TMI Blog2010 (12) TMI 1313X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals arise out of a common order dated 5.10.2007 passed by the learned Single Judge. The appellants herein are States of Meghalaya, Sikkim, Arunachal Pradesh, Nagaland, Kingdom of Bhutan, Madhya Pradesh and the promoters of States organised lotteries. 2. Writ Petitions came to be filed challenging the validity and vires of the Karnataka Tax on Lotteries, 2004 (for short hereinafter referred to as the 'State Act') promulgated by the State of Karnataka imposing tax on lotteries of the appellants/States. 3. According to the writ petitioners, the State Government was not justified in imposing tax on the sale of lottery tickets in view of the Judgement of the Apex Court in SUNRISE ASSOCIATES v. GOVERNMENT OF N.C.T OF DELHI OTHERS 2000 (10) SCC 420, As lotteries were taken out of the ambit of 'betting and gambling', in view of H. ANARAJ v. STATE OF MAHARASTRA-(1986) 1 SCC 414, it was incorrect for the respondent/State to impose tax on lotteries of other States, which is nothing but implied tax imposition on the sale of lotteries conducted by other States. State Act being extra-territorial was also one of the contention of the petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into public accounts of the State and the said income forms a significant portion of the State budget of the respective States. It is contended, even the State of Karnataka was organising, conducting and promoting its own lotteries in and outside the State till 1.4.2007 and was collecting huge revenue from sale of such lotteries and it was in direct competition with the lotteries organised by the other State Government. They further contend, by virtue of Entry 40 List 1 of the Seventh Schedule to the Constitution of India, lotteries organised by the Government of India or Government of any State fall under this entry, therefore only by Central Act, legislation pertaining to such lottery has to be made. Therefore, the State cannot legislate any law in respect of organised lotteries in any manner whatsover, According to them, this is one of the methods adopted by the respondent/State to restrict competence of the lotteries organised by the other States with an intention to enrich itself at the cost of other States in complete violation of Section 5 of the Central Act. Initially it levied and imposed sales tax on lottery tickets of other State organised lotteries, treating the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard. It was however held that the entrustment of power is only in respect of lotteries organised by the Government and that Government in the context of the entrustment of power, can only mean Government of Maharashtra and none other. Under Entry 40 of list 1 of list 1 of the 7th schedule of constitution, Parliament has exclusive powers to make laws in respect of lotteries organised by the Government of India or the Government of a state. Since the subject of lotteries organised by the Government of India or the Government of a State has been made a subject with the exclusive legislative competence of Parliament, it must follow in view of Art. 246(1) and (3) that no legislature of a State can make a law touching lotteries organised by the Govt. of India or the Government of a state. The Apex Court further observed that the Union and the State organised lotteries were specifically taken out of the ambit of State legislative field from the expression betting and gambling under entry 34 of State list. Therefore according to them, State has no competence to make any law pertaining to lotteries organised by the Government of India or the Government of a State. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Parliament. The provision relating to regulation of leases and matters connected therewith to be granted in future and not for alteration of the terms of leases which were in existence prior to act 67 of 1957. For that special legislative provision was necessary. In INDIA CEMENTS LTD. AND OTHERS Versus STATE OF TAMIL NADU AND OTHERS - (1990)(1)SCC 12, the controversy was whether levy of cess on royalty pertaining to extraction of mineral is within the competence of the State legislature. The argument was entry 50 in List II of the Seventh Schedule deals with taxes on mineral rights subject to limitation imposed by the Parliament relating to mineral development. Entry 23 of List II deals with regulation of mines and mineral development subject to the provisions of List I with respect to regulation and development under the control of the Union. Therefore, even though minerals are part of state List, they are treated separately. Therefore the principle that specific excludes the general must be applied. after referring to entry 54 of Union List 23 of the State List 49 of the State List 50 of the State List, Their Lordships ultimately held that royalty is a tax and as such ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ody was bound by the said declaration of law. In the circumstances Parliament stepped in and enacted the impugned law avowedly to bail the States of the predicament. The impugned enactment makes this objective clear beyond any doubt. At the same time Parliament does not purport to clothe the State Legislatures with the