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TMI Blog1996 (12) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Certific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 thereo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from imposing or authorising the imposition if, any tax to such extent, if any, as Parliament may be law provide in respect of a or trade business of any kind; carried on by Submissions of Counsel Mr. Sen prefaced his submissions for the NDMC and the MCD by pointing out that the phrase "Union Taxation" used in Article 289(1) of the Constitution has not been defined either in the text of the Constitution or in any of the decisions rendered by this Court. Pointing out the differences between Article 285 & 289, Mr. Sen stated that (i) the former exempts "all taxes" whereas the latter limits its exemption to taxes relating to "property and income"; and (ii) the former uses the words "imposed by a State or by any authority within a State" whereas the latter uses the phrase "Union Taxation". Thereafter, Mr. Sen contrasted Article 289(1) and Section 155 of the 1935 Act by pointing out that while Section 155(1) uses the words "lands & buildings", Article 289(1) uses the word "property". This, he explained, was on account of the strong position adopted by representatives of the States in the Constituent Assembly who ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 relatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome 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 conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter 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 Parliamen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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". The not defined in the Constitution, the word "State" has been defined in the General Clauses Act, 1897 (hereinafter called "the General ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 Cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xempt 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e: 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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, Parl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious 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 juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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, especial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Muni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities 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 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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