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CASE NO.: Appeal (civil)  1388 of 1975

PETITIONER: NEW DELHI MUNICIPAL CORPORATION ETC.

RESPONDENT: STATE OF PUNJAB ETC.ETC.

DATE OF JUDGMENT: 19/12/1996

BENCH: A.M.AHMADI CJI & JAGDISH SARAN VERMA & S.C.AGRAWAL & B.P.JEEVAN REDDY & A.S.ANAND &  B.L.HAN SARIA & S.C.SEN & K.S.PARIPOORNAN & B.N.KIRPAL

JUDGMENT: JUDGMENT

Judgement Delivered By: A.M.AHMADI CJI B.P.JEEVAN REDDY

A.M.AHMADI, CJI.

    These civil  appeals and  special leave  petitions have been filed  against the judgment and order of the Delhi High Court dated March 14, 1975 in Civil Writ Petition No. 342 of 1969 and  other  orders  which  follow  this  judgment.  The appellant in  all these  matters is  the New Delhi Municipal Committee (hereinafter  called "the  NDMC"). The respondents are the  Union of  India and  the State  of Andhra  Pradesh, Gujarat, Haryana,  Jammu &  Kashmir, Kerala, Madhya Pradesh, Maharashtra, Orissa,  Punjab, Rajashthan,  Tripura and  West Bengal. The  Municipal  Corporation  of  Delhi  (hereinafter called "the MCD") appears as an intervenor.      The Case History      The development  that occasioned  the setting up of the Constitution Bench  may now  be briefly  set out. The Punjab Municipal  Act,  1911  (hereinafter  called  "the  Act")  is applicable to  the Union  Territory of  Delhi and  under the provisions of  this Act,  the NDMC had been levying property tax on  the immovable  properties of  the respondent  States situated  within   Delhi.  The  respondents  challenged  the imposition of  such a  tax on  their properties  before  the Delhi High Court by contending that it would fall within the exemption  provided   for   in   Article   289(1)   of   the Constitution. In  the  impugned  judgment,  the  Delhi  High Court, while  accepting this  contention,  relied  upon  the relevant observations  of the  9-Judge Constitution Bench of this Court  in In Re The Bill to amend Section 20 of the Sea Customs Act,  1878 and  Section 3 of the Central Excises and Salt Act, 1944, [1964] 3 S.C.R. 787 (hereinafter called "The Sea Customs  Case"), to  quash the assessment and demands of house-tax in  respect of  the properties  of the  States and restrained the  NDMC from  levying such a tax in future. The NDMC filed  an application  under Article  133(1)(c) of  the Constitution seeking the grant of a certificate for leave to appeal to the Supreme Court; while granting the Certificate, the High  Court observed  that the principal question before it had  grave constitutional  implications which required an authoritative decision by this Court.      On January  1, 1976,  a Division  Bench of  this  Court

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directed that  the NDMC  could continue  to make assessments but it  was not to issue demand notices or make any attempts towards realisation  of the  taxes.  On  October  29,  1987, another Division  Bench of  this  Court  directed  that  the matter be listed before a Constitution Bench. On January 14, 1993, a  5-Judge Constitution  Bench  of  this  Court  began hearing  arguments   and   after   considering   the   rival submissions, on  October 4,  1994, passed an order referring the matter  to a 9-Judge Bench. In the said order, the Bench observed that  it had  considered the  decision in  the  Sea Customs Case  and was of the opinion that the point at issue in these  matters was  covered therein.  The decision in the Sea Customs  case having  been reaffirmed by the decision of this  Court   in  Andhra   Pradesh  State   Road   Transport Corporation v.  The Income  Tax Officer  & Another, (1969) 7 S.C.R. 17  (hereinafter called "the APSRTC case"), the Bench considered itself  bound by the decision; however, it was of the view  that the  arguments advanced before it, which were not considered  by the earlier decisions, were plausible and required consideration  which necessitated the setting up of a 9-Judge Bench to hear the matter.      The Impugned Judgment      An  analysis  of  the  impugned  judgment  may  now  be resorted to  in order  to gain  an insight  into the various Constitutional   questions    that    will    require    our consideration. Before  the High  Court, the  various  States contended the  following: by virtue of Article 289(1) of the Constitution, the property of the State is exempt from Union Taxation; the  undefined phrase  "Union Taxation" in Article 289(1) would  mean all taxes which the Union is empowered to impose; under  the Constitutional  scheme and,  specifically under Part  VIII of  the Constitution, Union Territories are to be  administered by  the President  of India  through the laws of  Parliament; Parliament  is the  law-making body for all Union Territories and by virtue of Article 246(4), while legislating for  Union Territories,  the power of Parliament to make  laws extends to all the three lists in Schedule VII of the  Constitution pertaining  to legislative  competence; insofar  as  the  Act  and  its  application  to  the  Union Territory of  Delhi is  concerned, though  it relates  to  a matter in  the State  List, it  would still amount to "Union Taxation" because, by virtue of its application to the Union Territory  of  Delhi,  it  would  be  deemed  to  have  been incorporated in  law made  by Parliament and would therefore be a  Union Law  imposing tax;  since the tax imposed by the Act amounts  to Union  Taxation, the  exemption  in  Article 289(1) of  the Constitution  which makes the property of the States immune  from Union  Taxation would  be attracted, and the properties  of the  States situated  in Delhi  would  be exempt from all taxes on property.      For the  NDMC, it  was  contended:  the  phrase  "Union Taxation"  would   not  extend   to  legislations  in  Union Territories and  interpretation should be restricted to laws made by  Parliament in respect of the entries in List I; the Union had  no power  to impose  taxes on entries relating to property as  they fall  under List II; the Act being a State Legislation could  not be  treated as  a Central Legislation for the  purpose of  attracting Article  289(1); the test to determine whether a tax forms part of "Union Taxation" is to check if  the proceeds thereof form part of the Consolidated Fund of India; since the proceeds of taxes on property under the Act  did not form part of the Consolidated Fund of India but were  retained by the Municipality for its own purposes, such a  tax would  not form part of "Union Taxation" and the States were  therefore not  entitled  to  be  exempted  from

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paying  it   under  Article   289(1);  the   scheme  of  the Constitution indicates  that Part C states, which later came to be  called Union Territories, were carved out as separate entities and  were not  to be regarded as part and parcel of the Union  Government; when  the Union Government legislates for Union Territories, it does so in a special and different capacity,  and  not  as  the  Union  Legislature;  it  would therefore be  erroneous to treat such laws made by the Union Government for  the Union  Territories as part of Union Laws that  would  account  for  "Union  Taxation"  under  Article 289(1).      To reach  its conclusion,  the High  Court conducted an examination of  the legislative  history of  the Act and its extension to  the Union  Territory  of  Delhi;  studied  the scheme of  the Constitution  with regard to the distribution of legislative  powers between  the States  and  the  Union; considered the  historical Constitutional  position of Union Territories; scrutinised  the series  of decisions  of  this Court on  the issue  whether a  Union  Territory  is  to  be regarded as  a State,  and analysed  the decision in the Sea Customs case  to  appreciate  the  true  import  of  Article 289(1). In  arriving  at  its  conclusion,  the  High  Court rejected the test of the proceeds of taxes being part of the Consolidated Fund  of India  as being  determinative of  the nature of  Union Taxation.  It accepted  the contention that all laws  applicable in a Union Territory would be deemed to be laws  made y  Parliament and  would therefore  be part of "Union Taxation"  and relied  upon the following observation in the Sea Customs case (at p. 812) for support:      "If a State has any property in any      Union  Territory,   that   property      would be exempt from Union Taxation      on property under Article 289(1)."      The High Court rejected the contention that the Act was a State  enactment and  stated that  under the scheme of the Constitution, the  term "Union  Territory" was distinct from "State" and therefore, the Union Territories could not claim to be  States for the purpose of attracting the exemption in Article 289(1).      Faced  with   such  a   vast   gamut   of   issues   of Constitutional import,  we are  of the  view that  before we analyse the  submissions put  forth before us by the learned counsel for  the various  parties, it would be convenient if the historical  background of  certain aspects of the matter could be  set out so as to provide a setting where the rival contentions can be better understood.      Constitutional history of the areas that are now called "Union Territories"      In the  pre-Constitutional era,  these territories were called Chief  Commissioner’s Provinces.  The  Government  of India Act  of 1919  contained specific  provisions  for  the governance  of   these  areas.   Under  the  scheme  of  the Government of  India Act,  1935 (hereinafter  referred to as "the 1935  Act"), the Federation of India comprised: (a) the Provinces called Governor’s Provinces; (b) the Indian States which had  acceded to  or were  expected to  accede  to  the Federation; and (c) the Chief Commissioner’s Provinces. Part IV of  the 1935  Act dealt  with  the  Chief  Commissioner’s Provinces  and  Section  94  listed  them  as:  (i)  British Baluchistan, (ii)  Delhi, (iii)  Ajmer-Marwara, (iv)  Coorg, (v) Andaman  & Nicobar  Islands, and  (vi) the area known as Panth Piploda:  and provided  that these  areas were  to  be administered by the Governor General, acting through a Chief Commissioner.      On July  31, 1947,  during the  incipient stages of the

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framing  of   the  Constitution,   a  Committee   under  the Chairmanship of  Dr. B. Pattabhi Sitaramayya was established to study  and report  on the Constitutional changes required in  the  administrative  structure  existing  in  the  Chief Commissioner’s provinces  to give  to the  people  of  these provinces a  due place  in the democratic governance of free India. After  the recommendations  of  this  Committee  were sanctioned by  the  Drafting  Committee,  they  were  placed before the  Constituent Assembly for its consideration.      The Constituent  Assembly considered all aspects of the issue with a view to providing an appropriate administration for what  were called  Part C  States, which  included three former Chief  Commissioner’s Provinces  - Delhi,  Ajmer  and Coorg - and some erstwhile Indian States which were retained as centrally  administered areas  after  their  merger  with India; the  latter group  consisted of  the following areas: Himachal  Pradesh,  Bhopal,  Bilaspur,  Cooch-Bihar,  Kutch, Tripura, Manipur  and Vindhya  Pradesh. It  was decided that the  decision   weather  these   territories   should   have legislatures and  Councils of  Ministers ought to be left to Parliament and,  for this  purpose,  an  enabling  provision should be  incorporated within the Constitution. It was also provided that  these Part  C States would be administered by the President,  acting to  such extent  as he  thought  fit, through a  Chief Commissioner or a Lieutenant Governor to be appointed by  him, or  through the Governor of a neighboring State,   subject   to   certain   procedural   requirements. Accordingly, Articles 239 and 240 were inserted in the final draft of the Constitution.      Under the  Constitution of India, as initially enacted, the Sates  were divided  into Part  A States, Part B States, Part C  States and  the territories  in Part  D.  The  First Schedule to  the Constitution provided details of the States falling within  each of  these categories. The Part C States comprised: (i)  Ajmer; (ii)  Bhopal;  (iii)  Bilaspur;  (iv) Cooch-Bihar; (v)  Coorg; (vi) Delhi; (vii) Himachal Pradesh; (viii) Manipur;  and (ix)  Tripura. The only territory under Part D was Andaman & Nicobar. Part VIII of the Constitution, comprising Articles  239-242,  dealt  with  Part  C  States. Article  239   provided  that  Part  C  States  were  to  be administered  by   the  President  acting  through  a  Chief Commissioner or  a Lieutenant Governor. Article 240 provided that Parliament could, by law, create a local legislature or a Council of Ministers or both for a Part C State and such a law  would   not  be   construed  as   a  law  amending  the Constitution. Article  241 allowed  Parliament to constitute High Courts for the States in Part C States. Article 242 was a special  provision for  Coorg.  Article  243,  which  also constituted  Part   IX  of  the  Constitution,  stated  that territories in Part D would be administered by the President through a  Chief  Commissioner  or  other  authority  to  be appointed by him.      In exercise of its powers under Article 240 (as it then stood), Parliament  enacted the  Government of Part C States Act, 1951  whereunder provisions were made in certain Part C States for  a Council  of Ministers  to aid  and advise  the Chief Commissioner  and also  for a  legislature  comprising elected representatives. Section 22 of this legislation made it clear  that the  legislative powers of such Part C States would  be   without  prejudice  to  the  plenary  powers  of Parliament to legislate upon any subject.      The State Reorganisation Commission which was set up in December, 1953,  while studying  the working of the units of the Union,  took up  to functioning of the Part C States for examination  as   an  independent   topic.  In  its  Report,

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submitted in  1955, the  Commission expressed  the view that Part  C   States  were   neither  financially   viable   nor functionally efficient,  and recommended  that each  of them should either  be amalgamated with the neighboring States or made a centrally administered territory.      Substantial  changes  were  made  by  the  Constitution (Seventh  Amendment)  Act,  1956  (hereinafter  called  "the Seventh   Amendment    Act"),   which    incorporated    the recommendations of  the States Reorganisation Commission and was to have effect in concert with the States Reorganisation Act, 1956.  The four categories of States that existed prior to these  Acts were  reduced to two categories. The first of these categories  comprised one  class called  ‘States,’ and there were  14 such  ‘States’. The second category comprised the areas which had earlier been included in Part C and Part D states;  these areas  were called  "Union Territories" and were six  in number.  Some additions and deletions were made to the  existing lists. While Ajmer, Bhopal, Coorg, Bilaspur and Kutch-Bihar became parts of other States. The Laccadive, Minnoy and  Amindivi Islands  became a  Union Territory. The six Union  Territories,  therefore,  were:  (1)  Delhi;  (2) Himachal Prades;  (3) Manipur;  (4) Tripura;  (5) Andaman  & Nicobar  Islands;  (6)  The  Laccadive,  Minnoy  &  Anindivi Islands.      The Seventh  Amendment Act also replaced Articles 239 & 240 by  new provisions;  the new  Article  240  allowed  the President to  make regulations for certain Union Territories and this  provision continues  to this day. It also repealed Article 242 & 243 of the Constitution.      Subsequently, Dadra  &  Nagar  Haveli  became  a  Union Territory by  the Constitution  (Tenth Amendment) Act, 1961; Goa, Daman & Diu and Pondicherry became Union Territories by the Constitution  (Twelfth Amendment) Act, 1962; Chandigargh became a Union Territory by the Punjab (Reorganisation) Act, 1966.      The  Constitution   (Fourteenth  Amendment)  Act,  1962 replaced the  old Article  240  as  Article  293A,  enabling Parliament to  create a  Legislature  and/or  a  Council  of Ministers for Himachal Pradesh, Manipur, Tripura, Goa, Daman and Diu  and Pondicherry.  Thereafter, by  the Government of Union  Territories   Act,  1963,   Parliament   did   create Legislative Assemblies,  comprising three nominated persons, for these territories.      Himachal Pradesh  ceased to  be a  Union Territories by virtue of  the State  of Himachal Pradesh Act, 1970. Manipur and Tripura  became States  by virtue  of the  North-Eastern Areas (Reorganisation) Act, 1971. Arunachal Pradesh, Mizoram and Goa,  Daman &  Diu ceased  to be  Union  Territories  by virtue of  the State  of Arunachal  Act, 1986,  the State of Mizoram Act,  1986 and the Goa, Daman & Diu (Reorganisation) Act, 1987  respectively. The Laccadive, Minicoy and Amindivi Island (Alteration  of Names)  Act, 1973 changed the name of these Island  to ‘Lakshadweep’  but it continued to remain a Union Territory.      The present  list of  Union Territories  is as follows: (i) Delhi;  (ii) Andaman  & Nicobar;  (iii) Lakshdweep; (iv) Dadar & Nagar Haveli; (v) Daman & Diu; (vi) Pondicherry; and (vii) Chandigarh.  However, it  is to  be noted that all the Union Territories  do not  have  the  same  status.  By  the constitution (Sixth-Ninth  Amendment)  Act,  1991,  Articles 239AA and 239AB, which are special provisions in relation to Delhi, were  added. They  provide that Delhi, which is to be called the National Capital Territory of Delhi, is to have a Legislative Assembly  which will  be competent to enact laws for matters falling in Lists II & III barring a few specific

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entries. As  the position  stands at the present moment, the Union Territories can be divided into three categories: (i)  Union Territories without legislature - comprising      Andaman & Nicobar, Lakshadweep, Dadar & Nagar Haveli,      Daman & Diu and Chandigarh. (ii) Union Territories  for  which  legislatures  have  been      established by  Acts of Parliament under Article 239A -      Pondicherry is the sole occupant of this category. (iii) Union  Territories which  have legislatures created by      the Constitution  (Articles  239AA  and  239AB)  -  The      National  Capital   Territory  of  Delhi  is  the  sole      occupant of this category.      The Constitutional  History  of  the  National  Capital Territory of Delhi and the application of the Act to it.      The area  that is  now known  as the  National  Capital Territory of Delhi was, until 1911, classified as a District of the  State of  Punjab. Following  the announcement of the decision to  transfer the  capital  of  British  India  from Calcutta to  Delhi, Government  Notification No.  911  dated September 17,  1912  was  issued  authorising  the  Governor General to take under his authority the territory comprising the Tehsil  of Delhi  and adjoining  areas. The Notification provided for the administration of these areas as a separate province under  the Chief  Commissioner. The Delhi Laws Act, 1912 and  the Delhi  Laws Act,  1915 made provisions for the continuance of  laws in  force in the territories comprising the Chief  Commissioner’s Province  in  Delhi  and  for  the extension of  other enactments  in  force  in  any  part  of British India to Delhi by the Governor-in-Council. Under the Government of  India Act, 1010 the Indian legislature at the power to enact laws.      Delhi was made by extension of laws force in Punjab and other States  by Notifications  issued under  the Delhi Laws Act, 1912  and 1915.  This enabled the General-in-Council to ensure, as  far as possible, uniformity of laws with Punjab, since a  substantial part  of Delhi had originally formed an administrative   district    of   that    province.    After Independence, Delhi continued to be administered directly by the Governor  of India and the different Departments of that Government  began   to  deal   directly  with  corresponding Departments  in   the  Chief   Commissioner’s  Office.  This arrangement continued till shortly after the commencement of the Constitution.      In the period immediately after the commencement of the Constitution, the  Part  C  States  Act,  1951  contained  a specific provision,  Section 21,  in respect  of Delhi which enabled it  to have  a Legislative Assembly and a Council of Ministers with  restrictive powers to make laws. As a result of this  provision, Delhi  continued to  have a  Legislative Assembly and a Council of Ministers till 1956.      The States  Reorganisation Commission  devoted  special attention to  the needs  of the  National Capital.  It noted that  the   dual  control   arising  from  the  division  of responsibility between  the Union  Government and  the State Government of Delhi had not only hampered the development of the  capital,   but  had   also  resulted   in   a   "marked deterioration of  administrative standards  in  Delhi".  The Commission came  to the conclusion that the National Capital must  remain  under  the  effective  control  of  the  Union Government.  With  reference  to  the  plea  for  a  popular Government, it observed: "We are definitely of the view that municipal autonomy in the form of the Corporation which will provide greater  local autonomy  than is the case in some of the important  federal capitals,  is the right, in fact, the only solution of the problem of Delhi State."

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    After  the  Seventh  Amendment  Act  came  into  force, following the  recommendations of  the States Reorganisation Commission, the  Legislative Assembly  and  the  Council  of Ministers  for  Delhi  ceased  to  exist  with  effect  from November 1, 1956. Furthermore, the Delhi Municipal Act, 1957 was enacted  constituting a  Municipal Corporation  for  the whole of  Delhi with  members elected  on the basis of adult franchise. The  jurisdiction of  the MCD  covered almost the entire Union  Territory of  Delhi, including  both urban and rural areas.  The areas  within the limits of NDMC and Delhi Cantonment Board  were kept  outside the jurisdiction of the MCD, but  the  territorial  jurisdiction  of  the  NDMC  was reduced. As already mentioned, the Constitution (Sixty-Ninth Amendment) Act,  1991 introduced  Articles 239AA  and  239AB into the  Constitution  which  provided  for  a  Legislative Assembly and a Council of Ministers for Delhi. Subsequently, the Government  of National  Capital Territory of Delhi Act, 1991  was   enacted  to   supplement  these   constitutional provisions.      The Act,  which  was  enacted  in  1911,  was  directly applicable to  Delhi since  at that  point of time, it was a district of  the State of Punjab. In 1912, when Delhi became a Chief  Commissioner’s Province,  the provisions of the Act and various  other Punjab enactments were made t continue in force in  the territory of Delhi by virtue of the Delhi Laws Act of  1912 and  the Delhi  Laws Act  of  1915.  After  the Constitution came  into being,  the Act was made to continue by virtue of the provisions of the Part C States Laws Act of 1950 and the Union Territories Laws Act of 1950.      Therefore, at  the time when the present dispute arose, the  Act   was  still   in  force.  However,  in  1994,  the Legislative Assembly  of the  National Capital  Territory of Delhi enacted  the New  Delhi Municipal  Committee Act, 1994 which is the law in force today. The MCD levied property tax on properties  situated  within  the  local  limits  of  its jurisdiction by  virtue  of  the  provisions  of  the  Delhi Municipal Corporation  Act, 1957.  However, for the purposes of deciding  the  case,  we  are  concerned  only  with  the provisions of the Act.      Before this  Court, a  number of  parties have advanced arguments on the various issues involved in the case. Mr. B. Sen,  council   for  the   appellants,  NDMC,  as  also  the intervenor, MCD, began by challenging the essential premises of the impugned judgment and advanced elaborate arguments on the manner  in which  the various  Constitutional provisions that are  germane to  the case, ought to be interpreted. The learned Attorney  General for India, appearing for the Union of India,  supported the  stance adopted  by the NDMC. These submissions  were  strenuously  opposed  by  Mr.  P.P.  Rao, learned  counsel  for  the  State  of  Punjab  and  in  this endeavour, he  was assisted  by Mr.  A.K.  Ganguli,  learned counsel for the State of Tripura who buttressed the position of the  States with his own submissions. The learned counsel appearing for  the State  of Rajashthan  lent support to the same.      The Central Issues      As before the High Court, so before us, the controversy between the  parties has,  in the  main, centred  around the question whether  the properties  owned and  occupied by the various States  within the  National  Capital  Territory  of Delhi are  entitled to  be exempted  from the  levy of taxes under the Act by virtue of the provisions of Article 289(1). The  larger   question  involved,  which  will  consequently require our  consideration, is  whether by virtue of Article 289(1), the  States are  entitled to exemption from the levy

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of taxes  imposed by  laws made  by Parliament under Article 246(4)  upon   their  properties   situated   within   Union Territories.      At this  stage, we  may set out the provisions that are central to  the adjudication  of the  present matter. In the following  table,   for  the   purposes   of   clarity   and convenience,  Articles   285  and   289   of   the   present Constitution have  been contrasted  against their  immediate predecessors, viz., Sections 154 & 155 of the 1935 Act. ------------------------------------------------------------ GOVERNMENT OF INDIA ACT, 1935         CONSTITUTION                                       OF INDIA ------------------------------------------------------------ Sec. 154 4. Exemption of certain public Art.285 Exemption of property property from taxation-        of the Union from State Property vested in His         taxation - (1) The property Majesty for purposes of the    of the Union shall, save in government of the Federation   so far as Parliament may by shall, save in so far as any   law otherwise provide, be Federal law may otherwise      exempted from all taxes provide, be exempt from all    improve by a State or by any taxes imposed by, or by any    authority within a State. authority within, a Province or Federated State: Provided until any Federal   (2) Nothing in clause(1) shall, law otherwise provides,      until Parliament by law any property so vested       otherwise provides, prevent any which was immediately        authority within a State from before the commencement      levying any tax on any property of Part III of this Act      of the Union to which such liable, or treated as        such property was immediately liable, to any such tax,     before the commencement of this shall so long as that tax    Constitution liable or treated continues, continue to       as liable, so long as that tax be liable, or to be treated  continues to be levied in that as liable, thereto.          State. Sec. 155 5. Exemption of Provincial Art.289 Exemption of property and Governments and Rulers of     income of a State from Union Federated States in respect   taxation - (1) The property of Federal taxation-          and income of a State shall be (1) Subject as hereinafter    exempt from Union taxation. provided, the Government of a Province and the Ruler  (2) Nothing in clause (1) shall of a Federated State shall   prevent the Union from imposing not be liable to Federal     or authorising the imposition taxation in respect of       if, any tax to such extent, lands or buildings situate   if any, as Parliament may be in British India or income   law provide in respect of a accruing, arising or         trade or business of any kind received in British India;   carried on by, ------------------------------------------------------------ GOVERNMENT OF INDIA ACT, 1935  CONSTITUTION OF INDIA ------------------------------------------------------------ Provided that- (a) where a trade or business   or on behalf of, the of any kind is carried on by    Government of a State, or or on behalf of the Government  any operations connected of a Province in any part of   therewith, or any property British India outside that     used or occupied for the Province or by a Ruler in any  purposes of such trade or part of British India, nothing business, or any income in this sub-section shall      accruing or arising in exempt that Government or      connection therewith.

