TaxTMI 
TaxTMI 
2010 (12) TMI 1313
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....I. CS PATIL, G.A. JUDGEMENT All these appeals arise out of a common order dated 5.10.2007 passed by the learned Single Judge. The appellants herein are States of Meghalaya, Sikkim, Arunachal Pradesh, Nagaland, Kingdom of Bhutan, Madhya Pradesh and the promoters of States organised lotteries. 2. Writ Petitions came to be filed challenging the validity and vires of the Karnataka Tax on Lotteries, 2004 (for short hereinafter referred to as the 'State Act') promulgated by the State of Karnataka imposing tax on lotteries of the appellants/States. 3. According to the writ petitioners, the State Government was not justified in imposing tax on the sale of lottery tickets in view of the Judgement of the Apex Court in SUNRISE ASSOCIATES v. GOVERNMENT OF N.C.T OF DELHI & OTHERS 2000 (10) SCC 420, As lotteries were taken out of the ambit of 'betting and gambling', in view of H. ANARAJ v. STATE OF MAHARASTRA-(1986) 1 SCC 414, it was incorrect for the respondent/State to impose tax on lotteries of other States, which is nothing but implied tax imposition on the sale of lotteries conducted by other States. State Act being extra-territorial was also one of the contentio....
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....te and the said income forms a significant portion of the State budget of the respective States. It is contended, even the State of Karnataka was organising, conducting and promoting its own lotteries in and outside the State till 1.4.2007 and was collecting huge revenue from sale of such lotteries and it was in direct competition with the lotteries organised by the other State Government. They further contend, by virtue of Entry 40 List 1 of the Seventh Schedule to the Constitution of India, lotteries organised by the Government of India or Government of any State fall under this entry, therefore only by Central Act, legislation pertaining to such lottery has to be made. Therefore, the State cannot legislate any law in respect of organised lotteries in any manner whatsover, According to them, this is one of the methods adopted by the respondent/State to restrict competence of the lotteries organised by the other States with an intention to enrich itself at the cost of other States in complete violation of Section 5 of the Central Act. Initially it levied and imposed sales tax on lottery tickets of other State organised lotteries, treating the same as goods. After realising the mis....
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....Government and that Government in the context of the entrustment of power, can only mean Government of Maharashtra and none other. Under Entry 40 of list 1 of list 1 of the 7th schedule of constitution, Parliament has exclusive powers to make laws in respect of lotteries organised by the Government of India or the Government of a state. Since the subject of lotteries organised by the Government of India or the Government of a State has been made a subject with the exclusive legislative competence of Parliament, it must follow in view of Art. 246(1) and (3) that no legislature of a State can make a law touching lotteries organised by the Govt. of India or the Government of a state. The Apex Court further observed that the Union and the State organised lotteries were specifically taken out of the ambit of State legislative field from the expression betting and gambling under entry 34 of State list. Therefore according to them, State has no competence to make any law pertaining to lotteries organised by the Government of India or the Government of a State. In the case of WAVERLY JUTE MILLS CO. LTD. V. RAYMON AND CO. (INDIA) PVT. LTD. (AIR 1963 SC 90) while referring to the entri....
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....r alteration of the terms of leases which were in existence prior to act 67 of 1957. For that special legislative provision was necessary. In INDIA CEMENTS LTD. AND OTHERS Versus STATE OF TAMIL NADU AND OTHERS - (1990)(1)SCC 12, the controversy was whether levy of cess on royalty pertaining to extraction of mineral is within the competence of the State legislature. The argument was entry 50 in List II of the Seventh Schedule deals with taxes on mineral rights subject to limitation imposed by the Parliament relating to mineral development. Entry 23 of List II deals with regulation of mines and mineral development subject to the provisions of List I with respect to regulation and development under the control of the Union. Therefore, even though minerals are part of state List, they are treated separately. Therefore the principle that specific excludes the general must be applied. after referring to entry 54 of Union List 23 of the State List 49 of the State List 50 of the State List, Their Lordships ultimately held that royalty is a tax and as such cess on royalty is made competence of the State legislature because section 9 of the Central Act covers the field and the state legis....
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.... the States of the predicament. The impugned enactment makes this objective clear beyond any doubt. At the same time Parliament does not purport to clothe the State Legislatures with the power which they do not posses. Parliament had already deprived the State Legislatures of the power to levy tax on minerals by making the declaration contained in Section 2 of the MMRD Act as far back as 1957. The said declaration remains intact which means that the States have no power to levy any tax or cess on minerals so long as the said declaration remains in force. Parliament therefore adopted the only legislative course open to it in the circumstances. It created those very levies with retrospective effect by enacting the impugned law. Parliament being empowered to make a law with retrospective effect is entitled to make the law effective for such anterior period as it thinks appropriate. It cannot be said that unless the levy created with retrospective effect also kept alive on the date the law is enacted by Parliament such a levy would be incompetent. this would amount to envolving a principle unknown to law and would also amount to creating a fetter on Parliament for which there is no bas....
