In Re: The Bill To Amend S. 20 Of The Sea... vs Unknown

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 10 May, 1963

Coram: B.P. Sinha, A.K. Sarkar, J.C. Shah, K.C. Das Gupta, K.N. Wanchoo, M. Hidayatullah, N. Rajagopala Ayyangar, P.B. Gajendragadkar, S.K. Das

In the matter titled “In Re: The Bill To Amend S. 20 Of The Sea … versus Unknown,” the Supreme Court of India heard arguments on 10 May 1963. The bench that heard the case consisted of Chief Justice B. P. Sinha, Judges A. K. Sarkar, J. C. Shah, K. C. Das Gupta, K. N. Wanchoo, M. Hidayatullah, N. Rajagopala Ayyangar, P. B. Gajendragadkar and S. K. Das. The judgment was authored by Chief Justice Sinha. The principal issue before the Court arose from a reference made by the President of India under article 143(1) of the Constitution. The reference required the Court to determine the proper scope and meaning of article 289 of the Constitution, which deals with the immunity of the States from taxation by the Union. After receiving the reference, the Court issued notices to the Attorney‑General of India and to the Advocates‑General of the various States. Subsequently, the Union Government presented its case through the learned Solicitor‑General, while the States of Andhra Pradesh, Assam, Bihar, Gujarat, Kerala, Madhya Pradesh, Madras, Maharashtra, Mysore, Orissa, Punjab and West Bengal were represented by their respective counsel. At the commencement of the hearing, an application was filed on behalf of the State of Uttar Pradesh seeking to be heard. No substantive statement of case had been filed for Uttar Pradesh, and the Court found no justification for condoning the delay; consequently, the application was declined.

The reference itself was expressed in the following terms: “Whereas sub‑section (1) of section 20 of the Sea Customs Act, 1878 (Act 8 of 1878), provides for the levy of customs duties on goods imported or exported by sea to the extent and in the manner specified in the said sub‑section; and whereas sub‑section (2) of section 20 of the said Act applies the provisions of sub‑section (1) of that section in respect of all goods belonging to the Government of a State and used for the purposes of a trade or business of any kind carried on by, or on behalf of, that Government, or of any operations connected with such trade or business as they apply in respect of goods not belonging to any Government; and whereas it is proposed to amend sub‑section (2) of section 20 of the said Act so as to apply the provisions of sub‑section (1) of that section in respect of all goods belonging to the Government of a State, irrespective of whether such goods are used or not for the purposes set out in the said sub‑section (2) as presently in force; and whereas sub‑section (1) of section 3 of the Central Excises and Salt Act, 1944 (Act 1 of 1944), provides for the levy of duties of exercise on all excisable goods other than salt which are produced or manufactured in India and a duty on salt manufactured in, or imported by land into any part of India in the manner specified in the said sub‑section; and whereas sub‑section (1A) of section 3 of the said”. The reference further sought to amend sub‑section (1A) of section 3 of the Central Excises and Salt Act to extend the levy of duties to all excisable goods other than salt produced or manufactured by a State Government, regardless of whether such goods are used for the purposes mentioned in the existing provision, and also to introduce a Bill in Parliament embodying these amendments.”

In this matter, the legislation was stated to apply the provisions of sub‑section (1) of the referenced section to every excisable good, other than salt, that is produced or manufactured in India by, or on behalf of, a State Government and that is employed for any kind of trade or business carried on by, or on behalf of, that State Government, or for any operations connected with such trade or business, even where those provisions relate to goods that are not produced or manufactured by any Government. The proposal was to amend sub‑section (1A) of section 3 of the same Act so that the provisions of sub‑section (1) would likewise apply to all excisable goods, other than salt, produced or manufactured in India by, or on behalf of, a State Government, without regard to whether those goods are actually used for the purposes enumerated in the existing sub‑section (1A). It was further proposed to introduce in Parliament a Bill—whose draft is annexed and marked ‘Annexure’—that would amend, for the stated purpose, sub‑section (2) of section 20 of the Sea Customs Act, 1878 (Act 8 of 1878) and sub‑section (1A) of section 3 of the Central Excises and Salt Act, 1944 (Act 1 of 1944). Certain State Governments have expressed the view that the amendments contained in the draft Bill might be unconstitutional because the provisions of article 289, read together with the definitions of ‘taxation’ and ‘tax’ in clause (28) of article 366 of the Constitution of India, forbid the Union from imposing or authorising any tax—including customs duties and excise duties—on the property of a State, except to the extent permitted by clauses (2) and (3) of article 289. The Government of India, however, is inclined to hold a different interpretation. First, it argues that the exemption from Union taxation provided by clause (1) of article 289 is confined to Union taxes that are directly levied on the property of a State and does not extend to Union taxes that relate to the property of a State; consequently, clauses (2) and (3) must be read in that sense. Second, it maintains that customs duties are taxes on the import or export of property and not taxes on the property itself, and that excise duties are taxes on the production or manufacture of property rather than taxes on the property per se. Third, it contends that article 289 does not prevent the Union from imposing or authorising customs duties on the import or export of State property, nor does it bar other Union taxes on State property that are not taxes on the property itself. Questions have therefore arisen regarding the correct interpretation and scope of article 289 of the Constitution of India, particularly as to whether the proposed amendments to the Sea Customs Act, 1878 and the Central Excises and Salt Act, 1944 are constitutionally valid.

The President noted that the matter before him required an examination of the meaning and the reach of article 289 of the Constitution of India, particularly with respect to the constitutional validity of the amendments proposed to the Sea Customs Act, 1878 (Act 8 of 1878) and to the Central Excises and Salt Act, 1944 (Act 1 of 1944) in the draft legislation that had been prepared. He further observed that, having considered the material set out earlier, it was clear that the legal questions that were about to be framed were of a nature that involved substantial public importance and therefore warranted the advice of the Supreme Court of India. Consequently, acting under the authority granted by clause (1) of article 143 of the Constitution of India, the President, Rajendra Prasad, formally referred the following three questions to the Supreme Court for its consideration and for a report of its opinion: (1) whether the provisions of article 289 preclude the Union from imposing, or authorising the imposition of, customs duties on the import or export of property belonging to a State when such property is used for purposes other than those specified in clause (2) of article 289; (2) whether the provisions of article 289 preclude the Union from imposing, or authorising the imposition of, excise duties on the production or manufacture in India of property belonging to a State when such property is used for purposes other than those specified in clause (2) of article 289; and (3) whether sub‑section (2) of section 20 of the Sea Customs Act, 1878 and sub‑section (1A) of section 3 of the Central Excises and Salt Act, 1944, as amended by the Bill set out in the annexure, are inconsistent with the provisions of article 289 of the Constitution of India.

The President’s communication was dated 19‑April‑1962 and was signed by him in New Delhi. The annexure attached to the communication contained the draft Bill which was intended to amend the two statutes. The draft Bill was titled “Sea Customs and Central Excises (Amendment) Act, 19” and began with a short title provision stating that the Act may be called by that name. The Bill proposed, in the first amendment, to substitute a new sub‑section (2) in section 20 of the Sea Customs Act, 1878. The substituted language stipulated that the provisions of sub‑section (1) would apply to all goods belonging to the Government in the same way as they applied to goods not belonging to the Government. The second amendment proposed to replace sub‑section (1A) in section 3 of the Central Excises and Salt Act, 1944. The new sub‑section (1A) provided that the provisions of sub‑section (1) would apply to all excisable goods other than salt that are produced or manufactured in India by, or on behalf of, the Government, in the same manner as they apply to goods that are not produced or manufactured by the Government.

The amendment stipulated that the provisions would apply only to goods that were not produced or manufactured by the Government. The Union of India argued that a proper interpretation of clause (1) of Article 289 meant that the constitutional immunity from taxation granted to the States was limited solely to taxes on property and on income, and that this immunity did not extend to every form of tax. The Union contended that the clause should not be read to include taxes that relate to property. It was submitted that a tax imposed as an import duty or an export duty was not a tax on property; rather, such a duty taxed the act of importing or exporting goods into or out of the country. In the same manner, an excise duty was characterised as a tax on the production or manufacture of goods, not as a tax on property. Although the quantum of such duties might be measured by reference to the value, weight or quantity of the goods, the Union maintained that, under the relevant statutory provisions, import duties, export duties and excise duties were fundamentally taxes on the occurrence of a particular event concerning goods – namely, the import, export, production or manufacture – and not taxes directly on the goods themselves as property. The Union further asserted that the true meaning of Article 289 had to be discerned not only from its literal wording but also from the broader constitutional scheme that allocated taxation powers between the Union and the States. It was argued that Articles 285 and 289 were complementary, and that a correct construction of one necessarily influenced the construction of the other. The Union advised that these articles should be read against the backdrop of the corresponding provisions of the Government of India Act 1935, sections 154 and 155. It was submitted that clause (2) of Article 289 was merely explanatory and did not constitute an exception to clause (1); consequently, the entire field of taxation covered by clause (1) was also encompassed by the language of clause (2). Since Parliament possessed exclusive authority to legislate on trade and commerce with foreign countries, as well as on customs duties, including export duties and excise duties on certain goods manufactured or produced in India, the Union claimed competence to impose or to authorise the imposition of customs duties on the import or export of goods by a State, even where such goods were the State’s property, and likewise to impose excise duties on the production or manufacture of goods by a State. The Union warned that interpreting clause (1) of Article 289 to exempt a State from customs duties or excise duties would unduly restrict Parliament’s exclusive power to enact laws concerning trade and commerce, a restriction that would be inconsistent with the constitutional scheme. Finally, the Union pointed out that the term “taxation” was employed in a very wide sense under Article 366(28), and that this broad sweep had to be confined by the reference to “property” or “income” in clause (1) of Article 289.

In this matter, the Court observed that the expression in Art. 289(1) must be read narrowly with respect to the words “property” or “income”. The Court pointed out that the placement of the words “property” and “income” together in clause (1) indicated that the exemption granted to the States was limited only to taxes that were directly imposed on property and on income. In other words, Art. 289(1) exempted the States solely from what are traditionally described as property taxes—taxes that arise because of ownership, possession or enjoyment of property. By contrast, customs duties and excise duties, although they relate to property, are not taxes on property in the strict sense; they are taxes that arise only on a particular transaction involving property. The Court further noted that clause (2) of Art. 289 made it clear that any trade or business carried on by a State would be liable to Union taxation. Clause (3) then empowered Parliament to decide which trades or businesses were incidental to the ordinary functions of government and therefore would escape Union taxation. Consequently, any trade or business that Parliament did not specifically declare as incidental would fall within the operation of clause (2) and would be subject to Union tax. The Court recorded the argument advanced on behalf of the States that, in interpreting Art. 289—upon which the President’s reference depended—one must remember that the Constitution does not differentiate between direct and indirect taxation, that trade, commerce and industry have been allocated between the Union and the States, and that the power to tax is distinct from the power to regulate trade and commerce. The States contended that a narrow construction, as advocated by the Union, would seriously and adversely affect the States’ activities and constitutional powers. They further argued that a comparison between s. 155 of the Government of India Act and Art. 289 of the Constitution favoured a broader interpretation, and that the legislative practice concerning excise and customs duties provided a permissible guide that supported this wider construction. Even assuming the Union’s narrower view, the States maintained that customs duties and excise duties affect property and therefore fall within the immunity granted by Art. 289(1). The States asserted that, when read properly, Art. 289(1) confers complete immunity from all taxation on any kind of property, and that any tax—whether imposed directly on property or merely related to property—lies within that immunity. Accordingly, they said, the distinction the Union tried to draw between a tax on property and a tax in relation to property was wholly irrelevant. Finally, the Court noted that clause (2) should not be seen as merely explanatory, as the Union suggested, but rather as an exception to the general rule established in clause (1), carving out a specific category that is nevertheless included within the broader exemption.

The Court observed that clause (2) of the Article functioned as a proviso to clause (1), effectively carving out a category that was already encompassed within the broader language of clause (1). Similarly, clause (3) operated as an exception to clause (2), removing from its scope a matter that had been included in clause (2). The Court noted that every State represented before it had accepted the position set out earlier in the judgment, with the sole exception of the State of Maharashtra. Counsel for the State of Maharashtra aligned with the Union’s submission that a clear distinction existed between a tax on property and an excise duty. According to this view, excise duty did not fall within the immunity granted by clause (1) of Article 289, because excise duty represented an exception to the State’s general authority to regulate trade, commerce, and to levy taxes, and therefore ought to be construed narrowly. Nevertheless, counsel for Maharashtra concurred with the other States in maintaining that duties of import and export were covered by the exemption contemplated in clause (1) of Article 289.

The Court then explained that the Union preferred to read clause (1) of Article 289 in a restricted manner, limiting the immunity to a direct tax on property and on the income of a State. In contrast, the States advocated for an all‑encompassing exemption from any Union tax that bore any relation to, or impact on, State property and income. Despite this fundamental divergence, both the Union and the States agreed that the terms “property,” “income,” and “tax” were employed in their widest possible sense. Both sides also accepted that the immunity conferred on the Union with respect to its own property by Article 285 corresponded to the immunity granted to the States by Article 289, and consequently the words “property,” “taxation,” and “tax” must be interpreted comprehensively in both Articles. The Court pointed out that while Article 285 mentions “property,” it does not expressly refer to “income,” a deliberate omission reflecting the framers’ awareness that taxation of income (apart from agricultural income) was exclusively placed in the Union List even before the Constitution came into force. It was further agreed that the language of Articles 285 and 289 closely parallels sections 154 and 155 of the Government of India Act, 1935, the only differences arising from the change in constitutional status and the integration of the Indian States after 1947. The Court indicated that presenting the wording of these parallel provisions would help to illuminate the points of similarity and contrast between the two statutes.

In this case, the Court examined the provisions of section 154 and section 155 of the Government of India Act and compared them with Article 285 and Article 289 of the Constitution. Section 154 stated that, to the extent that any Federation law might otherwise provide, property vested in His Majesty for the purposes of the Government of the Federation was to be exempt from all taxes imposed by a Province or a Federated State, or by any authority within such Province or State. However, the provision added that until a Federal law provided otherwise, any property that, immediately before the commencement of Part III of the Act, was liable or treated as liable to such tax, would continue to be liable or treated as liable for as long as that tax remained in force.

Section 155(1) provided that, subject to the conditions to follow, the Government of a Province and the Ruler of a Federated State were not liable to Federal taxation in respect of lands or buildings situated in British India, or of income accruing, arising or received in British India. The section then contained two provisos. Proviso (a) stated that if a trade or business of any kind was carried on by or on behalf of the Government of a Province in any part of British India outside that Province, or by a Ruler in any part of British India, nothing in the subsection would exempt that Government or Ruler from any Federal taxation in respect of that trade or business, any related operations, any income arising therefrom, or any property occupied for those purposes. Proviso (b) clarified that nothing in the subsection would exempt a Ruler from Federal taxation in respect of any lands, buildings or income that were his personal property or personal income. Section 155(2) further noted that the Act did not affect any exemption from taxation that the Ruler of an Indian State enjoyed by right at the passing of the Act with respect to any Indian Government securities issued before that date.

The Court observed that both section 154 and Article 285 dealt only with “property” and provided that property vested in the Union was exempt from all State taxes, subject to the saving of pre‑existing taxes until Parliament might legislate otherwise. Likewise, section 155 of the 1935 Act exempted from Federal taxes the Government of a Province concerning lands or buildings situated in British India or income accruing there, whereas Article 289(1) declared that the property and income of a State were exempt from Union taxation. The Court noted that section 155 contained two provisos, (a) concerning trade or business of a Province or Ruler, and (b) concerning a Ruler’s personal property, the latter being irrelevant to the present discussion. The Court pointed out that the term “income” appeared in both the 1935 Act provisions, while the term “lands or buildings” in the Act corresponded to the broader term “property” in Article 289(1).

Finally, the Court raised the question why “income” was expressly mentioned when the generic term “property” could be understood to include income. The Union suggested that the juxtaposition of the terms “property” and “income” indicated a specific intention, a point that would be examined further.

In this case, the Court observed that when a State’s “income” is declared exempt from Union taxation, the exemption must be understood to apply to a direct tax on both “property” and “income”. The Court explained that such an exemption does not cover indirect taxes that may be imposed in connection with a State’s property, such as an excise duty, which is a tax on the manufacture or production of goods, or a customs duty, which is a tax on the import or export of goods. Before analysing the rival arguments on whether the wording of Article 289(1) should be given a narrow meaning by the Union or a broader meaning by the States, the Court said it was necessary to keep in mind certain general considerations and the overall constitutional scheme that governs the Union’s power to impose taxes. The Court stressed that neither the Union nor the States may claim unlimited authority in the field of taxation; each is bound by the respective powers and responsibilities assigned to it. Part XII of the Constitution deals with finances, and at the very beginning Article 265 provides that no tax may be levied or collected except under the authority of law. That authority must be found in the three lists of the Seventh Schedule, subject to the provisions of Part XI, which regulates the relations between Union and States, especially Chapter I on legislative relations and the distribution of legislative powers, with particular reference to Article 246. Under Article 246, a State legislature has exclusive power to enact laws on matters listed in List II, while both Parliament and a State legislature may legislate on matters in List III, the Concurrent List. Notwithstanding these two lists, Parliament alone may legislate on any matter listed in List I, the Union List. Parliament also retains the power to make laws on matters in the State List with respect to any part of the territory of India that does not belong to a State. By virtue of Article 248, Parliament is vested with exclusive power to enact laws on any matter not enumerated in either the State List or the Concurrent List, which includes the authority to impose a tax that is not mentioned in those lists. The Court noted that it was unnecessary to discuss the extended legislative powers of Parliament that may arise in extraordinary circumstances under Articles 249, 250 and 252. In summary, the Court pointed out that while States enjoy exclusive legislative authority over the matters enumerated in List II, the Union’s exclusive authority to legislate on taxation matters in List I remains paramount.

In this case the Court observed that the authority of Parliament to legislate on taxation matters that fall within List I is exclusive, just as Parliament’s power to make laws on subjects enumerated in List I is exclusive. The Court explained that, with respect to taxation, the constitutional scheme assigns Parliament the sole power to impose taxes on income that is not agricultural income, which is listed under Entry 82 of List I; to levy customs duties, including export duties, which are covered by Entry 83; and to impose excise duties on tobacco and other goods that are manufactured or produced in India, except for alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs, which are placed under Entry 84 of List II and therefore lie within the competence of the State legislatures. The Court noted that it was unnecessary to discuss other taxes that Parliament may impose because they were not relevant to the questions before it.

The Court then turned to the powers of the State legislatures, noting that the States may tax agricultural income under Entry 46, may tax lands and buildings under Entry 49, and may levy excise duties on alcoholic liquors, opium and other narcotic substances that are manufactured or produced within the State, as well as counter‑vailing duties at the same or lower rates on similar goods produced elsewhere in India, as provided by Entry 51. The Court added that reference to additional heads of tax contained in the State List was unnecessary for the present discussion.

From this description the Court concluded that all taxes on income other than agricultural income fall within the exclusive domain of the Union, while taxes on agricultural income are reserved for the States. All customs duties, including export duties that relate to import into or export out of the country, are within Parliament’s exclusive competence, and the States have no jurisdiction over those duties. The States are concerned only with taxes on the entry of goods into local areas for consumption, use or sale, which are covered by Entry 52 of the State List. Except for excise duties on alcoholic liquors, opium and other narcotic drugs, every other excise duty may be levied by Parliament.

Consequently, the Court stated that, by and large, taxes on income, customs duties and excise duties are matters that Parliament may legislate on exclusively. The Court further linked these exclusive taxation powers with Parliament’s exclusive authority to regulate trade and commerce with foreign countries, to impose import and export duties across customs frontiers, to define customs frontiers under Entry 41, and to regulate inter‑State trade and commerce under Entry 42. Because regulation of both foreign and inter‑State trade is the Union’s exclusive responsibility, Parliament may enact legislation imposing customs duties on imports and exports as well as excise duties on the manufacture or production of goods other than alcoholic liquors and opium. Finally, the Court observed that the imposition of customs or excise duties may be pursued (1) solely to raise revenue, (2) solely to regulate trade and commerce, or (3) for both revenue‑raising and regulatory purposes.

In the discussion, the Court explained that a tax or duty could be imposed for one of three reasons: first, to raise revenue; second, to regulate trade and commerce, whether domestic or international; or third, to achieve both aims simultaneously. Consequently, if Article 289(1) were interpreted to exempt every State property from all taxes, the Parliament’s capacity to regulate foreign trade through its taxation power would be seriously weakened. The Court therefore held that this potential impairment must be kept in mind when construing Article 289(1). The Court further observed that Part XII of the Constitution contains an additional overarching principle that must be considered. Although various taxes are placed separately in List I or List II and there is no overlap of taxation powers between the two lists, and except for stamp duties (Entry 44) there is no tax listed in the Concurrent List, the Constitution nevertheless sets out a detailed scheme for distributing revenue between the Union and the States concerning taxes enumerated in List I. This scheme, devised by the Constitution‑makers, was intended to secure an equitable sharing of revenue between the centre and the States.

The Court noted that, as a general rule, all revenue received by the Government of India forms part of the Consolidated Fund of India, while all revenue received by a State forms part of that State’s Consolidated Fund. This rule is qualified by Chapter I of Part XII, which contains Articles 266 to 277. Under Article 268, stamp duties and excise duties on medicinal and toilet preparations, although levied by the Government of India, must be collected by the States in whose territories those duties are leviable; the amounts collected are not to be placed in the Consolidated Fund of India but are assigned to the collecting State. In a similar manner, Article 269 provides that duties and taxes levied and collected by the Union in respect of succession duty, estate duty, terminal taxes on goods and passengers carried by railway, sea or air, taxes on rail fares and freights, and other specified items shall be assigned to the States and distributed among them according to distribution principles laid down by parliamentary legislation under clause (2) of Article 269. Article 270 further stipulates that taxes on income, other than agricultural income, shall be levied and collected by the Government of India and then distributed between the Union and the States. The Court emphasized that the taxes and duties levied by the Union and collected either by the Union or by the States, as contemplated by Articles 268, 269 and 270, and subsequently distributed among the States, shall not become part of the Consolidated Fund of India. The discussion concluded with the observation that excise duties which are levied and collected by the Government of India and which form part of

The Court explained that the Consolidated Fund of India may be shared with the States when Parliament, under Article 272, sets out the distribution principles. Article 273 contains a specific provision for grants‑in‑aid to the revenues of Assam, Bihar, Orissa and West Bengal, which are to be given instead of any share of the net proceeds of export duty on jute and jute products. Article 274 then provides a safeguard, stating that no bill or amendment that creates or alters any tax or duty in which the States have an interest, or that changes the distribution principles for duties or taxes among the States as laid down in Articles 268 to 273, may be introduced in either House of Parliament unless it is recommended by the President. Parliament is also authorised to determine, each year, certain sums that may be charged on the Consolidated Fund of India as grants‑in‑aid to the revenues of any States that are judged to require assistance. Such aid may differ from State to State according to their individual needs, especially with reference to development schemes contemplated in Article 275(1). In addition, Article 280 provides for the President to appoint a Finance Commission, which is tasked with recommending to the President how the net proceeds of the taxes and duties mentioned earlier should be divided between the Union and the States, and what principles should guide the grants‑in‑aid to State revenues out of the Consolidated Fund of India.

Finally, the Court observed that Part XII of the Constitution contains detailed provisions on the sources of revenue for both the Union and the States and on the manner in which the Union shares the proceeds of duties and taxes that it imposes, whether those proceeds are collected by the Union itself or by the States. The revenue sources assigned to the Union are not intended solely for Union purposes; they must be distributed according to the principles laid down in parliamentary legislation as indicated by the relevant articles. Consequently, all taxes and duties levied by the Union and collected either by the Union or by the States do not belong to the Consolidated Fund of India. Many of those taxes and duties are allocated to the States and become part of the Consolidated Fund of the States. Even those taxes and duties that do constitute the Consolidated Fund of India may be used to supplement State revenues in line with each State’s needs. The Court noted that the questions concerning how these taxes and duties are distributed among the States, the principles governing that distribution, and the principles for grants‑in‑aid of State revenues out of the Consolidated Fund of India, are matters that must be determined by a high‑powered Finance Commission.

