STATE OF KARNATAKA & ANR. ETC. v. STATE OF MEGHALAYA & ANR. ETC.

The Judgment of the Court was delivered by B NAGARATHNA J. INDEX*

1Copy pinpoint1. Bird’s Eye View of Controversy ……………………………4

2Copy pinpoint2. Submissions …………………………………………………5 C 2.1. Submissions on behalf of Appellants: 2.1.1. Submissions on behalf of State of Karnataka…..................................................5 2.1.2. Submissions on behalf of State of Kerala…...9 D 2.2. Submissions on behalf of Respondents : 2.2.1. Submissions on behalf of State of Nagaland....11 2.2.2. Submissions on behalf of State of Sikkim.…22 2.2.3. Submissions on behalf of State of Meghalaya..26 E

3Copy pinpoint3. Reply Arguments………………………………………….29

4Copy pinpoint4. Points for Consideration………………....………..……...34

5Copy pinpoint5. Constitutional Scheme………………………………….…35

6Copy pinpoint6. Acts under consideration : F 6.1. The Lotteries (Regulation) Act, 1998…….………..62 6.2. The Karnataka Tax on Lotteries Act, 2004……….64 6.3. Kerala Tax on Paper Lotteries Act, 2005…………..67

7Copy pinpoint7. Parameters of Taxation……………...………………………..69 G

8Copy pinpoint8. Meaning of ‘betting and gambling’ and ‘lotteries’ …………73

9Copy pinpoint9. Discussion……………………………………………………..100

10Copy pinpoint10. Summary of Conclusions…………………………………….119

* Ed. Note: Pagination in the Index is as per the original judgment. H

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A These appeals have been preferred by the States of Karnataka, Kerala and others being aggrieved by the judgments passed by the Division Benches of the High Courts of the respective States. The Division Bench of the High Court of Karnataka vide impugned judgments dated 27 th December, 2010 and 7th March, 2011 held that the Karnataka Legislature had no legislative competence to pass the Karnataka Tax on B Lotteries Act, 2004 (hereinafter referred to as, “Karnataka Act, 2004”) and, consequently, directed the amounts deposited by the respondents- States who had organised the lottery schemes to be refunded to them within four months from the date of receipt of the copy of the impugned judgment.

C 2. Similarly, the Division Bench of the High Court of Kerala by the impugned judgments dated 30th April, 2020, 9th August, 2021 and 10th August, 2021, held that the Kerala legislature had no legislative competence to enact the Kerala Tax on Paper Lotteries, Act, 2005 (hereinafter referred to as, “Kerala Act, 2005”) and declared it as D unconstitutional and invalid. Liberty was reserved to the respondents- States to seek refund of the tax already collected by the State of the Kerala under the said Act on producing proper account and proof and a direction was issued to the State of Kerala to pass appropriate orders making refund of the amounts due based on evaluation of such proof, without any delay. E

3. Being aggrieved, the States of Karnataka, Kerala and others are in appeal before this Court. The respondents herein are the States of Nagaland, Arunachal Pradesh, Meghalaya, Sikkim, and others who are the organisers of the lotteries as well as promoters, inter alia, in the States of Karnataka and Kerala. F Bird’s eye view of the controversy:

4. The controversy in these cases is regarding the interpretation to be given to the expression ‘betting and gambling’ in Entries 34 and 62 of List II of the Seventh Schedule of the Constitution of India. Further, G whether the ‘lotteries organised by the Government of India or Government of a State’, which is a subject in Entry 40 of List I also encompasses the power to levy tax on the said lotteries? Consequently, whether under Entry 62 of List II the State Legislature is denuded of the power to levy tax on the said subject? In other words, whether the subject covered in Entry 40 of List I restricts the scope and ambit of Entries 34 H and 62 of List II?If the answer is in the affirmative, whether the State

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 531 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

Legislatures have no legislative competence to levy tax on lotteries A organised by the Government of India or Government of a State. Consequently, the question in these cases is, whether, the legislature of States of Karnataka and Kerala had the legislative competence to enact Karnataka Act, 2004 and Kerala Act, 2005 respectively. Further, whether these Acts are unconstitutional as being extra territorial in operation? B Submissions on behalf of Appellants: Submissions on behalf of State of Karnataka:

5. Sri N. Venkataraman, learned Senior Counsel and Additional Solicitor General appearing on behalf of the appellant-State of Karnataka contended that the impugned legislation passed by the Karnataka State C Legislature does not seek to impose a tax on the sale of lottery tickets. He referred to the following two cases in support of his contention: (i) Sunrise Associates vs. Govt. of NCT of Delhi – [(2006) 5 SCC 603] wherein it was held that lottery tickets are only actionable claims and not goods or services and cannot be taxed invoking Entry 54 of List II D and; (ii) Skill Lotto Solutions Pvt. Ltd. vs. Union of India –[2020 SCC Online SC 990] wherein it was held that under the new Central Goods and Services Tax (CGST) regime, post 1st July, 2017, actionable claims are brought under the tax network of Goods and Services Tax (GST). E

6. Learned Senior Counsel submitted that the tax under question, is neither a tax on sale of lottery tickets nor on lotteries as actionable claims and any reference to Entry 54 of List II will be of no avail as tax on lotteries is not a sales tax or Value Added Tax (VAT) or GST. He contended that the tax under question is a tax on gambling traceable to Entry 62 of List II which,inter alia, deals with tax on betting and gambling. It was contended that the Karnataka Tax on Lotteries Act, 2004 was passed in pursuance of the power under the aforesaid entry and the Karnataka State Legislature had the legislative competence to pass such a legislation.

7. Elaborating further, it was pointed out that Entry 40 of List I is only a ‘regulatory entry’ and the Lotteries (Regulation) Act, 1998 (hereinafter referred to as “Lotteries Act, 1998”) was enacted by the Parliament in light of the same. That said Act deals with only ‘regulation’ and not with ‘taxation’ owing to the jurisdictional incompetence of the Parliament in the area of taxation of State lotteries. Entry 34 of List II is H

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A also a ‘regulatory entry’. The said entry deals with betting and gambling, including lotteries that do not fall under the ambit of Entry 40 of List I. To the contrary, Entry 62 of List II is a specific taxing entry inter alia on gambling and betting. Learned Senior Counsel submitted that the source of taxation is Entry 62 of List II and not Entry 54 of List II and the tax is not on sale or purchase of lottery tickets. B

8. It was further contended that on a conjoint reading of Section 2(4) and Section 6 of the Karnataka Act, 2004 it would indicate that the ‘charge’ or ‘tax’ is a tax on lotteries i.e., on the chance of those persons participating in a lottery and the chance to win a prize in a lottery, which comes within the nomenclature of gambling. The measure of taxation, in case of a bumper draw is Rs.1,50,000/- and in case of any other draw is Rs.1,00,000/-.

9. Learned Senior Counsel further referred to Paragraph 6 of Govind Saran Ganga Saran vs. Commissioner of Sales Tax –[AIR 1958 SC 1041] to state that when the source of taxation and occurrence of taxable event, along with the measure are available to tax a person, such a levy cannot be questioned.

