NEW DELHI MUNICIPAL COUNCIL v. STATE OF PUNJAB ETC. ETC.

514 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.

A We find the above explanation cogent and acceptable. It fully ex- plains 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 B 289(1) uses a single expression ''Property" and says that property of a State shall be exempt from Union taxation. The expression "Property" is in- dubitably 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" - C 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 (a) 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 extenso hereinabove, for the use of the words "lands or buildings" in Section 155(1) is equally valid from 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 F 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 G 289 is practically identical (except for the two distinguishing features mentioned hereinbefore). It would, therefore, suffice if we discuss the proviso. It says - omitting refrains to 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

N.D.M.C. v. STATE [REDDY, J.) 515

respect of that trade or 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 emphasise that the proviso to Section 155(1) which by its own force levied truces upon the trading and business operations carried on by the provincial govern- ments did not either define the said expressions or specify which trading or business operations are subject to trocation. 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 2B? also similarly does not define or specify - nor does it require that the law made there- under should so define or specify. It cannot be said that unless the law made under and with reference to clause (2) specifies the particular trading or business operations to be truced, 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 trocation in respect of trade or business when the main limb of sub- section (1) .speaks only of truces 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 excep- tion? 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 proviso than to find a label for it. It is clarificatory in nature without a E 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 true 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 inco~e of Provincial government operates only where the income is earned or received by it as F 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 '2B9, it is not possible to say that every activity carried on by the G government is governmental activity. A distinction has to be made between governmental activity and trade and business carried on by the governme~t, at least for the purposes 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 move, it would not be a trade or business contemplated by clause (2). For example, H

516 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.

A 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 or business - that the proviso (or for that matter clause (2) of Article 289 would be attracted. Where there is no profit motive involved in B 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 be words "trade or business" in the proviso to Section 155 and in clause (2) of Article 289. Both c the words 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.

D 618. As observed by Lord Diplock in Town Investments Limited v. Depart- ment 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 E 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 Govermnent of India 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 F constitutional scheme, the necessity to maintain a balances between the Centre and the States and so on.

Proviso (i) not only speaks of trade or business carried on by the G Provincial governments (outside their respective territories) but also "any For example, almost evety State government maintains one or more guest-houses in Delhi for accommodating 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 cartying 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 H by the State government.

N.D.M.C. v. STATE [REDDY, J.] 517

operations connected therewith or any income arising in connection there- A with or any property occupied for the purposes thereof." So far as opera- tions 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 or 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 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 there~th 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 ean 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 confmed 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 p 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 Parlia- ment 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 government in G 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 H

518 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.

A Article 289. The State invoke clause (1) of the 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, D 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 certai111y the Delhi Municipal Corporation Act and N.D.M.C. Act - are post-constitutional enactment. As stated hereinbefore, E these enactments while specifically exemp_flng Jbe Umon p~operfy rermsQJ"~:_ ffi Article 285, do not exempt the properties of the State!fTh term8 orl\tth::le 289.* The omission cannot be said to be unintentional - particularly in the

• As a n1atter of fact, Section 115(4) of the Delhi Municipal Corporation Act and Section F 62(1) of the N.D.M.C. Act expressly exempt properties useCI 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 State 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). G Save as othenvise 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 : Provided that such society or body is supported wholly or in part by voluntary contribu- H tions, 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 said tax, if levied, would under the provisions of this Act be leviable primarily on the Council; (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 (a) of sub- sectioo. (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.

N.D.M.C. v. STATE [REDDY,J.] 519

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 State situated within their respec- tive jurisdictions. Taxes are levied on all properties within their jurisdiction (except the properties specifically exempted), irrespective of who owns them 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 c manner of their 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 sq~arely 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 inter- pretation 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 G

This is the nonual situation. No enactment states that it is made under and with reference to a particular head of legislative 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 to ascertain the head of legislation or provision to which the enactment is referable. H

520 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.

