IN RE. THE BILL TO AMEND S. 20 OF THB SEA CUSTOMS ACT, 1878, AND S. 3 OF THE CENTRAL EXCISES AND SALT ACT, 1944 versus VS.

South Wales v. The Oollecto¥ of Customs('), in which s. 114 was considered. That was an action brought to recover from the defendant the amout of customs duties demanded and paid under protest in respect of the importation into the Commonwealth of certain steel rails by the Government of the State of New South Wales. The rails were purchased in England and were shipped to the Secretary for Public Works of the State. At that time the current of authority in Austtalia was in favour of applying the American doctrine of immunity of instrumeJJtalities as laid down by the High Court in D'Emden v. Pedder('), though in that case, it was already held that s. 114 dealt with "tax on property", and it was a very different matter. The State sought the protection of s. 114. It was held that the doctrine had no application to powers expressly granted to the Commonwealth which by their very nature involved control of some operations of the State Government and one such grant was the power to make laws with respect to external trade. It was further held that the imposition of customs duties being a mode of regulating trade and commerce with other coutries as well as an exercise of the taxing power, the right of the States to import goods must be subject to the Commonwealth power. The Commonwealth power was said to flow from s. 51 [(i) and (ii)] which read :

pp. 889–890

"51. The Parliament shall, subject to the Constitution, have power to make laws for the peace, order and good government of the Commonwealth with respect to.: - (i) Trade and commerce with other coun-

p. 890

tries, and among the States, (ii) Taxation; but so as not to discriminate

p. 890

between States or parts of States". la this connection, one other section may be quoted :

p. 890

"55. Tax Bill.- Laws imposing taxation shall deal only with the imposition of taxation, and any provision therein dealing with any other matter shall be of no effect.

p. 890

Laws imposing taxation, except laws imposing duties of customs or of excise, shall deal with one subject of taxation only; but laws imposing duties of customs shall deal with dutJes of c~stoms only, a~d la~s imposing duties of excise shall deal with duties of excise only".

p. 890

In deciding that the State· Government was required to pay customs duties on. import by it, the provisions of s. ll4 notwithstanding, the learned Judges gave widely different reasons. Those reasons were pressed into service in the arguments before us, and I shall briefly notice them. Chief Justice Griffith found entinomy in the power of taxation and regulation conferred by s. 51 on the one hand and the exemption granted by s. 114. on the other, and held that if a construction was possible which would harmonise the two, it was to be preferred. The learned Chief Justice, therefore, examined the scheme of the Constitution Act and found that though the word 'taxation' ins. 51 (ii) iucluded custom3 duties, the latter were not described as 'tax' in the Consti· tution or as 'tax on property'. He held that customs duties were a tax on the movement of goods and the word 'tax' in s. 114 could not be held to include customs duties because the section mentioned a tax 'on property' 'belonging to a State'. He was of opinion that such property must be within the geoiraphical boundaries of the State and customs duties being collected at the confines of the State were collected before the goods became the property of the State. He concluded, therefore, that the levying of duties of customs on importation was not an imposition of the tax upon property within the literal meaning of s. 114, and even if it was, the section must be differently construed in the light of the general provisions of the Constitution Act. Barton and O'Connor, JJ., in separate judgments followed the same line of thought. Higgim, J., pointed out that before the prohibition applied, taxation of property must be 'as property'. His conclusion may be stated in his own words :

pp. 890–891

"I prefer to base my judgment on the ground which I have stated. I cannot confidently, take the ground that customs duty cannot be a tax within the meaning of the word 'tax' in section 114. It is true that 'duties of customs' and 'duties of excise' are the usual expressions; but phraseology, such as is used in s. 55, shows that the Constitution treats the im1>osing of such duties as being the imposing of taxes. 'Laws imposing taxation, except laws imposing duties of customs or excise, shall deal with one subject of taxation only'. However the fact that section 114 uses the mere word 'tax' not 'tax of any kind' although it speaks of 'property of any kind' -strengthens the view

p. 891

voi.. that the framers of the section could not have had customs duties in their minds at the time. They Jay the emphasis on the thought on ownership-'property of any kind belonging'

p. 892

etc." (p. 855). Isaacs, J., on the other hand, held that duties of customs as ordinarily understood or in the Customs Act, were imposed on the goods themselves and were therefore, 'on property' within the meaning of s. 114, but did not come within the meaning of 'tax' as used in that section and the Constitution genarally. He cited certain authorities to show that though the word 'taxation', when used to confer on Government a power, might carry the amplest meaning, being a generic word, the word tax might or might not be as wide in meaning when used in rome other context. The learned Judge found that the word 'tax' was used only in s. 114 and did, not carry the wide meaning, and coupled with the word 'property' could not be read to include customs duties.

p. 892

This decision of the Australian High Court was strongly relied upon by the learned Solicitor- General. It will, however, be seen that the construction of the words used ins. 114 is so intimately connected with the scheme and language of the other parts of the Constitution Act as to be of little · assistance to us. The words 'tax' and 'taxation' were not defined in the Australian Constitution, whereas they are, in our own. Further, the distinctimn between 'tax' and 'taxation' with all due respects is somewhat difficult to apprehand. I can only say in the words of Cassels, J., in a Canadian case to which I shall refer presently that :

p. 892

"I agree with the Attorney-General for British Columbia in his Statement before me as to the difference between taxation and a tax. As the Attorney.General states 'I am not relying very strongly upon that phase of the argument'. He thinks the distinction is rather subtle and thin,

pp. 892–893

so do I." We shall soon that the Privy Council ,lid not rely upon this distinction when this case was cited before it.

p. 893

The decision in the Australian case lays down certain general propositions which may be stated. It recognizes that customs duties have the dual aspect of raising revenue and of regulating external trade. This proposition, of course, is valid. It was also accepted in the American cases to which I have already referred and also in the Privy Council case from Canada to which I shall make reference. It also decided that the word 'taxation' is sufficiently wide to take in customs duties. This was laid down by Isaacs, J .. and cannot be said to be dissented from by the other learned Judges. This proposition is hardly necessary as an aid to construction of our Constitution which uses the word 'taxation', as I pointed out during the course of arguments only, in Art. 289, and defines the term :

p. 893

"Art. 366 (28). 'Taxation' includes the imopsition of any tax or impost, whether general or local or special, and 'tax' shall be

p. 893

construed accordingly". This gets over the difficulty felt in Australian case generally and particularly by Higgins J., in the extract I have made from his judgment. The fact that the word 'taxati · n' is med in one place only in our Constitution saves us from the task of examining the context, because the definition would become a dead letter if it were not used in that place in the sense defined. As regards the scheme of the Austra· lian Constitution, there is some similarity in that the powers of ta~ation copferred by s. 51 (>f the Australia11 Constitution Act on Parliament are subject to the provisions of that Constitution just as they are in our Constitution but unlike those conferred by the Constitution of Canada. I shall refer to these points which were used in arguments when I deal with our Constitution. I shall now refer to the Canadian case relied upon by the learned Solicitor-General.