10. Sri Venkataraman next urged that where a regulatory power and taxing power are traceable to different sources and are kept distinct under the Constitutional scheme, in such a case, the regulatory entry cannot subsume a taxing entry as was held in M.P.V Sundararamier and Co. vs. State of Andhra Pradesh–[AIR 1958 SC 468] and State of West Bengal vs. Kesoram Industries Limited–[(2004) 10 SCC 201]. He further relied upon a Seven Judge Bench decision in Synthetics and Chemicals Ltd. vs. State of Uttar Pradesh – [(1990)1 SCC 109] F wherein it was held that the power to regulate, develop or control would not include within its ken a power to levy tax or fee except when the said impost is only for a regulatory purpose. That it is permissible for the power to levy tax or fee for augmenting revenue to continue to vest with the State Legislature despite the regulatory power being with the Union. That ratio in synthetics and chemicals (supra) was reiterated recently in Jalkal Vibhag Nagar Nigam vs. Pradeshiya Industrial and Investment Corporation – [2021 SCC Online SC 960] and had first been laid down in RMDC vs. State of Mysore – [AIR 1962 SC 594].

11Copy pinpoint11. Sri Venkatraman further contended that the tax imposed in the instant case is not extra-territorial in its operation since the tax is on the act of gambling in the State of Karnataka and when more than one

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 533 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

State is involved, the nexus theory test has to be applied. Reliance was placed on State of Bombay vs. R.M.D. Chamarbaugwala – [AIR 1957 SC 699], wherein the requirement of fulfilling three principles, namely, real and not illusory connection; liability sought to be imposed be pertinent to that connection and the connection affecting merely the policy and not validity of legislation, were stipulated. In such a case, when there are participants from State of Karnataka in the act of gambling, there is a real connection to the taxable event and the levy under the impugned legislation is pertinent to that connection although the lottery is organised by any other State in the State of Karnataka.

12Copy pinpoint12. It was further contended that lotteries are res extra commercium i.e., outside the ambit of trade and commerce and therefore, it will neither get protection under Art. 19(1)(g) relating to trade, occupation, business or commerce nor the protection under Article 301 dealing with inter-state trade, commerce and business, even if the State happens to be the operator, as was held in the cases of R.M.D. Chamarbaugwala (supra) and B.R. Enterprises vs. State of Uttar D Pradesh – [(1999) 9 SCC 700]. Submissions on behalf of State of Kerala:

13Copy pinpoint13. Sri Pallav Shishodia, learned Senior Counsel appearing for the appellant-State of Kerala, adopted the submissions made by learned Senior Counsel for the State of Karnataka. He made the following additional E submissions: He submitted that under the Kerala Act, 2005 and the Rules made thereunder, the respondents were liable to pay the tax in advance before any draw, under Section10 thereof. The respondents herein in fact filed a writ petition seeking a writ of mandamus against the appellant-State of F Kerala directing them to accept advance tax. In addition, a companion petition was filed challenging Section10 of the aforesaid Act which was decided by the learned Single Judge of the High Court of Kerala on 10th January, 2007 and thereafter affirmed by the Division Bench on 30th March, 2007. The matter came up to this Court and vide Order dated 16th July, 2014 the High Court’s finding was affirmed in respect of G accepting advance tax; however, it did not accept the challenge to the aforesaid section.

14Copy pinpoint14. Sri Shishodia, learned Senior Counsel, contended that opportunity was granted to the respondents to prove that the burden of tax paid during the period 2006-2010 was not passed on to consumers/ H

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A purchasers of lottery tickets. That the same is contrary to law and was completely unwarranted in the present case. In support of his argument, he fervently relied on Mafatlal Industries Ltd. vs. Union of India - [(1997) 5 SCC536] where it was held that there is a rebuttable presumption that an indirect tax borne by an assessee is passed on to consumers. Even when challenge to constitutionality of a tax succeeds, B the relief of refund can be granted only when the assessee makes a claim to allege and establish that as a fact,the burden of tax collected in the interregnum was not passed on to consumers.

15Copy pinpoint15. Lastly, Sri Shishodia, learned Senior Counsel, contended that the tax period in the instant case is limited to the years 2006-2010 C whereafter lotteries of the State of Sikkim were discontinued in the State of Kerala because large scale frauds were reported. The said ban was made by the Central Government in exercise of power under Section 6 of the Lotteries Act, 1998 which was confirmed on 12 th June, 2015 after an investigation by the CBI and further enquiry. He urged that if the D submission that the State cannot tax lotteries at all is to be accepted by this Court, then the same should be held prospectively to validate non- refund of recoveries made of far. He drew our attention to Somaiya Organics (India) Ltd. vs. State of Uttar Pradesh – [(2001) 5 SCC 519] wherein I.C. Golaknath vs. State of Punjab – [AIR 1967 SC 1643] and India Cement Ltd. vs. State of Tamil Nadu – E [(1990)1SCC12] have been relied upon. Submissions on behalf of Respondents: Submissions on behalf of Nagaland:

16Copy pinpoint16. Sri C. Aryama Sundaram, learned Senior Counsel appearing on behalf of the State of Nagaland in Civil Appeal No.10467 of 2011raised the following main contentions: (i) Contentions pertaining to the legislative competence, or the lack thereof, of the State of Karnataka. (ii) That the impugned Act, in effect seeks to impose tax on the sale of lotteries. (iii) That the impugned Act seeks to operate extra- territorially. (iv) Contentions pertaining to the exigencies faced by North- H Eastern States in generating revenue.

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 535 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

17Copy pinpoint17. Sri. C. Aryama Sundaram, learned Senior Counsel, supported A the judgment of the High Court of Karnataka and contended that the State of Karnataka had no legislative competence to impose tax on the lotteries organised by the Governments of the Respondents-States. It was submitted that lotteries organised by the Government of India or by the Government of any State, fall within the ambit of Entry 40 of List I B and therefore any legislation pertaining to such lotteries may only be enacted by the Parliament.

18Copy pinpoint18. It was next contended that lotteries organised by the Government of India or by the Government of any State, were not within the legislative fields covered under Entries 34 or 62 of List II which pertain to the power of the State Legislature to make laws to regulate C ‘betting and gambling’ and to impose ‘taxes on luxuries, including taxes on entertainment, amusements, betting and gambling,’ respectively. That although the expression ‘betting and gambling’ may be construed as the genus, within which ‘lotteries’ is a species, the specific field of lotteries organised by the Government of India or by the Government of any D State, has been carved out of the genus of ‘betting and gambling’ and been placed under Entry 40 of List I, meaning thereby, that the same may be regulated or subjected to tax, only by the Parliament. In other words, it was contended that taxes on betting and gambling as envisaged under Entry 62 of List II, would be limited to those lotteries which are neither organised by the Government of India nor by the Government of any State. It was submitted that since the Act in question, enacted by the Legislature of the State of Karnataka, seeks to impose tax on the lotteries organised by the Central Government or by the Government of a State, it is beyond the legislative competence of State of Karnataka. That the State of Karnataka by enacting the impugned Act has attempted to legislate on an aspect which lies within the exclusive legislative domain of the Parliament and therefore the said Act is ultra vires the Constitution and is liable to be declared so.