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Ruler from any Federal taxation in respect of that trade or business, or any operations connected therewith, or any income arising in connection occupied for the purposes thereof; (b) nothing in this sub-section  (3) Nothing in clause (2) shall exempt a Ruler from any     shall apply to any trade Federal taxation in respect       or business, or to any of any lands, buildings or       class of trade or business, income being his personal        which Parliament may be law property or personal income.    declare to be incidental to                                  the ordinary functions of                                  government. (2) Nothing in this Act affects any exemption from taxation enjoyed as of right at the passing of this Act by the Ruler of an Indian State in respect of any Indian Government securities issued before that date.      Submissions of Counsel      Mr. Sen  prefaced his  submissions for the NDMC and the MCD by pointing out that the phrase "Union Taxation" used in Article 289(1)  of the  Constitution has  not  been  defined either in  the text  of the  Constitution or  in any  of the decisions  rendered   by  this   Court.  Pointing   out  the differences between  Article 285  & 289, Mr. Sen stated that (i) the former exempts "all taxes" whereas the latter limits its exemption  to taxes  relating to  "property and income"; and (ii) the former uses the words "imposed by a State or by any authority  within a  State" whereas  the latter uses the phrase "Union  Taxation".  Thereafter,  Mr.  Sen  contrasted Article 289(1)  and Section  155 of the 1935 Act by pointing out that  while Section  155(1)  uses  the  words  "lands  & buildings", Article  289(1) uses  the word "property". This, he explained,  was on account of the strong position adopted by representatives of the States in the Constituent Assembly who had  insisted that  the ambit  of the exemptions be cast wider.      At this  juncture, we  may refer  to article  246 which reads as follows:      "246. Subject-matter  of laws  made      by   Parliament    and    by    the      Legislatures  of   States  --   (1)      Notwithstanding anything in clauses      (2)   and   (3),   Parliament   has      exclusive power  to make  laws with      respect  to   any  of  the  matters      enumerated in List I in the Seventh      Schedule  (in   this   Constitution      referred to as the ‘Union List’).      (2)  Notwithstanding   anything  in      clause   (3),    Parliament,   and,      subject to  clause (3), Parliament,      and,  subject  to  clause  (1)  the      Legislature of any State also, have      power to  make laws with respect to      any of  the matters  enumerated  in      list III  in the  Seventh  Schedule      (in this  Constitution referred  to      as the ‘Concurrent List’).      (3) Subject to clauses (1) and (2),

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    the Legislature  of any  State  has      exclusive power  to make  laws  for      such State or any part thereof with      respect  to   any  of  the  matters      enumerated  in   List  II   in  the      Seventh    Schedule     (in    this      Constitution  referred  to  as  the      ‘State List’).      (4) Parliament  has power  to  make      laws with respect to any matter for      any part  of the territory of India      not    included    in    a    State      notwithstanding that such matter is      a matter  enumerated in  the  State      List."      Mr. Sen then submitted that two possible meanings could be ascribed  to the  phrase "Union Taxation": (i) Taxes that are levied  by Parliament  in exercise  of its  powers under Article 246(1)  and pertain only to entries in List I of the Seventh Schedule; (ii) Any tax that is levied as a result of a  law   passed  by  Parliament  including  those  that  are relatable to  entries in List II and List III of the Seventh Schedule.  Mr.   Sen  vehemently   urged  that   the  former interpretation be  adopted by  this Court. According to him, acceptance of the latter would lead to anomalous results. He submitted that when Parliament makes laws in exercise of its powers under  Article 246(4)  and in doing so, legislates on entries in  List-II, it  is doing so in a different capacity and the  character of  these laws is different from ordinary Union legislations.  To drive home the argument, Mr. Sen led us through  certain other  provisions of  the  Constitution, such as, Articles 249, 250, 252 and the Emergency Provisions in Part  XVIII of  the Constitution which empower Parliament to make  laws on  entries in  List II,  but the  nature  and effect of  these legislations  requires  that  they  be  not treated as ordinary Union legislations.      Thereafter, he  took us  through various  provisions in Part XII  of the  Constitution with  a view to analysing the distribution of  revenues between  the Union and the States. Having done  so, he  invited our attention to the provisions of Part VIII of the Constitution to support his stand that a Union Territory is an independent Constitutional entity akin to a State and that it has an identity separate from that of the Union  Government. To  this end,  he drew  our attention towards several  decisions of  this Court  on  the  question whether a  Union Territory is a State and sought to convince us that,  in the  present context,  the answer to this query must be in the affirmative.      Referring to  the two  decisions of  this Court  on the interpretation of Article 289(1) rendered in the Sea Customs case and  the APSRTC  case, Mr. Sen contended that the issue arising before  this Court  in the  present matter  had  not arisen for  adjudication in  either of  these two  cases. He submitted that  the observation  made by  Sinha, C.J. in the former case  would, therefore, have to be regarded as obiter dicta since  the issue of laws relating to Union Territories was  not  before  the  Court.  He  explained  that  such  an observation was  made in  the context  of  situations  where Parliament can  directly impose a tax on property to counter the argument  that only  States could levy taxes directly on property under  the Constitution.  Mr. Sen  stated that  the observation was  founded on  misconcenived premises and that there  were   other,  more   appropriate  situations   where Parliament could impose taxes directly on property, such as, in the  case of Entry 3, List I which deals with Cantonments

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and the  Cantonments Act,  1924 which  allows Parliament  to levy taxes for Cantonments. Mr. Sen then contended that such a power would be available to Parliament even when it enacts a legislation  by using  Entry 49,  List I  which relates to patents, inventions  and designs,  and also in the case of a few other entries in List I.      Thereafter, Mr.  Sen contended  that, in any event, the taxes levied  by NDMC  would not  amount to  Union  Taxation because they  are in  the nature  of a  Municipal  Tax.  Our attention  was  drawn  towards  the  Constitution  (Seventh- Fourth) Amendment  Act, 1992  which incorporated  Part  IXA, dealing with  Municipalities in  our Constitution. He argued that Municipalities  now  have  an  elevated  Constitutional status and  that since  they have  their own  machinery  for collecting taxes  besides having control over the fixing and charging of  the taxes,  these taxes  cannot be  regarded as part of  "Union Taxation".  He  then  took  us  through  the relevant provisions  of the  Act, the  New  Delhi  Municipal Corporation Act,  1994 and  the Delhi  Municipal Corporation Act, 1957  to indicate  that each  of these  bodies has been vested with  wide powers  of  fixing  the  rates  of  taxes, collecting them  and then  using the  proceeds, which  go to specially created  municipal funds,  towards securing  their objectives. Drawing  sustenance from the language of Article 285, which  specifically  exempts  taxes  imposed  by  local authorities, Mr.  Sen submitted  that since  such an express exemption is  not referred  to in  Article 289(1), Municipal Taxes were not meant to be covered within its exemption and, therefore, the  States are  bound to  pay these taxes to the NDMC and the MCD.      The learned Attorney General for India began by stating that it  is not  the identification  of the legislature that imposes the  law which  is determinative  of  the  issue  of "Union Taxation".  According to  him, to  determine the true character of Union Taxation, the subject of the levy must be analysed. He submitted that when Parliament makes use of its power under  Article  246(4),  it  does  so  in  an  unusual circumstance where  the ‘theme’ of the legislation undergoes a change.  He, therefore,  stressed that  in determining the scope of  "Union Taxation",  attention must  be paid  to the ‘theme’, (i.e.,  the context  and the specific circumstances in which  the tax  is levied)  rather than  to the  ‘author’ (i.e. the  body which  is levying  the tax).  He, therefore, submitted that the interpretation of "Union Taxation" should be restricted  to situations  where  Parliament  makes  laws imposing taxes under Article 246(1).      His next  submission was  that Articles  285 and 289 do not  exhaust   the  entire   area  of   taxation  under  the Constitution. Referring  to certain  other provisions  where Parliament is required to make laws for subjects in List II, the learned  Attorney General  drew  our  attention  towards Articles 249,  250, 252, 253 and 357. He then submitted that these provisions envisage unusual situations where, although Parliament is  the law  making body,  the resulting laws are not Union  laws in  the ordinary sense and the taxes imposed by these  laws  cannot  be  said  to  form  part  of  "Union Taxation". He  then contended  that similarly,  laws made by Parliament under  Article 246(4) are not the norm and cannot be said  to form  part of  "Union Taxation". Thereafter, the learned Attorney  General took us through the constitutional history of  Union Territories and more specifically, that of the National  Capital Territory of Delhi. Having done so, he stated that  such an analysis would reveal that though Union Territories are  not States,  they are akin to States, being nascent States.  He explained  that  the  practice  in  this

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regard shows  that, in  most  cases,  when  a  territory  is acquired by  the Union  and before  it is  admitted  to  the Indian Union  as a  full-fledged States,  it is  groomed for statehood by  being nurtured  as a  Union Territory. He then referred us to the decision of this Court in Ramesh Birch v. Union of  India, (1989)  Supp. 1 SCC 430 at 471, to buttress his stance  that Parliament  cannot  be  expected  to  draft legislations for Union Territories on a regular basis and to explain how it meets with its obligations in this regard.      Mr. P.P.  Rao, learned counsel for the States of Punjab & Haryana,  began his submissions by explaining the doctrine of immunity  of instrumentalities,  which is  said to be the legal basis  for the  incorporation of  Articles 285 and 289 into our  Constitution, and  also mentioned  the comparative positions  in   the  American,   Canadian   and   Australian jurisdictions. He  submitted that  the doctrine  positulates that in a federal set up, there should be inter-governmental tax immunities  between the federal and State wings. Such an immunity is  a Constitutional  limitation on  the low-making power of the respective legislature in the field of taxation as a  whole. After its genesis in the U.S., the doctrine has come to  be  accepted  in  Canada  and  Australia.  Mr.  Rao conceded that  though both  the 1935  Act  as  well  as  the Constitution   had    incorporated   such   reciprocal   tax immunities, they  were not  adopted to the same extent as in Canada and  Australia. However,  unlike in  these countries, the Union  of India  has a  sizeable territory  of  its  own comprising all  the Union Territories specified in the First Schedule. The  power to make laws including laws authorising levy or  collection of  taxes  of  all  kinds  is  conferred exclusively on  the Union  Parliament and  these territories would  form   an  important   part  of  the  reciprocal  tax immunities.      He  then  drew  our  attention  to  Article  265  which incorporates an  important constitutional  limitation on the power of  taxation when  it states  that "no  tax  shall  be levied or  collected except  by authority of law". In India, there are  only two  legislatures that are competent to tax: ‘Parliament for the Union’ and the ‘Legislature of a State’. Therefore, all  taxation must  fall  within  either  of  the categories   -    Union   Taxation    or   State   Taxation. Municipalities and  other local  authorities cannot  have an independent power  to tax  and that  is why  there can be no exemption for  Municipal taxes  independent of the exemption for State or Union Taxation. To that extent, he submits, the contention of  Mr. Sen,  that Article 289 exempts only Union Taxation without  mentioning  municipal  taxes  which  would imply that  the States  would not  be exempt from paying the latter, cannot be accepted.      Moving  on   to  the  definition  of  the  term  "Union Taxation", Mr.  Rao pointed out that in Article 285 the term "State Taxation" has been defined as "all taxes imposed by a State or  by any  authority within  a State". He urged us to adopt a  similar interpretation  for "Union  Taxation"  even though Article  289 does  not contain any such definition by pointing out  that being  corollaries of  each other,  these terms would  have been  used to convey a similar meaning. If this definition  were to be accepted, "Union Taxation" would mean "all  taxes imposed  by the  Union" and, therefore, the State would be entitled for exemption from the taxes imposed by NDMC.  To explain  the language and ambit of Articles 285 and 289,  Mr. Rao  took us through a detailed examination of the provisions  of the  1935 Act with a view to appreciating the true import of the predecessors of these two provisions, namely, Sections  154 and  155 of the said Act. To this end,

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we were  taken through  section 5,  6, 94, 99, 100, 104, 154 and 155 and Lists I & II of the Seventh Schedule to the 1935 Act. Mr. Rao, thereafter, contended that under the scheme of the 1935  Act, it  was quite clear that by virtue of Section 155, the  Provinces (predecessors of "States") were entitled to exemption  from taxes  on ‘lands  and buildings’  in  the chief  Commissioner’s   Provinces  (predecessors  of  "Union Territories"). He  contends that  that position continues in the present  Article 289  and, in fact, the immunity is much wider in  scope since  ‘property’ is  wider than  ‘lands and buildings’.  Mr.  Rao  also  led  us  through  the  relevant passages of  the Sea Customs case and stressed that both the minority and  the majority  opinions in  that case had taken the view  that the  properties of  States situated  in Union Territories were  exempt from  taxation. To  sum up, Mr. Rao put forth  his submissions to counter those put forth by Mr. Sen and  the learned  Attorney General  towards establishing that, even while exercising its powers under Article 246(1), Parliament can levy taxes directly on property.      Mr. A.K.  Ganguli, learned  counsel for  the  State  of Tripura, lent  support to  the submissions of Mr. Rao on the issue  of  Parliamentary  laws  being  applicable  to  Union Territories; he  emphasised that even after the introduction of Articles  239AA and  239AB in the Constitution, the Delhi Legislature could  not be said to be a legislative body with plenary powers.  The legislative  powers conferred on such a body are  restricted and  limited to certain spheres and are subject to  the powers  of the  Parliament to make laws with respect to  any matter  for  the  Union  Territories,  which obviously refers  to Article  246(4) of the Constitution. By way of  an analogy,  he referred  us to  Article 244 and the Sixth Schedule  to the Constitution which contain provisions for the  administration of  Tribal areas  in the  States  of Assam, Meghalaya, Tripura and Mizoram and provide for bodies with legislative powers. He led us through decisions of this Court on  the point  that the  law making  powers  of  these bodies, though conferred by the Constitution itself, are not plenary powers  as those  of  Parliament  or  of  the  State Legislatures.      Counsel submitted that the provisions contained in Part XII of  the Constitution relating to distribution of revenue between the  Union and  the States  are not determinative of the scope  of the  expression "Union  Taxation"  in  Article 289(1) as  they only  indicate that though a large number of taxes are  levied by  the Parliament  and collected  by  the Union Government,  eventually, a substantial portion thereof is distributed amongst the States.      After submitting that the main controversy in this case is squarely covered by the decision in the Sea Customs case, Mr. Ganguli  pointed out  that the Customs case, Mr. Ganguli pointed out  that the  Government of  India, while preparing its Receipt  Budget, has  always treated  taxes  imposed  by Parliament and  collected from the Union Territories as part of the  total tax  revenue of  the Union Government in which other taxes  such  as  corporation  tax,  taxes  on  income, customs duties and union excise duties are also included. He submitted that  even in  respect  of  non-tax  revenue,  the receipts from  the Union Territories are treated as receipts of the  Union Government. He, therefore, contended that even the Union  Government was  of the view that "Union Taxation" included taxes levied by Parliament in Union Territories.      Learned counsel for the State of Rajashthan, Mr. Gupta, sought to  bring to  our notice a wider comparative position of the  manner in  which countries  around  the  world  have adopted the American doctrine of reciprocal immunity.

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    Having noticed  the submissions  of the counsel for the various parties before us, we may now proceed to express our opinion on the diverse points raised in the present case.      Analysis of  the decisions  rendered in the Sea Customs case and the APSRTC case      The decision in the Sea Customs’ case was occasioned by the emanation  of a  proposal to  introduce in  Parliament a Bill to  amend Section  20 of the Sea Customs Act, 1878, and Section 3  of the  Central Excise  and Salt Act, 1944. These amendments would  have led  to the  imposition  of  indirect taxes, namely, excise and customs duties upon the properties of various  States which  were being used for purposes other than those  specified in  Article 289(2), i.e., for purposes not relating  to  trade  or  business.  A  number  of  State Governments objected  that such a law would fall foul of the interdiction  in   Article  289(1),  and,  in  view  of  the resulting controversy, the President referred, under Article 143, the  issue of  the constitutionality  of  the  proposed amendments to  this  Court.  The  issue  was  decided  by  a majority of  5 : 4. It was held that the immunity granted to States in  respect  of  Union  Taxation  under  Article  289 extends only  to those taxes that are directly leviable upon the property  and income  of the  States; since  excise  and customs duties  are indirect  taxes,  they  would  not  fall within the  ambit  of  the  exemption  in  Article  289  and Parliament could  impose such  duties upon  the property and income of  the States. There were two opinions outlining the majority view  and an  equal number for the minority. Sinha, C.J. delivered the first of the majority judgments on behalf of himself,  Gajendragadkar, Wanchoo  and  Shah,  JJ.  while Rajagopala Ayyangar,  J. delivered  a  separate,  concurring opinion. S.K.  Das, J.  delivered the  first of the minority opinions on  behalf of  himself, sarkar  and Das  Gupta, JJ. while Hidayatullah, J. rendered a separate minority opinion.      A number  of submissions were advanced before the Court with a  view to  facilitating a true construction of Article 289(1). In  this regard,  comparisons were  drawn  with  its corollary,  Article   285  and  with  the  provisions  which inspired the  adoption  of  these  two  provisions,  namely, Section 154  and 155  of the  1935 Act.  The Court  was also required to  analyse the scheme of the Constitution relevant to the  issue. For the moment, it is not necessary for us to analyse those  aspects of  the decision since, in any event, we will be required to give our independent consideration to these matters. We can, therefore, confine ourselves to those observations that  have a  direct bearing  upon the point at issue with  which we  are presently  concerned; this  aspect was, however,  not specifically  adverted to in all the four opinions.      In his  opinion  for  the  majority,  Sinha,  C.J.  has referred to  the  essential  contentions  urged  before  the Court. The  Upon urged  that the  exemption in clause (1) of Article  289  be  interpreted  restrictively,  limiting  its applicability to direct taxes on the property and the income of States;  the States,  on the other hand, canvassed for an expansive interpretation  which would exempt them from taxes having any relation whatsoever to their property and income. The learned  Chief Justice  noted that  it was  not disputed that the exemption in Article 289(1) was, as far as taxes on income are  concerned, restricted  to "Taxes  other than  on agricultural income",  which is the only entry (Entry 82) in List I  of the  Seventh Schedule which enables Parliament to legislate on  taxes relating  to income.  The learned  Chief Justice considered this to be a significant fact as it meant that if  the income  of State  was exempt only from taxes on

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income, the juxtaposition of the words "property and income" in Article  289(1) would lead to the inference that property is also  exempt only from direct taxes on property. However, it was  pointed out  by the  States that  List  I  does  not contain any  specific tax  on property  which  would  enable Parliament to  pass a law relating to taxes on property and, that  being   so,  the  intention  of  the  framers  of  the Constitution must have been to exempt the property of States from all  taxes, be  they direct  or indirect.  To meet this argument, the  learned Solicitor  General, appearing for the Union, put  forth several arguments, one of which came to be accepted by the learned Chief Justice as the main plank upon which he  based his  rejection  of  the  contention  of  the States. Since  these observations  are directly  relevant to the present case, they may be extracted here (at p. 812):      "It is true that List-I contains no      tax directly on property like List-      II, but  it does  not  follow  from      that that the Union has no power to      impose a  tax directly  on property      under  any  circumstances.  Article      246(4) gives power to Parliament to      make  laws   with  respect  to  any      matter  for   any   part   of   the      territory of  India not included in      a State  notwithstanding that  such      matter is  a matter  enumerated  in      the State  List. This means that so      far  as   Union   territories   are      concerned Parliament  has power  to      legislate not  only with respect to      items  in  List  I  but  also  with      respect  to   items  in   List  II.      Therefore,   so    far   as   Union      territories     are      concerned,      Parliament has  power to  impose  a      tax directly  on property  as such.      It cannot  therefore be  said  that      the exemption  of States’  property      under  Article   289(1)  would   be      meaningless as  Parliament  has  no      power to impose any tax directly on      property.  If   a  State   has  any      property  in  any  Union  territory      that property  would be exempt from      Union taxation  on  property  under      Article   289(1).    The   argument      therefore   that   Article   289(1)      cannot be  confined to tax directly      on property  because  there  is  no      such tax  provided in List I cannot      be accepted."                       (Emphasis added)      Thereafter, having  referred to the language of Article 285 and  the intention  of the  framers as perceived by him, the learned  Chief  Justice  came  to  the  conclusion  that immunity granted  by Articles  285 and  289 was  of  similar ambit and  extended only  to direct  taxes without exempting indirect taxes such as excise and customs duties.      Das, J., in his dissenting opinion, noted the objection of the  States that  List I  had no entry which would enable Parliament to  levy a tax directly on property. He took note of the  counter-arguments advanced  by the learned Solicitor General in  relation to  this aspect  but  could  not  bring himself to agree with the correctness of those propositions.

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While refereeing to the argument on Article 246(4), he noted (at p.843):      "... It would be a case of much ado      about nothing  if the  Constitution      solemnly provided  for an exemption      against  ‘property  tax’  on  State      property only  for such  rare cases      as are contemplated in Art. 246(4),      the situation  of state property in      territory not  included in a State.      Such situation  would be very rare,      and could  have hardly necessitated      a solemn safeguard at the inception      of the Constitution when the States      were classed under Part A or Part b      of the First Schedule. If the wider      interpretation  of  clause  (1)  of      Article  289   is  accepted,   such      property  would  also  be  excepted      from Union taxation except in cases      covered  by   clause  (2)   of  the      article. We  find it  difficult  to      accept the  contention that  clause      (1) of  Article 289  was meant only      for  cases   covered   by   Article      246(4)..."             (Emphasis added)      At this juncture, we may note that both Mr. Rao and Mr. Ganguli were  at pains  to point  out that  though  Das,  J. rejected the  overall contention  of the  learned  Solicitor General, he  had, by  stating that  the exemption  could not have  been  provided  "only  for  such  rare  cases  as  are contemplated in  Article 246(4)",  implicitly accepted  that these cases  would fall  within  the  exemption  in  Article 289(1).      Rajagopala  Ayyangar,  J.,  in  his  separate  majority judgment, makes  a specific  reference to this contention of the leaned Solicitor General (at pp. 918-19) but, aside from stating  that  "the  submission  of  the  learned  Solicitor General not  without force"  (at p.919), he did not make any further reference  to the  matter. Hidayatullah,  J., in his separate minority opinion, did not advert to this issue.      The preceding  analysis reveals  that the issue at hand was specifically  answered by this Court in the Sea Custom’s case. We  find it  difficult to  accept Mr. Sen’s contention that the  observations of  Sinha, C.J.  were made  by way of obiter dicta. Though the issue of legislations applicable in Union Territories  was not specifically before the Court, it did arise for consideration during its analysis of the power of Parliament  to levy  taxes directly  upon  property.  The latter question  was squarely  before the  the Court and the issue relating  to Union  Territories, though  incidental to the main  question, necessarily  required consideration. The observations of  Sinha, C.J.  are unequivocally in favour of the position  adopted by  the States  before  us,  who  find themselves in  the enviably  advantageous position  of being able to  draw sustenance  from even  the observations in the dissenting judgment of Das, J.      The decision in the Sea Custom’s case was reaffirmed by a Constitution  Bench of this Court in the APSRTC case was a matter relating  to assessment  of income-tax.  The facts of that case  are not  directly relevant  for our  purpose but, what is  of considerable  interest to  us is  the manner  in which the  scheme of  Article 289 and its three clauses were construed. Speaking  for  the  Court,  Gajendragadkar,  C.J.

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outlined the  scheme of  Article 289  (at p.25) which can be stated as  follows: The  general proposition that flows from clause (1) is that ordinarily, the income derived by a State both from  governmental and  non-governmental or  commercial activities shall  be immune  from income-tax  levied by  the Union. Clause  (2) then  provides an  exception and empowers Parliament to  make a  law imposing  a  tax  on  the  income derived by  the Government of a State from trade or business carried on  by it, or on its behalf. If clause (1) had stood by itself, it would not have been possible to include within its purview  income  derived  by  a  State  from  commercial activities but since clause (2) empowers Parliament to enact a law  levying taxes  on such  activities of  a  State,  the inescapable conclusion  is that  these  activities  must  be deemed to  have been  included in  clause (1) and that alone can be the justification for the onwards in which clause (2) has been couched in the Constitution. Thereafter, clause (3) empowers Parliament  to declare  by law  that any  trade  or business would be taken out of the purview of clause (2) and restore it  to the  area covered  by clause (1) by declaring that the  said  trade  or  business  is  incidental  to  the ordinary functions of Government. In other words, clause (3) is an  exception to  the exception prescribed by clause (2). Whatever trade  or business  is declared to be incidental to the ordinary  functions of  Government, would  cease  to  be governed by  clause (2)  and would then be exempt from Union taxation.      These observations  of Gajendragadkar, C.J. having been made in  the context  of income  tax levied  in the facts of that case,  mention only  taxes relating to income. They are equally  applicable   to  the  taxes  relating  to  property referred to  in Article 289. The essence of this analysis is that clause  (3) of  Article 289  is an  exception to clause (2), which  in turn  is an  exception to the first clause of the Article.      Analysis  of  this  Court’s  previous  rulings  on  the Constitutional status of Union Territories      We may now refer to a catena of decisions of this Court on the  seemingly innocuous  issue whether  or not  a  Union Territory has,  under the  scheme  of  our  Constitution,  a status distinct  from that  of the Union and the States. The fact that so many decisions of this Court exist on the issue would indicate  that the  matter is  not  one  that  can  be disposed of  by simply pointing to the separate parts of the Constitution which  deal with  Union Territories as distinct units.      Before dealing  with the  specific circumstances of and the decision in, each of these cases, it is necessary that a few provisions  which  figure  prominently  be  dealt  with. Article 246(4)  of the  Constitution, as it stood on January 26, 1950,  allowed Parliament  to "make laws with respect to any matter  for any  part of  the  territory  of  India  not included in  Part A  or Part  B of  the First Schedule". The Seventh Amendment  Act brought  about a  number  of  changes affecting Union Territories, some of which have already been noticed by  us. The  other changes  brought about  by it are also relevant;  it caused  Article 246  to be changed to its present form where Parliament is empowered to make laws with respect to  "any part of the territory of India not included in a  State". The  word "State"  has not been defined in the Constitution. Article 1(3) defines the territory of India as comprising: (a) the territories of the States; (b) the Union Territories specified  in the  First Schedule;  and (c) such other territories  as  may  be  acquired.  The  word  ‘Union Territory’ has  been defined in Article 366(30) to mean "any

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Union Territory specified in the First Schedule and includes any other  territory comprised within the territory of India but not specified in that Schedule".      Tho not  defined in  the Constitution, the word "State" has  been   defined  in   the  General   Clauses  Act,  1897 (hereinafter called  "the General Clauses Act"). Article 367 of the  Constitution states  that the  General Clauses  Act, 1897  shall,  unless  the  context  otherwise  requires  and subject  to  any  adoptions  and  modifications  made  under Article  372,   apply  for   the   interpretation   of   the Constitution.  Therefore,   on  a   plain  reading   of  the provisions involved,  it would appear that the definition of "State" in  the General  Clauses Act would be applicable for the purposes  of interpreting  the Constitution. Article 372 is the  saving clause  of the Constitution which enables all laws in force before the commencement of the Constitution to continue in  the territory  of India.  Article 372A,  which, once again,  owes its  origin to  the Seventh Amendment Act, empowers  the  President  to  make  further  adaptations  in particular situations.      Section 3(58)  of the  General Clauses Act, having been amended by the Seventh Amendment Act, reads as follows:      "3. Definitions.  -- In  this  Act,      and  in   all  General   Acts   and      Regulations    made    after    the      commencement of  this  Act,  unless      there is  anything repugnant in the      subject or context, --      (58) "State", --      (a) as  respects any  period before      the     commencement     of     the      Constitution  (Seventh   Amendment)      Act, 1956,  shall  mean  a  Part  A      State, a  Part B  State or a Part C      State; and      (b) as  respects any  period  after      such  commencement,  shall  mean  a      State  specified   in   the   First      Schedule to  the  Constitution  and      shall include a Union territory;"             (Emphasis added)      The latter  part of the definition, which states that a Union Territory  is included  within  the  definition  of  a State, has  introduced an  element  of  controversy  in  the interpretation of the Constitution.      While appreciating  the  reasoning  of  this  Court  in dealing with cases where it had to confront the issue of the status of  Union Territories, the time-frame and the history of the  Union Territories  which we  have adverted to in the earlier part  of this  judgment, must  be borne in mind. The first of  these cases was that of Satya Dev Bushhri v. Padam Deo and  Ors., [1955]  1 S.C.R. 549 This was a case relating to election  law and one of the contention of the appellant, who was  seeking to  disqualify the  respondents  under  the provisions of  the Representation of Peoples’ Act, 1951, was that contracts entered into by the respondents with the Part C States  were, in  effect, contracts  entered into with the Central  Government.   This  contention  was  based  on  the reasoning  that   the  executive   action  of   the  Central Government is vested in the President; the President is also the  Executive   Head  of  the  Part  C  States;  therefore, contracts with  the Part  C States  are contracts  with  the Central Government. The Court, speaking through Venkataraman Ayyar, J., rejected this contention and stated that when the President exercised  functions as  the Head  of the  Part  C