pp. 893–894

Before dealing with the Canadian precedent or the decision on appeal by the Judicial Committee, I find it necessary to refer to a few cases in which the Privy Council explained the general scheme of the British North America Act and the principles on which that Act is to be construed, particularly ss. 91 -95 of the Act, which deal with the powers of legislation in the Dominion and their distribution between the ,Dominion Parliament and the Legislatures of the Provinces. Without having those principles before one, there is a danger of misapprehending the implications of the cases relied upon by the learned Solicitor-General. It is not necessary to reproduce sections 91 and 92 in their entirety beyond the opening words which have a direct bearing upon the problem decided in the Privy Council case. Section 91, in so far as material to our purpose, reads :

p. 894

Section 91-

p. 894

"lt shall be lawful for the Q:1een, by and with the advice and consent of the Senate and House of Commons, to make laws for the peace, order, and good government of Canada, in relation to all matters not coming within the classes of subjects by this Act assigned exclusively to the legislatures of the provinces; and for greater certainty but not so as to restrict the terms of this section, it is hereby declared that (notwithstanding anything in this Act) the exclusive legislative authority of the Parliament 9f C~nada ex(ends to all matter~ coming within the classes of subjects next here- · r ma ter enumerate , t at dh' 1s to say,-"

pp. 894–895

"Then follows an enumeration of twenty nine classes of subjects".

p. 895

• • • • •

p. 895

"And any matter coming within any of the classes of subjects enumerated in this section shall not be deemed to come within the class of matters of a local or private nature comprised in the enumeration of the classes of subjects by this Act assigned exclusively to the legis-

p. 895

latures of the provinces." Section 92 is as follows :-

p. 895

"In each province the le~islature may exclusively make laws in relation to matters coming within the classes of subjects next hereinafter enumerated, that is to say,-"

p. 895

"Then follows an enumeration of sixteen classes of subjects."

p. 895

In dealing wi.th the general scheme of the Act, the Board in The Citizens Insurance Company of Oan-i la v. William Parsons and The Queen Insurance Company v. Williams Parsons('), pointed out that the scheme was to give primacy to the Dominion Parliament in cases of conflict of power notwithstanding anything in the Act and explained how the exclusiveness of the spheres of the two legislatutes was intended to work. The position was again summed up the next year in R·ussel v. Queen, the report of which is to be found in the same volume at p. 8:!9. Again, in Tennant v Union Bank of Oanad(i ('),it was held thats. 91 (No. 15) of the British North America Act gave the Dominion A.a, Parliament power to legislate over every transaction within the legitimate business of a banker, notwithstanding tliat the exercise of such power interfered with property and civil rights in the province (ss. 92, 20, 13) and conferred upon the bank privileges as a lender which the provincial law did not recognise. The decision was rested once again on the doctrine of paramountcy of Dominion Parliament notwithstanding anything in the Act so long as it did not fall within the exclusive power of the Provincial Legislature under section 91. Lord Watson observed:

pp. 895–896

" ........ But sect. 91 expressly declares that, 'notwithstanding anything in this Act,' the exclusive legislative authority of the Parliament of Canada shall extend to all matters coming within the enumerated classes; which plainly indicates that the legislation of that Parliament, so long as it strictly relates to these matters, is to be of paramount authority. To refuse effect to the declaration would render nugatory some of the legislative powers specially assigned to the Canadian Parliament."

p. 896

This primacy of Dominion.Parliament was in all matters legislative, subject, of course, to what was assigned exclusively to the Provincial Legislatures. But the primacy of Parliament of Canada was untrammelled by anything elsewhere to be found in the same Act.

p. 896

From the above citations, it is obvious that the general scheme of the British North America Act assigns certain subjects to the exclusive and plenary power of the Dominion Parliament, and certain other subjects exclusively to the Provincial Legislatures. Bys. 91, the Imperial Parliament has unequivocally placed everything nm assigned to the local legislatures within the jurisdiction of the Domi• qion Parli<1ment 11otwithstanding anything in the Act. The British North America Act thus has to be construed.as a "'hole and with reference first to the exclusive domain of the Provincial Legislatures, next, with reference to the Paramountcy of the Dominion Parliament and the general scheme of the Act. Unless a matter falls within s. 92 and does not fall within s. 91, the action of the Dominion Parliament is subject to no restraint by anything elsewhere to be found in the Act .

pp. 896–897

We are now in a position to consider the case so strongly relied upon by the learned Solicitor- General. To Understand that case, the facts must be seen first. It was a test case by way of an action by the Crown in the right of the Province to have it declared that it could import liquor into Canada for purposes of sale without paying castoms duties imposed by the Crown in the right of the Dominion of Canada by virtue of the Customs Act of Canada. The action of the Province of British Columbia was based on the provisions of Government Liquor Act which was declared intra vires by the Privy Council in Canadian Pacific Wine Company Limited v. Tuley('). Before the Exchequer Court, the following admission of facts was filed by the Attorney-General of Columbia:- "It is hereby admitted, for all purposes of this action, that the case of 'Johnnie Walker' 'Black label' whiskey, which was purchased and consigned to B.M. King George Vin the right of the province of British Columbia care of Liquor Control Board, Victoria B. C. as alleged in para 1 of the Statement of the claim filed herein, was so purchased and consigned to meet the requirements of the Government Liquor Stores established in British Columbia under the Government Liquor Act Ch. 30 of the States of British Columbia, 1921 and for the purpose of sale at the said Government Liquor Stores pursuant to the provisions of the

pp. 897–898

said Act". · . The contention on the side of the Province was that a. 125 of the British North America Act which provides "No lands or property belonging to Canada or any Province shall be liable to taxation", gave protection against the customs duty. The contention on the side of the Dominion was that the whi!lkey was· not imported for purposes 'of Government but for trade. It was pointed out that under s. 118, large sums were payable by the Dominion to the Provinces and reference was also made to ss. 122, 123 and 124, under whir:h customs and excise laws as also certain other dues were to continue until altered ·by the Parliament of Canada. British Columbia was not a part of the Dominion to start with. It was admitted into the Dominion under s. 146 of the British North America Act on May 16, 1871, by an order of Her Majesty in Council. Section 7 of the Order provided that the existing customs tariff and excise duties would continue in force in British Columbia for sometime. The Dominion Act under which the customs duty was sought to be levied provided as follows :-

p. 898

"The rates and duties of customs imposed by this Act, or the customs tariff or any other law relating to the customs, as well as the rates and duties of customs heretofore imposed by any Customs Act or Customs Tariff or any law relating to the Customs enacted and in force at any time since the first day of July 1867, shall be binding, and are declared and shall be deemed to have been always binding upon and payable by his Majesty, in respect of any goods, which may be hereafter or have been heretofore imported by or for His Majesty whether in thll rigl:lt of His Majesty's Government of Canad11 or His Majesty's Government of any Province of Canada, and whether or not the goods so imported belongfd at the time of importation to His Majesty; and any and all such Acts as aforesaid shall be construed and interpreted as if the rates and duties of customs aforesaid were and are by express words charged upon and made payable by His Majesty.

