Under the Constitution of India 1950:
Article 289 and its complementary Article 285 read as under:-
“289 (1) The property and income of a State shall be exempt from Union taxation.
(2) Nothing in clause (1) shall prevent the Union from imposing or authorizing the imposition of any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith.
(3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of Government.”
“285 (1) The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State.
(2) Nothing in clause (1) shall, until Parliament by law otherwise provides, prevent any authority within a State from leaving any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State.
The expression “Union taxation” is not defined in the Constitution and is only used in Article 289. Even Art. 285, which is the corresponding provision giving exemption to the Property of the Union, is differentia worded and uses the expression “all taxes imposed by a State or by any authority within a State” but does not use the expression “State taxation” in contradistinction to “Union taxation.”
Article 265 of the Constitution of India provides that every tax shall be levied or collected only by the authority I of law with the result that the power of the Union and the States to impose taxes within their respective spheres of Permissible taxation must be relatable to laws which they are competent to make with ‘the result that the powers of the Union and the States to impose tax must be coextensive with the powers of their respective legislatures with reference to the distribution of legislative business provided in Part Xi of the Constitution read with the Union, the State and the concurrent Lists. Incidentally while the Union and State Lists enumerate matters which deal with taxation, the Concurrent List does not except with certain duties and fees. Article 248, however, when it refers to the residuary Powers of legislation and vests it in Parliament, not on provides for Parliament’s exclusive powers to make laws with respect to any matter not enumerated in the Concurrent List or State List but takes care to add by clause (2) that “such power shall include the power of making any law imposing a tax not mentioned in either of those Lists.”
It would, Therefore, be necessary to examine the scheme of the Constitution with regard to the demarcation of legislative powers between the Union Legislature and the State Legislatures to determine the true meaning and import of the expression “Union taxation.”
India is a Union of States and its territories comprise the territories of the “States” and the Union territories specified in the First Schedule. Including the Union Territory of Delhi, and such other territories as may be acquired by it. This is what Article 1 of the Constitution provides. The Constitution is federal in character and is based on a rigid division of executive powers between the Union and the States executives and a corresponding demarcation of legislative! Functions of the Union Legislature that is, the Parliament and the Legislatures of the States. Article 245 provides that subject to the provisions of the Constitution, Parliament may make laws for the whole or anorak 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, as indeed Chapter I of Part Xi of the Constitution. in which this Article occurs. Deals with the distribution of legislative powers. Clause (1) of this Article provides that Parliament would have exclusive power to make laws with respect to any of the matters enumerated in the Union List in the Seventh Schedule of the Constitution. Clause (2) provides for the concurrent power of Parliament and State legislatures with reload to matters enumerated in the Concurrent List, in the Seventh Schedule to the Constitution. Clause (3) deals with the power of the Legislature of a State to make laws for such a State or any part of it with respect to matters enumerated in the State List in the Seventh Schedule. Article 248 provides for the power of Parliament to make laws with respect to residuary matters, that is, matters not enumerated in any of the two Lists -the concurrent and the State.
Chapter I further provides for exceptions to the general rule of demarcation of legislative powers provided in clauses (1). (2) and (3) of Article 246 and Article 248. One of these exceptions is contained in clause (4) of Article 246 while the other categories of exceptions are contained in Articles 249 to 253 of the Constitution.
The exception provided for in clause (4) of Article 246 deals with “any part of the territory of India not included in a State” and extends to such territories power of Parliament to make laws with respect not only to matters enumerated in the Union and the Concurrent List but also to matters enumerated in the State List. The Union Territory of Delhi is one such territory and a provision with regard to its administration, as indeed the other Union territories, is made in Part Viii of the Constitution. Article 239 in this part provides that every Union Territory shall be administered by the President acting, to such extent as he thinks fit, through an administrator to be appointed by him with such destination as he may specify. Articles 239-A. 239B and 240 deal with certain Union territories other than Delhi while Art. 241 deals with the constitution of High Courts in the various Union territories of India. It so happens that of the various Union territories enumerated in the First Schedule to the Constitution, the Union Territory of Delhi does not have a Legislature and it is for this reason that apart from the administration of the Union Territory, which is provided in Part Viii of the Constitution, provision had to be made for the enactment of laws with reared to such a territory and Clause (4) of Article 246 of the Constitution of India is that provision.