The Court observed that the Finance Commission was constituted as a responsible body entrusted with the objective determination of fiscal questions involving the Union and the States. Consequently, the Court held that it could not be fairly argued that the interpretation of article 289 advanced by the Union would seriously or adversely affect the revenues of the States. The Court explained that the financial scheme set out in Part XII of the Constitution had been crafted by the Constitution‑makers with the express purpose of ensuring an equitable sharing of revenue between the Union and the States, even though such revenue might arise from taxes and duties imposed by the Union and collected either directly by the Union or through the agencies of the States. The Court further noted that adopting the very expansive construction advocated by the States would create greater difficulties for the Union than the construction proposed by the Union.

The Court then turned to the nature of the Union’s taxation powers. It stated that those powers were primarily based on considerations of convenience of imposition and collection, rather than an intention to reserve all such taxes solely for Union purposes. In other words, the Constitution did not intend that every tax or duty levied by the Parliament of the Union be spent only on central activities to the exclusion of State activities. The Court pointed out that certain sources of revenue, such as taxes on land and other immovable property, had been expressly allocated to the States alone.

Recognising that the revenues assigned to the States might be insufficient for the States’ needs, the Court observed that the framers of the Constitution understood that the Government of India would have to subsidise State welfare programmes from the revenues levied and collected by the Union. Accordingly, the Constitution incorporated specific provisions, as already indicated, that empower Parliament to earmark a portion of its revenues—whether these form part of the Consolidated Fund of India or not—for the benefit of the States. Such allocations were to be made not according to fixed percentages but in accordance with the States’ respective needs.

The Court emphasized that the Constitution does not create a rigid separation between the revenues of the federating States and those of the Union, as might be found in other federal arrangements that maintain watertight compartments. Instead, the Indian Constitution does not envisage any inherent conflict of interest between the Union and the States. Consequently, the resources of the Union Government are not intended solely for Union activities; they are also meant to subsidise State activities in proportion to each State’s needs, irrespective of the amounts collected by or through the Union.

In sum, the Court described the Union and the States as forming a single organic whole for the purpose of utilising the resources of the entire territory of India. Bearing this constitutional scheme in mind, the Court indicated that the next step would be to examine the language of article 289 together with its complementary provision, article 285.

In this case, the Court examined the arguments advanced by the Union and by the States regarding the scope of the exemption provided in Article 289 of the Constitution. The Union argued that the language of Article 289, which exempts the property and income of a State from Union taxation, should be interpreted narrowly. According to that view, the exemption applies only to taxes that are levied directly on the property or income of the State, and does not extend to any other Union taxes that might have an indirect relation to the State’s property or income. Conversely, the States contended that the same provision should be understood broadly. They submitted that once Article 289(1) declares that the property and income of a State are exempt from Union taxation, the exemption must cover all forms of Union tax, irrespective of their nature or the manner in which they touch upon the State’s property or income. With respect to income, the Court noted that there was no substantial dispute. Both sides agreed that the exemption relates to taxes on income other than agricultural income, because the only income‑tax power listed in List I of the Seventh Schedule is found in entry 82. The real disagreement, the Court observed, revolved around the word ‘property’. The Court considered that the character of the exemption for property could influence the interpretation of the entire provision. If the intent behind the exemption of income is to exclude only income‑taxes, the Court reasoned, the parallel use of the words ‘property and income’ in Article 289(1) suggests that the exemption for property should be read in a similar, limited way – that is, only from taxes that are directly imposed on property. The States, however, pointed out that List I does not contain any tax that is expressly levied on property, unlike List II, which does. They argued that the framers of the Constitution must have intended that the property of a State be exempt from every Union tax that in any way relates to that property, even if the tax is indirect, such as customs duties, export duties or excise duties. The Court examined this contention in light of the constitutional scheme of legislative powers. While it is correct that List I lacks a specific provision for a direct tax on property, that absence does not imply that the Union lacks the authority to enact such a tax. Article 246(4) empowers Parliament to make laws concerning any matter in any part of India that is not part of a State, even if that matter is enumerated in the State List. Consequently, regarding Union territories, Parliament may legislate on matters that are listed in both List I and List II, including the imposition of a direct tax on property. The Court therefore concluded that it cannot be said that the exemption of State property from Union taxation would be meaningless because Parliament is incapable of imposing a direct property tax; Parliament does possess that power in respect of Union territories. Thus, the Court highlighted that the argument that Article 289(1) can be limited only to direct property taxes because List I lacks such a tax is not sustainable. The provision must be read in the context of the broader constitutional allocation of taxing powers, and the possibility that Parliament can levy a direct tax on property, at least in Union territories, must be acknowledged.

The Court observed that a State could not be subjected to a tax directly on its property, and that any property owned by a State in a Union territory was exempt from Union taxation on property under Article 289(1). Consequently, the submission that Article 289(1) could not be limited to a tax directly on property because the Union List contained no such tax was rejected. The Court then turned to the wording of Article 289, focusing on the term “property”. It noted that the provision stated only that “the property of a State shall be exempt from Union taxation” and that the word “all” did not modify “Union taxation”. Thus, the provision did not declare that State property was exempt from every form of Union tax. The Court framed the central question: whether the exemption in Article 289 applied solely to Union taxes that were a tax directly on property. Although Article 289(1) did not expressly say that the exemption covered tax on property, the Court held that such an intention could be correctly inferred by examining Article 289(2). Clause (2) dealt mainly with income that a State earned from trade or business carried on by it, and it further provided that when a State engaged in trade or business, nothing in clause (1) would prevent the Union from imposing any tax, to the extent that Parliament might by law provide, on any property used or occupied for that trade or business. The authority therefore given to Parliament could refer only to a tax directly on property that was used or occupied for the business, a tax related to the use or occupation of the property. To clarify this point, the Court looked to Article 285. Clause (1) of that article said that the property of the Union was exempt from “all taxes” imposed by a State or an authority within a State. At first sight, the phrase “all taxes” suggested a complete exemption from any tax the State could levy. However, the Court examined clause (2) of Article 285, which specified that, until Parliament enacted a law to the contrary, nothing in clause (1) would prevent a State authority from levying any tax on Union property that was liable or treated as liable at the commencement of the Constitution, provided that such tax continued to be levied in that State. In the Court’s opinion, clause (2) permitted an interpretation of clause (1) that limited the exemption to taxes of the nature of a direct tax on property. Accordingly, the Court concluded that the exemption in Article 289(1) should be read as applying only to Union taxes that are directly on property.

In this case, the Court explained that clause (1) of Article 285, when it mentions “all taxes,” must be understood to refer only to taxes that are directly imposed on property. The Court previously observed, while considering the general principles for interpreting Article 289(1), that the Union’s fiscal powers would be severely weakened if Article 289 were read as exempting a State’s property from every Union tax. The Court also noted that, although the Union may collect many taxes, Part XII of the Constitution contains provisions that allow those Union taxes to be assigned or distributed to the States, and it also provides for grants‑in‑aid from the Consolidated Fund of India to the States. In light of this constitutional scheme, the Court held that it is appropriate to read Article 289(1) as providing that the property and income of a State are exempt only from Union taxation that is levied on property and income. The Court found stronger justification for inserting the words “on property and income” after the phrase “Union taxation” in Article 289(1) than for placing the word “all” before the words “Union taxation.” The Court reasoned that interpreting the clause to mean “all Union taxation” would have a grave and debilitating effect on the Union’s resources, an effect that the Constitution does not intend to impose on Article 285(1). Conversely, the States would not suffer a comparable hardship if the phrase is read to exempt them only from Union taxes on property and income, because Part XII already makes provision for the assignment or distribution of Union‑levied taxes to the States and for the granting of aid from the Union, thereby mitigating any burden that might arise from a restrictive construction of Article 289(1). The Court further reminded that Articles 285 and 289 are successors to sections 154 and 155 of the Government of India Act, though the newer provisions differ in detail. In particular, clause (2) of Article 289, which parallels the proviso to section 154, clarifies that the reference in clause (1) of Article 285 to “all taxes” concerns taxes on Union property, and that clause (2) expressly permits the continuation of such taxes on property that was liable to them immediately before the Constitution came into force.

Immediately before the Constitution came into force, the property in question had been liable to the tax or had been treated as liable to that tax. Regarding article 289(1), the wording was altered from the earlier provision in section 155(1), which had stated that the government of a province would not be subject to federal taxation with respect to lands or buildings. Article 289, however, expands the scope beyond lands and buildings and expressly covers all property belonging to a State, whether that property is movable or immovable, and it provides an exemption from Union taxation. Nevertheless, the Court found no justification for construing clause (1) of article 289 as creating a blanket exemption that would shield every State property from every form of Union tax. The Court therefore held that, when article 289 is read together with its companion provision, article 285, the intention of the Constitution’s framers was that article 285 would exempt all Union property from any tax on property that might be imposed by a State or by any authority within that State, while article 289 would intend that all State property should be exempt from any tax on property that could be levied by the Union. Both articles, in the Court’s view, deal with taxes that are directly imposed on income or on property, and they do not extend to taxes that only indirectly affect income or property. Accordingly, the Union’s argument that these two articles should be read narrowly—so that one article exempts the property or income of a State and the other exempts the property of the Union from taxes that are directly imposed on property or income—was accepted as correct.

In support of this interpretation, the Court referred to decisions of the High Court of Australia, the Supreme Court of Canada, and the Judicial Committee of the Privy Council that had examined similar, though not identical, constitutional provisions in the Australian and Canadian contexts. The relevant Canadian constitutional provisions are found in sections 91, 92 and 125 of the British North America Act, 1867 (30‑31 Vict. Ch. 3). Section 91 declares that it shall be lawful for the Queen to make laws for the peace, order and good government of Canada on all matters that are not assigned exclusively to provincial legislatures, and, for greater certainty, it affirms that, notwithstanding anything in the Act, the exclusive legislative authority of the Parliament of Canada extends to all matters enumerated subsequently. Those enumerated matters include, inter alia, the regulation of trade and commerce and the raising of money by any mode or system of taxation. Section 92 grants provinces exclusive powers, including the power to impose direct taxation within the province for the purpose of raising revenue for provincial purposes. Section 125 states, in the same terms, that no lands or property belonging to Canada or any province shall be liable to taxation. The Court noted the strong parallel between section 125 of the Canadian Constitution and article 289(1) of the Indian Constitution.

The provision was expressed in the terms that no lands or property belonging to Canada or any province shall be liable to taxation. It follows that this wording runs very closely parallel to the provisions of article 289 (1) of the Constitution that is under consideration. Those Canadian constitutional provisions have been examined by the Supreme Court of Canada and also by the Judicial Committee of the Privy Council on several occasions. In the case titled Attorney‑General of the Province of British Columbia v. Attorney‑General of the Dominion of Canada, reported at 64 Can. S.C.R. 377, the issue arose as to whether the Province of British Columbia could import liquors into Canada for sale under the Government Liquor Act (11 Geo. V, c. 30) without being required to pay customs duties that were imposed by the Dominion of Canada. The argument presented, and also advanced before this Court, was that the word “tax” was sufficiently wide to include customs duties, and that the word “property” in section 125 encompassed property of every kind. The Dominion answered that customs duties did not constitute taxes within the meaning of the expression used in section 125; rather they were a regulation of trade and commerce. Moreover, even assuming that customs duties were included in the expression “taxation”, they were not a tax on property. The Dominion further contended that the term “taxation” in section 125 was not intended to cover customs duties because the prohibition in that section was meant to be reciprocal and did not extend to indirect taxation by the Dominion. By a majority judgment the Supreme Court of Canada upheld the decision of the Exchequer Court of Canada, which had held that the import by the Province was liable to pay import duty to the Dominion. Consequently the argument put forward on behalf of the Dominion was accepted, holding that customs duties were not taxes imposed on property as such but were levied on the importation of certain goods as a condition of their entry into Canada. That decision of the Supreme Court was challenged before the Privy Council by special leave. The Privy Council judgment, reported in Attorney‑General of British Columbia v. Attorney‑General of Canada (1924 A.C. 222), affirmed the appealed decision and held that the import duties imposed by the Dominion on alcoholic liquors imported into Canada by the Government of British Columbia for trade purposes were valid. The Privy Council based its reasoning on the entire scheme of the Canadian Constitution, under which the Dominion possessed the power to regulate trade and commerce throughout the Dominion, and concluded that section 125 must be interpreted so as not to defeat that paramount purpose. The Privy Council further observed that the correct solution lay in adapting section 125 to the whole scheme of government defined by the statute.

In this case the Court observed that the ratio decidendi of the earlier decision fully supported the Union’s submission and that the construction of Art. 289(1) must be read in harmony with the overall constitutional scheme. The discussion then turned to the Constitution of Australia and to the authorities of the High Court of Australia. The Court set out the relevant portion of section 51 of the Commonwealth of Australia Constitution Act, 1900 (63 and 64 Vict. c. 12), which provides: “The Parliament shall, subject to this Constitution, have power to make laws for the peace, order and good Government of Commonwealth with respect to – (i) Trade and Commerce with other countries, and among the States; (ii) Taxation; but so as not to discriminate between the States or parts of States.” This provision closely mirrors section 91 of the British North America Act, which confers on the Federal Parliament the exclusive authority to legislate on trade, commerce and related taxation. The Court then reproduced section 114 of the Australian Constitution, which grants immunity from taxation in the following terms: “A State shall not, without the consent of the Parliament of the Commonwealth, raise or maintain any naval or military force, or impose any tax on property of any kind belonging to the Commonwealth nor shall the Commonwealth impose any tax on property of any kind belonging to a State.” The Court noted that this provision corresponds to section 125 of the Canadian Constitution and to Arts. 285 and 289 of the present Constitution, all of which set out rules on exemption from taxation. The question of how to interpret those Australian provisions was previously considered by the High Court of Australia in Attorney‑General of New South Wales v. The Collector of Customs for New South Wales (1907‑8) 5 C.L.R. 818. In that case the State of New South Wales instituted proceedings to recover customs duties that had been collected by the Collector of Customs on a shipment of steel rails imported from England for use in the State’s railway construction. The State argued that the rails were property of the Government and therefore exempt from customs duties under section 114 of the Constitution. The majority of the Court held that customs duties constitute a method of regulating international trade and of exercising the taxing power, and consequently goods imported by a State government fall within the Commonwealth’s customs regime. The Court further ruled that the levy of customs duties does not amount to a tax on property within the meaning of section 114. The Court added that even if the language of the section could be given a broader interpretation,

In this passage the Court explained that interpreting the phrase to have a broad, all‑encompassing meaning was not the only possible reading and, in fact, such a broad construction should be rejected because it conflicted with the constitutional provisions that grant the Commonwealth the exclusive authority to levy customs duties and to regulate foreign trade and commerce. The judgment of Justice Isaacs reached the same conclusion, although he arrived there on slightly different grounds. Consequently, the Court, speaking with a unanimous voice but for differing reasons, held that the goods brought into the country by the State were subject to the applicable import duty. The High Court further observed that the expression “impose any tax” could, in theory, be applied to customs duties. Nevertheless, the Court stressed that the act of imposing customs duties did not fall within the meaning of an “imposition of a tax on property.” It also observed that customs duties were charged in relation to goods and, in a certain sense, were levied “upon” those goods, just as stamp duties, succession duties and other forms of indirect taxation are described as taxes on deeds or other real or personal property. The Court therefore recognized the established legal position that customs duties should not be regarded as a tax on property itself but rather as a charge on the operations or movements of property.

The authorities cited, which interpret similar provisions in the Canadian and Australian constitutions, fully support the Union’s argument that customs duties are not taxes on property. Instead, they are understood as imposts that impose conditions or restrictions on the import and export of goods, exercised under the Union’s exclusive power to regulate trade and commerce together with its power of taxation. Accordingly, the general language of the exemption must be read narrowly so that it does not clash with the Union’s authority to regulate trade and commerce and to levy customs duties. The States then contended that even if Article 289(1) exempts only the State’s property from a direct tax on property, the excise levy on goods listed under item 84 of List I constitutes a tax on property; therefore, no excise should be imposed on goods that belong to the State or are manufactured by it. They further argued that customs duties, including export duties covered by item 83 of List I, are likewise duties on imported or exported goods, and consequently the State’s property should be exempt under Article 289(1) from both excise duties and customs duties, including export duties. This argument raised the issue of the nature of excise and customs duties. The question regarding excise duties had previously been examined by this Court in Amalgamated Coalfields Ltd. v. Union of India. In that earlier consideration, the Court had reviewed prior decisions of the Federal Court in In re The Central Provinces and Berar Sales of Motor and Lubricant Taxation Act (1939 F.C.R. 18); The Province of Madras v. M/s. Budhu Paidanna (1942 F.C.R. 90); and the Judicial Committee of the Privy Council in Governor General in Council v. Province of Madras (1945 F.C.R. 179).

In the earlier decision, the Court quoted the observations made at page 1287, stating that it respectfully adopted the principles established by three prior judgments concerning the levy of excise duty and the mechanisms for its collection. The Court explained that excise duty was essentially a charge on the production or manufacture of goods that were produced or manufactured within the country. It described the duty as an indirect tax, which the manufacturer or producer ultimately shifted to the final consumer, so that the ultimate incidence of the duty always fell on the consumer. Subject to the legislative competence of the taxing authority, the Court noted that the tax could be imposed at any convenient stage, provided that its character—as a duty on manufacture or production—remained intact. The Court further clarified that the method used to collect the duty did not alter the essential nature of the duty; rather, it concerned only the administrative machinery employed for collection. By this reasoning, the Court concluded that the taxable event for excise duty was the manufacture of goods, and the duty was therefore not imposed directly on the goods themselves but on the act of manufacturing them. To illustrate the distinction, the Court contrasted excise duty with sales tax, explaining that sales tax was imposed in reference to goods sold, with the taxable event being the act of sale. Although both excise duty and sales tax related to goods, the Court emphasized that the former was a charge on manufacture while the latter was a charge on sale, and consequently neither could be described as a tax directly upon the goods themselves, for doing so would make the two charges identical. The Court observed that excise duties therefore possessed the character of indirect taxes as described in standard economic works, and should be distinguished from direct taxes such as those on property or income. In a similar vein, the Court held that customs duties, including export duties, although levied in reference to goods, had taxable events that were either the import of goods into the customs territory or their export out of it. These duties, like excise, were indirect taxes and could not be equated with direct taxes on the goods themselves. The Court explained that the true nature of an import duty was to create a condition that had to be satisfied before goods could be brought inside the customs territory, effectively regulating the manner and terms of entry of foreign goods, an authority exercised by the Union. Likewise, an export duty functioned as a condition precedent to the removal of goods from the country. Thus, the Court concluded that both import and export duties operated as indirect taxes rather than as direct taxes on property.

The Court observed that a duty on property, as contemplated in Article 289(1), does not fall within the definition of “taxation” set out in Article 366(28), even though that definition broadly states that taxation includes the imposition of any tax or impost, whether general, local, or special. The Court explained that the breadth of this definition must be narrowed when the surrounding context requires it. It noted that the Union Parliament alone possesses the exclusive authority to regulate foreign and inter‑State trade and commerce under Entries 41 and 42, and that it alone is responsible for imposing export duties, import duties, and excise duties in order to regulate trade, commerce, and to raise revenue. However, the Court pointed out that Article 289(1) creates an exception in favour of the States, granting them immunity from certain categories of Union taxation. Consequently, the Constitution must be interpreted in a way that gives full effect to both the exclusive legislative power of Parliament and the narrowly crafted immunity provided to the States.

The Court warned that if the States were held to be exempt from all forms of Union taxation on their imports and exports, the result could be the absurdity of a State importing or exporting every conceivable commodity, thereby effectively undermining Parliament’s exclusive power to legislate in those areas. Because the provision in Article 289(1) functions as an exception to Parliament’s exclusive legislative field, the Court held that this exception must be read strictly and confined to taxes that are directly levied on the property or income of a State. In other words, the immunity granted to the States is limited to taxes that fall directly on property and income, and does not extend to duties that are imposed on goods or commodities. Therefore, even though import duties, export duties, and excise duties relate to goods, they are not direct taxes on property and are consequently excluded from the exemption in Article 289(1).

The Court referred to the decision in Attorney‑General for British Columbia v. Kingcome Navigation Co. Ltd. (1934 A.C. 45) to illustrate that customs duties and excise duties are, in substance, trading taxes rather than direct taxes. It then addressed the argument advanced on behalf of the States that the Constitution makes no distinction between direct and indirect taxes, and therefore such a distinction should be irrelevant to the present dispute. While acknowledging that the Constitution does not expressly differentiate between the two categories, the Court maintained that duties of customs—including export duties—and excise duties are imposed primarily to regulate trade and commerce. These duties fall within the Union’s competence under various entries in List I, and they are better characterised as imposts that relate to the movement of property through import or export, or to the production or manufacture of goods. Accordingly, even in the absence of an explicit constitutional distinction, such duties cannot be regarded as taxes on property.

In this case, the Court observed that although the Constitution does not expressly separate direct and indirect taxes, the exemption in Article 289(1) that shields property from Union taxation must be understood as referring to taxes that economists classify as direct taxes on property. The Court explained that duties of customs and excise are essentially taxes on trade rather than taxes on ownership of property, and therefore they do not fall within the scope of the exemption. The States argued that a narrow construction of Article 289(1) favored by the Union would seriously and adversely affect the States’ activities. The Court noted that this argument failed to consider the more severe consequences that would arise if the broader construction advocated by the States were adopted.

The Court illustrated the potential impact of the States’ preferred interpretation by describing a hypothetical situation in which a State decides to engage in large‑scale foreign trade involving various commodities. Under the States’ view, entry 83 of List I, which empowers the Union Parliament to tax such trade, would become ineffective, thereby eroding the Parliament’s exclusive authority to legislate on international trade and commerce, including the power to impose taxes on that trade. The Court emphasized that trade with foreign countries, import and export across customs frontiers, and inter‑State commerce all lie within the exclusive jurisdiction of the Union Parliament. Consequently, the Court rejected any construction of Article 289(1) that would nullify the Parliament’s exclusive power in these matters, deeming such an outcome unacceptable and contrary to the constitutional scheme.

Turning to the argument raised on behalf of the States concerning Section 20 of the Sea Customs Act, the Court noted that this provision, as amended by Act XLV of 1951, had taken much of its language from Clause 2 of Article 289. The States suggested that this borrowing indicated Parliament’s own understanding that Clause 2 should be interpreted in the same way they proposed. However, the Court held that the Constitution must be interpreted in its proper context, and Parliament’s wording in the statute does not settle the constitutional question. Accordingly, the Court concluded that the immunity granted to the States against Union taxation does not extend to customs duties, including export duties, or to excise duties. For the three questions referred to the Court, the answer must therefore be negative. The Court directed that its opinion be reported to the President, as required under Article 143(1). The judgment was delivered by Justice S.K. DAS.

In the matter before the Court, three specific questions of law were framed for consideration. The first question asked whether the provisions of article 289 of the Constitution barred the Union from imposing, or authorising the imposition of, customs duties on the import or export of a State’s property when such property was used for purposes other than those expressly mentioned in clause (2) of that article. The second question sought to determine whether article 289 similarly prevented the Union from imposing, or authorising the imposition of, excise duties on the production or manufacture within India of a State’s property used for purposes beyond those specified in clause (2) of the same article. The third question examined whether sub‑section (2) of section 20 of the Sea Customs Act, 1878 (Act 8 of 1878), and sub‑section (1A) of section 3 of the Central Excises and Salt Act, 1944 (Act I of 1944), as amended by the Bill annexed to the reference, were inconsistent with the provisions of article 289 of the Constitution.

