial relations  between the Union and the States. Since
this  aspect   and  its  relevance  to  Article  289(1)  was
discussed at  length in  the Sea Customs case, we may advert
to those  observations. Das,  J. (at  p. 852),  was  of  the
opinion that  the provisions of Part XII of the Constitution
would have  no bearing on the import of Articles 285 and 289
which ought to be construed on their own terms. Sinha, C.J.,
however,  analysed   these  provisions  at  length  and  the
relevant observations  in this  behalf may be reproduced (at
pp. 809-10):
     "It will  thus appear that Part XII
     of  the   Constitution   has   made
     elaborate  provisions   as  to  the
     revenues of  the Union  and of  the
     States, and  as to  how  the  Union
     will share  the proceeds  of duties
     and  taxes   imposed  by   it   and
     collected either by the Union or by
     the  States.   Sources  of  revenue
     which have  been allocated  to  the
     Union are  not meant  entirely  for
     the purposes  of the Union but have
     to be  distributed according to the
     principles     laid     down     by
     Parliamentary    legislation     as
     contemplated   by    the   Articles
     aforesaid. Thus  all the  taxes and
     duties  levied  by  the  Union  and
     collected either by the Union or by
     the States  do not form part of the
     Consolidated Fund of India but many
     of  those   taxes  and  duties  are
     distributed among  the  States  and
     form part  of the Consolidated Fund
     of the States. Even those taxes and
     duties   which    constitute    the
     Consolidated  Fund   of  India  may
     constitute the Consolidated Fund of
     India may  be used for the purposes
     of supplementing  the  revenues  of
     the States in accordance with their
     needs.  ....The       financial
     arrangement     and      adjustment
     suggested  in   Part  XII   of  the
     Constitution has  been designed  by
     the Constitution-makers  in such  a
     way  as   to  ensure  an  equitable
     distribution   of    the   revenues
     between the  Union and  the States,
     even though  those revenues  may be
     derived  from   taxes  and   duties
     imposed by  the Union and collected
     by it  or through the agency of the
     States. ....It  will thus  be  seen
     that   the   powers   of   taxation
     assigned to  the  Union  are  based
     mostly   on    considerations    of
     convenience   of   imposition   and
     collection and  not with  a view to
     allocate them  solely to the Union;
     that is to say, it was not intended
     that all  taxes and  duties imposed
     by the  Union Parliament  should be
     expended on  the activities  of the
     Centre and not on the activities of
     the States. ...The resources of the
     Union  Government   are  not  meant
     exclusively for  the benefit of the
     Union  activities;  they  are  also
     meant    for     subsidising    the
     activities   of   the   States   in
     accordance  with  their  respective
     needs, irrespective  of the amounts
     collected by  or through  them.  In
     other  words,  the  Union  and  the
     States together  form  one  organic
     whole   for    the   purposes    of
     utilisation of the resources of the
     territories of India as a whole."
     We are  of the  view that  an analysis  of some  of the
provisions in  Part XI, Chapter I of the Constitution, which
deals with  the legislative  relations between the Union and
the States  will be  crucial to  the  determination  of  the
central issue  in this  case. We  may first  notice  certain
provisions in  the Constitution  which enable  Parliament to
make laws for subjects contained in the State List, to which
our attention  was drawn  by counsel  for the  appellants as
also the  learned Attorney  General. We must note that these
provisions conceive of extraordinary situations. Article 279
provides for  a situation  where, if  the Council  of States
declare by a resolution that it is necessary in the national
interest to  do so,  Parliament may  make laws in respect of
matters enumerated  in the  State List. Article 250 empowers
Parliament to  make laws  for the whole or any part of India
in respect  of matters  enumerated in the State List while a
Proclamation of  Emergency  is  in  operation.  Article  252
empowers Parliament  to make  laws with  respect to  matters
enumerated in  the State  List if two or more States resolve
that such  a course  of action  is  desirable.  Article  253
reserves to  Parliament the exclusive power to make laws for
the whole  or  any  part  of  the  territory  of  India  for
implementing any  treaty, agreement  or convention  with any
other country  or any  decision made  at  any  international
conference, association  or any  other body.  The  Emergency
Provisions outlined  in Part  XVIII of  the Constitution and
comprising  Articles   352  to   360  conceive   of  special
situations in which Parliament is empowered to enact laws on
matters in List II.
     It has  been urged  that when Parliament legislates for
Union  Territories  in  exercise  of  powers  under  Article
246(4), it  is a situation similar to those enumerated above
and is  to be  treated  as  an  exceptional  situation,  not
forming part of the ordinary constitutional scheme and hence
falling  outside  the  ambit  of  "Union  Taxation".  Having
analysed  the  scheme  of  Part  VIII  of  the  Constitution
including the  changes wrought  into it,  we are of the view
that despite  the fact that, of late, Union Territories have
been granted  greater powers,  they continue to be very much
under the  control and  supervision of  the Union Government
for their  governance. Some  clue as  to the reasons for the
recent  amendments   in  Part  VIII  may  be  found  in  the
observations of  this Court in Ramesh Brich's case, which we
have extracted earlier. It is possible that since Parliament
may not  have enough  time at  its disposal  to enact entire
volumes of  legislations for  certain Union  Territories, it
may decide,  at least  in respect of those Union Territories
whose importance is enhanced on account of the size of their
territories  and  their  geographical  location,  that  they
should  be  given  more  autonomy  in  legislative  matters.
However, these  changes will  not have  the effect of making
such Union  Territories as  independent as  the States. This
point is  best illustrated  by referring  to the case of the
National Capital  Territory of  Delhi which is today a Union
Territory and  enjoys the maximum autonomy on account of the
fact that  it has a Legislature created by the Constitution.
However, Clauses  3(b) and  3(c) of  Article 239AA  make  it
abundantly clear  that the  plenary power  to legislate upon
matters affecting  Delhi still  vests with  Parliament as it
retains the  power to  legislate upon any matter relating to
Delhi and,  in the  event  of  any  repugnancy,  it  is  the
Parliamentary law  which will  prevail.  It  is,  therefore,
clear  that   Union  Territories   are  in  fact  under  the
supervision  of  the  Union  Government  and  it  cannot  be
contended that their position is akin to that of the States.