pp. 898–899

Provided, however, that nothing herein contained is intended to impose or to declare the imposition of any tax upon, or to make or to declare liable to taxation, any property belonging to His Majesty either in the right of

p. 899

Canada or of a Province". In the Exchequer Court, Cassells, J., based his decision on the fact that the whiskey was imported not for any governmental purpose but for trade. He, therefore, rejected the claim of the Province following Mr. Justice Brewer's dictum in the South Carolina ca8e, and referred to two cases of the Privy Council, Farnell v. Bowman ( anci Attorney-General of the Strait Settlement v. Wemyss ('), in which it was stated that "if a State chooses to embark upon private business in competition with other trades, they should be liable just as other persons engaging in trade". The Australian case of Attorney General of New South Wales v. Collector of Customs ("), was referred to but was not followed.

p. 899

An appeal was taken to the Supreme Court of Canada. The report of the decision is found in The Attorney-General of the Province of British Columbia v. The Attorney-General of the Dominion of Canada ('). It was argued on behalf of British Columbia that in s. 125, British North America Act, the word 'taxati0n' included the imposition of

p. 899

customs duties and the word 'property' included • movable property of all kinds and not merely s.r.R. property as may be incidental to the administration of the provincial government. On behalf of the Dominion, it was contended that customs duties did not come within 'taxation' but were merely in the nature of regulations of trade and commerce, and further this was not 'taxation on property', and Attorney-General of New South Wales v. Collector of Customa ( was relied upon.

pp. 899–900

The Court consisted of five learned Judges and they delivered separate judgments. Iddington J., declined to go into the question whether the word 'taxation' would or would not include customs duties. He held that s. 125 was in a· chapter which dealt with lands and property and thus was confined to property as was mentioned there or in the 3rd and 4th Schedules, and concluded that in view of this context and the nature of the powers given by Nos. 2 and 3 of s. 91, the power to demand customs duties must be upheld. Anglin J., held on the authority of Attorney-General of New South Wales v. Collector of Customs('), that s. 125 could not have been in· tended to give exemptions of this kind, and that customs duties were not only taxes but were also regulatory and were imposed rather on movement across the border than on the goods themselves and were thus not a tax 'on property' in Canada. Mignault J., followed a similar line. Duff J., entered into a more detailed discussion of the sheme of the British North America Act. He observed that it was a fundamental part of the scheme of Confederation to give amplest authority in relation to external trade exclusively to the Dominion, and customs duties were an instrument of regulation. He, therefore, held that the theory of Dominion primacy must on such a construction of s. 125 postulate a power of disallowance of anything which would weaken that control and primacy. He also held that 'taxation' in relation to property was less comprehensive in significance than 'taxation' simpliciter, and though customs duties were taxes on commodities in one sense, they were not 'taxes on property' as used in s. 125 where the word 'property' was used in the sense of distribution of 'lands' and 'property' between the Dominion and the Provinces. Brodeur J., held that customs duties in Canada both regulated and raised revenue and the Act under which they were levied laid them 'on or upon goods' and this attracted s. 125.

pp. 900–901

All thrse reasons were of course pressed into service in the arguments before us. I shall now address myself to the Privy Council judgment on appeal from the Supreme Court. The Privy Council did not express any opinion on these reasons.

p. 901

Lord Buckmaster referred to the width of s. 125 but pointed out that it could not be read in an isolated and disjunctive way. It was to be read as a part of the general scheme of the Constitution Act by which the Dominion was to enjoy exclusive legis· lative authority over matters enumerated in s. 91 which included regulation of trade and commerce aud raising of money by any mode or system of taxation. He pointed out that customs duties had these dual functions and whether it was the one func-

p. 901

tion or the other or both, the Dominion alone had , the power. The claim of the Provinces that though the Dominion had the power to erect a tariff wall, the provinces could make a breach in it by virtue of s. 125 through which the goods could pass un· affected by the Custo111s duties, was not accepted, because s. 125 was a part of a group of sections which distributed property between the Dominion and the Provinces and gave control to the Provinces over properties allocated to them. This did not affect authority conferred by s. 91, which power extended to regulation of trade and commerce

p. 901

throughout the Dominion and irrespective of the ' area of its operation. Lord Buckmaster, therefore,

p. 901

VOL. held that this purpose was paramount and s. 125 must not be read to defeat it. In other words, the primacy of Dominion Parliament in the matter of regulation of external trade and commerce and taxation of this type was held to be unaffected bys. 125. Lord Buckmaster referred to Attorney-General of New South Wales v. Collector of Customs('), but did not apply it and observed that "the true solution is to be found in the adaptation of s. 125 to the whole scheme of Government" which the British North America Act defined.

p. 902

The Canadian decisions are based upon the scheme of the British North America Act which gives paramountcy to the Dominion Parliament which was unaffected by s. 125 which found place · in a group of sections dealing with the distribution of property between the Dominion and the Provinces.

p. 902

Now, the arguments in the present case follow . the lines taken in the cases I have reviewed. It is contended for the Union that the exclusive power to levy duties of customs and regulation of exte:nal trade belongs to Parliament, that customs duties. both raise revenue and regulate, that they are not 'taxes' much less 'taxes on property', and Art. 289 must be interpreted to preserve the exclusive and plenary power of Parliament. On the other side, it is contended that clauses (2) and (3) ir.dicate that the ' right of Parliament is to tax the trading activities of State Governments but to leave free their ordinary functions as the Governments of the States, and the prohibition in cl. (l) of Art. 289 is absolute subject only to what is expressly excluded by cl. (2). To understand the arguments and to see how the precedents of other countries serve us to understand our Constitution, I shall first analyse the scheme of taxation under our Constitution.

p. 902

To begin with, it is a matter for reflection whether the word 'property' in Art. 289 excludes ' property imported from foreign countries which has to bear a tax before it can enter the territory of India. The Article bans taxation of property belonging to the Government of a State. If by property is meant only that property which is within the geographical limits of a State, the~ property outside those limits and seeking to enter the State across customs frontiers may have to bear customs duty. Similarly, if customs duties do not come within the word 'taxation', the Article is again ineffective to save the property of the Slate Governments. The Union claims that customs duty is neither 'taxation' nor a 'tax on property'. It is a tax on the movement of goods across the customs frontier and the protection given by Article 289(1) does not apply. The scheme of the Constitution clearly shows that neither claim of the Union can be upheld.

pp. 902–903

The Union List does not include any tax which in the technical or popular sense can be said to be 'property tax' or a tax laid on property as property. These tax entries begin at No. 82 which is "taxes on income other than agricultural income". Then follow Nos. 83 and 8! which deal with duties of customs and duties of excise. It is these entries which are the subject of controversy. If these are not to be regarded as taxes on 'property', then, no other tax can be remotely connected with the property of the State in the sense suggested by the learned Solicitor-General, Nos. 85 and 86 deal with companies, and Nos. 87 and 88, with death duties. In extremely rare cases. a State might be the legatee as in U. S. v. Perkins(') and Snyder v. Bettm'An ('), but it is difficult to imagine that such a case was in contemplation. Terminal taxes and taxes on railway fares and freights of No. 89 may fall upon the States, but under Art. 269, the proceeds have to be assigned to the States. No. 90 deals with taxes other than stamp duties on transactions in stock exchanges and future markets. They are seldom, if at all, likely to U,~.