The Court noted that it had heard very detailed arguments on each of these questions. The learned Solicitor‑General of India presented the Union of India’s position, while several States were represented by their Advocates‑General or other counsel. Apart from the State of Maharashtra, which aligned its view closely with that of the Union, there existed a sharp conflict between the remaining States and the Union regarding the appropriate answers to the three questions. Generally, the States, except Maharashtra, argued that article 289 exempted State property from the imposition of customs duties and excise duties except to the extent that clause (2) expressly permitted such duties; they contended that any duty beyond the scope of clause (2) would be unconstitutional. Conversely, the Union maintained that the breadth of power conferred on the Union Legislature to impose customs duties (entry 83 of List I of the Seventh Schedule) and excise duties (entry 84 of List I of the Seventh Schedule) could be narrowed only by a very strict interpretation of article 289. According to the Union’s interpretation, clause (1) of article 289 was confined solely to a property tax, that is, a tax on goods as such, and did not extend to taxes on the importation, exportation, production, or manufacture of those goods. Viewed from this perspective, the Union asserted that article 289 offered no protection to a State concerning customs duties or excise duties.

In order to contextualise the questions, the Court briefly outlined the constitutional background. The Sea Customs Act, 1878 (Act 8 of 1878), had been enacted in March 1878 with the purpose of consolidating and amending the law relating to the levy of sea customs duties. Similarly, the Central Excises and Salt Act, 1944 (Act I of 1944), had been enacted in February 1944 to consolidate and amend the law relating to central excise duties and to salt. These statutes formed the legislative framework against which the compatibility of the proposed amendments with article 289 was to be examined.

The Court observed that the legislation concerning duties of excise and salt originated in the early twentieth century. The Government of India Act, 1915 (5 and 6 Geo. 5, c. 61) was enacted as a comprehensive consolidating measure that repealed and re‑enacted the numerous Parliamentary statutes governing the administration of British India which had been passed between 1770 and 1912. In a subsequent minor amendment, the Government of India Amendment Act, 1916 (6 and 7 Geo. 5, c. 37) altered the 1915 Act in certain respects and also introduced substantive provisions that were not included in the principal Act. Again, in 1919 the legislation was amended by the Government of India Act, 1919 (9 and 10 Geo. 5, c. 101), which was introduced to bring into effect the constitutional reforms recommended in the Montagu‑Chelmsford Report. Section 45 of the 1919 Act stipulated that the amendments made by the 1919 Act and the 1916 Amendment Act were to be incorporated into the text of the Government of India Act, 1915, and that the resulting document, as amended, would be known as the Government of India Act. This Act created an Indian Legislature composed of two chambers, namely the Council of States and the Legislative Assembly. The Legislature was granted the authority to enact laws applicable to all persons, all courts, and all places and things within British India, and it also possessed the power to repeal or modify any law then in force anywhere in British India.

The Court further explained that, before the adoption of the Government of India Act, 1935 (26 Geo. V, c. 2), the Crown’s dominion and authority over the whole of British India derived from a combination of statutory sources and prerogative rights. The statutory sources originated in Acts of the British Parliament, while the prerogative rights were based on claims of conquest, cession, or long‑standing usage; some of these rights had been directly acquired by the Crown, and others were inherited as successor to the East India Company’s rights. The Secretary of State for India acted as the Crown’s responsible agent for exercising all authority vested in the Crown with respect to Indian affairs. Nevertheless, the Government of India Act declared that the superintendence, direction and control of the civil and military government of India were vested in the Governor‑General‑in‑Council, whereas the administration of the Governor’s and Chief Commissioners’ provinces was vested in the respective local governments. The Government of India Act, 1935 introduced a dual system of governance consisting of autonomous provinces and a federation, establishing both a Federal Legislature and a Provincial Legislature. The Seventh Schedule of that Act set out three legislative lists: List I (the Federal Legislative List), List II (the Provincial Legislative List) and List III (the Concurrent List). Legislative powers were allocated among the legislatures in accordance with these lists. Duties of customs, including export duties, were placed within item 44 of List I, and duties of excise on tobacco

In this matter the Court explained that the classes of goods covered by item 45 included manufactured or produced articles in India, except alcoholic liquors, opium and similar products. The Indian Legislature had, from time to time, amended both the Sea Customs Act of 1878 and the Central Excises and Salt Act of 1944 in order to exercise the legislative authority it possessed under either the Government of India Act or the Government of India Act 1935. The Indian Independence Act of 1947 established the Dominion of India effective 15 August 1947 and, consequently, the Secretary of State for India – who had been the Crown’s responsible agent for Indian affairs – vanished from the Indian constitutional framework. The Constitution of India then came into force on 26 January 1950, proclaiming India to be a sovereign democratic republic organized as a union of states. Although the Constitution introduced a new constitutional order, it retained the distribution of legislative powers that had been set out in the Government of India Act 1935, allocating authority between Parliament, which functioned as the Union Legislature, and the legislatures of the individual states. The Constitution’s Seventh Schedule therefore comprised three distinct lists: Union List (List I), State List (List II) and Concurrent List (List III). Within List I, entry 83 related to duties of customs, including export duties, while entry 84 dealt with duties of excise on tobacco and on other goods manufactured or produced in India, again excluding alcoholic liquors, opium and similar items. The allocation of legislative powers and the relationship between Union and State legislatures were governed by Articles 245 to 258, which formed Chapter I of Part XI of the Constitution. In ordinary circumstances, Parliament possessed exclusive authority to legislate on matters enumerated in List I; each State legislature held exclusive authority over matters enumerated in List II; and both Parliament and State legislatures shared authority to legislate on matters enumerated in List III. Article 245 further stipulated that the law‑making powers of Parliament and of State legislatures were subject to the Constitution itself. Certain constitutional provisions, notably Articles 285 and 289 found in Chapter I of Part XII, imposed additional constraints. Part XII addressed subjects such as finance, borrowing and property, contracts and related matters. Article 289 was quoted in full: “(1) The property and income of a State shall be exempt from Union taxation. (2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. (3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of government.” The Court noted that the interpretation of Article 289 formed the principal issue for consideration in the reference.

In this matter, the Court observed that clause (3) of Article 289 provides that nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of government. The Court further indicated that the principal issue for consideration in the reference was the interpretation of Article 289.

The Court noted that shortly after the Constitution came into force, Section 20 of the Sea Customs Act, 1878, which identified the goods liable to duty under that Act, was amended by the Union Legislature through Act XLV of 1951. The amendment introduced a new sub‑section, namely sub‑section (2), which stipulated that the provisions of sub‑section (1) would apply to goods that belong to a State Government and are used for the purpose of any trade or business of any kind carried on by, or on behalf of, that Government, or to any operations connected with such trade or business, in the same manner as those provisions apply to goods that do not belong to any Government.

The Court further explained that a comparable amendment was effected in Section 3 of the Central Excises and Salt Act, 1944. The amendment inserted sub‑section (1‑A), which declared that the provisions of sub‑section (1) would apply to all excisable goods other than salt that are produced or manufactured in India by, or on behalf of, a State Government (excluding Union territories) and are used for the purposes of any trade or business of any kind carried on by, or on behalf of, that Government, or for any operations connected with such trade or business, in the same way as those provisions apply to goods which are not produced or manufactured by any Government.

The Court stated that it is evident that these two amendments were intended to bring the Sea Customs Act, 1878, and the Central Excises and Salt Act, 1944, into conformity with the requirements of Article 289 of the Constitution. Subsequently, in 1962, the Union Government placed a draft Bill before Parliament proposing further amendments to the same statutes. The Court quoted two specific clauses of the draft Bill to illustrate the reference made to the Court. Clause 2 proposed amending Section 20 of the Sea Customs Act, 1878, by substituting the existing sub‑section (2) with the following new sub‑section: “(2) The provisions of sub‑section (1) shall apply in respect of all goods belonging to the Government as they apply in respect of goods not belonging to the Government.” Clause 3 proposed amending Section 3 of the Central Excises and Salt Act, 1944, by substituting sub‑section (1‑A) with the following new sub‑section: “(1A) The provisions of sub‑section (1) shall apply in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of, the Government as they apply in respect of goods which are not produced or manufactured by the Government.”

It was stated that the amendment would apply “or on behalf of the Government as they apply in respect of goods which are not produced or manufactured by the Government.” The draft Bill therefore created a controversy. Several State governments argued that the proposed amendments were constitutionally invalid because the provisions of Article 289, when read together with the definitions of “taxation” and “tax” in clause (28) of Article 366 of the Constitution, prohibited the Union from imposing or authorising any tax—including customs duties and excise duties—on or in relation to any property of a State, except as allowed by clauses (2) and (3) of Article 289. The Union Government, on the other hand, maintained that the exemption granted by clause (1) of Article 289 was limited to Union taxes that were directly imposed on the property of a State and did not extend to Union taxes that were merely related to that property. Accordingly, the Union argued that customs duties, being taxes on the import or export of goods rather than taxes on the goods themselves, and excise duties, being taxes on the production or manufacture of goods rather than taxes on the goods themselves, fell outside the protection afforded by clause (1) of Article 289. This disagreement generated doubts about the correct interpretation and the scope of Article 289, and particularly raised questions about the constitutional validity of the amendments contained in the draft Bill. Because of these doubts, the President referred the three questions that had been raised to the Supreme Court for consideration and requested a report of the Court’s opinion on the matters.

In one of the earliest references to the Federal Court, the case In re The Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 (Central Provinces and Berar Act No. XIV of 1938) was cited. Under section 213 of the Government of India Act, 1935—corresponding to Article 143 of the Constitution—Chief Justice Gwyer observed that the same rules applied to interpreting other statutes would also apply to interpreting a constitutional enactment, but that their application must be conditioned by the specific subject matter of the enactment itself. He emphasized that the Constitution is a mechanism for making laws, not merely an act that declares what the law ought to be, and that this principle is especially important in a federal constitution with a delicate balance of jurisdictions. The Court recognised that interpreters of an organic instrument such as the Constitution must be guided by a broad and liberal spirit, as the Constitution establishes a constitutional machinery intended to govern the nation, embody its ideals, and enable the realisation of those ideals for present and future generations. However, this recognition did not grant interpreters unlimited freedom to stretch or distort the language of the enactment in order to fit any legal or constitutional theory, nor to supply omissions or correct presumed errors.

The Court observed that those who interpret a constitutional provision must not distort its language to serve any legal or constitutional theory, nor must they alter it to supply omissions or to correct presumed errors. Keeping this principle in mind, the Court examined the relevant constitutional articles that framed the issue. The central question concerned the true scope and effect of Article 289, which the Court had quoted earlier. Clause (1) of Article 289 provides that the property and income of a State shall be exempt from Union taxation. Article 366(28) then defines, unless the context requires otherwise, the term “taxation” to include the imposition of any tax or impost, whether general, local, or special, and mandates that the word “tax” be interpreted in the same manner. The Court first considered whether the context of Article 289 demanded a different meaning for “taxation”. To do so, the Court substituted in Article 289(1) the words that Article 366(28) says the expression “taxation” encompasses. Consequently, Clause (1) of Article 289 would read: “The property and income of a State shall be exempt from the imposition of any tax or impost, whether general or local or special, by the Union.” The Court found no doubt that customs duty or excise duty constituted an impost within the meaning of Article 366(28), a point not contested by the learned Solicitor‑General. Therefore, interpreting Article 289(1) with the definition supplied by Article 366(28) meant that, however broad a liberal spirit might inspire interpreters, they could not stretch or pervert the clear language stating that the property and income of a State were exempt from any impost, whether general, local, or special, imposed by the Union. Turning to the Union’s property, the Court noted that the counterpart provision was Article 285, which reads: “(1) The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State. (2) Nothing in clause (1) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State.” The Court emphasized that the words of Article 285(1) are even clearer and more emphatic, declaring that the Union’s property shall, except where Parliament by law provides otherwise, be exempt from all taxes imposed by a State or any authority within a State.

In this case the Court held that the phrase “all taxes” must be understood to cover every tax, whether that tax is directly imposed on property or is otherwise related to property. The Court observed that neither Article 289(1) nor Article 285(1) contains any limiting terms that would narrow the ordinary meaning of the word “taxation” in Article 289 or the expression “all taxes” in Article 285. Accordingly, the distribution of legislative powers set out in Article 245 is expressly subject to the constitutional provisions, and the consequence is that Parliament is not empowered to legislate away the exemption created by Article 289(1), just as a State Legislature is not empowered to legislate away the exemption created by Article 285(1). Applying the rule of construction previously referenced, the Court identified the plain effect of Articles 245, 285(1), 289(1) and 366(28). It explained that, under Article 285(1), the property of the Union is exempt from every tax imposed by a State or by any authority within a State, except to the extent that Parliament may by law provide otherwise; and that, likewise, the property and income of a State are exempt from Union taxation, except to the extent that clause (2) of Article 289 authorises the Union to levy a tax on the property of a State.

The Court then turned to consider whether the context of Article 289 or any other constitutional article requires a different interpretation of the expressions “taxation” or “taxes” in Article 289(1) or Article 285(1). The learned Solicitor‑General emphasized the words “property” and “income” that appear in Article 289 and submitted that the term “income” is unnecessary in Article 285(1) because taxes on income (other than agricultural income) are listed in List I of the Seventh Schedule, and a State or an authority within a State lacks the competence to impose such a tax. Relying on the presence of both “property” and “income” in clause (1) of Article 289, the Solicitor‑General argued that the Constitution’s framers intended to restrict clause (1) to direct taxes on property or on income—that is, a tax solely on property as such or solely on income as such. He further elaborated that the phrase “income shall be exempt from tax” should be read as an exemption from income‑tax, just as the phrase “property shall be exempt from tax” should be read as an exemption from property tax, thereby contending that the word “property” governs the meaning of “taxation” and narrows its comprehensive sense. The Court rejected this line of reasoning in its entirety. While acknowledging that the Solicitor‑General conceded that “property” in clause (1) of Article 289 carries a broad meaning and refers to all property and assets of a State, the Court found that this acknowledgment does not support the narrow construction proposed. The Court noted that Article 294, which follows in the same Part of the Constitution, underscores the comprehensive use of the term “property,” encompassing all assets, whether movable or immovable, thereby reinforcing a wide‑ranging interpretation of the constitutional exemptions.

In the same Part of the Constitution it is provided that, from the moment the Constitution came into force, every piece of property and every asset that immediately before that moment was held by His Majesty for the purposes of the Government of the Dominion of India, as well as every piece of property and asset that immediately before that moment was held by His Majesty for the purposes of the Government of each Governor’s Province, shall thereafter vest respectively in the Union and in the corresponding State. This provision makes it clear that, within the Constitution, the term “property” is intended to be understood in a broad manner that embraces all assets, whether they are movable or immovable. In addition to the assets that vested in the Union or in a State at the commencement of the Constitution, the Union or a State is also authorised to acquire new assets after that date, a matter that is dealt with in Articles 296 to 298 of the Constitution. Accordingly, in both Articles 285 and 289 the word “property” must be read as encompassing all property and assets that vested in the Union or in a State at the commencement of the Constitution together with any property and assets that may be acquired thereafter by the Union or by a State. Clause (1) of Article 289 contains the subject phrase “property and income” and the predicate “shall be exempt from Union taxation”. When read grammatically, the clause can be understood only in the sense that all property and all income of a State shall be exempt from every form of taxation imposed by the Union, thereby giving the word “taxation” its full and comprehensive meaning as required by Article 366(28). It is important to stress that in this sentence the term “property” is not employed as a qualifier that narrows the meaning of “taxation”; rather, it functions as the subject that receives the benefit of exemption from Union taxation. One may reasonably interpret a statement that State income shall be free from Union tax to mean that such income is free from Union income‑tax, especially because there is only a single legislative entry dealing with a tax on income (excluding agricultural income), namely entry 82 in List I. However, the Court cannot accept an interpretation that treats the word “property” as a qualifier that limits the scope of “taxation” and thereby diminishes its comprehensive connotation. The Union’s power to tax matters relating to property of various kinds extends over a wide field, as shown by entries 82 to 92A of the Constitution. Consequently, there is no justification for reading the word “property” in Articles 285 and 289 as referring solely to those items that permit the imposition of a direct tax on property while excluding other items. No legitimate ground exists for such a restriction within the context of Article 289, and imposing it would run contrary to the plain language of the article. The learned Solicitor‑General has moreover acknowledged that Articles 285(1) and 289(1) are analogous and complementary provisions that convey the same meaning. While Article 285(1) does not contain the word “income”, it does contain the word “property”, and it states that the property of the Union…

The Court observed that Article 285(1) states that the property of the Union shall be exempt from all taxes imposed by a State or by any authority within a State. The Court rejected the view that the word “property” in that provision qualifies or narrows the expression “all taxes”. It held that the ordinary meaning of “all taxes” is inclusive of every tax, and that the clear intention of the Constitution‑makers was to exempt Union property from every tax that a State may levy, even a tax on agricultural income derived from Union property. The Court noted that the items in List II of the Seventh Schedule, which enumerate taxes or duties that a State Legislature may impose, are those numbered 46 to 62. Some of these entries are expressly taxes on property, such as entry 49 “taxes on lands and buildings”, entry 56 “taxes on goods and passengers carried by road or on inland waterways”, entry 57 “taxes on vehicles, whether mechanically propelled or not, suitable for use on roads etc.”, and entry 58 “taxes on animals and boats”. Other entries relate to property but are not taxes on property per se; for example, entry 51 deals with “duties of excise on the manufacture or production of alcoholic liquors for human consumption manufactured in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India”, entry 52 concerns “taxes on the entry of goods into a local area for consumption, use or sale therein”, entry 54 covers “taxes on the sale or purchase of goods other than newspapers”, and entry 55 pertains to “taxes on advertisements other than advertisements published in the newspapers”. The Court explained that if the Solicitor‑General’s argument were accepted, the exemption would apply only to those taxes that are directly taxes on property, and would not extend to taxes on manufacture, entry, sale or purchase of goods. Such a construction would effectively strip the phrase “all taxes” of its meaning, forcing the Court to read the Constitution as if the framers had intended the expression to refer to a limited subset of taxes. The Court further pointed out that Article 366(28) requires the word “tax” to be construed in the same comprehensive manner as the word “taxation”. Finally, the Court remarked that, unlike some other legal systems, neither the Government of India Act 1935 nor the present Constitution demands a detailed distinction between direct and indirect taxation, because no such categorical division is provided. Consequently, taxes of various kinds, including those that may be characterised as indirect, such as luxuries or trade taxes, and those that possess features of both categories, such as succession duties and certain excise duties, fall within the same constitutional framework.

In the case of M. P. V. Sundararamier & Co. v. The State of Andhra Pradesh, the Court observed that the Constitution was not drafted on a blank slate; rather, it was built on the federal framework that had been created by the Government of India Act, 1935. Although that Act had undergone substantial repeal, modification and addition, the Court held that it continued to constitute the structural foundation upon which the present Constitution was erected. The Court then turned its attention to the entries contained in List I and List II of the Seventh Schedule. It stated that, although the analysis did not exhaust every entry, the examination led to the inference that taxation was not intended to be absorbed within the principal subject of legislation even if a very broad construction might allow such inclusion. Instead, the Court explained, taxation was treated as a distinct matter for the purpose of determining legislative competence. This separation, the Court said, was reflected in the language of Article 248, clauses (1) and (2), and also in Entry 97 of List I. The Court clarified that the distinction lay between the main subject of a law and a tax that related to that subject; the main subject appeared in one group of entries, while a tax concerning that subject was listed in a second group. No distinction was drawn between direct and indirect taxes, and several entries in both List I and List II covered taxes that could be either direct or indirect. Referring to an earlier decision concerning the Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938, Justice Sulaiman, after citing the Canadian Constitution under the British North America Act, 1867, and the Australian Constitution under the Commonwealth of Australia Constitution Act, 1900, observed that, unlike those constitutions, the Government of India Act, 1935, made no separation between direct and indirect taxation. He noted that for purposes of legislative competence the ultimate incidence of a tax was not a decisive test and that there was no justification for adopting a rule that certain duties classified as direct should be assigned to the provinces while duties regarded as indirect should be reserved for the federation. He concluded that, as in the 1935 Act, the present Constitution also distinguished, for legislative competence, between the main subject of legislation and a tax relating to that subject. On that basis, the Court found it impossible to accept the Union’s argument that the word “property” in clause (1) of Article 289 or clause (1) of Article 285 created a distinction between direct and indirect taxation, i.e., a tax on property as such versus a tax in relation to property. Consequently, the Court examined clauses (2) and (3) of Article 289 and clause (2) of Article 285, noting that these provisions further clarified the scope of the constitutional limitation and reinforced the view that the distinction for competence purposes was between the principal legislative subject and any tax relating to it, without reference to a direct‑indirect dichotomy.

The Court observed that clause (2) of Article 289 formed an exception to clause (1) because it expressly stated that nothing in clause (1) would prevent the Union from imposing or authorising the imposition of any tax to the extent that Parliament might by law provide in respect of a trade or business of any kind carried on by or on behalf of a State Government, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. Clause (3) was then noted to provide that nothing in clause (2) would apply to any trade or business or to any class of trade or business which Parliament might by law declare to be incidental to the ordinary functions of Government. In effect, clause (2) created an exception to clause (1) and clause (3) created an exception to that exception. The Court explained that the broad distinction drawn in these two clauses lay between the trading or business activities of a State Government and its governmental functions. Regarding its trading or business activities, a tax could be imposed, and any property used or occupied for the purpose of such trade or business would be liable to tax. However, when Parliament declared a particular trade or business to be incidental to the ordinary functions of Government, the exemption provided by clause (1) would take effect and clause (2) would not defeat that operation. The combined effect of clauses (1), (2) and (3) was therefore described as follows: under clause (1) the property and income of a State were exempt from Union taxation; clause (2) nevertheless provided that income of a State derived from commercial activities or the property of a State in respect of a trade or business of any kind carried on by or on behalf of a State Government, or any operations connected therewith, or any property used or occupied for the purpose of such trade or business, would not be immune from Union taxation; and under clause (3) Parliament could by law declare any trade or business or any class of trade or business of a State to be incidental to the ordinary functions of Government, and if such a declaration were made, clause (2) would not apply and the exemption in clause (1) would continue. The Court acknowledged that determining what constitutes a governmental function versus a trading or business function was not always easy. It cited Australian examples where governmental activities such as municipal road construction, harbour dredging, piloting and ferries were held to be “industrial” even though no charge was made for the services. The Indian Constitution, the Court noted, avoided this difficulty by empowering Parliament to declare by law that any trade or business carried on by a State would not fall within the scope of clause (2) but would be deemed incidental to the ordinary functions of Government.

The Court explained that when Parliament makes a declaration that a trade or business carried on by a State is incidental to the ordinary functions of government, the Union is consequently barred from imposing any tax on that trade, on the business itself, on the related property, or on the income that arises from it. The Court regarded this result as expressing the true effect of the three clauses contained in Article 289. The Court then considered the argument advanced by the learned Solicitor‑General, who, on behalf of the Union, contended that clause (1) of Article 289 should be given a limited meaning. The Court observed that if clause (1) were to be read narrowly, the distinction drawn in clauses (2) and (3) between trading or business activities on the one hand and governmental functions on the other would lose much of its significance. Clause (1) and clause (2) differentiate between trading activities and other functions, while clause (2) and clause (3) differentiate between ordinary trading activities and those that are truly governmental functions. The Court noted that if the Union were prevented only from levying a tax on property per se, it would be difficult to understand why the Constitution‑makers felt it necessary to draw a separate line between the trading or business activities of a Government and its governmental functions. The Court asked why a reference to trading or business activities was needed in clauses (2) and (3) when a simple statement that property used or occupied in connection with a trade or business would be liable to tax might have sufficed. The Court pointed out that clause (2) extends beyond merely the use or occupation of property; it also mentions activities such as production, manufacture, and transportation of goods, which suggests a broader legislative intent than a mere direct tax on property.

The Court further examined the submissions of the learned Solicitor‑General. He first suggested that clause (2) was not an exception to clause (1) but rather an explanatory provision. The Court found this explanation unsatisfactory because it did not clarify why the Constitution would refer specifically to business or trading activities if its sole purpose was to limit the exemption to a direct tax on property. The Solicitor‑General then argued that even if clause (2) were an exception, the exception applied only to the matter of property tax. According to that view, only the final part of clause (2)—which speaks of property used or occupied for the purpose of a State Government’s trading or business activities—would be relevant, while the earlier portions dealing with the nature of the trading or business activities themselves, such as production or manufacture of goods, would be irrelevant. The Court observed that this interpretation failed to account for the broader language of the clause. The Court also noted that Parliament’s own amendments in 1951 to Section 20 of the Sea Customs Act, and to Section 3 of the Central Excises and Salt Act, demonstrated a legislative understanding that clause (2) creates an exception to clause (1) by distinguishing between the trading activities of a State Government and its purely governmental functions. This legislative history supported a reading of clause (2) as providing a wider scope than a mere property‑tax exemption.