19Copy pinpoint19. In order to buttress the above contentions, learned Senior Counsel placed reliance on the following judgments of this Court: G (i) H. Anraj vs. State of Maharashtra – [1984 (2) SCC 292] wherein this Court considered whether the State of Maharashtra could impose a ban on the sale of lottery tickets of other States, by relying on an executive order of the President under Article 258 (1) of the Constitution which H

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A entrusted the State Government with the executive power of the Union as regards the conduct of lottery. This Court held that the Parliament has exclusive power to make laws in respect of lotteries organised by the Government of India or the Government of a State. It was further observed that State organised lotteries were specifically taken out of the B ambit of the legislative field of States from the expression ‘betting and gambling’ under entry 34 of the State list. (ii) State of Haryana vs. M/s Suman Enterprises – [(1994) 4 SCC 217] is a case where this Court, in deciding whether the State of Haryana could issue a Notification imposing a C ban on the lotteries of other states, held that regulation of lotteries organised by other states is not a State subject but is within the exclusive regulatory power of the Parliament under Entry 40 of List I.

20Copy pinpoint20. It was submitted that although the afore-cited decisions make D no specific reference to Entry 62 of List II and only observe that State organised lotteries were specifically taken out of the ambit of Entry 34 of List II, ‘betting and gambling’ as appearing in both these entries must be construed in a similar manner; i.e. that they are inclusive only of those lotteries which are organised other than by the Government of E India or by the Government of any State. In this regard, Jindal Stainless Ltd. vs. State of Haryana – [2017 (12) SCC 1] was pressed into service to contend that the same expression, if used in different entries in the same List, would have the same meaning. Therefore, although State organised lotteries have specifically been carved out of the expression ‘betting and gambling’ as appearing in Entry 34 of List II, it F may be deemed that ‘betting and gambling’ as appearing in Entry 62 of List II is also not inclusive of State organised lotteries.

21Copy pinpoint21. It was further urged in this regard that if Entry 34 of List II is a general entry which deals with the regulatory power of the State Legislature in the area of ‘betting and gambling’, Entry 62 of List II G vests a more specific power of taxation over ‘betting and gambling’ with the State Legislature. Once it has been held that a given expression, as appearing in a general entry would be construed to exclude a certain item, then it would naturally follow that such item would also be excluded from a specific entry which employs the said expression. In the instant case, lotteries organised by the Government of India or the Government

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 537 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

of any State have been specifically excluded from the ambit of ‘betting and gambling’ as appearing in Entry 34 of List II, therefore, it would follow that it would also be excluded from Entry 62 of List II which is a narrower power, only dealing with taxation. Reference was made to Prof. Yashpal vs. State of Chhattisgarh – [2005 (5) SCC 420] wherein it was held that a narrow or restrictive interpretation would generally not be accorded to a legislative heading which is general in nature. In this regard it was contended that although a general entry is not usually given a restrictive meaning, when in exceptional cases a restrictive interpretation is given, such interpretation should be given effect to not only in connection with the general entry, but should also be extended to specific entries which employ the same term as was interpreted. C

22Copy pinpoint22. It was next contended that the sole and exclusive power of imposition of taxes which are beyond the legislative fields covered under entries specified in List I and List II, would vest only with the Parliament by virtue of Entry 97 of List I read with Article 248 (3) and Article 265 of the Constitution of India. In support of the above contention, learned D Senior Counsel for the State of Nagaland relied on the decision in Union of India vs. Harbhajan Singh Dhillon – [1971 (2) SCC 779], wherein this Court while dealing with the question as to the legislative competence to enact a Legislation pertaining to wealth tax, held that while the subject matter of wealth tax is not specifically covered under any of the entries of the three Lists of the Constitution, the Constitution has not denied the E Union Government power to levy wealth tax and such power would be traceable to Entry 97 of List I. That the impugned Act, in effect seeks to impose tax on the sale of lottery tickets: F

23Copy pinpoint23. It was submitted on behalf of the State of Nagaland that the impugned Act in fact, seeks to impose a tax on lotteries organized by the Government of India or by the Government of any Stateand that legislative competence to enact such statute could not be traced to Entry 62 of List II. The said Entry deals with the power to impose ‘taxes on luxuries, including taxes on entertainment, amusements, betting and gambling.’ G The event or incidence for imposition of such tax would be either the conduct of lotteries or the sale and purchase of lottery tickets. That by enacting the impugned Act, what the State Legislature sought to tax was the sale of lottery tickets, which was not permissible in light of the decision of this Court in Sunrise Associates vs. Government of Delhi H

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A – [(2006) 5 SCC 603]. In the said case, it was held that lottery tickets were not goods within the meaning of the Sales Tax Act and therefore they cannot be subject to sales tax. That the impugned Act, in a clandestine manner, sought to impose sales tax on the sale of lottery tickets which is not permissible.

24Copy pinpoint24. In support of the said contention, the statement of objects and reasons of the impugned Act was referred to, which provides that it has been enacted with an intention “to regulate the actual number of draws held by any lottery promoter.” It was submitted that while the statement of objects and reasons has been worded in a manner as if the legislation C would seek to regulate the quantum of betting and gambling activities or the number of draws held by a lottery promoter, in effect, the tax sought to be imposed by the impugned legislation is in the nature of sales tax. That tax was being levied on the proceeds from the sale of lottery tickets and this would point to the tax being in the nature of sales tax. It was submitted that the impugned Act does not expressly employ the term D ‘sale of lottery tickets’ but seeks to tax the same under the guise of regulating the number of draws held by a promoter.

25Copy pinpoint25. Alternatively, it was contended that even if it is assumed for the sake of argument that the tax was being imposed, not on the sale of lottery tickets but on the conduct of lottery activities, including formulation E and notification of scheme of lotteries, printing of lottery tickets, transportation of lottery tickets, conducting of the draw, declaration of winners, no taxable event relatable to activities listed hereinabove had occurred within the State of Karnataka. That in order for a tax to be imposed by a State, the taxable event would have to occur within the F State. That, the only event that has occurred within the State of Karnataka, was the sale of lottery tickets and the same is not taxable. Hence, it was submitted that the Appellants herein were seeking to do indirectly, that which could not have been done directly. That the impugned Act seeks to operate extra-territorially:

26Copy pinpoint26. Sri Aryama Sundaram next contended that for a State to impose tax on any activity, there ought to be a territorial nexus between the activity sought to be taxed and the levy of the tax. In the instant case, even if the submission made by on behalf of the State of Karnataka that the activity sought to be taxed is the propensity to participate in lotteries, no part of such activity has arisen or taken place within the State of H

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 539 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

Karnataka. All activities which are to be undertaken for the conduct of lotteries, such as formulation and notification of the scheme of lotteries, printing of lottery tickets, transportation of lottery tickets, conducting of the draw, declaration of winners, were undertaken outside the territorial limits of Karnataka and therefore, the conduct of lotteries cannot be subject to tax by the State of Karnataka. In this regard, reference was made to Article 246 (3) of the Constitution of India to contend that a State Government has the power to enact laws for the State or any part thereof. A State Government does not have the power to extend its laws beyond its territorial limits. If a State law is allowed to operate in relation to activities which are conducted beyond its territorial limits, it would have the effect of encroaching upon the legislative power of other States. C