Having analysed  the relevant  Constitutional provisions  as
also the  applicable precedents,  we are  of the  view  that
under the scheme of the Indian Constitution, the position of
the Union  Territories cannot  be equated  with that  of the
States. Though  they do  have a separate identity within the
Constitutional framework, this will not enable them to avail
of the privileges available to the States.
     It has  been urged  before us  that the  phrase  "Union
Taxation" has  to be  interpreted in  the context of Article
246, which  deals with  the subject  matter of  laws made by
Parliament and  the State Legislatures, and that the context
of "Union  Taxation"  should  be  limited  to  those  matter
falling within  Articles 246(1),  where Parliament  has  the
legislative competence to levy taxes with respect to matters
enumerated in  the Union  List. We  see no reason why such a
limiting principle  must be  read into the definition of the
phrase "Union  Taxation". In  our view,  the  term  can  and
should  be  given  the  widest  amplitude,  allowing  it  to
encompass all  taxes that  are levied  by the  authority  of
Parliamentary laws.  Though the amplitude of the term "Union
Taxation" was  not expressly  before the  Court in  the  Sea
Customs case,  it is  clear from an analysis of the majority
judgment that  the learned Judges considered the term "Union
Taxation" to mean all taxes leviable by the Union. As Clause
(4)  of   Article  246  itself  envisages  situations  where
Parliament is  to make  laws in  respect of  matters in  the
State List,  it cannot  be said  that this  is a  rare or an
unusual circumstance.  The Constitution does not contain any
provision which would indicate that the definition of "Union
Taxation" should  be restrictively  interpreted so  as to be
within  the   confines  of   Article  246(1).  The  specific
situations envisaged  in Articles 249, 250, 252, 253 and the
Emergency Provisions  in Part  XVIII of  the Constitution do
not make for the creation of any anomalous situations. These
Articles,   which   provide   for   unusual   exercises   of
Parliamentary power  involving the matters enumerated in the
State List,  can be  regarded as  exceptions to  the general
rule. We  are, therefore,  of  the  view  that,  unless  the
context requires otherwise - as in the case of Articles 249,
250, 252,  253 and the Emergency Provisions in Part XVIII of
the Constitution  - the broad definition of "Union Taxation"
embracing all  taxes leviable  by  Parliament  ought  to  be
accepted for the purpose of interpreting Article 289(1).
     As already  noticed by us, under the scheme of the 1935
Act, those lands or buildings of the Provinces and Federated
States which  were situated  within the Chief Commissioner's
Provinces were,  by virtue  of Section 155(1), exempted from
Federal  Taxation.   There  can  be  dispute  about  such  a
construction of  the provision for, otherwise, the exemption
in Section  155(1) would  have no  meaning.  Section  155(1)
formed the  basis for the present Article 289(1) and, having
closely examined  the various stages by which Article 289(1)
replaced Section  155(1), we  find that  this  position  was
never  sought   to  be   deviated  from.   The  presumption,
therefore, is  that it  was the  intention of the framers of
the Constitution  to maintain the status quo with respect to
the position  regarding the  Chief Commissioner's  Provinces
which are  now called  "Union Territories". That presumption
is  further   reinforced  by   the  general  scheme  of  the
Constitution  which   furthers  Article   289(1)   and   its
applicability in respect of the Union Territories.
     Unlike other  Federations, the  Union of  India  has  a
sizeable  territory   of  its   own  comprising   the  Union
Territories which  have been specified in the First Schedule
to  the  Constitution.  Therefore,  the  limited  reciprocal
inter-governmental immunity  bestowed by the Constitution in
Articles 285  and 289  is given  fuller meaning by virtue of
the adoption  of the wider meaning of "Union Taxation"; this
would mean  that, just  as the  properties of  the Union are
exempt from  taxes on  property leviable  by the States, the
properties of  the States  will also be exempt from taxes on
property leviable  by the  Union in areas falling within its
territorial jurisdiction.
     While attempting  to demonstrate  that the reasoning of
Sinha, C.J. in the Sea Customs case was incorrect insofar as
his acceptance of the contention that Article 246(4) enables
Parliament to levy taxes directly on property was concerned,
Mr. B.  Sen contended  that Article  246(4) was  not in  the
contemplation of  the framers  of the Constitution when they
carved out  the exemption  in favour  of the property of the
States from  Union  Taxation;  he  then  proceeded  to  cite
examples of  specific circumstances  in which Parliament can
levy taxes directly on property which, according to him, was
what the  framers  had  intended  to  exempt  under  Article
289(1). He  drew our  attention to Entry 3 of the Union List
["Delimitation of Cantonment areas, local self-government in
such areas, the constitution and powers within such areas of
cantonment  authorities   and   the   regulation   of   home
accommodation (including  the  control  of  rents)  in  such
areas"] and  stated that by virtue of this entry, Parliament
is rendered competent to levy taxes on the use or occupation
of properties  located within areas declared as Cantonments.
He then  referred to Entry 54 of the Union List ("Regulation
of mines and mineral development to the extent to which such
regulation and development under the control of the Union is
declared by  Parliament by law to be expedient in the public
interest") and  to the  Mines  and  Minerals  (Regulation  &
Development) Act,  1956 which together empower Parliament to
levy taxes  on mines  and minerals  which would  be  in  the
nature of  a tax  on property.  Referring to Entry 49 of the
Union List  ("Patents, Inventions  and  Designs;  copyright;
trade-marks and  merchandise marks"), Mr. Sen contended that
since  these   subjects  are   regarded  as   intangible  or
incorporeal properties, taxes levied by Parliament upon them
would also  amount to  taxes on  property. Additionally, Mr.
Sen has  referred to  the following  Entries  in  the  Union
Lists: Entries  24 &  25 (relating  to Shipping activities),
Entry 47  ("Insurance"), Entry  52 ("Industries, the control
of which by the Union is declared by Parliament by law to be
in the  public interest"):  to demonstrate  that  Parliament
does have power to levy taxes directly on property.