The Court observed that the insertion of two sub‑sections—sub‑section (3) of section 20 of the Sea Customs Act, 1878, and sub‑section (1‑A) of section 3 of the Central Excises and Salt Act, 1944—demonstrated Parliament’s intention to treat clause (2) of Article 289 as an exception to clause (1). Those amendments created a clear distinction between the trading activities undertaken by a State Government and the ordinary governmental functions of that State. Accordingly, the amendments provided that no exemption would apply to goods owned by a State Government when such goods were used for any trade or business conducted by, or on behalf of, that Government, or for any operations connected with that trade or business. By contrast, the amendments granted exemption to other goods that belonged to the Government but were not employed in a trade or business context. The Court then examined the broader context of Article 289, focusing particularly on clauses (2) and (3). It concluded that nothing in Article 289 limits the wide‑ranging definition of the term “taxation” contained in that provision. The Court noted that a similar interpretative approach applied to clause (2) of Article 285, which also creates an exception to clause (1) of that article and preserves any tax on Union property that existed immediately before the Constitution came into force, provided that such tax continues to be levied within the State.

The Court identified a serious difficulty with the Solicitor‑General’s argument, describing it as almost fatal. It pointed out that the Union’s taxing powers listed in List I, covering entries 82 through 92A, contain no entry permitting the Union to impose a direct tax on property in the sense the Solicitor‑General suggested for Article 289(1). While entries in List II do allow State Legislatures to levy direct taxes on property such as “lands and buildings” or “animals and boats,” the Union lacks a corresponding power to impose a “property tax” on State property under List I. If the Solicitor‑General’s position were correct, the only tax from which State property could obtain exemption under clause (1) of Article 289 would be a Union‑imposed property tax, a tax the Union is constitutionally unable to levy on State property. In response, the Solicitor‑General advanced a two‑part reply. First, he cited entry 89 (terminal taxes on goods and passengers carried by railway, sea or air), entry 86 (taxes on the capital value of assets of individuals and companies, excluding agricultural land), and entry 97 (the residuary entry) as bases for a Union property tax. Second, he referred to Article 246(4), which authorises Parliament to make laws on any matter concerning any part of the territory of India not included in a State, even if that matter is enumerated in the State List. The Court found these arguments unconvincing, noting that entry 86 pertains to individuals and companies, not State property, and that entry 89 deals with terminal taxes, which differ fundamentally from a property tax as envisaged by the Solicitor‑General.

The learned Solicitor‑General argued that the Union could impose a property tax on State property situated in a territory of India that is not included in any State, even though the matter is enumerated in the State List. He further maintained that the Union could rely on any of the three entries previously mentioned, and that, under Article 246(4), the Union was competent to levy a property tax on State property found in a territory outside a State. The Court found that this argument did not adequately address the objection raised on behalf of the States. Entry 86 deals with the capital value of assets owned by individuals and companies and, therefore, has no connection with State property because a State is neither an individual nor a company. Entry 89 pertains to a terminal tax, which is fundamentally different from a property tax in the sense advanced by the learned Solicitor‑General. The Court expressed doubt that the exemption provided by clause (1) of Article 289 was intended as a safeguard against the exercise of power under the residuary entry. In addition, the Court questioned whether the residuary entry could be interpreted to include a ‘property tax’ when specific entries relating to such a tax already exist in List II. The Court observed that it would amount to “much ado about nothing” if the Constitution had solemnly provided an exemption from ‘property tax’ on State property only for the rare circumstances contemplated in Article 246(4), namely, State property located in a territory not included in a State. Such circumstances would be extremely uncommon and would hardly have justified a solemn safeguard at the Constitution’s inception, when the States were classified under Part A or Part B of the First Schedule. The Court noted that, if a broader interpretation of clause (1) of Article 289 were adopted, sue property would also be exempt from Union taxation except in the situations covered by clause (2) of the same article. Consequently, the Court found it difficult to accept the contention that clause (1) of Article 289 was meant solely for the cases covered by Article 246(4), as that view would merely reflect the interpretation advanced on behalf of the Union. The Court then indicated that it would consider the problem from three additional perspectives: first, against the background of similar provisions in the Government of India Act, 1935; second, in light of the scheme of financial relations between the States and the Union under the Constitution; and third, regarding the distribution of taxing powers between the States and the Union. Regarding the Government of India Act, 1935, the relevant provisions were found in sections 154 and 155, which read, in the portion applicable to this case: “S. 154. Property vested in His Majesty for purposes of the government of the Federation shall, save in so far as any Federal law may otherwise provide, be exempt from all taxes imposed by, or by any authority within, a Province or Federated State: Provided that, until any Federal law otherwise provides, any property”.

In this portion of the judgment the Court set out the operative provisions of sections 154 and 155 of the Government of India Act 1935. Section 154 provided that any property which had been vested in the Crown immediately before the commencement of Part III of the Act and which, at that moment, was either liable or deemed liable to any tax would remain liable or deemed liable for as long as that particular tax continued to be imposed. Thus, the legacy liability persisted until the tax itself was withdrawn. Section 155(1) then dealt with the liability of provincial governments and the rulers of federated states to what was described as “Federal taxation.” The provision stated that, subject to the qualifications that would follow, neither the Government of a Province nor the ruler of a Federated State could be subjected to Federal tax on lands or buildings located in British India, nor on income that accrued, arose, or was received in British India. However, a specific exception was inserted: where a trade or business of any description was carried on by, or on behalf of, the provincial Government in any part of British India outside the boundaries of that Province, or where a ruler conducted such a trade or business anywhere in British India, the subsection explicitly prohibited the exemption of that Government or ruler from Federal taxation. Consequently, any tax on the trade or business itself, on operations connected with it, on income generated by it, or on property occupied for its purposes would still be chargeable. The remaining portions of the subsection, noted in the record only as “(b) … (2) …”, were omitted from the excerpt and therefore were not discussed further in this segment of the judgment.

Turning to the historical framework that preceded the 1935 legislation, the Court explained that before the Government of India Act 1935 the constitutional arrangement in India was essentially unitary in character, although it accommodated local legislatures that possessed only limited powers. In order to distinguish the functions exercised by the local governments and the legislatures of the Governor’s Provinces from those performed by the Governor‑General in Council and the central Indian Legislature, the subjects of legislation were classified into two broad categories: Central subjects and Provincial subjects. This classification was set out in the Lists contained in Schedule I of the Devolution Rules, which had been made under sections 45‑A and 129‑A of the Government of India Act 1919. Under this older system, all Government property was vested in His Majesty for the purpose of the Government of India, and consequently there was no perceived need for a special statutory provision granting immunity to that property from taxation; the Crown’s ownership was deemed sufficient to secure its exemption.

The Court then noted that the Government of India Act 1935 introduced a dual system of government, thereby creating a federal‑like structure with distinct central and provincial spheres of authority. Part III of the Act, which dealt with the distribution of powers, came into force on 1 April 1937. Property that belonged to the Crown and that existed prior to that effective date continued to be governed by the general law as developed by the courts, rather than by any specific statutory rule. The Court observed that judicial opinion on the taxability of such Crown property was not uniform. In some decisions, the courts held that statutes imposing duties of tax were binding on the Government unless the nature of the duty or tax made it inapplicable to the Government. In contrast, other decisions adhered to the English position, whereby the Crown enjoyed immunity from taxation on the basis of the prerogative that the Crown was not bound by any statute unless that statute expressly named the Crown. The introduction of the dual system therefore raised the question of whether one level of Government could tax the property or income of the other level, a question that the Court identified as requiring careful analysis.

Finally, the Court mentioned the doctrine of Immunity of Instrumentalities, a principle first articulated by the United States Supreme Court in the case of McCulloch v. Maryland [1819] 4 W.H. 316. The doctrine was explained to mean that when two separate governments are established under a federal constitution, each with limited jurisdiction, the powers of each government are to be exercised in a manner that does not impair the functions assigned to the other government. Accordingly, any incidental or indirect interference with the functions of the Federal Government would render a State law invalid, even if the law dealt with a subject that was otherwise within the State’s legislative competence, and similarly the Federal Legislature could not tax the agencies or instrumentalities of the State. The Court observed that this doctrine had undergone many changes in American jurisprudence, but it served as a useful analytical tool for assessing the limits of taxation between the Union and the States in the Indian constitutional context.

In this case, the Court explained that when a federal constitution creates two distinct governments, each possessing only a limited scope of authority, the power of each government must be interpreted as being subject to an implied restriction that it should not hinder the functions assigned to the other government. Consequently, any incidental or indirect intrusion into the activities of the federal government would render a state law invalid, even if that law dealt with a matter formally allocated to the state legislature, and the same principle operated in reverse. The Court noted that established jurisprudence held that a state could not impose taxes on the agencies or instrumentalities of the federal government, and that a comparable limitation applied to the federal legislature with respect to state entities. The doctrine, originating from the United States decision in McCulloch v. Maryland, has undergone many changes in American case law. The Court stated that it was unnecessary to trace the entire historical development of those changes.

The Court then turned to the provisions of the Government of India Act, 1935 and the Constitution of 1950, observing that both instruments incorporated the principle of limited mutual exemption from taxation in sections 154 and 155 of the 1935 Act and Articles 285 and 289 of the Constitution. Citing the Judicial Committee’s language in Webb v. Outrim [[1907] A.C. 81], the Court observed that the inclusion of those specific provisions demonstrated that the issue of interference between federal and state powers was not left to an implied prohibition, but was instead defined expressly by the statutes themselves. The Court added that, apart from those sections, the state and union legislatures possessed the full authority to legislate on matters listed in their respective lists, always subject to the remaining constitutional provisions. The Court further explained that Sections 154 and 155 functioned together to grant mutual exemption of property of the Federation and the provinces from taxation by the other, reflecting the common practice in federal constitutions of exempting the governments of the constituent units from each other’s taxes as part of a reciprocal arrangement, as recorded in the Parliamentary Debates, Vol. 302, Columns 523‑524. A notable distinction was highlighted: Section 154 referred to “property vested in His Majesty for the purpose of the Federation,” thereby covering movable property, whereas Section 155 limited the exemption for the “units” to lands and buildings, as illustrated in Bell v. Municipal Commissioner of Madras [25 Madras 457]. The Court reasoned that this distinction meant that movable property owned by the Federation would be free from provincial duties such as octroi, while goods belonging to provincial governments would remain liable to customs and excise duties imposed by the federal government. The Court further noted that income derived from commercial enterprises and trade‑like operations carried on by the units, when confined within the territory of that unit, would not be subject to federal income tax.

In this case, the Court explained that income earned by the units from commercial activities confined within the territory of that unit was not subject to Federal income tax. This arrangement reflected the purpose of sections 154 and 155 of the Government of India Act, 1935. When those provisions were compared with Articles 285 and 289 of the Constitution, a clear difference emerged. The language of section 155 used the expression “lands and buildings,” whereas Article 289 employed the broader term “property.” By using “property” in both Article 285 and Article 289, the Constitution placed the Union and the States on an essentially equal footing regarding exemption from taxation by one another. Both articles adopted a comprehensive definition of “property,” thereby eliminating the earlier distinction between movable and immovable property that existed in sections 154 and 155. The Court concluded that the Constitution’s framers intentionally departed from the earlier statutory wording. The earlier statutory distinction and judicial interpretation that treated “property” in section 154 as a comprehensive term to secure exemption for Federal property from all Provincial taxes were consciously set aside. Consequently, the Court rejected the argument that the phrase “property” or the juxtaposition of “property and income” in Article 289 was meant to qualify the word “taxation” and alter its plain meaning.

The Court then turned to the financial relationship between the Union and the States as governed by Chapter I of Part XII of the Constitution. It summarized the scheme as a system of revenue distribution in which both Union and State governments could collect taxes, yet certain taxes collected by the Union were assigned to the States under Article 269, and other taxes levied and collected by the Union were shared between the Union and the States pursuant to Articles 270 and 272. The Constitution also provided for grants in aid to States, notably those cultivating jute, in lieu of any share of the net proceeds from export duties on jute and jute products under Article 273, and for other grants to States deemed by Parliament to require assistance under Article 275. These provisions, the Court observed, demonstrated an intent to create financial integration so that neither the Union nor the States would lack the resources needed to carry out essential welfare functions. Importantly, the Court found no provision within this financial framework that would affect the exemption granted to Union property by Article 285 and to State property by Article 289. Hence, the broader reading of Articles 285 and 289 was consistent with the overall scheme of financial adjustments embodied in Part XII.

The Court examined the provisions of Article 285, which deals with Union property, together with Article 289, which deals with State property. It expressed that it could not discern how a narrow construction of these two Articles would further the financial adjustments that the earlier Articles in the same chapter seek to achieve, nor could it see how a broader construction would hinder those adjustments. The Court reiterated that Articles 285 and 289 must be interpreted according to their own language, and that it would not be proper to alter or distort that language unless compelling reasons could be drawn from other relevant constitutional provisions. After reviewing the remaining provisions of Part XII that regulate financial relations between the Union and the States, the Court found no such compelling reasons.

Having previously referred briefly to the distribution of legislative power between the Union and the States, the Court noted that, with respect to taxation, the entries in the Seventh Schedule distinguish between the principal subject of legislation and the tax that relates to that subject. Specifically, entry 82 places taxes on income other than agricultural income in List I; entry 83 places duties of customs, including export duties, in List I; and entry 84 places duties of excise on tobacco and other manufactured goods, except alcoholic liquors for human consumption, opium, hemp and other narcotic drugs, also in List I. Consequently, under Article 246, Parliament alone possesses the authority to enact laws imposing those taxes. The Union had argued that a broader interpretation of Article 289 would significantly curtail Parliament’s power to legislate on these taxes. The Court rejected this contention, observing that Parliament’s legislative authority is always subject to the Constitution itself, and Article 289 is one of the constitutional limits on that authority. Hence, it is not a satisfactory answer to claim that a wider meaning of Article 289 would merely restrict Parliament, because if the true scope of Article 289 demands a broader meaning, that provision must govern Parliament’s power, as expressly indicated by Article 245.

The Court also considered another argument that the Union holds exclusive power to regulate foreign trade, imports and exports across customs frontiers, and the definition of those frontiers (entry 41 of List I), as well as inter‑State trade and commerce (entry 42 of List I). This exclusive power includes the authority to impose customs duties and excise duties. The Union contended that if the exemption from taxation provided by Article 289 were interpreted to extend to customs and excise duties on goods imported, exported, produced or manufactured by a State, the Union’s regulatory power would be seriously affected. We

The Court observed that the argument claiming an adverse effect on the Union’s authority to control foreign and inter‑State trade was unconvincing. It explained that the Constitution vests the power to regulate trade and commerce with foreign nations and between States exclusively in the Union, and that the Union may, in the exercise of that power, impose regulatory measures on the activities of a State. The Court cited existing control mechanisms such as the Import Control Order and the Essential Supplies Act as examples of how the Union implements its regulatory authority. It further noted that, under Article 302, Parliament is empowered to enact legislation that may restrict the freedom of trade, commerce, or intercourse between one State and another, or within any part of the territory of India, when such restriction is required in the public interest. Article 256 obliges the executive of each State to ensure compliance with laws made by Parliament, while Article 257 requires that a State’s executive power be exercised so as not to impede or prejudice the Union’s executive power, allowing the Union Government to issue necessary directions to a State Government. Regarding intra‑State trade, the Court recognized that the State possesses legislative competence under entry 26 of List II. Consequently, the Court concluded that interpreting Article 289 to exempt State property from Union taxation, including customs and excise duties, would not create any serious difficulty for foreign or inter‑State trade. Such an interpretation, the Court held, would not interfere with the Union’s established power of control over those domains.

The Court further rejected the contention that the Union’s power to regulate trade by imposing customs duties would be nullified if a State enjoyed immunity from such duties on imports or exports. It emphasized that the Union’s legislative power to regulate foreign trade, as listed in the Constitution, is subject to the Constitution’s provisions, notably Article 289(1). In the event of a conflict between Article 289(1) and the Union’s legislative competence to regulate foreign trade, the Court held that Article 289(1) must prevail. Accordingly, the Union cannot levy a customs duty on goods imported by a State and justify the levy as an exercise of its power to regulate foreign trade. The Court also referred to the decision in M. P. V. Sundararamier & Co. v. State of Madhya Pradesh ([1958] S.C.R. 1422), observing that a legislative entry that does not expressly confer a power of taxation does not create such a power. From that principle, the Court inferred that the power in List I to regulate foreign trade cannot be exercised through the imposition of a tax, and that any regulation of foreign trade must be carried out by means other than taxation.

The Court observed that a distinctive characteristic of the Constitution was its effort to reconcile the interests of the individual with those of the community, and to balance the interests of a State against those of the Union. It explained that the Constitution did not intend to pit the States against one another or against the Union; rather, each entity was meant to operate smoothly within its own sphere without obstruction by the others, while permitting the Union to exercise overriding authority when public interest required such action. The Court described this arrangement as a harmonious balance of jurisdictions that had functioned satisfactorily to date and expressed hope that, with prudent judgment exercised by all parties, the same balance would continue to be maintained in the future. The Court further stated that it could not accept the proposition that the exemption afforded to State property from Union taxation under Article 289 conflicted with the Union’s power to regulate foreign trade or inter‑State trade, nor could it see any disruption of the aforementioned balance of jurisdictions. In this regard, the Court reminded that Article 289(2) expressly barred any exemption from Union taxation for State trading activities or for property used in such activities, unless Parliament enacted a law declaring those activities to be incidental to the ordinary functions of government. The Court noted that the discussion up to this point had centred on the relevant constitutional provisions and suggested that it might be useful to examine how comparable issues have been resolved under other federal constitutions. At the same time, the Court cautioned that each constitution must be interpreted within its own historical, geographical, and social context, and that a decision addressing a similar constitutional question in a different jurisdiction does not automatically provide a reliable guide. Consequently, the problem should be resolved according to the terms of the Constitution under which it arose. Keeping this warning in mind, the Court turned to several Canadian cases cited by the learned Solicitor‑General. It explained that the central feature of a federal constitution is the allocation of legislative powers between the central authority and the constituent states or provinces. The Court referred to Sections 91 to 95 of the British North America Act, 1867, which delineated this division in Canada. Under Section 92, particular subjects were listed, granting provinces exclusive authority to legislate on matters falling within those categories. Conversely, the opening paragraph of Section 91 conferred upon the Dominion the power “to make laws for the peace, order and good government of Canada in relation to all matters not coming within the classes of subjects by this Act assigned exclusively to the Legislatures of the Provinces,” thereby reserving residual powers to the central government.

In the British North America Act the term “Provinces” was used to indicate that any power not explicitly granted to the provinces was retained by the Dominion. After this introductory statement the Act listed twenty‑nine specific classes of subjects, thereby illustrating the intended scope of the general language without limiting it. Section 125 of the same Act declared that “No lands or property belonging to Canada or any province shall be liable to taxation.” The Supreme Court of Canada considered the application of this provision in the case titled The Attorney‑General of British Columbia v. The Attorney‑General for Canada, reported in volume 64 of the Canada Supreme Court Reports at page 377. The facts of that case were that the government of British Columbia, exercising its authority to regulate and sell alcoholic beverages, entered the business of handling alcoholic liquor and needed to import “Johnnie Walker Black Label” whisky. The provincial government asserted that customs duties normally imposed by the Dominion Parliament on such imports should not apply to it, relying on the protection granted by section 125. The Court, by a majority, held that the customs duties imposed on the imported whisky did not constitute “taxation” of “property” belonging to a province within the meaning of section 125. The leading judgment, written by Justice Duff, explained that customs duties used as a tool for regulating external trade fall within the second enumerated head of powers under section 91, whereas customs duties imposed primarily to raise revenue are, in a broad sense, taxes on consumable goods and on consumption. By contrast, taxes on capital, assets, or property represent a separate category. Justice Duff emphasized that the first task in interpreting the section is to ascertain the ordinary grammatical meaning of the words, and that meaning must be understood in the context in which the words appear and in relation to the subject matter. He observed that the provision concerns not taxation in a general sense but the liability of “property” to “taxation,” and that the word “taxation” in that specific association carries a much narrower import than when the term stands alone or in other contexts. It is relevant to note that the Canadian Constitution did not contain an explicit definition of the term “taxation” comparable to the definition found in Article 366(28) of the Indian Constitution. Consequently, under Canadian constitutional law it was permissible to distinguish between “taxation of property” and the “levying of customs duties” when the purpose was revenue generation. By contrast, the Indian Constitution expressly states that “taxation” includes the imposition of any tax or impost, whether general, local or special, indicating that the framers were aware of the differing breadth of meanings attachable to the term and deliberately chose to adopt the broader definition in the constitutional text.

In this passage the Court observed that the Constitution contains an explicit interpretation article, which prevents the matter from being left solely to judicial determination. The Court noted that one could reasonably wonder whether the Canadian decision would have been reached in the same way if the Canadian Constitution had contained a comparable provision, and whether, as Justice Duff had stated, the primary task in construing any provision is to discover the ordinary and grammatical meaning of the words employed. The Court then referred to a decision of the Supreme Court that had subsequently been endorsed by the Judicial Committee of the Privy Council in the case of Attorney‑General of British Columbia v. Attorney‑General of Canada, reported in 1924 A.C. 222. Referring to section 125 of the British North America Act, Lord Buckmaster declared that, when read in isolation and without regard to the overall statutory scheme, the section unquestionably furnishes a strong argument supporting the appellant’s position. However, Lord Buckmaster emphasized that the section cannot be interpreted in such an isolated and disjointed manner because it forms only a part of the broader statutory framework that allocates distinct powers and authorities between the Provincial and Dominion Governments.

He explained that section 91, which vests powers in the Dominion, expressly provides that the Dominion shall have exclusive legislative authority over all matters listed in the Schedule, including the regulation of trade and commerce and the raising of revenue by any mode or system of taxation. The imposition of customs duties on imported goods may pursue several objectives: it may be intended solely to raise revenue, it may aim to regulate trade and commerce by protecting domestic industries, or it may seek to achieve both objectives simultaneously. In each of these scenarios, the power to impose such duties resides with the Dominion. While acknowledging that this general power does indeed exist, Lord Buckmaster observed that some have argued that section 125 creates a breach in the tariff wall, allowing goods to move between the Province and the Dominion without being subject to duties. He rejected this view, stating that section 125 must be understood as part of a series of sections, beginning with section 102, which allocate specific classes of property between the Dominion and the Province and grant the Province control over the portion allocated to it. This allocation, however, does not preclude the application of Dominion legislation enacted under the authority granted by section 91.

Lord Buckmaster further observed that the Dominion possesses the power to regulate trade and commerce throughout the entire country, and that this power operates without partiality to the extent it is exercised. Consequently, section 125 must be interpreted in a manner that prevents the defeat of the overarching purpose declared for the Dominion’s authority. The Court concluded that Lord Buckmaster’s observations were rooted in the unique characteristics of the Canadian Constitution, especially the supreme authority of the Dominion to regulate trade and commerce across the entire Dominion, to which section 125 was intended to yield. The Court then contrasted this with the scheme of the Indian Constitution, noting that it differs in several respects, beginning with the fact that the legislative power of Parliament is expressly subject to other constitutional provisions.