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States, he  occupied a position analogous to the Governor in Part A States. Furthermore, Section 38(22) of the Government of Part  C  States  Act,  1951  clearly  provided  that  all executive action  of the State would be taken in the name of the  Chief   Commissioner.  It  was,  therefore,  held  that contracts with  the Part  C States  could not  be said to be contracts with  the Central  Government. Analysing  Articles 239, 240 and 241 of the Constitution, the Court held that it could not  be said  that these  had the effect of converting Part C States into the Central Government and that they have a distinct  status. However,  when  the  case  came  up  for review, in  Satya Dev Bushahri v. Padam Deo and Ors., [1955] 1 S.C.R. 561, the Court, after having been directed towards, and having taken note of the provisions of, Section 3(8) and Section 3(60)  of  the  General  Clauses  Act  which  define "Central Government"  and "State  Government"  respectively, and stipulate  that for  Part C States, references to "State Government" would mean the "Central Government", held that a contract with  the Chief Commissioner in a Part C State is a contract with  the Central  Government. It,  however,  added that this  would not  affect the  status of Part C States as independent units,  distinct from the Union Government under the Constitution.      The State  of Madhya  Pradesh v. Shri Maula Bux & Ors., [1962] 2  S.C.R. 794,  a decision rendered by a Constitution Bench, concerned  the State of Vindhya Pradesh which, at the relevant time,  was a  Part C  State and  raised  the  issue whether, in  a civil  suit, the State of Vindhya Pradesh was the proper  party to be sued under Section 79(a) of the Code of Civil  Procedure, 1908.  The argument of the respondents, based on Sections 3(8) and 3(60) of the General Clauses Act, was  that   if,  in  case  of  the  Part  C  States,  "State Government" means the "Central Government", the proper party to be  sued would be the Union of India instead of the State of Vindhya  Pradesh.  Hidayatullah,  J.,  speaking  for  the Constitution  Bench,   at  pp.   798-802,  relied   on   the observations in  the first  of the  Satya Dev  cases to  the effect that  Part C States had a separate existence and were not merged  with the  Central Government and went on to hold that  the  State  of  Vindhya  Pradesh,  having  a  distinct identity, was  the proper  party to  be sued.  Although  the reviewed decision  in Satya  Dev’s case was not referred to, since the proposition relied upon by Hidayatullah, J. was in fact reaffirmed  in the  review, the relevant proposition of law  laid  down  in  the  case  does  not  suffer  from  any infirmity.      These cases  are useful  for our purpose to the limited extent that they declare that Union Territories are not part of the  Central Government and are, to that extent, distinct Constitutional entities.  However, the  issue whether  Union Territories are  distinct from  States was not considered in these cases;  it did  however arise for consideration in the following cases.      In Ram  Kishore Sen  v. Union of India, [1966] 1 S.C.R. 430, the Court had to consider whether the word "State" used in article  3(c) of  the Constitution  would  include  Union Territories; the Constitution Bench followed the stipulation in Articles  367 and 372 to notice the definition of "State" in Section  3(58) of the General Clauses Act and the context of Article  3 to  hold that the word ‘State’ in Article 3(c) would have  to be  interpreted in the light of Section 3(58) of  the   General  Clause   Act  and   would  include  Union Territories. The correctness of this proposition was doubted by Hidayatullah, J. in a subsequent case which we will refer to  in  due  course.  The  fact  however  remains  that  the

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definition in  Section 3(58)  of the General Clauses Act has been utilised  for interpreting  a Constitutional provision. The question  that therefore  arises is  whether  this  will affect the  status of  Union Territories in matters relating to Article  246, to  which  an  answer  was  provided  in  a subsequent case to which we shall immediately advert.      T.M. Kanniyan  v.  Income-Tax  Officer,  Pondicherry  & Anr.,  [1968]  2  S.C.R.  103,  was  a  case  in  which  the petitioners had  challenged the  vires of  a  regulation  by which the President had, in exercise of powers under Article 240, repealed  the laws  in force  in relation to Income-Tax within the  Union Territory  of Pondicherry and had made the Income-Tax Act,  1961  applicable  to  it.  Explaining  that Parliament, and through it the President, had plenary powers to make laws for Union Territories on all matters, Bachawat, J., speaking  for the  Constitution Bench, stated as follows (at pp. 108-109):      "Parliament has  plenary  power  to      legislate for the Union Territories      with regard  to any  subject.  With      regard to  Union Territories  there      is no  distribution of  legislative      powers...      [The]      inclusive      definition [in Section 3(58) of the      General Clauses  Act] is  repugnant      to  the   subject  and  context  of      Article 246.  There, the expression      "State" means  the States specified      in the  First Schedule.  There is a      distribution of  legislative  power      between    Parliament    and    the      legislatures   of    the    States.      Exclusive power  to legislate  with      respect to  the matters  enumerated      in the  State List  is assigned  to      the  legislatures   of  the  States      established by Part VI. There is no      distribution of  legislative  power      with respect  to Union Territories.      That is  why  Parliament  is  given      power   by    Article   246(4)   to      legislate  even   with  respect  to      matters  enumerated  in  the  State      List. If  the inclusive  definition      of "State"  in Section 3(58) of the      General Clause Act were to apply to      Article  246(4),  Parliament  would      have no  power to legislate for the      Union Territories  with respect  to      matters  enumerated  in  the  State      List  and   until   a   legislature      empowered  to  legislate  on  those      matters is  created  under  Article      239A  for  the  Union  Territories,      there  would   be  no   legislature      competent  to  legislate  on  those      matters;  moreover,   for   certain      territories such as the Andaman and      Nicobar Islands, no legislature can      be created  under Article 239A, and      for such  territories there  can be      no authority competent to legislate      with respect  to matters enumerated      in   the   State   List.   Such   a      construction is  repugnant  to  the

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    subject and context of Article 246.      It follows  that in view of Article      246(4),  Parliament   has   plenary      powers  to   make  laws  for  Union      Territories on all matters."      The  Court,   therefore,  held   that  Parliament   was empowered to  make laws for Union Territories on all matters and the  regulation made by the President in exercise of his powers under  Article 240  was  valid.  The  ratio  of  this decision, therefore,  is  that  the  definition  of  "State" provided by  Section 3(58)  of the General Clauses Act would not apply  for the  purposes of  Article 246.  This ratio is equally  applicable  at  the  present  moment  for,  despite several  changes  having  been  made  in  respect  of  Union Territories since  the decision  in Kanniyan’s  case, of the seven existing  Union Territories,  as many  as five  do not have Legislature  of their  own. The  controversy  was  not, however, put to rest by the decision in Kanniyan’s case.      In Management of Advance Insurance Co. Ltd. v.      Shri Gurudasmal  & Ors.,  [1970] 3 S.C.R. 881, the main issue before another Constitution Bench was whether the word "State" used  in Entry  80 of List I of the Seventh Schedule could be  said to  exclude the application of the definition in Section  3(58) of the General Clauses Act. Relying on the decision in  Kanniyan’s case,  Hidayatullah, J.  held  that, ordinarily, the definition would apply in the interpretation of the Constitution unless it is repugnant to the subject or context.  However,   the  noted,   that  after  the  Seventh Amendment Act where Union Territories have been mentioned as separate   entities,    the   distinction   between   "Union Territories" and  "States"  cannot  be  lost  sight  of.  He expressly approved  the reasoning of Bachawat, J. in holding that in  the context of Article 246, the definition provided in Section  3(58) would not apply; however, on the facts and in the  circumstances of  the case  before him, he felt that the subject  and context  of Entry  80  of  the  Union  List required the  application of the definition given in Section 3(58). While  referring to  the decision  in  Ram  Kishore’s case, Hidayatullah,  J. noted  that this  decision  was  per incuriam for  the reason  that it  referred to  Article  372 whereas the  proper reference  ought to have been to Article 372A.      The  same   issue  was   thereafter  considered   by  a Constitution Bench in S.K. Singh v. Shri V.V. Giri, [1971] 2 S.C.R.  197,  wherein  Bhargava,  J.,  while  delivering  an opinion concurring with the majority, reached the conclusion that the  definition in Section 3(58) of the General Clauses Act would  not apply  to matters involving interpretation of the Constitution.  The case,  which involved  a challenge to the election  of Shri  V.V. Giri  as the President of India, required the  Court to  consider the issue in the context of Article 54 which provides that the electoral college for the President consists  of the elected members of both Houses of Parliament, and  the  elected  members  of  the  Legislative Assemblies of  the States.  Relying  on  the  definition  of "State" in  Section 3(58) of the General Clauses Act, it was argued  that   Union  Territories   are  also   States  and, consequently,  the   elected  members   of  the  Legislative Assemblies of the Union Territories must also be included in the electoral  college; their  omission was  said  to  be  a material irregularity  which  would  vitiate  the  election. Responding to  this contention,  the learned  Judge held  as follows (at pp. 313-314):      "Article 54,  no doubt,  lays  down      that all  elected  members  of  the

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    legislative   assemblies   of   the      States are  to be  included in  the      electoral  college;  but  the  word      ‘States’ used  Territories.  It  is      true that,  under Article  367, the      General  Clauses  Act  applies  for      interpretation of  the Constitution      as    it     applies    for     the      interpretation of  an  Act  of  the      legislature  of   the  Dominion  of      India;  but   that  Act   has  been      applied  as   it  stood   on   26th      January,     1950,     when     the      Constitution   came   into   force,      subject only  to any  adoptions and      modifications  that   may  be  made      therein  under   Article  372.  The      General Clausers  Act, as it was in      1950 and  as  adapted  or  modified      under Article  372, did  not define      "State" so  as to  include a  Union      Territory.  The   Constitution  was      amended   by    the    Constitution      (Seventh  Amendment)   Act,   1956,      which introduced  Article  372A  in      the     Constitution     permitting      adoptions and  modifications of all      laws  which  may  be  necessary  or      expedient  for   the   purpose   of      bringing the  provisions of the law      into accord  with the  Constitution      as amended by the Seventh Amendment      Act, 1956.  It was  in exercise  of      this power  under Article 372A that      Section  3(58)   of   the   General      Clauses Act  was amended,  so that,      thereafter,  "State"   as   defined      include Union Territories also. The      new  definition   of   "State"   in      Section  3(58)   of   the   General      Clauses  Act   as   a   result   of      modifications and  adoptions  under      Article 372A would, no doubt, apply      to the  interpretation of  all laws      of Parliament,  but it cannot apply      to  the   interpretation   of   the      Constitution, because  Article  367      was not amended and it was not laid      down that  the General Clauses Act,      as adapted  or modified  under  any      Article  other  than  Article  372,      will    also     apply    to    the      interpretation of the Constitution.      Since, until its amendment in 1956,      Section  3(58)   of   the   General      Clauses Act  did not define "State"      as including  Union Territories for      purposes   of   interpretation   of      Article 54,  the Union  Territories      cannot be  treated as  included  in      the word "State"."      The view  of  the  learned  Judge  does  seem  to  have considerable force  and it  is also  to be  remembered  that Hidayatullah,  J.   had  doubted   the  correctness  of  the proposition laid  down in  Ram Kishore’s  case on the ground

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that the  proper reference in it should have been to Article 372A, rather  than to  Article 372. However, we must refrain from making any comment because the issue whether or not the General Clause  Act applies  to the  interpretation  of  the Constitution is  not properly  before us  in the  facts  and circumstances  of   the  present  case;  what  is  more,  no arguments have  been canvassed  before us on this issue. For the present,  we can  draw support  from the observations in Kanniyan’s case as affirmed in the Advance Insurance case to the effect  that the  definition in  Section  3(58)  of  the General Clauses  Act is repugnant to the subject and context of Article 246. We can, therefore, proceed on the assumption that for  our purposes, a Union Territory is not a State; we must, however,  hasten to  add that  this assumption will be open to  reconsideration subsequent  to our  analysis of the Constitutional scheme regarding the issues before us.      Interpretation of  "Union Taxation"  in Article  289(1) and scope of its ambit.      We may  now address the central issue in the case which involves the  determination of  the ambit of Article 289(1). In order  to appreciate the true import of the words used in this provision,  it will  be to  our benefit  to examine the Constitutional history of Article 289 as well as that of its corollary, Article 285.      Articles 285  and 289 are modified versions of Sections 154  and  155  of  the  1953  Act,  as  in  obvious  from  a comparative study made in the earlier part of this judgment. While Articles  285  and  289  seek  to  provide  reciprocal immunities within the Republic of India to the Union and the States from each other’s taxing powers, Sections 154 and 155 strove to  achieve the  same result  within British India in respect of  the Federal  Government on the one hand, and the Governments of  the Provinces  and the Federal States on the other. However, in the process of adopting the provisions of the 1935  Act for  our Constitution,  a  number  of  changes occurred and we must analyse some of these in greater detail for they are extremely relevant for our purposes.      To appreciate  the true import of Sections 154 and 155, it will  be necessary  to refer  to a  few provisions of the 1935 Act  so as  to obtain  an understanding  of its general scheme. Section 5 of the 1935 Act stated that the Federation of India  would comprise  the Provisions,  the Indian States and the  Chief Commissioner’s Provinces. Section 6 defined a ‘Federated States’  as an  Indian State which had acceded to or might  accede to  the Federation.  Section 94  provided a list of  the Chief  Commissioner’s Provinces and stated that they would  be administered  by the  Governor General acting through a Chief Commissioner. Section 99, which provided the manner in  which legislative  powers were  to be distributed between the Federal and Provincial legislatures, stated that the Federal  Legislature was  empowered to make laws for the whole or  any part  of British  India or  for any  Federated States, while  the Provincial Legislatures were empowered to make laws for the provinces. Section 311(1) defined ‘British India’ as  "All territories   or the  time  being  comprised within the Governor’s Provinces and the Chief Commissioner’s Provinces". Section 100, which dealt with the subject matter of Federal  and Provincial  laws, provided  that the Federal Legislature would  have power  to make  laws with respect to matters enumerated  in List I of the Seventh Schedule to the 1935 Act,  which was  to be  called the "Federal Legislative List"; the  Provincial Legislature would have powers to make laws in  respect of  matters  in  List  II  of  the  Seventh Schedule, called  "the Provincial Legislative List"; and, in respect of  Matters provided  in List  III  of  the  Seventh

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Schedule, called "the Concurrent Legislative List", both the Provincial  and   the   Federal   Legislature   would   have jurisdiction.  Clause  (4)  of  Section  100,  which  is  of considerable importance for our purpose, provided in express terms that the Federal Legislature would have "power to make laws with  respect to  matters enumerated  in the Provincial Legislative List except for a Province or any part thereof". It was,  therefore, clearly  contemplated that  the  Federal Legislature would have the power to make laws for matters in the Provincial  Legislative List  in respect  of  the  Chief Commissioner’s Provinces and the Federated States. Under the scheme  of  the  1935  Act,  situations  where  the  Federal Legislature could  enact laws with respect to matters in the Provincial Legislative  List were, therefore, not considered to be rare or unusual.      While  both   the  Federal  Legislative  List  and  the Provincial Legislative  List contained  entries allowing the levy of  taxes, the Federal Legislative List did not contain any entry  which allowed  the Federal  Legislature  to  levy taxes directly  on property.  Entry  42  of  the  Provincial Legislative List  empowered the  Provincial Legislatures  to levy  taxes   specifically  on   lands  and  buildings.  The Concurrent  Legislative   List  contained   only  one  entry relating to  taxes, namely, Entry 13 which referred to stamp duties.      Section 154,  in  material  terms,  provided  that  the property of  the Federal Government would be exempt from all taxes imposed  by Provinces  and Federated  States  and  the local authorities  within them.  The proviso  added that, in the absence  of any Federal law stipulating otherwise, those properties of  the Federal  Government which were subject to the levy  of taxes  before the  commencement of  Part III of that Act  would continue  to be  liable  to  pay  them.  The exemption in  Section 154,  therfore, did not extend to such taxes, including taxes levied under Municipal laws. It is to be noted  that Section  154 did not provide for an exemption in respect of the income of the Federal Government primarily because the  Provinces lacked  the legislative competence to enact laws levying taxes on income.      Section 155(1) stated that the Government of a Province and the  ruler of  a Federated  State would not be liable to "Federal  Taxation"   in  respect  of  "lands  or  buildings situated in  British India". Proviso (a) stipulated that all the trading  and business activities carried on by Provinces and  the   Federated  States   outside   their   territorial jurisdiction would  be  subjected  to  Federal  Taxation  in British India.  Provision (b)  stipulated that  the personal property and  income of  a Ruler  of a Federated State would also be  subject to  Federal Taxation.  Clause  (2)  of  the Section   being    self-explanatory,   does    not   require elucidation. In  response to a query from us, Mr. Sen sought to find  the reason  for the  existence of  the exemption in Section 155(1); it appears that the purpose was to avoid the liabilities imposed  by Sections  3 and  9 of the Income Tax Act, 1912 upon the Provinces.      Comprising the text of Sections 154 and 155, it becomes clear that  even under the scheme of the 1935 Act, the ambit of the  reciprocal immunities  was not  equal in  length and breadth; while  Section 154  exempted the  property  of  the Federal  Government   from  "all   taxes",  the   Provincial Governments and  Rulers of Federated States were entitled to an  exemption  only  in  respect  of  "lands  or  buildings" situated in  British India  and "income"  accruing  thereof. This feature will gain some importance when we deal with the comparative Constitutional position at a later stage.

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The term  "Federal Taxation" was not defined in the 1935 Act but some  clue to  its meaning can be discerned by referring to Sections  99 and  100  which  described  the  legislative powers of  the Federal Legislature. As we have already seen, the Federal  Legislative List  did  not  allow  the  Federal Legislature to  levy taxes  on lands  and buildings; in fact this  subject  was  expressly  included  in  the  Provincial Legislative List.  On the  face of  it, this  would make the exemption in  Section 155  otiose.  However,  the  confusion clears when  one notices  Clause (4)  of Section  100  which expressly enables  the Federal  Legislature to  legislate in respect of  matters in  the Provincial  Legislative List for territories  apart   from  the  Provinces.  Viewed  in  this context, and  taking into account the definition of "British India" in  Section 311(1), Section 155 would have to be read as exempting  the Governments of Provinces and the rulers of Federated States from "Federal Taxation" in respect of lands or buildings situated in the Chief Commissioner’s Provinces. This is  the only  possible interpretation  which will  give meaning to  the words  of Section 155. Since, at the time of the enactment  of  the  legislation,  there  were  only  six territories classified  as Chief  Commissioner’s  Provinces, the exemption  could not  be said  to be  at  par  with  the exemption provided  in Section  154 but,  all the  same,  in terms of  the revenue  amount  involved,  it  could  not  be considered insignificant  either. It therefore becomes clear that, under  the scheme  of the 1935 Act, "Federal Taxation" included taxes  leviable by  the Federal  Government in  the Chief Commissioner’s  Provinces and  that the  properties of the  Provinces  and  the  Rulers  of  the  Federated  States situated within these Chief Commissioners Provinces would be exempt from  such "Federal  Taxation". It remains to be seen whether the  position came  to be changed during the process of  transformation  of  these  sections  into  the  existing provisions of the Constitution.      In  the   earlier  stages   of  the   framing  of   the Constitution, the  issue of  financial relations between the Centre and  the units  was addressed by two Committees - the Union Powers Committee and the Union Constitution Committee. These Committees  recommended that  the schemes envisaged by the 1935  Act should  be generally  followed. In  the  Draft Constitution prepared  by the  Constitutional  Adviser,  Sir B.N. Rau, in October 1947, Clauses 205 and 207 were modified versions of  Sections 154  and 155.  On October  2, 1947, an Expert Committee  on Financial  Provisions was  appointed to make recommendations  as to the provisions on the subject to be embodied  in  the  new  Constitution  after  taking  into account the  views of the States and also the Draft prepared by the Constitutional Adviser. The Drafting Committee of the Constitution took up the issue in January 1948 and took into consideration the  Drafts  prepared  by  the  Constitutional Adviser as also the Expert Committee on Financial Provision. Thereafter, these provisions came to be numbered as Articles 264 and  266 of the Draft Constitution. After the Constitute Assembly had  considered the  matter at  length and formally approved these  provisions, they  came to  be renumbered  as Articles 285 and 289.      The present  Article  285  is  much  the  same  as  its predecessor Section  154 and, though there were some changes in its  text as the provision charted its course through the stages  enumerated   above,  not   being  relevant  for  our purposes, we shall ignore its discussion.      The present  Article 289  was Clause  207 in  the Draft Constitution prepared  by  the  Constitutional  Adviser.  It provided that  the Government  of a unit would not be liable

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to  Federal  Taxation  in  respect  of  lands  or  buildings situated within  the territories of the Federation or income accruing, arising  or received  within such territories; the two exceptions  provided were  in favour  of (a)  any income accruing to  a unit’s  Government through  trade or business and (b)  the personal property or the personal income of the Ruler of  Indian State.  As we  have observed, under Section 155, the  Provinces and  Federated  States  were  liable  to taxation only  in respect  of trade  and business operations carried on  by them  outside their  own territories. To that extent Clause  207 had  made a  substantial  departure.  The Constitutional  Adviser  relied  on  the  decisions  of  the Supreme Court  of the  United States of America in McCulloch v. Maryland,  4 L.  Ed 579  (1890), and  South  Carolina  v. United States,  199 U.S.  437 (1905), to buttress his stance that the  Federation should have the power to tax the units, but not  vice versa  for the reason that when the Federation taxed the  instrumentalities of  the  units,  it  taxed  its constituents, whereas  when a  unit taxed  the operations of the Federal  Government,  it  acted  upon  instrumentalities created, not  by its  own constituents,  but by  people over whom it could claim no control.      The Expert  Committee on  Financial Provisions approved the Constitutional Adviser’s recommendation that the trading operations of  the units,  as also  of local bodies, whether carried on  within or  without their  jurisdiction should be liable to  central taxation;  they, however,  suggested that quasi-trading operations  incidental to the normal functions of Government should be exempt from such taxation.      When the Drafting Committee took up the matter, it duly noted the  recommendations of the Constitutional Adviser and the Expert Committee and, in July 1949, convened a Premier’s Conference to  discuss these  provisions. Draft  Article 266 came in  for a  lot of  criticism and  a  number  of  States suggested that  insofar as  Article 266  did not  exempt the trading and  business operations  of State  Governments from Union Taxation,  it  be  dispensed  with  altogether.  Other suggestions were also forwarded to the Drafting Committee: a number of  States were  of the  view that  the provision was inequitable and  one-sided insofar  as it  sought to subject trade and  business operations  of the  State Governments to Union  Taxation,   while  under  Article  264,  States  were debarred from  taxing the  property of  the  Union.  Such  a provision, it  was felt,  was bound to retard the industrial development of  the Provinces, taking away the incentive for State enterprise.      Reconsidering  the   provision  in  the  light  of  the comments  of   the  Provincial   Governments,  the  Drafting Committee decided, in consultation with the Central Ministry of Finance,  to introduce  some important changes in Article 266. The  ambit of  the exemption in Clause (1) was expanded by including  ‘property’ instead  of  ‘lands  or  buildings’ thereby bringing  within its  purview, movable  property  as well. On  the issue  of  trade  and  business,  a  provision similar to  the present  Article 289(2)  was included.  This provision would  enable Parliament  to pass a law to declare which of  the trading  and business activities of the States were  to   be  classified   as  ordinary  functions  of  the Government allowing them to be exempted, and making the rest of the  activities liable  to tax.  Drafting Article 266 was considered by  the Constitutent  Assembly  on  September  9, 1949. Some  members representing  the States of Tranvancore- Cochin  and   Mysore  expressed   apprehensions  that  Union Taxation of industrial and commercial activities would check the expansion  of industrialisation  and  would  reduce  the

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capacity of  States to discharge their ordinary governmental functions. Mr.  P.T. Chacko  from Travancore-Cochin referred to  the   principle  of   immunity  from  inter-governmental taxation as it stood in the United States of America and the fact of  its incorporation  in Draft  Article 264; he sought the extension  of the  doctrine to  States  as  well.  While allaying their  apprehensions, Mr. Alladi Krishnaswami Ayyar noted the  fact that  the Australian,  Canadian and American Constitutions  had  incorporated  the  principle  of  inter- governmental immunities.  He stated  that the Australian and Canadian experiences were irrelevant for the purposes of the Indian Constitution  for, when they were drafted, it was not envisaged that  large  schemes  of  socialisation  would  be implemented. referring  to the American position, he pointed out that  even within  that jurisdiction,  the doctrine  had begun to  lose favour  and  was  in  the  process  of  being discarded. Thereafter,  he observed that under the provision as it was placed before the Constituent Assembly, Parliament was left  with the  option of  making the  law  which  would declare those  trading and business operations of the States which would  be liable  to Union  Taxation after taking into account the  general interests  of trade and industry of the whole country and other democratic factors. He therfore felt that  the   provision  was  "very  salutary".  Subsequently, following the  reassurances given  by  the  Central  Finance Minister, the  amendments were  withdrawn and  Draft Article 266 was  accepted  in  toto.  [Note:  For  a  study  of  the evolution of  Articles 285  and 289  within the  Constituent Assembly, See  B. Shiva  Rao,  The  Framing  of  the  Indian Constitution: A  Study,  N.M.  Tripathi  Pvt.  Ltd.,  Bombay (1968) pp.  649-99; for reference to original documents, See B. Shiva Rao, ibid, Vols. III & IV].      Mr. P.P.  Rao and  the other  learned counsel appearing for the  States have  argued  before  us  that  the  present Articles 285  and 289  are based  on the  U.S.  doctrine  of reciprocal immunity of instrumentalities which has also been incorporated in  the Canadian  and Australian  Constitution, apart from  certain other  Constitutions. Before we begin to examine the  text of  Articles 285 and 289 with to finding a solution to  the Constitutional  conundrum posed by the case before us, we must analyse this proposition closely.      The doctrine  of inter-governmental  immunity has  been the subject  to some  controversy  in  the  country  of  its origin, the  United States  of America.  The origin  of this doctrine is  ascribed to  the judgment of Chief Justice John Marshall in  the case  of  McCulloch  v.  Maryland  (supra). However, as pointed out by commentators, on the facts of the case, where  a State  Tax sought  to be  levied on a Federal Bank was held to be void, the decision was more in favour of declaring the  supremacy of  the Federal  Government than of upholding the rights of States. It was, therefore, the basis for  establishing  federal  immunity  from  State  Taxation. However, later  decisions interpreted  the judgment  to hold that its  corollary, that  the property  of States  would be exempt from  Federal Taxation  was equally  applicable; more than 50  years after  the decision  in McCulloch’s case, the Supreme Court,  in Collector v. Day, [[11. Wall. 113 (1871)] made the  theory of  inter-governmental immunity reciprocal. The doctrine,  as propounded in Collector Vs. Day, was never applied  widely   and,  in   subsequent   years,   underwent significant modifications. In The South Carolina case, which was the  second case  relied upon the Constitutional Adviser in preparing  Clause 207  of  his  Draft  Constitution,  the Supreme Court  dealt  a  further  blow  to  the  concept  of immunity of  States from Federal Taxation, when it held that

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South Carolina  was bound  to pay  a National  Excise Tax on liquor-dealers  which   was  being  levied  by  the  Federal Government. The  Supreme Court  drew a  distinction  between State functions  which were  strictly governmental and those which were  commercial in  nature;  it  was  held  that  the governmental  functions   of  State  would  be  immune  from taxation but when the States entered into ordinary business, no immunity  would exist.  This created  fresh problems  and over time,  several Judges  of the  Supreme Court  protested against the  illogical distinction  between governmental and business activities, calling for a complete reexamination of the entire  doctrine.  In  later  years,  the  doctrine  was considerably modified.  In recent  years, the  Supreme Court has come to recognise a narrower tax immunity for the States than for  the National  Government on  the basis of a theory that combines  the principle  of national supremacy with the argument  that   the  interests   of  States  received  more representation in  Congress than  national interest received in State  Legislature. It  is to  be noted  that we have had this position  from  the  time  that  the  Constitution  was originally enacted.      As we  have already noticed, the Constitutional Adviser relied upon  the decisions in McCulloch’s case and The South Carolina case,  for justifying the reduction in the ambit of the immunity  of States  from Union Taxation rather than for establishing reciprocal  immunity between the States and the Union. Furthermore,  in the Constituent Assembly, Mr. Alladi Krishanswami Ayyar  had doubted  the  applicability  of  the doctrine  to   the  Indian   Constitution  and  had  instead commended the  present scheme  whereby the troublesome issue of determining  which of the trading and business operations of State  should be  subject to Union Taxation has been left to Parliament; while enacting such a law Parliament would be forced to cater to the interests of the States on account of the presence  of their representatives in it. The usefulness of any  further discussion  on  the  applicability  of  this doctrine to the Indian Constitution is rendered questionable by virtue  of the  fact that  this  Court  had,  on  earlier occasions, rejected  it. In State of West Bengal v. Union of India, [1964]  1 S.C.R.  371, Sinha,  C.J., speaking for the majority in  a six-Judge  Constitution Bench  expressly held (at   p.   407)   that   the   doctrine   of   immunity   of instrumentalities had  been rejected by the Privy Council as inapplicable to  the Canadian  and Australian  Constitutions and having  practically been  given up in the United States, it was  equally inapplicable  to the Indian Constitution. In the APSRTC  case (supra,  at p.  24), the Court rejected the contention of  the Advocate-General of Andhra Pradesh urging it to  adopt the  American doctrine,  by relying  upon these observations of Sinha, C.J.      It is,  therefore, clear  that in seeking a solution to the problem  faced by us, we must rely primarily on the bare text of Articles 285 and 289. Comparing these provisions, it becomes evident  that the  Constitution does  envisage  some form of  inter-governmental immunity.  Article 285(1), while exempting the property of the Union from all taxes, does not attempt to  provide an exemption in respect of income as the States do  not possess  legislative competence to levy taxes on income  as such;  however, taxes  relating to income that have a bearing on property such as the taxes on agricultural income levied  by using Entry 46 of the State List will also be exempt  in view of the wide-ranging, all-embracing nature of the  exemption. Article 285(2) saves, until Parliament by law  decides   otherwise,   all   pre-Constitutional   taxes applicable to Union property.