The exceptions provided for in Articles 249 to 253 of the Constitution, ho,wever, are by and large intended to deal with extra ordinary situations. Article 249, for example extends the power of Parliament to make laws with respect of any matter enumerated in the State List if the Council of States declares by a resolution by a requisites majority that such a course would be “necessary or expedient in the national interest.” Article 250 however, empowers Parliament to make laws with respect to whole or part of India “with respect to any of the matters enumerated in the State List while a Proclamation of Emergency is in operation.” Article 252 then empowers Parliament to make laws with respect to matters enumerated in the State List if the legislatures of two or more States resolve that such a course appears “to be desirable”. Article 253 reserves to Parliament exclusive power to make laws for the whole or by part of the territory of India “for implementing any treaty agreement or convention with any other country or countries or any decision made at any international conference, association or other body.”
A picture of distribution of legislative powers and demarcation of fields of taxation between the Union and the States and of their corresponding legislatures would be incomplete without a reference to the Provisions in Chap. I of Part Xii of the Constitution with regard to the financial matters notable Articles 266 to 275. Article 266 Provides that all revenues received by the Government of India, all loans raised by that Government and all moneys received by that Government in repayment of loans shall form one consolidated fund to be entitled “the consolidated Fund of India,” and all revenues received by the Government of a State, all loans raised by that Government and all moneys received by that Government in repayments of loans shall form one consolidated fund to be entitled “the Consolidated Fund of the State.” Article 267 then provides for the Contingency Fund of India and the Contingency Fund of the State. Article 268 provides for the distribution of the revenues between the Union and the States. Articles 268 provides that stamp duties and such duties of excise on medical and toilet preparations as are mentioned in the Union List shall be levied by the Government of India but shall be collected where they are legible within any Union territory by the Government of India while in other cases by the State within which such duties are respectively livable and that the proceeds of any such duties livable within any such State shall not form part of Consolidated Fund of India but shall be sent to that State. Article 269 makes provision with regard to taxes levied and collected by the Union but which would be assigned to the States while Article 270 provides for taxes levied and collected by the Union and distributed between the Union and the States. Article 271 provides for surcharge on certain duties and taxes for purposes of the Union and Article 272 provides for taxes which are levied and collected by the Union and may be distributed between the Union and the State. Article 273 makes provision for grants in lieu of export duty on jute products. Article 275 provides for grants from the Union to certain States. Article 280 provides for appointment by the President of a Finance Commission periodically to make recommendations to the President as to-
“(a) the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be divided between them and the allocation between the States of the respective shares of such proceeds,
(b) the Principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.”
It may be useful to mention that the Constitution provides for exemption of income and property of a State from Union taxation and the property of a Union from all taxes imposed by a State or by any authority within a State on a near reciprocal basis. While Article 289 exempts “the property and income of a State” from “Union taxation” except in case the Parliament authorizes the imposition of any tax in respect of a trade or business of any kind carded on by, or on behalf of, the Government of a State, or any operations connected therewith or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. “Article 285 property for exemption to the “property of the Union” from all taxes imposed by a State or by any authority within a State.” Clause (2) of Article 285, however, exempts from the operation of clause (1) of that Article any levy of tax on any property of the Union within a State to which such property was immediately before the commencement of the Constitution liable or treated as liable so long as that tax continues to be levied in that State until Parliament by law otherwise provides.