p. 903

vot. fall on the States and the proceeds are also assigna· ble to the States. No. 91 is Rates of stamp rJuties, and No. 92, taxes on the sale or purchase of newspapers and on advertisements published therein, and No. 92-A, taxes on the sale and purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce, are again not taxes such as may be con· sidered to be 'on property'. The net proceeds of these taxes are again to be given to the States. When the question was put to the learned Solicitor-General as to which tax on property was in contemplation, he could only point to the residuary power of Parliament. This shows that unle8s Art. 289(1) took in entries relating to customs duties and excise duties, the protection granted by the clause would be large· ly superflnous or nugatory.

p. 904

The Government of India Act, 1935, granted exemption in respect of lands and buildings only. The present Article changed the words to 'property and income'. The pharse is exhaustive of all the assets and income of the States. Clause (2) o( the Article indicates that the exemption is not to apply to the trade or business carried on by the State and any tax can be imposed in respect of such trade or business of any kind or any operations connected therewith and any property used or occupied for the purpose of such trade or business and any income accuring or arising in connection therewith. The repeated use of the word 'any' shows that the distinction sought to be made in Australia from the use of the word in one place and its omission in another is not admissible. The words 'used or occupied' show that movable and immovable properties are included. Clause (3) shows that power is reserved to Parliament to declare by law which trade or business or class of trade or business is incidental to the ordinary functions of Government, thus, taking the matter out or the jurisdictioa of courts. Till Parliament so declares, all trade and business of any kind must remain subject to taxation.

pp. 904–905

From the above, it follows that the three clauses of Art. 289 must be read together and harmoniously together their correct import. It is not possible to read cl. (1) with the assistance of rulings of other Courts. The problem to be faced is : What is included in the expression 'property of a State' ? It must obviously include all property to which the State can lay claim. The word 'property' is wi:le enough to include immovable as well as movable varieties. Art. 289 departed from the language of the Government of India Act, 1935 by discarding 'lands or buildings' and using the more comprehensive expres.~ion 'property', and in cl. (2) qualified that word by 'any' and by 'used or occupied'. The collocation of these expressions clearly indicates that the property of the State in whatever circumstances situated, was meant and was exempt from taxation and the only property which was made subject to taxation was any property used or occupied for business. Property, which is brought into ownership and possession abroad, or property, which is produced or manufactured by the State, is property of the State. If not, the question may be asked, "Whose property is it then ?", and no answer to such a question can be given. I am, therefore, of the opinion that takin!i the language of Art. 289 (1) by itself or even as modified by that of clauses (2) and (3), the conclusion is inescapable that properties of all kinds belonging to the States save those used or occupied for trade or business, were meant to be exempted from 'taxation'. Such property may be immovable or movable and need not be within the geographical limits. This Article is in the part dealing with "Finance" and is included in a sub·chapter entitled "Miscellaneous Financial Provisions". Its significance is tbus not made less by any special considerations as was the case with s. 125 of the British North America Act. The powers of legislation, which Parliament enjoys by virtue of the taxation entries in List I, are expressly 8ubject to the provisions of th:e Constitution, and Art. 289 must, therefore, override unless it be in· applicable. The Scheme of Art. 289 does not admit that the word 'property' should be read in any specialized sense. I am, therefore, of opinion that goods imported and goods manufactured or produced by the States are included in the word 'property'.

pp. 905–906

It is next contended that neither customs duties nor excise duties can be said to be "taxation", and even if they can be described as "taxation" or "tax", they are not tax on property. They are said to be taxes on movement of goods in the one case, and taxes on production or manufacture, in the other. Many rulings were cited to show that this is the way in which Judges have described these levies. I shall deal with customs duties first, because, in my opinion, excise duties are simpler to deal with. Some Judges have described excise duties as "on goods produced", and some, as "on production and manufacture", and it is easy to cite an equal number of cases on either side.

p. 906

The definition of the word 'taxation' in our Constitution is the most significant fact. It serves to distinguish the Australian cases and it tells us what kind of levy would be hit by Art. 289 (I). This. is what it states :

p. 906

" 'Taxation' includes the imposition of any tax or impost, whether general or local or special, and 'tax' shall be construed accord-

p. 906

ingly". Though it is not an exhaustive definition and only shows what is included in the word, one is struck immediately by its width of language. Though it speaks of any tax or impost, it goes a step further and adds "whether general, or local or special" indicating thereby that no special or local considerations are relevant and even a general non-discriminatory levy must be regarded as taxation. I have already stated that the word "taxation" is used only in Art. 2~9 ( 1) and it must be read with all its wealth of meaning into the first clause of the Article. Not to do so would be to make the definition entirely redundant. When the clause is expanded in the light of the definition, it reads :

pp. 906–907

"The property and income of a State shall be exempt from any Union tax or impost, whether

p. 907

general or local or special". The underlined portion represents the definition.

p. 907

The question thus arises why use the word and define it in this comprehensive way if there was no tax in the legislative entries in List 1 which could be said to fall on the property of the States unless one thought in teTms of customs duties and excises ? According to Wells('), "Scientifically considered taxation is the taking or appropriating such portions of the product or property of a country or community as is necessary for the support of its Government by methods that are not in the nature of extortions,

p. 907

punishments or confiscations". Viewed in this broad way and having in mind that the term 'taxation' as used in the Article was specially defined with great width, the answu to the question posed by me is obvious. But that is not all. The definition speaks of "impost". The word "impost" in its general sense means a tax or tribute or duty and may be on persons or on goods. In a special sense it means a duty on imported goods and on merchandise. See Pacific Ins. Co. v. Sonle('). In Ward v. Maryland ('), it is stated ;

pp. 907–908

"An .impost, or a duty on imports, is a custom

p. 908

or tax levied on articles brought into a country". The 0 xford Dictionary does say that this special meaning is after Cowell and that there is no evidance of the origin. But every dictionary of legal terms will bear out the special meaning. Indeed, the American Constitution classifies "impost" with "duties" and "excises"· as indirect taxes in contradistinction to taxes on property or capitation. The word "duties" is sometimes used as synonymous with tax, but in a special sense, it means an indirect tax impO!ed on the importation or consumption of goods. See Pollock v. Farmers' Loan &: Trust Co (').

p. 908

In Art. 289(1), property of the States is exempted from Union taxation. One cannot go by the word "property" alone but must take into consideration the ambit of the word "taxation" also. I have read the definition into the first clause of Art. 289. Reading further into the definition the meaning of the word "impost" not as a "tax" (which is unnecessary as the word "tax" has already been used and there is a presumption against tautology) but as a "duty on importation or consumption", one gets this result :

p. 908

"The property and income of a State shall be exempt from any Union tax or duty on import-

p. 908

ed goods or merchandise of all kinds''. In other words, property of the States shall be free from direct taxes and indirect taxes.

