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Issues: (i) Whether Article 289 of the Constitution precludes the Union from imposing or authorising customs duties on the import or export of property belonging to a State used for purposes other than those covered by clause (2); (ii) Whether Article 289 of the Constitution precludes the Union from imposing or authorising excise duties on the production or manufacture in India of property belonging to a State used for purposes other than those covered by clause (2).
Issue (i): Whether Article 289 of the Constitution precludes the Union from imposing or authorising customs duties on the import or export of property belonging to a State used for purposes other than those covered by clause (2).
Analysis: Article 289(1), read with Article 366(28), was construed in the light of the scheme of distribution of taxing powers, the complementary nature of Article 285, and the structure of Part XII. The immunity was held to be confined to taxation directly on property and income, and not to extend to customs duties, which are imposed on importation or exportation and operate as indirect imposts associated with trade regulation and revenue collection. Article 289(2) and (3) were treated as confirming that trading activities of a State and property used for such trade may be subjected to Union taxation.
Conclusion: Article 289 does not preclude the Union from imposing customs duties on such State property. The answer is against the State and in favour of the Union.
Issue (ii): Whether Article 289 of the Constitution precludes the Union from imposing or authorising excise duties on the production or manufacture in India of property belonging to a State used for purposes other than those covered by clause (2).
Analysis: Excise duty was treated as a levy on manufacture or production, not as a direct tax on property. On that construction, it falls outside the immunity in Article 289(1), which protects only property and income from Union taxation in the direct sense. The exception in Article 289(2) also indicates that State trading and connected operations are not immune from Union taxation.
Conclusion: Article 289 does not preclude the Union from imposing excise duties on such State property. The answer is against the State and in favour of the Union.
Final Conclusion: The constitutional immunity of a State from Union taxation was held not to extend to customs duties or excise duties in the context referred, and the proposed amendments were therefore not inconsistent with Article 289 except where clause (2) itself applies.
Ratio Decidendi: The expression that the property and income of a State shall be exempt from Union taxation protects only taxation directly on property or income, and does not extend to customs or excise duties imposed on importation, exportation, production, or manufacture.
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