A opinion, it should be so sustained, even though it may be that the appel- lant-corporations have not chosen to argue this point specifically. As would be 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. B 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 meaning 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 clause (1) of Article 289 and that by virtue of the exemption provided by clause (1), taxes are not C 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 ~ear out our view. In Charanjit Lal Chowdhary v. Union of India, [1950] S.C.R. 869, Fazl Ali, J. D stated : 11 •••• .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 BwTakur Coal Co. v. Union of India, A.l.R. (1961) S.C. 654 at 963 = [1962] 1 S.C.R. 44, Mudholkar, J., speaking for E the Constitution Bench, observed : "Were 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 Con- F stitution the law can be sustained. 11 In Rt. Rev. Msqr. 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 G 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 the barrier or regulatory measures and 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 H

N.D.M.C. v. STATE [REDDY,J.] 521

is held to be inapplicable to a minority educational institution in A a situation of the kind with which we are concerned in this case. We do not think it necessary or advisable to strike down the Rule as a whole but do restlict its operation and make it inapplicable to a minority educational institution in a situation like the one which arose in this case." B ileference may also be made to another Constitution Bench decision in Sanjeev Coke Manufacturing Co. v. Mis. Bharat Coking Ltd. &Anr., A.LR. (1983) S.C. 289 = (1983) 1S.C.C.147. The following observations in Para 26 are apposite : c "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 D Parliament meant to say. None else. Once a statute leaves Parlia- ment House, the Court's is the only authentic voice which may echo (interpret) the Parliament. This the Court will do with refer- ence to the language of the statute and other permissible aids. The executive Government may place before the Court their under- standing of what Parliament has said or intended to say or what they think was Parliament's object and all the facts and circumstan- ces 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) spokemen do not bring out relevant circumstances but indulge in empty and self- defeating affidavits. They do not and they cannot bind Parliament. Validity of legisla- tion is not 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: H

522 SUPREME COURTREPORTS[1996] SUPP.10 S.C.R.

A "(b) that there is always a presumption in favour of the Con- stitutionality 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;

(e) that in order to sustain the presumption of constitutionality the B Cour:t may take into consideration matters of common knowledge, matters. of common repoTt, the history of the times and assume every state of facts which can conceived existing at the time legislation; and ......"

C 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 D (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 govern- ment, 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 G 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 exemp- H tion can be held to be ineffective nor the authorities can be said to have

N.D.M.C. v. STATE [REDDY,J.] 523

no jurisdiction to decide these questions. Appeals are provided to civil A courts against the orders of the assessing authorities.

In the light of the above position of law, it is for 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. B PARTY c V

The following conclusions flaw from the above discussion :

(a) the property taxes levied by and under the Punjab Municipal Act, C 1911, the New Delhi Municipal Council 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 any trade or busin-::ss - 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 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 G Constitution. The reasons are the following :

(a) according to the judgment under appeal, the properties of the State were exempt i11 toto whereas according to this judgment, some of the properties of the State situated within the Union Territory of Delhi may H

524 SUPREME COURT REPORTS(l996] SUPP. 10 S.C.R.

A become liable to tax. The assessees are the State governments and the taxes are being levied under a Parliamentary enactment. This inter-state charac- ter of the dispute is a relevant factor;

(b) from the year 1975 upto now, there have been no assessments B because of the judgment of the High Court; and

( c) retrospective assessment of properties under the above enact- ments appears to be a doubtful proposition - at any rate, not an advisable thing to do in all the facts and circumstances of this case.

C 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, D 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 compen- satory 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 ar~ents in these E .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. F There shall be no order as to costs.

AHMADI, CJ. 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 G which follow this judgment. The appellant in all these matters is the New Delhi Municipal Committee (hereinafter called "the NDMC"). The respon- dents are the Union of India and the States of Andhra Pradesh, Gujarat, Haryana, Jammu & Kashmir, Kerala, Madhya Pradesh, Maharashtra, Oris- sa, Punjab, Rajasthan, Tripura and West Bengal. The Municipal Corpora- H tion of Delhi (hereinafter called "the MCD") appears as an intervenor.