p. 908

It will thus be seen that both from the angle of the word "property" as also from the angle of the word "taxation" we reach the two kinds of taxes which are the subject matter of controversy here. On the other hand, all this width of language is lost completely if these taxes are left out and one goes in search of other possible taxes. The definition may conceivably cover some of them in very special circumstances but the proceeds of those taxes are assignable to the States, and it seems pointless to include them for taxation and then to hand over the proceeds to the States. The distinction between the trading activity of the State Governments and their ordinary functions of government, which is worked out with such elaborate care on the American pattern, also loses its point. Clause (i) would scar· cely be necessary and cl. (3), even less.

pp. 908–909

The next que~tion is whether customs duties and excises are m their true nature taxes on the occasion of importation in the one case and produc· tion in the other, and cannot be described as "taxes on property". To begin with, the expression "taxes on property" is not used; nor is the expression "taxes in respect of property", with which the former expression was compared. The former expression was used in the Australian Constitution Act and the distinction was made by the High Court of that country. We are only concerned to see whether the imports of the States would be free from Union taxation. If by the nature of customs duties as a tax on movement of goods, it cannot be said that the exemption has been earned, there should be an answer in favour of the validity of the amendment. If customs duties can be said to be "tax on property", the answer must be the other way.

p. 909

In this connection, there is the High authority of Chief Justice Marshall in Brown v. Maryli;md ('), where he observed :

p. 909

"l\n impost, or duty on imports, is a custom or a tax levied on articles brought into a country, and is most usually secured before the importer is allowed to exercise his rights of ownership over them, because evasions of the law can be prevented more certainly by executing it while the articles are in its custody. It would not, however, be less an impost or duty on the articles, if it were to be levied on them after they were landed .. The policy and consequent practice of levying or securing the duty before or on entering the port, does not limit the power to that state of things, nor, consequently, the prohibition, unless the true meaning of the clause so confines it. What, then, are 'imports'? The lexicons inform us, they are 'things imported'. If we appeal to usage for the meaning of the word, we shall receive the same answer. They are the articles themselves which are brought into the country. 'A duty on imports', then, i~ not merely a duty on the act of importation, but is a duty on the

pp. 909–910

thing imported." In Marriot v. Brune ( later approved in Lawder v. Stone ( it was laid down that customs are duties charged upon commodities on their being imported into or exported from a country. It follows, therefore;, that it is not right to say that customs duties are on movement of goods and not upon the goods themselves. A glance at the Sea Customs Act, 1878, which is sought to be amended, shows that the legislative practice in our country has been to describe customs duties as laid on the goods or commodities. Section 20 itself, which is sought to be amended, says:

p. 910

" ............... customs duties shall be levied ..... . qn (a) goods imported or exported, etc. (b) opium, salt or salted fish imported, etc. (c) goods brought from any foreign port

pp. 910–911

to ............ etc. (d) goods brought in bond from one cus·

p. 911

toms port to another". Similarly, ss. ~'5, 26, 27, 28, 29, 29A, 31, 32 and several others mentioned goods as being the subject of the tax. Section 43, which deals with drawbacks, may be seen in this connection :

p. 911

"43. When any goods, having been charged with import duty at one customs-port and thence exported to another, are re-exported by Sea as aforesaid, drawback shall be allowed on such goods as if they had been so re-exported from the former port."

p. 911

• • • • • The duty is laid on goods and it is the goods which earn the drawback. It would be not wrong to say that the whole of the Sea Customs Act speaks of gooiB all the time.

p. 911

If then the goods be the property of the States and those goods have to bear the tax before rights of ownership can be exercised in respect of them, is it an error to say that the exemption of Art. 28~ ( 1) will be available to them, regard being had to the language of the clauie read with the definition of ''taxation"-

p. 911

"The property ...... of a State shall be exempt from any Union tax or impost, whether general or local or special"?

p. 911

Indeed, Parliament in 1951, soon after the Constituent Assembly had adopted the Constitution,

p. 911

amended s. 20 of the Sea Customs Act, 1878, by ' • inserting sub-s. (2) whieb read:

p. 911

"The provisions of sub-section (1) shall apply in respect of all goods belonging to the Government of a State and used for the purpose of a trade or business of any kind carried on by, or on behalf of, that Government, or of any operathm connected with such trade or business as they apply in respect of goods not

p. 912

belonging to any Government." This sub-section reproduces cl. (2) of Art. 289. It views the goods imported as property, customs duties as "taxation", and declares that such goods though belonging to a State Government would bear the tax under the circumstances mentioned in the said clause, If there ever was a perfect instance of contemporanea expositio, this must be it. It is not a case of a modern statute being interpreted with reference to an old one. Nor is their any judicial interpretation involved. This is a case of the same body of men enacting a provision in an Act to carry out the intent and meaning of a provision of the Constitution adopted earlier by them. In their understanding of the Constitution, customs duties as levied under the Sea Customs Act, 1878, were affected by the change from "lands and buildings" of s. 154 of the Government of India Act, 19::!5, to "property" and the grant of exemption to such property from Union taxation. If I had any doubts about the construction of Art. 289, this would have served me to show the way. I, however, think that the matter hardly admits of any doubt.

p. 912

The learned Solicitor-General again and again referred to the dual purpose achieved by the imposition of customs duties, namely, the raising of revenue and the regulation of foreign trade. He associated excise duties with customs in the same breath and cited the Privy Council case from Canada to argue that if the proposed amendment is declared in either case to be unconstitutional, then, the regulatory part of the same law would fail without being in any way imperilled by Art. 289 or anything elsewhere to be found in the Constitution. This argument needs serious consideration.

pp. 912–913

There can be no doubt that the power of Parliament to regulate foreign trade is plenary and is untrammelled by anything contained in Art. 289. A similar aswmption may also be made in favour of duties of excise, though the element of regulation may be somewhat weaker there than in the duties of customs. The question, however, is what purpose is the proposed amendment intended to serve ? It is a little difficult to dissociate the regulatory aspect from taxation. Even in Australia, where tax laws must deal only with taxation and no other subject, the regulatory aspect of customs duties was adverted to. In the United States of America also, this regulatory aspect of customs duties did play a prominent part. Can we, therefore, say that the combined effect of entries 83 and 41 of List 1 would austain the proposed amendment ? If it were a question of regulation being inextricably woven into the tax, I would have paused to consider the matter. I am not expounding a law already made but am giving an opinion on certain questions. These questions definitely refer to the revenue aspect of customs duties. If the law were framed to regulate and even to prohibit the importation, by the State Government in common with others, of certain goods or classes of goods, I would have no hesitation in saying that such a law would not offend the exemption in Art. 289. Even if the Jaw was intended to achieve 'both ends' there would be an argument in favour of the Union. But if the advice is sought on the plain question whether the goods of the States can be taxed to raise revenue, the answer is e51ually plain that it is not permissible except in the circumstances already mentioned respectively in the two sub-sections which are sought to be amended .