On a review of the various Provisions in Part Xii of the Constitution, Sinha, C. J.. as he then was summed up the -position thus 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. In Re: The Bill To Amend S. 20 of The Sea Customs Act, 1878 and S. 3 of The Central Excises and Salt Act, 1944, :
“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 amongst 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 be used for the purposes of supplementing the revenues of the States in accordance with their needs. The question of the distribution of the aforesaid taxes and duties amongst the States and the principles governing them as also the principles governing grants-in-aid of revenues of the States out of the Consolidated Fund of India are matters which have to be decided by a happy powered Finance Commission which is a responsible body designated to determine those matters in an objective way. It cannot, Therefore, be justly contended that the construction of Article 289 suggested on behalf of the Union will have the effect of seriously and adversely affecting the revenues of the States. The financial arrangement and adjustment suggested in Part-XII of the Constitution has been disciplined by the Constitution-makers in such a way as to ensure an acquirable 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. On the other hand, there may be more serious difficulties in the way of the Union if we were to adopt the very wide interpretation suggested on behalf 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 wag not intended that all taxes and duties imposed by the Union Parliament should be expended on the activities of the Center and not on the activities of the States. Sources of revenue allocated to the States, like taxes on land and other kinds of immovable property, have been allocated to the States alone. The Constitution-makers realized the fact that those sources of revenue allocated to the States may not be sufficient for their purposes and that the Government of India would have to subsidize their welfare activities out of the revenues levied and collected by the Union Government. Realizing the limitations on the financial resources of the States and the growing needs of the community in a welfare State, the Constitution has made as already indicated, specific provisions empowering Parliament to set aside a portion of its revenues, whether forming part of the Consolidated Fund of India or not for the benefits of the States, not in stated proportions but according to their needs. It is clear, Therefore, that considerations which may apply to those Constitutions which recognize water-tight compartments between the revenues of the federating States and those of the federation do not apply to our Constitution which does not postulate any conflict of interest between the Union on the one hand and the States on the other. The resources of the Union Government are not meant exclusively for the benefit of the Union activities; they are also meant for subsidizing 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 utilization of the resources of the territories of India as a whole.”
Bearing in mind the scheme of distribution of legislative powers and of taxation between the Union and States and the provision with regard to allocation of funds for the purpose of the Union and the States it becomes obvious that when Article 289(1) refers, to “Union taxation”, it means taxes which are livable by the Union or to put it differentia taxes which can be levied by the authority of Parliament and pertaining to matters on which Parliament is empowered, to legislate by virtue of the various constitutional provisions. The authority which collects the taxes or the entity to which the proceeds or part of the proceeds from such taxes is eventually allocated either under the Constitution or under the machinery set up by the Constitution would, Therefore, be wholly irrelevant for the purpose of a decision as to the true meaning of the expression “Union taxation”. It is, Therefore, not possible to accept the contention that the test would be as to whether the proceeds would form part of the Consolidated Fund of India.
This conclusion is fully borne out by certain observations of the Supreme Court in Re: The Bill to Amend Section 20 of the Sea Customs Act (supra). In that case the provision of Article 289(1) of the Constitution of India fell for consideration before the Supreme Court as a result of a proposal to introduce in Parliament bill to amend Section 20 of the Sea Customs Act and Section 3 of the Central Excises and Salt Act with a view to applying, provision of the said two Acts to goods belonging to the State Governments in reared to which certain doubts arose as to whether the provisions of the Bill were inconsistent with Article 289 of the Constitution of India. The President of India referred under Article 143 of the Constitution of India certain questions for the opinion of the Supreme Court to ascertain if the proposed amendment would be constitutional. The question for the consideration of the Supreme Court was whether the provisions of Article 289 of the Constitution precluded the Union from imposing: or authorizes the imposition of custom duties on import or export or excise duties on the production and manufacture in India on the property of a State used for purposes other than those specified in clause (2) of the Article. By majority it was held that the provisions of Article 289(1) the Constitution of India were in the nature of an exception to the exclusive field of legislation reserved to Parliament and were limited to taxes “on property” and on income of a State: that the immunity granted in favor of States had to be restricted to taxes levied directly on property and in-come and that even though import and export duty or duties of excises had reference to goods and commodities, they are not taxes on property directly and were not within the exemption under Article 289(1) of the Constitution. The contention before the Supreme Court on behalf of the Union was that Article 289(1) properly interpreted would mean that the immunity from taxation granted by it to the State was only in respect of tax on property and on income and that the immunity did not extend to all taxes and should not be interpreted so as to include taxation “in relation to property.” The contention on behalf of the States was that in interpreting Article 289 of the Constitution, it must be held that the immunity was extended from “all” Union taxation whether “on -property” or “in relation to property”. The contention of the Union prevailed and Sinha C. J., as he then was, and who spoke for the minority, observed. “We are Therefore, of opinion reading Art. 289 and its complementary Article 285 together that the intention of the Constitution-makers was that Article 285 would exempt all property of the Union from all taxes on property levied by a State or by any authority within the State while Article 289 contemplates that all property of the States would be exempt from all taxes on property which may be livable by the Union.” The term “Union taxation” was, Therefore, considered to be synonymous with taxes “livable” by the Union so that the determining factor was the competence of the Union to levy the taxes and the corresponding competence of Parliament to make laws incorporating such a tax.