N.D.M.C. v. STATE [AHMADI, CJ.] 525

The Case History A

The developments that occasioned che 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 B tax on the immovable properties of the respondent State situated within Delhi.· The respondents challenged the imposition of such a tax on their properties before the Delhi High Colirt 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 con- tention, relied upon the relevant observations of the 9-Judge Constitution C 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 D NDMC filed an application under Article 133(1)(c) of the ConstitutiO~ 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 req~ired an

. authoritative decision by this Court. E On January 1, 1976 a Division Bench of this Court 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 Con- F stitution Bench of this Court began hearing arguments and after consider- ing 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 G 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; how- ever it was of the view that the arguments advanced before it, which were not considered by the earlier decisions, were plausible and required con- H

526 SUPREME COURT REPORTS[l996J SUPP. 10 S.C.R.

A sideration which necessitated the setting up of a 9-Judge Bench to hear the matter.

17te Impugned Judgment

An analysis of the impugned judgment may now be resorted to in B order to gain an insight into the various Constitutional questions that will require our consideration. Before the High Court, the various States con- tended the following; by virtue of Article 289(1) of the Constitution, the property of the States is exempt from Union Taxation; the undefined phrase "Union Taxation" in Article 289(1) would mean all taxes which the C 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 D 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 tlie Union Territory of Delhi is concerned, though it relates to a matter in the State List, it would still amount to "Union Taxation" becz.use, by virtue of its application to the Union Territory of E 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. F For the NDMC, it was contended : the phrase "Union Taxation" would not extend to legislations in Union Territories and its 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

N.D.M.C. v. STATE [AHMADI, CJ.] 527

Municipality for its own purposes, such a tax would not form part of "Union A Taxation" and the States were therefore not entitled to be exempted from 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 B 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 c 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 dis- tribution of legislative powers between the States and the Union; con- sidered. the historical Constitutional position of Union Territories; scrutinised the series of decisions of this Court on the issue whether a D 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 determina- tive 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 by 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 Taiation on property under Article 289(1)."

The High Court rejected the contenticm that the Act was a State enactment and stated that under the scheme of the Constitution, the term "Union G 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

528 SUPREME COURT REPORTS[l996] SUPP. 10 S.C.R. A 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 under- stood.

Constitutional histmy of the areas that are now called "Union Ter- B litories"

In the pre-Constitutional era, these territories were called Chief Commissioner's Provinces. The Government of India Act 1919 contained specific provisions for the governance of these areas. Under the Scheme c of the Government oflndia 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 D (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 Commis- s10ner. .. . E On July 31, 1947, during the incipient stages of the 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 recommenda- F tions 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 - G Delhi, Ajmer and Coorg - and some erstwhile Indian States which were retained a:s 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 whether these territories should have legis- H latures and Councils of Ministers ought to be left to Parliament and, for this purpose, an enabling provision should be incorporated within the

N.D.M.C. v. STATE [AHMADI, O.] 529

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 neighbouring State, subject to certain procedural requirements. Accordingly. Article 239 and 240 were inserted in the final draft of the Constitution. B Under the Constitution of India, as initially enacted, the States 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) C Delhi; (vii) Himachal Pradesh; (viii) Manipur; and (ix) Tripura. The only territory under Part D was Andaman· & Nicobar. Part VIII of the Constitu- tion, 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 D 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 of 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), Parlia- ment 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 States Reorganisation Commission which was set up in Decem- G ber, 1953, while studying the working of the units of the Union, took up the functioning of the Part C States for examination as an independent topic. In its Report, 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 amal- gamated with the neighbouring States or made a centrally administered H

530 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.