     Mr. A.K.  Ganguli controverted  Mr. Sen's contention in
this respect;  he argued that Entry 3 of the Union List does
not contemplate  the  levy  of  taxes  by  Parliament.  With
respect to  Entries 47  & 54,  he argued  that these entries
would be  covered by Article 289(2) of the Constitution. The
same contention  would, presumably, be applicable in respect
of the other entries cited by Mr. Sen.
     In  our   opinion,  there   is  no   warrant   for   an
authoritative pronouncement upon this aspect for, even if we
assume that  Mr. Sen's  contention is  correct and  that all
these Entries  do in  fact empower  Parliament to levy taxes
directly on  property, it  would not in any way detract from
the correctness of our interpretation that the levy of taxes
under  Article  246(4)  is  covered  by  the  phrase  "Union
Taxation"  in  Article  289(1);  these  Entries  would  then
provide additional  areas in respect of which the States can
claim exemption  from Union  Taxation under  Article 289(10,
thus lending  greater weight to the solemnity and the actual
worth, in real terms, of the phraseology of Article 289(1).
     However, we find ourselves unable to agree with Mr. Sen
when he contends that the entries cited by him were the only
instances kept  in contemplation  by the framers at the time
of the  drafting of  Article 289(1).  If that  were so,  the
ambit of  the exemption  would traverse  an extremely narrow
field which  would then  lend credence to the observation of
Das, J. in the Sea Customs case, albeit made in the converse
context, that  the exemption  in Article 289(1) would amount
to "much ado about nothing".
     Classification of taxes imposed by Municipalities
     We may  now turn  to Mr.  Sen's alternatives submission
that the taxes levied by the NDMC under the Act would not be
covered by the exemption in Article 289(1) as that provision
cannot be construed to encompass Municipal Taxes.
     To appreciate  this contention,  we will be required to
analyse certain  provisions of  the Act as also those of the
Constitution. Section  61 of  the Act, which is the charging
section, at the relevant time, empowered the Municipality to
levy a  tax payable  by the  owner on  lands  and  buildings
subject to,  and to the extent of, the qualifying conditions
provided therein.  It is  clear from  an  analysis  of  this
provision that  it provides  for the  levy of a consolidated
tax, combining  within it  the tax  element and  the service
element. Section 51 of the Act provides for the constitution
of a Municipal fund and states that all sums received by the
Municipal Committee  are to be credited to it. Section 52 of
the Act  provides the  manner in which the sums collected in
the Municipal  Fund are  to  be  applied  by  the  Municipal
Committee.  Our   attention  has  also  been  drawn  towards
analogous provisions  in the  New Delhi  Municipal Committee
Act and  the Delhi  Municipal  Committee  Act  to  form  the
foundation  of   the  argument   that,   under   all   these
legislations, the  Municipalities have  been vested  with  a
great deal of financial autonomy; they have the power to fix
their own  budgets, levy  taxes  within  prescribed  limits,
collect the  proceeds of  such imposition  which are  to  be
diverted to  Municipal Funds  which function  entirely under
the supervision  of the Committees. It is argued that such a
stance is further reinforced by the introduction of Part IXA
into the  Constitution which allows for Municipalities to be
vested with  substantial powers, including the power to tax,
thereby  providing  Constitutional  support.  The  argument,
therefore,  is   that  now   that  the  Constitution  itself
recognises Municipal  taxes as a separate category of taxes,
they should  not be  construed to  fall within the exemption
provided by  Article 289(1). Another limb of this submission
is that  while under  Article  285,  taxes  imposed  by  any
"authority within  a State", which would necessarily include
Municipal taxes,  have been  expressly exempted, Article 289
does not  provide for any such facility and, to that extent,
taxes levied  by Municipalities within the Union Territories
are not covered by the exemption in Article 289(1).
     We have  great difficulty  in accepting this assertion.
Article 265  of the  Constitution emphatically mandates that
"no tax  shall be levied or collected except by authority of
law". Under  the framework of the Constitution there are two
principal bodies  which have been vested with plenary powers
to make  laws, these  being the  Union Legislature, which is
described by  Article 79  as "Parliament  for the Union" and
the State  Legislatures, which  are described by Article 168
in the  singular as  "Legislature of a State". While certain
other  bodies  have  been  vested  with  legislative  power,
including the  power of  levying taxes,  by the Constitution
for specific purposes, as in the case of District Committees
and Regional  Councils constituted  under the  aegis of  the
Sixth Schedule  to the  Constitution, the  plenary power  to
legislate, especially  in matters relating to revenue, still
vests with the Union and the State Legislatures. Even if the
submission that  Municipalities now  possess, under Part IXA
of the  Constitution, a  higher juridical status is correct,
the extension  of that  logic to  the proposition  that they
have plenary powers to levy taxes is not, as is clear from a
perusal  of  the  relevant  part  of  Article  243X  of  the
Constitution which reads as under:
     "243X. Power  to impose  taxes  by,
     and Funds of, the Municipalities.--
     The Legislature  of a State may, by
     law,--
     (a)  authorise  a  Municipality  to
     levy, collect  and appropriate such
     taxes, duties,  tolls and  fees  in
     accordance with  such procedure and
     subject to such limits;
     (b) ...                 ...
     ...
     (c) ...                 ...
     ...
     (d) ...
                     ...
     ...
     as may be specified in law."
     Article 243ZB  provides that  this  provision  will  be
applicable to  Union Territories  and the  reference to  the
legislature of  a State  would apply, in relation to a Union
Territory having a Legislative Assembly, to that Legislative
Assembly.
     It is, therefore, clear that even under the new scheme,
Municipalities do  not have  an independent  power  to  levy
taxes. Although  they can  now be  granted more  substantial
powers than  ever before, they continue to be dependent upon
their  parent   Legislatures  for   the  bestowal   of  such
privileges. In  the case  of Municipalities  within  States,
they have  to be  specifically delegated the power to tax by
the concerned  State Legislature. In Union Territories which
do not  have Legislative  Assemblies of  their own,  such  a
power would have to be delegated by Parliament. Of the rest,
those which  have Legislative  Assemblies of their own would
have to specifically empower Municipalities within them with
the power to levy taxes.
     We have already held that despite the fact that certain
Union Territories  have Legislative Assemblies of their own,
they are  very much  under  the  supervision  of  the  Union
Government and cannot be said to have an independent status.