27Copy pinpoint27. Learned Senior Counsel appearing for the State of Nagaland next submitted that the decision of this Court in R.M.D. Chamarbaugwala (supra) relied upon by the appellants would not come to their aid in the instant case. That in the said case, several activities, such as the sale and distribution of forms for the lottery and prize competitions, the collection of entry fees, publication of advertisements pertaining to the lottery and prize competitions, were all conducted within the State of Bombay and it was in that context that this Court held that the State of Bombay possessed legislative competence to enact the Bombay Lotteries and Prize Competitions Control and Tax Act, 1948 which sought to control and levy tax on lotteries and prize competitions in the State of Bombay. In the said case, two conditions were laid down by this Court in order to establish territorial control: (a) real and not illusory connection; (b) the liability sought to be imposed must necessarily pertain to the said connection. In this context, it was urged that the State Acts impugned in these cases would satisfy the aforestated conditions only qua the sale and distribution of lottery tickets, which activity is in any case not taxable. Therefore, reliance placed by the appellants on the said case was misplaced. Contentions pertaining to the exigencies faced by North- Eastern States in generating revenue: G

28Copy pinpoint28. It was submitted that Section 10 of the impugned legislation requires the State which organises the lottery sought to be taxed, to deposit taxes in advance. This has resulted in a situation which is detrimental to the economic necessities of the State of Nagaland. Learned Senior Counsel explained the difficulty that may arise if the said scheme H

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A is permitted to continue: The State of Karnataka collects the tax amount in advance. The amount of tax to be paid is calculated having no regard to the number of tickets sold but is based on the entire scheme or draw. Such a requirement may result in an absurd situation where despite there being negligible or no sale of lottery tickets, as may be the case sometimes, the State of Karnataka would be entitled to enjoy the tax on the entire scheme.

29Copy pinpoint29. It was also urged that if the impugned Act is held to be valid then it would be open to the Legislatures of each of the States in the Country to enact a similar legislation and this would result in a situation of multiple taxation of the same event. Further, if the organising State is required to pre-deposit the tax pertaining to the scheme floated, in each State where a similar enactment may be made, it would result in a situation where lottery schemes would no longer be a source of revenue to the organising State. Reference was made to the decision of this Court in B.R. Enterprises(supra)wherein the importance of lotteries, as a source of revenue to North-Eastern States was recognised. It was urged that the State of Karnataka must not be permitted to curtail the rights of North- Eastern States to conduct lotteries.

30Copy pinpoint30. On the aforesaid submissions, learned Senior Counsel appearing for the State of Nagaland sought dismissal of the appeals. E Submissions on behalf of State of Sikkim:

31Copy pinpoint31. Sri S.K. Bagaria, learned Senior Counsel appearing for the State of Sikkim, First Respondent in Civil Appeal No. 911 of 2021, adopted the contentions advanced by Sri Aryama Sundaram, learned Senior Counsel appearing on behalf of the State of Nagaland in Civil Appeal F No. 10467 of 2011. He further elaborated on the submissions as regards the exclusion of the species of ‘lotteries’ from the genus of ‘betting and gambling’ as appearing in Entries 34 and 62 of List II vide H. Anraj (supra) and M/s Suman Enterprises (supra).He contended that although the decision of this Court in H. Anraj (supra) excluded ‘lotteries’ from G the legislative field of the State Legislature while examining Entry 34 of List II and no reference was made in the said judgment to Entry 62 of List II, it may be construed that ‘lotteries’ organised by the Government of India or the Government of a State are not included within the expression ‘betting and gambling’ appearing in Entry 34 as well as Entry 62 of List II. In support of this contention, reference was made to a H decision of this Court in R.M.D. Chamarbaugwala (supra) wherein a

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 541 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

co-relation was established by the Court between the expression ‘betting and gambling’ as appearing under Entry 34 of List II and Entry 62 of List II, by holding that once it is held that a legislation falls under the topic of ‘betting and gambling’ under Entry 34 of List II, it would follow that the tax imposed by the same legislation would fall under Entry 62 of List II. In this context, it was contended that since it has been unequivocally declared that the tax imposed on ‘betting and gambling’ under Entry 62 of List II seeks to tax the same activity which is regulated under Entry 34 of List II, it logically follows that the expression ‘betting and gambling’ must be given the same meaning and interpretation in both these entries. In other words, an interpretation which suggests that ‘lotteries’ has been carved out of ‘betting and gambling,’ should be made equally applicable to Entry 62, as is applicable to Entry 34 of List II. 32.It was next contended that the impugned Act, namely, the Kerala Lotteries Act, makes no distinction between the taxing event and the measure of tax, i.e., a distinction between the subject matter of tax and the standard by which the amount of tax is to be measured. Reference D was made to Federation of Hotel and Restaurant Association of India vs. Union of India - [(1989) 3 SCC 634] to contend that the subject of a tax is different from the measure of the levy of tax. That the measure of tax is not determinative of its essential character or the competence of the legislature. In this regard, it was submitted that ‘draw’ of lotteries, as appearing in Section 6 of the impugned Act, is only a measure and not the taxable event. That the impugned Act is ambiguous and uncertain and in the guise of tax on lotteries, seeks to levy tax on sale of lotteries.

33Copy pinpoint33. Reference was made to specific provisions of the impugned Act of State of Kerala to contend that the tax sought to be imposed was in effect a tax on sale of lottery tickets. Section 6 of the said Act is the charging provision. It merely states that the tax sought to be levied under the Act is ‘tax on paper lotteries’. Therefore, it is unclear as to what aspect of the conduct of lotteries is sought to be subjected to taxation. That while section 2 (i) of the said Act has defined ‘lottery’ to mean a lottery organised by the Government of India or the Government of any G State, nothing can be imputed from such definition as to the chargeability or the taxing event. It was further urged that Section 7(1) and 8(1) of the Act mandatorily require that any promoter involved in the sale of lottery tickets be registered under the Act and file returns. Section 8(2) imposes the liability of tax on a promoter who has registered and filed returns under Section 7(1) and 8(1) of the Act. In this regard it was H

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A submitted that it is the promoter, who is involved in the sale of the tickets, who is required to bear the burden of tax and therefore, what the State Government has done is to levy sales tax on the sale of paper lotteries in Kerala, which is impermissible in light of the decision of this Court in Sunrise Associates (supra). That in the absence of any clarity in the charging provision as to what would be the taxable event and on a conjoint B reading of Section 7 and 8 of the impugned Act, the only deduction that could be made would be that the event taxed was the sale of lotteries.

34Copy pinpoint34. In reply to the contention advanced on behalf of the State of Kerala, to the effect that the burden of tax imposed on the State of Sikkim was being passed on to the consumer and therefore, the State of C Sikkim was not entitled to claim refund of tax imposed even in the event that the impugned Act was struck down, as receiving a refund would amount to unjust enrichment, it was urged that the doctrine of unjust enrichment was not applicable to a State vide Mafatlal Industries Ltd. (supra). Therefore, the amount of tax collected by the State of Kerala D without jurisdiction is liable to be refunded. Submissions on behalf of the State of Meghalaya:

35Copy pinpoint35. Sri Arvind P. Datar, learned Senior Counsel appearing for the State of Meghalaya and Sri Amit Kumar, learned Advocate General for the State of Meghalaya adopted the contentions of Sri C. Aryama E Sundaram, learned Senior Counsel appearing for the State of Nagaland. He made an additional argument as regards the exclusive Parliamentary power to impose taxation on lotteries organised by the Government of a State. It was submitted that in determining the legislative competence pertaining to the legislative field of ‘State Lotteries’ reference must be made to the Government of India Act, 1935. The said Act provided in Entry 47 of List I for the regulation of ‘State Lotteries.’ The said Act provided for regulation of ‘betting and gambling’ in Entry 36 of List II and the power to impose ‘taxes on luxuries, including taxes on entertainments, amusements, betting and gambling’ under Entry 50 of List II. In that context, it was urged that State lotteries have always been within the exclusive legislative domain of the Parliament and have been carved out of the expression ‘betting and gambling’ as appearing in List II.

