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

"Article 54. no doubt, lays down that all elected members of the legislative assemblies of the States are to J:ie included in the electoral college; but the word 'States' used in this Article cannot include Union Territories. It is true that, under Article 367, the General Clauses Act applies for interpretation of the Constitution as it applies for the interpretation of an Act of the legislature of the Dominion of India; but that Act has been applied as it stood on 26th January, 1950, when the Constitution came into force, subject only to any adaptations and modifications that may be made therein under Article 372. The General Clauses Act, as it was in 1950 and as adapted or modified under Article 372, did not define "State" so as to include a Union Territory. The Constitution was amended by the Constitution (Seventh Amendment) Act, 1956, F which introduced Article 372A in the Constitution permitting adaptations and modifications of all laws which may be necessary or expedient for the purpose ofbringing the provisions of the law into accord with the Constitution as amended by the Seventh Amendment Act, 1956. It was in exercise of this power under Article 372A that Section 3(58) of the General Clauses Act was G amended, so that, thereafter, "State" as defined included Union Territories also. The new definition of "State" in Section 3(58) of the General Clauses Act as a result of modifications and adapta- tions under Article 372A would, no doubt, apply to the interpreta- tion of all laws of Parliament, but it cannot apply to the H I

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

A interpretation of the Constitution; because Article 367 was not amended and it was not laid down that the General Clauses Act, as adapted or modified under any Article other than Article 372, will also apply to the interpretation of the Constitution. Since, until its amendment in 1956, Section 3(58) of the General Clauses Act did not define "State" as including Union Territories for purpose B · of interpretation of Article 54, the Union Territories cannot be treated as included in the word "State"."

This view of the learned Judge does seem to have considerable force and it is also to be remembered that Hidayatullah, J. had doubted the correctness of the proposition laid down in Ram Kishore's case on the ground that the proper reference in it should have been to Article 372A, rather than to Article 372. However, we must refrain from making any comment because the issue whether or not the General Clause Act applies to the interpretation of the Constitution is not properly before us in the facts and circumstances of the present case; what is more, no arguments have been canvassed before us on this issue. For the present, we can draw support 'from the observations in Kanniyan's case as affirmed in the Ad- vance Insurance case to the effect that the definition in Section 3(58) of the General Clauses Act is repugnant to the subject and context of Article 246. We can, therefore, proceed on the assumption that for our purposes, a E Union Territory is not a State; we must, however, hasten to add that this assumption will be open to reconsideration subsequent to our analysis of the Constitutional scheme regarding the issue before us.

Interpretation of "Union Taxation" in Article 289(1) and scope of its ambit. F We may now address the central issue in the case which involves the determination of the ambit of Article 289(1). In order to appreciate the true import of the words used in this provision, it will be to our benefit to examine the Constitutional history of Article 289 as well as that of its G corollary, Article 285.

Articles 285 and 289 are modified versions of Sections 154 and 155 of the 1935 Act, as is obvious from a comparative study made in the earlier part of this judgment. While Articles 285 and 289 seek to provide recipro- cal immunities within the Republic of India to the Union and the States ·H from each other's taxing powers, Sections 154 and 155 strove to achieve

N.!'!.M.C. v. STATE [AHMADI, CJ.] 555

the same result within.British India in respect of the Federal Government A on the one hand, and the Governments of the Provinces and the Federated States on the other. However, in the process of adopting the provisions of the 1935 Act for our Constitution, a number of changes occurred and we must analyse some of these in greater detail for they are extremely relevant for our purposes. B To appreciate the true import of Sections 154 and 155, it will be necessary to refer to a few provisions of the 1935 Act so as to obtain an understanding of its general scheme. Section 5 of the 1935 Act stated that the Federation of India would comprise the Provinces, the Indian States and the Chief Commissioner's Provinces. Section 6 defined a 'Federated C State' as an Indian State which had acceded to or might accede to the Federation~ Section 94 provided a list of the Chief Commissioner's Provin- ces and stated that they would be administered by the Governor General acting through a Chief Commissioner. Section 99, which provided the manner in which legislative powers were to be distributed between the D Federal and Provincial legislatures, stated that the Federal Legislature was empowered to make laws for the whole or any part of British India or for any Federated State, while the Provincial Legislatures were empowered to· make laws for the provinces. Section 311(1) defined 'British India' as "All "territories for the time being comprised within the Governor's Provinces and the Chief Commissioner's Provinces". Section 100, which dealt with E the subject matter of Federal and Provincial laws provided that the Federal Legislature would have power to make laws with respect to_ matters enumerated in List I of the Seventh Schedule to the 1935 Act, which was to be called the "Federal Legislative List"; the Provincial Legislature. would have powers to make laws in respect of matters in List II of the Seventh F Sc;hedule, called "the Provincial Legislative List"; and, in respect of matters provided in List ·m of the Seventh Schedule, called "the Concurrent Legislative List", both the Provincial and the Federal Legislature would have jurisdiction. Clause (4) of Section 100, which is of considerable importance for our purpose, provided in express terms that the Federal G Legislature would. have "power to make laws with respect to matters enumerated in the Provincial Legislative List except for a Province or any part thereof'. It was, therefore, clearly contemplated that the Federal Legislature would have the power to make laws for matters in the Proviu- cial Legislative List in respect of the Chief Commissioner'_s Provinces and the Federated States. Under the scheme of the 1935 Act, situations where H

556 SUPREME COURT REPORTS(1996) SUPP.10 S.C.R. A the Federal Legislature could enact laws with respect to matters in the Provincial Legislative List were, therefore, not considered to be rare or unusual.

. While both the Federal Legislative List and the Provincial Legislative List contained entries allowing the levy of taxes, the Federal Legislative B List did not contain any entry which allowed the Federal Legislature to levy taxes directly on property. Entry 42 of the Provincial Legislative List empowered the Provincial Legislatures to levy taxes specifically on lands and buildings. The Concurrent Legislative List contained only one entry relating to taxes, namely, Entry 13 which referred to stamp duties. c Section 154, in material terms, provided that the property of the Federal Government would be exempt from all taxes imposed by Provinces and Federated States arid the local liuthorities within them. The proviso added that, in the absence of any federal law stipulating otherwise, those properties of the Federal Government which were subject to the levy of D taxes before the commencement of part III of that Act would continue to be liable to pay them. The exemption in Section 154, therefore, did not extend to such taxes, including taxes levied under Municipal laws. It is to be noted that Section 154 did not provide for an exemption in respect of the income of the Federal Government Primarily because the Provinces E . lacked the legislative competence to enact laws levying taxes on income. Section 155(1) stated that the Government of a Province and the ruler of a Federated State would not be liable to "Federal Taxation" in respect of "lands or buildings situated in British India". Proviso (a) stipu- lated that all the trading and business activities carried on by Provinces and F the Federated States outside their territorial jurisdiction would be sub- jected to Federal Taxation in British India. Proviso (b) stipulated that the personal property and income of a Ruler of a Federated State would also be subject to Federal Taxation. Clause (2) of the Section being self-ex- planatory, does not require elucidation. In response to a query from us, G Mr. Sen sought to find the reason for the existence of the exemption in Section 155(1); it appears that the purpose was to avoid the liabilities imposed by Sections 3 and 9 of the Income Tax Act, 1912 upon the Provinces.