Under our  Constitutional scheme,  all  taxation  must  fall
within either  of two  categories: State  Taxation or  Union
Taxation.  Since  it  is  axiomatic  that  taxes  levied  by
authorities within  a State  would amount to State taxation,
it would appear that the words "or by any authority within a
State" have  been added in Article 285(1) by way of abundant
caution. It  could  also  be  that  these  words  one  their
presence in  the provision  to historical reasons; it may be
noted that Section 154 of the 1935 Act was similarly worded.
The fact  that Article  289(1), which  in its phraseology is
different from  Section 155  of the  1935  Act  having  been
drafted  by   the  Drafting   Committee  to   meet  specific
objections, does  not contain  words  similar  to  those  in
Article 285(1),  will not in any way further the case of the
appellant,  because   the  phrase   "Union  Taxation"   will
encompass Municipal  taxes levied by Municipalities in Union
Territories.
     Before we  part, we  must  refer  to  Part  IV  of  the
judgment of Jeevan Reddy, J. where Clause (2) of Article 289
has been invoked to validate the levy of taxes under the Act
and  the   Delhi  Municipal   Corporation  Act   upon  those
properties of State Governments which are being occupied for
commercial or trade purposes.
     At the  outset, we must express our great reluctance to
deal with  this proposition,  for it  is not  based  on  any
contention advanced  by any  of  the  counsel  who  appeared
before us,  either in  their written  pleadings or  in their
oral submissions. This is not because we feel constrained to
restrict ourselves  to  the  parameters  prescribed  by  the
submissions  of  counsel,  but  because  we  feel  that  the
opposite side  did not have a fair opportunity to answer the
line of  reasoning adopted in that behalf. The view taken by
Reddy, J.  has  the  effect  of  imposing  considerable  tax
liabilities upon  the properties  of the  State  Governments
and, in  our view,  it would only be proper that their views
in this  behalf be  obtained before  visiting them with such
liability. We  have only  the rule  of caution in mind which
warns  that   ordinarily,  courts  should,  particularly  in
constitutional matters,  refrain from expressing opinions on
points not  raised or  not fully  and effectively  argued by
counsel on either side.
     Be that  as it  may, we  must, for  the record, express
ourselves on  the view  taken by  Reddy,  J.  after  closely
examining it.  Reddy, J. begins his examination of the issue
by noting  that the Act, the Delhi Municipal Corporation Act
and the  New Delhi  Municipal Committee Act contain specific
provisions exempting  the properties of the Union from local
taxation in  accordance with  Article 285. It is then stated
that since  none of these Acts contain similar exemptions in
favour of  the properties  of States,  it is clear that they
purport to  levy taxes  on them.  This is  followed  by  the
observation that  though the  States seek  an exemption from
such levies  on the  basis of  clause (1) of Article 289, as
per the  ratio of the APSRTC Case, clause (1) has to be read
in the  context of clauses (2) and (3) of that Article. This
would, it  is stated,  lead to  the consequence  that  if  a
Parliamentary law  within  the  meaning  of  clause  (2)  of
Article 289  is made,  the area covered by that law would be
removed from  the field occupied in clause (1); for support,
an analogy  is drawn  from the  decision in  R.C. Cooper  v.
Union of India [1970] 1 SCR 248.
     Thereafter, the  meaning and  scope of  Article 289  as
well  as   its  underlying   objective  are  ascertained  by
contrasting it  with Section 155 of the 1935 Act. The use of
the  words  "lands  and  buildings"  in  Section  155(1)  is
analysed to  arrive at  the conclusion that these words were
included to empower the federal legislature to levy taxes on
lands and buildings situated within the Chief Commissioner's
Provinces. It  is then noted that Article 289 uses the wider
expression `property',  but that  the same  reasoning  holds
good for  the preset  Union Territories, making the property
and income of State situated within Union Territories exempt
from "Union  Taxation". With  respect to  the  provision  to
Section 155(1),  it  is  observed  that  the  provision  was
automatically applicable on its own force. It did not define
the  trading   and   business   operations   of   Provincial
Governments, nor  did it  specify which  of these operations
would be subject to Federal Taxation. It is then stated that
the same  position continues  in Article  289 with  the only
difference being the requirement of a the enactment of a law
by Parliament  in this  behalf. Thereafter,  it is  observed
that the  exemption in  clause (1) of Article 289 is subject
to clause  (2) of  Article 289.  Clause (2)  is analysed and
interpreted as  clarifying clause (1) to the extent that the
exemption upon  the income of Provincial Government operates
only when  such income  is carried  on for  the  purpose  of
governmental  functions  and  not  for  trade  and  business
activities, carried  on with the profit motive. It is stated
that though  "trade and business" ordinarily has a very wide
and  ambiguous   meaning   (certain   English   and   Indian
authorities are  cited to  illustrate this  point), but, for
the purposes  of clause  (2) of Article 289, they have to be
given a  restricted meaning.  It is,  therefore, stated that
under Article 289(2), the trading and business activities of
State Governments,  which are  carried on  with  the  profit
motive, will  be liable  to tax  and  cannot  avail  of  the
exemptions in Article 289(1).
     Clause (2)  is further  analysed and  is interpreted as
having been included for the purpose of removing the trading
and  business  activities  of  State  Governments  from  the
purview of  the exemption  in clause  (1).  However,  it  is
stated, such  a removal  is not  automatic and  is dependent
upon the  enactment of  a Parliamentary  Law  which  imposes
taxes on  specified trading and business activities of State
Governments.
     Thereafter, the  question whether  Parliament  has,  in
exercise of  powers under  Article 289(2),  imposed taxes on
the trading and business activities of State Governments, is
sought to  be addressed.  In this  respect, the Act, the New
Delhi  Municipal  Committee  Act  and  the  Delhi  Municipal
Corporation Act,  which are deemed to be post-Constitutional
enactments, are  examined. It  is  noted  that  while  these
enactments  contain   specific  exemptions   in  favour   of
properties of  the Union and also exempt properties used for
`charitable purposes'  and `public  worship',  they  do  not
exempt properties  of State  Governments. It  is stated that
the  latter  omission  must  be  deemed  to  be  deliberate.
