1963 (5) TMI 57 - SC - Customs

Constitution Limits Tax Immunity: Indirect Taxes Apply

The Court unanimously held that the immunity granted by Article 289(1) of the Constitution is limited to direct taxes on property and income and does not ... Whether when Art. 289 provides for the exemption of State property from Union taxation, it only provides for exemption from that kind of Union taxation which is a tax directly on property? Whether the proposed extension of customs and excise duties to all goods belonging to the State Governments, imported or exported in the one case and manufactured or produced in the other, would not offend Art. 289? If the expression 'taxes' in relation to the exemption of property from tax were confined to direct taxes on property the exemption would be unmeaning, as such taxes could not be imposed by the Union? Held that:- It would not be proper to read the scope of the saving in favour of the Union in clause (2) as reflecting on the scope of Art. 289(1). A tax on the use of property or on the property itself which is occupied for the purpose of trade would obviously be a direct tax on property which ex-concessis the Central legislature under the Government of India Act and Parliament under the Constitution are incompetent to impose. It is not the contention of the States that the center has such a power to levy a tax on occupation or use of property where it is in connection with a trade or business. This would at least show that it is not justifiable to imply from clause (2) to the construction of clause (1) of Art. 289 that but for that provision Parliament would be entitled to impose such a tax. The other points urged have been dealt with in the opinion of my Lord the Chief Justice and I do not propose to cover the same ground. The questions referred to this Court for its opinion should be answered as they have been by the Chief Justice i.e. in the negative. Issues Involved:1. Interpretation of Article 289 of the Constitution regarding the immunity of States from Union taxation.2. Validity of imposing customs duties on State property.3. Validity of imposing excise duties on State property.4. Consistency of proposed amendments to the Sea Customs Act, 1878, and the Central Excises and Salt Act, 1944, with Article 289 of the Constitution.Issue-wise Detailed Analysis:1. Interpretation of Article 289 of the Constitution regarding the immunity of States from Union taxation:The main question revolves around the true scope and interpretation of Article 289 of the Constitution, which relates to the immunity of States from Union taxation. The Union of India argued that the immunity granted by Article 289(1) is restricted to direct taxes on property and income, and does not extend to indirect taxes such as customs duties and excise duties. The States contended that Article 289 grants complete immunity from all taxation on any kind of property, including indirect taxes. The Court examined the language of Article 289 and its historical context, concluding that the immunity under Article 289(1) is limited to direct taxes on property and income, and does not extend to indirect taxes such as customs duties and excise duties.2. Validity of imposing customs duties on State property:The Union argued that customs duties are taxes on the import or export of property and not taxes on property as such. The States contended that customs duties affect property and are within the immunity granted by Article 289(1). The Court examined the nature of customs duties and concluded that they are not taxes on property but are imposed on the event of import or export of goods. Therefore, customs duties do not fall within the immunity granted by Article 289(1), and the Union can impose customs duties on State property used for purposes other than those specified in Article 289(2).3. Validity of imposing excise duties on State property:The Union argued that excise duties are taxes on the production or manufacture of property and not taxes on property as such. The States contended that excise duties affect property and are within the immunity granted by Article 289(1). The Court examined the nature of excise duties and concluded that they are not taxes on property but are imposed on the event of production or manufacture of goods. Therefore, excise duties do not fall within the immunity granted by Article 289(1), and the Union can impose excise duties on State property used for purposes other than those specified in Article 289(2).4. Consistency of proposed amendments to the Sea Customs Act, 1878, and the Central Excises and Salt Act, 1944, with Article 289 of the Constitution:The proposed amendments aimed to apply customs duties and excise duties to all goods belonging to the Government of a State, irrespective of whether such goods are used for trade or business purposes. The States argued that these amendments would be inconsistent with the immunity granted by Article 289. The Court concluded that the proposed amendments are consistent with Article 289, as the immunity under Article 289(1) does not extend to indirect taxes such as customs duties and excise duties. Therefore, the Union can impose these duties on State property used for purposes other than those specified in Article 289(2).Summary of Judgments:The Court delivered a unanimous judgment, holding that the immunity granted by Article 289(1) is limited to direct taxes on property and income and does not extend to indirect taxes such as customs duties and excise duties. Therefore, the Union can impose customs duties and excise duties on State property used for purposes other than those specified in Article 289(2). The proposed amendments to the Sea Customs Act, 1878, and the Central Excises and Salt Act, 1944, are consistent with Article 289 of the Constitution.