power which they do not posses. Parliament had already deprived the State Legislatures of the power to levy tax on minerals by making the declaration contained in Section 2 of the MMRD Act as far back as 1957. The said declaration remains intact which means that the States have no power to levy any tax or cess on minerals so long as the said declaration remains in force. Parliament therefore adopted the only legislative course open to it in the circumstances. It created those very levies with retrospective effect by enacting the impugned law. Parliament being empowered to make a law with retrospective effect is entitled to make the law effective for such anterior period as it thinks appropriate. It cannot be said that unless the levy created with retrospective effect also kept alive on the date the law is enacted by Parliament such a levy would be incompetent. this w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NI SHAMSUDIN AND OTHERS-(2009) 3 SCC 466 (2009) 3 SCC 511- STATE OF KERALA AND OTHERS V. PRABHAVATHY THANAKAMMA OTHERS these cases pertain to sale of lottery tickets in the State of Kerala. Their Lordships held that purchaser of lottery would have a claim to a conditional interest in the prize money which is not in the purchaser s possession. This right is actionable claim and is excluded from definition of goods under the Sale of Goods Act and the sales tax statutes. Hence no sale tax is leviable. Reference is made to CAUVERY WATER DISPUTES TRIBUNAL (SAWANT J.) -1993 SUPPL. (1) SCC 96 (II). In this case challenge was to Karnataka Cauvery Basin Irrigation Protection Ordinance of 1991. Learned counsel Mr. Udaya Holla appearing for some of the appellants contents that in the above case. Their Lordships dealt with the distinctions between Art. 262, Entry 56 of List 1 and Entry 17 of List II of the constitution. Inter-State Water Disputes Act 1956 was made by the Parliament pursuant to the Art. 262 of the Constitution specifically for the adjudication of the disputes between the riparian States with regard to the use distribution or control of the waters of the Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a compensatory tax and its payment is then not for the revenue but as reimbursement/recompense to the service/facility provider. According to the learned counsel, except sale of lottery tickets, nothing happens in the State of Karnataka and the entire operation of State organised lotteries like formulating the scheme, printing, etc. happens outside the State of Karnataka. Therefore, question of compensating the services provided by the State of Karnataka would not arise by mere sale of tickets of State organised lotteries in the State of Karnataka. In GODFREY PHILLIP INDIA LTD. v. STATE OF U.P. [(2005) 2 SCC 515], the appellant-assessee had challenged imposition and levy of luxury tax on tobacco and tobacco products by trading them as luxuries within the meaning of the word luxuries in Entry 62 of List II. Under this entry, the exclusive power to make laws with respect to taxes on lotteries including taxes on entertainment, etc. vests with the State legislature. Their Lordships held at paras 68, 69, 70 as under: 68. NO State can therefore by describing an item as a luxury, seek to levy tax on its supply. It cannot be dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferring to larger Bench decision in BENGAL IMMUNITY CO. LTD. v. STATE OF BIHAR, AIR 1955 SC 661 and RAM NARAIN SONS LTD. VS. CST (AIR 1955 SC 765), while discussing Arts, 286 269 with reference to the entries in the List I, II III of the VII schedule. They were also referring to the law laid down in 20 th CENTURY FINANCE CORPN. TATA IRON STEEL CO. VS. S.R. SARKAR. The law laid down in these Judgements is to the effect that is a ban is imposed by Arts, 286 269 on the taxation powers of the State, as they are independence and separate, first they must be got over before a legislature can impose tax on transactions of sale or purchase of goods. Such ban would operate by its own force without reference to the language in which an entry in List II of the VII Schedule has been couched. Therefore, the measure given to the filed of legislation by the language of entry in List II of VII Schedule is always subject to the limits of constitutional empowerment to legislate and it can never cross the barriers created by the Constitution. It was held that several entries in all the 3 lists of the VII Schedule though legislative heads are fields of legislation, they are not the source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BOMBAY v. R.M.D.C.