Thereafter, it is stated that two views are possible in this
regard. The  first is  to  adopt  the  position  that  since
neither of  these enactments are purported to have been made
under Article  289(2), they  should not be treated as having
been enacted  for that  purpose and, consequently, should be
held to  be incapable  of levying  taxes  on  any  property,
whether occupied  for governmental  or trading  purposes, of
the State  Governments. The  second view,  which  Reddy,  J.
adopts, is  to  take  the  position  that  the  Doctrine  of
Presumption of  Constitutionality of  Legislations points in
favour of  holding that  the Act  and  the  Delhi  Municipal
Corporation Act  are laws  made by  Parliament under Article
289(2), and  taxes  imposed  by  them  upon  the  properties
occupied  for  trading  and  business  activities  by  State
Governments would  be  valid  and  effective.  A  number  of
decisions  of   this   Court   are   cited   to   show   the
jurisprudential  basis   of  this   tool  of  Constitutional
interpretation. It  is pointed  out that  though neither  of
these legislations  purport to  have been made under Article
289(2), but,  since this  is  normal  practice  in  that  no
legislation specifies the provision of the Constitution that
it is  enacted under, this fact need not be over-emphasised.
It is,  therefore, held  that the  levy of property taxes by
these enactment  is valid  to the  extent that it relates to
lands and  buildings owned  by State Governments and used by
them for trade and business purposes. [In an earlier part of
the opinion, the difficulty in drawing a distinction between
governmental and  business functions is noted and an example
in respect of gues-touses maintained by State Governments is
supplied]. Thereafter,  it is  stated that  it  is  for  the
"appropriate  assessing   authority"  to   determine  "which
land/building falls within which category in accordance with
law and  take appropriate further action". It is then stated
that  since,   under   these   enactments,   the   assessing
authorities  are   required  to   decide  several  difficult
questions as  to what  amounts to `charitable purpose' etc.,
the obligation imposed by such directions would not prove to
be too  onerous to discharge. Reddy, J. sums up the issue by
recommending to  the Union that it consider granting a total
exemption in favour of all properties of State Governments.
     We are  of the  opinion that  of the two possible views
expressed by  Reddy, J.,  it is  the first which ought to be
preferred. We  think that  the second  view is  fraught with
several  difficulties.  Such  a  construction,  while  being
violative of  the scheme  envisaged by  the Framers  of  the
Constitution, may well result in a situation that was sought
to be avoided by them. The directions may also lead to grave
practical difficulties;  moreover, since  the effect  of the
directions would  be to  vest the executive authorities with
substantial policy  making powers, their issuance might well
be offensive  to established  principles  of  delegation  of
powers.
     We shall  now set  out the reasons which cause us to so
think; in  doing so,  we may  have to  revisit some  of  the
ground that  has already  been  traversed  by  us,  but  the
repetition can  be justified by the narrower focus that will
now be imparted to those aspects.
     Articles 285  and 289,  and their  predecessors in  the
1935 Act,  owe their  origin to  the  American  doctrine  of
Inter-governmental   Tax   Immunity.   This   doctrine   was
enunciated n  the case  of McCulloch  Vs. Maryland  (supra).
However, the  doctrine was  substantially  modified  by  the
decision in  South Carolina  Vs. United States (supra) which
drew  a   distinction  between   strictly  governmental  and
business functions  of governments.  In the  latter case, it
was  held   that  the   governmental  functions   of   State
Governments would  be exempt from Federal Taxation but their
commercial functions would be subject to the levy of Federal
Taxes. This  case imposed  upon Courts  the heavy  burden of
determining in specific cases when a particular function was
or was  not governmental.  A number of conflicting decisions
were rendered  and caused  a great  deal of  confusion as to
which of the activities of governments were to be classified
as 'business'  or 'proprietary'  and were,  therefore, to be
liable to  Federal Taxation. The controversy was set at rest
by a  unanimous decision  of the  U.S. Supreme  Court in new
York Vs.  United States  [326 U.S. 572; 90 L.ED. 326 (1946)]
wherein it  was concluded  that the  artificial  distinction
between governmental  and proprietary/business  functions of
States was unworkable and required to be abandoned.
     The difficulty in determining the distinction between a
governmental function  and a trading or business function of
the State has also been felt and recognised in Australia. In
South Australia Vs. Commonwealth [(1942) 65 C.L.R. 373], the
changing character  of government functions of the State was
noted and  it was  held that,  "In a  fully  self-government
country when  a Parliament determines legislative policy and
an executive  government carries  it out,  any activity  may
become a function of government if Parliament so determines"
[supra at  p.423]. The  Court in  this decision  come to the
conclusion that the best way to avoid the controversy was to
allow Parliament  to decide, by law, which of the activities
of the State would be classified as relating to business and
would consequently be liable to taxation.
     Under the  predecessor  of  Article  289,  i.e.,  under
proviso (a) to Sections 155 (1) of the 1935 Act, the Federal
government  was   empowered  to  levy  taxes  on  lands  and
buildings of  Provincial Governments  used by them for trade
or  business.   The  provision  itself  vested  the  Federal
Government with  the power  to levy such taxes and there was
no requirement  for the  enactment of a specific law in that
behalf. This  position continued  till the Constitution came
into force.
     When Sir  B.N. Rau  prepared  his  Draft  Constitution,
Clause 207 (present Article 289) was drafted on the basis of
Section 155  of  the  1935  Act.  An  attempt  was  made  to
incorporate the  U.S. position prevailing after the decision
in the  South Carolina  case (supra) by stipulating that all
trading activities  of State  Governments would be liable to
Union Taxation.  However, even  under  this  provision,  the
power to  tax was  automatic and  did not require a specific
law. [See  : A Note on certain clauses by the Constitutional
Adviser, B. Shiva Rao, Vol. III, p.197 at PP. 204-205].
     The Expert  Committee on Financial Provisions, however,
recommended   that   quasi-trading   activities   of   State
Governments should  be exempt  from Union  Taxation. [See  :
Report of  the Expert  Committee, B.  Shiva Rao,  Vol.  III,
p.260 at p.266].