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    With respect  to Article  289, we have already examined the manner  in which  this provision  was analysed  by  this Court in  the APSRTC  case. We  are in  agreement  with  the proposition that  the  three  clauses  of  Article  289  are interlinked, in  that, Clause  (3) is an exception to Clause (2) which  in turn is an exception to Clause (1). As we have noticed for  ourselves, the  framers of the Constitution had consciously conferred Parliament with the option of deciding which of  the trading  and business activities of the States would be  subject to  the levy  of Union  taxes.  So,  while Article 289(1)  generally exempts the property and income of the States from Union taxation, Clauses (2) and (3) grant to Parliament the aforementioned prerogatives.      Having understood  the scheme  of Articles 285 and 289, we must  sharply focus  on the  specific wording  of Article 289(1) and,  in particular,  on the  meaning of  the  phrase "Union Taxation".  It may  be noted  that the  phrase "Union Taxation"  appears   in  only   two  places  in  the  entire Constitution - in the marginal heading of Article 289 and in the main  text of  Article 289(1). It is suggested that some guidance may  be  obtained  by  analysing  the  term  "State Taxation" which  appears in  the marginal heading of Article 285 and  has been described in the text of Article 285(1) as "all taxes  imposed by  a State".  On that reasoning, "Union Taxation" would mean "all taxes imposed by the Union".      The word "taxation" has been defined in Article 366(28) which states that unless the context otherwise requires, the word "taxation"  includes "the  imposition  of  any  tax  or impost, whether general or local or special and, ‘tax’ shall be construed  accordingly". This  definition was accepted by Das, J.  and Hidayatullah, J. in their minority opinions (at pp. 834-35  and 893-94 respectively) in the Sea Customs case for interpreting  Article 289(1).  However, Sinha,  C.J., in his  majority   opinion  (at   pp.  923-34),   rejected  the application of  this definition to Article 289(1) as, in his opinion,  the   context  of  Article  289(1)  precluded  the application of  the definition.  Rajagopala Ayyangar, J., in his separate  majority opinion  (at pp.  921-93), also  felt that the  definition would  not apply.  We concur  with  the majority view in the Sea Customs case that the definition of "taxation" provided  in Article  366(28) will  not apply for the purpose of interpreting Article 289(1).      Our attention  has been  drawn towards  the  provisions contained in  Part XII  of  the  Constitution  which  has  a bearing on  the scheme  of the  Constitution with respect to financial relations  between the Union and the States. Since this  aspect   and  its  relevance  to  Article  289(1)  was discussed at  length in  the Sea Customs case, we may advert to those  observations. Das,  J. (at  p. 852),  was  of  the opinion that  the provisions of Part XII of the Constitution would have  no bearing on the import of Articles 285 and 289 which ought to be construed on their own terms. Sinha, C.J., however,  analysed   these  provisions  at  length  and  the relevant observations  in this  behalf may be reproduced (at pp. 809-10):      "It will  thus appear that Part XII      of  the   Constitution   has   made      elaborate  provisions   as  to  the      revenues of  the Union  and of  the      States, and  as to  how  the  Union      will share  the proceeds  of duties      and  taxes   imposed  by   it   and      collected either by the Union or by      the  States.   Sources  of  revenue      which have  been allocated  to  the

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    Union are  not meant  entirely  for      the purposes  of the Union but have      to be  distributed according to the      principles     laid     down     by      Parliamentary    legislation     as      contemplated   by    the   Articles      aforesaid. Thus  all the  taxes and      duties  levied  by  the  Union  and      collected either by the Union or by      the States  do not form part of the      Consolidated Fund of India but many      of  those   taxes  and  duties  are      distributed among  the  States  and      form part  of the Consolidated Fund      of the States. Even those taxes and      duties   which    constitute    the      Consolidated  Fund   of  India  may      constitute the Consolidated Fund of      India may  be used for the purposes      of supplementing  the  revenues  of      the States in accordance with their      needs.      ....The       financial      arrangement     and      adjustment      suggested  in   Part  XII   of  the      Constitution has  been designed  by      the Constitution-makers  in such  a      way  as   to  ensure  an  equitable      distribution   of    the   revenues      between the  Union and  the States,      even though  those revenues  may be      derived  from   taxes  and   duties      imposed by  the Union and collected      by it  or through the agency of the      States. ....It  will thus  be  seen      that   the   powers   of   taxation      assigned to  the  Union  are  based      mostly   on    considerations    of      convenience   of   imposition   and      collection and  not with  a view to      allocate them  solely to the Union;      that is to say, it was not intended      that all  taxes and  duties imposed      by the  Union Parliament  should be      expended on  the activities  of the      Centre and not on the activities of      the States. ...The resources of the      Union  Government   are  not  meant      exclusively for  the benefit of the      Union  activities;  they  are  also      meant    for     subsidising    the      activities   of   the   States   in      accordance  with  their  respective      needs, irrespective  of the amounts      collected by  or through  them.  In      other  words,  the  Union  and  the      States together  form  one  organic      whole   for    the   purposes    of      utilisation of the resources of the      territories of India as a whole."      We are  of the  view that  an analysis  of some  of the provisions in  Part XI, Chapter I of the Constitution, which deals with  the legislative  relations between the Union and the States  will be  crucial to  the  determination  of  the central issue  in this  case. We  may first  notice  certain provisions in  the Constitution  which enable  Parliament to

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make laws for subjects contained in the State List, to which our attention  was drawn  by counsel  for the  appellants as also the  learned Attorney  General. We must note that these provisions conceive of extraordinary situations. Article 279 provides for  a situation  where, if  the Council  of States declare by a resolution that it is necessary in the national interest to  do so,  Parliament may  make laws in respect of matters enumerated  in the  State List. Article 250 empowers Parliament to  make laws  for the whole or any part of India in respect  of matters  enumerated in the State List while a Proclamation of  Emergency  is  in  operation.  Article  252 empowers Parliament  to make  laws with  respect to  matters enumerated in  the State  List if two or more States resolve that such  a course  of action  is  desirable.  Article  253 reserves to  Parliament the exclusive power to make laws for the whole  or  any  part  of  the  territory  of  India  for implementing any  treaty, agreement  or convention  with any other country  or any  decision made  at  any  international conference, association  or any  other body.  The  Emergency Provisions outlined  in Part  XVIII of  the Constitution and comprising  Articles   352  to   360  conceive   of  special situations in which Parliament is empowered to enact laws on matters in List II.      It has  been urged  that when Parliament legislates for Union  Territories  in  exercise  of  powers  under  Article 246(4), it  is a situation similar to those enumerated above and is  to be  treated  as  an  exceptional  situation,  not forming part of the ordinary constitutional scheme and hence falling  outside  the  ambit  of  "Union  Taxation".  Having analysed  the  scheme  of  Part  VIII  of  the  Constitution including the  changes wrought  into it,  we are of the view that despite  the fact that, of late, Union Territories have been granted  greater powers,  they continue to be very much under the  control and  supervision of  the Union Government for their  governance. Some  clue as  to the reasons for the recent  amendments   in  Part  VIII  may  be  found  in  the observations of  this Court in Ramesh Brich’s case, which we have extracted earlier. It is possible that since Parliament may not  have enough  time at  its disposal  to enact entire volumes of  legislations for  certain Union  Territories, it may decide,  at least  in respect of those Union Territories whose importance is enhanced on account of the size of their territories  and  their  geographical  location,  that  they should  be  given  more  autonomy  in  legislative  matters. However, these  changes will  not have  the effect of making such Union  Territories as  independent as  the States. This point is  best illustrated  by referring  to the case of the National Capital  Territory of  Delhi which is today a Union Territory and  enjoys the maximum autonomy on account of the fact that  it has a Legislature created by the Constitution. However, Clauses  3(b) and  3(c) of  Article 239AA  make  it abundantly clear  that the  plenary power  to legislate upon matters affecting  Delhi still  vests with  Parliament as it retains the  power to  legislate upon any matter relating to Delhi and,  in the  event  of  any  repugnancy,  it  is  the Parliamentary law  which will  prevail.  It  is,  therefore, clear  that   Union  Territories   are  in  fact  under  the supervision  of  the  Union  Government  and  it  cannot  be contended that their position is akin to that of the States. Having analysed  the relevant  Constitutional provisions  as also the  applicable precedents,  we are  of the  view  that under the scheme of the Indian Constitution, the position of the Union  Territories cannot  be equated  with that  of the States. Though  they do  have a separate identity within the Constitutional framework, this will not enable them to avail

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of the privileges available to the States.      It has  been urged  before us  that the  phrase  "Union Taxation" has  to be  interpreted in  the context of Article 246, which  deals with  the subject  matter of  laws made by Parliament and  the State Legislatures, and that the context of "Union  Taxation"  should  be  limited  to  those  matter falling within  Articles 246(1),  where Parliament  has  the legislative competence to levy taxes with respect to matters enumerated in  the Union  List. We  see no reason why such a limiting principle  must be  read into the definition of the phrase "Union  Taxation". In  our view,  the  term  can  and should  be  given  the  widest  amplitude,  allowing  it  to encompass all  taxes that  are levied  by the  authority  of Parliamentary laws.  Though the amplitude of the term "Union Taxation" was  not expressly  before the  Court in  the  Sea Customs case,  it is  clear from an analysis of the majority judgment that  the learned Judges considered the term "Union Taxation" to mean all taxes leviable by the Union. As Clause (4)  of   Article  246  itself  envisages  situations  where Parliament is  to make  laws in  respect of  matters in  the State List,  it cannot  be said  that this  is a  rare or an unusual circumstance.  The Constitution does not contain any provision which would indicate that the definition of "Union Taxation" should  be restrictively  interpreted so  as to be within  the   confines  of   Article  246(1).  The  specific situations envisaged  in Articles 249, 250, 252, 253 and the Emergency Provisions  in Part  XVIII of  the Constitution do not make for the creation of any anomalous situations. These Articles,   which   provide   for   unusual   exercises   of Parliamentary power  involving the matters enumerated in the State List,  can be  regarded as  exceptions to  the general rule. We  are, therefore,  of  the  view  that,  unless  the context requires otherwise - as in the case of Articles 249, 250, 252,  253 and the Emergency Provisions in Part XVIII of the Constitution  - the broad definition of "Union Taxation" embracing all  taxes leviable  by  Parliament  ought  to  be accepted for the purpose of interpreting Article 289(1).      As already  noticed by us, under the scheme of the 1935 Act, those lands or buildings of the Provinces and Federated States which  were situated  within the Chief Commissioner’s Provinces were,  by virtue  of Section 155(1), exempted from Federal  Taxation.   There  can  be  dispute  about  such  a construction of  the provision for, otherwise, the exemption in Section  155(1) would  have no  meaning.  Section  155(1) formed the  basis for the present Article 289(1) and, having closely examined  the various stages by which Article 289(1) replaced Section  155(1), we  find that  this  position  was never  sought   to  be   deviated  from.   The  presumption, therefore, is  that it  was the  intention of the framers of the Constitution  to maintain the status quo with respect to the position  regarding the  Chief Commissioner’s  Provinces which are  now called  "Union Territories". That presumption is  further   reinforced  by   the  general  scheme  of  the Constitution  which   furthers  Article   289(1)   and   its applicability in respect of the Union Territories.      Unlike other  Federations, the  Union of  India  has  a sizeable  territory   of  its   own  comprising   the  Union Territories which  have been specified in the First Schedule to  the  Constitution.  Therefore,  the  limited  reciprocal inter-governmental immunity  bestowed by the Constitution in Articles 285  and 289  is given  fuller meaning by virtue of the adoption  of the wider meaning of "Union Taxation"; this would mean  that, just  as the  properties of  the Union are exempt from  taxes on  property leviable  by the States, the properties of  the States  will also be exempt from taxes on

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property leviable  by the  Union in areas falling within its territorial jurisdiction.      While attempting  to demonstrate  that the reasoning of Sinha, C.J. in the Sea Customs case was incorrect insofar as his acceptance of the contention that Article 246(4) enables Parliament to levy taxes directly on property was concerned, Mr. B.  Sen contended  that Article  246(4) was  not in  the contemplation of  the framers  of the Constitution when they carved out  the exemption  in favour  of the property of the States from  Union  Taxation;  he  then  proceeded  to  cite examples of  specific circumstances  in which Parliament can levy taxes directly on property which, according to him, was what the  framers  had  intended  to  exempt  under  Article 289(1). He  drew our  attention to Entry 3 of the Union List ["Delimitation of Cantonment areas, local self-government in such areas, the constitution and powers within such areas of cantonment  authorities   and   the   regulation   of   home accommodation (including  the  control  of  rents)  in  such areas"] and  stated that by virtue of this entry, Parliament is rendered competent to levy taxes on the use or occupation of properties  located within areas declared as Cantonments. He then  referred to Entry 54 of the Union List ("Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by  Parliament by law to be expedient in the public interest") and  to the  Mines  and  Minerals  (Regulation  & Development) Act,  1956 which together empower Parliament to levy taxes  on mines  and minerals  which would  be  in  the nature of  a tax  on property.  Referring to Entry 49 of the Union List  ("Patents, Inventions  and  Designs;  copyright; trade-marks and  merchandise marks"), Mr. Sen contended that since  these   subjects  are   regarded  as   intangible  or incorporeal properties, taxes levied by Parliament upon them would also  amount to  taxes on  property. Additionally, Mr. Sen has  referred to  the following  Entries  in  the  Union Lists: Entries  24 &  25 (relating  to Shipping activities), Entry 47  ("Insurance"), Entry  52 ("Industries, the control of which by the Union is declared by Parliament by law to be in the  public interest"):  to demonstrate  that  Parliament does have power to levy taxes directly on property.      Mr. A.K.  Ganguli controverted  Mr. Sen’s contention in this respect;  he argued that Entry 3 of the Union List does not contemplate  the  levy  of  taxes  by  Parliament.  With respect to  Entries 47  & 54,  he argued  that these entries would be  covered by Article 289(2) of the Constitution. The same contention  would, presumably, be applicable in respect of the other entries cited by Mr. Sen.      In  our   opinion,  there   is  no   warrant   for   an authoritative pronouncement upon this aspect for, even if we assume that  Mr. Sen’s  contention is  correct and  that all these Entries  do in  fact empower  Parliament to levy taxes directly on  property, it  would not in any way detract from the correctness of our interpretation that the levy of taxes under  Article  246(4)  is  covered  by  the  phrase  "Union Taxation"  in  Article  289(1);  these  Entries  would  then provide additional  areas in respect of which the States can claim exemption  from Union  Taxation under  Article 289(10, thus lending  greater weight to the solemnity and the actual worth, in real terms, of the phraseology of Article 289(1).      However, we find ourselves unable to agree with Mr. Sen when he contends that the entries cited by him were the only instances kept  in contemplation  by the framers at the time of the  drafting of  Article 289(1).  If that  were so,  the ambit of  the exemption  would traverse  an extremely narrow field which  would then  lend credence to the observation of

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Das, J. in the Sea Customs case, albeit made in the converse context, that  the exemption  in Article 289(1) would amount to "much ado about nothing".      Classification of taxes imposed by Municipalities      We may  now turn  to Mr.  Sen’s alternatives submission that the taxes levied by the NDMC under the Act would not be covered by the exemption in Article 289(1) as that provision cannot be construed to encompass Municipal Taxes.      To appreciate  this contention,  we will be required to analyse certain  provisions of  the Act as also those of the Constitution. Section  61 of  the Act, which is the charging section, at the relevant time, empowered the Municipality to levy a  tax payable  by the  owner on  lands  and  buildings subject to,  and to the extent of, the qualifying conditions provided therein.  It is  clear from  an  analysis  of  this provision that  it provides  for the  levy of a consolidated tax, combining  within it  the tax  element and  the service element. Section 51 of the Act provides for the constitution of a Municipal fund and states that all sums received by the Municipal Committee  are to be credited to it. Section 52 of the Act  provides the  manner in which the sums collected in the Municipal  Fund are  to  be  applied  by  the  Municipal Committee.  Our   attention  has  also  been  drawn  towards analogous provisions  in the  New Delhi  Municipal Committee Act and  the Delhi  Municipal  Committee  Act  to  form  the foundation  of   the  argument   that,   under   all   these legislations, the  Municipalities have  been vested  with  a great deal of financial autonomy; they have the power to fix their own  budgets, levy  taxes  within  prescribed  limits, collect the  proceeds of  such imposition  which are  to  be diverted to  Municipal Funds  which function  entirely under the supervision  of the Committees. It is argued that such a stance is further reinforced by the introduction of Part IXA into the  Constitution which allows for Municipalities to be vested with  substantial powers, including the power to tax, thereby  providing  Constitutional  support.  The  argument, therefore,  is   that  now   that  the  Constitution  itself recognises Municipal  taxes as a separate category of taxes, they should  not be  construed to  fall within the exemption provided by  Article 289(1). Another limb of this submission is that  while under  Article  285,  taxes  imposed  by  any "authority within  a State", which would necessarily include Municipal taxes,  have been  expressly exempted, Article 289 does not  provide for any such facility and, to that extent, taxes levied  by Municipalities within the Union Territories are not covered by the exemption in Article 289(1).      We have  great difficulty  in accepting this assertion. Article 265  of the  Constitution emphatically mandates that "no tax  shall be levied or collected except by authority of law". Under  the framework of the Constitution there are two principal bodies  which have been vested with plenary powers to make  laws, these  being the  Union Legislature, which is described by  Article 79  as "Parliament  for the Union" and the State  Legislatures, which  are described by Article 168 in the  singular as  "Legislature of a State". While certain other  bodies  have  been  vested  with  legislative  power, including the  power of  levying taxes,  by the Constitution for specific purposes, as in the case of District Committees and Regional  Councils constituted  under the  aegis of  the Sixth Schedule  to the  Constitution, the  plenary power  to legislate, especially  in matters relating to revenue, still vests with the Union and the State Legislatures. Even if the submission that  Municipalities now  possess, under Part IXA of the  Constitution, a  higher juridical status is correct, the extension  of that  logic to  the proposition  that they

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have plenary powers to levy taxes is not, as is clear from a perusal  of  the  relevant  part  of  Article  243X  of  the Constitution which reads as under:      "243X. Power  to impose  taxes  by,      and Funds of, the Municipalities.--      The Legislature  of a State may, by      law,--      (a)  authorise  a  Municipality  to      levy, collect  and appropriate such      taxes, duties,  tolls and  fees  in      accordance with  such procedure and      subject to such limits;      (b) ...                         ...      ...      (c) ...                         ...      ...      (d) ...                                      ...      ...      as may be specified in law."      Article 243ZB  provides that  this  provision  will  be applicable to  Union Territories  and the  reference to  the legislature of  a State  would apply, in relation to a Union Territory having a Legislative Assembly, to that Legislative Assembly.      It is, therefore, clear that even under the new scheme, Municipalities do  not have  an independent  power  to  levy taxes. Although  they can  now be  granted more  substantial powers than  ever before, they continue to be dependent upon their  parent   Legislatures  for   the  bestowal   of  such privileges. In  the case  of Municipalities  within  States, they have  to be  specifically delegated the power to tax by the concerned  State Legislature. In Union Territories which do not  have Legislative  Assemblies of  their own,  such  a power would have to be delegated by Parliament. Of the rest, those which  have Legislative  Assemblies of their own would have to specifically empower Municipalities within them with the power to levy taxes.      We have already held that despite the fact that certain Union Territories  have Legislative Assemblies of their own, they are  very much  under  the  supervision  of  the  Union Government and cannot be said to have an independent status. Under our  Constitutional scheme,  all  taxation  must  fall within either  of two  categories: State  Taxation or  Union Taxation.  Since  it  is  axiomatic  that  taxes  levied  by authorities within  a State  would amount to State taxation, it would appear that the words "or by any authority within a State" have  been added in Article 285(1) by way of abundant caution. It  could  also  be  that  these  words  one  their presence in  the provision  to historical reasons; it may be noted that Section 154 of the 1935 Act was similarly worded. The fact  that Article  289(1), which  in its phraseology is different from  Section 155  of the  1935  Act  having  been drafted  by   the  Drafting   Committee  to   meet  specific objections, does  not contain  words  similar  to  those  in Article 285(1),  will not in any way further the case of the appellant,  because   the  phrase   "Union  Taxation"   will encompass Municipal  taxes levied by Municipalities in Union Territories.      Before we  part, we  must  refer  to  Part  IV  of  the judgment of Jeevan Reddy, J. where Clause (2) of Article 289 has been invoked to validate the levy of taxes under the Act and  the   Delhi  Municipal   Corporation  Act   upon  those properties of State Governments which are being occupied for commercial or trade purposes.