36Copy pinpoint36. It was further contended that the power to impose taxation on lotteries is inherent in the general legislative power under Entry 40 of H List I. Learned Senior Counsel referred to certain Entries of List I and

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 543 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

II to contend that wherever the legislative competence relatable to the general legislative field or regulatory field is different from the taxation field, such separation has been expressly stated in the Constitution. Since such distinction has not been made in the context of lotteries covered under Entry 40 of List I, the scope of this entry is unrestricted and every type of legislation qua Central and State organised lotteries is within its ambit.

37Copy pinpoint37. Sri Datar next contended that to uphold the validity of the impugned legislations and allow them to operate, would be against the principles of federalism and inter-governmental immunity. In this regard, reliance was placed on New Delhi Municipal Council vs. State of C Punjab –[(1997) 7 SCC 339] wherein this Court, after discussing the principle of inter-governmental immunity as it operates in the United States of America, held that the said principle would operate in India as well, although to a limited extent. In the Indian context, the immunity conferred on the Union, from any action of the State, is absolute; while immunity to States from the actions of the Union is as per Article 289 of the Constitution. It was submitted in this regard that the impugned Legislations seek to impose interest and penalties on the Union for non- payment of taxes levied on it and also prescribes with holding monies due to the Union in order to recover the tax due. That such provisions of the statute pose a threat to the principle of inter-governmental immunity, which is well recognised and currently operating in India.

38Copy pinpoint38. Learned Senior Counsel appearing for the State of Meghalaya urged that the doctrine of pith and substance and the aspects theory have no relevance to the instant matter. That the doctrine of pith and substance is employed by a Court to save a statute from being declared ultra-vires, when the main purpose of the statute is to legislate on an aspect which is within the legislative competence of the legislature that has enacted it, while an incidental or ancillary purpose sought to be achieved by the statute has the effect of branching into another list. However, in the instant case, the impugned Statutes have only one purpose viz. taxing Central and State organised lotteries. Therefore, they are in their entirety encroaching on the exclusive legislative domain of the Parliament. In a similar vein, it was contended that the aspects doctrine cannot be pressed into service in order to uphold the vires of the impugned Legislations as the said doctrine may be employed only when two aspects are found in the statute and each of such aspects is traceable to a H

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A legislative field in a different List. However, in the instant case, the impugned legislations only have one aspect, traceable to the legislative field covered by a single Entry, viz. Entry 40 of List I. Reply Arguments:

39Copy pinpoint39. Learned Senior Counsel, Sri Venkataraman, appearing for the B State of Karnataka, in response to the submissions made on behalf of State of Nagaland, stated that if the submission is that by virtue of Entry 40 of List I, the Union gains taxing power under Entry 97 of List I, it would be a self-defeating submission. It was also contended that recourse to Entry 97 of List I can only be taken after exhausting specific Entries C under List I and List II. It cannot be contented that the power is secured under Entry 97 of List I as Entry 62 of List II has never undergone any change, mutilation or any denudation till date.

40Copy pinpoint40. In this regard it was explained that Entry 42 of List I refersto inter-state trade and commerce. That originally the tax on inter-state trade and commerce along with local sales tax was levied only by the D State under Entry 54 of List II. Only after the 6 th Constitutional Amendment Act in 1956, the powers of the State were denuded and the Union was vested with the exclusive power by insertion of Entry 92A in List I. When Entry 62 of List II has not been denuded, it cannot be construed that Entry 40 of List I can subsume within itself, the taxation power as would be available under Entry 97 of List I, overlooking the Dhillon Test.

41Copy pinpoint41. In response to the submissions of the State of Meghalaya in respect of Article 246(1) that under the said provision, Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I and therefore, Entry 40 of List I is good enough to include power of taxation on lotteries organised by Central or State Governments, it was urged that the said provision cannot be read in insolation. He submitted that List I and II vest exclusive powers in Union and States respectively and therefore one cannot be read in insolation to the other. G

42Copy pinpoint42. It was further submitted that the Constitution Bench in RMDC vs. State of Mysore (supra) had clearly stated that the surrender of a regulatory or any other power to the Union cannot mean a surrender of the taxation power. Taxing powers are always identified independently and unless such power is transposed, denuded or mutilated, it cannot be H read by implication as held in M.P.V. Sundararamier (supra).

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 545 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

43Copy pinpoint43. In respect of the submission relating to Article 289, Sri A Venkataraman pointed out that there is a ‘Constitutional bar’ against the Union taxing the Income of a State, and the same cannot be taxed by virtue of Article 289. He stated that any activity conducted per se by the State, in this case conducting State Lotteries, cannot be taxed under Article 289. B

44Copy pinpoint44. Learned Senior Counsel then addressed the submission raised by the State of Nagaland that since the Union is imposing tax on lotteries under the GST regime, the power of taxation would vest with the Union even under the pre-GST era. He stated that the aforesaid submission was not rightas it was incorrect to say that the Union is taxing under the GST regime. It was urged that GST is a unique tax traceable to Article C 246A both in terms of power and field of legislation, under which the taxable event is one,namely supply and the taxing power vests both with the Union and the States. However, in the present case at hand, Article 246 is the source of power and Entries in List I and II are fields of legislation which have to be interpreted. D

45Copy pinpoint45. In response to the argument that lottery is the main source of income for the North - Eastern States and grave prejudice would be caused to State revenue if the appellant-States are permitted to tax, learned Senior Counsel urged that there is no equity is taxation laws. It was submitted that the respective North - Eastern States have earned E their lottery revenues using the territory of other States. In such a case, it is not open to plead that such States should not use their taxing powers only because that would be detrimental to North - Eastern States.

46Copy pinpoint46. Learned Senior Counsel Sri Pallav Shishodia for the State of Kerala, in furtherance of the contentions of the learned Senior Counsel F appearing for the State of Karnataka, placed reliance on the decision of the Constitution Bench of this Court in Kesoram Industries Limited (supra) wherein it was held that the ‘power of regulation and control’ is separate and distinct from the ‘power of taxation’ and so are the fields for the purpose of legislation. It was submitted that the States can legislate to regulate ‘betting and gambling’ in their respective states G except with respect to lotteries organised by other States which shall remain governed by the Lotteries Act, 1998 enacted by the Parliament having legislative competence under Entry 40 of List I. However, levy of tax on ‘betting and gambling’ is a different field of legislation under Entry 62 of List II. H

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47Copy pinpoint47. It was further contended that the regulation of gambling and taxing of gambling activity being two separate and distinct fields of legislation, the width of legislative power of States to tax State organised lotteries under Entry 62 of List II cannot be curtailed by regulatory powers of Centre under Entry 40 of List I even though only regulatory powers of states to regulate State organised lotteries are taken out from Entry B 34 of List II.