Comparing the text of Sections 154 and 155, it becomes clear that H even under the scheme of the 1935 Act, the ambit of the reciprocal

N.D.M.C. v. STATE [AHMADI, O.] 557

immunities was not equal in length and breadth; while Section 154 ex- A empted the property of the Federal Government from "all taxes", the Provincial Governments and Rulers of Federated States were entitled to an exemption only in respect of "lands or buildings" situated in British India and "Income" accruing thereof. This feature will gain some importance when we deal with the comparative Constitutional position at a later stage. B

The term "Federal Taxation" was not defined in the 1935 Act but some clue to its meaning can be discerned by referring to sections 99 and 100 which _described the legislative powers of the Federal Legislature. As we have already seen, the Federal Legislative List did not allow the Federal Legis- lature to levy taxes on lands and buildings; in fact this subject was expressly included in the Provincial Legislative List. On the face of it, this would make the exemption in Section 155 otiose. However, the confusion clears when one notices Clause (4) of Section 100 which expressly enables the Federal Legislature to legislate in respect of matters in the Provincial Legislative List for territories apart from the Provinces. Viewed in this context, and taking into account the definition of "British India" in Section 311(1), Section 155 would have to be read as exempting the Governments of Provinces and the rulers of Federated States from "Federal Taxation" in respect of lands or buildings situated in the Chief Commissioner's Provin- ces. This is the only possible interpretation which will give meaning to the words of Section 155. Since, at the time to of the enactment of the legislation, there were only six territories classified as Chief Commissioner's Provinces, the exemption could not be said to be at par with the exemption provided in Section 154 but, all the same, in terms of the revenue amount involved, it could not be considered insignificant either. It therefore becomes clear that, under the scheme of the 1935 Act, p "Federal Taxation" included taxes leviable by the Federal Government in the Chief Commissioner's Provinces and that the Properties of the Provin- ces and the Rulers of the Federated States situated within these Chief Commissioners Provinces would be exempt from such "Federal Taxation". It remains to be seen whether the position came to be changed during the process of transformation of these sections into the existing provisions of G the Constitution.

In the earlier stages of the framing of the Constitution, the issue of financial relations between the Centre and the units was addressed by two Committees -the Union Powers Committee and the ·Union Constitution H

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

A Committee. These Committees recommended that the schemes envisaged by the 1935 Act should be generally followed. In the Draft Constitution prepared by the Constitutional Adviser, Sri B.N. Rau, in October 1947. Clauses 205 and 207 were modified versions of Sections 154 and 155. On October 2, 1947, an Expert Committee on Financial Provisions was ap- B pointed to make recommendations as to the provisions on the subject to be embodied in the new Constitution after taking into account the views of the States and also the Draft prepared by the Constitutional Adviser. The Drafting Committee of the Constitution took up the issue in January.1948 and took into consideration the Drafts prepared by the Constitutional Adviser as also the Expert Committee on Financial Provision. Thereafter, C these provisions came to be numbered as Articles 264 and 266 of the Draft Constitution. After the Constituent Assembly had considered the matter at length and formally approved these provisions, they came to be renum- bered as Article 285 and 289.

D The present Article 285 is much the same as its predecessor Section 145 and, though there were some changes in its text as the provision charted its course through the ~tages enumerated above, not being relevant for our purposes, we shall ignore its discussion.

The present Article 289 was Clause 207 in the Draft Constitution E prepared by the Constitutional Adviser. It provided that the Govern- ment of a unit would not be liable to Federal Taxation in respect of lands or buildings situated within the territories of the Federation or income accruing, arising or received within such territories; the two excep- tion provided were in favour of (a) any income accruing to a unit's F Government through trade or business and (b) the personal property or the personal income of the Ruler of Indian State. As we have observed, under Section 155, the Provinces and Federated States were liable to taxation only in respect of trade and business operations carried on by them outside their own territories. T-0 that extent Clause 207 had made a substantial departure. The Constitutional Adviser relied on the decisions of the Supreme Court to the United States of America in Mc Culloch v. Maryland, 4 L. Ed 579 (1890) and South Carolina v. United States, 199 U.S. 437 (1905), to butteress his stance that the Federation should have the power to tax the units, but not vice versa for the reason that when the Federation taxed the instrumentalities of the units, it taxed its constituents, whereas when a unit taxed the operations of the Federal Government, it

N.D.M.C. v. STAIB [AHMADI, CJ.) 559 acted upon instrumentalities created, not by its own constituents, but by people over whom it could claim no control.

The Expert Committee on Financial Provisions approved the Con- stitutional Adviser's recommendation that the trading operations of the units, as also of local bodies, whether carried on within or without their jurisdiction should be liable to central taxation; they, however, suggested that quasi-trading operations incidental to the normal functions of Govern- ment should be exempt from such taxation.

When the Drafting Committee took up the matter, it duly noted the recommendations of the Constitutional Adviser and the Expert Committee C and, in July 1949, convened a Premier's Conference to discuss these provisions. Draft Article 266 came in for a lot of criticism and a number of States suggested that insofar as Article 266 did not exempt the trading and business operations of State Governments from Union Taxation, it be dispensed with altogether. Other suggestions were also forwarded to the D Drafting Committee : a number of States were of the view that the provision was inequitable and one-sided insofar as it sought to subject trade and business operations of the State Government to Union Taxation, while under Article 264, State.s were debarred from taxing the property of the Union. Such a provision, it was felt, was bound to retard the industrial development of the Provinces taking away the incentive for State E enterprise.

Reconsidering the provisions in the light of the comments of the Provincial Governments, the Drafting Committee decided, in consultation with the Central Ministry of Finance, to introduce some important changes in Article 266. The ambit of the exemption in Clause (1) was expanded by including 'property' instead of 'lands or buildings' thereby bringing within its purview, movable property as well. On the issue of trade and business, a provision similar to the present Article 289(2) was included. This provision would enable Parliament to pass a law to declare which of the trading and business activities of the States were to be classified as ordinary functions of the Government allowing them to be exempted, and making the rest of the activities liable to tax. Draft Article 266 was considered by ·-~ the Constituent Assembly on September 9, 1949. Some members repre- senting the States of Travancore-Cochin and Mysore expressed apprehen- sions that Union Taxation of industrial and commercial activities would H

560 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R. J • ' A check the expansion of industrialisation and would reduce the capacity of State to discharge their ordinary governmental functions. Mr. P.T. Chacko from Travancore-Cochin referred to the principle of immllnity from inter- governmental taxation as it stood in the United States of America and the fact of its incorporation in Draft Article 264; he sought the extension of .B the doctrine to States as well. While allaying their apprehensions, Mr. Alladi Krishnaswami Ayyar noted the fact that the Australian, Canadian and American Constitutions had incorporated the principle of inter- governmental immunities. He stated that the Australian and Canadian experiences were irrelevant for the purpose of the Indian Constitution for, when they were drafted, it was not envisaged that large schemes of socialisation would be implemented. Referring to the American position, he pointed out that even within that jurisdiction, the doctrine had begun to lose favour and was in the process of being discarded. Thereafter, he observed that under the provision as it was placed before the Constituent Assembly, Parliament was left with the option of making the law which would declare those trading and business operations of the States which would be liable to Union Taxation after taking into account the general interests of trade and industry of the whole country and other democratic factors. He therefore felt that the provision was "very salutary''. Sub- sequently, following the reassurances given by the C_entral Finance Mini- ster, the amendments were withdrawn and Draft Article 266 was accepted in toto. (Note : For a study of evolution of Articles 285 and 289 within the Constituent Assembly, See B. Shiva Rao, The Framing of the Indian Constitution : A Study, N.M. Tripathi Pvt. Ltd., Bombay (1968) pp. 649-99; for reference to original documents, See B. Shiva Rao, ibid, Vols. III & IV). F Mr. P.P. Rao and the other learned counsel appearing for the State have argued before us that the present Articles 285 and 289 are based on the U.S. doctrine of reciprocal immunity of instrumentalities which has also been incorporated in the Canadian and Australian Constitution, apart from certain other Constitutions. Before we begin to examine the text of Article G 285 and 289 with a view to finding a solution to the Constitutional conun- drum posed by the case before us, we must analyse this proposition closely.