A 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 Reor- ganisation Commission and was to have effect in concert with the States B 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 C "Union Territories" and were six in number. Some additions and dele- tions 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 Pradesh (3) Manipur; (4) Tripura; (5) Andaman & Nicobar Islands; (6) The Lac- D cadive, Minnoy & Amindivi 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. E 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; Chandigarh became a Union Territory by the Punjab (Reorganisation) Act, 1966. F The Constitution (Fourteenth Amendment) Act, 1962 replaced the old Article 240 as Article 239 A, enabling Parliament to create a Legislature and/or a Council of Ministers for Himachal Pradesh, Manipur, Tripura, Goa, Daman and Diu and Pondicherry. Thereafter, G 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 Territory by virtue of the State of Himachal Pradesh Act, 1970. Manipur and Tripura became H. states by virtue of the North-Eastern Areas (Reorganisation) Act, 1971.

N.D.M.C. v. STATE [AHMADI, O.J 531

Arunachal Pradesh, Mizoram and Goa, Daman & Diu ceased to be Union A 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 Islands (Alteration of Names) Act, 1973 changed the name of these Islands to 'Lakshadweep' but it continued to remain a Union Territory. .B The present list of Union Territories is as follows : (i) Delhi; (ii) Andaman & Nicobar; (iii) Lakshadweep; (iv) Dadar & Nagar Haveli; (v) Daman and & 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 (Sixty-Ninth Amendment) Act, 1991, Article C 239AA and 239AB, which are special provisions in relation to Delhi, wytrt? 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 entries. As the position stands at the present moment, the Union Territories can be divided into three categories : D (i) Union Territories without legislatures - comp;ising 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 Tenitory of Delhi and the application of the Act to it. ~-· -- The area tha:t-:m:--p_ow known as the National Capital Territory of G 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 H

532 SUPREME COURT REPORTS(1996J SUPP.10 S.C.R.

A 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 enact- B ments in force in any part of British India to Delhi by the Governor- General-in-Council. Under the Government of India Act, 1919, the Indian Legislature had the power to enact laws for the province of Delhi. How- ever, legislation for Delhi was made by extension of laws in force in Punjab and other States by Notifications issued under the Delhi Laws Act, 1912 and 1915. This enabled the Governor-General-in- Council to ensure, as for C 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 Govern- ment of India and the different Departments of that Government began to deal directly with corresponding.Departments in the Chief Commissioner's D Office. This arrangement continued till shortly after the commencement of the Constitution.

In the period immediately after the commencement of the Constitu- tion, the part C States Act, 1951 contained a specific provision, Section E 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.

p 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 ad- .. ministrative standards in Delhi". The Commission came to the conclusion that the National Capital must remain under the effective control of 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 grater 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."

N.D.M.C. v. STATE [AHMADI,CJ.] 533

_ After the Seventh Amendment Act came into force, following the A ' recommendations of the States Reorganisation Commission, the Legisla- tive Assembly and the Council of Ministers for Delhi ceased to exist with effect from November 1, 1956. Furthermore, the Delhi Municipai Act,· 1957 was enacted constituting a Municipal Corporation for the whole of Delhi with members elected on the basis of adult franchise. The jurisdic- B tion 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 due 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 C 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, D when Delhi became </- Chief Commissioner's Province, the provisions of the Act and various other Punjab enactments were made to 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 E 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 F on properties situated within the local limits of its jurisdiction by virtue of the provisions of the Delhi Municipal Corporation Act, 1957. How- ever, for the purposes of deciding the case, we are concerned only with the provisions of the Act. · G Before this Court, a number of parties have advanced arguments on the various issues involved in the case. Mr. B. Sen, counsel 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 H

534 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.

A learned Attorney General for India, appearing for the Union of India, supported the stance ad6pted 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 B Rajasthan lent support to the same.

17ie 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 considera- tion, is whether by virtue of Article 289(1), the States are entitled to exemption from the levy of taxes imposed by laws made by Parliament under Article 246(4) upon their properties situated within Union Ter- "t . n.ones.

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 pur- E· poses of clarity and convenience, Articles 285 and 289 of the present Constitution have been contrasted against their immediate predeces- sors, viz., Sections 154 & 155 of the 1935 Act.