48Copy pinpoint48. To buttress his contention, learned Senior Counsel for the State of Kerala referred to Chapter 5, Subsidiary Rules in Principles of Statutory Interpretation authored by Justice GP Singh under the heading ‘Same Word Same Meaning’. He contended that it is a settled principle of interpretation that the same expression can have different meanings in the same statute or even the same provision, if the context so required. Learned Senior Counsel cited the case of Maharaj Singh vs. State of UP – [1977 (1) SCC 155] in this behalf.

49Copy pinpoint49. It was further urged that the respective contexts of the expression ‘betting and gambling’ under Entry 34 and Entry 62 both in List II are very different. Entry 34 of List II describes the legislative field of regulatory powers of the State over ‘betting and gambling’ while Entry 62 of List II describes the legislative field of taxation on ‘betting and gambling’ by States. Learned Senior Counsel for the State E of Kerala emphasized upon the judgment of this Court in Kesoram Industries Limited (supra) and stated that the principles in the aforesaid case have also been approved in the case of Jindal Stainless Limited (supra).

50Copy pinpoint50. Learned Senior Counsel submitted that there were several examples where regulatory powers are with the Centre and the taxing power is with the States. To fortify his argument, he relied upon State of Uttar Pradesh vs. Vam Organic Chemicals Limited and Ors. – [2004 (1) SCC 225] wherein it was held that the tax or fee imposed for regulatory purposes must not be mistaken as tax under taxing entry. The regulatory power cannot be used for plenary taxation. However, the levy of some regulatory charges under the Lotteries Act, 1998 is not a tax and does not in any manner whittle down the scope of Entry 62 ofList II.To conclude, learned Senior Counsel for the State of Kerala submitted that one transaction can have several aspects to attract both central and state taxes as was held in Federation of Hotel and H Restaurant Association of India (supra).

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 547 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

51Copy pinpoint51. Further, learned Senior Counsel brought to the attention of A this Court, the principle, that ‘specific’ excludes ‘general’ and that the taxing entry would limit the scope of general regulatory entry, as was explained in the Commentary on Constitution of India (2nd Edition, Volume 2, Pg.2145) authored by Sri Arvind P. Datar, Senior Advocate.

52Copy pinpoint52. Learned Senior Counsel for the State of Kerala stated that B Entry 62 of List II is now whittled down in view of the now firmly established GST regime. He stated that the interpretation of Entry 62 of List II in the present set of appeals concerns taxes paid in the past. Points for consideration

53Copy pinpoint53. Having heard learned Senior Counsel and learned counsel C appearing for the respective parties and upon perusal of the record, the following points would arise for our consideration: (i) Whether the subject ‘lotteries organised by the Central Government and the State Governments’ being carved out of ‘betting and gambling’ which is dealt withunder Entry 34 D of List II and being placed in Entry 40 of List I would also exclude the power of taxation on the same in Entry 62 of List II? (ii) Whether the power of taxation on ‘betting and gambling’ is within the ambit of Entry 62 of List II? E (iii) Whether the impugned Acts passed by the Karnataka and Kerala State Legislatures are within the legislative competence of Entry 62 of List II, and are therefore valid pieces of legislation? (iv) What order? F

Constitutional Scheme

54Copy pinpoint54. For easy and immediate reference, the following provisions of the Constitution of India are extracted as under : “245. Extent of laws made by Parliament and by the G Legislatures of States – (1) 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. H

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A (2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra territorial operation.

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 B respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the ‘Union List’). (2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List C III in the Seventh Schedule (in this 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 D 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 E State List. 246A. Special provision with respect to goods and services tax - 1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every F State, have power to make laws with respect to goods and services tax imposed by the Union or by such State. (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce. G Explanation. - The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council.] X X X H

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 549 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

248. Residuary powers of legislation – A (1) Subject to Article 246A, Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List (2) Such power shall include the power of making any law imposing a tax not mentioned in either of those Lists B

X X X

265. Taxes not to be imposed save by authority of law- No tax shall be levied or collected except by authority of law. C X X X Entries 40 and 97 ofList I

40. Lotteries organised by the Government of India or the Government of a State.

97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists. Entries 34 and 62ofList II

34. Betting and gambling. 62*. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling. [*As it stood prior to its substitution with effect from 16.09.2016 which is relevant for the purpose of these cases].” Some of the salient aspects concerning the distribution of the legislative powers between the Parliament and State Legislature as per the three Lists of Seventh Schedule of the Constitution in the backdrop of provisions could be alluded to.Article 246 of the Constitution deals with the distribution of legislative powers between the Union and the States. The said Article has to be read along with the three Lists namely the Union List, the State List and the Concurrent List. The taxing powers of the Union as well as the States are also demarcated as separate Entries in the Union List as well as the State List i.e. List I and List II respectively. The Entries in the Lists are the fields of legislative powers conferred under Article 246 of the Constitution. In other words, the Entries define the areas of legislative competence of the Union and State Legislature. H

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55Copy pinpoint55. Article 246 deals with subject matter of laws made by Parliament and by the Legislatures of States as follows : (a) Clause (1) of Article 246 states that 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 (Union List). In this case, we are concerned with Entry 40 of List I, which deals with Lotteries organised by the Government of India or the Government of a State. (b) Clause (2) of Article 246 of the Constitution, states that notwithstanding anything in clause (3), the Parliament and the Legislature of any State also have the power to make laws with respect to any matters enumerated in List-III (Concurrent List). (c) Clause (3) thereof, states that the Legislature of any State has exclusive power to make laws for the State with respect to any matters enumerated in List-II (State List). However, clause (3) of Article 246, is subject to clauses (1) and (2) which begin with a non-obstante clause.

56Copy pinpoint56. The power to legislate which is dealt with under Article 246 has to be read in conjunction with the Entries in the three Lists which define the respective areas of legislative competence of the Union and State Legislatures. While interpreting these entries, they should not be viewed in a narrow or myopic manner but by giving the widest scope to their meaning, particularly, when the vires of a provision of a statue is assailed. In such circumstances, a liberal construction must be given to the Entry by looking at the substance of the legislation and not its mere form. However, while interpreting the Entries in the case of an apparent conflict, every attempt must be made by the Court to harmonise or reconcile them. Where there is an apparent overlapping between two Entries, the doctrine of pith and substance is applied to find out the true character of the enactment and the entry within which it would fall. The G doctrine of pith and substance, in short, means, if an enactment substantially falls within the powers expressly conferred by the Constitution upon the legislature which enacted it, it cannot be held to be invalid merely because it incidentally encroaches on matters assigned to another legislature. Also, in a situation where there is overlapping, the doctrine has to be applied to determine to which Entry, a piece of legislation could be related. If there is any trenching on the field reserved to another

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 551 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

legislature, the same would be of no consequence. In order to examine the true character of enactment or a provision thereof, due regard must be had to the enactment as a whole and to its scope and objects. It is said that the question of invasion into another legislative territory has to be determined by substance and not by degree.