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    At the  outset, we must express our great reluctance to deal with  this proposition,  for it  is not  based  on  any contention advanced  by any  of  the  counsel  who  appeared before us,  either in  their written  pleadings or  in their oral submissions. This is not because we feel constrained to restrict ourselves  to  the  parameters  prescribed  by  the submissions  of  counsel,  but  because  we  feel  that  the opposite side  did not have a fair opportunity to answer the line of  reasoning adopted in that behalf. The view taken by Reddy, J.  has  the  effect  of  imposing  considerable  tax liabilities upon  the properties  of the  State  Governments and, in  our view,  it would only be proper that their views in this  behalf be  obtained before  visiting them with such liability. We  have only  the rule  of caution in mind which warns  that   ordinarily,  courts  should,  particularly  in constitutional matters,  refrain from expressing opinions on points not  raised or  not fully  and effectively  argued by counsel on either side.      Be that  as it  may, we  must, for  the record, express ourselves on  the view  taken by  Reddy,  J.  after  closely examining it.  Reddy, J. begins his examination of the issue by noting  that the Act, the Delhi Municipal Corporation Act and the  New Delhi  Municipal Committee Act contain specific provisions exempting  the properties of the Union from local taxation in  accordance with  Article 285. It is then stated that since  none of these Acts contain similar exemptions in favour of  the properties  of States,  it is clear that they purport to  levy taxes  on them.  This is  followed  by  the observation that  though the  States seek  an exemption from such levies  on the  basis of  clause (1) of Article 289, as per the  ratio of the APSRTC Case, clause (1) has to be read in the  context of clauses (2) and (3) of that Article. This would, it  is stated,  lead to  the consequence  that  if  a Parliamentary law  within  the  meaning  of  clause  (2)  of Article 289  is made,  the area covered by that law would be removed from  the field occupied in clause (1); for support, an analogy  is drawn  from the  decision in  R.C. Cooper  v. Union of India [1970] 1 SCR 248.      Thereafter, the  meaning and  scope of  Article 289  as well  as   its  underlying   objective  are  ascertained  by contrasting it  with Section 155 of the 1935 Act. The use of the  words  "lands  and  buildings"  in  Section  155(1)  is analysed to  arrive at  the conclusion that these words were included to empower the federal legislature to levy taxes on lands and buildings situated within the Chief Commissioner’s Provinces. It  is then noted that Article 289 uses the wider expression ‘property’,  but that  the same  reasoning  holds good for  the preset  Union Territories, making the property and income of State situated within Union Territories exempt from "Union  Taxation". With  respect to  the  provision  to Section 155(1),  it  is  observed  that  the  provision  was automatically applicable on its own force. It did not define the  trading   and   business   operations   of   Provincial Governments, nor  did it  specify which  of these operations would be subject to Federal Taxation. It is then stated that the same  position continues  in Article  289 with  the only difference being the requirement of a the enactment of a law by Parliament  in this  behalf. Thereafter,  it is  observed that the  exemption in  clause (1) of Article 289 is subject to clause  (2) of  Article 289.  Clause (2)  is analysed and interpreted as  clarifying clause (1) to the extent that the exemption upon  the income of Provincial Government operates only when  such income  is carried  on for  the  purpose  of governmental  functions  and  not  for  trade  and  business activities, carried  on with the profit motive. It is stated

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that though  "trade and business" ordinarily has a very wide and  ambiguous   meaning   (certain   English   and   Indian authorities are  cited to  illustrate this  point), but, for the purposes  of clause  (2) of Article 289, they have to be given a  restricted meaning.  It is,  therefore, stated that under Article 289(2), the trading and business activities of State Governments,  which are  carried on  with  the  profit motive, will  be liable  to tax  and  cannot  avail  of  the exemptions in Article 289(1).      Clause (2)  is further  analysed and  is interpreted as having been included for the purpose of removing the trading and  business  activities  of  State  Governments  from  the purview of  the exemption  in clause  (1).  However,  it  is stated, such  a removal  is not  automatic and  is dependent upon the  enactment of  a Parliamentary  Law  which  imposes taxes on  specified trading and business activities of State Governments.      Thereafter, the  question whether  Parliament  has,  in exercise of  powers under  Article 289(2),  imposed taxes on the trading and business activities of State Governments, is sought to  be addressed.  In this  respect, the Act, the New Delhi  Municipal  Committee  Act  and  the  Delhi  Municipal Corporation Act,  which are deemed to be post-Constitutional enactments, are  examined. It  is  noted  that  while  these enactments  contain   specific  exemptions   in  favour   of properties of  the Union and also exempt properties used for ‘charitable purposes’  and ‘public  worship’,  they  do  not exempt properties  of State  Governments. It  is stated that the  latter  omission  must  be  deemed  to  be  deliberate. Thereafter, it is stated that two views are possible in this regard. The  first is  to  adopt  the  position  that  since neither of  these enactments are purported to have been made under Article  289(2), they  should not be treated as having been enacted  for that  purpose and, consequently, should be held to  be incapable  of levying  taxes  on  any  property, whether occupied  for governmental  or trading  purposes, of the State  Governments. The  second view,  which  Reddy,  J. adopts, is  to  take  the  position  that  the  Doctrine  of Presumption of  Constitutionality of  Legislations points in favour of  holding that  the Act  and  the  Delhi  Municipal Corporation Act  are laws  made by  Parliament under Article 289(2), and  taxes  imposed  by  them  upon  the  properties occupied  for  trading  and  business  activities  by  State Governments would  be  valid  and  effective.  A  number  of decisions  of   this   Court   are   cited   to   show   the jurisprudential  basis   of  this   tool  of  Constitutional interpretation. It  is pointed  out that  though neither  of these legislations  purport to  have been made under Article 289(2), but,  since this  is  normal  practice  in  that  no legislation specifies the provision of the Constitution that it is  enacted under, this fact need not be over-emphasised. It is,  therefore, held  that the  levy of property taxes by these enactment  is valid  to the  extent that it relates to lands and  buildings owned  by State Governments and used by them for trade and business purposes. [In an earlier part of the opinion, the difficulty in drawing a distinction between governmental and  business functions is noted and an example in respect of gues-touses maintained by State Governments is supplied]. Thereafter,  it is  stated that  it  is  for  the "appropriate  assessing   authority"  to   determine  "which land/building falls within which category in accordance with law and  take appropriate further action". It is then stated that  since,   under   these   enactments,   the   assessing authorities  are   required  to   decide  several  difficult questions as  to what  amounts to ‘charitable purpose’ etc.,

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the obligation imposed by such directions would not prove to be too  onerous to discharge. Reddy, J. sums up the issue by recommending to  the Union that it consider granting a total exemption in favour of all properties of State Governments.      We are  of the  opinion that  of the two possible views expressed by  Reddy, J.,  it is  the first which ought to be preferred. We  think that  the second  view is  fraught with several  difficulties.  Such  a  construction,  while  being violative of  the scheme  envisaged by  the Framers  of  the Constitution, may well result in a situation that was sought to be avoided by them. The directions may also lead to grave practical difficulties;  moreover, since  the effect  of the directions would  be to  vest the executive authorities with substantial policy  making powers, their issuance might well be offensive  to established  principles  of  delegation  of powers.      We shall  now set  out the reasons which cause us to so think; in  doing so,  we may  have to  revisit some  of  the ground that  has already  been  traversed  by  us,  but  the repetition can  be justified by the narrower focus that will now be imparted to those aspects.      Articles 285  and 289,  and their  predecessors in  the 1935 Act,  owe their  origin to  the  American  doctrine  of Inter-governmental   Tax   Immunity.   This   doctrine   was enunciated n  the case  of McCulloch  Vs. Maryland  (supra). However, the  doctrine was  substantially  modified  by  the decision in  South Carolina  Vs. United States (supra) which drew  a   distinction  between   strictly  governmental  and business functions  of governments.  In the  latter case, it was  held   that  the   governmental  functions   of   State Governments would  be exempt from Federal Taxation but their commercial functions would be subject to the levy of Federal Taxes. This  case imposed  upon Courts  the heavy  burden of determining in specific cases when a particular function was or was  not governmental.  A number of conflicting decisions were rendered  and caused  a great  deal of  confusion as to which of the activities of governments were to be classified as ’business’  or ’proprietary’  and were,  therefore, to be liable to  Federal Taxation. The controversy was set at rest by a  unanimous decision  of the  U.S. Supreme  Court in new York Vs.  United States  [326 U.S. 572; 90 L.ED. 326 (1946)] wherein it  was concluded  that the  artificial  distinction between governmental  and proprietary/business  functions of States was unworkable and required to be abandoned.      The difficulty in determining the distinction between a governmental function  and a trading or business function of the State has also been felt and recognised in Australia. In South Australia Vs. Commonwealth [(1942) 65 C.L.R. 373], the changing character  of government functions of the State was noted and  it was  held that,  "In a  fully  self-government country when  a Parliament determines legislative policy and an executive  government carries  it out,  any activity  may become a function of government if Parliament so determines" [supra at  p.423]. The  Court in  this decision  come to the conclusion that the best way to avoid the controversy was to allow Parliament  to decide, by law, which of the activities of the State would be classified as relating to business and would consequently be liable to taxation.      Under the  predecessor  of  Article  289,  i.e.,  under proviso (a) to Sections 155 (1) of the 1935 Act, the Federal government  was   empowered  to  levy  taxes  on  lands  and buildings of  Provincial Governments  used by them for trade or  business.   The  provision  itself  vested  the  Federal Government with  the power  to levy such taxes and there was no requirement  for the  enactment of a specific law in that

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behalf. This  position continued  till the Constitution came into force.      When Sir  B.N. Rau  prepared  his  Draft  Constitution, Clause 207 (present Article 289) was drafted on the basis of Section 155  of  the  1935  Act.  An  attempt  was  made  to incorporate the  U.S. position prevailing after the decision in the  South Carolina  case (supra) by stipulating that all trading activities  of State  Governments would be liable to Union Taxation.  However, even  under  this  provision,  the power to  tax was  automatic and  did not require a specific law. [See  : A Note on certain clauses by the Constitutional Adviser, B. Shiva Rao, Vol. III, p.197 at PP. 204-205].      The Expert  Committee on Financial Provisions, however, recommended   that   quasi-trading   activities   of   State Governments should  be exempt  from Union  Taxation. [See  : Report of  the Expert  Committee, B.  Shiva Rao,  Vol.  III, p.260 at p.266].      Even  when  the  Drafting  Committee  incorporated  the provision as Draft Article 266 and subsequently modified it, there was  no stipulation  for a law before the power to tax could be  exercised. [See  the text of Draft Article 266, B. Shiva Rao, Vol. IV, p.676]. At the Premier’s Conference held in July,  1949, the provision met with severe criticism. The Premier of  the United  Province suggested  that all trading and business  activities of State Governments be exempt from Union Taxation.  Several other  Provinces also  made similar representations.  Based   on  these   representations,   the Drafting Committee  made a substantial change in the text of Draft Article  266.  A  provision  similar  to  the  present Article 289(2),  whereby Parliament  would have the power to determine which  of the  trading and  business activities of State Governments  would be  liable to  Union  Taxation  was incorporated. [See  :  Revised  draft  by  the  Ministry  of Finance, B. Shiva Rao, Vol. IV, pp.731-732].      When Draft Article 266 was discussed in the Assembly, a number of  members expressed  fears that  Union Taxation  of commercial activities  of State  Governments would check the expansion of  industrialisation and  reduce the  capacity of States to perform their ordinary functions. They, therefore, demanded that  the trading  and business activities of State Governments  be   exempt   from   Union   Taxation.   Alladi Krishnaswamy Ayyar  sought to  allay these  apprehensions by making an elaborate statement, the relevant part of which is quoted below  [Constituent Assembly  Debates, Vol.  IX,  pp. 1167-69]:      "....It is  a permissive power that      is given  to Parliament  under  the      section. There is no duty case upon      Parliament to  levy a  tax and I am      sure  in  the  larger  interest  of      trade and industry, Parliament will      certainly not  go to  the length of      taxing ...  industries  which  have      been thriving.  .... So  far as the      United States  is concerned  in the      early  days  though  there  was  no      express   provision   through   the      medium   of    the   doctrine    of      Instrumentality, they held that the      State  cannot   tax   the   Federal      Government    and    the    Federal      Government  cannot  tax  the  State      instrumentality  because  both  are      parts   of   a   single   composite      mechanism and  if you permit one to

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    tax the  other, it  may destroy the      whole   mechanism.    Later,    the      doctrine of  instrumentality itself      was felt  to be  not  n  the  large      interest of  the State,  and  quite      recently the  swing of the pendulum      is the other way. The other day one      of the  most enlightened of Supreme      Court Judges  held in what is known      as the  Spring of  the State of New      York, in  regard to certain springs      which were  worked by  the State of      New  York   -  for   this  part  of      business they held that there is no      immunity of  the  State  from  tax.      They said  ’You have  to draw  some      line between  one kind  of activity      of a  State  and  another  kind  of      activity. Of  course it cannot be a      rigid definition.  What may  be  in      one sphere  may  easily  pass  into      another sphere with the progress of      the State  and with the development      of the  polity  in  the  particular      State’. [In  all probability,  this      is a  reference to  the opinion  of      Frankfurter, J.  in  new  York  Vs.      United States  (supra) which upheld      the application of a Federal Excise      Tax to  the sale  of mineral waters      bottled by  the State  of New  York      with a  view to providing funds for      a  State   health   resort].   ....      [N]ormally  speaking,   you  cannot      regard at  the  present  day  under      existing conditions the carrying on      of trade  and business  as a normal      or   ordinary   function   of   the      Government.  It  may  develop  into      ordinary function - certain aspects      of  it,  especially  the  transport      service and certain key industries,      may soon  become the  parts of  the      State    enterprise.    ....    The      Parliament will  take note  of  the      progressive   tendency    of    the      particular times  and may  at  once      declare accordingly.  It might  not      have been  the ordinary function of      Government  before.   Now  it   may      become an  ordinary function. There      will be  sufficient  elasticity  in      clause (3) to enable the Government      to exempt  from taxation particular      trades  or   industries  which  are      started as  public utility services      or declare  them as  regular  State      industries. Nobody  can question  a      law made  by Parliament because the      Parliament  has   stated   that   a      particular industry  is an ordinary      function  of   the  State   whereas      according  to  the  notions  of  an      individual economist  A or  B it is      not  a   ordinary  function   of  a

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    Government.  Parliament   will  lay      down the  law of  the land  and  it      will be  the sole  arbiter  of  the      question as  to whether  it  is  an      ordinary function  of Government or      not.      Therefore having regard:      (a)  to   the  plenary   power   of      Parliament to exempt and particular      industries, and particular business      from  the   operation  of  the  tax      provision.      (b) having  regard to the fact that      it is  not obligatory on Parliament      to levy any tax.      (c) that  the  very  conception  of      State industry  may change with the      further evolution  of the State and      changing times, and      (d) to the inter-connection between      one State and another.      it  will   be  very   difficult  to      differentiate  between   particular      States, between  States which  have      been working certain industries and      other States.  .... [T]o lay down a      general principle  of law that even      at  the   present  day  before  the      provinces are  on their  feet every      trade or  business is  exempt  from      taxation will  lead  to  wild-goose      schemes being  started  by  various      provinces. They  may not  take into      account the  general  interests  of      the trade and industry in the whole      country. They  may not  of industry      and    another.     Under     those      circumstances    the     particular      provision which  has been  inserted      by Dr.  Ambedkar is a very salutary      one and is consistent with the most      advanced principles  of  democratic      and  federal   policy  in  all  the      countries."      (Comment and Emphasis supplied)      It is,  therefore, clear that clause (2) of Article 289 was a  well-considered compromise which was arrived at after balancing the demands of those who sought complete exemption of commercial  activities of  State Governments  from  Union Taxation and  those who were in favour of levying such Union Taxes. The  Framers  desired  that  the  issue  whether  the trading and  business activities of State governments should be subject  to Union  Taxation, be  left to  the  wisdom  of Parliament. As is evident from the reference to New York Vs. United States  (supra) in the extracted portion, the Framers were conscious  of the  difficulty in drawing a line between the  governmental   and  commercial   functions   of   State Governments and  they hoped  that Parliament would take into account a  shot of  relevant factors  before enacting  a law which  would   specify  the   trading  activities  of  State Governments making  them liable  to Union  Taxation.  It  is important to  note that the Framers did not expressly confer upon the  Union the  power to  tax commercial  activities of State governments.  The exercise  of such  a power  is  made conditional  upon   the  enactment   of  a   special,   duly

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considered, legislation.  It is  also important to note that clause (2)  of Article  289 has  made a  departure from  the proviso to  Section 155(1).  Under the  present scheme,  the power to  tax is  not automatic  and the  responsibility  of specifying the  trading and  business  activities  of  State Governments which  would be  liable  to  Union  Taxation  is expressly vested in Parliament.      Neither the  Act, which  is a  1911 enactment,  nor the Delhi Municipal  Corporation Act,  can qualify as laws under Article 289.  They do  not  specify  which  of  the  trading activities of  State Governments  are  liable  to  taxation; indeed, by  their very nature, they cannot purport to do so. It must  be remembered  that the Act and the Delhi Municipal Corporation Act  are not  Parliamentary Laws  in  the  sense envisaged by  Article 289(2). Though the Act is sought to be construed as a post-Constitutional, Parliamentary enactment, the fact  remains that  it is a pre-Constitutional, colonial legislation. As  for the Delhi Municipal Corporation Act, it is, in  essence, an  ordinary  Municipal  legislation.  What makes it  special is  the fact,  occasioned in  its case  by geographical and  historical factors, that it was enacted by Parliament instead  of  by  a  State  legislature.  In  this regard,  we  may  recall  the  submissions  of  the  learned Attorney General  n respect of how Parliament discharges its obligation towards  enacting  laws  for  Union  Territories. After stating  that Parliament  cannot afford  to  undertake threadbare  discussions   before   legislating   for   Union Territories, the learned Attorney General referred us to the following passage  of the  decision of  chis Court in Ramesh Birch v. Union of India (1989) Supp.1 SCC 430 at 471:      "[Union      Territories]       are      territories situated  in the  midst      of  contiguous   territories  which      have a proper legislature. They are      small territories falling under the      legislative     jurisdiction     of      Parliament   which    has    hardly      sufficient time  to look  after the      details of  all  their  legislative      needs and  requirements. To require      or expect  Parliament to  legislate      for    them     will    entail    a      disproportionate  pressure  on  its      legislative schedule.  It will also      mean the unnecessary utilisation of      the  time  of  a  large  number  of      members of  Parliament for,  except      the few  (less  than  ten)  members      returned  to  Parliament  from  the      Union  territory,   none  else   is      likely to  be  interested  in  such      legislation. In  such a  situation,      the  most   convenient  course   of      legislating   for   them   is   the      adaptation, by  extension, of  laws      in force  in  other  areas  of  the      country. As  Fazal Ali,  J. pointed      out in  the Delhi Laws Act case, it      is not a power to make laws that is      delegated  but   only  a  power  to      ’transplant’ laws  already in force      after having  undergone scrutiny by      Parliament  or  one  of  the  State      legislatures, and that too, without      any material change."

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    It  is,   therefore,  clear  that  it  would  be  quite dangerous to  assume that  when Parliament enacted the Delhi Municipal  Corporation   Act,  it   had  intended  that  the enactment should  secure the  purpose enshrined  in  Article 289(2). If  any safe  assumption is to be drawn, it is this: in all  probability,  while  enacting  tee  Delhi  Municipal Corporation  Act,  Parliament  must  have  ’transplanted’  a municipal legislation  existing in a certain State, made the necessary changes  and completed the procedural formalities. That would  explain why  the Delhi Municipal Corporation Act (as also  the new Delhi Municipal Committee Act) contains an exemption on  the lines of the one prescribed by Article 285 -  this   is  a   typical  feature   of  ordinary  Municipal legislations, which  are enacted  by State  legislatures who are conscious  of the mandate of Article 285. Moreover, such legislations  do   not  contain   exemptions  in  favour  of properties  of   State  Governments   because,  within   the territory  of   a  State,  the  properties  of  other  State Governments  are   liable  to  taxation.  So,  when  such  a legislation is  ’transplanted’ almost  verbatim into a Union Territory, it  will obviously  not contain  an exemption  in favour of  properties of  State Governments.  In the face of the actual conditions which govern the enactment of laws for Union Territories by Parliament, (these conditions have been statutorily provided;  moreover this Court has already taken notice of  them) it is difficult to assume that the omission of an  exemption in  the Delhi  Municipal Corporation Act in favour of  State Governments, is deliberate. The Act and the Delhi Municipal  Corporation Act  cannot, therefore, be said to meet  the special  requirements which have been expressed by the Framers to be necessary for complying with the spirit of Article 289(2).      Reddy, J.  has taken  the view  that  the  Doctrine  of Presumption of  Constitutionality of  Legislations  requires the saving  of the  taxes which  these Acts  impose upon the commercial activities  of State  Governments. The  Act is  a pre-Constitutional enactment.  The basis of this doctrine is the assumed  intention of  the legislators not to transgress Constitutional boundaries. It is difficult to appreciate how that intention can be assumed when, at the time that the law was passed, there was no such barrier and the limitation was brought in by a Constitution long after the enactment of the law. (This  Court has  in  a  Constitution  Bench  decision, Gulabbhai Vs.  Union of  India, AIR  1967 SC  1110 at  1117, raised doubts  along similar  lines). The  Framers obviously wanted the  law under  Article 289(2)  to be  of a very high standard. Can  these laws,  which are  silent  on  the  most important aspect  required  by  Article  289(2),  i.e.,  the specification of the trading activities of State Governments which would  be liable  to Union  Taxation, be  said to meet with that standard?      The Doctrine  of Presumption  of  Constitutionality  of Legislations is  not one  of infinite  application;  it  has recognised limitations.  It  is  settled  law  that  if  any interpretation is  possible which  will save an Act from the attack of  unconstitutionality, that  interpretation  should always  be   accepted  in   preference  to   an  alternative interpretation that  might also be possible, under which the statute would  be void. However, this Court has consistently followed a  policy of  not putting  an unnatural  and forced meaning on  the words that have been used by the legislature in the  search for  an interpretation  which would  save the statutory provisions. We are not "free to stretch or pervert the language  of the enactment in the interests of any legal or Constitutional  theory" See In Re the Central Provinces &

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Berar Act  No. XIV of 1938, (1939) FCR 18 at p. 37; also see : Diamond  Sugar Mills  Ltd. Vs.  The State of U.P. [1961] 3 SCR 242 at 248-249.      The Act  and the  Delhi Municipal  Corporation Act  are ordinary Municipal  legislations. They  do not,  and cannot, purport to  be laws made by Parliament under Article 289(2). There is  no reason  why such a strained reasoning should be employed to  save some  of the  taxes that may be capable of being imposed  on certain  properties of  State Governments. There seems  to be  no  pressing  reason  for  invoking  the doctrine. Reddy, J. has, in the earlier part of his opinion, held that  a large number of properties of State Governments would be  exempt from taxes leviable under these Acts due to the operation of Article 289(1). To employ such reasoning to construe Article  289(2) in a bid to save what would only be a reduced amount, does not seem justified.      The practical  effect of  the directions recommended by Reddy, J.  is also  worth noticing.  It is  abundantly clear that the  task of  determining which  of the  activities  of Governments are governmental and which are commercial, is an extremely difficult  one. Reddy, J. entrusts this assignment to the  "assessing authorities  under the Acts" who can only be  municipal  authorities.  This  is  an  issue  which  has confounded courts  in the  U.S. and in Australia for several years. This issue was considered to be so troublesome by the Framers that  they entrusted  it to  Parliament in  the hope that it  would fully deliberate the matter before enacting a comprehensive legislation.      In the In Re: The Delhi Laws Act case, AIR 1951 SC 324, this Court  authoritatively held that the legislature cannot delegate its  essential  policy-making  function.  Over  the years, this  Court has  elaborated this  proposition to hold that the  legislature can  delegate some  of its legislative functions provided  it lays  down the policy in clear terms. The legislature  is required to declare the policy of law in unambiguous terms,  lay down  elaborate legal principles and provide illuminating  standards  for  the  guidance  of  the delegate.  Even   though  this   Court  has,  on  occasions, sanctioned  very   broad  delegations  of  taxing  power  to municipal bodies,  to delegate  the task  of carving out the distinction between  governmental and  business functions of State Governments  to municipal authorities would clearly be against the  interdiction in  the Delhi Laws Act case as the assignment requires  not only  the  making  of  policy,  but indeed, the  making of very difficult and challenging policy choices. Reddy,  J.  has  noted  that  the  Delhi  Municipal Corporation Act  provides exemptions in favour of activities that  are   capable  of   being  classified  as  ’charitable purpose’, ’public worship’ etc. and states that to ascertain the ambit  of these  categories is an equally difficult task which  is   already  being   discharged  by   the  assessing authorities. However, the point that needs to be emphasised, is that  Section 115  of the Delhi Municipal Corporation Act defines these  terms  and  provides  guidelines  in  respect thereof.  However,  there  is  no  provision  in  the  Delhi Municipal Corporation  Act which states that the trading and business operations of State Governments would be subject to property taxes.  The Act  is equally  silent on this aspect. Consequently, no  guidelines in  this behalf are to be found within the  parameters of  these legislations.  Under  these circumstances, in  the complete  absence  of  any  statutory policy or  any guidelines  for  the  delegation  of  such  a policy, we  believe  that  it  would  be  impermissible  and hazardous to  directly assign such a function, nay power, to executive Municipal authorities.

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    The  decision   whether   the   properties   of   State Governments  occupied  for  commercial  purposes  should  be subject to  the levy  of Union Taxes is one that is required by  Article  289(2)  to  be  made  by  a  legislation  which specifies the  activities which would be liable to tax. This decision cannot be entrusted to municipal functionaries. For these reasons, we find ourselves unable to agree with Reddy, J. in  his finding  that the properties of State Governments occupied by  them for trade or business purposes are subject to the  levy of  taxes under the Act and the Delhi Municipal Corporation Act.      we may now summarise our conclusions: i)   The  central  issue  in  the  present  matter,  namely,      whether the  properties owned  by the  States which are      situated  within  Union  Territories  are  exempt  from      paying property taxes, was specifically answered in the      affirmative in  the Sea  Customs case; the observations      in this  regard are  part of the ratio decidendi of the      case and  having been  re-affirmed  by  a  Constitution      Bench which  was bearing  a litigation  inter partes in      the APSRTC case, they constitute good law; ii)  The definition  of ’State’ provided in Section 3(58) of      the General  Clauses Act,  which declares that the word      ’State’   would    include   ’Union    Territory’,   is      inapplicable to Article 246 (4); iii) The term  "Union Taxation"  used in Article 289(1) will      ordinarily mean  "all taxes  leviable by the Union" and      it includes  within its  ambit taxes on property levied      within Union  Territories; therefore,  the  States  can      avail of  the exemption  provided in  Article 289(1) in      respect  of  their  properties  situated  within  Union      Territories; iv)  Property taxes  levied by  municipalities within  Union      Territories  are  properly  within  the  ambit  of  the      exemption provided in Article 289(1) and the States can      avail of the exemption.      In the  result, the Civil Appeals and the Special leave Petitions are  dismissed. There  shall be  no  order  as  to costs.

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B.P. JEEVAN REDDY (on behalf of A.S. ANAND, SUHAS C. SEN,                   K.S. PARIPOORHAN AND B.N. KIRPAL, JJ.)