The doctrine of inter-governmental immunity has been the subject of some controversy in the country of its origin, the United States of H America. The origin of this doctrine is ascribed to the judgment of Chief

N.D.M.C. v. STATE [AHMADI, CJ.). 561

Justice John Marshall in the case of Mc Culloch v. Maryland (supra). A However, as pointed out by commentators, on the facts of the case, where a State Tax sought to be levied on a Federal Bank was held to be void, the decision was more in favour or declaring the supremacy of the Federal Government than of upholding the rights of States. It was, therefore, the basis for establishing federal immunity from State Taxation. However, later decisions interpreted the judgment to hold that its corollary; that the property of States would be exempt from Federal Taxation was equally applicable; more than 50 years after the decision in Mc Culloch's case, the Supreme Court, in Collector v. Day, 11 Wall. 113 (1871) made the theory of inter-governmental immunity reciprocal. The doctrine, as propounded in Collector v. Day, was never applied widely and, in subsequent years, underwent significant modifications. In The South Carolina case, which was the second case relied upon by the Constitutional Adviser in preparing Clause 207 of his Draft Constitution, the Supreme Court dealt a further blow to the concept of immunity of State from Federal Taxation, when it held that South Carolina was bound to pay a National Excise Tax on liquor-dealers which wa5 being levied by the Federal Government. The Supreme Court drew a distinction between State functions which were strictly governmental and those which were commercial in nature; it was held that th~ governmental functions of State would be immune from taxation but when the States entered into ordinary business, no immunity would exist. This created fresh problems and over time, several Judges of the Supreme Court protested against the illogical distinction between governmental and business activities, calling for a complete re-examination of the entire doctrine. In later years, the doctrine was considerably modified. In recent years, the Supreme Court has come to recognise a narrower tax immunity for ~he States than for the National Government on the basis of a theory that combines the principle of national supremacy with the argument that the interests of States received more representation in Congress than national interest received in State Legislature. It is to be noted that we have had this position from the time that the Constitution was originally enacted. G As we have already noticed, the Constitutional Adviser relied upon the decisions in Mc Culloch's case and The, South Carolina case, for justifying the reduction in the ambit of the immunity of State from Union Taxation rather than for establishing reciprocal immunity between the States and the Union. Furthermore, in the Constit11ent Assembly, Mr. H

562 SUPREME COURTREPORTS(l996] SUPP.10 S.C.R. -

A Alladi Krishnaswami Ayyar had doubted the applicability of the doctrine to the Indian Constitution and had instead co=ended the present scheme whereby the troublesome issue of determining which of the trading and business operations of state should be subject to Union Taxation has been left to Parliament; while enacting such a law Parlill!llent would be forced B to cater to the interests of the States on account of the presence of their representatives in it. The usefulness of any further discussion on the applicability of this doctrine to the Indian Constitution is rendered ques- tionable by virtue of the fact that this Court had, on earlier occasions, rejected it. In State of West Bengal v. Union of India. (1964] 1 s:C.R. 371, Sinha, C.J., speaking for the majority in a six-Judge Constitution Bench C expressly held (at p. 407) that the doctrine of immunity of instrumentalities had been rejected by the Privy Council as inapplicable to the Canadian and Australian Constitutions and having practically been given up in the United States, it was equally inapplicable to the Indian Constitution. In the APSRTC case (supra), at p. 24, the Court rejected the contention of the D Advocate-General of Andhra Pradesh urging it to adopt the American doctrine, by relying upon these observations of Sinha, CJ.

It is, therefore, clear that in seeking a solution to the problem faced by us, we must rely primarily on t~e bare text of Articles 285 and 289. Comparing these provisions, it becomes evident that the Constitution does envisage some form of inter-governmental immunity. Article 285(1), while exempting the property of the Union from all taxes, does not attempt to provide an exemption in respect of income as the States do not possess legislative competence to levy taxes on income as such; however, taxes relating to income that have a bearing on property such as the taxes on agricultural income levied by using Entry 46 of the State List will also be exempt in view of the wide-ranging all- embracing nature of the exemption. Article 285(2) saves, until Parliament by law decides otherwise, all pre- Constitutional taxes applicable to Union property.

With respect to Article 289, we have already examined the manner in which this provision was analysed by this Court in the APSRTC case. We are in agreement with the proposition that the three clauses of Article 289 are interlinked, in that, Clause (3) is an exception to Clause (2) which in turn is exception to Clause (1). As we have noticed for ourselves, the framers of the Constitution had consciously conferred Parliament with the option of deciding which of the trading and business activities of the States

N.D.M.C v. STAIB [AHMADI, CJ.) · 563

would be subject to the levy of Union taxes. So, while Article 289(1) A generally exempts the property and income of the Sates from Union taxation, Clauses (2) and (3) grant to Parliament the aforementioned prerogatives.

Having understood the scheme. of Articles 285 and 289, we must B sharply focus on the specific wording of Article 289(1) and, in particular, on the meaning of the phrase "Union Taxation". It may be noted that the phrase "Union Taxation" appears in only two:places in the entire Constitu- tion - in the marginal heading of Article 289 and in the main text of Article 289(1). It is suggested that some guidance may be obtained by analysing the term " State Taxation" which appears in the marginal heading of Article C 285 and has been described in the text of Article 285 (1) as "all taxes imposed by a State". On that reasoning, "Union Taxation" would mean "all taxes imposed by the Union".

The word "taxation" has been defined in Article 366(28) which states that unless the context otherwise requires, the word "taxation" includes "the imposition of any tax or impost, whether general or local or special and, 'tax' shall be construed accordingly". This definition was accepted by Das. J. and Hidayatullah, J. in their minority opinions (at pp. 8~4-35 and 893-94 respectively) in the Sea Customs case for interpreting Article 289(1). However, Sinha, C.J., in his majority opinion (at pp. 923-34), rejected the application of this definition to Article 289(1) as, in his opinion, the context of Article 289(1) precluded the application of the definition. Rajagopala Ayyangar, J., in his separate majority opinion (at pp. 921- 93), also felt that the definition would not apply. We concur with the majority view in the Sea Customs case that the definition of "taxation" provided in Article F 366(28) will not apply for the purpose of interpreting Article 289(1).