57Copy pinpoint57. In case of any conflict between Entries in ListI and ListII, the power of Parliament to legislate under ListI will supersede when, on an interpretation, the two powers cannot be reconciled. But if a legislation in pith and substance falls within any of the Entries of ListII, the State Legislature’s competence cannot be questioned on the ground that the field is covered by Union list or the Concurrent list vide Prafulla Kumar Mukherjee vs. Bank of Commerce, Khulna - [AIR 1947 P.C. 60]. C According to the pith and substance rule, if a law is in its pith and substance within the competence of the Legislature which has made it, it will not be invalid because it incidentally touches upon the subject lying within the competence of another Legislature vide State of Bombay vs. FN Balsara – [AIR 1951 SC 318]. D

58Copy pinpoint58. In Atiabari Tea Company Ltd. vs. State of Assam – [AIR 1961 SC 232], it has been observed by this Court that the test of pith and substance is generally and more appropriately applied when a dispute arises as to the legislative competence of the Legislature and it has to be resolved by reference to the Entries to which the impugned legislation is E relatable. When a question of legislative competence is raised, the test is to look at the legislation as a whole and if it has a substantial and not merely a remote connection with the Entry, the same may well be taken to be alegislation on the topic vide Ujagar Prints vs. Union of India – [AIR 1989 SC 516]. F

59Copy pinpoint59. The expression used in Article 246 is ‘with respect to’ any of the matters enumerated in the respective Lists. The said expression indicates the ambit of the power of the respective Legislature to legislate as regards the subject matters comprised in the various Entries included in the legislative Lists. Hence, where the Entry describes an object of tax, all taxable events pertaining to the object are within that field of G legislation unless the event is specifically provided for elsewhere under a different legislative head. Thus, the Court has to discover the true character and nature of the Legislation while deciding the validity of the Legislation. Applying the doctrine of pith and substance while interpreting the legislative Lists what needs to be seen is whether an enactment H

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A substantially falls within the powers expressly conferred by the Constitution upon the Legislature which enacted it. If it does, it cannot be held to be invalid merely because it incidentally encroaches on matters assigned to another Legislature vide FN Balsara (supra).

60Copy pinpoint60. In Ujagar Prints (supra), it was observed that the Entries in the legislative Lists must receive a liberal construction inspired by a broad and generous spirit and not in a narrow and pedantic manner. This is because the Entries are not sources of legislative power but are merely topics or fields of Legislation. The expression ‘with respect to’ in Article 246 brings in the doctrine of pith and substance in the understanding of the exertion of the legislative power and wherever the question of legislative competence is raised, the test is whether the Legislation, looked at as a whole, is substantially ‘with respect to’ the particular topic of Legislation. For applying the principle of pith and substance, regard must be had (i) to the enactment as a whole, (ii) to its main object, and (iii) to the scope and effect of the provision.

61Copy pinpoint61. Once the Legislation is found to be ‘with respect to’ the legislative Entry in question unless there are other constitutional prohibitions, the power would be unfettered. It would also extend to all ancillary and subsidiary matters which can fairly and reasonably be said to be comprehended in that topic or category of Legislation vide United E Provinces vs. Atiqa Begum – [AIR 1941 FC 16].

62Copy pinpoint62. Another important aspect while construing the Entries in the respective Lists is that every attempt should be made to harmonise the contents of the Entries so that interpretation of one Entry should not render the entire content of another Entry nugatory vide Calcutta Gas F Company vs. State of West Bengal – [AIR 1962 SC 1044]. This is especially so when some of the Entries in a different List or in the same List may overlap or may appear to be in direct conflict with each other, in such a situation, a duty is cast on the Court to reconcile the Entries and bring about a harmonious construction. Thus, an effort must be made to give effect to both Entries and thereby arrive at a reconciliation or harmonious construction of the same. In other words, a construction which would reduce one of the Entries nugatory or dead letter, is not to be followed.

63Copy pinpoint63. The sequitur to the aforesaid discussion is that if the Legislature passes a law which is beyond its legislative competence, it is a nullity ab-initio. The Legislation is rendered null and void for want of jurisdiction

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 553 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

or legislative competence vide RMDC vs Union of India – [AIR 1957 A SC 628].

64Copy pinpoint64. Since these appeals concern interpretation, inter alia, of Entry 62 of List II, which is a taxation entry, it would be useful to refer to certain other articles of the Constitution. Article 265 of the Constitution of India states that no tax shall be levied or collected except by authority of law. That means not only the levy but also the collection of a tax must be authorized by law. The tax to be levied must be within the competence of the Legislature imposing the tax and the validity of the tax has to be adjudged with reference to the competence of the Legislature at the time the statute authorizing the tax was enacted. Further, the law imposing the tax must have been validly enacted. Thus, power to tax cannot be inferred by implication. The source of power which does not specifically speak of taxation cannot be interpreted by expanding its width as to include therein the power to tax by implication or by necessary inference. There must be a charging section specifically empowering the State to levy the tax vide Kesoram Industries Limited. (supra). D

65Copy pinpoint65. Bearing in mind the issues raised in this batch of cases, it is unnecessary to consider the other aspects touching upon the validity of the taxation laws made by a Legislature viz., that they ought not to violate any fundamental right etc., as what is of more significance to the present appeals is the question, whether, the impugned Acts contravene E the specific provisions of the Constitution which impose limitation on legislative power relating to particular matters.

66Copy pinpoint66. Further, under Article 289, the Union cannot tax the property and income of a State vide Re. Sea Customs Act – [AIR 1963 SC 1760]. This is based on the principles of federalism and inter- F governmental immunity as adverted to by learned Senior Counsel Sri Datar. However, under clause (2) of Article 289, the Union can impose or authorize 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 G of such trade or business, or any income accruing or arising in connection therewith. Clause (2) of Article 289 states that Parliament may by law declare any trade or business or any class of trade or business to be incidental to the ordinary functions of government in which event, clause (2) of Article 289 would not apply. H

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67Copy pinpoint67. Further, when a power is conferred on the Legislature to levy a tax, the power itself must be widely construed. It must include the power to impose a tax and select the articles or commodities for the exercise of such power. It must also include the power to fix the rate and prescribe the machinery for the recovery of tax. In imposing taxes, the Legislature can also appoint authorities for collecting taxes and may prescribe the procedure for determining the amount of tax payable by any individual and also ensure that there is no evasion of tax. All these provisions are subsidiary to the main power to levy a tax vide Khyerbari Tea Co. Ltd. vs. State of Assam – [AIR 1964 SC 925].