p. 913

Section 20 of the Sea Customs Act, and s. 3 of the Central Excises & Salt Act, do not pretend to regulate external trade in the one case and production and manufacture, in the other. They are provisions for raising revenue in much the traditional English way. Whatever little prete.oce there might be is shed completely by the proposed amendment which, to borrow once again from Mr. Justice Douglas, is a "measure designed to put the States on the tax collectors' list". In these circumstances, I answer the question in respect of customs duties without adverting to entry 41 of the Union list. It is argued that the States would import goods not only free but also freely and, thus, lose valuable exchange. But the question can only be answered as posed and not on the basis of horrible imaginings. It can be argued with equal force that the State Governments may be expected to evince a sane attitude towards our finances.

p. 914

In so far as excise duties are concerned, no question of regulation of trade or of production or of manufacture can really arise except in certain rare circumstances. Much of this power of regulation of production and manufacture (except in respect of certain essential commodities mentioned in No. 33 of List III and those specially mentioned in List I) belongs to the States. In entry No. 84, we are concerned with tobacco and other goods except alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics. If regulation can serve the purpose, power will have first to be found either in List I or List Ill. But if it were a

p. 914

of pure taxation, then, the excise duty is laid on goods in much the same way as customs. We cannot treat the observations of Judges, where they speak of excises as "on production and manufacture", to be as binding as statutes. Other Judges have used other language, like "on goods produced or manufactured". The Central Excise & Salt Act uses the latter, and so do the lists in the Constitution. There is, therefore, no difference in this respect between excises and customs. The case of excises is simpler and a fortiori, because the goods produced iu the States by the States for their ordinary functions of Government and not for trade or business, are property of the States and directly within their ownership. If such property is taxed, it is directly hit by Art. 289 (l), and the arguments on the analogy of customs have little place. It follows, therefore, that neither customs duties nor excise duties can be levied on goods properly belonging to a State if the goods are imported or produced not for the purpose of trade or business but for purposes incidental to the ordinary functions of Government. It also follows that the sections of the two Acts as they stand today reflect the true position under the Comtitution. I may add that if the Union Government desires to put a curb on the excessive importation of goods by the States, the power to regulate external trade is available and it is unaffected by Art. 289. A measure designed to achieve regulation by a system of controls, licensing and all such devices, would not be affected by the exemption contained in the Article, but a pW'e taxing measure, which seeks to tax property used for State or governmental purposes, is within the exemption.

pp. 914–915

My answers to the questions are:

p. 915

(1) The provisions of Art. 289 of the Constitution preclude the Union from imposing, or authorizing the imposition of, customs duties on the import or export of the property of a State used for purposes other than those specified in cl. (2) of that Article, if the imposition is to raise revenue but not to regulate external tr<;1q~, ·(2) The provisions of Art. 289 of the Constitution of India preclude the Union from imposing, or authorizing the imposition of, excise duties on the production or manufacture in India of the property of a State used for purposes other than those specified in

pp. 915–916

cl. (2) of that Article.

p. 916

(3) The answer is in the affirmative.

p. 916

RAJAClOPALA AYYANGAR J.-1 entirely agree with the opinion expressed by my Lord the Chief Justice both as regards the answers to the questions referred to this Court as well as the reasoning on which the same is based. My only justification for venturing to add a few words of my own, is because of my feeling that certain matters on which great stress was laid by learned Counsel appearing for the States, might be dealt with a little more fully.

p. 916

When the learned Solicitor-General submitted that on a proper construction of Art. 289 (1), the immunity from Union taxation in its relation to property was confined a direct tax on propertyand did not extend to indirect taxes-which were not on property but on an incident or an event in relation to property, it was urged by learned Counsel for the States that this was introducing a distinction between direct and indirect taxes which formed no part of our constitutional structure. It is true that no such express distinction has been made by our Constitution, even so, taxes in the shape of duties of customs (including export duties) and excise, particularly when imposed with a view to regulating trade and commerce in so far as such matters are within the competence of Parliament being covered by various entries in List I, these cannot b~ called taxes on property; for they are imposts with reference to the movement of property by way of import or export or with reference to the production or manufacture of goods. Therefore, even though our Constitution does not confer or distribute legislative power to tax based on any diiitinetion between direct and indirect taxes, it is wrong to suggest that for construing the exemption in Art. 289 (1), the distinction would necessarily be irrelevant. Learned Counsel for the States are perfectly correct in their submission that the Constitution does not distribute legislative power in regard to taxation between the Union and the States or any distinction between direct and ind ire ct taxes as in Canada. In passing I might observe that even in Australia, there is no distribution of taxing power on such a basis, for while the Commonwealth Parliament has an exclusive power to levy duties of customs and excise (subject to the same having to be uniform) it has power, generally speaking, to impose direct taxes also, provided they do not discriminate, and the States have alio a similar power to levy such direct taxes. This however does not by itself eliminate the relevance of the distinction for any particular purpose. That there is a distinction between direct and indirect taxes cannot be disputed and I heard no submission to the contrary. The question is whether that distinction has any materiality for interpreting the meaning of the words 'the property of a State not being subject to Union taxation'. The question at once arises whether when reference is made to "property" and "its taxation" what is meant is merely a tax on property as such, i. e. on the beneficial ownership by the State of the property or whether it is intended to include a tax which bears merely some relationship to or has some impact on such property. For in ultimate analysis the distinction between a direct and an indirect tax is a distinction based upon the difference in impact which is also expressed as a distinction based upon its being one not on property but on a taxable event in relation to property. If the taxable event is merely the ownership of th1 pr<i>perty and on the beneficial interest therein, it would be a direct tax, whereas if the conoecti on between the property and the tax-payer is not merely ownership but something else such as a transaction in relation to it, then it would be an indirect tax. The argument therefore that under the Constitution legislative power in relation to taxation is not dis· tributed between the Union and the States on any distinction between direct and indirect taxes as in Canada is not very material and of course not decisive on the question under consideration by us.

pp. 916–918

It was strenuously urged on behalf of the States that if Art. 289 (1) were construed in the manner suggested by the Union, i. e., confining the immunity to direct taxes· on property as distinct from taxes on property which merely impinged on or had an impact on property, the States could derive no benefit at all from the provision, because the Union Parliament had no legislative competence under the entries in the Union list to impose any direct taxes on property and that if some meaning and content has to be given to the exemption it would only be if its scope were to be held to extend to indirect taxes on property such as excise duty and duties of customs. The learned Solicitor-General submitted that even on the construction which he desired us to adopt there would be scope for the operation of the immunity because the exemption might very well have been framed in view of the possible direct taxation on certain forms of property under entry 97 of the Union List, read with Art. 248, though such taxes had not yet been imposed. His further argument was that the exemption might be capable of being invoked in cases where any State owned property in the Union territories, for in such a situation the Union Government would have under Art. 246 (4) power to legislate on the items enumera· ted in the State List and thus levy direct taxes on property. On the other side, it was urged that it would not be reasonable to construe the words as having some meaning by reference to such unlikely eventualities, but that it would be proper to attri · bute to the Constitution makers an intention to make provision for the usual and the normal.