Our attention has been drawn towards the provisions contained in Part XII of the Constitution which has a bearing on the scheme of the Constitution with respect to financial relations between the Union and the G States. Since this aspect and its relevance to Article 289(1) was discussed at length in the Sea Customs case, we may advert to those observations. Das, J. (at p. 852), was of the opinion that the provisions of Part XII of the Constitution would have no bearing on the import of Articles 285 and 289 which ought to be construed on their own terms. Sinha, C.J., however, analysed these provisions at length and the relevant observations in this H

564 SUPREME COURT REPORTS(1996) SUPP. 10 S.C.R.

A behalf may be reproduced (at pp. 809-10) :

"It will thus appear that Part XII of the Constitution has made elaborate provisions as to the revenues of the Union and of the States, and as to how the Union will share the proceeds of duties and taxes imposed by it and collected either by the Union or by B the States. Sources of revenue which have been allocated to the Union are not meant entirely for the purposes of the Union but have to be distributed according to the principles laid down by Parliamentary legislation as contemplated by the Articles aforesaid. Thus all the taxes and duties levied by the Union and c collected either by the Union or by the State do not form part of the Copsolidated Fund of India but many of those taxes and duties are distributed amongst the States and from part of the Con- solidated Fund of the States. Even those taxes and duties which constitute the Consolidated Fund of India may be used for the purposes of supplementing the revenues of the States in accord- D ance with their needs. .. ..The financial arrangement and adjust- ment suggested in Part XII of the Constitution has been designed by the Constitution-makers in such a way as to ensure an equitable distributi_on of the revenues between the Union and the States, even though those revenues may be derived from taxes and duties E imposed by the Union and collected by it or through the agency of t~e States. .. ..It will thus be seen that the powers of taxation assigned to the Union are based mostly on considerations of convenience of imposition and collection and not with a view to allocate them sqlely to the Union; that is to say, it was not intended that all taxes ruid duties imposed by the Union Parliament should F- be expended on the activities of the Centre and not on the activities of the States .....The resources of the Union Government are not meant exclusively for the benefit of the Union activities; they are also meant for subsidising the activities of the States in accordance with their respective needs, irrespective of the amounts collected G by or through them. In other words, the Union and the State together form one organic whole for the purpose of utilisation of the resources of the territories of India as a whole."

We are of the view that an analysis of some of the provisions in H Part XI, Chapter I of the Constitution, which deals with the legislative

N.D.M.C. v. STATE [AHMADI, CJ.) 565

relations between the Union and the States will be crucial to the deter- A mination of the central issue in this case. We may first notice certain provisions in the Constitution which enable Parliament to make laws for subjects contained in the State List, to which our attention was drawn by counsel for the appellants as also the learned Attorney General. We must note that these provisions conceive of extraordinary situations. Article 249 B provides for a situation where, if the Council of States declare by a ~solution that it is necessary in the national interest to do so, Parliament may make laws in respect of matters enumerated in the State List. Article 250 empowers Parliament to make laws for the whole or any part of India in respect of matters enumerated in the State List while a Proclamation of Emergency is in operation. Article 252 empowers Parliament to make laws C with respect to matters enumerated in the State List if two or more states resolve that such course of action is desirable. Article 253 reserves to Parliament the exclusive power to make laws for the whole or any part of the territory of India for implementing any treaty, agreement or convention with any other country or any decision made at any international con- D ference, association or any other body. The emergency provisions outlined in Part XVIII of the Constitution and comprising Articles 352 to 360 conceive of special situations in which Parliament is empowered to enact laws on matters in List II.

It has been urged that when Parliament legislates for Union Ter- E ritories in exercise of powers under Article 246(4), it is a situation similar to those enumerated above and is to be treated as an exceptional situation, not forming part of the ordinary constitutional scheme and hence falling outside the ambit of "Union Taxation". Having analysed the scheme of Part VIII of the Constitution including the changes brought into it, we are of the view that despite the factthat, of late, Union Territories have been granted greater powers, they continue to be very much under the control aiid supervision of the Union Government for their gm'ernance. Some clue as to the reasons for the recent amendments in Part VIII may be found in the observations of this Court in Ramesh Birch's case, which we have extracted earlier. It is possible that since Parliament may not have enough time at its disposal to enact entire volumes of legislations for certain Union Territories, it may decide, at least in respect of those Union Territories whose importance is enhanced on account of the size of their territories and their geographical location, that they should be given more autonomy in legislative matters. However, these changes will not have the effect of H

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

A making such Union Territories as independent as the States. This point is best illustrated by referring to the case of the National capital Territory of · Delhi which is today a Union Territory and enjoys the maximum autonomy on account of the fact that it has a Legislature created by the Constitution. However, Clauses 3(b) and 3(c) of Article 239AA make it abundantly clear B that the plenary power to legislate upon matter affecting Delhi still vests with Parliament as it retains the power to legislate upon any matter relating to Delhi and, in the event of any repugnancy, it is the Parliamentary law which will prevail. It is, therefore, clear that Union Territories are in fact under the supervision of the Union Government and it cannot be contended that their position is akin to that of th"e States. Having C analysed the relevant ConstitUtional provisions as also the applicable precedents, we are of the view that under the scheme of the Indian Constitution, the position of the Union Territories cannot be equated with that of the States. Though they do have a separate identity within the Constitutional framework, this will not enable them to avail of the privileges available to the States.

It has been urged before us that the phrase "Union Taxation" has to be interpreted in the context of Article 246, which deals with the s.ubject matter of laws made by Parliament and the State Legislatures~ and that the context of "Union Taxation" should be limited to those matters falling within Articles 246(1), where Parliament has the legisla- tive competence to levy taxes with respect to matters enumerated in the union.List. We see no reason why such a limiting principle must be read into the definition of the phrase "Union Taxation". In our view, the term can and should be given the widest amplitude, allowing it to encompass all taxes that are levied by the authority of Parliamentary laws. Though the amplitude of the term "Union Taxation" was not expressly before the Court in the Sea Customs case, it is clear from an analysis of the majority judgments that the learned Judges considered the term "Union Taxation" to mean all taxes leviable by the Union. As Clause (4) of Article 246 itself envisages situations where Parliament is to make laws in respect of matters in the State List, it cannot be said that this is a rare or an unusual circumstance. The Constitution does not contain any provisions which would indicate that the definition of "Union Taxation" should be restrictively interpreted so as to be within the confines of Article 246(1). The specific,situations envisaged in Articles 249, 250, H 252, 253 and the Emergency Provisions in Part XVIII of the Constitution

N.D.M.C. v. STATE [AHMADI, CJ.) 567 do not make for the creation of any anomalous situations. These Articles, A ·· which provide for unusual exercises of Parliamentary power involving the matters enumerated in the State List, can be regarded as exceptions to the general rule. We are, therefore, of the view that, unless the context requires otherwise - as in the case of Articles 249, 250, 252, 253 and the Emergency Provisions in Part XVIII of the Constitution - the broad B ~efinition of "Union Taxation" embracing all taxes leviable by Parliament ought to be accepted for the purpose of interpreting Article 289(1).

As already noticed by us, under the scheme of the 1935 Act, those lands or buildings of the Provinces and Federated States which were situated within the Chief Commissioner's Provinces were, by virtue of C Section 155(1), exempted from Federal Taxation. There can be no dispute about such a construction of the provision for, otherwise, the exemption in Section 155(1) would have no meaning. Section 155(1) formed the basis for th present Article 289(1) and, having closely examined the various stages , by which Article 289(1) replaced Section 155(1), we find that this position -D was never .sought to be deviated from. The presumption therefore, its that it was the intention of the framers of the Constitution to maintain the status quo with respect to the position regarding the Chief Commissioner's Provinces which are now called "Union Territories". That presumption is further reinforced by the general scheme of the Constitution which furthers the interpretation that we have sought to give to Article 289(1) and its applicability in respect of the Union Territories.