GOVERNMENT OF INDIA ACT, CONSTITUTION OF 1935 INDIA F 4 Sec. 154 Exemption of certain public Art. Exemption of property of the property from taxation - 285 Union from State taxation - Property vested in His Majesty (1) The property of the for purposes of the government Union shall, save in so far as G of the Federation shall, save in Parliament may by law so far as any Federal law may otherwise provide, be otherwise provide, be exempt exempted from all taxes from all taxes imposed by, or imposed by a State or by any by any authority within, a authority within a State. Province of Federated State. H

N.D.M.C. v. STATE (AHMADI, O.] 535

Provided until any Federal law (2) Nothing rn clause (1) A otherwise provides, any shall, until Parliament by law property so vested which was otherwise provides, prevent 'immediately before the any authority within a State commencement of Part III of from levying any tax on any this Act liable, or treated as property of the Union to B liable, to any such tax, shall, so which such property was long as that tax continues, immediately before the continue to be liable, or to be commencement of this treated as liable, thereto. Constitution liable or treated as liable, so long as that tax continues to be levied in that C State. Sec. 155 5 Exemption of Provincial Art. Exemption of property and Governments and ,Rulers of 289 income of a State from Union Federated States in respect of taxation - (1) The property D Federal taxation - (1) Subject as and income of a State shall hereinafter provided, the be exempt from Union Government of a Province and taxation. the Ruler of a Federated State shall not be liable to Federal (2) Nothing in clause (1) E taxation in respect of lands or shall prevent the Union buildings situate in British India from imposing, or or income accruing, arising or authorising the imposition received in British India; of, any tax to such extent, if any, as Parliament may by Provided that - law provide in respect of a F (a) where a trade or business of trade or business of any any kind is carried on by or on kind carried on by,, or on behalf of the Government of a behalf of, the Government Province in any part of British of a State, or any operations India outside that Province or connected therewith, or any G by a Ruler in any part of British property used or occupied India, nothing in this sub- for the purposes of such section shall exempt that trade or business, or any Government or Ruler from any income accruing or arising Federal taxation in respect of in connection therewith. H

536 SUPREME COURT REPORTS(l996] SUPP.10 S.C.R.

A that trade or business, or any (3) Nothing in clause (2) operations connected shall apply to any trade or therewith, or any income business, or to any class of arising in connection therewith, trade or business, which or any property occupied for Parliament may be laow the purposes thereof; declare to be incidental to B be ordinary functions of government. (b) nothing in this sub-section shall exempt a Ruler from any Federal taxation in respect of c any lands buildings or income being his personal property or personal income. (2) Nothing in this Act affects any exemption from taxation D 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 , E date.

Submissions of Counsel

Mr. Sen prefaced his submissions for the NDMC and the MCD by p 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 difference between Articles 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 G State or by any authority within a State" whereas the latter uses the phrase "Union Taxation". Thereafter, Mr. Sen contrasted Article 289(1) and Sec- tion 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 repre- H sentatives of the States in the Constituent Assembly who had insisted that

N.D.M.C. v. STATE [AHMADI, CJ.] 537

the ambit of the exemptions be cast wider. A At this juncture, we may ref~r to Article 246 which reads as follows:

"246. Subject-matter of laws made by Parliament and by the Legis- latures of States - (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make law 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, sub- ject to clause (1) theLegislature of any State also, have power to make laws with -;espect 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), the Legislature of any State has exclusive power to make laws for such State or any part thereof. D 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 H

538 SUPREME COURT REPORTS[1996J SUPP. 10 S.C.R.

A 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 B 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 C 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.

D 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 regard as obiter dicta since the issue of laws E relating to Union Territories was not before the Court. He explained that such an observation was made in the context 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 obsyrvation was founded on misconceived premises and that p 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 and the Cantonments Act, 1924 which allows Parliament to levy taxes for Contonments. 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 G 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 Constitu- H tion (Seventy-Fourth) Amendment Act, 1992 which incorporated Part

N.D.M.C. v. STATE [AHMADI, CJ.) 539

IXA, dealing with Municipalities in our Constitution. He argued that · A 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 . B 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 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 i_ts 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 p 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 G 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 H .