pp. 918–919

I must say that the ·submissions of the learned Solicitor-General are not without force. That apart, I consider that the history of this clause should be sufficient to preclude an argument of the type urged for the States having any great or decisive validity. It is common ground that Art. 289 (I) was taken over from s. 155 (1) of the Government of India Act, 1935, with however a variation to which I shall advert. In that earlier statute, that section ran :

p. 919

"Subject as hereinafter provided, the Government of a Province shall not be liable to Federal taxation in respect of lands or buildings situate in British India or income accuring

p. 919

or arising or received in British India." The only change which is material which this section has undergone is the substitution of the word 'property' for the words "lands and buildings", thus extending the immunity not only to immovable property of the type specified but to other forms of property, including movable property as well. The distribution of legislative power in regard to taxation under the Government of India Act in the field relevant to the present context was identical with that which is found in the Constitution. Then as now, there was no power in the Central Legislature to levy anv direct taxes on lands and buildings, besides ther~ being no entry like 97 in the Union list, the residuary power remaining after the distribu· tion in the three lists being vested in the Governor General for allocation under s. 104. It would have been impossible to find any scope for the operation of this exemption under the scheme of distribution of taxing power under the Government of India Act except possibly on some such line as suggested by the learned Solicitor-General. The fact therefore that if one had regard merely to the distribution of taxing power between the Centre and the Provinces there was no scope for imparting a wider meaning to the expression "taxes on lands and buildings" appears to me to support the view that the circumstance that direct taxes on property are not within Union Legislative power is not by itself a ground for reading the exemption from taxation as necessarily having any particular or a wider connotation.

pp. 919–920

The next question is whether the inclusion of property other than "lands and buildings" in the Article by itself brings within the immunity taxation not merely of the property itself but on some incident or event in relation to property such as production or manufacture, import or export (to refer to the incidents which are relevant to the context) or does the Article contemplate the same type of taxe1 in relation to movable property as were within the exemption under the Government of India Act in regard to "lands and buildings"? In other words, just in the case of "lands and buildings" under the ·Government of India Act, 1935, is the type of taxation of other species of property now brought in one which is direct and which arises from the mere ownership of such property or does it. include a tax levied not on the property itself but on an incident or event in relation to it ? The analogy of the immunity from direct taxes on "lands and buildings" which formed the feature of the exemption in regard to "property" under the Government of India Act, 1 !135, would appear to favour the view that it is also a direct taxation in relation to the other forms of property that was intended to be brought within Art. 289 ( 1). Of course, this view could be over· borne by sufficient reason pointing the other way.

pp. 920–921

It was in this context that a reference was made to the use of the expression "taxation" in Art. 289, a terin which has been defined in Art. 366 {28) thus:- "366. In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, th~,t is to say- (28) "Taxation" includes the imposition of any tax or impost, whether general or local or special, and "tax" shall be construed accordingly."

p. 921

There is no doubt that if this definition were applied and every "tax, duty or impost" were within the scope of the exemption, the submissions made on behalf of the States would be formidable. A subsidiary and related point was also made that the ex· pression "taxation" occurs only in Art. 289 and that if the width of the definition in Art. 366(28) is not held to be applicable to understand the content of that word in Art. 289, the definition itself would be rendered wholly unmeaning. Before considering these arguments it is necessary to advert to some matters. It is true that the expression "taxation" occurs only in Art. 289( 1) but it is also to be noted that the definition of the term "taxation" in Art. 366 has been bodily taken from s. 311(2) of the Government of India Act, 1935. Just as under the Constitution the word "taxation" also occurs only once in the Government of India Act, 1935, viz., in s. 155(1) corresponding to Art. 289(1). The defini· tion, it would be seen, applies to define not merely the word "taxation" but also to the "rammatical variations of that expression-for instance "taxes". In the circumstances the only question is whather in the context in which the word occurs having regard to the antecedent history and the form of the provision and to the other provisions of the Constitution there is justification for the word being understood as meaning something less than the full width of which it is capable under the definition.

pp. 921–922

In this connection it would be pertinent to refer to the terms of Article 285 in which the corresponding immunity of the Union from State taxation is provided. That Article runs :- "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. ·

p. 922

(2) Nothing in clause (1) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying 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

p. 922

continues to be levied in that State." In regard to this provision there arc two matters ta which attention might be directed. The first of them is the use of the expression "all" in clause(!)- (taken from the corresponding s. 154 (I) of the Government of India Act 1935)-which is absent from Art. 289 (I). It is manifest that some significance has to be attached to this variation. If the definition of the word "taxes" in Art. 366 (28) were applied to that word in Art. 285 (I), it would be apparent that the word "all" would be wholly superfluous and otiose, as the definition itself-and that is the contention urged before us on behalf of the States-embraces all and every tax. This would suggest that it would not be wrong to take the view that the Constitution makers felt that notwithstanding the definition of "taxes" in Art. 366 (28), it might not always have that width of connotation. so that it was necessary to affirm and if need be supplement its width by the addition of the word "all". The other matter is this. If the definition of "taxes" were read into Art. 285 and the Article read literally, it would be seen that property of which the Union was the owner would be entitled to the exemption, whether or not the beneficial occupation and use of the property was in the Union. In other words, the literal reading of the Article would bring within the exemption a tax on a private occupier of Union land-even when imposed on the beneficial interest of such occupier. S. 125 of of the British North America Act 1867 ran :

pp. 922–923

"No lands or property belonging to Canada ...

p. 923

shall be liable to taxation (Provincial)". A lessee of Dominion Crown lands taken on lease for grazing purposes was astessed to land tax under an enactment of Saskatchewan in respect of the lessee's interest in the lands. The dominion challenged the validity of the. imposition on the . ground of the land itself being within the immunity conferred by s. 125. Rejecting this contention Viscount Haldane speaking for the Judicial Committee said :

p. 923

" ......... although the appellant is sought to be taxed in respect of his occupation of land, the fee of which is in the Crown, the operation of the Statute imposing the tax is limited to

p. 923

the appellants' own interest." ( My object in referring to these observations is that provisions of this sortxcannot always be read literally and that the object of the framers as disclosed by the general scheme of distribution of powers has to be borne in mind to arrive at their proper construction. It is in this context that the intimate correlation between the exclusive legislative power of the Union in regard to "trade and commerce with foreign countries", and related to it, "import and export across customs frontiers" and the duties with which we are now concerned and particularly import and export duties on movements across the customs frontier assume crucial importance; and pose the question whether this power confided to the Union was intended to be broke1 into by every component State imparting its requirements free of duty.