-AIR 1957 SC 699. d. R.M.D.C. (P) LTD. v. STATE OF MYSORE- AIR 1962 SC 594. e. B.R. ENTERPRISES v. STATE OF U.P. (1999) 9 SCC 700. f. SUNRISE ASSOCIATES v. GOVT. OF N.C.T. OF DELHI-(2006) 5 SCC 603. g. DEEPCHAND v. STATE OF U.P. AIR 1959 SC 648. h. NIRMAL AGENCY v. COMMERCIAL TAX OFFICER, XVI CIRCLE, BANGALORE ANR. (1992) 86 STC 450. i. YASHA OVERSEAS v. COMMISSIONER OF SALES TAX AND ORS. (2008) 7 SCC 681. j. GREATER BOMBAY CO-OP. BANK LTD. v. UNITED YARN TEX (P) LTD. (2007) 6 SCC 236. k. TWENTIETH CENTURY FINANCE CORPN. LTD. v. STATE OF MAHARASTRA (2000) 6 SCC 12. l. THE BULLION GRAIN EXCHANGE LTD. v. STATE OF PUNJAB AIR 1961 SC 268. m. STATE OF SIKKIM ANR. V. STATE OF KERALA ORS. (2007) 15 KTR 426 (Ker.) In the case of I.T.C. Ltd. vs. A.P.M.C. (2002) 9 SCC 232, per majority their Lordship held that tobacco industry does not comprehend sale of raw tobacco. Therefore, Parliament was not competent to legislate in that respect and the question was whether the word industry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... next to consider whether, in the case of an Act passed by the Legislature of a Province (now a State) its operation extends beyond the boundaries of the Province or the State; for under the provisions conferring legislative powers on it such Legislature can only make a law for its territories or any part thereof and its laws cannot, in absence of a territorial nexus, have any extra territorial operation. If the impugned law satisfies both these tests, then finally the court has to ascertain if there is anything in any other part of the Constitution which places any fetter on the legislative powers of such Legislature. The impugned law has to pass all the tests. Placing reliance on R.M.D.C. (P) LTD. v. STATE OF MYSORE (AIR 1962 SC 594) wherein it was contended that the subject of betting and gambling enumerated under Entry 34 of List II of the VII Schedule and the taxes imposed on betting and gambling coming under Entry 62 of List II are to be read separately as separate powers and therefore, when control and regulation of prize competitions ere surrendered to Parliament by the State legislatures by virtue of resolutions, as required under Act, 252 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ES v. GOVT. OF N.C.T. OF DELHI [(2006) 5 SCC 603], their Lordships held that sale of lottery tickets does not involve sale of goods and lottery tickets are not goods. There is no sale of goods within the meaning of Sales tax Act of various States. In DEEP CHAND v. STATE OF U.P. [AIR 1959 SC 648] after referring to Article 245 etc. their Lordship held at para 13 as under: 13. The relevant Articles of the Constitution read as follows: Article 245: (1) Subject to the provision of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State. Article 246: (1) Notwithstanding anything in clauses (2) and (3) Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the Union List ). (2) Notwithstanding anything in clause (3), Parliament and subject to clause (1), the Legislature of any State also, have power to make, laws with respect to any of the matters enumerated in List III in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the territory of India before the commencement of the Constitution and such laws in so far as they are inconsistent with the provisions of Part III shall, to the extent of such inconsistency be void. The clause, thereof, recognizes the validity of the pre-Constitution laws and only declares that the said laws would be void thereafter to the extent of their inconsistency with Part III; whereas cl. (2) of that article imposes a prohibition on the State making laws taking away or abridging the rights conferred by Part III and declares that laws made in contravention of this shall, to the extent of the contravention, be void. There is a clear distinction between the two clauses. Under el. (1), a pre-Constitution law subsists except to the extent of its inconsistency with the provisions of Part III; whereas, no post-Constitution law can be made contravening the provisions of Part III, and thereof the law, to that extent, though made, is a nullity from its inception. If this clear distinction is bone in mind, much of the cloud raised is dispelled. When cl. (2) of Art. 13 says in clear and unambiguous terms that no State shall make any law which takes away or abridges the rights conferr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OF SALES TAX AND OTHERS [(2008) 7 SCC 681]. This case pertains to sale of goods where replenishment licences (REP licences) granted come under Import-Export Policy of relevant years. Earlier in VIKAS SALES CORPN. CASE (1996) 4 SCC 433, their Lordship held that REP licence/Exim scrip to be goods and hence, exigible to tax and the same was not altered by Constitution Bench decision in SUNRISE ASSOCIATES case, although in SUNRISE ASSOCIATES case, their Lordships did not approve the decision in VIKAS SALES case to the extent VIKAS case had given free marketability of REP as an additional reason in support of its conclusion. Ultimately their Lordships held that said decision did not in any way change the legal position regarding the sale of REP Licence as concluded by VIKAS case holding it as goods. GREATER BOMBAY CO-OP. BANK LTD v. UNITED YARN TEX. (P) LTD [(2007) 6 SCC 236]. In this case it is relevant to refer to the following: The express exclusion of cooperative societies in Schedule VII List I Entry 43 and the express inclusion of cooperative societies in List II Entry 32 separately and apart from but along with corporations other than those speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the situs of sale. There are conflicting views on this question. One of the principles providing situs of sale was engrafted in the explanation to clause (1)(a) of Article 286, as it existed prior to the Constitution (Sixth Amendment) Act, which provided that the situs of sale would be where the goods are delivered for consumption. The second view