    Article 289(1)  of the  Constitution of  India declares that the  "property and  income of  a State  shall be exempt from Union  taxation". The question in this batch of appeals is whether  the properties  of the  States situated  in  the Union Territory   of  Delhi are  exempt from  property taxes levied under  the municipal enactments in force in the Union Territory of  Delhi. The Delhi High Court has taken the view that they  are. That  view is  challenged in  these  appeals preferred by  the New  Delhi Municipal  Corporation and  the Delhi Municipal Corporation.      Leave granted in the Special Leave Petitions.      Prior to  1911-12, a  large part  of the  territory now comprised in  the Union Territory of Delhi was a district of the Province  of Punjab.  By a  proclamation dated September 17, 1912, the Governor General took the said territory under his immediate  authority and  management, to be administered as a separate Province to be known as the Province of Delhi. [This was  in connection  with the  decision  to  shift  the Capital from Calcutta to Delhi.] In the same year, the Delhi

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Laws Act, 1912 {1912 Act] was enacted. It came into force on and with effect from the Ist day of October, 1912. Schedule- A to  the Act  defined the  "territory" covered  by the  new Province. Sections  2 and  3 of  the 1912 Act provided inter alia that  the creation  of the  new Province of Delhi shall not effect  any change in the territorial application of any enactment. One  of the  Acts so  applying to  the  territory comprised in  the new  Province  of  Delhi  was  the  Punjab Municipal Act, 1911.      In the  year 1915,  another Act  called "The Delhi Laws Act, 1915"  [1915 Act]  was enacted.  Under this  enactment, certain areas  formerly comprised in the United Provinces of Agra and  Oudh were included in and added to the Province of Delhi with  effect from  Ist April,  1915. Section  2 of the 1915 Act also contained a saving clause similar to Section 2 of the 1912 Act.      In the  Constitution  of  India,  1950,  as  originally enacted, the  First Schedule  contained four  categories  of States, viz.,  Part ‘A’,  Part ‘B’,  Part ‘C’  and Part ‘D’. Part ‘D’  comprised only of Andaman and Nicobar Islands. The Chief Commissioner’s  Province of  Delhi was one of the Part ‘C’ States.  By virtue  of the  Part ‘C’  States [Laws] Act, 1950,  the   laws  in   force   in   the   erstwhile   Chief Commissioner’s Province  of Delhi were continued in the Part ‘C’ State of Delhi. This Act came into force on the 16th day of April, 1950.      In the year 1951, the Parliament enacted the Government of Part  ‘C’ States  Act, 1951.  This Act  contemplated that there shall be a legislature for each of the Part ‘C’ States specified therein  which included  Delhi. Section  21 stated that the  legislature of  a Part  ‘C’ State  shall have  the power to  make laws  with respect  to  any  of  the  matters enumerated in  List-II and  List-III of the Seventh Schedule to the  Constitution. In  the  case  of  Delhi  legislature, however, it  was provided  that it  shall not  have power to make  laws   with  respect   to  matters  specified  therein including     "the  constitution  and  powers  of  municipal corporations and  other local  authorities,  of  improvement trusts and of water supply, drainage, electricity, transport and other  public utility  authorities in  Delhi or  in  New Delhi". Section  22  provided  that  any  law  made  by  the legislature of  a Part‘C’  State shall,  to  the  extent  of repugnancy with  any law made by Parliament, whether enacted earlier or later, be void. It is necessary to notice the two distinctive features of the legislatures of Part ‘C’ States; not only  were they created under an Act made by Parliament, the laws  made by  them even  with respect  to  any  of  the matters enumerated  in List-II  were subject to any law made by the  Parliament. In  case of  repugnancy, the law made by legislature was  to be  of no  effect. So  far as  Delhi  is concerned, the  Parliament placed certain additional fetters referred to in Section 26.      It is  stated that  in the year 1952, a legislature was created for  Delhi which  functioned upto  November 1,  1956 when the  Government  of  Part  ‘C’  States  Act,  1951  was repealed by  Section 130  of the States’ Reorganisation Act, 1956. While repealing the Government of Part ‘C’ States Act, 1951, the  States’ Reorganisation  Act, 1956 did not provide for the creation or continuance of legislatures for the Part ‘C’ States.  The legislature constituted for Delhi thus came to an end.      By Constitution  Seventh [Amendment] Act, 1956, some of the Part  ‘C’ States  ceased to exist, having been merged in one or  the  other  State  while  some  others  continued  - designated as  Union territories.  The categorisation of the

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States into  Parts A,B,C  and D  was done  away with. In its place,  the   First  Schedule   came  to  provide  only  two categories, viz.,  "(i) the  States"  and  "(ii)  the  Union territories". The  Seventh  [Amendment]  Act  specified  six Union   territories,    viz.,   Delhi,   Himachal   Pradesh, Manipur,Tripura, Andaman  and Nicobar  Islands and  Laccadiv Minicoy and  Amindivi Islands.  Delhi thus  became  a  Union territory. With  the  inclusion  of  Goa  and  other  former Portugese territories  in the  Union, the  number  of  Union territories grew  to  eight  by  1962.  In  that  year,  the Constitution Fourteenth  [Amendment} Act,  1962 was enacted. Pondicherry was  added as a Union territory as S1.No.9. More important, the  said Amendment Act introduced Article 239-A. The new  Article provided that "Parliament may by law create for any  of  the  Union  territories  of  Himachal  Pradesh, Manipur, Tripura,  Goa, Daman  and Diu  and  Pondicherry,  a body,  whether  elected  or  partly  nominated,  and  partly elected  to   function  as   a  legislature  for  the  Union territory, or  a council  of ministers,  or both  with  such constitutional powers  and functions in each case, as may be specified in the law" [Emphasis added]. It is significant to note that the said article did not provide for creation of a legislature or  a council  of ministers, as the case may be, for the Union Territory of Delhi.      Pursuant  to  Article  239-A,  Parliament  enacted  the Government  of  Union  Territories  Act,  1963  [1963  Act]. Obviously, this  Act applied only to those Union territories as were  referred to  in Article  239-A. It did not apply to Delhi.  This   Act  provided  for  creation  of  Legislative Assemblies for  the Union  territories mentioned  in Article 239-A and  the extent  of their  legislative power.  Section 3(1) declared  that "there  shall be  a Legislative Assembly for each  Union territory"  whereas Section  18(1)  provided that "subject to the provisions of this Act, the Legislative Assembly of a Union territory may make laws for the whole or any part  of the  Union territory with respect to any of the matters enumerated  in the State List or the Concurrent List in the  Seventh Schedule  to the Constitution insofar as any such matter is applicable in relation to Union territories." Sub-section (2) of Section 18 read with Section 21, however, conferred over-riding  power upon the Parliament to make any law with  respect to any matter for a Union territory or any part thereof. In case of inconsistency between a law made by Parliament and a law made by the legislature of any of these Union territories,  the latter  was to be void to the extent of repugnancy, notwithstanding whether the Parliamentary law was earlier  or subsequent  in point  if time. Section 19 of the Act  exempted the  property of  the Union from all taxes imposed by or under any law made by the Legislative Assembly of a Union territory except insofar as is permitted by a law made by Parliament.      By the  Constitution Sixty Ninth [Amendment] Act, 1991, Article  239-AA   was  introduced   in  Part-VIII   of   the Constitution .  This Article re-named the Union Territory of Delhi as  the "National  Capital  Territory  of  Delhi"  and provided that there shall be a Legislative Assembly for such National Capital  Territory.  The  Legislative  Assembly  so created was  empowered by clause (3) of the said Article "to make laws  for the whole or any part of the National Capital Territory with  respect to  any of the matters enumerated in the State  List or  in the  Concurrent List,  insofar as any such matter  is applicable  to  Union  territories,  except, matters with respect to Entries 1,2 and 18 of the State List and Entries 64,65 and 66 of that List insofar as they relate to the  said Entries  1,  2  and  18".  Clause  (3)  further

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provided that  the  power  conferred  upon  the  Legislative Assembly of  Delhi by  the said  article shall  not derogate from the powers of the Parliament "to make laws with respect to any matter for a Union territory or any part thereof". It further provided  that in  the case  of repugnancy,  the law made by  Parliament shall prevail, whether the Parliamentary law is  earlier or  later to  the  law  made  by  the  Delhi Legislative Assembly.  The Parliament  is also  empowered to amend, vary  or repeal  any  law  made  by  the  Legislative Assembly. Article  239-AA came  into force  with effect from February 1,  1991. Pursuant  to the  article, the Parliament enacted the  Government of  National  Capital  Territory  of Delhi Act,  1991. It not only provided for constitution of a Legislative Assembly  but also its powers as contemplated by Article 239-AA.  This Act too came into force on February 1, 1991. The subordinate status of the Delhi Legislature is too obvious to merit any emphasis.      So far as the MUNICIPAL LAWS GOVERNING THE TERRITORY OF DELHI is  concerned, the following is the position: by Delhi Laws Act,  1912, referred to supra, the Punjab Municipal Act continued to  govern the  territory comprised  in the  Chief Commissioner’s Province  of Delhi. The Act is stated to have been  extended   to  Part   ‘C’  State   of  Delhi  under  a notification issued  under Part  ‘C’ State [Laws] Act, 1950. In the  impugned judgment,  the High  Court has  stated  the following facts:      "The  various   Punjab   enactments      which were  then in  force  in  the      territory of  Delhi continued to be      in force  by virtue  of  the  Delhi      Laws Act  of 1912  and later by the      Part C  States Laws Act of 1950 and      the Union  Territories Laws  Act of      1950. The application and the later      extension of  this law to the Union      Territory of  Delhi was, therefore,      not by  the authority  of the State      Legislature but that of the Central      Legislature, that  is, the  Central      Legislature under the Government of      India Act  followed by  the Central      legislature under  the Constitution      of India,  that is,  the Parliament      of India......  The Delhi  Laws Act      1912, the  Union Territories [Laws]      Act, 1950  as  indeed  the  Part  C      States [Laws]  Act, 1950  were  all      central   statutes   and   when   a      provincial Act  or an Act which may      be treated  as a  provincial Act or      State  Act   was  extended   to   a      territory    by     a    particular      legislature, it  would be deemed to      be  the   enactment   of   such   a      legislature and  this principle  is      clearly recognised  by the  Supreme      Court in  the case of Mithan Lal v.      The State  of  Delhi  and  another,      1959 S.C.R.445...It  is thus  clear      that on the extension of the Act to      the Union Territory of Delhi by the      various     Central     Legislative      enactments referred  to  above,  it      became a  Central Act  or an Act of      Parliament as  if made by virtue of

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    power of  Parliament  to  legislate      for the Union territory of Delhi by      virtue of clause (4) of Article 246      of the Constitution of India."      The correctness  of the above factual statement has not been disputed by anyone before us. Indeed, the contention of Sri P.P.  Rao,  who  led  the  argument  on  behalf  of  the respondents-State governments  was to  the same  effect.  He contended that inasmuch as the Punjab Municipal Act has been extended to Part ‘C’ State of Delhi Under the Part ‘C’ State [Laws] Act,  1950 with  effect from  April 16, 1950, it is a post-constitutional enactment  made by  Parliament and hence the taxes  levied thereunder  constitute Union  taxation. He placed strong  reliance upon  the decision  in Mithan Lal v. The State  of Delhi & Anr. [1959 S.C.R.445] and also certain observations  in   T.M.  Kanniyan  v.  Income  Tax  Officer, Pondicherry &  Anr. [1968  (2) S.C.R.103] in that behalf. It is obvious  that  this  was  also  the  case  of  the  State governments before  the Delhi  High  Court.  We,  therefore, proceed on  the basis  that the  Punjab  Municipal  Act  was extended to  Part ‘C’  State of Delhi under and by virtue of the Part  ‘C’ State of Delhi under and by virtue of the Part ‘C’ States  [Laws] Act, 1950 which came into of the force on April 16, 1950.      By virtue  of the Constitution Seventh [Amendment] Act, 1956, the  Part ‘C’ State of Delhi was designated as a Union Territory. The  Punjab Municipal Act continued to govern the Union Territory  of Delhi.  In the year 1957, the Parliament enacted the Delhi Municipality Act, 1957. The First Schedule to the  Act specified  the boundaries  of New  Delhi  within which area  the Punjab  Municipal Act  continued  to  be  in force. The  remaining  area  was  designated  as  the  Delhi Municipal  Corporation   area  and   the   Delhi   Municipal Corporation Act, 1957 was made applicable to it. In the year 1994,  the   Parliament  enacted  the  new  Delhi  Municipal Corporation Act,  1994 repealing Punjab Municipal Act, 1911. This Act  has been  brought into  force with effect from May 25, 1994. It is, however, confined in its application to the area comprised in the New Delhi Municipal Corporation. Delhi and New  Delhi are  thus  governed  by  different  municipal enactments. The  Delhi Municipal  Corporation  Act  and  New Delhi Municipal  Corporation Act are, without a doubt, post- constitutional laws enacted by Parliament.                          PART - II      Article 1(1) of the Constitution of India declares that India, i.e.,  Bharat, shall be a Union of States. As amended by the Constitution Seventh [Amendment] Act, clauses (2) and (3) Article 1 read:      "(2) The States and the territories      thereof shall  be as  specified  in      the First Schedule.      (3) The  territory of  India  shall      comprise--      (a) the territories of State;      (b) the Union territories specified      in the First Schedule; and      (c) such  other territories  as may      be acquired."      Clause  (30)   in  Article   366  defines   the  "Union territory" in the following words:      "‘Union territory’  means any Union      Territory specified  in  the  First      Schedule  and  includes  any  other      territory   comprised    with   the      territory   of    India   but   not

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    specified in that Schedule."      The  expression   "State"  is   not  defined   in   the Constitution. It is defined in the General Clauses act, 1397 which is  made  applicable  to  the  interpretation  of  the Constitution  by   Article  367.  As  on  the  date  of  the commencement of  the Constitution,  clause (58) in Section 3 of the  General Clauses Act defined "State" in the following words"      "(58). ‘State’  shall mean a Part A      State, a  Part B  State or a Part C      State."      The said  definition was  amended by  the adaptation of Laws Order  No.1 of 1956 issued by the President in exercise of the  power conferred  upon him  by Article  372-A of  the Constitution  introduced   by   the   Constitution   Seventh [Amendment] Act. The amended definition reads thus:      "(58) ‘States’--      (a) as  respects any  period before      the     commencement     of     the      Constitution  (Seventh   Amendment)      Act, 1958,  shall  mean  a  Part  A      State, a  Part B  State or a Part C      State; and      (b) as  respects any  period  after      such  commencement,  shall  mean  a      State  specified   in   the   First      Schedule to  the  Constitution  and      shall include a Union territory."      The definitions  in the  General  Clauses  Act,  it  is necessary to  remember, have  to be read and applied subject to the  opening words  in Section  3, viz., "unless there is anything repugnant in the subject or context....".      Part-XI  of   the   Constitution   contains   provision governing relations  between the  Union and the States. This part  is   divided  into   two  chapters,   viz.,  Chapter-I containing Articles  245 to  255 and  Chapter-II  containing Articles  256   to  263.   Chapter-I   carries   the   title "legislative   relations"   while   Chapter-II   is   called "Administrative relations".  Article 245,  which carries the heading/marginal note "The extent of laws made by Parliament and the  Legislature of States" contains two clauses. Clause (1)  says   that  subject   to  the   provisions   of   this Constitution, Parliament  may make laws for the whole or any part of  the territory  of India  and the  legislature of  a State may make laws for the whole or any part of the State." Article  246  is  of  crucial  relevance  herein  and  must, therefore, be set out in its entirety:      "246.     subject-matter  of   laws      made  by   Parliament  and  by  the      Legislatures     of     States.-(1)      Notwithstanding anything in clauses      (2)   and   (3),   Parliament   has      exclusive power  to make  laws with      respect  to   any  of  the  matters      enumerated in List I of the Seventh      Schedule   to    the   Constitution      referred to as the ‘Union List’).      (2)  Notwithstanding  anything   in      clause   (3),    Parliament,   and,      subject   to    clause   (1)    the      legislature  of  any  State...also,      have  power   to  make   laws  with      respect  to   any  of  the  matters      enumerated  in   List  III  in  the      Seventh     Schedule     to     the

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    Constitution  referred  to  as  the      ‘Concurrent List’).      (3)  Subject  to  clauses  (1)  and      (2),   the   Legislature   of   any      State....has  exclusive   power  to      make laws  for such  State  or  any      part thereof with respect to any of      the matters  enumerated in  List II      in  the  Seventh  Schedule  to  the      Constitution  referred  to  as  the      ‘State List’).      (4) Parliament  has power  to  make      laws with respect to any matter for      any of  the territory  of India not      included in a State notwithstanding      that  such   matter  is   a  matter      enumerated in the State List."             [Emphasis added]      It is  relevant to  point out  that in  clauses (2) and (3),  as   originally  enacted   -  and   upto  the  Seventh [Amendment] Act - the expression "State" was followed by the words "specified in Part-A or Part-B of the First Schedule". Similarly, the  words, "in  a State"  in  clause  (3),  were followed by  the words  "in Part-A  or Part-B  of the  First Schedule". In  other words,  clauses (2)  and (3) of Article 246 expressly  excluded Part  ‘C’ and  Part ‘D’  States from their purview.  The  position  is  no  different  after  the Constitution Seventh  [Amendment] Act,  which designated the Part-C States  as  Union  territories.  They  ceased  to  be states. As  rightly pointed  out by  a Constitution Beach of this Court  in T.M.  Kanniyan, the  context of  Article  246 excludes Union  territories from the ambit of the expression "State" occurring therein. As a matter of fact, this is true of Chapter-I  of Part-XI  of the Constitution as a whole. It may be remembered that during the period intervening between The Constitution Seventh [Amendment] Act, 1962, there was no provision  for   a  legislature   for  any   of  the   Union territories.  Article   239-A  in   Part-VII  -  "The  Union Territories" -  [which  before  the  Seventh  Amendment  was entitled "The  States in  Part-C  of  the  First  Schedule"] introduced by  Constitution Fourteenth  [Amendment] Act  did not itself  create a  legislature for  Union territories; it merely empowered  the Parliament  to create them for certain specified Union  territories [excluding Delhi] and to confer upon  them   such  powers   as  the   Parliament  may  think appropriate. Thus,  the  legislatures  created  for  certain Union territories  under the  1963 Act were not legislatures in  the   sense  used  in  Chapter-III  of  Part-IV  of  the Constitution, but  were mere  creatures of  the Parliament - some sort  of  subordinate  legislative  bodies.  They  were unlike the legislatures contemplated by Chapter-III of Part- VI of  the Constitution  which  are  supreme  in  the  field allotted to  them, i.e.,  in the field designated by List-II of the  Seventh Schedule.  The legislatures  created by  the 1963 Act  for certain  Union territories owe their existence and derive  their powers  from the Act of the Parliament and are subject  to its  over-riding authority.  In  short,  the State legislatures  contemplated by Chapter-I of Part-XI are the legislatures  of States  referred to  in Chapter-III  of Part-VI  and  not  the  legislatures  of  Union  territories created by  the 1963  Act. Union  territories are not States for the purposes of Part-XI [Chapter-I] of the Constitution.      Article 248  confers the  residuary  legislative  power upon the  Parliament. The  said power  includes the power to make any  law imposing a tax not mentioned in either List-II

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or List-III.  Articles 249, 250, 252 and 357 confer upon the Parliament power  to  make  laws  with  respect  to  matters enumerated in  List-II in  certain  exceptional  situations, which may,  for the sake of convenience, be called a case of "substitute legislation". It would be enough to refer to the marginal headings of these four Articles. They read:      "249.     Power  of  Parliament  to      legislate with  respect to a matter      in  the   State  in   the  national      interest.      250. Power   of    Parliament    to      legislate  with   respect  to   any      matter  in  the  State  List  if  a      Proclamation  of  Emergency  is  in      operation.      252. Power   of    Parliament    to      legislate for two or more States by      consent  and   adoption   of   such      legislation by any other State.      357. Exercise of legislative powers      under  Proclamation   issued  under      article 356."      We may  now set out ARTICLE 285 AND      289:      "285. exemption  of property of the      Union from  State  taxation.--  (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 an authority within a State.      (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      continues  to  be  levied  in  that      State.      289.  Exemption   of  property  and      income  of   a  State   from  Union      taxation.-- (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      authorising the  imposition of, any      tax to  such  extent,  if  any,  as      Parliament many  by law  provide in      respect of  a trade  or business of      any  kind  carried  on  by,  or  on      behalf of,  the Government 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 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

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    functions of Government."      A federation  pre-supposes two  coalescing  units:  the Federal Government/Centre  and the States/Provinces. Each is supposed to be supreme in the sphere allotted it/them. Power to tax  is an incident of sovereignty. Basic premise is that one sovereign  cannot tax  the other  sovereign. Article 285 and 289  manifest this  mutual regard  and immunity but in a manner peculiar  to our  constitutional  scheme.  While  the immunity created  in favour  of the  Union is  absolute, the immunity created in favour of the States is a qualified one. We may elaborate: Article 285 says that "the property of the Union shall...be  exempt from  all tax imposed by a State or by  any   authority  within  a  State"  unless,  of  course, Parliament  itself  permits  the  same  and  to  the  extent permitted by  it. [Clause  (2)  of  Article  285  saves  the existing taxes  until the Parliament otherwise provides, but this is  only a  transitional provision.] The ban, if it can be called  one, is  absolute and emphatic in terms. There is no way  a State legislature can levy a tax upon the property of the  Union. So  far as  Article  289  is  concerned,  the position is  different. Clause  (1), had it stood by itself, would have  been similar  to clause  (1) of  Article 285. It says that  "the property-and  income-of  a  State  shall  be exempt from Union taxation". But it does not stand alone. It is qualified by clause (2) and clause (3) is an exception to clause (2).  But before  we refer to clause (2), a word with respect  to   the  meaning   and  ambit  of  the  expression "property" occurring  in this article. Expression "property" is wide  enough to take in all kinds of property. In Re. the Bill to  amend Section  20 of  the Sea Customs Act, 1878 and Section 3  of the  Central Excises  and Salt Act, 1944 [1964 (3) S.C.R.787],  all the  learned Judges  [both majority and dissenting]  were   agreed  that   the  expression  must  be understood in  its widest sense. There is no reason to put a restricted  construction   thereon.  Indeed,   there  is  no controversy about  this proposition  before  us.  Coming  to clause (2), it says that the ban imposed by clause (1) shall not prevent  the Union  from  imposing  or  authorising  the imposition of  any tax  to  such  extent,  if  any,  as  the 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 (b) any operations connected with such trade  or business or (c) any property used or occupied for the purposes of such trade or business or (d) any income accruing  or  arising  in  connection  with  such  trade  or business. [The inspiration for this provision may perhaps be found in  certain United States’ decision on the question of the power  of the  units of  a federal  polity to  tax  each others’ properties.]  Clause (3)  empowers the Parliament to declare, by  law, which  trade or  business or  any class of trades or businesses is incidental to the ordinary functions of  the   Government,  whereupon  the  trades/businesses  so specified go out of the purview of clause (2).      It would  be appropriate  at this  state to  notice the ratio of  two judgments  of this  Court dealing with Article 289. In Re: Sea Customs Act, a Special Bench of nine learned Judges, by a majority, laid down the following propositions: (a) clause  (1) of  Article 289  provides for  exemption  of property and  income of  the States  only from taxes imposed directly upon  them; it has no application to indirect taxes like duties  of excise and customs; (b) duties of excise and customs are  not taxes on property or income; they are taxes on manufacture/production  of goods  and on import/export of goods, as the case may be, and hence, outside the purview of clause (1)  of Article  239. The  other decision  in  Andhra

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Pradesh State  Road Transport  Corporation v. The Income Tax Office [1964 (7) S.C.R.17] is the decision of a Constitution Bench. The  main holding  in this case is that income of the A.P.S.R.T.C. is  not the  income  of  the  State  of  Andhra Pradesh since  the former is an independent legal entity and hence, Article  289(1) does  not avail it. At the same time, certain observations  are made in the decision regarding the scheme of  Article 289.  It is  held that  clause (2)  is an exception of a proviso to clause (1) and as such whatever is included in  clause (2)  must be  deemed to  be included  in clause  (1).  In  other  words,  the  trading  and  business activities referred  to in clause (2) are included in clause (1) and  precisely for  this reason  the exception in clause (2) was  provided. Clause  (3), it was held, is an exception to clause (2). In the words of the Constitution Bench:      "The scheme  of Art.289  appears to      be  that   ordinarily,  the  income      derived  by   a  State   both  from      government and  non-governmental or      commercial  activities   shall   be      immune from  income-tax  levied  by      the Union, provided, of course, the      income in  question can  be said to      be  income   of  the   State.  This      general  proposition   flows   from      clause (1).      Clause   (2)   then   provides   an      exception and  authorises the Union      to impose  a tax  in respect of the      income derived by the Government of      a  State  from  trade  or  business      carried on by it, or on its behalf:      that is  to say,  the  income  from      trade or business carried on by the      Government of  a State  or  on  its      behalf which  would not  have  been      taxable under  clause (1),  can  be      taxed, provided  a law  is made  by      Parliament  in   that  behalf.   If      clause (1)  had stood by itself, it      may not  have been  easy to include      within its  purview income  derived      by   a    State   from   commercial      activities, but  since clause  (2),      in terms,  empowers  Parliament  to      make  a   law  levying   a  tax  on      commercial activities carried on by      or  on   behalf  of  a  State,  the      conclusion  is   inescapable   that      these  activities  were  deemed  to      have been  included in  cl. (1) and      that alone can be the justification      for the  words in which cl. (2) has      been adopted  by the  Constitution.      It is plain that cl.(2) proceeds on      the  basis   that   but   for   its      provision,  the   trading  activity      which is  covered by  it would have      claimed   exemption    from   Union      taxation under  cl.(1). That is the      result of  reading clauses  (1) and      (2) together.      Clause (3) then empowers Parliament      to declare by law that any trade or      business would  be taken out of the

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    purview of  cl.(2) and  restored to      the  area   covered  by  cl.(1)  by      declaring that  the said  trade  or      business  is   incidental  to   the      ordinary functions  of  government.      In  other   words,  cl.(3)   is  an      exception    to    the    exception      prescribed  by   cl.(2).   Whatever      trade or business is declared to be      incidental    to    the    ordinary      functions of government, would then      be exempt from by cl.(2). and would      then be exempt from Union taxation.      That, broadly stated, appears to be      the result of the scheme adopted by      the three clause of Art.289."                          PART - III      The crucial  question arising  in this batch of appeals pertains to  the meaning  of the expression "Union taxation" occurring in  Article 289(1).  According to  the appellants- municipal corporations,  the property taxes levied either by Punjab Municipal Act, 1911, as extended to and applicable in the New  Delhi Municipal  Corporation area  or by  the Delhi Municipal Corporation  Act, 1957  applicable  to  the  Delhi Municipal Corporation  area do  not fall within the ambit of the expression  "Union taxation".  According to them, "Union taxation" means  levy of  any of  the taxes mentioned in the Union  List   [List-I  in   the  Seventh   Schedule  to  the Constitution]. May  be, it  may also  take in  levy of Stamp duties [which  is the  only taxation entry in the Concurrent List] by  Parliament, but by no stretch of imagination, they contend, can  levy of  any tax  provided in  the State  List [List-II in  the Seventh  Schedule] can  be characterised as Union taxation. Merely because the Parliament levies the tax provided in  List-II, such taxation does not amount to Union taxation. There  are many situations where the Parliament is empowered by  Constitution to  make  laws  with  respect  to matters enumerated  in List-II.  For example,  Articles 249, 250, 252  and 357  empower the  Parliament to make laws with respect  to   matters  enumerated   in  List-II  in  certain specified situations.  If any taxes are levied by Parliament while legislating  under any  of the  above  articles,  such taxation cannot  certainly be termed as "Union taxation". It would still  be State  taxation. The  levy  of  taxation  by Parliament within  the Union  territories is  of  a  similar nature.  Either   because  the   Union  territory   has   no legislature or because the Union territory has a legislature but the  Parliament chooses  to act in exercise of its over- riding power,  the taxes levied by a Parliamentary enactment within such  Union territories  would not be Union taxation. It is  relevant to notice, the learned counsel contend, that the legislatures  of the  Union territories  referred to  in Article 239-A as well as the legislature of Delhi created by Article 239-AA  are empowered  to make  laws with respect to any of the matters enumerated in List-II and List-III of the Seventh Schedule, just like any other State legislature; any taxes levied  by  these  legislatures  cannot  certainly  be characterised  as   "Union  taxation".  Merely  because  the Parliament has been given an over-riding power to make a law with respect  to matters  enumerated  even  in  List-II,  in suppression of  the law made by the legislature of the Union territory, it  does not  follow that  the law so made is any the less  a law  belonging to  the sphere  of the State. The test in  such matters  - it  is contended - is not who makes the law  but to  which matter  in which List does the law in