68Copy pinpoint68. If a tax is ultra vires or unconstitutional then the party is entitled to have a refund of it from the government whether it has been paid under protest or not. This Court has held that the payment of tax which is without authority of law is payment made under a mistake within the meaning of Section 72 of the Indian Contract Act. Then, in such a case, question would arise, whether, the government to whom the payment had been made by mistake must repay it. Thus, the principle of restitution or repayment of the tax simpliciter has been considered in light of the doctrine of unlawful enrichment. The doctrine envisages that when the State collects a tax from the tax payer without authority of law, but if the taxpayer has already passed on the burden of the tax money paid by him to the State to someone else and has recouped the money then the taxpayer is not entitled to ask for the restitution from the State the money paid by him as unauthorised tax. In such circumstances, the State cannot be asked to refund the tax money to the taxpayer on the principle of unlawful enrichment. The Court may refuse the relief to the concerned taxpayer who had ultimately paid the above but not to the intermediary to collect the amount from them and paid the same to the government. It would all depend upon the facts and circumstances of each case. With the passage of time, it has been held that no refund can be granted so as to cause a windfall gain to any person when he has not suffered the burden of tax. That the right of restitution is neither automatic nor unconditional vide Mafatlal Industries (supra). In the said case it was held that refund claim can be allowed only when a person establishes that he has not passed on the burden to others.

69Copy pinpoint69. With the above preface, we shall consider the relevant case law cited at the Bar on interpretation of an Entry in respect of taxation.

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 555 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

70Copy pinpoint70. Under the Seventh Schedule of the Constitution, Lists I & II A are divided essentially into two groups: One, relating to the power to legislate on specified subjects and the other, relating to the power to tax. In Hoechst Pharmaceuticals Ltd. vs. State of Bihar – [AIR 1983 SC 1019], it has been categorically held that taxation is considered as a distinct matter for purposes of legislative competence. B

71Copy pinpoint71. It would be relevant to discuss the following judgments of this Court in detail so as to bring out the pertinent principles of interpretation of taxation Entries in List II even when regulation of an activity is provided under an Entry in List I. They are (i) M.P.V. Sundararamier (supra) and (ii) Kesoram Industries Ltd. (supra) while delving on these judgments reference would also be made to other cases cited at the Bar, particularly C Synthetics and Chemicals Ltd. (supra) and Harbhajan Singh Dhillon (supra). M.P.V. Sundararamier :

72Copy pinpoint72. In M.P.V. Sundararamier (supra), the petitioners were dealers carrying on business in the city of Madras (now Chennai) for the sale and purchase of yarn, and they had filed petitions under Article 32 of the Constitution before this Court for the issuance of a writ of prohibition or any other appropriate writ restraining the erstwhile State of Andhra Pradesh from taking proceedings for imposing tax on certain sales effected by them in favour of merchants who were residing or carrying on business in what was the erstwhile State of Andhra Pradesh, on the ground, inter alia, that the said sales were made in the course of inter- State trade, and that no tax could be levied on them by reason of the prohibition contained in Article 286(2) of the Constitution. One of the questions considered in the said case was, whether, tax on inter-State F sales was within the exclusive competence of Parliament, and whether the Act impugned in the said case (Madras General Sales Tax Act, 1939; ‘Madras Act’, for short) and the amendment made thereof by the Madras General Sales Tax (Amendment) Act No.25 of 1947, was in consequence bad, as it authorized the State to levy the sales tax. G

73Copy pinpoint73. The contention was that Entry 42 of List I dealt with inter- State trade and commerce and under that Entry, the Parliament had the exclusive power to enact laws in respect of inter-State trade and commerce which also included the power to impose a tax on inter-State sales and the State Legislature had therefore no competence under the Constitution to enact a law imposing tax on such sales and the laws H

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A passed by the States after the enactment of the Constitution, imposing such a tax were ultra vires and void and therefore, the Act impugned in the said case was also ultra vires. It was contended that the content of Entry 42 in List I was the same as that of the Commerce Clause of the American Constitution and it must therefore be construed as having the same effect. It was also argued that the power to impose tax on inter- B State sales did not vest with the State. That after the enforcement of the Constitution, no law of a State could impose a tax on inter-State sales and hence section 22 of the Madras Act impugned in the said case which came into force after the Constitution was enforced and sought to impose such a tax, was bad in law.

74Copy pinpoint74. The aforesaid contentions were considered in light of the Government of India Act, 1935 under which there was no entry corresponding to Entry 42 of List I of the Constitution but there was Entry 48 in List II which corresponded to Entry 54 of List II of the Constitution. That under Entry 48 of List II of the Government of India D Act, 1935 the State had power to pass a law imposing a tax on inter- State sales because the term of the Entry was wide enough to include both inter-State sales as well as intra-State sales. However, after the Constitution came into force for the first time a new Entry 42 of List I was added and consequently, the States were deprived of the power to tax inter-State sales which had earlier been within their legislative competence under Entry 48 of List II, under the Government of India Act, 1935.

75Copy pinpoint75. It was observed by this Court that while enacting Entry 42 of List I the Constitution makers could have included the power to tax on inter-State sales instead of leaving that to be inferred by construction of Entry 42 of List I in light of the Commerce Clause under the American Constitution. While saying so in paragraph 51, it was observed as follows : “51. In List I, Entries 1 to 81 mention the several matters over which Parliament has authority to legislate. Entries 82 to 92 G enumerate the taxes which could be imposed by a law of Parliament. An examination of these two groups of Entries shows that while the main subject of legislation figures in the first group, a tax in relation thereto is separately mentioned in the second. Thus, Entry 22 in List I is “Railways”, and Entry 89 is “Terminal H taxes on goods or passengers, carried by railway, sea or air; taxes

STATE OF KARNATAKA & ANR. ETC. v. STATE OF 557 MEGHALAYA & ANR. ETC. [B. V. NAGARATHNA, J.]

on railway fares and freights”. If Entry 22 is to be construed as involving taxes to be imposed, then Entry 89 would be superfluous. Entry 41 mentions “Trade and commerce with foreign countries; import and export across customs frontiers”. If these expressions are to be interpreted as including duties to be levied in respect of that trade and commerce, then Entry 83 which is “Duties of customs including export duties” would be wholly redundant. Entries 43 and 44 relate to incorporation, regulation and winding up of corporations. Entry 85 provides separately for corporation tax. Turning to List II, Entries 1 to 44 form one group mentioning the subjects on which the States could legislate. Entries 45 to 63 in that List form another group, and they deal with taxes. Entry C 18, for example, is “Land” and Entry 45 is “Land revenue”. Entry 23 is “Regulation of mines” and Entry 50 is “Taxes on mineral rights”. The above analysis — and it is not exhaustive of the Entries in the Lists — leads to the inference that taxation is not intended to be comprised in the main subject in which it might on an extended construction be regarded as included, but is treated as a distinct matter for purposes of legislative competence. And this distinction is also manifest in the language of Article 248, clauses (1) and (2) and of Entry 97 in List I of the Constitution. Construing Entry 42 in the light of the above scheme, it is difficult to resist the conclusion that the power of Parliament to legislate on inter-State trade and commerce under Entry 42 does not include a power to impose a tax on sales in the course of such trade and commerce.” On the above analysis, it was categorically inferred that taxation was not intended to be comprised in the main subject in which it might, on extended construction, be regarded as included but is to be treated as a distinct matter for the purpose of legislative competence. But while saying so, in the said case, reliance was placed on Article 286 of the Constitution and on the point, as to, whether, tax on inter-State sales was included within Entry 42 in List I, it was held in the negative, particularly, having regard to Article 286 of the Constitution. Consequently, it was opined that the State had power under Entry 54 of List II to impose a tax on inter-State sales but it would be subject to restrictions included under Article 286(2) of the Constitution. The aforesaid conclusion was summed up in paragraph 55 in the following words : H