The Court observed that the Constitution of India imposed explicit limitations on the legislative authority of Parliament; it noted that the power to regulate trade and commerce was concurrently vested in the Union and the States; and it highlighted that a clear separation existed between the substantive purpose of a law and any tax that might be imposed in connection with that purpose. The Court declined to place special emphasis on the phrase “notwithstanding anything in this Act” that appeared in section 91 of the British North America Act, 1867, observing that that phrase concerned the enumeration of subjects rather than the specific provision under discussion, namely section 125. In the Court’s view, the earlier decision had been decided on the basis of the distinctive features of the Canadian Constitution and therefore did not provide a reliable guide for interpreting the Indian Constitution. The Court further suggested that, had the Canadian case been decided under the Indian Constitution, clause (2) of Article 289 would have adequately addressed the issue, because a State could not claim an exemption for its own commercial activities; consequently, when British Columbia imported whisky for the purpose of carrying on a business in alcoholic beverages, it could not have relied on clause (1) of Article 289 to claim an exemption. The Court then turned to certain Australian decisions. It described the Commonwealth of Australia Constitution Act, 1900 as creating a federation that resembled that of the United States, in which powers were allocated to the Federal Government with any residual powers remaining with the States or the people. The Court noted that, like the Canadian Constitution, the Australian document attempted to adapt responsible government to a federal system, but differed in the manner in which powers were divided. Regarding the Commonwealth, the Court pointed out that section 51 listed thirty‑nine specific powers, including, inter alia, the power to make laws for the peace, order and good government of the Commonwealth with respect to (i) trade and commerce with other countries and among the States, and (ii) taxation, provided that such taxation did not discriminate between States or parts of States. The Court explained that section 52 enumerated the circumstances in which the Commonwealth’s power was exclusive. Concerning the States, the Court referred to the broad principle of division embodied in section 107, which declared that the Constitution left the powers of the States untouched except where the Constitution expressly provided otherwise, thereby preserving State sovereignty within its own domain. The Court further cited section 114 of the Commonwealth of Australia Act, which stated that a State could not, without the consent of the Commonwealth Parliament, raise or maintain any naval or military force, nor impose any tax on property belonging to the Commonwealth, and similarly the Commonwealth could not impose any tax on property belonging to a State. The Court noted that the decision most heavily relied upon by the learned Solicitor‑General was Attorney‑General of New South Wales v. Collector of Customs for New South Wales.

In the case cited as Attorney‑General of New South Wales v. Collector of Customs for New South Wales, the Attorney‑General of New South Wales instituted legal proceedings in order to recover from the Collector of Customs a specific sum. The sum represented customs duties that the Collector had demanded on the importation into the Commonwealth of a shipment of steel rails. These rails had been purchased in England by the State of New South Wales for use in constructing the State’s railway system. When the rails arrived at the port of Sydney, the Collector asserted that customs duties were payable on them. The State contested the liability for such duties and consequently deposited the amount claimed by the Collector, but did so under protest.

The matter was referred to the High Court of Australia for determination of two principal questions. The first question asked whether the provisions of the Customs Act 1901 together with the Customs Tariff of 1922 applied to the Crown when it acted as the representative of the New South Wales community. The second question concerned whether the steel rails were exempt from customs duty by virtue of section 114 of the Constitution. Regarding the first question, Chief Justice Griffith observed that the issue had already been resolved by the earlier decision in The King v. Sutton. Concerning the second question, the majority of the judges held that customs duties, irrespective of whether they could be described as a “tax,” did not constitute a tax upon property within the meaning of section 114. Justice Isaacs expressed a contrary view, holding that duties of customs, as traditionally understood and as enacted in the Customs Act, were imposed on the goods themselves and therefore fell within the concept of “property” under section 114, but that they did not correspond to the expression “tax” used in that provision and in the Constitution generally.

Chief Justice Griffith further distinguished between direct and indirect taxation and asserted that section 114 applied solely to property located within the Commonwealth’s limits, not to goods that were in the process of entering those limits. He maintained that the power to impose taxation under section 51(ii) and the power to regulate importation under section 51(i) were paramount, unlimited, and should be given full effect. Accordingly, he argued that the language of section 114 could be interpreted in two ways. He noted that, in certain contexts, the words “impose any tax” might be applicable to customs duties, and that the term “taxation” in section 51(ii) certainly included the levying of such duties. However, he emphasized that the Constitution never expressly described these duties as a “tax,” unless the term “taxation” in section 51(ii) was itself a description of them, and that the Constitution never referred to the imposition of customs duties as a tax on property.

In this passage the Court observed that the levying of customs duties is never described as the imposition of a tax on property. Section 86 refers to “the collection and control of duties of Customs and of Excise”, and sections 88, 89, 90, 92, 93, 94 and 95 all speak of the “imposition” of duties of Customs. The Court explained that such duties are imposed in respect of “goods” and, in one sense, “upon” goods, noting that the word “upon” is sometimes used as a synonym for “in respect of”. The Court further pointed out that the terms “upon” or “on” are colloquially used when discussing stamp duties, succession duties and other forms of indirect taxation, describing them as taxes on deeds or on real and personal property. However, the Court recognised that these forms of taxation are not truly taxes upon property but taxes upon the operations and movements of property.

Higgins J. based his decision on a different ground. He stated that he could not confidently accept the proposition that a customs duty could not be a tax within the meaning of the word “tax” in section 114. He observed that section 114 does not use the expression “tax of any kind”, but instead speaks of “any tax on property of any kind belonging to a State”. From the use of the phrase “property of any kind belonging …”, he derived that ownership is the crucial test. The learned Judge noted that the prohibition on State taxation was suggested by the British North America Act, section 125, but that substituting the word “property” for “lands or property” may have obscured the intention to limit the prohibition to what are known as “property taxes”. He explained that, under the Constitution, property may be taxed by both the State and the Commonwealth, whereas customs taxation is exclusively a Commonwealth matter pursuant to section 90. The Court added that retaliatory taxes between the States and the Commonwealth are possible concerning property taxes but are impossible concerning customs taxes. Moreover, the Court held that, regardless of any motive that led to the express prohibition, the language of the Constitution points to the taxation of property as the subject of that prohibition, as reflected in the clause stating that a State shall not, without the consent of the Parliament of the Commonwealth, impose any tax on property of any kind belonging to the Commonwealth, nor shall the Commonwealth impose any tax on property of any kind belonging to a State.

The Court then expressed that the considerations which led the learned Judges to their conclusions are not considerations available under the present Constitution. It noted that the matter before it concerned an exemption clause in Article 289(1), and that this exemption clause must be interpreted in accordance with the constitutional framework.

The Court explained that the provision must be read using the interpretative key supplied by Article 366(28). It emphasized that under the Constitution the term “taxation” acquires its meaning from the Constitution itself, and that the Court is not at liberty to assign a different meaning in order to create a separation between direct and indirect taxes, nor to separate taxes on property that already lie within the limits of the Commonwealth from taxes on property that is in the process of becoming subject to those limits. Likewise the Court held that it is not permissible to distinguish between a tax that is imposed on property and a tax that is imposed in respect of property.

The judgment noted that Section 114 of the Commonwealth of Australia Act 1900 expressly employs the expression “tax on property”. By contrast, the exemption clause in Article 289 uses distinct wording that does not modify the word “tax” in any way; it simply provides that the property and income of a State shall be exempt from any tax or impost, whether general, local or special, that may be imposed by the Union. The Court observed that even in the context of Section 114 of the 1900 Act, a difficulty arises in trying to separate “property” from “the importation of property” because the provision uses the phrase “of any kind”. The Court referred to the commentary of Nicholas in The Australian Constitution (second edition, page 143), which described the solution as distinguishing between “property” and “the importation of property”, and also between “duties” and “taxation” as those terms are employed in the Constitution. Nicholas further pointed out that these distinctions are not without problems, since Section 114 again uses the words “of any kind”, while the only express authority to impose duties is found in Section 51(ii). The Court added that the policy reflected in those provisions has not been uniformly accepted by all States. Some States have been forced to pay duties on imported goods, such as locomotives that were not manufactured in Australia, which reduced the proceeds of their loans for the benefit of Commonwealth revenue and resulted in the exemption power not being exercised where it might otherwise have been applicable, as noted in the Report of the Royal Commission (page 361).

Turning to the broader constitutional context, the Court observed that the Australian case demonstrates that the Constitution treats the “taxing power” as separate from the “regulatory power”. It reiterated that the Constitution does not adopt a classification of taxes as “direct” or “indirect”. Moreover, the Court stressed that the question arising under Article 289 is not a matter of legislative power; rather, the issue is the precise scope of the immunity or exemption that Article 289 confers.

In support of this approach, the Court cited the decision in Attorney‑General for Saskatchewan v. Canadian Pacific Railway Company [[1953] A.C. 594]. That case required construction of an exemption granted to the Canadian Pacific Railway Company by clause 16 of a contract between the Canadian Government and the railway. The exemption clause, among other things, provided that “the Canadian Pacific Railway, and all stations and station grounds, workshops, buildings, yards and other property etc., shall be forever free from taxation by the Dominion, or by any province hereafter to be established, or by any municipal corporation therein.” The Court indicated that the analysis of this clause would illuminate the principles relevant to interpreting the exemption in Article 289.

In the Canadian case, the exemption clause stated that the railway and all of its stations, grounds, workshops, buildings, yards and other property “shall be forever free from taxation by the Dominion, or by any province hereafter to be established, or by any municipal corporation therein.” After the Province of Saskatchewan was created in 1905, the Dominion Parliament enacted section 24 of the Saskatchewan Act, 1905, which declared that the powers granted to the new province were to be exercised subject to clause 16 of the contract with the railway. The Canadian Pacific Railway Company subsequently claimed that it was exempt from the business tax imposed under the Saskatchewan City Act, 1947, on the basis of the exemption clause. The province argued before the Judicial Committee of the Privy Council that the exemption applied only to taxes levied on the owner in respect of ownership of the property and did not extend to taxes on the company’s business operations. The Judicial Committee rejected that narrow construction, observing that the language of clause 16 protected the property “forever from taxation” by any province, and that a tax on the company for using the property was effectively a tax on the property itself, which the clause prohibited. The Committee therefore interpreted the exemption broadly, holding that a tax on the owner for the use of the property fell within the exemption just as a tax on the property itself did. The Court in the present matter indicated that the exemption clause in Article 289 must be read in the same manner, on its own terms, and that no issue of paramountcy of legislative power arose from such a construction.

On behalf of the States, except for Maharashtra which supported the Union only on excise duties, counsel argued vigorously that the distinction between a tax on property as such and a tax in relation to property was immaterial for the purpose of Article 289. Both categories affect property, and if property is to be free from Union taxation, it makes no difference whether the tax is imposed on ownership, possession, production, manufacture, importation or exportation of the property. Numerous decisions were cited to illustrate the character of customs duties and excise duties. The Court noted that several of its own judgments have held that an excise duty is a tax on goods produced or manufactured within the taxing country, while customs or export duties are levied on goods that are imported or exported. This understanding is reinforced by provisions regarding draw‑back and refund rules in customs matters. The Court deemed it unnecessary to examine all those decisions in detail for the present issue. It was sufficient to observe that determining whether an impost—whether a tax, duty or fee—falls within a particular entry of the Seventh Schedule requires an examination of the nature of the impost. The Judicial Committee’s reasoning in Governor‑General in Council v. Province of Madras was cited, noting that an excise duty is primarily a levy on the manufacturer or producer concerning the commodity, distinct from a tax on sales, and that although the two may appear to overlap in practice, they are legally separate and distinct impositions.

The Court observed that a detailed examination of the numerous decisions cited concerning the character of excise duty was unnecessary for resolving the issue before it. It stated that, to decide whether an impost—whether a tax, duty, or fee—belongs to one of the entries in the Legislative Lists of the Seventh Schedule, it may be required to analyse the nature of the impost itself. Referring to the judgment of the Judicial Committee in Governor‑General in Council v. Province of Madras, the Court noted that an excise duty is principally a levy imposed on a manufacturer or producer with respect to the commodity that has been manufactured or produced. The Court further explained that such a duty is a tax on goods, which must be distinguished from a tax on the sale of goods or on the proceeds of those sales. Although the two categories of tax—one imposed on the manufacturer for his goods and the other imposed on a vendor for his sales—might appear to overlap in a practical sense, the Court clarified that, in law, the two are separate and distinct imposts and do not overlap. Nevertheless, the Court emphasized that the present controversy did not centre on the classification of the impost but rather on the breadth of the immunity granted by article 289 of the Constitution. It indicated that the scope of that immunity depended upon the true meaning and effect of articles 245, 285, 289 and clause 366(28) of the Constitution. In that context, the Court held that the distinction between a tax on property as such and a tax in relation to property was immaterial. Both categories affect property, and if the Constitution’s true intent is to exempt State property from any tax or impost imposed by the Union—whether general, local or special—then the analytical difference between a tax on property as such and a tax in relation to property loses significance. Accordingly, for the reasons set out, the Court concluded that the answers to the three questions referred to it must be affirmative, thereby rejecting the Union’s position. The opinion was delivered in the name of Hidayatullah, J.

The Court then turned to the legislative proposal that had been placed before Parliament, namely a Bill intended to amend section 20 of the Sea Customs Act, 1878 (Act 8 of 1878) and section 3 of the Central Excises and Salt Act, 1944 (Act 1 of 1944) so that the provisions of those statutes would apply to goods owned by State Governments. In response to that proposal, the President of India, invoking article 143 of the Constitution, referred three specific questions to the Supreme Court for its opinion on the constitutionality of the suggested amendments. The first of those questions asked whether the provisions of article 289 of the Constitution barred the Union from imposing, or authorising the imposition of, customs duties on the import or export of the property of

The President sought the Court’s opinion on three matters arising from a Bill to amend section 20 of the Sea Customs Act, 1878 and section 3 of the Central Excises and Salt Act, 1944. The first question asked whether article 289 of the Constitution prohibited the Union from imposing, or authorising the imposition of, customs duties on the import or export of property belonging to a State when that property was used for purposes other than those specified in clause (2) of article 289. The second question asked whether the same constitutional provision barred the Union from imposing, or authorising the imposition of, excise duties on the production or manufacture in India of property belonging to a State when that property was used for purposes other than those specified in clause (2) of article 289. The third question queried whether sub‑section (2) of section 20 of the Sea Customs Act, 1878 and sub‑section (1A) of section 3 of the Central Excises and Salt Act, 1944, as amended by the Bill set out in the Annexure, would be inconsistent with the provisions of article 289 of the Constitution.

The Court noted that the existing provisions of the two Acts, in their present form, authorize the levy of customs duties and excise duties on all goods belonging to a State only when such goods are employed for the purposes of trade or business of any kind carried on by, or on behalf of, that Government, or for operations connected with such trade or business, as they apply to goods not belonging to any Government. The Court then reproduced the current text of the relevant sections. Section 20 of the Sea Customs Act reads:

“20. (1) Except as hereinafter provided, customs‑duties shall be levied at such rates as may be prescribed by or under any law for the time being in force, on – (a) goods imported or exported by sea into or from any customs‑port from or to any foreign port; (b) opium, salt or salted fish imported by sea from any customs‑port into any other customs‑port; (c) goods brought from any foreign port to any customs‑port, and, without payment of duty, there transhipped for, or thence carried to, and imported at, any other customs‑port; and (d) goods brought in bond from one customs‑port to another. (2) The provisions of sub‑section (1) shall apply in respect of all goods belonging to the Government of a State and used for the purposes of a trade or business of any kind carried on by, or on behalf of, that Government, or of any operations connected with such trade or business as they apply in respect of goods not belonging to any Government. Explanation – In this sub‑section ‘State’ does not include a Union territory.”

Section 3 of the Central Excises and Salt Act is set out as follows:

“3. (1) There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than salt which are produced or manufactured in India and a duty on salt manufactured in, or imported by land into, any part of India as, and at the rates, set forth in the First Schedule. (1A) The provisions of sub‑section (1) shall apply in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of, the Government of a State other than a Union territory and used for the purposes of a trade or business of any kind carried on by, or on behalf of, that Government, or of any operations connected with such trade or business as they apply in respect of goods which are not produced or manufactured by any Government.”

The amendment language states that the provisions shall apply to a government or any entity acting on its behalf, and to any operations connected with such trade or business as they apply to goods that are not produced or manufactured by any government. The bill proposes two specific amendments. First, it seeks to amend Section 20 of the Sea Customs Act, 1878, by replacing subsection (2) with a new provision that reads: “(2) The provisions of subsection (1) shall apply in respect of all goods belonging to the Government as they apply in respect of goods not belonging to the Government.” Second, it seeks to amend Section 3 of the Central Excises and Salt Act, 1944, by substituting subsection (1A) with the following wording: “(1A) The provisions of subsection (1) shall apply in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of, the Government as they apply in respect of goods which are not produced or manufactured by the Government.” The Court observed that the issue raised by the amendment is of considerable importance to both the States and the Union. It noted that the Union appears intent to place State Governments on its tax‑payers’ list, covering not only their commercial activities but also their governmental functions. The Court clarified that, provided the Constitution does not forbid such action, there can be no doubt about the Union’s authority, and the central question is whether Article 289 of the Constitution imposes a prohibition. The judgment explained that the Republic consists of States, each with its own Government that possesses and exercises powers comparable to any other Government. The Union Government, while supreme within its designated sphere, does not enjoy unlimited supremacy; its authority is limited in certain respects to preserve the supremacy of State Governments. One such limitation is found in Article 289(1), and the Court’s task is to determine the extent of that restriction. The Court further examined the taxing power of Parliament, which unquestionably includes the power to levy customs duties, including export duties under entry 83 of List I of the Seventh Schedule, and excise duties on tobacco and other manufactured goods under entry 84, except for those specifically excluded. In addition to these taxation powers, Parliament holds exclusive regulatory authority over “trade and commerce with foreign countries; import and export across customs frontiers” under entry 41, and over “inter‑State trade and commerce” under entry 42. These powers are plenary and can be restricted only if the Constitution expressly provides such a limitation. Accordingly, under Article 245, Parliament’s legislative power is declared to be subject to the Constitution, and Article 246 further delineates the division of legislative subjects between Parliament and the State Legislatures.

The Court explained that the Constitution assigned exclusive legislative authority to Parliament for all matters enumerated in the Union List, and it assigned exclusive authority to the State Legislatures for matters enumerated in the State List. In addition, the Constitution created a third category, the Concurrent List, which comprised subjects over which both Parliament and the State Legislatures could legislate. To prevent conflict between statutes, Article 254 was cited; it stipulated that whenever a law made by Parliament conflicted with a law made by a State Legislature, the parliamentary law would prevail, irrespective of which law was enacted first. Beyond these general rules, the Court noted that Parliament possessed the power to enact legislation for any territory of India that was not part of a State, even when such legislation concerned matters that otherwise fell within the State List. Moreover, Parliament enjoyed exclusive authority to legislate on any subject that did not appear in either the Concurrent List or the State List. The Court summarized this arrangement as the overall scheme of legislative relations and the allocation of legislative powers established by the Constitution.

Turning to the fiscal aspects of the Lists, the Court observed that all three Lists contained entries that authorised the raising of revenue through taxes, duties and fees, but that the specific power to levy taxes was confined to the Union List and the State List. Only two entries in the Concurrent List dealt with revenue matters: entry 44 permitted the imposition of stamp duties, except for duties or fees collected by judicial stamps and excluded the rates of stamp duties; and entry 47 allowed the levy of fees in respect of matters in the Concurrent List, but expressly excluded any fees collected by courts. The remaining entries in the Union and State Lists enabled the Union and the States respectively to impose taxes, duties and fees for their own revenue needs. The Court remarked that these provisions were drafted, as far as possible, to achieve a clear and equitable division of fiscal authority. Although a detailed mechanism existed for sharing the proceeds of certain Union taxes with the States, the Court indicated that this sharing scheme was not the subject of the present consideration. Regarding the scope of the taxation power, the Court held that it was plenary, limited only where the exercise of that power encroached upon the exclusive domain of the other list. Consequently, the Court warned of the potential danger in a federal system of one level of government taxing the other, either as an initial imposition or as a retaliatory measure. The Constitution addressed this concern in Parts XII and XIII, which provide for immunity from tax in certain circumstances and guarantee freedom of trade, commerce and intercourse throughout the territory of India, as reflected in Articles 285 to 289 of Part XII.

The judgment first noted that the Constitution contains provisions that grant immunity from taxation in certain circumstances. It observed that Article 286, which limits the imposition of tax on the sale and purchase of goods, has already been examined by this Court on many occasions and therefore need not be reconsidered here. Article 285 provides that the property of the Union is exempt from State taxes, while Article 289 provides that the property and income of a State are exempt from Union taxation. The present reference primarily concerned Article 289. Articles 287 and 288, which concern special exemption from taxes on electricity in specific cases, were stated to be irrelevant to the matter before the Court. Setting aside Articles 286, 287 and 288, the Court reproduced the text of Articles 285 and 289 for clarity. Article 285 (1) reads: “The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State.” Clause (2) adds: “Nothing in clause (1) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State.” Article 289 (1) states: “The property and income of a State shall be exempt from Union taxation.” Clause (2) continues: “Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith.” Finally, clause (3) provides: “Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of government.” The Court explained that these constitutional provisions are the ones the President of India invoked in this reference to determine whether the proposed extension of customs and excise duties to all goods belonging to State Governments—whether imported, exported, manufactured or produced—would violate Article 289.

The judgment then mentioned that, for comparative purposes, similar immunities were contained in the Government of India Act, 1935, specifically in sections 154 and 155, although the wording differed slightly from the present constitutional text. The Court quoted section 154 in full as follows: “154. Exemption of certain public property from taxation. – Property vested in His Majesty for purposes of the Government of the Federation shall, save in so far as any Federal law may otherwise provide, be exempt from all taxes imposed by, or by any authority within, a Province or Federated State: Provided that, until any Federal law otherwise provides,”. This quotation was presented to aid future comparison of the older statutory scheme with the current constitutional immunities.

In this provision, the Court recorded that any property that had been vested and that, immediately before the commencement of Part III of the Act, was liable or was treated as liable to a particular tax, would remain liable or be treated as liable to that same tax for as long as the tax itself continued to exist.

The Court then turned to Section 155, which dealt with the exemption of provincial governments and the rulers of federated states from federal taxation. The section began by stating that, subject to the conditions set out later, the government of a province and the ruler of a federated state were not liable to federal taxation on lands or buildings situated in British India, nor on income that accrued, arose, or was received in British India. However, the provision contained two important qualifications. First, it provided that if a province’s government carried on any trade or business of any kind, either within British India outside the province or if a ruler conducted such trade anywhere in British India, the exemption would not apply. In such cases, the government or ruler would remain subject to federal taxation on the trade or business itself, on any operations connected with it, on any income that arose from it, and on any property occupied for those purposes. Second, the provision clarified that a ruler could not claim exemption from federal taxation on any lands, buildings, or income that constituted the ruler’s personal property or personal income. The section concluded with a second clause stating that nothing in the Act would disturb any exemption from taxation that the ruler of an Indian State already enjoyed at the time the Act was passed with respect to any Indian Government securities that had been issued before that date.

The Court observed that, as previously noted, a federal system of dual government required that each level of government be protected from taxation by the other level. The Court explained that the United States did not contain an explicit constitutional provision on this point, but the immunity was regarded as an implied consequence of the dual‑government structure. In Canada, Section 125 of the British North America Act 1867 expressly prohibited any land or property belonging to Canada or any province from being liable to taxation. The Australian Constitution, which one of its framers, Justice Higgins, described as a “pedantic imitation” of the American Constitution, contained Section 114, which prohibited a State from raising or maintaining a naval or military force, or imposing any tax on property of any kind belonging to the Commonwealth without the Commonwealth’s consent, and likewise barred the Commonwealth from imposing any tax on property belonging to a State. The Court further noted that even relatively recent constitutions, such as those of Argentina and Brazil, included comparable provisions. In Brazil, Article 32 expressly forbade the Union, the States, and the Municipalities from taxing the goods, income, or services of one another.

Finally, the Court recounted the arguments presented before it. The Solicitor‑General of India, representing the Union, together with the Advocates‑General of several states and other learned counsel, advanced two distinct lines of reasoning. The first line sought to rely on decisions from the United States, Canada, and Australia where constitutional restrictions on inter‑governmental taxation had either been upheld or rejected, and to draw analogies from those foreign rulings. The second line focused directly on the plain terms of the Constitution, urging that the interpretation should be based on what the Constitution itself expressly mandated. The Court identified these two approaches as the classic methods of interpreting and constructing a written Constitution: one that looks outward to comparative case law for guidance, and another that confines itself to the literal meaning and purpose of the constitutional text itself.