540 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.

A 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 B are akin to States, being nascent States. He explained that the practice in this 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 State, 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 • C 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 instrumen- D talities, 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 postulates 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 law-making power of the respective legislatures 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 sizeable territory of its own comprising all the Union territories specified in the First Schedule. The power to make laws including authorising levy or collection of taxes of all kinds is conferred exclusively on the Union Parliament arid these territories would form an important part of the reciprocal tax immunities.

G 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, .J:here 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.

N.D.M.C. v. STATE [AHMADI, CT.] 541

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 of 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. B 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, we were taken through Sections 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 con- tends that the position continues in the present Article 289 and, in fact, the immunity is much wide 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 _iJild 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 G Attorney General towards establishing that, even while exercising its powers under Article 246(1), Parliament can levy taxes directly on property.

Mr. AK. Ganguli, learned counsel for the State of Tripura, lent support to the submissions of Mr. Rao on the issue of Parliamentary laws· H.

542 SUPREME COURT REPORTS(l996J SUPP. 10 S.C.R.

A 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 .B 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 C 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 D Constitution relating to distribution of revenue between the Union and the States are not determinative of the scope of the expression "Union Taxa- tion" 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. E 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 Government of India, while preparing its Receipt Budget, has always treated taxes imposed by Parliament and collected from the Union F 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" G included taxes.levied by Parliament in Union Territories.

Learned counsel for the State of Rajasthan, 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.

N.D.M.C. v. STATE [AHMADI, CJ.] 543

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. B The decision in the Sea Customs's 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, CJ. 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 F 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, com- parisons were drawn with its corollary, Article 285 and with the provisions which inspired the adoption of these two provisions, namely, Sections 154 G 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 H

544 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.

A direct bearing upon the point at issue with which we are presently con- cerned; 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 Union 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 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 Parlia~ent to pass a law relating to taxes on property and, that being so, that 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 the Union has no power to impose a tax directly on property under any circumstances. G 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 iri .. 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 H to items in List I but also with respect to item in List II. Therefore,

N.D.M.C. v. STATE [AHMADI, O.] 545

so far as Union terri~es are concerned, Parliament has power A · to impose a tax directly on property as such. It cannot therefore be said that the exemption of State's 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 B 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) c 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 the immunity granted by Articles 285 and 289 was of similar ambit and extended only to dire.ct.____taxes without exempting indirect taxes such as excise and customs duties. - D 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. While referring E 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. p 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 Constitu- tion 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 exempted from Union G taxation except in cases covered by clause (2) of the article. We fmd it difficult to accept the contention that clause (1) of Article 289 was meant only for cases covered by Article 246(4) ... "

(Emphasis added) H

546 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.

A 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 learned Solicitor General (at pp. 918-19 ) but, aside from stating that "the submission of the learned Solicitor General are 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 Customs's case. We find it difficult to accept Mr. Sen's contention that the observations of Sinha; CJ. 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 considera- tion during its analysis of the power of Parliament to levy taxes directly upon property. The latter question was squai:ely before the Court and the issue relating to Union Territories, though incidental to the main question, necessarily required consideration. The observations of Sinha, C.J. arc 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 form even the observations in the dissenting judgment of Das. J. F The decision in the Sea Customs's case was reaffirmed by a Constitu- tion Bench of this Court in the APSRTC case which 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. G Speaking for the Court, Gajendragadkar, C.J. 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) H then provides an exception and empowers Parliament to make a law

N.D.M.C. v. STATE [AHMADI, CJ.] 547

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 been possible to include within its purview income derived by a State from commercial activities but since clause (2) em- powers Parliament to enact a law levying taxes on such activities of a State, the inescapable conclusion is that activities inust be deemed to have been included in clause (1) and that alone can be the justification for the words 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, CJ. 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. E

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 F 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 niany 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. G

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 H

548 SUPREME COURT REPORTS[1996] SUPP. 10 Si. C.R.

A 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 causBd Article 246 to be changed to its present form where Parliament B 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 maybe acquired. The word 'Union Territory' has been defined in Article 366(30) to mean "any Union C Territory specified in the First Schedule and includes any other territory comprised wit~ the territory of India but not specified in that Schedule".