Unlike other Federations, the Union of India has a sizeable territory of its own comprising the Union Territories which have been specified in the First Schedule to the Constitution. Therefore, the limited reciprocal inter-governmental immunity bestowed by the Constitution in Articles 285 and 289 is given fuller meaning by virtue of the adoption of the wider meaning of "Union Taxation"; this would mean that, just as the properti~s of the Union are exempt from taxes on property leviable by the States, the properties of the States will also be exempt from taxes on property leviable by the Union in areas falling within its territorial jurisdiction. G

While attempting to demonstrate that the reasoning of Sinha, C.J. in the Sea Customs case was incorrect insofar as his acceptance of the contention that Article 246(4) enables Parliament to levy taxes directly on property was concerned, Mr. B. Sen contended that Article 246(4) was not H

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

In our opinion, there is no warrant for an authoritative pronounce- · ment upon this aspect for, even if we assume that Mr. Sen's contention is correct and that all these Entries do in fact empower Parliament to levy taxes directly on property, it would not in any way detract from the

N.D.M.C. .v. STATE [AHMADI, CJ.) 569 correctness of our interpretation that the levy of taxes under Article 246(4) A is covered by the phrase "Union Taxation" in Article 289(1); these Entries would then provide additional areas in respect of which the States can claim exemption from Union Taxation under Article 289(1), thus lending greater weight to the solemnity and the actual worth, in real terms, of the phraseology 9f Article 289(1). ,B

However, we find ourselves unable to agree with Mr. Sen when he contends that the entries cited by him were the only instances kept in contemplation by the framers at the time of the drafting of Article 289(1). If that were so, the ambit of the exemption would traverse an extremely narrow field which would then lend credence to the observation of Das, J. C in the Sea Customs case, albeit made in the converse context, that the exemption in Article 289(1) would amount to "much ado about nothing".

Classification of taxes imposed by Municipalities

We may now turn to Mr. Sen's alternative submission that the taxes D levied by the NDMC under the Act would not be covered by the exemption in Article 289( 1) as that provision cannot be construed to encompass Municipal Taxes.

To appreciate this contention, we will be required to analyse certain provisions of the Act as also those of the Constitution. Section 61 of the E Act, which is the. charging Section, at the relevant time, empowered the Municipality to levy a tax payable by the owner on lands and buildings subject to, and to the extent of, the qualifying conditions provided therein. It is clear from an analysis of this provision that it provides for the levy of a consolidated tax, combining within it the tax element and ... the service element. Section 51 of the Act provides for the constitution of a Municipal -: fund and states that all sums received by the Municipal Committee are to be credited to it. Section 52 of the Act provides the manner in which the sums collected in the Municipal Funds are to be applied by the Municipal Committee. Our attention has also been drawn towards analogous provisions in- the New Delhi Municipal Committee Act and the Delhi Municipal Committee Act to form the foundation of the argument that, under all.these legislations, the Municipalities have been vested with a great deal of financial autonomy; they have the power to fix their own budgets, levy taxes within prescribed limits, collect the proceeds of such imposition which are to be diverted to Municipal Funds which function entirely under H

570 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R. ' I

A the supervision of the Committees. It is argued that such a stance is further reinforced by the introduction of Part IXA into the Constitution which allows for Municipalities to be vested with substantial powers, including the power to tax, thereby providing Constitutional support. The argument, therefore, is that now that the Constitution itself recognises Municipal taxes as a separate category of taxes, they should not be construed to fall within . B the exemption pro,vided by Article 289(1). Another limb of this submission is that while under Article 285, taxes imposed by any "authority within a State", which would necessarily include Municipal taxes, have been express- ly exempted, Article 289 does not provide for any such facility and, to that extent, taxes levied by Municipalities within the Union Territories are not C covered by the exemption in Article 289(1).

We have great difficulty in accepting this assertion. Article 265 of the Constitution emphatically mandates that "no tax shall be levied or collected except by authority of law" . Under the framework of the Constitution D there are two principal bodies which have been vested with plenary powers to make laws, these being the Union Legislature, which is described by Article 79 as "Parliament for the Union" and the State Legislatures, which are described by Article 168 in the singular as "Legislature of a State". While certain other bodies have been vested with legislative power, includ- ing the power of levying taxes, 'by the Constitution for specific purpose, as in the· case of District Committees and Regional Councils constituted under the aegis of the Sixth Schedule to the Constitution, the plenary power to legislate, especially in matters relating to revenue, still vests with the Union and the State Legislatures. Even if the submission that Municipalities now possess, under Part IXA of the Constitution, a higher juridical status is correct, the extension of that logic to the proposition that they have Plenary powers to levy taxes is not, as is clear from a perusal of relevant part of Article 243X of the Constitution which reads as under :

"243X. Power to impose taxes by, and Funds of, the Municipalities. - The Legislature of a State may, by Law, - G (a) authorise a Municipality to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits;

N.D.M.C. v. STATE [AHMADI, CJ.] 571

.I (c) A

as may be specified in law." B Article 243ZB provides that this provision will be applicable to Union Territories and the reference to the legislature of a State would . apply, in relation to a Union Territory having a Legislative Assembly, to that Legislative Assembly.

It is, therefore, clear that even under the new ·scheme, Municipalities C do not have an independent power to levy truces. Although they can now be granted more substantial powers than ever before, they continue to be dependent upon their parent Legislatures for the bestowal of such privileges. In the case of Municipalities within States, they have to be specifically delegated the power to true by the concerned State Legislature. D ·In Union Territories which do not have Legislative Assemblies of their own, such a powe~ would have to be delegated by Parliament. Of the rest, those which have I Legislative Assemblies of their own would have to specifically empowbr Municipalities within them wit4 the power to levy truces. E We have already held that despite that fact that certain Union Territories have Legislative Assemblies of their own, they are very mucli under the supervision of the Union Government and cannot be said to have an independent status. Under our Constitutional scheme, all taication must fall within either of two categories : State Taication or Union Taication. F Since it is aiciomatic that truces levied. by authorities within a State would amount to State taication, it would . appear that the words "or by any authority within a State" have been added in Article 285(1) by way of abundant caution. It could also be that these words owe their presence in the provision to historical reasons; it may be noted that Section 154 of the G 1935 Act was similarly worded. The fact that Article 289(1), which in its phraseology is different from Section 155 of the 1935 Act having been drafted by the Drafting Committee to meet specific objections, does not contain words similar to those in Article 285(1), will not in any way further the case of the appellant, because the phrase "Union Taication" will encom- pass Municipal truces leVied by Municipalities in Union Territories. H

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

A Before we part, we must refer to Part IV of the judgment of Jee.van Reddy, J. where Clause (2) of Article 289 has been invoked to validate the levy of taxes under the Act and the Delhi Municipal Corporation Act upon those properties of State Governments which are being occupied for commercial or trade purposes. B At the outset, we must express our great reluctance to deal with this proposition, for it is not based on any contention advanced by any of the counsel who appeared before us, either in their written pleadings or in their oral submissions. This is not because we feel constrained to restrict our- C selves to the parameters prescribed by the submissions of counsel, but because we feel that the opposite side did not have a fair opportunity to answer the line of reasoning adopted in that behalf. The view taken by Reddy, J. has the effect of imposing considerable tax liabilities upon the properties of the State Governments and, in our view, it would only be · D proper that their views in this behalf be obtained before visiting them with such liability. We have only the rule of caution in mind which warns that ordinarily, courts should, particularly in constitutional matters, refrain from expressing opinions on points not raised or not fully and effectively argued by counsel on.either side. , E Be that as it may, we must, for the record, express ourselves on the view taken by Reddy, J. after closely examining it. Reddy, J. begins his examination of the issue by noting tliat the Act, the Delhi Municipal Corporation Act and the New Delhi Municipal Committee Act contain specific provisions exempting the properties of the Union from local taxa- tion in accordance with Article 285. It is then Stated that since none of these Acts contain similar exemptions in favour of the properties of States, it is clear that they purport to levy taxes on them. This is followed by the observation that though the States seek an exemption, from such levies on the basis of clause (1) of Article 289, as per the ratio of the APSRTC case, clause (1) has to be read in the context of clauses (2) and (3) of that Article. This would, it is stated, lead to the consequence that if a Par- liamentry law within the meaning of clause (2) of Article 289 is made, the . area covered by that law would be removed from the field occupied in clause (1); for support, an analogy is drawn from the decision in R.C. H Cooper v. Union of India, [1970] 1 SCR 248.