The Court observed that the arguments presented fell into two distinct categories. One category sought to rely on decisions of Canadian and Australian courts in which constitutional restrictions had either been upheld or rejected, and then to draw analogies from those foreign rulings. The other category insisted on a plain reading of the constitutional text, asking what the Constitution itself expressly declares. The Court explained that these two categories embody the classic approaches to interpreting and constructing a written Constitution. Referring to Cooley’s exposition in “Constitutional Limitations” (page 97), the Court noted that interpretation is “the art of finding out the true sense of any form of words; that is, the sense which their author intended to convey,” whereas construction involves “the drawing of conclusions, respecting subjects that lie beyond the direct expression of the text, from elements known from and given in the text; conclusions which are in the spirit, though not within the letter of the text.” With a written Constitution such as India’s, the Court held that the predominant task is interpretation. However, the Court added that where the Constitution’s language hints that earlier decisions of supreme courts of other jurisdictions have been taken as guide‑posts, it may be necessary to look beyond the literal text to discern what the framers sought to achieve and what they intended to avoid. The Court recalled that in Webb v. Outtrim [[1907] A.C. 81] Lord Halsbury observed the difficulty of ascertaining the precise preferences of the framers of the Australian Constitution. The Court also emphasized that the Indian Constitution was drafted by the Indian people for the Indian people. While interpreting the Constitution, the Court warned against completely abandoning the constitutional text and venturing into foreign doctrinal seas. Nonetheless, the Court recognised that the Constitution itself contains compelling indications that its drafters wished to eschew certain implications of judgments rendered by the supreme courts of the United States, Canada and Australia. The observations of those learned courts had been cited by the counsel appearing before the Court as part of the historical background of the constitutional provisions. The Court found it useful to address those foreign precedents first, as doing so prepares an understanding of the Indian Constitution. By examining the problem in other jurisdictions, the Court suggested that the issue becomes clearer when viewed in one’s own constitutional setting.

The Court then turned to the United States, noting that the doctrine of intergovernmental tax immunity originated there. In the United States, the immunity of one level of government from taxation by another was regarded as an indispensable consequence of the dual system of government. The Court traced the origin of this principle to what Justice Frankfurter described as a “seductive cliché” of Chief Justice Marshall in McCulloch v. Maryland [4 Wheaton 316], namely that the power to tax entails the power to destroy. The Court emphasized that the doctrine was more than a mere cliché; Chief Justice Marshall had declared it fundamental to the operation of dual government. The Court therefore recognized that the American experience provides the earliest articulation of the doctrine that one government should not be subject to taxation by another, an idea that later influences comparative constitutional analysis.

In his discussion, the Court recalled the words of Chief Justice Marshall: “If we measure the power of taxation residing in a State, by the extent of sovereignty which the people of a single State possess, and can confer on its government, we have an intelligible standard, applicable to every case to which the power may be applied. We have a principle which leaves the power of taxing the people and property of a State unimpaired, which leaves to a State the command of all its resources, and which places beyond its reach, all those which are conferred by the people of the United States on the Government of the Union, and all those means which are given for the purpose of carrying those powers into execution. We have a principle which is safe for the States, and safe for the Union. We are relieved, as we ought to be, from clashing sovereignty; from interfering powers; from a repugnancy between a right in one Government to pull down what there is an acknowledged right in another to build up; from the incompatibility of a right in one government to destroy what there is a right in another to preserve. We are not driven to the perplexing inquiry, so unfit for the judicial department, what degree of taxation is the legitimate use and what degree may amount to the abuse of the power.” The Chief Justice then concluded in famously emphatic language that the Court had given the subject its most deliberate consideration and arrived at a conviction that “the States have no power, by taxation or otherwise, to retard, impede, burden or in any manner control, the operations of the Constitution laws enacted by Congress to carry into execution the powers vested in the general government. This is, we think, the unavoidable consequence of that supremacy which the Constitution has declared.” The doctrine, however, attracted early dissent. Justice Bradley was a principal early critic, describing the doctrine as founded on a fallacy that would lead to mischievous consequences in Collector v. Day [11 Wall. 113: 20 L.Ed. 122]. He noted that the McCulloch case involved a State tax that was really discriminatory against the operations of a national bank and could have been decided without laying down any such broad proposition. Despite this criticism, the doctrine was accepted and progressively expanded to include not only the property and activities of a Government within its protection but also all means, agencies and instrumentalities by which Government acts. Only after many years did the reach of the doctrine begin to be curtailed. In Panhandle Oil Co. v. Mississippi [277 U. S. 218, 223: 72 L.Ed 857, 859], Justice Holmes rejected the earlier cliche with the sharp observation that “the power to tax is not the power to destroy while this Court sits.” Yet it was the accumulation of increasing dissents that eventually led to the overturning of a significant number of cases, as reflected in Graves v. New York [306 U.S. 466: 83 L.Ed. 927].

The Court expressly avoided a discussion of the historical evolution by which the doctrine had been narrowed, limiting its analysis to the portion of the doctrine that had survived the various attacks it had faced. The Court then turned to the decision in State of South Carolina v. United States, 199 U.S. 437 (50 L.Ed. 261), a case that states frequently cite when interpreting Article 289. In that case the State of South Carolina had assumed the operation of selling intoxicating liquors as an exercise of its sovereign authority. The agents who dispensed and sold the liquor on behalf of the State were subjected, under a Federal revenue statute, to an excise licence tax that applied uniformly to every seller of intoxicating liquors. The Court held that those state agents did not fall within the protection of the doctrine because they were engaged in a commercial activity rather than performing a governmental function. In delivering the opinion, Justice Brewer explained that allowing a profit motive to be mixed with regulatory duties could lead a State to take ownership of items such as tobacco, oleomargarine and other subjects of internal revenue taxation. He warned that if one State found such a venture profitable, other States might follow, thereby jeopardising the entire system of internal revenue taxes. Justice Brewer further observed that, under that reasoning, control of public utilities—including gas, water, and railroad systems—could shift to the States, making the States owners of all property and business, and raising the question of what contribution the States would then make to national revenues. He concluded that the tax in question was not imposed on any property belonging to the State; rather, it was a charge on a business activity before any profit was realized, essentially a tax on the means by which the property would be acquired before it actually was acquired. This reasoning established a clear distinction between a State acting as a trader and a State acting as a government.

The Court noted that the distinction drawn in the South Carolina case was later reinforced in Ohio Helvering, 292 U.S. 360 (78 L.Ed. 1307). In that decision the Court observed that when a State enters the marketplace seeking customers, it divests itself, at least to the extent relevant to the federal taxing power, of its quasi‑sovereign character and assumes the role of a commercial trader. Subsequent jurisprudence has consistently preserved this separation between governmental activities and commercial activities undertaken by a State. The term “governmental functions” has been further qualified by adjectives such as “strictly,” “essential,” or “usual,” indicating that only those functions traditionally performed by State governments can be considered exempt from federal taxation. It has been emphasized that if a State engages in activities beyond its traditional governmental role, it cannot claim exemption from the general taxing authority of the federal government. The Court pointed to the decision in University of Illinois v. United States, 289 U.S. 48 (77 L.Ed. 1025), as an illustration of the strict application of the doctrine. In that case the University of Illinois imported scientific equipment for use in one of its departments and was assessed customs duties. The University paid the duties under protest, asserting that it was merely an instrumentality of the State of Illinois performing a governmental function. This dispute highlighted the ongoing judicial effort to delineate clearly the boundary between activities that qualify as governmental functions and those that constitute commercial trading, thereby determining the applicability of federal taxation.

In the case that was being considered, the Court explained that the Tariff Act of 1922, under which the duty was imposed, was enacted primarily to raise revenue, to regulate foreign commerce, and to promote American industry. Relying on the decision in Gibbons v. Ogden, the Court observed that the constitutional power to regulate commerce with foreign nations is plenary and exclusive to Congress, and that the exercise of that power cannot be limited, qualified, or impeded by any action of the States. Accordingly, the Court noted that the Constitution denies the States the authority to impose duties on imports or exports unless Congress expressly consents, citing the relevant constitutional provisions. From this principle, the Court concluded that the doctrine of dual sovereignty does not apply to the regulation of foreign commerce. The argument presented by the party challenging the duty was that the Tariff Act merely imposed a tax and that the tax burden fell upon a State instrumentality. While the Court conceded that the tax could indeed affect a State instrumentality, it emphasized that customs duties may be imposed for regulatory purposes, that the statute expressly contemplates the regulation of foreign trade, and that the revenue generated is incidental to the regulatory objective. The Court further held that the protective aspect of the duty did not extend beyond the legitimate governmental functions of the federal government. Chief Justice Hughes was then quoted as observing that the mere fact that a State, while performing its governmental duties, may use imported articles does not transform the act of importation into a State function that is independent of federal authority. He warned that allowing States or their instrumentalities to import goods for their own use without complying with congressional requirements would undermine, and possibly destroy, the single, dominant control over foreign trade that the Constitution intended to create. He added that it is for Congress alone to decide the extent, if any, to which States and their instrumentalities may be exempted from paying duties on imported articles. The Court later referred to a more recent Supreme Court decision commonly identified as the “soft drink case,” in which the State bottled and sold natural mineral water. The majority held that a non‑discriminatory tax on all sellers, including the State government, was permissible because the State’s sale of mineral water, despite involving natural resources, did not constitute a governmental function and therefore did not impinge upon State sovereignty. Justice Frankfurter, speaking for a portion of the Court, asserted that Congress’s power to levy taxes implicitly possesses a reach no less extensive than its power to regulate commerce. He recognized that certain State activities and State‑owned property are uniquely characterized in inter‑governmental relations and form a distinct class. He explained that only a State can own a State house or collect income through taxation, and that these unique attributes should not be placed within an abstract category of taxpayers for federal tax purposes without effectively taxing the State as a State. He further noted that, as long as Congress chooses, it may tax enterprises that generate revenue irrespective of whether that revenue could be earned only by a State, and may decide whether to exempt enterprises pursued by States for public purposes while taxing comparable private enterprises.

In the discussion, the Court observed that the federal government generally raised revenue by taxing any source of income that could be earned by private persons as well as by the State, and that the Constitution did not prohibit such a tax merely because it also fell upon a State. The Court noted that Congress could, if it wished, exempt enterprises operated by States for the public good while still taxing comparable enterprises carried on for private purposes. Justice Frankfurter rejected criteria that attempted to separate State activities into “proprietary” versus “governmental,” or to rely on notions of “historically sanctioned” or “profit‑producing” activities, and he held that nothing in the Constitution restricted Congress from including States in a tax that was levied generally upon private persons on the same subject matter. Justice Rutledge did not embrace the broader extension of that principle but refrained from expressing a contrary view. Chief Justice Stone, together with Justices Read, Murphy and Burton, explained that United States cases fell into two categories: one in which taxes were imposed directly on the property, income or activities of the State, and another in which taxes were laid upon agents and instrumentalities of the State, a burden that was said to indirectly cripple the State. They concluded that the distinction between governmental and proprietary interests was untenable. The Court agreed that a non‑discriminatory tax could occasionally be imposed on the State provided it did not impair the State’s sovereign functions, emphasizing that the crucial question was whether the tax unduly interfered with the performance of governmental duties rather than whether it was discriminatory. Accordingly, the Court held that the specific tax under consideration did not curtail the State’s governmental functions, and therefore the Constitution could not be interpreted to give the State’s mineral‑water business immunity from federal taxation, nor could it deny the federal government the power to impose the tax. Justice Jackson abstained from participating, while Justices Douglas and Black entered a strong dissent. Their dissent rested on the view that the taxation power of one level of government, when exercised against another, would likely increase the cost of the other’s operations and, if the federal government could place local governments on its tax rolls, the capacity of those governments to serve their citizens would be hampered. From this analysis of American cases, the Court inferred that the modern doctrine no longer extends immunity to agents, means or instrumentalities of the State as it once did, and that immunity does not cover any trading or business activity of the State even when such activity involves natural resources, although Congress may choose to excuse particular instances. Immunity continued to apply to State‑owned property held in its sovereign capacity, but not to property used in the course of trade. Only marginal cases, where a tax excessively interfered with the State acting as a State, warranted a narrow exception.

In this case, the Court observed that, except for narrow instances where a tax would interfere unduly with a State’s essential functions, the States did not enjoy blanket immunity from taxation. The Court noted that some States argued that the distinction drawn by Justice Brewer in the South Carolina decision, reported as 199 United States 437 and 50 Lawyers’ Edition 261, had been preserved in the framework of Article 289. Those States contended that when import and export activities were performed as part of essential governmental functions, such activities should be exempt from customs duties, whereas activities that amounted to trading should not enjoy that exemption. They further asserted that a comparable exemption from excise duty should arise on the same reasoning. In other words, the States claimed that the Constitution of India reproduced, in its broad contours, the doctrine that had been accepted in the United States at the time our Constitution was drafted.

The Court agreed that the broad features of Article 289 corresponded to the American doctrine as it stood before our Constitution was framed. Article 289 conferred an exemption from taxation on the property and income of the States. The Court deferred a detailed discussion of the precise limits of that exemption until after it examined the Canadian and Australian constitutional provisions and the relevant case law. However, the Court emphasized that Article 289 clearly restricted the exemption so that trading activities carried out by the States, and any property used or occupied for such trade or business, were subject to taxation. This limitation followed unmistakably from clause two of Article 289. Without undertaking an exhaustive exegetical analysis of the wording of that clause and its relationship to clauses one and three, the Court found it sufficient to state that clause two excluded from the exemption granted by clause one all trading activities of the State and the property employed in those activities. The introductory words “Nothing in clause one” did not render clause two an exception to clause one; rather, they stressed that the power described in clause two operated independently of the exemption in clause one.

The Court further explained that the same introductory phrase appeared in clause three, and the concluding words “incidental to the ordinary functions of government” indicated that Parliament could, by legislation, deem certain trading activities to be incidental to the ordinary functions of Government. This approach was also recognised in United States jurisprudence, where statutes sometimes created special exemptions in favour of State trading activities. Consequently, the Court concluded that the overall scheme of Article 289 was based on the American pattern whereby the property and income of the States were exempt from taxation, but trading was not considered an ordinary governmental function unless Parliament expressly declared a particular trade or class of trades to be incidental to governmental functions.

In the judgment it was observed that the Constitution provides no immunity for agents or instrumentalities of the Government. The exemption that exists relates only to the “property and income of a State”. The significance of these words is supported by decisions under the Canadian and Australian Constitutions. The discussion began with Australia because the leading Australian case was decided before the leading Canadian case. Section 114 of the Commonwealth of Australia Constitution Act was quoted, the operative part stating that a State shall not impose any tax on property of any kind belonging to the Commonwealth, nor shall the Commonwealth impose any tax on property of any kind belonging to a State. The doctrine of immunity of instrumentalities, treated as an implied prohibition in the Constitution, was held by the Supreme Court of Victoria to be inapplicable to the Australian Constitution before the High Court was constituted; however, the High Court applied the doctrine in its first case, D’Emden v Pedder (1904) 1 CLR 91. The historical development of the doctrine was not traced in depth because it was subsequently rejected in the Engineers’ case (1920) 28 CLR 129. Nevertheless, D’Emden held that section 114 concerned only a “tax on property” and represented a prohibition distinct from that embodied in the American doctrine. The issue resurfaced in two cases decided in 1908. In King v Sutton (1908) 5 CLR 786, a quantity of wire netting purchased in England and imported into the Commonwealth by the Government of New South Wales was landed at Sydney Harbour. The State removed the netting under its executive authority without making any entry or obtaining the permission of customs officers. Customs authorities sued the State under sections 36 and 236 of the Customs Act 1901. The Court held that the Customs Act 1901 was a valid exercise of the exclusive power of the Commonwealth conferred by sections 52(ii), 86 and 90 of the Constitution Act to impose, collect and control customs and excise duties, and that the Act applied to goods imported by a State in the same manner as to private persons; consequently goods that were subject to the control of customs under section 30 could not be removed in contravention of the Act. The following day the High Court delivered its judgment in Attorney‑General of New South Wales v Collector of Customs (1908) 5 CLR 818, in which section 114 was examined. That action was brought to recover from the Collector the amount of customs duties that had been demanded and paid under protest in respect of the importation into the Commonwealth of certain steel rails purchased in England and shipped to the Secretary for Public Works of the State.

In the matter before the Court, the State had imported goods and then relied upon section 114 of the Constitution to claim immunity from customs duties. At that time Australian jurisprudence was strongly influenced by the American doctrine of immunity of instrumentalities, a principle that the High Court had articulated in D’Emden v. Pedder (9104) 1 C.L.R. 91. Although that earlier decision had already determined that section 114 dealt with a “tax on property,” the doctrine was considered inapplicable to the present case because the subject matter differed significantly. The State therefore invoked section 114 in an attempt to protect itself from the duty imposed. The Court, however, held that the doctrine of immunity could not be applied to powers that were expressly conferred on the Commonwealth and that, by their very nature, involved the regulation of certain activities of State governments. One such expressly granted power was the authority to enact legislation concerning external trade. The Court further observed that the imposition of customs duties operated both as a means of regulating international trade and as an exercise of the Commonwealth’s taxing power. Consequently, the right of a State to import goods was deemed to be subject to the overarching Commonwealth power. This power was said to derive from section 51(i) and (ii) of the Constitution, which provides that the Parliament may, subject to the Constitution, make laws for the peace, order and good government of the Commonwealth with respect to (i) trade and commerce with other countries and among the States, and (ii) taxation, provided that such laws do not discriminate between States or parts of States. In the same context, the Court referred to section 55, which stipulates that a tax bill shall deal solely with the imposition of taxation and that any provision dealing with other matters shall be of no effect; it further requires that laws imposing customs duties deal only with customs duties and that laws imposing excise duties deal only with excise duties.

In determining that the State Government was required to pay customs duties on its imports, the Court noted that the provisions of section 114 did not exempt the State, notwithstanding the arguments presented. The learned judges each offered different grounds for reaching that conclusion, and those grounds were later invoked in the arguments before this Court. Chief Justice Griffith perceived a conflict, or antinomy, between the taxation and regulatory powers conferred by section 51 on the one hand and the exemption claimed under section 114 on the other. He argued that, where possible, a construction that harmonised the two provisions should be preferred. Accordingly, the Chief Justice examined the constitutional scheme and observed that, although the term “taxation” in section 51(ii) encompasses customs duties, the Constitution does not describe customs duties as a “tax” or as a “tax on property.” He held that customs duties constitute a tax on the movement of goods, and that the reference to a tax “on property” belonging to a State in section 114 could not be interpreted to include customs duties. The Chief Justice further reasoned that such property must be within the geographical

In this case, the Court noted that the Chief Justice had reasoned that customs duties are collected at the external limits of the State, that is, before the imported goods become property of the State. Consequently, the imposition of customs duties on importation does not constitute a tax on property within the literal meaning of section 114. Moreover, even assuming a broader interpretation, the provision must be read in harmony with the general scheme of the Constitution Act. Judges Barton and O'Connor, in their separate judgments, adopted the same approach. Judge Higgins emphasized that before the prohibition of section 114 could apply, the taxation of property must occur as an imposition upon the property itself. He stated that he preferred to base his judgment on the ground he had articulated and could not confidently accept the proposition that customs duty cannot be regarded as a tax within the meaning of section 114. He acknowledged that the terms “duties of customs” and “duties of excise” are the usual expressions, yet the language of section 55 shows that the Constitution treats the levying of such duties as the levying of taxes, for example, “Laws imposing taxation, except laws imposing duties of customs or excise, shall deal with one subject of taxation only.” Nevertheless, he observed that section 114 uses only the word “tax” and not “tax of any kind,” although it refers to “property of any kind belonging to a State.” This, he argued, indicates that the framers of that provision could not have contemplated customs duties, because the emphasis is on ownership of property (p. 855). 117. Judge Isaacs, on the other hand, held that customs duties, as normally understood or as defined in the Customs Act, are imposed upon the goods themselves and therefore fall within the meaning of “property” in section 114. However, he concluded that those duties do not fall within the meaning of “tax” as used in that section and in the Constitution generally. He cited authorities to show that while the term “taxation” may have a broad, generic meaning when conferring a power on the Government, the word “tax” may not be so expansive in other contexts. Accordingly, he found that the word “tax” appears only in section 114, does not carry the wide meaning, and when read together with the word “property” cannot be interpreted to include customs duties. 118. The Australian High Court decision supporting this view was relied upon heavily by the Solicitor‑General. 119. The Court observed, however, that the construction of the terms employed in section 114 is closely connected with the overall scheme and language of the remaining parts of the Constitution Act, providing limited assistance for interpretation. 120. Unlike the Australian Constitution, the present Constitution defines the terms “tax” and “taxation,” and the distinction between the two concepts, with all its nuances, is somewhat difficult to grasp.

In this case, the Court observed that the distinction between a tax and taxation was somewhat difficult to apprehend. The Court quoted Cassels, J., from a Canadian decision that would be cited later, stating that the Court agreed with the Attorney‑General for British Columbia regarding the difference between taxation and a tax. The Attorney‑General had testified, “I am not relying very strongly upon that phase of the argument,” and added that the distinction was subtle and thin, a view the Court also shared. The Court then noted that the Privy Council, when the same matter was before it, did not depend on that distinction. Turning to the Australian decision, the Court outlined several general propositions that emerged from that judgment. It recognised that customs duties possessed a dual character: they raised revenue and regulated external trade, a proposition the Court described as valid. The Court further observed that the same view had been accepted in the American authorities previously referenced and also in a Canadian Privy Council case that would be mentioned. The Australian judgment further held that the term “taxation” was sufficiently broad to include customs duties, a principle articulated by Isaacs, J., and not contradicted by any other learned judge. The Court considered that this principle was of little assistance for construing the Indian Constitution, which employed the word “taxation” only in Article 289 and defined it in Article 366(28) as encompassing the imposition of any tax or impost, whether general, local, or special, and directing that “tax” be construed accordingly. By relying on that definition, the Court overcame the difficulty identified in the Australian case, particularly by Higgins, J., in the excerpt previously quoted. The Court emphasized that the solitary occurrence of the word “taxation” in the Constitution eliminated the need to examine broader context, because the definition would otherwise become a dead letter. Regarding the scheme of the Australian Constitution, the Court noted a partial similarity: the taxation powers granted to Parliament by section 51 of the Australian Constitution Act were subject to that Constitution’s provisions, much as they were under the Indian Constitution, but this similarity did not extend to the powers granted by the Constitution of Canada. The Court indicated that these points had been raised in arguments concerning the Indian Constitution and proceeded to refer to the Canadian case relied upon by the learned Solicitor‑General. Before examining that Canadian precedent and the Judicial Committee’s appeal decision, the Court found it necessary to refer to several decisions in which the Privy Council explained the general scheme of the British North America Act and the principles for its construction, especially sections 91 to 95, which dealt with the distribution of legislative powers between the Dominion Parliament and the provincial legislatures.

In order to avoid misunderstanding the effect of the authorities cited by the solicitor‑general, the Court emphasized that a preliminary grasp of the basic principles underlying those cases was essential. The Court noted that it was unnecessary to reproduce the full text of sections 91 and 92 of the British North America Act; only the introductory portions that directly related to the issue before the Privy Council needed to be set out. Accordingly, the Court quoted the relevant part of section 91, which states: “It shall be lawful for the Queen, by and with the advice and consent of the Senate and House of Commons, to make laws for the peace, order, and good government of Canada, in relation to all matters not coming within the classes of subjects by this Act assigned exclusively to the legislatures of the provinces; and for greater certainty but not so as to restrict the terms of this section, it is hereby declared that (notwithstanding anything in this Act) the exclusive legislative authority of the Parliament of Canada extends to all matters coming within the classes of subjects next hereinafter enumerated, that is to say—” followed by an enumeration of twenty‑nine classes of subjects, and the addition that “any matter coming within any of the classes of subjects enumerated in this section shall not be deemed to come within the class of matters of a local or private nature comprised in the enumeration of the classes of subjects by this Act assigned exclusively to the legislatures of the provinces.” The Court then reproduced section 92, which provides: “In each province the legislature may exclusively make laws in relation to matters coming within the classes of subjects next hereinafter enumerated, that is to say—” followed by an enumeration of sixteen classes of subjects. Turning to the general scheme of the Act, the Court referred to the observations of the Board in The Citizens Insurance Company of Canada v. William Parsons and The Queen Insurance Company v. Williams Parsons [(1881‑82) 7 App. Cas. 96], where it was explained that the scheme was intended to give primacy to the Dominion Parliament in any conflict of jurisdiction, and that the exclusivity of the two legislatures’ spheres was to operate accordingly. The Court further noted that the same principle was summarised the following year in Russell v. Queen, reported in the same volume at page 829. In addition, the Court cited Tennant v. Union Bank of Canada [(1894) A.C. 31 at 41], in which it was held that section 91 (paragraph 15) conferred upon the Dominion Parliament the power to legislate over every transaction within the legitimate business of a banker, even where such legislation interfered with property and civil rights in the province (sections 92, 20, 13) and granted the bank privileges not recognised by provincial law. That decision rested once again on the doctrine of paramountcy of the Dominion Parliament, “notwithstanding anything in this Act,” provided the legislation did not intrude upon a power that was exclusively assigned to a provincial legislature.