is, situs of sale would be the place where the contract is concluded. The third view is that the place where the goods are sold or delivered would be the situs of sale. The fourth view is that where the essential ingredients, which complete a sale, are found in majority would be the situs of sale. There would be no difficulty in finding out situs of sale where it has been provided by legal fiction by the appropriate legislature. In the present case, we do not find that Parliament has, by creating any fiction, fixed the location of sale in case of the transfer of right to use goods. We, therefore, have to look into the decisional law. 31. It was then argued that if Section 4 of the Central Sales Tax Act is not applicable to the transaction of deemed sale under Article 366 (29-A)(d), the same may be applied by analogy f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... state legislation for tax on lotteries. Senior Counsel appearing for the State has referred to the decision in State of W.B. v. KESORAM INDUSTRIES LTD. (2004) 10 SCC 201, where the supreme court has held that power to taxation is different from power to make legislation in the form of regulation. It is specifically held by the Supreme Court in the said decision that even though taxation may be adopted as a method for regulation, the power to tax is not incidental to legislation by way of regulation. Contrary to this, petitioner have relied on Ext. P1 judgement of the Bombay High Court wherein the Bombay High Court has struck down levy of sales tax on lottery based on draw. The decision of the Bombay High Court is not applicable to the facts of this case because what the court has considered therein is levy of tax on lottery as sale of goods . Incidentally, the court held that draw of lottery cannot be treated as sale of goods for the purpose of taxation. However, in this case it is to be seen that what is taxed is draw of lottery under law made in exercise of statutory power left on the legislature under entry 62 of the state List which specifically authorizes levy of tax among ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s participating in the chances of a prize by purchasing tickets. Section 8 refers to registration of promoters and sellers. Section 4 of the Central Act reads as under: 4. Conditions subject to which lotteries may be organised, etc.- A State Government may organise, conduct or promote a lottery, subject to the following conditions, namely:- (a) prizes shall not be offered on any pre-announced number or on the basis of a single digit; (b) the State Government shall print the lottery tickets bearing the imprint and logo of the state in such manner that the authenticity of the lottery tickets is ensured; (c) the State Government shall sell the tickets either itself or through distributors or selling agents; (d) the proceeds of the sale of lottery tickets shall be credited into the public account of the State; (e) the State Government itself shall conduct the draws of all the lotteries; (f) the prize money unclaimed within such time as may be prescribed by the State Government or not otherwise distributed, shall become the property of that Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40 of the Union list irrespective of whether such entry is a regulatory entry or otherwise. Their Lordships in H. Anraj V. State of Maharashtra AIR 1984 SC 781 held that lotteries organised by the Government of India or the Government of a State have been taken out from the legislative field comprised by the expression betting and gambling and is reserved to be dealt with by Parliament. In the case of J K B AIR 1984 (3) SCC 1542 it was a case pertaining to private lotteries and not State organised lotteries. While extending the distinction between the two kinds of lotteries, they have stated that the two belong to two different topics- one State organised lotteries and the other private lotteries. States organised lotteries definitely come within the Union list entry 40 and private lotteries come under list II. In the case of STATE OF HARYANA v. SUMAN ENTERPRISES (1994) 4 SCC 217 their Lordships held that the prohibition cannot extend to the sale of lottery tickets or lotteries organised by the other States. This is the implication arising out of a proper construction of entry 40 of list I and entry 34 of List II of the VII schedule. 15. In Anaraj s case the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 700) their Lordships took a different view so far as the nature of state organised lotteries. According to Their Lordships State organised lotteries are not different from other lotteries because the inherent nature of the game of chance is the same. As the primary consideration is what exactly made lotteries gambling and how the State organised lotteries are alien to gambling. Their Lordships while comparing the State organised lotteries with other lotteries held that the touchstone for both the lotteries is the chance to win, either way the element of chance persists. The difference is the stringent measures and other conditions for conducting state organised lotteries which would inculcate faith in the minds of the public to participate in such lottery as the same would be conducted fairly with no chance of any fraud, misappropriate