     Even  when  the  Drafting  Committee  incorporated  the
provision as Draft Article 266 and subsequently modified it,
there was  no stipulation  for a law before the power to tax
could be  exercised. [See  the text of Draft Article 266, B.
Shiva Rao, Vol. IV, p.676]. At the Premier's Conference held
in July,  1949, the provision met with severe criticism. The
Premier of  the United  Province suggested  that all trading
and business  activities of State Governments be exempt from
Union Taxation.  Several other  Provinces also  made similar
representations.  Based   on  these   representations,   the
Drafting Committee  made a substantial change in the text of
Draft Article  266.  A  provision  similar  to  the  present
Article 289(2),  whereby Parliament  would have the power to
determine which  of the  trading and  business activities of
State Governments  would be  liable to  Union  Taxation  was
incorporated. [See  :  Revised  draft  by  the  Ministry  of
Finance, B. Shiva Rao, Vol. IV, pp.731-732].
     When Draft Article 266 was discussed in the Assembly, a
number of  members expressed  fears that  Union Taxation  of
commercial activities  of State  Governments would check the
expansion of  industrialisation and  reduce the  capacity of
States to perform their ordinary functions. They, therefore,
demanded that  the trading  and business activities of State
Governments  be   exempt   from   Union   Taxation.   Alladi
Krishnaswamy Ayyar  sought to  allay these  apprehensions by
making an elaborate statement, the relevant part of which is
quoted below  [Constituent Assembly  Debates, Vol.  IX,  pp.
1167-69]:
     "....It is  a permissive power that
     is given  to Parliament  under  the
     section. There is no duty case upon
     Parliament to  levy a  tax and I am
     sure  in  the  larger  interest  of
     trade and industry, Parliament will
     certainly not  go to  the length of
     taxing ...  industries  which  have
     been thriving.  .... So  far as the
     United States  is concerned  in the
     early  days  though  there  was  no
     express   provision   through   the
     medium   of    the   doctrine    of
     Instrumentality, they held that the
     State  cannot   tax   the   Federal
     Government    and    the    Federal
     Government  cannot  tax  the  State
     instrumentality  because  both  are
     parts   of   a   single   composite
     mechanism and  if you permit one to
     tax the  other, it  may destroy the
     whole   mechanism.    Later,    the
     doctrine of  instrumentality itself
     was felt  to be  not  n  the  large
     interest of  the State,  and  quite
     recently the  swing of the pendulum
     is the other way. The other day one
     of the  most enlightened of Supreme
     Court Judges  held in what is known
     as the  Spring of  the State of New
     York, in  regard to certain springs
     which were  worked by  the State of
     New  York   -  for   this  part  of
     business they held that there is no
     immunity of  the  State  from  tax.
     They said  'You have  to draw  some
     line between  one kind  of activity
     of a  State  and  another  kind  of
     activity. Of  course it cannot be a
     rigid definition.  What may  be  in
     one sphere  may  easily  pass  into
     another sphere with the progress of
     the State  and with the development
     of the  polity  in  the  particular
     State'. [In  all probability,  this
     is a  reference to  the opinion  of
     Frankfurter, J.  in  new  York  Vs.
     United States  (supra) which upheld
     the application of a Federal Excise
     Tax to  the sale  of mineral waters
     bottled by  the State  of New  York
     with a  view to providing funds for
     a  State   health   resort].   ....
     [N]ormally  speaking,   you  cannot
     regard at  the  present  day  under
     existing conditions the carrying on
     of trade  and business  as a normal
     or   ordinary   function   of   the
     Government.  It  may  develop  into
     ordinary function - certain aspects
     of  it,  especially  the  transport
     service and certain key industries,
     may soon  become the  parts of  the
     State    enterprise.    ....    The
     Parliament will  take note  of  the
     progressive   tendency    of    the
     particular times  and may  at  once
     declare accordingly.  It might  not
     have been  the ordinary function of
     Government  before.   Now  it   may
     become an  ordinary function. There
     will be  sufficient  elasticity  in
     clause (3) to enable the Government
     to exempt  from taxation particular
     trades  or   industries  which  are
     started as  public utility services
     or declare  them as  regular  State
     industries. Nobody  can question  a
     law made  by Parliament because the
     Parliament  has   stated   that   a
     particular industry  is an ordinary
     function  of   the  State   whereas
     according  to  the  notions  of  an
     individual economist  A or  B it is
     not  a   ordinary  function   of  a
     Government.  Parliament   will  lay
     down the  law of  the land  and  it
     will be  the sole  arbiter  of  the
     question as  to whether  it  is  an
     ordinary function  of Government or
     not.
     Therefore having regard:
     (a)  to   the  plenary   power   of
     Parliament to exempt and particular
     industries, and particular business
     from  the   operation  of  the  tax
     provision.
     (b) having  regard to the fact that
     it is  not obligatory on Parliament
     to levy any tax.
     (c) that  the  very  conception  of
     State industry  may change with the
     further evolution  of the State and
     changing times, and
     (d) to the inter-connection between
     one State and another.
     it  will   be  very   difficult  to
     differentiate  between   particular
     States, between  States which  have
     been working certain industries and
     other States.  .... [T]o lay down a
     general principle  of law that even
     at  the   present  day  before  the
     provinces are  on their  feet every
     trade or  business is  exempt  from
     taxation will  lead  to  wild-goose
     schemes being  started  by  various
     provinces. They  may not  take into
     account the  general  interests  of
     the trade and industry in the whole
     country. They  may not  of industry
     and    another.     Under     those
     circumstances    the     particular
     provision which  has been  inserted
     by Dr.  Ambedkar is a very salutary
     one and is consistent with the most
     advanced principles  of  democratic
     and  federal   policy  in  all  the
     countries."
     (Comment and Emphasis supplied)
     It is,  therefore, clear that clause (2) of Article 289
was a  well-considered compromise which was arrived at after
balancing the demands of those who sought complete exemption
of commercial  activities of  State Governments  from  Union
Taxation and  those who were in favour of levying such Union
Taxes. The  Framers  desired  that  the  issue  whether  the
trading and  business activities of State governments should
be subject  to Union  Taxation, be  left to  the  wisdom  of
Parliament. As is evident from the reference to New York Vs.