Lord Watson observed that section 91 of the British North America Act expressly declared that, notwithstanding anything in the Act, the exclusive legislative authority of the Parliament of Canada extended to all matters that fell within the enumerated classes. He explained that this provision plainly indicated that any legislation of the Canadian Parliament that strictly related to those matters possessed paramount authority. He further warned that refusing to give effect to that declaration would render nugatory the specific legislative powers that had been specially assigned to the Canadian Parliament. The Court noted that this primacy of the Dominion Parliament applied to all legislative matters, subject only to those powers that were assigned exclusively to the Provincial Legislatures. However, the Court emphasized that the primacy of the Parliament of Canada was not limited by any other provision that might be found elsewhere in the same Act.

The Court then explained that, taken together, the cited authorities made it clear that the general scheme of the British North America Act allocated certain subjects to the exclusive and plenary power of the Dominion Parliament and allocated other subjects exclusively to the Provincial Legislatures. By virtue of section 91, the Imperial Parliament had unequivocally placed every matter that was not assigned to the local legislatures within the jurisdiction of the Dominion Parliament, notwithstanding anything else in the Act. Accordingly, the British North America Act had to be interpreted as a whole, first with reference to the exclusive domain of the Provincial Legislatures, then with reference to the paramountcy of the Dominion Parliament and the overall scheme of the Act. The Court stated that unless a matter fell within section 92 and did not fall within section 91, the action of the Dominion Parliament was subject to no restraint by any other provision of the Act. Having set out this constitutional framework, the Court turned to the case that the learned Solicitor‑General had relied upon. The Court observed that the facts of that case needed to be examined. The case was a test case brought by the Crown in the right of the Province of British Columbia, which sought a declaration that the Province could import liquor into Canada for sale without paying customs duties that the Crown in the right of the Dominion of Canada imposed under the Customs Act. The Provincial action was based on the Government Liquor Act, which had previously been held intra vires by the Privy Council in Canadian Pacific Wine Company Limited v. Tuley [1921] 2 A.C. 417. In the proceedings before the Exchequer Court, the Attorney‑General of British Columbia filed an admission of facts stating that the “Johnnie Walker Black Label” whiskey had been purchased and consigned to His Majesty King George V in the right of the Province of British Columbia, through the Liquor Control Board of Victoria, British Columbia, in accordance with paragraph 1 of the Statement of Claim. The admission further stated that the whiskey had been purchased and consigned to meet the requirements of the Government Liquor Stores established in British Columbia under the Government Liquor Act.

The Province of British Columbia argued that the shipment of “Johnnie Walker ‘Black label’” whiskey, which had been purchased and consigned to His Majesty King George V in the right of the province and intended for sale in the Government Liquor Stores established under the Government Liquor Act, was protected from customs duties by section 125 of the British North America Act. That provision, the Province maintained, declares that no lands or property belonging to Canada or any Province shall be liable to taxation, and therefore the whiskey, as property of the Province, should be exempt from the duty. The Dominion, on the other hand, contended that the whiskey was not imported for a governmental purpose but for commercial trade, and therefore the duty was applicable. The Dominion further pointed out that section 118 of the same Act required large sums to be payable by the Dominion to the Provinces, and that sections 122, 123 and 124 preserved the operation of customs and excise laws and other dues until altered by the Parliament of Canada. The Province was reminded that British Columbia had not originally been a part of the Dominion; it entered the Confederation on 16 May 1871 pursuant to section 146 of the British North America Act by an order of Her Majesty in Council. Section 7 of that Order expressly provided that the existing customs tariff and excise duties would continue to apply in British Columbia for a period of time. The Dominion legislation under which the customs duty was sought to be levied stated that the rates and duties of customs imposed by that Act, or any previous customs law in force since 1 July 1867, were binding upon and payable by His Majesty, whether the goods were imported in the right of the Government of Canada or of any Province, and regardless of whether the goods belonged to His Majesty at the time of importation. The provision also clarified that nothing in the legislation was intended to impose a tax on any property belonging to His Majesty in the right of Canada or of a Province.

In the Exchequer Court, Justice Cassells based his judgment on the factual finding that the whiskey had been imported not for any governmental purpose but for ordinary trade. Accordingly, he dismissed the Province’s claim, relying on the dictum of Mr Justice Brewer in the South Carolina case and citing two Privy Council decisions: Farnell v Bowman (1887) 12 App. Cas. 643 and Attorney‑General of the Strait Settlement v Wemyss (1888) 13 App. Cas. 192. Those cases held that when a State engages in private business that competes with other traders, it must be liable to duties in the same manner as other persons engaged in trade. The Court therefore concluded that the customs duty was lawfully payable on the whiskey, and the Province’s reliance on section 125 of the British North America Act to claim exemption from taxation was rejected.

The Court noted the authority in Attorney‑General of the Strait Settlement v. Wemyss [(1888) 13 App. Cas. 192], which expressed that a State entering private trade in competition with other merchants should be liable in the same way as ordinary traders. The Australian decision in Attorney‑General of New South Wales v. Collector of Customs [(1908) 5 C.L.R. 818] was mentioned but not adopted. An appeal was then brought before the Supreme Court of Canada, and the judgment appears in The Attorney‑General of the Province of British Columbia v. The Attorney‑General of the Dominion of Canada [64 Canada S.C.R. 377]. The province of British Columbia advanced the argument that, under section 125 of the British North America Act, the term “taxation” encompassed customs duties and that the word “property” covered all movable property, not merely property incidental to provincial administration. The Dominion counter‑argued that customs duties were not “taxation” within the meaning of the provision but were regulations of trade and commerce, and therefore did not constitute “taxation on property.” The Dominion also relied on the Australian case Attorney‑General of New South Wales v. Collector of Customs [(1908) 5 C.L.R. 818]. The Supreme Court sat with five learned judges, each issuing separate opinions. Justice Iddington refrained from deciding whether “taxation” included customs duties; he observed that section 125 formed part of a chapter dealing with lands and property and was therefore confined to property matters listed in that chapter or in the third and fourth Schedules. Consequently, he concluded that, given this context and the nature of the powers granted by paragraphs 2 and 3 of section 91, the authority to levy customs duties must be upheld. Justice Anglin, relying on the Australian case, held that section 125 could not have been intended to create such exemptions and maintained that customs duties were both taxes and regulatory measures, imposed on the movement of goods across the border rather than on the goods themselves, and thus were not a tax “on property” in Canada. Justice Mignault adopted a similar approach. Justice Duff engaged in a more detailed analysis of the British North America Act’s scheme, observing that a fundamental feature of Confederation was to grant the Dominion the broadest authority over external trade, with customs duties serving as a tool of regulation. He therefore argued that the principle of Dominion primacy, interpreted in light of section 125, required a power to disallow any measure that might diminish that control. He further reasoned that “taxation” concerning property was narrower in scope than “taxation” in a general sense; while customs duties could be regarded as taxes on commodities, they did not qualify as taxes on property.

In interpreting section 125 the Court observed that the term “property” was intended to address the allocation of lands and other property between the Dominion and the Provinces. Justice Brodeur had previously determined that Canadian customs duties performed both regulatory and revenue‑raising functions, and that the legislation imposing those duties described them as levied “on or upon goods,” thereby bringing them within the scope of section 125. All of these considerations were raised by counsel in the present arguments. The judgment of the Privy Council on appeal from the Supreme Court was then examined. The Privy Council did not comment on the foregoing reasons. Lord Buckmaster, however, addressed the breadth of section 125 and emphasized that the provision could not be read in isolation or in a fragmentary manner. He explained that section 125 must be read as part of the overall scheme of the Constitution Act, which accords the Dominion exclusive legislative authority over the matters listed in section 91, including the regulation of trade and commerce and the raising of revenue by any system of taxation. Lord Buckmaster noted that customs duties possess this dual character of regulation and taxation, and that, whether one function or the other or both are considered, the power rests solely with the Dominion. The contention advanced by the Provinces—that although the Dominion could establish a tariff barrier, the Provinces might create a breach in that barrier under section 125 allowing goods to pass free of customs duties—was rejected. Lord Buckmaster explained that section 125 resides among a series of sections that allocate property between the Dominion and the Provinces and give the Provinces control over the property assigned to them; this allocation does not diminish the authority granted by section 91, which extends to the regulation of trade and commerce throughout the Dominion irrespective of territorial limits. Consequently, Lord Buckmaster held that the purpose of exclusive Dominion control over external trade and the associated taxation is paramount and that section 125 must not be interpreted to undermine that purpose. In other words, the primacy of the Dominion Parliament in regulating external trade and imposing related taxes remains unaffected by section 125. While referring to the case of Attorney‑General of New South Wales v. Collector of Customs (1908) 5 CLR 818, Lord Buckmaster did not apply its reasoning, instead observing that “the true solution is to be found in the adaptation of section 125 to the whole scheme of Government” as defined by the British North America Act. Subsequent Canadian decisions have therefore relied on the scheme of the British North America Act, which affirms the paramount authority of the Dominion Parliament, a authority that section 125 does not diminish because it belongs to a group of provisions dealing with the distribution of property between the Dominion and the Provinces. The arguments presented in the present case follow the same line of reasoning. It is submitted on behalf of the Union that the exclusive power to impose customs duties and to regulate external trade resides with Parliament.

The Court recorded that the Union argued that customs duties served both to raise revenue and to regulate trade, and that such duties were not “taxes” and certainly not “taxes on property.” The Union further maintained that Article 289 should be read in a manner that protects the exclusive and plenary authority of Parliament over customs matters. In contrast, the opposing side contended that clauses (2) and (3) of Article 289 indicated that Parliament possessed the power to tax the commercial activities of State Governments while leaving untouched the ordinary functions of those State Governments. It was also argued that the prohibition contained in clause (1) of Article 289 was absolute, save for those matters expressly excluded by clause (2). To illuminate these competing positions and to assess how foreign precedents might aid in interpreting the Constitution, the Court first undertook a detailed analysis of the constitutional scheme of taxation.

The Court observed that a preliminary question arose as to whether the term “property” in Article 289 excluded foreign‑origin goods that were required to bear a duty before entering Indian territory. Article 289 prohibited the taxation of property belonging to a State Government. If “property” were understood narrowly to mean only assets situated within a State’s geographic limits, then property located abroad and seeking entry across customs borders could logically be subject to customs duty. Conversely, if customs duties were deemed not to fall within the concept of “taxation,” the article would again fail to shield State property. The Union maintained that customs duty was neither “taxation” nor a “tax on property,” characterising it instead as a charge on the movement of goods across the customs frontier, and therefore asserted that the protection of Article 289(1) did not apply. The Court, however, found that the constitutional taxonomy did not support either Union claim. It further noted that the Union List did not contain any entry that could be described in either technical or popular terms as a “property tax” or a tax levied on property as such. The first relevant entry began with No. 82, described as “taxes on income other than agricultural income,” followed by Nos. 83 and 84, which dealt respectively with customs duties and excise duties. These two entries formed the core of the controversy. If they were not to be regarded as taxes on “property,” then no other entry could be linked to State property in the manner suggested by the learned Solicitor‑General. The subsequent entries—Nos. 85 and 86 concerning companies, Nos. 87 and 88 concerning death duties, and rare instances where a State might be a legatee as referenced in U.S. v. Perkins and Snyder v. Bettman—did not pertain to the issue. Even taxes on railway fares, freight (No. 89), and other taxes (No. 90) might fall on the States, but under Article 269 the proceeds were required to be assigned to the States, reinforcing the conclusion that Article 289(1) could not be interpreted to exclude customs and excise duties.

The judgment noted that the entry relating to future markets was rarely, if ever, likely to impose a tax burden on the States, and that any revenue generated from such taxes would also be assignable to the States. Entry No. 91 was identified as the rates of stamp duties. Entry No. 92 covered taxes on the sale or purchase of newspapers and on advertisements published in those newspapers. Entry No. 92‑A dealt with taxes on the sale and purchase of goods other than newspapers when such transactions occurred in the course of inter‑State trade or commerce. The Court held that none of these entries could be characterized as taxes that are “on property.” The net proceeds from each of these taxes were likewise directed to be given to the States.

When counsel for the Government asked the learned Solicitor‑General which specific tax on property was envisioned by the Constitution, the Solicitor‑General was able to refer only to the residuary power of Parliament. The Court observed that, if Article 289(1) did not expressly include entries relating to customs duties and excise duties, the protection afforded by that clause would be essentially ineffective or meaningless. The judgment then turned to the historical background, noting that the Government of India Act, 1935 granted an exemption only with respect to lands and buildings. The present constitutional provision replaced the limited phrase “lands and buildings” with the broader terms “property and income,” thereby encompassing all assets and income of the States.

Clause (2) of Article 289 was explained to indicate that the exemption does not extend to any trade or business carried on by a State. Accordingly, Parliament may impose any tax on such trade or business of any kind, on any operations connected therewith, on any property that is used or occupied for the purpose of that trade or business, and on any income that accrues or arises in connection with it. The Court emphasized that the repeated use of the word “any” demonstrates that a distinction attempted in Australian jurisprudence—where the word appears in one provision but is omitted in another—is not acceptable. Moreover, the expressions “used or occupied” were interpreted to include both movable and immovable property.

Clause (3) was described as reserving to Parliament the power to declare by law which trade or business, or class of trade or business, is incidental to the ordinary functions of Government, thereby removing such matters from judicial jurisdiction. Until Parliament makes such a declaration, all trade and business of any kind remain subject to taxation. The Court concluded that the three clauses of Article 289 must be read together in a harmonious manner to ascertain their true meaning. It is not permissible to interpret clause (1) in isolation or by relying on rulings of other courts. The essential question, according to the Court, is what is encompassed by the expression “property of a State.” This expression must include every form of property to which the State can claim ownership, both immovable and movable. By discarding the narrower language of the 1935 Act and adopting the comprehensive term “property,” and by qualifying it with “any” and “used or occupied,” the Constitution clearly intends to cover all categories of State property.

The judgment noted that the property of the State, regardless of where it is situated, was intended to be exempt from taxation, and that only property that is used or occupied for business purposes is subject to taxation. It further explained that property acquired abroad or property produced or manufactured by the State is still considered property of the State. The text observed that if such property were not deemed State property, the question would arise as to whose property it actually is, a question for which no answer could be supplied. Consequently, the author expressed the view that, when the language of Article 289(1) is read either alone or together with clauses (2) and (3), the inevitable conclusion is that every kind of property belonging to the States, except that which is used or occupied for trade or business, was meant to be exempt from “taxation.” The judgment added that this exemption applies to both immovable and movable property and that the property need not be located within the territorial limits of India. It pointed out that this Article forms part of the chapter on “Finance” and appears in a sub‑chapter titled “Miscellaneous Financial Provisions,” and therefore its importance is not reduced by any special considerations, unlike Section 125 of the British North America Act. The judgment further stated that the legislative powers enjoyed by Parliament under the taxation entries in List I are expressly subject to the Constitution, and that Article 289 must prevail unless it is inapplicable. The scheme of Article 289 does not permit a narrow or specialized interpretation of the word “property,” and the author reiterated the opinion that goods imported and goods manufactured or produced by the States are included within the meaning of “property.” The judgment then turned to the contention that customs duties and excise duties cannot be characterised as “taxation,” or that even if they are described as such, they are not taxes on property. It observed that customs duties are described as taxes on the movement of goods, while excise duties are described as taxes on production or manufacture. Numerous rulings were cited to show that judges have described these levies in both ways. The author said that customs duties would be addressed first because excise duties are simpler to consider. It was noted that some judges have described excise duties as “on goods produced,” while others have described them as “on production and manufacture,” and that case law exists on both sides. The judgment highlighted that the definition of “taxation” in the Constitution is a crucial point. That definition, it said, distinguishes the Australian cases and indicates what kind of levy is caught by Article 289(1). The Constitution defines “taxation” as the imposition of any tax or impost, whether general, local or special, and directs that the word “tax” be construed accordingly. Although the definition is not exhaustive, the judgment observed that its broad language immediately demonstrates a wide scope, covering any tax or impost and moving beyond a mere enumeration of items.

The passage adds the expression “whether general, or local or special,” thereby indicating that no special or local considerations affect the analysis and that even a general, non‑discriminatory levy must be treated as taxation. It was previously observed that the term “taxation” occurs only in Article 289(1) and therefore must be read with the full richness of its definition into the first clause of that article; to ignore the definition would render it completely redundant. When the clause is expanded in the light of the definition, it reads: “The property and income of a State shall be exempt from any Union tax or impost, whether general or local or special.” The underlined portion of that sentence represents the definition itself. The question then arises why the Constitution uses such a comprehensive wording and definition if there were no taxes in the legislative entries of List I that could be said to fall upon the property of the States, unless one were to think of customs duties and excise duties. According to Wells in Theory and Practice of Taxation (p. 204), taxation, when considered scientifically, is the taking or appropriating of portions of a country’s product or property that are necessary for the support of its Government by methods that are not in the nature of extortions, punishments or confiscations. Viewed in this broad sense, and keeping in mind that the term “taxation” as used in the article was deliberately defined with great breadth, the answer to the posed question becomes apparent. The definition also contains the word “impost.” In its ordinary sense, “impost” means a tax, tribute or duty and may be imposed on persons or on goods. In a special sense, it refers specifically to a duty on imported goods and on merchandise, as noted in Pacific Ins. Co. v. Sonle (7 Wall. (U.S.) 433 : 19 L.Ed. 95). In Ward v. Maryland (12 Wall. (U.S.) 418 : 20 L.Ed. 449) it is explained that an impost, or a duty on imports, is a custom or tax levied on articles brought into a country. Although the Oxford Dictionary attributes this special meaning to Cowell and provides no evidence of origin, every legal‑terms dictionary confirms the special sense. Moreover, the American Constitution classifies “impost” together with “duties” and “excises” as indirect taxes, distinguishing them from taxes on property or capitation. The word “duties,” while sometimes synonymous with tax, in its special sense denotes an indirect tax imposed on the importation or consumption of goods, as discussed in Pollock v. Farmers' Loan & Trust Co. (158 U.S. 601, 622 : 39 L.Ed. 1108). Article 289(1) therefore exempts the property of the States from Union taxation. One cannot rely solely on the word “property”; the full scope of “taxation” must also be taken into account. Accordingly, the definition has been read into the first clause of Article 289.

Continuing the reading into the definition, the term “impost” is understood not merely as a generic “tax” – a usage that would be redundant because the word “tax” already appears – but specifically as a “duty on importation or consumption.” This interpretation yields the result that “The property and income of a State shall be exempt from any Union tax or duty on imported goods or merchandise of all kinds.” In other words, the property of the States is free from both direct taxes and indirect taxes. Consequently, from the perspective of the word “property” as well as from the perspective of the word “taxation,” the analysis arrives at the two categories of taxes that constitute the subject of the present controversy. If these taxes are omitted and the focus shifts to other possible taxes, the broad language of the definition is lost. While the definition might conceivably encompass certain taxes in very special circumstances, the proceeds of such taxes would be assignable to the States, rendering their inclusion for purposes of taxation essentially pointless.

In this passage the Court explained that the word “impost” should not be understood merely as the word “tax,” because the term “tax” had already been used and the law avoids redundant expressions. Instead, the Court interpreted “impost” to mean a duty that is imposed on the importation or consumption of goods. Applying that meaning, the Court arrived at the proposition that the property and income of a State shall be exempt from any Union tax or duty that is levied on imported goods or merchandise of any kind.

The Court then clarified that, in other words, the property of the States shall be free from both direct taxes and indirect taxes. It observed that, when the word “property” is examined together with the word “taxation,” the analysis leads to the two categories of taxes that form the subject of the present controversy. The Court warned that the broad language would be entirely lost if those taxes were omitted and the focus shifted to searching for other possible taxes. It noted that the definition might, in very special circumstances, extend to some of those other taxes, but the proceeds of such taxes are assignable to the States. Consequently, it seemed pointless to include them for taxation only to later remit the proceeds back to the States. The Court further remarked that the distinction between the trading activities of State governments and their ordinary governmental functions—an elaborate distinction developed in the American model—would also become meaningless. Accordingly, Clause (2) would be of little necessity, and Clause (3) even less so.

Turning to the next issue, the Court asked whether customs duties and excise duties are, in their true nature, taxes that arise on the occasion of importation in the former case and on production in the latter case, and therefore cannot be described as “taxes on property.” The Court observed that the expression “taxes on property” is not employed, nor is the expression “taxes in respect of property,” which had been used for comparison. It pointed out that the former expression appears in the Australian Constitution Act, where the High Court of that country made a distinction. The Court confined its concern to the question of whether the imports of the States would be exempt from Union taxation. It stated that if customs duties are regarded as a tax on the movement of goods, then the exemption would not have been earned, and the amendment would be upheld as valid. Conversely, if customs duties could be characterised as a “tax on property,” the opposite conclusion would follow.

In support of its analysis, the Court cited the authoritative observation of Chief Justice Marshall in Brown v. Maryland, where it was held that an impost or duty on imports is a custom or tax levied on articles brought into a country, and that such duty is usually secured before the importer is allowed to exercise ownership rights over the articles, because imposing the duty while the articles are in custody more effectively prevents evasion. The Court added that the duty would not become any less an impost or duty on the articles even if it were levied after the articles had arrived.

The Court noted that the duty could be collected after the goods had been landed, and that the policy of securing the duty before or on entry into the port did not confine the power to that particular circumstance unless the true meaning of the relevant clause required such a limitation. It then turned to the meaning of the term “imports”. Dictionaries describe “imports” as the things imported, and ordinary usage confirms that the term refers to the articles themselves that are brought into the country. Consequently, a “duty on imports” is not merely a charge on the act of importation but a charge that attaches to the thing imported.

In the decision of Marriott v. Brune, later affirmed in Lawder v. Stone, the Court had held that customs duties are charges imposed on commodities at the moment they are imported into or exported from a country. That precedent establishes that customs duties cannot be characterized solely as taxes on the movement of goods; rather, they are taxes on the goods themselves. A review of the Sea Customs Act of 1878, which is the statute under amendment, shows that the legislative practice in this jurisdiction has consistently described customs duties as levied upon the goods or commodities. Section 20 of that Act, the provision being amended, expressly provides that customs duties shall be levied on (a) goods imported or exported, (b) opium, salt or salted fish imported, (c) goods brought from any foreign port, and (d) goods brought in bond from one customs port to another. Similar language appears in sections 25, 26, 27, 28, 29, 29A, 31 and 32, each naming goods as the subject of the tax. Section 43, which deals with drawbacks, states that when goods charged with import duty at one customs‑port are subsequently exported to another port and then re‑exported by sea, the drawback shall be allowed as if the goods had been re‑exported from the original port.

The Court observed that the duty is laid on the goods themselves and that it is the goods that generate the entitlement to a drawback. It would therefore be inaccurate to suggest that the Sea Customs Act addresses anything other than goods throughout its provisions. The Court then considered the situation where the goods are the property of a State. It held that if such goods must bear the tax before the State can exercise ownership rights, it would be erroneous to conclude that the exemption provided in Article 289(1) of the Constitution applies to them. The language of the constitutional clause, read together with the definition of “taxation”, states that the property of a State shall be exempt from any Union tax or impost, whether general, local or special. Finally, the Court noted that Parliament, in 1951, shortly after the Constituent Assembly adopted the Constitution, amended Section 20 of the Sea Customs Act by inserting sub‑section (2) to give effect to the constitutional provision.