It must, however, be pointed out that from what has been said above it does not necessarily follow that taxes having their foundation in laws made by Parliament by virtue of what may convenient be described as its extraordinary powers provided for in Articles 249 to 253 of the Constitution must be treated as forming part of “Union taxation”. This is so because it could be said with some justification that while legislating in exercise of those powers Parliament would not be exercising its own legislative functions but would, as it were, act-, in as a delegate of the State legislatures concerned or be deemed as if it was functioning as a State Legislature. In such cases different considerations may perhaps apply. It is unnecessary to carry this matter any further as being beyond the Scope of the controversy before us.
The question that then arises is whether tax on property livable under the Act could be said to be a tax livable by the Union. The answer is both in the affirmative and, the negative depending on the territory to which it relates and the legislature which authorizes its imposition. In so far as tax on property may be imposed in the various States in India by virtue of Entry 41 in the State List by the State legislatures or by statutes which could be de-ice to have been made by such a legislature it could not be considered a Union taxation by any stretch of imagination. The same is, however, not true where such a tax is levied by virtue of the authority of Parliament and. Therefore, of the Union to impose a tax as in the case of Union territory of Delhi. It has been noticed above that by virtue of Article 239 of the Constitution of India every Union territory has to be administered by the President through an administrators. By virtue of clause (4) of Article 246 of the Constitution. Parliament has -power to make laws with respect to the Union territories and where tax is imposed on property in such territories it would be Union taxation because such a tax would have its genesis in Parliament’s power to make laws. In such a case, the Union taxation would not have relation to any particular List but to a particular territory and once it relates to a tax in that territory it could encompass all the Lists and this is so because the whole scheme of demarcation of taxing power between the Union and the States has relevance between the Union on the one hand and the various States on the other. No such demarcation exists or could be conceived in case of territories, which are administered by the Union itself. The demarcation then becomes irrelevant. In such a case, the Union executive as indeed the Union Legislature, that is the Parliament, becomes a repository of all executive and legislative powers respectively in relation to that territory and all taxation imposed in that territory would have to be under the authority of the Union and by virtue of laws made by Parliament and would, Therefore, be the tax of the Union and hence “Union taxation”.
This conclusion also finds support from the conclusion arrived at by the Supreme Court in the above case. An argument was raised on behalf of the States that Article 289 could not have provided for exemption with regard to tax on property because tax on property legitimately belongs to the field of State Legislation by virtue of Entry 41 in List 11 and that, Therefore, the interpretation canvassed on behalf of the Union could not -prevail. This argument was dispelled by the Supreme Court and it was pointed out that such an argument ignored the provision of Article 246(4) of the Constitution of India. This is how Sinha. C. J. dealt with the argument:
“But it is said that there is no specific tax on property in List I and it is Therefore contended on behalf of the States that when property of a State was exempted from Union taxation, the intention of the Constitution-makers must have been to exempt it from all such taxes which are in any way related to poverty. Therefore, it is urged that the exemption is not merely from taxes directly on property as such but from all taxes which impinge on property of a State even indirectly like customs duties, or export duties or excise duties. It is true that List I contains no tax directive on property like List Il but it does not follow from that that the Union has no power to impose a tax directly on property under, any circumstances. Art. 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 Il. 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 State property from Union taxation directive on 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.”
This decision is, Therefore, a clear authority for the proposition that Union taxation under Article 289(1) of the Constitution of India means tax livable by the Union by virtue of the competence of Parliament to make laws and would include laws which Parliament was competent to make for the Union Territory of Delhi by virtue of clause (1) of Article 289 (sic) (clause (4) of Article 246) of the Constitution including laws authorising imposition of tax.