or default. It assures and gives hope to the recipients of prizes that everything is fair and safe, the sate lotteries are conducted to augment public revenue and therefore, it is authorised and legalised. The entire sale proceeds would be used for the benefit of the public at large and this gives clear indication that it is not in the hands of indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ticket does not pay for the right to participate. He pays consideration for the chance to win. Therefore, their Lordships held that the right to participate being an inseparable part of the chance to win, is therefore, part of an actionable claim. The chance to win and the right to participate were both held t be future rights. From a reading of the above decision, initially the lotteries organised by the Government of India or the State Government came to be taken out from the ambit or State legislative field under the expression betting and gambling as per H. ANRAJ s case in 1984. As the State lotteries organised by the Government of India or the Government of a State has been made a subject within the exclusive legislative competence of Parliament, State has no legislative competence to make a law touching lotteries organised by the Government of India or the Government of a State. When we look at entry 62 in the State list, though it refer to taxes on entertainment, amusement, betting and gambling, it does not specifically include lotteries organised by the Government of India or Government of a State. Entry 97 of the Union list refer to any other matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate list by taking assistance of any entry. Therefore, the regulation of these lotteries cannot be read into State list by banking assistance of any entry. Even the rules and regulations pertaining to the State organised lotteries are covered under section 12 of the Central Act. 19. If the contention of the respondent is to be accepted, viz. the State gets legislative competence under section 12 of the Central Act through delegated powers, it means that they admit that the Parliament had the power to tax the State organised lotteries and the power is delegated to the State. 20. Under the State Act, charging Section can be understood from Section 6 of the State Act which refers to tax on lotteries at a fixed rate per draw. Conducting of lotteries and the draw both events take place outside the State of Karnataka so far as State Organised Lotteries. If the operation of the State Act extends only to the State of Karnataka, the event of draw takes place outside the territories of State of Karnataka. 21. The only event that takes place in the State of Karnataka is sale of lotteries. In view of the decision in the Sunrise Associates, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets, sale of tickets through distributors and publishing the results in the State Gazette. All these activities except sale of tickets takes outside the State of Karnataka. Sale of tickets can also take place in various States as long as there is no ban on the tickets in those State. In case, more than one State makes a similar law as involved in this case and if tax has to be imposed on every draw, the State which organises the lottery and conducting draw of the lottery may have to shell down tax to several State. Then the very purpose of holding organised lotteries by Union of India or by a State to augment income which ultimately be used for public at large is lost. Organising such lottery is legalised by virtue of decision in B.R. ENTERPRISES vs. STATE OF U.P. The revenue from organising such lottery is not in the hands of private persons or groups or associations, but it would be credited either to the fund of the Union or the State fund depending upon the fact whether it is organised by Union of India or a particular State. 23. According to the respondents it is not a sale of goods for the purpose of Sales Tax Act but an actionable claim. Even in a case if a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s permitted under the Central Act. In other words, the alleged charging section requires tax to be collected on each lottery, meaning to levy tax on each draw held under the lottery scheme and not the scheme itself. 26. The learned Single Judge opined that Entry 40of List I does not stand in the way of State Legislation to tax on lotteries. This is opined on the basis of decision reported in 2004 (1) SCC 201 in the case of STATE OF WEST BENGAL VS. KESORAM INSUSTRIES. The real question of controversy in that case was whether the expression betting and gambling interpreted differently for the purpose of taxation and for the purpose of Legislation in the form of regulation that is found in the same list. The law laid down in the case of Keshoram Industries is not properly interpreted. The learned Judge though concedes and admits that the draw takes place outside the State, but observes that the tax is not on the draw, but on the conduct of lotteries in reality. It is nothing but marketing tickets thereby sale of tickets which takes in the State of Karnataka. The observation of the Single Judge is that the levy of tax on draw on draw is only a measure of tax which is ..... 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