Though not defined in the Constitution, the word "State" has been defined in the General Clauses Act, 1897 (hereinafter called "the General D Clauses Act"). Article 367 of the Constitution states that the General Clauses Act, 1897 shall, unless the context otherwise requires and subject to any adaptations and modifications made under Article 372, apply for the interpretation of the Constitution. Therefore, on a plain reading of the provisions involved, 1t would appear that the definition of "State" in the E 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 follow :

"3. Definitions. - In this Act, and in all General Acts and Regula- tions 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 H Constitution (Seventh Amendment) Act, 1956, shall mean a

N.D.M.C. v. STATE (AHMADI, CT.] 549

Part A State, a Part B State or a Part C State; and ,A (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) B 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 ad- verted to in the earlier part of this judgment, must be borne in mind. The first of these cases was that of Satya Dev Bushahri v. Padam Deo and Ors., (1955] 1 S.C.R. 549. This was a case relating to election law and one of the contentions 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 conten- tion was based on the reasoning that the executive action of the Central Government is vested in the President; the President is also the Executive E Head of the Part C States; therefore, contracts with the Part C States are contracts with the Central Government. The Court, speaking through Venkatarama Ayyar, J., rejected this contention and stated that when the President exercised functions as the Head of the Part C States, he occupied a position analogous to the Governor in Part A States. Furthermore, F 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 Govern- ment. Analysing Articles 239, 240 and 241 of the Constitution, the Court G 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 Govern- H

550 SUPREME COURT REPORTS(l996) SUPP. 10 S.C.R.

A ment" and "State Government" respectively, and stipulate that for Part C States, references to "State Government" would mean the "Central Govern- ment", 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 B from the Union Government under the Constitution.

The State of Madhya Pradesh v. Sh1i 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 C 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 D 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 reaf- firmed 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) l S.C.R. 430, the Court G 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 Clauses Act and

N.D.M.C. v. STATE [AHMADI, CJ.] 551

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 and definition in Section 3(58) of the General Clauses Act has been utilised for interpreting a Constitu- tional 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 C 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. D. 108-109) :

"Parliament has plenary powers to legislate for the Union Ter- ritories with regard to any subject. With regard to Union T.er- ,_ . ritories there is no distribution .of legislative powers... (The inclusive definition (in Section 3(58) of the General Clauses Act) E 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 F 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 G 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 em- powered 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 H

552 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.

A 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 subject and context of Article 246(4), Parliament has plenary powers to make laws for union Territories on all matters." B The Court, therefore, held that Parliament was empowered to make laws for Union Territories on all matters and the regulation made by the Presi- dent in exercise of his power under Article 240 was valid. The ratio of this decision, therefore, is that the definition of "State" provided by Section 3(58) c 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 Legislatures of their own. The controversy was not, however, put to rest by the decision in Kanniyan's case. D 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 ~eventh Schedule I. could be said to exclude the application of the definition in Section 3(58) . E of the General Clauses Act. Relying on the decision in Kanniyan's case, Hidayatullah, J. held that, ordinarily, the defmition would apply in the interpretation of the Constitution unless it is repugnant to the subject or context. However, he noted, that after the Seventh Amendment Act where Union Territories have been mentioned as separate entities, the distinction F between "Union Territories" and "States" cannot be lost sight of. He ex- pressly 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 G referring to the decision in Ram !Ushore'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. H Singh v. Shri V.V. Giri, (1971) 2 S.C.R. 197, wherein Bhargava, J., while

N.D.M.C. v. STATE [AHMADI, CJ.] 553

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 AsseJ;nblies of the Union Territories must alscr 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) :