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question pertain.  Clause (4)  of Article  246  specifically empowers the  Parliament to  make laws  with respect  to any matter  enumerated   in  List-II   in  the   case  of  Union territories. This shows that even the said clause recognises the distinction  between List-I  and List-II  in the Seventh Schedule, it is submitted.      The learned Attorney General appearing for the Union of India supported  the contentions  of the appellant-municipal corporations.      On the  other hand,  the  contentions  of  the  learned counted for  the respondents  are to the following effect: a Union territory  is not  a "State"  within  the  meaning  of Article 246. Even prior to the Seventh [Amendment] Act, Part ‘C’ States,  or for  that matter  Part-D  States,  were  not within the  purview of the said article. The division of the legislative powers  provided by  clauses (1), (2) and (3) of article 246  has  no  relevance  in  the  case  of  a  Union territory. Union territory, as the name itself indicates, is a territory  belonging to  Union. A  Union territory  has no legislature as  contemplated by Part-VI of the Constitution. A Union  territory may  have a legislature  or may not. Even if it  is bestowed  with one,  it is  not by  virtue of  the Constitution but  by virtue  of a  Parliamentary enactments, e.g., Government  of Part  ‘C’ States  Act, 1951  [prior  to November 1,  1956] and  Government of Union Territories Act, 1963. Even  the legislature  provided for  Delhi by  Article 239-AA of the Constitution with effect from February 1, 1992 is not  a legislature  like that  of the  States governed by Part-VI of  the Constitution.  Not only  the  powers  of  he legislature  are   circumscribed  by   providing  that  such legislature cannot  make  laws  with  reference  to  certain specified entries  in List-II  but any  law made  by it even with reference  to a  matter enumerated in the State List is subject to  the law  made by  Parliament. In  any event, the position obtaining  in Delhi  after February  1, 1992 is not relevant in  these appeals  since these appeals pertain to a period anterior  to the said date. The Punjab Municipal Act, 1911[as extended and applied to the Union Territory of Delhi by Part  ‘C’ States  [Laws] Act]  and  the  Delhi  Municipal Corporation Act,  1957 are  Parliamentary laws enacted under and by  virtue of the legislative power vested in Parliament by clause  (4) of  Article 246. The taxes levied by the said enactments constitute "Union taxation" within the meaning of Article 289(1)  and hence,  the properties  of the States in the Union  Territory of Delhi are exempt therefrom. Reliance is placed  upon the majority opinion in Re.: Sea Customs Act in support  of the  above propositions. It is submitted that there are no reasons to take a different view now.      On  a   consideration  of  rival  contentions,  we  are inclined to  agree with  the respondents-States.  The States put together  do not  exhaust the  territory of India. There are certain  territories which do not form part of any State and yet  are the  territories of  the Union. That the States and Union  territories of  the Union.  That the  States  and Union territories  are different  entities, is  evident from clause (2)  of Article  1 - indeed from the entire scheme of the Constitution.  Article 245(1) says that while Parliament may make  laws for the whole or any part of the territory of India, the  legislature of  a State  may make  laws for  the whole or  any part  of the  State. Article  1(2)  read  with Article 245(1)  shows that  so far  as the Union territories are concerned,  the only  law-making body is the Parliament. The legislature  of a  State cannot make any law for a Union territory; it can make laws only of that State. Clauses (1), (2) and  (3) of Article 246 speak of division of legislative

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powers between  the Parliament  and State legislatures. This division is  only  between  the  Parliament  and  the  State legislatures,  i.e., between the Union and the States. There is no  division of  legislative powers between the Union and Union territories. Similarly, there is no division of powers between States  and Union   territories.  So  far  as  Union territories are  concerned, it  is clause (4) of Article 246 that is  relevant. It  says that the Parliament has power to make laws  with respect  to any  matter for  any part of the territory of  India not  included in a State notwithstanding that such  matter is  a matter enumerated in the State List. Now, the Union territory is not included in the territory of any State.  If so,  Parliament is  the only  law-making body available for such Union territories. It is equally relevant to mention  that the Constitution, as originally enacted did no provided for a legislature for any of the Part ‘C’ States [or, for  that matter, Part‘D’ States]. It is only by virtue of the  Government of  Part ‘C’  States Act,  1951 that some Part ‘C’  States including Delhi got a legislature. This was put an  end to  by the  States Reorganisation  Act, 1956. In 1962,  the   Constitution  Fourteenth  [Amendment]  Act  did provide for  creation/constitution of legislatures for Union territories [excluding,  of course, Delhi] but even here the Constitution did  not itself  provide for  legislatures  for those Part‘C’  States; it merely empowered the Parliament to provide for  the same by making a law. In the year 1991, the Constitution did  provide for  a legislature  for the  Union Territory of  Delhi [National Capital Territory of Delhi] by Sixty-Ninth [Amendment]  Act [Article  239AA] but  even here the  legislature   so  created   was  not   a  full  fledged legislature not  did have  the effect  of - assuming that it could -  lift the  National Capital  Territory of Delhi from Union territory  category to  the category  of States within the meaning  of Chapter-I  of Part-XI  of the Constitution . All  this  necessarily  means  that  so  far  as  the  Union territories are  concerned, there is not such thing as List- I,  List-II  or  List-III.  The  only  legislative  body  is Parliament -  or a  legislative  body  created  by  it.  The Parliament  can   make  any  law  in  respect  of  the  said territories  -   subject,  of   course,  to   constitutional limitations other than those specified in Chapter-I of Part- XI of the Constitution. Above all, Union Territories are not "States" as  contemplated by  Chapter-I of Part-XI; they are the territories of the Union falling outside the territories of the  States. Once  the Union  territory is  a part of the Union and  not part  of any  State, it  follows that any tax levied  by   its  legislative   body  is   Union   taxation. Admittedly, it  cannot be called "State taxation"- and under the  constitutional  scheme,  there  in  no  third  kind  of taxation. Either  it is  Union taxation  or State  taxation. This is  also the opinion of the majority in Re.:Sea Customs Act. B.P.  Sinha, C.J.,  speaking on behalf of himself, P.B. Gajendragadkar, Wanchoo  and Shah,  JJ. - while dealing with the  argument  that  in  the  absence  of  a  power  in  the Parliament to levy taxes on lands and buildings [which power exclusively belongs  to State legislatures, i.e., Item 49 in List-II], the  immunity provided  by Article 289(1) does not make any sense - observed thus:      "It is true that List I contains no      tax directly  on property like List      II, but  it does  not  follow  from      that the  Union  has  no  power  to      impose a  tax directly  on property      under  any  circumstances.  Article      246(4) gives power to Parliament to

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    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 I but also      with respect  to items  in List II.      Therefore,   so    far   as   Union      territories     are      concerned,      Parliament has  power to  impose  a      tax directly  on property  as such.      It cannot  therefore be  said  that      the exemption  of States’  property      from  Union  taxation  directly  on      property under  Art.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      Art.289(1). The  argument therefore      that Art.289(1)  cannot be confined      to tax directly on property because      there is  no such  tax provided  in      List I cannot be accepted."      Rajagopala Iyyengar,J.  agreed with  Sinha, CJ. on this aspect, as  indeed on  the main  holding.  The  decision  in Re.:Sea Customs  Act has  been rendered  by a  Bench of nine learned Judges. The decision of the majority is binding upon us and  we see  no reason  to take a different view. Indeed, the view  taken by  the majority accords fully with the view expressed by us hereinabove.      Now, so  far as  the analogy of laws made by Parliament under Articles 249, 250, 252 and 357 are concerned, we think the analogy  is  odious.  Articles  249,  250  and  357  are exceptional situations which call for the Parliament to step in and make laws in respect of matters enumerated in List-II and which laws have effect for a limited period. Article 252 is a case where the State legislatures themselves invite the Parliament to  make a  law on  their behalf.  These are  all situations of  what may be called "substitute legislation" - either because of a particular situation or because there is no legislature  at a  given moment to enact laws. As against these provisions,  clause (4)  of Article 246 is a permanent features and  laws made  thereunder are  laws  made  in  the regular course.      In this  connection, it  is necessary  to remember that all the  Union territories  are not situate alike. There are certain Union territories [I.e., Andaman and Nicobar Islands and Chandigarh] for which there can be no legislature at all -  as  on  today.  there  is  a  second  category  of  Union territories covered  by  Article  239-A  [which  applied  to Himachal Pradesh,  Manipur, Tripura,  Goa, Daman and Diu and Pondicherry -  now, of  course, only Pondicherry survives in this category,  the rest  having acquired  Statehood]  which have legislatures  by courtesy of Parliament. The Parliament can, by  law, provide  for constitution  of legislatures for these States and confer upon these legislatures such powers, as it  may think  appropriate. The  Parliament  had  created

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legislatures for  these Union  territories  under  the  "The Government of  Union Territories Act, 1963", empowering them to make  laws with  respect to  matters in List-II and List- III,  but  subject  to  its  over-riding  power.  The  third category is  Delhi. It  had no  legislature with effect from November 1,  1956 until  one has  been created  under and by virtue of the Constitution Sixty-Ninth [Amendment] Act, 1991 which introduced  Article 239-AA. We have already dealt with the special  features of  Article 239-AA and need not repeat it. Indeed,  a reference  to Article  239-B read with clause (8) of Article 239-AA shows how the Union Territory of Delhi is in  a class by itself but is certainly not a State within the meaning  of Article  246 or Part-VI of the Constitution. In us,  it is  also a  territory governed  by clause  (4) of Article 246. As pointed out by the learned Attorney General, various  Union   territories  are  in  different  stages  of evolution. Some have already acquired Statehood and some may be on  the way  to it. The fact, however, remains that those surviving as  Union  territories  are  governed  by  Article 246(4) notwithstanding  the differences  in their respective set-ups -  and  Delhi,  now  called  the  "National  Capital Territory of Delhi", is yet a Union territory.      It would be appropriate at this state to refer to a few decisions on  his aspect.  In T.M.  Kanniyan, a Constitution Bench speaking through Bachawat, J. had this to say:      "Parliament has  plenary  power  to      legislate for the Union territories      with regard  to any  subject.  With      regard to  Union territories, there      is no  distribution of  legislative      power. Article  246(4) enacts  that      ‘Parliament has  power to make laws      with respect  to any matter for any      part of  the territory of India not      included in a State notwithstanding      that  such   matter  is   a  matter      enumerated in  the State  List.’ In      R.K.  Sen   v.   Union   [1966]   1      S.C.R.480, it  was pointed out that      having  regard   to  Art.367,   the      definition of ‘State’ in s.3(58) of      the  General   Clauses  Act.   1897      applies for  the interpretation  of      the Constitution  unless  there  is      anything repugnant  in the  subject      or context.  Under that definition,      the expression  ‘State’ as  respect      any period  after the  commencement      of   the    Constitution   (Seventh      Amendment) Act,  1956 ‘shall mean a      State  specified   in   the   First      Schedule to  the  Constitution  and      shall include  a Union  territory’.      But this  inclusive  definition  is      repugnant  to   the   subject   and      context  of   Art.246.  There,  the      expression ‘State’ means the States      specified in  the  First  Schedule.      There   is    a   distribution   of      legislative      power      between      Parliament and  the legislatures of      the  States.   Exclusive  power  to      legislate  with   respect  to   the      mattes enumerated in the State List      is assigned  to the legislatures of

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    the State  established by  Part VI.      There   is   no   distribution   of      legislative power  with respect  to      Union  territories.   That  is  why      Parliament  is   given   power   by      Art.246(4) to  legislate even  with      respect to  matters  enumerated  in      the State  List. If  the  inclusive      definition of ‘State’ in s.3(58) of      the General  Clauses  Act  were  to      apply  to   Art.246(4),  Parliament      would have  no power  to  legislate      for  the   Union  territories  with      respect to  matters  enumerated  in      the  State   List   and   until   a      legislature empowered  to legislate      on those  matters is  created under      Art.239A for the Union territories,      there  would   be  no   legislature      competent  to  legislate  on  those      matter is  created  under  Art.239A      for the  Union  territories,  there      would be  no legislature  competent      to  legislate   on  those  matters;      moreover, for  certain  territories      such as  the  Andaman  and  Nicobar      Islands  no   legislature  can   be      created  under  Art.239A,  and  for      such territories  there can  be  no      authority  competent  to  legislate      with respect  to matter  enumerated      in   the   State   List.   Such   a      construction is  repugnant  to  the      subject and  context to Art.246. It      follows that in view of Art.246(4),      Parliament has  plenary  powers  to      make laws  for Union territories on      all matters.  Parliament can by law      extend the  Income-tax Act, 1961 to      a   Union   territory   with   such      modifications as it thinks fit. The      President in  the exercise  of  his      powers  under   Art.240  can   make      regulations  which  have  the  same      force  and  effect  as  an  Act  of      Parliament which  applies  to  that      territory.   The    President   can      therefore by  regulation made under      Art.240 extend  the Income-tax Act,      1961 to  that territory  with  such      modifications as he thinks it.      The   President   can   thus   make      regulations  under   Art.240   with      respect  to   a   Union   territory      occupying the  same field  on which      Parliament can  also make  laws. We      are not  impressed by  the argument      that  tush  overlapping  of  powers      would lead  to a  clash between the      President and Parliament. The Union      territories      are      centrally      administered through  the President      acting through an administrator. In      the cabinet  system  of  Government      the President acts on the advice of

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    the Ministers  who are  responsible      to    Parliament....It    is    not      necessary to  make any distribution      of income-tax with respect to Union      territories  as  those  territories      are centrally  administered through      the President."             [emphasis added]      We respectfully agree with the above statement of law.      We do not think it necessary to refer to or discuss the propositions laid  down in  Management of  Advance Insurance Co.Ltd. V.  Shri Gurudasmal  &  Ors.  [1970  (3)  S.C.R.881] holding that  the amended  definition of  "State" in  clause (58) of  Section 3  of the  General Clauses  Act applies  to interpretation of  Constitution by  virtue of  Article 372-A nor with the contrary proposition in the dissenting judgment of Bhargava, J. in Shiv Kirpal Singh v. Shri V.V. Giri [1971 (2) S.C.R.197  at 313].  It is enough to say that context of Article 246  - indeed  of Chapter  - I in Part XI - excludes the application of the said amended definition.      In  Mithanlan   [Supra],  T.L.   Venkatrama  Iyer,  J., speaking for  the Constitution  Bench, while dealing with an argument based on Article 248(2) observed:      "That Article  has reference to the      distribution of  legislative powers      between the  Centre and  the States      mentioned in  Parts A  and B  under      the three  Lists in Sch.VII, and it      provided that in respect of matters      not   enumerated   in   the   Lists      including    taxation,     it    is      Parliament that  has power to enact      laws. It has no application to Part      C States  for which  the  coverning      provision is Art, 246(4). Moreover,      when a  notification is  issued  by      the     appropriate      Government      extending the law of a Part A State      to a  Part  C  State,  the  law  so      extended derives  its force  in the      State to  which it is extended from      6.2 of the part C States (Laws) Act      enacted by  Parliament. The  result      of a notification issued under that      section is  that the  provisions of      the law  which is  extended  become      incorporated by  reference  in  the      Act itself,  and  therefore  a  tax      imposed thereunder is a tax imposed      by Parliament.  There  is  thus  no      substance in this contention."             [Emphasis added]      To the  same effect is the decision of a Division Bench in Satpal & Co. v. Lt. Governor [1979 (3) S.C.R 651].      It is  then argued for the appellants that if the above view is  taken, it  would  lead  to  an  inconsistency.  The reasoning in  this behalf  runs thus:  a  law  made  by  the legislature of  a Union territory levying taxes on lands and buildings would  be "State taxation", but if the same tax is levied by  a  law  made  by  the  Parliament,  it  is  being characterised as  "Union taxation"; this is indeed a curious and inconsistent  position, say  the learned counsel for the appellants. In  our opinion,  however, the very premise upon which this  argument is  urged is  incorrect. A  tax  levied under   a law  made by  a legislature  of a  Union territory

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cannot be called "State taxation" for the simple reason that Union territory  is not  a "State"  within  the  meaning  of Article 246  [or for  that matter,  Chapter-I of Part-XI] or Part-VI or Article 285 to 289.      Lastly, we  may refer  to the  circumstance that  Delhi Municipal Corporation  Act, 1957  was enacted by Parliament. Hence, so  far as  the Delhi  Municipal Corporation  area is concerned, the  taxes are  levied under  and by  virtue of a Parliamentary enactment.  So far  as the New Delhi Municipal Corporation area  is concerned,  the taxes  were levied till 1994 under  the Punjab  municipal Act,  1911 as extended and applied by  the Part  ‘C’ State  [Laws] Act, 1950 enacted by Parliament. It  is held  by this  Court  in  Mithanlal  that extension   of an  Act to  an area has the same effect as if that Act  has been made by the extending legislature for the area. The Court Said:      "Moreover, when  a notification  is      issued    by     the    appropriate      Government extending  the law  of a      Part A State to a Part C State, the      law so  extended derives  its force      in  the   State  to   which  it  is      extended from  s.2 of  the  Part  C      States  (Laws)   Act   enacted   by      Parliament.   The   result   of   a      notification  issued   under   that      section is  that the  provisions of      the law  which is  extended  become      incorporated by  reference  in  the      Act itself,  and  therefore  a  tax      imposed thereunder is a tax imposed      by Parliament.  There  is  thus  no      substance in this contention." [Also see T.M. Kanniyan [1968 (2) S.C.R.203 at 108].]      It must accordingly be held that with effect from 1950, it is as if the property taxes are levied by a Parliamentary enactment. In 1994, of course, Parliament itself enacted the New Delhi  Municipal Corporation  Act [with  effect from May 25, 1994]  repealing the  Punjab Municipal Act. Taxes levied under these  enactments cannot but be Union taxation - Union taxation in a Union Territory.      For all  the above  reason, we  hold that  the levy  of taxes on  property by  the Punjab  Municipal Act,  1911  [as extended to  Part ‘C’  States of  Delhi by  Part ‘C’  States (Laws) Act, 1950], the Delhi Municipal Corporation Act, 1957 and the  New Delhi  Municipal Corporation  Act,  1994  [both Parliamentary  enactments]  constitutes  "Union  taxation  " within the meaning of Article 289(1).                          PART - IV      The Delhi  Municipal Corporation  Act, 1957, the Punjab Municipal Act,  1911 [as  extended to the Union Territory of Delhi] and  the New  Delhi Municipal  Corporation Act,  1994 [N.D.M.C. Act]  specifically exempt  the properties  of  the Union from  taxation. Section  119 of  the  Delhi  Municipal Corporation  Act   is  in   terms  of  Article  285  of  the Constitution. It reads:      "119. Taxation  of Union properties      --  (1)   Notwithstanding  anything      contained    in    the    foregoing      provisions of  this Chapter,  lands      and buildings  being properties  of      the Union  shall be exempt from the      property taxes specified in section      114:      Provided that  nothing in this sub-

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    section    shall     prevent    the      Corporation from levying any of the      said  taxes   on  such   lands  and      buildings    to  which  immediately      before the  26th January 1950, they      were liable  or treated  as liable,      so long as that tax continues to be      levied by  the Corporation on other      lands and buildings."      Sub-section (3)  of Section  61 is  also  in  terms  of Article 285 of the Constitution. It reads:      "Nothing in  this sub-section shall      authorise the imposition of any tax      which  the  provincial  legislature      has  no  power  to  impose  in  the      Province under the Constitution--      Provided  that  a  committee  which      immediately before the commencement      of the  Constitution shall lawfully      levying any  such  tax  under  this      section  as   then  in   force  may      continue to  levy  such  tax  until      provision to  the contrary  is made      by Parliament."      Sub-section (1)  of Section  65 of  the N.D.M.C. Act is again in the same terms as Article 285.      None of  the above  enactments provide any exemption in favour of  the properties  of a State. Section 115(4) of the Delhi Municipal  Corporation Act,  Section 61  of the Punjab Municipal Act  and  Section  62  of  the  N.D.M.C  Act  levy property  tax   on   all   the   properties   within   their jurisdiction. From  the fact  that properties  of the  Union have been  specifically exempted in terms of Article 285 but the properties of the States have not been exempted in terms of Article  289 shows  that so  far as  these enactments go, they purport  to levy tax on the properties of the States as well. The  State governments, it is equally obvious, are not claiming  exemption   from  municipal   taxation  under  any provision of  the concerned  State enactment  but only under and by  virtue of  Article 289 of the Constitution. They are relying upon  clause (1) of Article 889 which is undoubtedly in absolute  terms. Clause  (1) of  Article 289  says,  "the property and  income of  a State  shall be exempt from Union taxation". But  clause (1)  does  not  stand  alone.  It  is qualified by  clause (2)  - which  in turn  is qualified  by clause (3).  Where an exemption is claimed under clause (1), we cannot  shut our  eyes to  the said qualifying clause and give  effect  to  clause  (1)  alone.  In  the  decision  in A.P.S.R.T.C., this  Court has  held that  clause (2)  is  an exception to  clause (1) and that clause (3) is an exception to clause  (2). When  a claim  for exemption  is made  under clause (1)  of Article  289, the  Court has  to examine  and determine the  field  occupied  by  clause  (1)  by  reading clauses (1)  and (2)  together. If  there is  a la w made by Parliament within  the  meaning  of  clause  (2),  the  area covered by  that law will be removed from the field occupied by clause (1). By way of analogy, we may refer to sub-clause (f) of  clause (1)  and clause  (5) of Article 19, which has been explained  by a  Special Bench of eleven Judges in R.C. Cooper v.  Union  of  India  [1970  (1)  S.C.C.248]  in  the following words:  "Clause (5)  of Article 19 and clauses (1) and (2)  of Article  31 prescribe  restrictions  upon  State action, subject  to which  the  right  to  property  may  be exercised." But before we elaborate this aspect, it would be appropriate to examine the meaning and scheme of Article 289

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and the object underlying it.      Since Article  289 is  successor to  Section 155 of the Government of  India Act,  1935 -  no  doubt,  with  certain changes -  it would  be helpful  to refer to and examine the purport and  scope of  Section 155  [as it obtained prior to its amendment  in 1947].  We would  also  be  simultaneously examining the scheme and purport of Article 289. It would be appropriate  to  read  both  Article  289  and  Section  155 together:      "289.     Exemption of property and      income  of   a  State   from  Union      taxation --  (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      authorising 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,      which Parliament may by law declare      to be  incidental to  the  ordinary      functions of Government.      155.(1)  Subject   as   hereinafter      provided,  the   Government  of   a      Province  and   the  Ruler   of   a      federated State shall not be liable      to Federal  taxation in  respect of      lands  or  buildings    situate  in      British India  or income  accruing,      arising  or   received  in  British      India;      Provide that-      (a)  where a  trade or  business of      any kind  is carried  on by  or  on      behalf  of   the  Government  of  a      province in  any  part  of  British      India, outside  that Province or by      a Ruler  in  any  part  of  British      India, nothing  in this sub-section      shall  exempt  that  Government  or      Ruler from  any Federal taxation in      respect of  that trade or business,      or   any    operations    connected      therewith, or any property occupied      for the purposes thereof;      (b)  nothing  in  this  sub-section      shall  exempt   a  Ruler  from  any      Federal taxation  in respect of any      lands, buildings  or  income  being      his personal  property or  personal      income.      (2)  Nothing in  this  Act  affects      any exemption from taxation enjoyed      as of  right at the passing of this

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    act by the Ruler of an Indian State      in respect of any Indian Government      securities   issued   before   that      date."      The first  distinguishing feature to be noticed is that while Section  155 spoke  of "lands and buildings" belonging to the  Government of  a Province  situate in  British India being exempt  from Federal  taxation [we are leaving out the portion relating  to Rulers  of  Acceding  States/Federating States], Article  289(1) speaks of "the property" of a State being  exempt  from  Union  taxation.  The  second  material difference is  between proviso  (a) to  Section  155(1)  and clause (2)  of article  289 corresponding  to it.  Under the proviso, trade  or  business  carried  on  by  a  Provincial government was  excluded from  the exemption provided in the main limb  of sub-section  (1) whereas  clause (2)  does not itself deny  the exemption  to such  trade or  business;  it merely enable  the Parliament  to make  a law levying tax on such  trade   or  business.   This  change   has  a  certain background,  which  we  shall  refer  to  later.  The  third distinguishing feature  between the  said proviso and clause (2) is  this: while  the denial of exemption provided by the proviso was  to the  trade  or  business  carried  on  by  a Provincial government  outside its  territory, clause (2) of Article 289  contains no  such restrictive words. The fourth distinguishing feature  is the  provision in  clause (3)  of Article 289,  which enables  the Parliament to declare which trades/ businesses  are incidental  to ordinary functions of government, in which event those trades/businesses go out of the purview  of clause  (2); no  such provision  existed  in Section 155.      Even under  the Government of India Act, 1935 the power to levy  taxes on  lands and  buildings was  vested  in  the Provincial legislatures  alone. Federal  legislature had  no power to  levy such  taxes. If so, the question arises - why did the  British  Parliament  provide  that  the  lands  and buildings of  a Provincial  government situated  in  British India are  exempt from  Federal taxation.  Since, no Federal tax could  ever have  been levied by the Federal legislature on lands or buildings, is the exemption meaningless? This is the question  which was  also agitated  before  the  learned Judges who  answered the  Presidential reference in Re.: Sea Customs  Act.   Sri  P.P.  Rao  and  other  learned  counsel appearing for  the State  governments submit  that the  said exemption is  neither   meaningless  nor  unnecessary.  They submit that  the language  used in  the main  limb  of  sub- section (1)  of Section  155 was  used advisedly  to meet  a specific situation. Their explanation, as condensed by us in our words, is to the following effect:      even at  the time  of enactment and      commencement of  the Government  of      India  Act,   1935,  the  area  now      comprised in the Union Territory of      Delhi was  comprised in  the  Chief      Commissioner’s Province  of  Delhi;      besides Delhi,  there were  several      other     Chief      Commissioner’s      Provinces  within   British  India;      every  Provinces   government   and      almost every major native State had      properties in  Delhi for one or the      other   purpose;   prior   to   the      commencement of the 1935 Act, there      was no  such thing  as division  of      powers between  the Centre  and the