N.D.M.C. v. STATE [AHMADI, CJ.] 573

Thereafter, the meaning and scope of Article 289 as well as its A underlying objective are ascertained by contrasting it with Section 155 of the 1935 Act. The use of the words "lands and buildings" in Section 155(1) is analysed to arrive at the conclusion that these words were included to empower the federal legislature to levy taxes on lands and buildings situated within the Chief Commissioner's Provinces. It is then noted that B Article 289 uses the wider expression 'property', but that the same reason- ing holds good for the present Union Territories, making the property and income of States situated within Union Territories exempt from "Union Taxation". With respect to the proviso to Section 155(1), it is observed that the provision was automatically applicable on its own force. It did not C define the trading and business operations of Provincial Governments, nor did it specify which of these operations would be subject to Federal· Taxation. It is then stated that the same position continues in Article 289 with the only difference being the requirement of a enactment of a law by Parliament in this behalf. Thereafter, it is observed that the exemption in clause {1) of Article 289 is subject to clause (2) of Article 289. Clause (2) D is analysed and interpreted as clarifying clause {1) to the extent that the exemption upon the income of Provincial Government operates only when such income is carried on for the purpose of governmental functions and not for trade and business activities, carried on with the profit motive. It is stated that though "trade and business" ordinarily has a very wide and ambiguous meaning (certain English and Indian authorities are cited to illustrate this point), but, for the purpose of clause (2) of Article 289, they have to be given a restricted meaning. It is, therefore, stated that under Article 289{2), the trading and business activities of State Governments, which are carried on with the profit motive, will be liable to tax and cannot avail to the exemptions in Article 289{1).

Clause {2) is further analysed and is interpreted as having been included for the purpose of removing the trading and business activities of State Governments from the purview of the exemption in clause {1). However, it is stated, such a removal is not ·automatic and is dependent upon the enactment of a Parliamentary Law which impose taxes on specified trading and business activities of State Governments.

Thereafter, the question whether Parliament has, in exercise of powers under Article 289(2), imposed taxes on the trading and business H

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

A activities of State Governments, is sought to be addressed. In this respect, the Act, the New Delhi Municipal Committee Act and the Delhi Municipal Corporation Act, which are deemed to be post-Constitutional enactments, are examined. It is noted that while these enactments contain specific exemptions in favour of properties of the Union and also exempt properties used for 'charitable purposes' and 'public worship', they do not exempt properties of State Governments. It is stated that the latter omission must be deemed to be deliberate. Thereafter, it is stated that two views are possible in this regard. The first is to adopt the position that since neither of these enactments are purported to have been made under Article 289(2), they should not be treated as having been enacted for that purpose and, consequently, should be held to be incapable to levying taxes on any . property, whether occupied for government for governmental or trading purposes, of the State Governments. The second view, which Reddy, J. adopts, is to take the position that the Doctrine of Presumption of Con- D stitutionality of Legislations points in favour of holding that the Act and the Delhi Municipal Corporation Act are laws made by Parliament under Article 289(2), and taxes imposed by them upon the properties occupied for trading and business activities by State Governments would be valid and effective. A number of decisions of this Court are cited to show the jurisprudential basis of this tool of Constitutional interpretation. It is pointed out that though neither of these legislations purport to have been ·made under Article 289(2), but, since this is normal practice in that no legislation specifies the provision of the Constitution that it is enacted under, this fact need not be over-emphasised. It is, therefore, held that the levy of property taxes by these enactments is valid to the extent that it relates to lands and buildings owned by State Governments and used by them for trade and business purposes. (In an earlier part of the opinion, the difficulty in drawing a distinction between governmental and business functions is noted and an example in respect of guest- houses maintained by State Governments is supplied). Thereafter, it is stated that it is for the G "appropriate assessing authority" to determine "which land/building falls within which category in accordance with law and take appropriate further action". It is then stated that since, under these enactments, the assessing authorities .are required to decide several difficult questions as to what amounts to 'charitable purpose' etc., the obligation imposed by such direc- H tions would not prove to be too onerous to discharge. Reddy, J. sums up

N.D.M.C. v. STATE [AHMADI, CJ.] 575

the issue by recommending to the Union that it consider granting total A exemption in favour of all properties of State Government.

We are of the opinion that of the two possible views expressed by Reddy, J ., it is the first which ought to be preferred. We think that the second view is fraught with several difficulties. Such a construction, while being violative of the scheme envisaged by the framers of the Constitution, B may well result in a situation that was sought to be avoided by them. The directions may also lead to grave practical difficulties; moreover since the \ effect of the directions would be to vest the executive authorities with substantial policy making powers, their issuance might well be offensive to established principles of delegation of powers. c We shall now set out the reasons which cause us to so think; in doing so, we may have to revisit some of the ground that has already been traversed by us, but the repetition can be justified by narrower focus that will now be imparted to those aspects. D · Articles 285 and 289, and their predecessors in the 1935 Act, owe their origin to the American doctrine of Inter-governmental Tax Immunity. This doctrine was enunciated in the case of Mc Cu/loch v. Maryland (supra). However, die doctrine was substantially modified by the decision in South Carolina v. United States (supra) which drew a distinction between E strictly governmental and business functions of governments. Jn the latter case, it was held that the governmental functions of State Governments would be exempt from Federal Taxation but their commercial functions would be subject to the levy of Federal Taxes. This case imposed upon Courts the heavy burden of determining in specific cases when a particular p function was or was not governmental. A number of conflicting decisions were rendered and caused a great deal of confusion as to which of the activities of governments were to be classified as 'business' or 'proprietary' and were, therefore to be liable to Federal Taxation. The controversy was set at rest by a unanimous decision of the U.S. Supreme Court in New York v. United States, 326 U.S. 572; 90 L. ED. 326 (1946) wherein it was G concluded that the artificial distinction between governmental and proprietary/business functions of States was unworkable and required to be abandoned.

The difficulty in determining the distinction between a governmental H

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

A' function and a trading or busi~e~s function of the State has also been felt and recognised in Australia. In South Australia v. Commonwealth, (1942) 65 C.L.R. 373, the changing character of government functions of the State was noted and it was held that, "In a fully self-government ·country where a Parliament determines legislative policy and an executive government B carries it out, any activity may become a function of government if Parlia- ment so determines" (supra) at p. 423). The Court in this decision came to the conclusion that the best way to avoid the controversy was to allow Parliament to 4ecide, by law, which of the activities of the State would be classified as relating to business and would consequently be liable to taxation. c Under the predecessor of Article 289, i.e., under proviso (a) to Sections 155(1) of the 1935 Act, the Federal Government was empowered to levy taxes on lands and buildings of Provincial Governments used by them for trade or business. The provision itself vested the Federal Govern- D ment with the power to levy such taxes and there was no requirement for the enactment of a specific law in that behalf. This position continued till the Constitution came into force.

When Sir B.N. Rao prepared his Draft Constitution, Clause 207 E (present Article 289) was drafted on the basis of Section 155 of the 1935 . Act. An attempt was made to incorporate the U.S. position prevailing after the decision in the South Carolina case (supra) by stipulating that all trading activities of State Governments would be liable to Union Taxation. However, even under this provision, the powers to tax was automatic and F did not require a specific law. (See : A Note on certain clauses by the Constitutional Adviser, B. Shiva Rao, Vol. III, p. 197 at pp. 204-205.

· The Expert Committee on Financial Provisions, however, recom- mended that quasi-trading activities of State Governments should be ex- empt from Union Taxation. (See : Report of the Expert Committee, B. Shiva G Rao, Vol. III, p. 260 at p. 266).