United States  (supra) in the extracted portion, the Framers
were conscious  of the  difficulty in drawing a line between
the  governmental   and  commercial   functions   of   State
Governments and  they hoped  that Parliament would take into
account a  shot of  relevant factors  before enacting  a law
which  would   specify  the   trading  activities  of  State
Governments making  them liable  to Union  Taxation.  It  is
important to  note that the Framers did not expressly confer
upon the  Union the  power to  tax commercial  activities of
State governments.  The exercise  of such  a power  is  made
conditional  upon   the  enactment   of  a   special,   duly
considered, legislation.  It is  also important to note that
clause (2)  of Article  289 has  made a  departure from  the
proviso to  Section 155(1).  Under the  present scheme,  the
power to  tax is  not automatic  and the  responsibility  of
specifying the  trading and  business  activities  of  State
Governments which  would be  liable  to  Union  Taxation  is
expressly vested in Parliament.
     Neither the  Act, which  is a  1911 enactment,  nor the
Delhi Municipal  Corporation Act,  can qualify as laws under
Article 289.  They do  not  specify  which  of  the  trading
activities of  State Governments  are  liable  to  taxation;
indeed, by  their very nature, they cannot purport to do so.
It must  be remembered  that the Act and the Delhi Municipal
Corporation Act  are not  Parliamentary Laws  in  the  sense
envisaged by  Article 289(2). Though the Act is sought to be
construed as a post-Constitutional, Parliamentary enactment,
the fact  remains that  it is a pre-Constitutional, colonial
legislation. As  for the Delhi Municipal Corporation Act, it
is, in  essence, an  ordinary  Municipal  legislation.  What
makes it  special is  the fact,  occasioned in  its case  by
geographical and  historical factors, that it was enacted by
Parliament instead  of  by  a  State  legislature.  In  this
regard,  we  may  recall  the  submissions  of  the  learned
Attorney General  n respect of how Parliament discharges its
obligation towards  enacting  laws  for  Union  Territories.
After stating  that Parliament  cannot afford  to  undertake
threadbare  discussions   before   legislating   for   Union
Territories, the learned Attorney General referred us to the
following passage  of the  decision of  chis Court in Ramesh
Birch v. Union of India (1989) Supp.1 SCC 430 at 471:
     "[Union      Territories]       are
     territories situated  in the  midst
     of  contiguous   territories  which
     have a proper legislature. They are
     small territories falling under the
     legislative     jurisdiction     of
     Parliament   which    has    hardly
     sufficient time  to look  after the
     details of  all  their  legislative
     needs and  requirements. To require
     or expect  Parliament to  legislate
     for    them     will    entail    a
     disproportionate  pressure  on  its
     legislative schedule.  It will also
     mean the unnecessary utilisation of
     the  time  of  a  large  number  of
     members of  Parliament for,  except
     the few  (less  than  ten)  members
     returned  to  Parliament  from  the
     Union  territory,   none  else   is
     likely to  be  interested  in  such
     legislation. In  such a  situation,
     the  most   convenient  course   of
     legislating   for   them   is   the
     adaptation, by  extension, of  laws
     in force  in  other  areas  of  the
     country. As  Fazal Ali,  J. pointed
     out in  the Delhi Laws Act case, it
     is not a power to make laws that is
     delegated  but   only  a  power  to
     'transplant' laws  already in force
     after having  undergone scrutiny by
     Parliament  or  one  of  the  State
     legislatures, and that too, without
     any material change."
     It  is,   therefore,  clear  that  it  would  be  quite
dangerous to  assume that  when Parliament enacted the Delhi
Municipal  Corporation   Act,  it   had  intended  that  the
enactment should  secure the  purpose enshrined  in  Article
289(2). If  any safe  assumption is to be drawn, it is this:
in all  probability,  while  enacting  tee  Delhi  Municipal
Corporation  Act,  Parliament  must  have  'transplanted'  a
municipal legislation  existing in a certain State, made the
necessary changes  and completed the procedural formalities.
That would  explain why  the Delhi Municipal Corporation Act
(as also  the new Delhi Municipal Committee Act) contains an
exemption on  the lines of the one prescribed by Article 285
-  this   is  a   typical  feature   of  ordinary  Municipal
legislations, which  are enacted  by State  legislatures who
are conscious  of the mandate of Article 285. Moreover, such
legislations  do   not  contain   exemptions  in  favour  of
properties  of   State  Governments   because,  within   the
territory  of   a  State,  the  properties  of  other  State
Governments  are   liable  to  taxation.  So,  when  such  a
legislation is  'transplanted' almost  verbatim into a Union
Territory, it  will obviously  not contain  an exemption  in
favour of  properties of  State Governments.  In the face of
the actual conditions which govern the enactment of laws for
Union Territories by Parliament, (these conditions have been
statutorily provided;  moreover this Court has already taken
notice of  them) it is difficult to assume that the omission
of an  exemption in  the Delhi  Municipal Corporation Act in
favour of  State Governments, is deliberate. The Act and the
Delhi Municipal  Corporation Act  cannot, therefore, be said
to meet  the special  requirements which have been expressed
by the Framers to be necessary for complying with the spirit
of Article 289(2).
     Reddy, J.  has taken  the view  that  the  Doctrine  of
Presumption of  Constitutionality of  Legislations  requires
the saving  of the  taxes which  these Acts  impose upon the
commercial activities  of State  Governments. The  Act is  a
pre-Constitutional enactment.  The basis of this doctrine is
the assumed  intention of  the legislators not to transgress
Constitutional boundaries. It is difficult to appreciate how
that intention can be assumed when, at the time that the law
was passed, there was no such barrier and the limitation was
brought in by a Constitution long after the enactment of the
law. (This  Court has  in  a  Constitution  Bench  decision,
Gulabbhai Vs.  Union of  India, AIR  1967 SC  1110 at  1117,
raised doubts  along similar  lines). The  Framers obviously
wanted the  law under  Article 289(2)  to be  of a very high
standard. Can  these laws,  which are  silent  on  the  most
important aspect  required  by  Article  289(2),  i.e.,  the
specification of the trading activities of State Governments
which would  be liable  to Union  Taxation, be  said to meet
with that standard?