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    Provinces;  Provinces   were   mere      administrative units;  the  concept      of division  of powers  between the      Federation [Centre]  and its  units      [Provinces], i.e., the concept of a      Federation, broadly  speaking,  was      introduced by  the said Act for the      first time; in such a situation, it      was  necessary   that  the   mutual      respect  and   regard  between  the      Centre and the Provinces basic to a      federal concept,  is  affirmed  and      given      due       constitutional      recognition     even   before   the      enactment of  the Delhi  Laws  Act,      1912,  the   Governor  General   in      Council  with   the  sanction   and      approbation  of  the  Secretary  of      State   for    India,    had,    by      proclamation      published      in      Notification No.911  dated the 17th      day of September, 1912, taken under      his   immediate    authority    and      management,     the     territories      mentioned in  Schedule-A to the Act      [that portion  of the  district  of      Delhi  comprising   the  tehsil  of      Delhi   and   police   station   of      Mehrauli]   which   were   formerly      included in the Province of Punjab,      with a  view  to  provide  for  the      administration   thereof by a Chief      Commissioner   as   a      separate      Province  to   be  known   as   the      Province of  Delhi; it was the said      status which  was affirmed  by  the      Delhi Laws  Act, 1912; Section 5 of      the Government  of India  Act, 1935      made a  clear  distinction  between      the   Provinces   and   the   Chief      Commissioner’s Provinces; while the      Provinces   were    provided   with      legislatures [Chapter-III  of Part-      III  of   the   Act],   the   Chief      Commissioner’s Provinces,  governed      by Part  - IV  of the  Act, had  no      legislatures of their own; the only      legislature  for   them   was   the      Federal legislature; any tax levied      in   the    Chief    Commissioner’s      Province should  have  been  levied      only by  the Federal legislature or      the Governor  General, as  the case      may be;  Section 99(1)  of the  Act      provided    that    "the    Federal      Legislature may  make laws  for the      whole or  any part of British India      or for  any Federated  State and  a      Provincial  Legislature   may  make      laws for  the Province  or for  any      part thereof";  all this shows that      the tax  on lands  or buildings  in      the Chief  Commissioner’s Provinces      including  Delhi  could  have  been      levied only by Federal legislature;

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    Section 155(1)  was meant to exempt      the   lands    or   buildings    of      Provincial  governments  from  such      federal taxation - it is submitted.      We find the above explanation cogent and acceptable. It fully explains the use of the words "lands and buildings" in Section 155(1) of the Act. We think it unnecessary to repeat the whole reasoning once again.      As against the words "lands and buildings" belonging to a Provincial  government in Section 155 of the Government of India Act,  1935, Article  289(1) uses  a single  expression "Property" and says that property of a State shall be exempt from  Union   taxation.   The   expression   "Property"   is indubitably much  wider. It  takes in  not  only  lands  and buildings but  all forms  of property. While the Constituent Assembly debates  do not throw any light upon the reason for this change  - from  "lands or buildings" to "property" - it is, in  all probability, attributable to the large number of representations made  by several  Provincial governments  to the Constituent  Assembly  that  not  merely  the  lands  or buildings but any and every trade and business carried on by a State  government should equally be entitled to exemption. Sri B.Sen invited our attention to those representations and submitted that it is these representations which induced the Constituent Assembly to draft clause (2) of Article 289 in a manner different from proviso (1) to Section 155(1). Be that as it  may, The  fact remains that the expression "property" in Article  289(1) has  to be  given its  natural and proper meaning. It  includes not  only lands  and buildings but all forms of  property. The  explanation offered  by the learned counsel appearing  for the  States,  set  out  in  extension hereinabove, for  the use  of the words "lands or buildings" in Section 155(1) is equally valid for clause (1) of Article 289 insofar as it pertains to lands and buildings.      It must  be remembered  that both  Section  155(1)  and Article 289(1)  exempt the  income  as  well  derived  by  a Provincial Government/State  government from Union taxation. Both the  property and  income of the States are thus exempt under clause  (1) of  Article 289  subject,  of  course,  to clause (2) thereof.      Now what  does clause (2) of Article 289 say? It may be noticed that  the language  of the  first proviso to Section 155  and  of  clause  (2)  of  Article  289  is  practically identical  [except   for  the  two  distinguishing  features mentioned hereinbefore].  It would, therefore, suffice if we discuss the proviso. It says - omitting reference t Princely States -  that where  a trade  or business  of any  kind  is carried on  by or  on behalf of the government of a Province in any  part  of  British  India  [outside  that  Province], nothing in sub-section (1) shall exempt that Government from any Federal taxation in respect of that trade of business or any operations  connected therewith or any income arising in connection  therewith  or  any  property  [i.e.,  lands  and buildings]  occupied   for  the   purposes  thereof.  It  is necessary to  emphasis that  the proviso  to Section  155(1) which by  its own  force levied  taxes upon  the trading and business operations carried on by the Provincial governments did not  either define the said expressions or specify which trading or  business operations  are subject to taxation. On this account.  the proviso  was not and could not be said to have been,  ineffective or  unenforceable. It  was effective till January  26, 1950.  Clause  (2)  of  Article  289  also similarly does  not define  or specify - nor does it require that the law made thereunder should so define or specify. It cannot be  said that  unless the  law made  under  and  with

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reference to  clause (2) specifies the particular trading or business operations  to be  taxed, it  would not  be  a  law within the  meaning  of  clause  (2).  Coming  back  to  the language of  clause (2),  a question is raised, why does the proviso speak  of taxation  in respect  of trade or business when the  main limb  of sub-section (1) speaks only of taxes in respect of lands or buildings and income? Is the ambit of proviso wider  than the  main limb?  Is  it  an  independent provision of  a substantive nature notwithstanding the label given to  it as a proviso? Or is it only an exception? It is asked. We are, however, of the considered opinion that it is more important  to give  effect to  the language  of and the intention underlying  the proviso  than to  find a label for it. It  is clarificatory  in nature  without a    doubt;  it appears to  be more  indeed. It is concerned mainly with the "income" [of Provincial governments] referred to in the main limb of  sub-section (1).  It speaks of tax on the "lands or buildings" in that context alone, as we shall explain in the next paragraph.  The idea  underlying the proviso is to make it  clear   that  the  exemption  of  income  of  Provincial government operates  only where  the  income  is  earned  or received by  it as a government; it will not avail where the income is  earned   or received by the Provincial government on account of or from any trade or business carried on by it - that  is a  trade or  a business  carried on  with  profit motive. In  the light  of the  language of  the  proviso  to Section 155  and clause  (2)  of  Article  289,  it  is  not possible to  say that  every  activity  carried  on  by  the government is governmental activity. A distinction has to be made between  governmental activity  and trade  and business carried on  by the  government, at  least for the purpose of this clause.  It is  for this reason, we say, that unless an activity in  the nature  of trade and business is carried on with a  profit motive,  it would  not be a trade or business contemplated by  clause  (2).  For  example,  mere  sale  of government properties,  immovable or movable, or granting of leases and  licences in  respect of  its properties does not amount to  carrying on trade or business. Only where a trade or business  is carried  on with  a profit  motive -  or any property is  used or occupied for the purpose of carrying on such trade  of business  - that  the proviso  [or   for that matter clause  (2) of Article 289] would be attracted. Where there is  no profit  motive involved in any activity carried on by the State government, it cannot be said to be carrying on  a   trade  or   business  within   the  meaning  of  the proviso/clause (2),  merely because some profit results from the activity*.  We may pause here a while and explain why we are attaching such restricted meaning to the words "trade or business" in the proviso to Section 155 and in clause (2) of Article 289.  Both the  word import  substantially the  same idea though,  ordinarily speaking, the expression "business" appears to be wider in its content. The expression, however, has no definite meaning; its meaning varies with the context and several  other factors.  See Board  of Revenue  v.  A.M. Ansari [1976  (3) S.C.C.512]  and State of Gujarat v. Raipur Manufacturing Company  [1967 (1)  S.C.R.618]. As observed by Lord Diplock  in Town  Investments Limited  v. Department of Environment   [1977   (1)   All.E.R.813-H.L.],   "the   word ‘business’  is  an  etymological  chameleon;  it  suits  its meaning to  the context  in which  it is  found. It is not a term of  legal art  and its dictionary meanings, as Lindley, C.J. pointed  out in Rolls v. Miller embrace almost anything which is  an occupation,  as  distinct  from  a  pleasure  - anything which  is an  occupation or  a duty  which requires attention is  a business....’." Having regard to the context

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in which  the words  "trade or  business" occur - whether in the proviso  to Section 155 of the Government of Indian Act, 1935 or  in clause  (2) of Article 289 of our Constitution - they must be given, and we have given, a restricted meaning, the context  being levy  of tax  by one unit of federal upon the income  of  the  other  unit,  the  manifold  activities carried on  by governments  under out constitutional scheme, the necessity  to maintain  a balance between the Centre and the States and so on.      *For example,  almost every  State government maintains one or  more guest-houses  in Delhi  for accommodation their officials and  others connected  with  the  affairs  of  the State. But,  when some  rooms/accommodation are not occupied by  such   persons  and   remain   vacant,   outsiders   are accommodated therein,  though at higher rates. This activity cannot obviously be called carrying on trade or business nor can it be said that the building is used or occupied for the purpose of  any trade  or business  carried on  by the State government. ordinarily speaking, the expression "business" appears to be wider in  its  content.  The  expression,  however,  has  no definite meaning;  its meaning  varies with  the context and several other  factors. See  Board of  Revenue v. A.M.Ansari [1976  (3)   S.C.C.512]  and  State  of  Gujarat  v.  Raipur Manufacturing Company [1967 (1) ALL.E.R.813-H.L.], "the word ‘business’  is  an  etymological  chameleon;  it  suits  its meaning to  the context  in which  it is  found. It is not a term  of   legal  art   and  its   dictionary  meanings,  as Lindlay,C.J. pointed  out in Rolls v. Miller embrace ‘almost anything which is an occupation, as distinct from a pleasure - anything  which is  an occupation or a duty which requires attention is  a business..."-"  Having regard to the context in which  the words  "trade or  business" occur - whether in the proviso  to Section 155 of the Government of Indian Act, 1935 or  in clause  (2) of Article 289 of our constitution - they must be given, and we have given, a restricted meaning, the context being levy of tax by one unit of federation upon the income  of  the  other  unit,  the  manifold  activities carried on  by governments  under our constitutional scheme, the necessity  to maintain  a balance between the Centre and the State and so on.      Proviso (i)  not  only  speaks  of  trade  or  business carried on  by the  Provincial governments  [outside   their respective territories]  but also  "any operations connected therewith or  any income  arising in connection therewith or any property  occupied for  the purposes thereof." So far as operations  connected   with  the   trade  or   business  is concerned, they  naturally go  along with  the main trade or business. No  difficulty is  expressed  by  anyone  on  this count. Similarly,  with respect  to any  income  arising  in connection with such trade or business too, no difficulty is expressed since  the income  is an  incident of the trade of business. Difficulty  is, however,  expressed regarding  the other set  of  words  "or  any  property  occupied  for  the purposes thereof". The said words, in our opinion, mean that if any  property, i.e.,  any land or building is occupied by the Provincial  government for  the purpose  of any trade or business carried  on by the Provincial government, such land or building  too loses the benefit of exemption contained in the main  limb of  sub-section (1);  it  becomes  liable  to Federal taxation. To repeat, the central idea underlying the proviso is to remove the trading or business operations from the purview  of the  main limb of sub-section (1) of Section 155. Now,  coming to  clause (2) of Article 289, position is the same  with the  two  distinguishing  features  mentioned

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supra, viz.,  (a) under this clause, removal of exemption is not automatic; it comes about only when the Parliament makes a law  imposing taxes  in respect  of any  trade or business carried  on   by  a  State  government  and  all  activities connected   therewith or  any property  used or occupied for the purposes  of such  business as  also the  income derived therefrom. If  any property - whether movable or immovable - is used  or occupied  for the  purpose of  any such trade or business, it  can be denied the exemption provided by clause (1) but  this denial  can be  only by  way of  a law made by Parliament and  (b) the exception contemplated by clause (2) is not  confined to trade and business carried on by a State outside its  territory as  was provided by the first proviso to Section  155. Even  the trade or business carried on by a State within  its own  territory can  also be brought within the purview  of the  enactment made [by Parliament] in terms of the said clause.      Adverting to  the matters  before us,  the question  is whether the  Parliament has  made any law as contemplated by clause (2)  of Article  289? For, if no such law is made, it is evident,  all the  properties of State governments in the Union Territory  of Delhi  would be  exempt  from  taxation. [Parliament has  admittedly not made any law as contemplated by clause (3) of Article 289.] We have observed hereinbefore that the claim of exemption put forward by State governments in respect  of their  properties situated  in  N.D.M.C.  and Delhi Municipal  Corporation areas is founded - and can only be founded - on Article 289. The States invoke clause (1) of he article  but we are of the considered opinion that clause (1) cannot  be looked  at in  isolation;  it  must  be  read subject to  clause (2). All the three clauses of Article 289 are parts  of one  single scheme.  Hence, when  a claim  for exemption with reference to clause (1) is made, one must see what is  the field  on which  it operates  and that  can  be determined only  by reading  it along  with clause  (2). The exemption provided  by Article  289(1) is  a qualified one - qualified by  clause (2),  as explained  hereinbefore. It is not an  absolute exemption  like the one provided by Article 285(1). If  there is a law within the meaning of clause (2), the field  occupied by  clause (1)  gets  curtailed  to  the extent specified  in clause (2) and the law made thereunder. It is,  therefore,  necessary  in  this  case  to  determine whether  the   Punjab   Municipal   Act,   Delhi   Municipal Corporation Act  and N.D.M.C. Act are or can be deemed to be enactments within  the meaning of clause (2) of Article 289. These  enactments   -  and  certainly  the  Delhi  Municipal Corporation Act  and N.D.M.C.  Act - are post-constitutional enactments. As  stated hereinbefore,  these enactments while specifically exempting  the Union  properties  in  terms  of Article 285,  do not  exempt the properties of the States in terms of Article 289*. The      *As a  matter of  fact, "Section  115(4) of  the  Delhi Municipal Corporation  Act and Section 62(1) of the N.D.M.C. Act  expressly   exempt  properties   used  exclusively  for ‘charitable purposes’ or ‘for public worship’ [as defined by them] but do not provide for an exemption in the case of the properties of  the States in terms of Article 289. It cannot be said,  or presumed,  that Parliament was not aware of, or conscious of,  Article 289  while enacting  the  said  Acts. Section 62(1)  and (2) of the N.D.M.C Act read: "62(1). Save as otherwise provided in this Act, the property tax shall be levied in  respect of  all lands  and buildings in New Delhi except --  (a) lands  and buildings or portions of lands and buildings exclusively  occupied and  used for public worship or by a society or body for a charitable purpose:

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    Provided that  such society of body is supported wholly or in  part by voluntary constitutions, applies its profits, if any,  or other  income in  promoting its objects and does not pay any dividend or bonus to its members.      Explanation.-- ‘Charitable  purpose’ includes relief of the poor,  education and medical relief but does not include a purpose which relates exclusively to religious teaching;      (b) lands  and buildings  vested  in  the  Council,  in respect of  which the  said tax,  if levied, would under the provisions of this Act be leviable primarily on the Council; omission cannot  be said  to be unintentional - particularly in the  case of Delhi Municipal Corporation Act and N.D.M.C. Act. The  intention is  clear and obvious: the enactments do not  wish   to  provide  for  any  exemption  in  favour  of properties of  the States  situated within  their respective jurisdictions. Texes  are levied  on all  properties  within their  jurisdiction   [except  the  properties  specifically exempted], irrespective  of who  owns then  and to  what use they are  put. In  such a  situation, the  question is,  how should they  be understood? Two views can be taken: one that since the  said enactments  do not expressly purport to have been made under and as contemplated by clause (2) of Article 289,  they  should  not  be  read  and  understood  as  laws contemplated by  or within  the meaning  of the  said clause (2). The effect of this view would be that the properties of the State in Union Territory of Delhi will be totally exempt irrespective of the manner of their (c) agricultural lands and buildings (other than dwelling houses). (2) Lands and buildings or portions thereof shall not be deemed to be exclusively occupied and used for public worship or for a charitable purpose within the meaning of clause (1) of sub-section (1) if any trade or business is carried on in such lands and buildings or portions thereof or if in respect of such lands and buildings or portions thereof, any rent is derived. use and occupation. In other words, the consequence would be that the relevant provisions of the said enactments would be ineffective and  unenforceable against  all  the  properties held by  the States  in the Union Territory/National Capital Territory of Delhi, irrespective of the nature of their user or occupation. The second view is that since there is always a presumption of constitutionality in favour of the statutes and  also   because  the   declaration  of   invalidity   or inapplicability of  a statute  should be  only to the extent the enactment  is clearly outside the legislative competence of the  legislative body making it or is squarely covered by the ban  or prohibition  in  question,  the  declaration  of invalidity should  not extend  to the  extent the enactments can be  related to  and  upheld  with  reference    to  some constitutional  provision,  even  though  not  cited  by  or recited in  the enactment.  Similarly,  the  declaration  of inapplicability should  only be  to the  extent the  law  is plainly covered  by the  ban or prohibition, as the case may be. What  is not covered by the constitutional bar should be held to  be applicable  and  effective.  In  our  respectful opinion the  latter view  is consistent  with the well-known principles of  constitutional interpretation  and should  be preferred. We  may pause here and explain our view-point. If the law had expressly stated that it is a law made under and with reference  to clause  (2) of  Article 289,  no  further question would  have arisen.  The only  question is where it does not  say so*,  can its  validity  or  applicability  be sustained with  reference to  clause (2).  In our considered opinion, it  should be  so sustained,  even though it may be

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that the appellant-corporations have not chose to argue this point specifically.  As would  b evident  from some  of  the decisions referred  to hereinafter, the fact that a party or a government  does not  choose to  put forward  an  argument cannot be  a ground for the court not to declare the correct position in  law. The  appellants are  saying that  all  the properties of  the States  are not  exempt because the taxes levied by them do not constitute "Union taxation" within the main of  clause (1)  of Article 289. We have not agreed with them. We  have held  that the  taxes levied by the aforesaid enactments do constitute "Union taxation" within the meaning of *This is  the normal  situation. No enactment states that it is made  under and  with reference  to a  particular head of legislation in the Seventh Schedule to the Constitution or a provision in  the Constitution.  Only when  the enactment is questioned on  the ground  of legislative competence, is the court required  to ascertain  the  head  of  legislation  or provision to which the enactment is referable. clause (1)  of  Article  289  and  that  by  virtue  of  the exemption provided  by clause (1), taxes are not leviable on State properties.  In view  of the fact that clauses (1) and (2) of  Article 289 go together, form part of one scheme and have to be read together, we cannot ignore the operation and applicability of  clause (2), at the same time. Reference to a few  decisions would  bear out  our view. In Charanjit Lal Chowdhary v.  Union of  India [1950 S.C.R.869], Fazl Ali, J. stated: "....it  is the  accepted doctrine  of the  American Courts, which  I consider  to be  well-founded on principle, that  the   presumption  is   always  in   favour   of   the constitutionality of  an enactment,  and the  burden is upon him who  attacks it  to show  that there  has been  a  clear transgression of the constitutional principles". In Burrakur Coal Co.  V. Union  of India  [A.I.R.1961 S.C.  654 at 963 = 1962  (1)   S.C.R.44],  Mudholkar,   j.,  speaking  for  the Constitution Bench,  observed: "Where  the validity of a law made by  a competent legislature is challenged in a Court of law, that  Court is  bound  to  presume  in  favour  of  its validity. Further, while considering the validity of the law the  court  will  not  consider  itself  restricted  to  the pleadings of  the State  and would be free to satisfy itself whether under  any provision of the Constitution the law can be sustained." In Rt.Rev.Msgr. Mark Netto v. State of Kerala &  Ors.   [1979  (1)   S.C.C.23],  the   Constitution  Bench considered  the   question  whether   a  rule  made  by  the Government of  Kerala is  violative of  the right  conferred upon the minorities by Article 30. It was held:      "In that  view of  the  matter  the      Rule in question its wide amplitude      sanctioning  the   withholding   of      permission for  admission  of  girl      students  in   the  boys   minority      school is  violative of Article 30.      if so widely interpreted it crosses      comes in the region of interference      with  the   administration  of  the      institution,  a   right  which   is      guaranteed to  the  minority  under      Article 30.  The  Rule,  therefore,      must be interpreted narrowly and is      held  to   be  inapplicable   to  a      minority educational institution in      a situation  of the kind with which      we are  concerned in  this case. We      do  not   think  it   necessary  or

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    advisable to  strike down  the Rule      as a  whole  but  do  restrict  its      operation and  make it inapplicable      to    a     minority    educational      institution in a situation like the      one which arose in this case."      Reference may  also be  made  to  another  Constitution Bench decision  in Sanjeev  Coke Manufacturing  Co. v.  M/s. Bharat Coking  Ltd. &  Anr. [A.I.R.1983  S.C.239 =  1983 (1) S.C.C.147].  The   following  observation  in  Para  26  are apposite:      "The deponents  of  the  affidavits      filed into  Court may speak for the      parties on  whose behalf they swear      to  the  statements.  They  do  not      speak for  the Parliament.  No  one      may speak  for the  Parliament  and      Parliament  is   never  before  the      Court. After  Parliament  has  said      what it  intends to  say, only  the      Court may  say what  the Parliament      meant to  say. None  else.  Once  a      statute  leaves  Parliament  House,      the Court’s  is the  only authentic      voice which  may  echo  (interpret)      the Parliament. This the Court will      do with  reference to  the language      of   the    statute    and    other      permissible  aids.   The  executive      Government  may  place  before  the      Court their  understanding of  what      Parliament has  said or intended to      say  or   what   they   think   was      Parliament’s  object  and  all  the      facts and  circumstances  which  in      their view  led to the legislation.      When they  do so, they do not speak      for   Parliament.    No   Act    of      Parliament  may   be  struck   down      because  of  the  understanding  or      misunderstanding  of  Parliamentary      intention    by    the    executive      government or  because  their  (the      Government’s)  spokesmen   do   not      bring  out  relevant  circumstances      but  indulge  in  empty  and  self-      defeating affidavits.  They do  not      and they  cannot  bind  Parliament.      Validity of  legislation is  not to      be  judged   merely  by  affidavits      filed on  behalf of  the State, but      by all  the relevant  circumstances      which the Court may ultimately find      and more  especially by what may be      gathered from  what the legislature      has itself said."      Lastly,  we   may  quote   the  pertinent  propositions enunciated in  Ram Krishna Dalmia v. Justice Tendolkar [1959 S.C.R.279] to the following effect:      "(b)  that   there  is   always   a      presumption  in   favour   of   the      constitutionality of  an  enactment      and the  burden  is  upon  him  who      attacks it  to show  that there has      been a  clear transgression  of the

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    constitutional principles;      (e) that  in order  to sustain  the      presumption  of   constitutionality      the    Court    may    take    into      consideration  matters   of  common      knowledge,   matters    of   common      report, the  history of  the  times      and may assume every state of facts      which can  be conceived existing at      the time of legislation; and...." These are  well-settled propositions. Applying them, it must be held  that the  aforesaid Municipal Laws are inapplicable to the  properties of  State governments  to the extent such properties are  governed and  saved by clause (1) of Article 289 and  that insofar as the properties used or occupied for the purpose  of a  trade or business carried on by the state government [as  explained hereinbefore]  are concerned,  the ban in  clause (1) does not avail them and the taxes thereon must be held to be valid and effective. It may be reiterated that the  Delhi Municipal  Corporation  Act,  1957  and  the N.D.M.C. Act,  1994 are  post-constitutional enactments  and that the  Punjab Municipal  Act too  must be  deemed to be a post-constitutional  enactment   for   the   reasons   given hereinabove. It  must, therefore,  be held  that the levy of property taxes by the said enactments is valid to the extent it relates to lands and buildings owned by State governments and used  or occupied  for the  purposes  of  any  trade  or business carried  on by  such  State  government.  In  other words, the  levy must be held to be invalid and inapplicable only to  the extent  of those  lands and buildings which are not used  or occupied  for the  purposes  of  any  trade  or business carried  on by  the State  government, as explained hereinbefore.  It   is   for   the   appropriate   assessing authorities to  determine which  land/building falls  within which category  in accordance  with law  and in the light of this judgment  and take  appropriate further action. In this connection, we  may mention  that the  assessing authorities under the Act have to decide several questions under the Act including the  questions whether  any land  or  building  is being used  for "charitable  purpose" or  "public  worship". They also  have to decide whether a land is an "agricultural land". These  are difficult  questions as  would be  evident from a  reference to  the plethora  of decisions  under  the Income Tax  Act where  these  expressions  occur.  For  this reason, neither  the exemption can be held to be ineffective nor the  authorities can  be said to have no jurisdiction to decide these questions. Appeals are provided to civil courts against the orders of the assessing authorities.      In the  light of  the above  position of law, it is for the Union  of India  to consider whether any steps are to be taken to  maintain the  balance between  the Union  and  the States in the matter of taxation.                           PART - V      The  following   conclusions  flow   from   the   above discussion: (a)  the property  taxes levied  by  and  under  the  Punjab Municipal Act,  1911, the  New Delhi  Municipal  Corporation Act, 1994  and the  Delhi Municipal  Corporation  Act,  1957 constitute "Union taxation" within the meaning of clause (1) of Article 289 of the Constitution of India; (b)  the  levy   of  property   taxes  under  the  aforesaid enactments on  lands and/or buildings belonging to the State governments is  invalid and  incompetent by  virtue  of  the mandate contained  in clause (1) of Article 289. However, if any land or building is used or occupied for the purposes of

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any trade  or business  - trade  or business as explained in the body  of this  judgment -  carried on by or on behalf of the State government, such land or building shall be subject to levy  of property taxes levied by the said enactments. In other words,  State property exempted under clause (1) means such property  as is  used for the purpose of the government and not for the purposes of trade or business; (c)  it is  for the authorities under the said enactments to determine with  notice to  the  affected  State  government, which land  or building is used or occupied for the purposes of any  trade or business carried on by or on behalf of that State government.      We  direct   that  this  judgment  shall  operate  only prospectively. It  will   govern the  Financial Year 1996-97 [commencing on April 1, 1996] and onwards. For this purpose, we invoke  our power  under Article 142 of the Constitution. The reasons are the following; (a)  according to  the judgment under appeal, the properties of the  State were  exempt in toto whereas according to this judgment, some  of the  properties  of  the  State  situated within the  Union Territory  of Delhi  may become  liable to tax. The  assessees are  the State governments and the taxes are being  levied  under  a  Parliamentary  enactment.  This inter-State character of the dispute is a relevant factor; (b)  from the  year  1975  upto  now,  there  have  been  no assessments because of the judgment of the High Court; and (c)  retrospective assessment  of properties under the above enactments appears  to be  a doubtful  proposition -  at any rate, not  an   advisable thing  to do  in all the facts and circumstances of this case.      Before parting  with this case, it would be appropriate to refer to a submission of Sri B.Sen. He submitted that the exemption provided by clause (1) of Article 289 does not and cannot apply  to compensatory taxes like water tax, drainage tax  and   so  on.   Even  where   the  enactment  does  not specifically and  individually enumerate these components of property taxes,  i.e., where  the levy is of a composite tax known as  "Property tax",  it must  be  presumed,  says  Sri B.Sen, that  part of  the property taxes are compensatory in nature. We are, however, not inclined to express any opinion on this  aspect in  the absence  of any  material placed  in support thereof.  We cannot permit this new plea, which does not appear  to be  a pure  question of law, to be raised for the  first   time  at   the  time   of  arguments  in  these appeals/writ petitions.      The appeals and writ petitions are accordingly disposed of in  the above terms. The judgment of the High Court shall stand  modified  to  the  extent  it  is  contrary  to  this judgment.      There shall be no order as to costs.