Even when the Drafting Committee incorporated the provision as Draft Article 266 and subsequently modified it, there was no stipulation for a law before the power to tax could be exercised. (See the text of Draft H Article 266, B. Shiva Rao, Vol. IV, p. 676). At the Premier's Conference

N.D.M.C. v. STATE [AHMADI, CJ.] 577

held in July, 1949, the provision met with severe criticism. The Premier of A the United Province suggested that all trading and business activities of 1.

State Governments be exempt from Union Taxation. Several other Provin- ces also made similar representations. Based on these representations. The Drafting Committee made a substantial change in the text of Draft Article

266. A provision similar to the present Article 289(2), whereby Parliament B would have the power to determine which of the trading and business activities of State Governments would be liable to Union Taxation was incorpo~ated. (See : Revised draft by the Ministry of Finance, B. Shiva Rao, Vol. IV pp. 731-732. i when Draft Article 266 was discussed in the Assembly, a number of C members' expressed fears that Union Taxation of commercial activities of State Governments would check the expansion of industrialisation and reduce the capacity of States to perform their ordinary functions. They, therefore, demanded that the trading and business activities of State Governments be exempt from Union Taxation. Alladi Krishnaswamy Ayyar D sought to allay these apprehensions by making an elaborate statement, the relevant part of which is quoted below (Constituent Assembly Debates, Vol. IX, pp. 1167-69) :

".... It is a permissive power that is given to Parliament under the section. There is no duty cast upon Parliament to levy a lax and I E am sure in the larger interest of trade and industry, Parliament will certainly not go to the length of taxing ... industries which have been thriving ..... So far as the United States is concerned in the early days though there was no express provision through the medium of the doctrine of Instrumentality, they held that the State F cannot tax the Federal Government and the Federal Government cannot tax the State instrumentality because both are parts of a single composite mechanism and if you permit one to tax the other, it may destroy the whole mechanism. Later, the doctrine of in- strumentality itself was felt to be not in the large interest of the G State, and quite recently the swing of the pendulum is the other way. The other day one of the most enlightened of Sup'reme Court Judges held in what is known as the Spring of the State of New York, in regard to certain springs which were worked by the State of New York - for this part of business they held that there is no immunity of the State from tax. They said 'You have to draw some H

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

A line between one kind of activity of a State and another kind of activity. Of course it cannot be a rigid definition. What may be in one sphere may easily pass into another sphere with the progress of the State and with the development of the polity in the particular State'. (In all probability, this is a reference to the opinion of Frankfurter, !. in New York v. United States (supra) which upheld B the application of a Federal Excise Tax to the sale of mineral waters bottled by the State of New York with a view to providing funds for a State health.resort) . ..... (N)ormally speaking, you cannot regard at the present day under existing conditions the carrying on the trade and business as a normal or ordinary function of the Govern- c ment. It may develop into ordinary function - certain aspects of it, especially the transport service and certain key industries, may soon become the parts of the State enterprise. The Parliament will take note of the progressive tendency of the particular times and may at once declare accordingly. It might not have been the ordinary function of Government before. Now it may become an D ordinary function. There will be sufficient elasticity in clause (3) to enable the Government to exempt from taxation particular trades or industries with are started as public utility services or declare them as regular State industries. Nobody can question a law made by Parliament because the Parliament has stated that a E particular industry is an ordinary function of the State whereas according to the notions of an individual economist or it is not a ordinary function of a Government. Parliament will lay down the law of the land and it will be the sole arbiter of the question as to whether it is an ordinary function of Government or not. F Therefore having regard :

(a) to the plenary power of Parliament tci exempt any particular industries, and particular business from the operation of the tax provision. G (b) having regard to the fact that it is not obligatory on Parliament to levy any tax.

(c) that the very conception of State industry may change with H the further evolution of the State and changing times, and

N.D.M.C. v. STATE [AHMADI, CJ.]. 579

(d) to the inter-connection between one State and another. A it will be very difficult to differentiate between particular States, between States which have been working certain industries and other State ..... (T)o lay down a 'general principal of law that even at the present day before _the provinces are on their feet every trade or business is exempt from taxation will lead to wild-goose schemes being started by various provinces. They may not take into account the general interests of the trade and industry in the whole country. They may not have regard to the difference between one kind of "industry and another. Under those circumstances the particular provision which has been inserted by Dr. Ambedkar is a very salutary one and is consistent with the most advanced principles of democratic and federal policy in all the countries."

(Comment and Emphasis supplied)

It is, therefore, clear that clause (2) of Article 289 was well con- D sidered compromise which was arrived at after balancing the demands of those who sought complete exemption of commercial activities of State Governments from Union Taxation and those who were in favour of levying such Union Taxes. The framers desired that the issue whether the trading and business activities of State Governments should be subject to Union E Taxation, be left to the wisdom of Parliament. As is evident from the reference to New York v. United States (supra) in the extracted portion, the framers were conscious of the difficulty in drawing a line between the governmental and commercial functions of State Governments and they hoped that Parliament would take into account a host of relevant factors before enacting a law which would specify the trading activities of State F Government making them liable to Union Taxation. It is important to note that the framers did not expressly confer upon the Union the power to tax commercial activities of State Governments. The exercise of such a power is made conditional upon the enactment of a special, duly considered, legislation. It is also important to note that clause (2) of Article 289 has G made a depatture from the proviso to Section 155(1). Under the present scheme, the power to tax is not automatic and the responsibility of specify- ing the trading and business activities of State Governments which would be liable to Union Taxation is expressly vested in Parliament.

Neither the Act, which is a_ 1911 enactment, nor the Delhi Municipal H

580 SUPREME COURT REPORTS[l996) SUPP. 10 S.C.R.

A Corporation Act, can qualify as laws under Article 289. They do not specify which of the trading activities of State Governments are liable to taxation; indeed, by their very nature, they cannot purport to do so. It must be remembered that the Act and the Delhi Municipal Corporation Act are not Parliamentary Laws in the sense envisaged by Article 289(2). Though B the Act is sought to be construed as a post-Constitutional, Parliamentary enactment, the fact remains that it is a pre-Constitutional, colonial legisla- tion. As for the Delhi Municipal Corporation Act, it is, in essence, an ordinary Municipal legislation. What makes it special is the fact, oc- casioned in its case by geographical and historical factors, that it was C enacted by Parliament instead of by a State legislature. In this regard, we may recall the submissions of the learned Attorney General in respect of how Parliament discharges its obligation towards enacting laws for Union Territories. After stating that Parliament cannot afford to undertake threadbare discussions before legislating for Union Territories, the learned Attorney General referred us to the following of the decision of this Court D in Ramesh Birch v. Union of India, [1989) Supp. 1 SCC 430 at 471 :

"(Union Territories) are territories situated in the midst of con- tiguous territories which have a proper legislature. They are small territories falling under the legislative jurisdiction of Parliament E which has hardly sufficient time to look after the details of all their legislative needs and requirements. To require or expect Parliame11t to legislate for them will elttail a disproportionate pressure on its legislative schedule. It will also mean the unnecessary utilisation of the time of a large number of members of Parliament for, except the few (less than ten) members returned to Parliament from the F Union territory, none else is likely to be interested in such legis- lation. In such a situation, the most convenient course of legislating for them is the adaptation, by extension, of laws in force in .other areas of the country. As Fazal Ail, J. pointed out in the Delhi Laws Act case, it is not a power to make laws that is delegated but only G a power to 'transplant' laws already in force after having undergone scrutiny by Parliament or one of the State legislaturer, and that too, without any material change."