     The Doctrine  of Presumption  of  Constitutionality  of
Legislations is  not one  of infinite  application;  it  has
recognised limitations.  It  is  settled  law  that  if  any
interpretation is  possible which  will save an Act from the
attack of  unconstitutionality, that  interpretation  should
always  be   accepted  in   preference  to   an  alternative
interpretation that  might also be possible, under which the
statute would  be void. However, this Court has consistently
followed a  policy of  not putting  an unnatural  and forced
meaning on  the words that have been used by the legislature
in the  search for  an interpretation  which would  save the
statutory provisions. We are not "free to stretch or pervert
the language  of the enactment in the interests of any legal
or Constitutional  theory" See In Re the Central Provinces &
Berar Act  No. XIV of 1938, (1939) FCR 18 at p. 37; also see
: Diamond  Sugar Mills  Ltd. Vs.  The State of U.P. [1961] 3
SCR 242 at 248-249.
     The Act  and the  Delhi Municipal  Corporation Act  are
ordinary Municipal  legislations. They  do not,  and cannot,
purport to  be laws made by Parliament under Article 289(2).
There is  no reason  why such a strained reasoning should be
employed to  save some  of the  taxes that may be capable of
being imposed  on certain  properties of  State Governments.
There seems  to be  no  pressing  reason  for  invoking  the
doctrine. Reddy, J. has, in the earlier part of his opinion,
held that  a large number of properties of State Governments
would be  exempt from taxes leviable under these Acts due to
the operation of Article 289(1). To employ such reasoning to
construe Article  289(2) in a bid to save what would only be
a reduced amount, does not seem justified.
     The practical  effect of  the directions recommended by
Reddy, J.  is also  worth noticing.  It is  abundantly clear
that the  task of  determining which  of the  activities  of
Governments are governmental and which are commercial, is an
extremely difficult  one. Reddy, J. entrusts this assignment
to the  "assessing authorities  under the Acts" who can only
be  municipal  authorities.  This  is  an  issue  which  has
confounded courts  in the  U.S. and in Australia for several
years. This issue was considered to be so troublesome by the
Framers that  they entrusted  it to  Parliament in  the hope
that it  would fully deliberate the matter before enacting a
comprehensive legislation.
     In the In Re: The Delhi Laws Act case, AIR 1951 SC 324,
this Court  authoritatively held that the legislature cannot
delegate its  essential  policy-making  function.  Over  the
years, this  Court has  elaborated this  proposition to hold
that the  legislature can  delegate some  of its legislative
functions provided  it lays  down the policy in clear terms.
The legislature  is required to declare the policy of law in
unambiguous terms,  lay down  elaborate legal principles and
provide illuminating  standards  for  the  guidance  of  the
delegate.  Even   though  this   Court  has,  on  occasions,
sanctioned  very   broad  delegations  of  taxing  power  to
municipal bodies,  to delegate  the task  of carving out the
distinction between  governmental and  business functions of
State Governments  to municipal authorities would clearly be
against the  interdiction in  the Delhi Laws Act case as the
assignment requires  not only  the  making  of  policy,  but
indeed, the  making of very difficult and challenging policy
choices. Reddy,  J.  has  noted  that  the  Delhi  Municipal
Corporation Act  provides exemptions in favour of activities
that  are   capable  of   being  classified  as  'charitable
purpose', 'public worship' etc. and states that to ascertain
the ambit  of these  categories is an equally difficult task
which  is   already  being   discharged  by   the  assessing
authorities. However, the point that needs to be emphasised,
is that  Section 115  of the Delhi Municipal Corporation Act
defines these  terms  and  provides  guidelines  in  respect
thereof.  However,  there  is  no  provision  in  the  Delhi
Municipal Corporation  Act which states that the trading and
business operations of State Governments would be subject to
property taxes.  The Act  is equally  silent on this aspect.
Consequently, no  guidelines in  this behalf are to be found
within the  parameters of  these legislations.  Under  these
circumstances, in  the complete  absence  of  any  statutory
policy or  any guidelines  for  the  delegation  of  such  a
policy, we  believe  that  it  would  be  impermissible  and
hazardous to  directly assign such a function, nay power, to
executive Municipal authorities.
     The  decision   whether   the   properties   of   State
Governments  occupied  for  commercial  purposes  should  be
subject to  the levy  of Union Taxes is one that is required
by  Article  289(2)  to  be  made  by  a  legislation  which
specifies the  activities which would be liable to tax. This
decision cannot be entrusted to municipal functionaries. For
these reasons, we find ourselves unable to agree with Reddy,
J. in  his finding  that the properties of State Governments
occupied by  them for trade or business purposes are subject
to the  levy of  taxes under the Act and the Delhi Municipal
Corporation Act.
     we may now summarise our conclusions:
i)   The  central  issue  in  the  present  matter,  namely,
     whether the  properties owned  by the  States which are
     situated  within  Union  Territories  are  exempt  from
     paying property taxes, was specifically answered in the
     affirmative in  the Sea  Customs case; the observations
     in this  regard are  part of the ratio decidendi of the
     case and  having been  re-affirmed  by  a  Constitution
     Bench which  was bearing  a litigation  inter partes in
     the APSRTC case, they constitute good law;
ii)  The definition  of 'State' provided in Section 3(58) of
     the General  Clauses Act,  which declares that the word
     'State'   would    include   'Union    Territory',   is
     inapplicable to Article 246 (4);
iii) The term  "Union Taxation"  used in Article 289(1) will
     ordinarily mean  "all taxes  leviable by the Union" and
     it includes  within its  ambit taxes on property levied
     within Union  Territories; therefore,  the  States  can
     avail of  the exemption  provided in  Article 289(1) in
     respect  of  their  properties  situated  within  Union
     Territories;
iv)  Property taxes  levied by  municipalities within  Union
     Territories  are  properly  within  the  ambit  of  the
     exemption provided in Article 289(1) and the States can
     avail of the exemption.
     In the  result, the Civil Appeals and the Special leave
Petitions are  dismissed. There  shall be  no  order  as  to
costs.


 

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