pp. 923–924

There was one other further submission made to us by learned Counsel for the States which re· quires some detailed examination and this was ba1ed upon the impact of cl. (2) of Art. 289 on the import of cl. (I). The argument was this : The non-obstante clause with which cl. (2) opens should be taken to indicate that but for that clause, the exemption would be operative so as to deprive the Union of the power to levy tax in the con verse ·circumstance, in other words that but for clause (2) even where the State was engaged in a trading activity it would be entitled to claim exemption from Union taxes. It was therefore su.bmitted that. light could be gathered from the content of cl. (2) on the types of taxation from which exemption was granted under cl. (I) or in other words for determin· ing the ambit of the immunity covered by cl. (1). The argument proceeded. Cl. (2) permits the Union to impose the following taxes notwithstanding the blanket exemption granted by cl. (I}. These taxes are : (I) A tax in respect of a trade or business of any kind carried on by or on behalf of the State. The taxes leviable in respect of a trade or business would be, having regard to the entries in the Union List-(a) income tax (item 82), (b) possibly corporation tax (item 85) where the State carries on business through a State owned or State controlled corporation, (c) taxes on the capital value of assests of companies (item 86) in cases where the State carries on business through a State owned corporation; (2) Taxes in respect of operations connected with a trade or business. These might include a tax on freights, sales tax, and it was added duties of customs and duties of excise; (3) Taxes in respect of property used or occupied in connection with such a trade or business or any income accuring or arising in connection therewith. It was strongly pressed upon us that not merely direct taxes on property and direct taxes on income, but other types of taxes which were incidental to the "operations connected" with a trade or business (and it wa, suggested that customs and excise duties were such) could be imposed by the Union upon the States in cases where the latter was carrying on a trade or business. It necessarily followed, it was urged, that if these were not used for a trade or business, the taxes would fall within the scope of the exemption under Art. 289 (1 ). In other words, the argument was that as there was a limited power in Parliament to impose taxation on States or on those acting on behalf of the States it necessarily connoted that in cases not covered by cl. (2), that is in cases where it was not connected with a trade or business the exemption under cl. (1) would operate.

pp. 924–925

The precise relationship between clauses (2) and (1) and the question whether the former was a proviso properly so called which had been carved out of the main provision of cl. ( 1) and which but for such carving out would be within cl. (1) was the subject of considerable debate before us but I consider that it is not necessary to deal with this rather technical point for in my view the history of cl. (2) throws

p. 925

---~ 926 SUPREMECOURTREPORTS[l964]VOL. considerable light on its significance and place ·in the scheme of tax exemption. At the Imperial Economic Conference of 1923 a resolution was adopted to the effect that the Parliaments of Great Britain, the Dominions and India should be invited to enact a declaration that the general and particular provisions of their respective Acts imposing taxation might be made to apply to any commercial or industrial enterprises carried on by any other such Government in all respects as if it were carried on by or on behalf of a subject of the British Crown.

p. 926

This resolution drew a distinction between the trading and business activities of the several constituent units owing allegiance to the Crown of England and their governmental activities. In pursuanee of this resolution the Imperial Parliament enacted s. 25 in the Finance Act of 1925 (15 and 16 George V, Ch. 36) which read to quote the material words :

p. 926

"25. (1) Where a trade or business of any kind is carried on by or on behalf of the Government of any part of His Majesty's Dominions which is outside Great Britain and Northern Ireland, that Government shall, in respect of the trade or business and of all operations in connection therewith, all property occupied in Great Britain or Northern Ireland and all goods owned in Great Britain or Northern Ireland for the purposes thereof, and all income arising in connection therewith, be liable, in the same manner as in the like case any other person would be, to all taxation for the time being in force in Great Britain or Northern Ireland.

p. 926

(2) (3) Nothing in this section shall- ( a) affect the immunity of any such Government as aforesaid from taxation in respect of any income or property to which sub-section ( 1) of this section

pp. 926–927

does not apply ; or

p. 927

(b) " A similar provision was enacted in India in the Government Trading Taxation Act, 1926 (Act 3 of 1926). Its preamble recited :

p. 927

"WHEREAS it is expedient to determine the liability to taxation for the time being in force in British India of the Government of any part of His Majesty's Dominions, exclusive of British India, in respect of any trade or business carried on by or on behalf of such Government. It is hereby enacted as follows :-"

p. 927

The operative provision was s. 2 and it ran:- "2. (1) Where a trade or business of any kind is carried on by or on behalf of the Government of any part of his Majesty's Dominions, exclusive of British India, that Government shall, in respect of the trade or business and of all operations connected therewith, all property occupied in British India and all goods owned in British India for the purposes thereof, and all income arising in connection therewith, be liable- (a) to taxation under the Indian Income-tax Act, 1922, ·in the same manner and to the same extent as in the like case a com· pany would be liable;

p. 927

(bl to all other taxation for the time being in force in British India in the same manner as in the like case any other person would

p. 928

be liable. (2) For the purposes of the levy and collection of income-tax under the Indian Income-tax Act, 1922, in accordance with the provisions of sub-section (1) any Government to which that sub-section applies shall be deemed to be a company within the meaning of that Act, and the provisions of that Act shall apply accordingly. (3) In this section the expression "His Majesty's Dominions" includes any territory which is under His Majesty's protection or in respect of which a mandate is being exercised by the Government

p. 928

of any part of His Majesty's Dominions." This, it would be seen, applied to a foreign Govern· ment carrying on a trade or business or owning pro· perty or using property within British India. The Act has been adapted subsequently to bring it into line wiith the constitutional changes that have taken place since 1926, but it is unnecessary to refer to them. Proviso (a) to sub·s. (1) of s. 155 enacted the exemp· tion in the same terms as in the Act of 1926 in favour of the Provinces under the Government of India Act, 1935. This bodily incorporation was done without any reference to the distribution of legislative powers effected by Sch. 7 of the Government of India Act.

p. 928

This being the historical origin of this provision, it is not easy to relate it to the exemption in Art. 289. (1) or to construe the exemption with its aid. Bearing in mind this antecedent history it appears to me that it would not be proper to read the scope of the saving in favour of the Union in cl. (2) as reflecting on the scope of Art. 289 ( l).

pp. 928–929

There is also another angle from which the relevance of clause (2) to the construction of clause (1) of Art. 289 might be tested. One of the more serious arguments put forward on behalf of the States to which I have adverted was that if the expression 'taxes' in relation to the exemption of property from tax were confined to direct taxes on property the exemption would be unmeamng, as such taxes could not be imposed by the Union. Now, let me take the taxes specified in Art. 289 (2). They include, for instance, taxes on "property used or occupied for the purpose of such trade or business". A tax on the use of property or on the property itself which is occupied for the purpose of trade would obviously be a direct tax on property which ex-concessis the Central legislature under the GQvernment of India Act and Parliament under the Constitution are incompetent to impose. It is not the contention of the States that the Centre has such a power to levy a tax on occupation or use of property where it is in connection with a trade or business. This would at least show that it is not justifiable to imply from clause (2) that but for that provision Parliament would be entitled to impose such a tax. The other points urged have been dealt with in the opinion of my Lord the Chief J u~tice and I do not propose to cover the same ground. I concur in the view that the questions referred to this Court for its opinion should be answered as they have been by the Chief Justice.

p. 929

BY COURT : In view of the opinion of the majority the answer to the three questions referred to is in the negative.

p. 929

Questions answered accordingly •

p. 929