It is, therefore, clear that it would be quite dangerous to assume that H when Parliament enacted the Delhi Municipal Corporation Act, it had

N.D.M.C. v. STATE [AHMADI, O.J 581

intended that the enactment should secure the purpose enshrined in Ar- A . . tide 289(2). If any safe assumption is to be drawn, it is this : in all probability, while enacting the Delhi Municipal Corporation Act, Parlia- ment must have 'transplanted' a municipal legislation existing in a certain State, made the necessary changes and completed the procedural for- malities. That would explain why the Delhi Municipal Corporation Act (as B also the New Delhi Municipal Committee Act) contains an exemption on the lines of the one prescribed by Article 285 - this is a typical feature of ordinary municipal legislations, which are enacted by State legislatures who are conscious of the mandate of Article 285. Moreover, such legislations do not contain exemptions in favour of properties of State Governments C because, within the territory of a State, the properties of other State Governments are liable to taxation. So, when such a legislation is 'transplanted' almost verbatim into a Union Territory, it will obviously not contain an exemption in favour of properties of State Governments. In the face of the actual conditions which govern the enactment of laws for Union Territories by Parliament, (these conditions have been statutorily provided; moreover this Court has already taken notice of them) it is difficul~ to assume that the omission of an exemption in the Delhi Municipal Corpora- tion ·Act in favour of State Governments, is deliberate. The Act and the ·· Delhi Municipal Corporation Ad cannot, therefore, be said to meet the special requirements which have been expressed by the framers to be necessary for complying with the spirit of Article 289(2).

Reddy, J. has taken the view that the Doctrine of Presumption of Constitutionality of Legislations requires the saving of the taxes which these Acts impose upon the commercial activities of State Governments. The Act is a pre-Constitutional enactment. The basis of this doctrine is the assumed intention of the legislators not to transgress Constitutional boundaries. It is difficult to appreciate how that intention can be assumed when, at the time that the law was passed, there was no such barrier and the limitation was brought in by a Constitution long after the enactment of the law. (This Court has in a Constitution Bench decision, Gulabbhai v. Union of India, G AIR (1967) SC 1110at1117, raised doubts along similar lines). The framers obviously wanted the law under Article 289(2) to be of a very high stand- ard. Can these laws, which are silent on the most important aspect required by Article 289(2), i.e,, the specification of the trading activities of State H

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

A Governments which would be liable to Union taxation, be said to meet with that standard?

The Doctrine of Presumption of Constitutionality of Legislations is not one of infinite application; it has recognised limitations. It is settled law that if any interpretation is possible which will save an Act from the attack of unconstitutionality, that interpretation should always be accepted in preference to an alternative interpretation that might also be possible, under which the statute would be void. However, this Court has consistent- ly followed a policy of not putting an unnatural and forced meaning on the words that have used by the legislature in the search of an interpretation which would save the statutory provisions. We are•not "free to stretch or pervert the language of the enactment in the interests of any legal or Constitutional theory" See In Re the Central Provinces & Berar Act No. XIV of 1938, (1939) FCR 18 at p. 37; also see : Diamond Sugar Mills Ltd. v. The State of U.P., (1961] 3 SCR 242 at 248-249. D The Act and the Delhi Municipal Corporation Act are ordinary Municipal Legislations. They do not, and cannot, purport to be laws made by Parliament under Article 289(2). These is no reason why such a strained reasoning should be employed to save some of the taxes that may be capable of being imposed on certain properties of State Government. There seems to be no pressing reason for invoking the doctrine. Reddy, J. has, in the earlier part of his opinion, held that a large number of properties of State Governments would be exempt form taxes leviable under these Acts due to the operation of Article 289(1). To employ such reasoning to construe Article 289(2) in a bid to save what would only be a reduced amount, does not seem justified.

The practical effect of the directions recommended by Reddy, J. is also worth noticing. It is abundantly clear that the task of determining which of the activities of Governments are governmental and which are commercial, is an extremely difficult one. Reddy, J. entrusts this assignment to the "assessing authorities under the Acts" who can only be municipal , authorities. This is an issue which has confounded court in the U.S. and in · · ' Australia for several years. This issue was considered to be so troublesome by the framers that they entrusted it to Parliament in the hope that it would fully deliberate the matter before enacting a comprehensive legislation.

N.D.M.C. v. STATE [AHMADI, CJ.) 583

In the In Re: The Delhi Laws Act case, AIR (1951) SC 324, this Court A . authoritatively held that the legislature cannot delegate its essential policy- making function. Over the years, this Court has elaborated this proposition to hold that the legislature can delegate some of its legislative functions provided it lays down the policy in clear terms. The legislature is required to declare the policy of law in unambiguous terms, lay down elaborate legal principles and provide illuminating standards for the guidance of the delegate. Even though this Court has, on occasions, sanctioned very broad delegations of taxing power to municipal bodies, to delegate the task of carving out the distinction between governmental and business functions of State Governments to municipal authorities would clearly be against the interdiction in the Delhi Laws Act case as the assignment requires not only the making of policy, but indeed, the making of very difficult and challeng- ing policy choices. Reddy, J. has noted that the Delhi Municipal Corpora- tion Act provides exemptions in favour of activities that are capable of being classified as 'charitable purpose', 'public worship' etc. and states that to ascertain the ambit of these categories is an equally difficult task which is already being discharged by the assessing authorities. However, the point that needs to be emphasised, is that Section 115 of the Delhi Municipal Corporation Act defines these terms and provides guidelines in respect thereof. Howeve~, there is no provision in the Delhi Municipal Corporation '\ Act which states that the trading and business operations of State Govern- ments would be subject to property taxes. The act is equally silent on this aspect. Consequently, no guidelines in this behalf are to be found within the parameters of these legislations. Under these circumstances, in the complete absence of any statutory policy or any guidelines for the delega- tion of such a policy, we believe that it would be impermissible and hazardous to directly assign such a function, anq power, to Executive p Municipal authorities.

The decision whether the properties of State Governments occupied for commercial purposes should be subject to the levy of Union taxes is one that is required by Article 289(2) to be made by a legislation which specifies the activities which would be liable to tax. This decision cannot G be entrusted to municipal functionaries. For these reasons, we find oursel- ves unable to agree with Reddy, J. in his finding that the properties of State Governments occupied by them for trade or business purposes are subject to the levy of taxes under the Act and the Delhi Municipal Corporation ~. H

584 SUPREME COURT REPORTS[l996] SUPP.10 S.C.R.

A We may now summarise our conclusions:

(i) The central issue in the present matter, namely, whether the properties owned by the States which· are situated within Union Territories are exempt from paying property taxes, was specifically answered in the affirmative in the Sea Customs B case; the observations in this regard are part of the ratio decidendi of the case and having been re-affirmed by a Con- stitution Bench which was hearing a litigation inter partes in theAPSRTC case, they constitute good law;

(ii) The definition of 'State' provided in Section 3(58) of the c General Clauses Act, which declares that the word 'State' would include 'Union Territory', is inapplicable to Article 246(4);

(iii) The term "Union Taxation" used in Article 289(1) will or- dinarily mean "all taxes leviable by the Union" and it includes / D within its ambit taxes on property levied within Union Ter- ritories; therefore, the States can avail of the exemption provided in Article 289(i) in respect of their properties situated within Union Territories; ;''

E (iv) Property taxes levied by municipalities within Union Ter- ritories are properly within the ambit of the exemption provided in Article 289(1) and the State can avail of the . exemption.

In the result, the Civil Appeals and the Special Leave Petitions are F dismissed. There shall be no order as to costs.

R.P. Matters disposed of.