In this case the Court considered the amendment made to section 20 of the Sea Customs Act, 1878, by inserting sub‑section (2). The newly‑added provision read: “The provisions of sub‑section (1) shall apply in respect of all goods belonging to the Government of a State and used for the purpose of a trade or business of any kind carried on by or on behalf of that Government, or of any operations connected with such trade or business as they apply in respect of goods not belonging to any Government.” The Court observed that this sub‑section reproduces clause (2) of Article 289 of the Constitution. By reproducing that clause, the provision treats imported goods as property, regards customs duties as “taxation”, and declares that even when the goods belong to a State Government they will be liable to tax in the circumstances described in the constitutional clause. The Court described this as a perfect example of contemporanea expositio, noting that the provision is not a modern statute being read with an older one, nor is there any judicial interpretation involved. Instead, it is an instance where the same Legislature that framed the Constitution later enacted a statutory provision to give effect to the intention and meaning of a constitutional provision that they had previously adopted. In their understanding, the Constitution’s change from the term “land and buildings” in section 154 of the Government of India Act, 1935, to the broader term “property” meant that the exemption granted to such property from Union taxation would apply to customs duties as well. The Court added that, had there been any doubt about the construction of Article 289, this amendment would have clarified the issue, but it concluded that the matter leaves little room for doubt.

The learned Solicitor‑General repeatedly emphasized that customs duties serve a dual purpose – they raise revenue for the Union and they regulate foreign trade. He linked excise duties with customs duties and referred to a Privy Council decision from Canada to argue that if the proposed amendment were held unconstitutional, the regulatory portion of the law would fail, yet it would not be jeopardised by Article 289 or any other constitutional provision. The Court indicated that this argument required serious consideration. It further affirmed that Parliament possesses plenary power to regulate foreign trade and that such power is not constrained by any provision of Article 289. A similar view could be taken concerning excise duties, although the regulatory element in excise is weaker than that in customs duties. The Court then posed the central question: what purpose does the proposed amendment aim to achieve? It recognised that separating the regulatory aspect from the revenue‑raising aspect of customs duties is difficult. The Court noted that even in jurisdictions such as Australia, where tax statutes are confined strictly to taxation, the regulatory dimension of customs duties has been acknowledged, and that in the United States the regulatory role of customs duties has also played a prominent part. Consequently, the Court asked whether the combined effect of entries 83 and 41 of List I would support the amendment, leaving the matter open for further analysis.

In this case, the Court considered whether the proposed amendment could be justified on the basis that regulation was inseparably linked to taxation. The Court explained that if the amendment were intended solely to regulate or even prohibit the importation of certain goods by a State Government acting jointly with others, such a law would not conflict with the exemption provided by Article 289. The Court noted that an argument could be made in favour of the Union if the legislation sought to achieve both regulatory and revenue objectives. However, when the question was limited to whether States could impose taxes on goods to raise revenue, the Court answered plainly that such taxation was not permissible except in the limited circumstances already described in the two sub‑sections proposed to be amended. The Court observed that Section 20 of the Sea Customs Act and Section 3 of the Central Excises & Salt Act were not designed to regulate external trade or production and manufacture; rather, they were traditional revenue‑raising provisions. The Court further stated that any pretense of regulation was entirely removed by the proposed amendment, which, quoting Mr. Justice Douglas, amounted to “a measure designed to put the States on the tax collectors’ list”. Consequently, the Court answered the customs‑duty question without referring to Entry 41 of the Union List and rejected the notion that States would lose valuable exchange by importing goods freely, describing such speculation as “horrible imaginings”. The Court also emphasized that State Governments were expected to act sensibly concerning public finances.

Regarding excise duties, the Court held that genuine regulatory questions concerning trade, production, or manufacture arise only in rare circumstances, as most regulatory power over production and manufacture—except for essential commodities listed in No. 33 of List III and those specifically mentioned in List I—belongs to the States. The Court explained that Entry 84 relates to tobacco and various goods, excluding alcoholic liquors for human consumption, opium, Indian hemp, and other narcotic drugs. If regulation were required, the authority would need to be found in either List I or List III. In contrast, where the purpose is pure taxation, excise duty is imposed on goods in much the same way as customs duty. The Court cautioned that judicial observations describing excise as “on production and manufacture” are not as binding as statutory language, noting that other judges have described excise duties as “on goods produced or manufactured”.

The judgment noted that the Central Excise and Salt Act adopts the same wording as the constitutional lists, and therefore there is no distinction between excise duties and customs duties for the purpose of the discussion. The court explained that the situation is straightforward because goods that are produced by a State for its ordinary governmental functions, and not for trade or business, belong to the State and are directly owned by it. Taxing such property would invoke the immunity provision of Article 289(1) of the Constitution, rendering the comparison with customs duties largely irrelevant. Consequently, the court held that neither customs duties nor excise duties may be imposed on property belonging to a State when the goods are either imported or produced for purposes incidental to the normal functions of government rather than for commercial purposes. The court further observed that the existing provisions of the two Acts accurately reflect the constitutional position. It added that, should the Union Government wish to curb excessive importation of goods by the States, it may do so by exercising its power to regulate external trade, a power that is not limited by Article 289. Measures such as controls, licensing and similar regulatory mechanisms would therefore remain valid, whereas a purely fiscal measure intended to tax property used for State or governmental purposes would be barred by the constitutional exemption.

The court answered the questions referred to it as follows: first, Article 289 of the Constitution bars the Union from imposing or authorising customs duties on the import or export of State property used for purposes other than those specified in clause (2) when the purpose of the duty is to raise revenue rather than to regulate external trade; second, the same constitutional provision prevents the Union from imposing or authorising excise duties on the production or manufacture in India of State property used for purposes other than those listed in clause (2); third, the answer to the overall query was affirmed. The judge expressed complete agreement with the opinion of the Chief Justice regarding both the answers to the questions and the reasoning underlying them. The judge added a brief comment, noting that counsel for the States had emphasized certain points that deserved fuller consideration. The judgment then recorded the Solicitor‑General’s submission that a proper construction of Article 289(1) limits the immunity from Union taxation to a direct tax on property and does not extend to indirect taxes, which are levied not on the property itself but on an incident.

In this case, counsel representing the States argued that introducing a distinction between direct and indirect taxes would create a classification that does not appear in the constitutional framework. They noted that the Constitution contains no express separation of taxes into those categories, yet taxes such as customs duties, export duties and excise duties, when imposed to regulate trade and commerce within Parliament’s competence under various entries in List I, cannot be described as taxes on property because they are levied on the movement of goods or on their manufacture rather than on the ownership of the property itself. Consequently, even though the Constitution does not allocate legislative power to tax based on a direct‑versus‑indirect distinction, it would be erroneous to assert that the distinction is irrelevant when construing the exemption contained in Article 289(1). The States’ counsel correctly pointed out that the Constitution does not distribute taxing authority between the Union and the States on the basis of a direct‑indirect split, unlike the scheme found in Canada. The judgment also observed that a similar situation exists in Australia, where the Commonwealth Parliament possesses an exclusive right to impose customs and excise duties—subject to the requirement of uniformity—and may also levy direct taxes provided they do not discriminate, while the States retain the power to impose their own direct taxes. Nevertheless, the absence of a constitutional distribution of taxing power does not, by itself, eliminate the relevance of the direct‑indirect distinction for a particular interpretive purpose. Both parties agreed that a distinction between direct and indirect taxes undeniably exists, and no argument was presented to refute its existence. The pivotal issue, therefore, was whether this distinction had any material significance for interpreting the phrase “the property of a State not being subject to Union taxation.” The question arose as to whether reference to “property” and “its taxation” meant only a tax on the property as such—i.e., a tax on the State’s beneficial ownership—or whether it also encompassed a tax that merely bears a relationship to, or has an impact upon, that property. Ultimately, the distinction between direct and indirect taxes is rooted in the differing impact of the tax: a direct tax is imposed on ownership or beneficial interest, whereas an indirect tax is imposed on a transaction or event relating to the property rather than on the ownership itself.

In this part of the judgment, the Court explained that if a tax is imposed on property only because of the ownership of that property, the tax is regarded as a direct tax, whereas a tax that is imposed because of some transaction or other relationship to the property is classified as an indirect tax. Accordingly, the Court held that the contention advanced by the Union—that the Constitution does not allocate legislative authority over taxation between the Union and the States on the basis of a distinction between direct and indirect taxes, as is done in Canada—was not a material point and could not determine the issue that the Court was addressing. The Court noted that the States had argued forcefully that if article 289(1) were interpreted in the narrow way proposed by the Union—limiting the immunity to direct taxes on property and excluding taxes that merely affect property—the States would obtain no benefit from the provision. Their argument was based on the observation that the Union Parliament possessed no power under any entry in the Union List to levy direct taxes on property, and therefore the only way to give effect to the exemption would be to read it as covering indirect taxes on property, such as excise duties and customs duties. The Solicitor‑General for the Union countered that even under the construction he advocated, the exemption could still operate because it might have been drafted with a view to possible direct taxation of certain forms of property under entry 97 of the Union List read with article 248, even though such taxes had not yet been imposed. He further contended that the exemption could be invoked where a State owned property situated in Union territories, since in that situation article 246(4) would empower the Union Government to legislate on matters enumerated in the State List and thereby levy direct taxes on that property. Opposing this view, it was submitted that it would be unreasonable to interpret the words of the clause on the basis of such hypothetical and unlikely scenarios, and that the Constitution‑makers must be understood to have intended to provide for the ordinary and normal situation. The Court observed that the submissions of the Solicitor‑General were not without merit. However, the Court also considered that the historical background of the clause was sufficient to reject the States’ line of argument as lacking decisive force. The Court pointed out that article 289(1) was adopted from section 155(1) of the Government of India Act, 1935, with a specific alteration. That earlier provision read: “Subject as hereinafter provided, the Government of a Province shall not be liable to Federal taxation in respect of lands or buildings situate in British India or income accruing or arising or received in British India.” The Court highlighted that the only material change made in the Constitution was the replacement of the words “lands and buildings” with the single term “property,” thereby extending the immunity beyond immovable property to include other forms of property as well.

In this passage the Court observed that the amendment extended the immunity from taxation not only to the specific type of immovable property originally mentioned but also to other categories of property, including movable property. The Court noted that the pattern of legislative authority over taxation that existed under the Government of India Act was the same as the pattern set out in the Constitution. At the time of the Act, and likewise today, the Central Legislature possessed no power to impose direct taxes on lands and buildings, and there was no corresponding entry, such as entry 97, in the Union list. The residual authority that remained after the allocation of powers among the three lists was vested in the Governor‑General for distribution under section 104. Consequently, the Court found that it would have been impossible to locate any room within the scheme of taxing‑power distribution under the Government of India Act for the exemption to operate, except perhaps in a narrow sense suggested by the learned Solicitor‑General. The Court therefore concluded that, when one looks solely at the division of taxing authority between the centre and the provinces, there is no basis for giving a broader meaning to the phrase “taxes on lands and buildings.” This observation supports the view that the mere fact that direct taxes on property do not fall within Union legislative competence does not, by itself, justify interpreting the exemption from taxation as having a broader or particular scope.

The Court then turned to the next issue, namely whether the inclusion of property other than “lands and buildings” in Article 289(1) creates an immunity that covers not only the property itself but also any incident or event relating to that property, such as its production, manufacture, import or export, which are the incidents relevant to the present context. The Court asked whether the Article envisages the same kind of taxes on movable property as were covered by the exemption for “lands and buildings” under the Government of India Act, 1935. In other words, with respect to “lands and buildings” under the 1935 Act, does the present provision bring within its ambit a direct tax arising merely from ownership of other species of property, or does it also include a tax levied on an incident or event connected with the property? The Court observed that the analogy of the exemption from direct taxes on “lands and buildings” under the 1935 Act tended to support the view that the Constitution intended a similar direct tax exemption for other forms of property within Article 289(1). The Court, however, acknowledged that this view could be displaced by sufficient reasons pointing in the opposite direction. In this context, the Court referred to the use of the term “taxation” in Article 289, which is defined in Article 366(28) as including the imposition of any tax or impost, whether general, local, or special, and that “tax” shall be construed accordingly.

In the judgment, the Court observed that Article 366 clause 28 defines the term “taxation” to include the imposition of any tax or impost, whether it is general, local, or special, and that the word “tax” must be interpreted in accordance with that definition. The Court noted that if this expansive definition were applied to every “tax, duty or impost” falling within the scope of the exemption in Article 289, the arguments advanced on behalf of the States would become extremely persuasive. A subsidiary point was raised that the expression “taxation” appears solely in Article 289, and that if the broad definition contained in Article 366 clause 28 were not employed to give meaning to that word in Article 289, the definition itself would become essentially meaningless.

Before addressing those arguments, the Court considered several preliminary matters. It affirmed that although the word “taxation” is found only in Article 289(1), the definition of that term in Article 366 was taken directly from section 311(2) of the Government of India Act, 1935. Similarly, in the 1935 Act the word “taxation” occurs only in section 155(1), which corresponds to Article 289(1) of the Constitution. The Court emphasized that the definition in Article 366 applies not merely to the singular term “taxation” but also to its grammatical variants, such as “taxes.” Consequently, the issue was whether, in the context of the constitutional provision, the antecedent history, the form of the clause, and the other constitutional provisions, there was any justification for interpreting the word more narrowly than the full breadth afforded by the definition.

The Court then turned to Article 285, which provides the Union with immunity from State taxation. Article 285(1) states that the property of the Union shall, except where Parliament may legislate otherwise, be exempt from all taxes imposed by a State or by any authority within a State. Clause (2) adds that nothing in clause (1) shall, until Parliament provides otherwise, prevent a State authority from levying any tax on Union property that was liable to tax immediately before the commencement of the Constitution, provided that such a tax continues to be levied in that State. Two observations were highlighted. First, the use of the word “all” in clause (1)—borrowed from section 154(1) of the Government of India Act—does not appear in Article 289(1). The Court noted that this variation is significant because if the definition of “taxes” in Article 366 clause 28 were applied to the word “all” in Article 285(1), the term “all” would become redundant, the definition already encompassing every tax. This suggests that the framers may have intended that, despite the broad definition, the word “all” was inserted to expressly broaden the scope where necessary. Second, the Court observed that if the definition of “taxes” were read into Article 285 and the article interpreted literally, Union property would be exempt from tax regardless of whether the beneficial use and occupation of that property were in the Union, thereby potentially extending the exemption to taxes levied on private occupiers of Union land.

In examining the term “all” that appears in article 285(1), the Court observed that the definition of “taxes” contained in article 366(28) already encompassed every possible tax. The argument presented on behalf of the States was that the word “all” therefore seemed redundant and superfluous. The Court noted, however, that the inclusion of the word could indicate that the Constitution‑makers were aware that the definition in article 366(28) might not always be interpreted with its fullest possible meaning. Consequently, they may have wished to reinforce or, if necessary, broaden the scope of the exemption by expressly adding the term “all”. The Court further considered the effect of reading the definition of “taxes” into article 285 and then applying the article literally. Under such a literal construction, any property owned by the Union would qualify for the exemption, irrespective of whether the beneficial occupation and use of that property occurred within the Union. In other words, a private person who occupied Union land could enjoy an exemption from tax even when the tax was imposed on the private occupier’s beneficial interest. To illustrate this point, the Court referred to section 125 of the British North America Act 1867, which declared that no lands or property belonging to Canada were liable to provincial taxation. The Court then recounted the case of a lessee of Dominion Crown lands in Saskatchewan who was assessed land tax on his interest in the leased land. The Dominion challenged the assessment on the ground that section 125 granted immunity to the land itself. Viscount Haldane, speaking for the Judicial Committee, rejected this contention, observing that although the appellant was taxed in respect of his occupation of land, the land remained Crown property and the statutory tax operated only upon the appellant’s own interest. The Court cited this passage from Smith v. Vermillion Hills [1916] 2 A.C. 569, 574, to demonstrate that a purely literal reading of an immunity provision may lead to unintended results.

The Court emphasized that provisions of this nature cannot always be interpreted strictly literally; instead, the purpose and scheme intended by the framers must guide construction. The Court explained that the overall distribution of legislative powers, particularly the exclusive Union authority over “trade and commerce with foreign countries” and, by extension, “import and export across customs frontiers,” should be kept in mind when construing the duties now under consideration. These import and export duties, which affect movement across the customs frontier, are central to the question of whether the Union’s exclusive power can be fragmented by individual States imposing their own requirements without duty. The Court therefore considered the intimate correlation between the Union’s exclusive legislative competence in foreign trade matters and the fiscal measures that accompany such trade. In this context, the Court noted an additional submission made by counsel for the States. That submission, which required detailed examination, was based on the impact of clause (2) of article 289 and its relationship to the exemption articulated in clause (1). The Court indicated that this further argument would be addressed in the subsequent analysis.

In this part of the case, counsel for the States contended that the phrase “non‑obstante” introducing clause (2) should be read as indicating that, if clause (2) were absent, the exemption in clause (1) would automatically apply even when a State was carrying on a trading activity. The argument therefore implied that clause (2) functions as a limitation on the broad exemption granted by clause (1), depriving the Union of the power to levy a tax in the opposite situation. Consequently, the counsel submitted that the wording of clause (2) itself could be used to discover which kinds of taxation were excluded from the immunity created by clause (1). In other words, the content of clause (2) was presented as a key to defining the scope of the exemption covered by clause (1). The counsel then set out the specific taxes that, notwithstanding the blanket exemption of clause (1), the Union was permitted to impose under clause (2).

According to the submission, clause (2) authorises the Union to levy three principal categories of tax. First, a tax may be imposed on “a trade or business of any kind carried on by or on behalf of the State.” Within this category, the taxes that could be attracted, as read against the Union List, include: (a) income tax (entry 82); (b) corporation tax (entry 85) where the State conducts business through a State‑owned or State‑controlled corporation; and (c) tax on the capital value of assets of companies (entry 86) when the State operates through a State‑owned corporation. Second, the Union may levy taxes on “operations connected with a trade or business.” The counsel identified possible examples such as a tax on freight, a sales tax, and, in addition, customs duties and excise duties. Third, the Union may impose taxes on “property used or occupied in connection with such a trade or business or any income arising therefrom.” The argument emphasised that not only direct taxes on property or income, but also taxes that are incidental to the operations connected with a trade or business—customs and excise duties being illustrative examples—could be imposed by the Union when a State is engaged in a trade or business. It was further submitted that, where the State is not using its power for a trade or business, those taxes would fall within the exemption provided by Article 289(1). In essence, the counsel argued that Parliament’s limited authority to tax States or entities acting on their behalf implies that, in situations not covered by clause (2)—that is, where there is no connection with a trade or business—the exemption in clause (1) would apply. Finally, the counsel raised the precise relationship between clauses (1) and (2), questioning whether clause (2) should be regarded as a properly worded proviso carved out of the main provision of clause (1), and that, but for such carving out, the matters covered by clause (2) would have been within the ambit of clause (1).

In the Court’s discussion, clause (1) was the subject of extensive debate, but the Court found it unnecessary to resolve that highly technical issue because the historical background of clause (2) provides substantial insight into its meaning and its role within the overall framework of tax exemption. The Court referred to the Imperial Economic Conference of 1923, at which a resolution was adopted stating that the Parliaments of Great Britain, the Dominions and India should be invited to enact a declaration that the general and specific provisions of their respective taxation statutes could be applied to any commercial or industrial enterprise conducted by any other such Government as if the enterprise were carried on by, or on behalf of, a subject of the British Crown. This resolution explicitly distinguished between the trading and business activities of the various constituent units that owed allegiance to the Crown of England and the governmental functions of those units. In order to implement the resolution, the Imperial Parliament passed section 25 of the Finance Act 1925 (15 and 16 George V, Chapter 36). The substantive portion of that section read, in essential terms: “Where a trade or business of any kind is carried on by or on behalf of the Government of any part of His Majesty’s Dominions which is outside Great Britain and Northern Ireland, that Government shall, with respect to the trade or business and all operations connected therewith, all property occupied in Great Britain or Northern Ireland and all goods owned in Great Britain or Northern Ireland for the purposes of that trade or business, and all income arising therefrom, be liable, in the same manner as any other person would be in a comparable case, to all taxes then in force in Great Britain or Northern Ireland.” Section (2) of the same provision continued with further details, and section (3) clarified that nothing in the section should affect the immunity of such a Government from taxation on any income or property that does not fall within sub‑section (1), nor should it affect other specified immunities. A comparable measure was later incorporated into Indian law through the Government Trading Taxation Act, 1926 (Act 3 of 1926). The preamble of that Act declared it expedient to ascertain the tax liability, for the period then prevailing in British India, of the Government of any part of His Majesty’s Dominions, excluding British India, with respect to any trade or business conducted by or on behalf of that Government. The operative clause, section 2, stipulated: “Where a trade or business of any kind is carried on by or on behalf of the Government of any part of His Majesty’s Dominions, exclusive of British India, that Government shall, with respect to the trade or business and all operations connected therewith, all property occupied in British India and all goods owned in British India for the purposes thereof,” thereby extending the taxation framework to such governmental commercial activities.

In that provision, every income that arose in connection with the trade or business of a foreign government was required to be liable to two forms of tax. First, the income was subject to taxation under the Indian Income‑tax Act of 1922, and it was to be treated in exactly the same way and to the same extent as a company would be taxed in a comparable situation. Second, the income was also subject to all other taxes that were then in force in British India, and it was to be taxed in the same manner as any other person would be taxed under those statutes. The provision further stipulated that, for the purposes of levying and collecting income‑tax under the Indian Income‑tax Act of 1922, any government to which the first sub‑section applied would be deemed to be a company within the meaning of that Act, and consequently all the provisions of the Act would apply to that government as if it were a company. Finally, the section defined the expression “His Majesty’s Dominions” to include any territory that was under His Majesty’s protection or over which a mandate was being exercised by the government of any part of His Majesty’s Dominions.

The Court observed that this language clearly extended to a foreign government that was carrying on a trade or business, or that owned or used property, within British India. Although the Act had later been amended to reflect constitutional changes that occurred after 1926, the Court deemed it unnecessary to discuss those later modifications. The Court noted that proviso (a) to sub‑section (1) of section 155 had introduced an exemption on the same terms as the 1926 Act for the Provinces under the Government of India Act of 1935, and that this incorporation was made without any reference to the distribution of legislative powers set out in Schedule 7 of the Government of India Act. Because this historical origin was not easily reconciled with the exemption found in Article 289(1) of the Constitution, the Court concluded that it would be inappropriate to interpret the Union’s saving clause in clause (2) as affecting the scope of Article 289(1). The Court also considered a separate line of argument raised on behalf of the States, which claimed that if the term “taxes” in the property‑exemption clause were limited only to direct taxes on property, the exemption would become meaningless, since the Union could not impose such direct taxes. Referring to the taxes listed in Article 289(2), the Court pointed out that these include taxes on “property used or occupied for the purpose of such trade or business.” A tax on the use of property or on the property itself, when occupied for trade purposes, would plainly be a direct tax on property, a type of tax that, under the Government of India Act and the Constitution, the Central legislature and Parliament are constitutionally incompetent to impose.

In that portion of the judgment, the Court observed that the States did not maintain that the Union possessed the authority to impose a tax on the occupation or use of property when such occupation or use was connected with a trade or business. The Court explained that this lack of contention demonstrated that it would be unreasonable to infer, from clause (2), that the Parliament would be empowered, in the absence of that clause, to levy such a tax. The Court further noted that the remaining arguments raised by the States had already been addressed in the opinion delivered by the Chief Justice, and therefore the present judge did not intend to revisit those points. The judge expressly expressed agreement with the view that the questions referred to the Court for its opinion should be answered in the same manner as they had been resolved by the Chief Justice. Accordingly, the Court, on behalf of the majority, concluded that the answer to each of the three questions presented was in the negative. The judgment concluded by stating that the questions were answered accordingly.