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....rtain to sale of lottery tickets in the State of Kerala. Their Lordships held that purchaser of lottery would have a claim to a conditional interest in the prize money which is not in the purchaser's possession. This right is actionable claim and is excluded from definition of 'goods' under the Sale of Goods Act and the sales tax statutes. Hence no sale tax is leviable. Reference is made to CAUVERY WATER DISPUTES TRIBUNAL (SAWANT J.) -1993 SUPPL. (1) SCC 96 (II). In this case challenge was to Karnataka Cauvery Basin Irrigation Protection Ordinance of 1991. Learned counsel Mr. Udaya Holla appearing for some of the appellants contents that in the above case. Their Lordships dealt with the distinctions between Art. 262, Entry 56 of List 1 and Entry 17 of List II of the constitution. Inter-State Water Disputes Act 1956 was made by the Parliament pursuant to the Art. 262 of the Constitution specifically for the adjudication of the disputes between the riparian States with regard to the use distribution or control of the waters of the Inter-State river or river valleys. The adjudication of disputes referred to above could be in relation to use distribution or control of the waters ....
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....tickets, nothing happens in the State of Karnataka and the entire operation of State organised lotteries like formulating the scheme, printing, etc. happens outside the State of Karnataka. Therefore, question of compensating the services provided by the State of Karnataka would not arise by mere sale of tickets of State organised lotteries in the State of Karnataka. In GODFREY PHILLIP INDIA LTD. v. STATE OF U.P. - [(2005) 2 SCC 515], the appellant-assessee had challenged imposition and levy of luxury tax on tobacco and tobacco products by trading them as luxuries within the meaning of the word "luxuries" in Entry 62 of List II. Under this entry, the exclusive power to make laws with respect to taxes on lotteries including taxes on entertainment, etc. vests with the State legislature. Their Lordships held at paras 68, 69, 70 as under: "68. NO State can therefore by describing an item as a luxury, seek to levy tax on its supply. It cannot be disputed that as far as U.P. and A.P. are concerned, were it not for their interpretation of Entry 62 of List II, the tax would be referable only to Entry 54 List II. If Entry 62 List II does not allow the taxation of goods, the levy ....
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.... down in 20^th CENTURY FINANCE CORPN. & TATA IRON & STEEL CO. VS. S.R. SARKAR. The law laid down in these Judgements is to the effect that is a ban is imposed by Arts, 286 & 269 on the taxation powers of the State, as they are independence and separate, first they must be got over before a legislature can impose tax on transactions of sale or purchase of goods. Such ban would operate by its own force without reference to the language in which an entry in List II of the VII Schedule has been couched. Therefore, the measure given to the filed of legislation by the language of entry in List II of VII Schedule is always subject to the limits of constitutional empowerment to legislate and it can never cross the barriers created by the Constitution. It was held that several entries in all the 3 lists of the VII Schedule though legislative heads are fields of legislation, they are not the source of legislative empowerment. It is further said that generally speaking, a legislation having extra territorial operation can be enacted only by Parliament and not by State legislature unless one can establish territorial nexus. This was with reference to BURMAH SHELL OIL STORAGE case. Their Lordsh....
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....I CIRCLE, BANGALORE & ANR. - (1992) 86 STC 450. i. YASHA OVERSEAS v. COMMISSIONER OF SALES TAX AND ORS. - (2008) 7 SCC 681. j. GREATER BOMBAY CO-OP. BANK LTD. v. UNITED YARN TEX (P) LTD. - (2007) 6 SCC 236. k. TWENTIETH CENTURY FINANCE CORPN. LTD. v. STATE OF MAHARASTRA - (2000) 6 SCC 12. l. THE BULLION & GRAIN EXCHANGE LTD. v. STATE OF PUNJAB - AIR 1961 SC 268. m. STATE OF SIKKIM & ANR. V. STATE OF KERALA & ORS. (2007) 15 KTR 426 (Ker.) In the case of I.T.C. Ltd. vs. A.P.M.C. (2002) 9 SCC 232, per majority their Lordship held that tobacco industry does not comprehend sale of raw tobacco. Therefore, Parliament was not competent to legislate in that respect and the question was whether the word 'industry' is to be constructed liberally or give a restricted meaning. Their Lordship per majority held that 'industry' includes only process of manufacture or production but does not include process antecedent thereto, such as acquisition of raw material and subsequent thereto, such as disposal of finished product of that industry. Therefore despite the declaration, Parliament is not competent to legislate in respect of such antecedent or subs....
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....ascertain if there is anything in any other part of the Constitution which places any fetter on the legislative powers of such Legislature. The impugned law has to pass all the tests." Placing reliance on R.M.D.C. (P) LTD. v. STATE OF MYSORE (AIR 1962 SC 594) wherein it was contended that the subject of betting and gambling enumerated under Entry 34 of List II of the VII Schedule and the taxes imposed on betting and gambling coming under Entry 62 of List II are to be read separately as separate powers and therefore, when control and regulation of prize competitions ere surrendered to Parliament by the State legislatures by virtue of resolutions, as required under Act, 252, the power to tax under Entry 62 of List II which is a separate head cannot be said to have been surrendered. It was further held in the said case that a tax has to be imposed for the purpose of revenue and not for the purpose of control and the Mysore Act, was really colourable legislation by which impugned tax was levied. The learned counsel for the respondent referred to a passage from AIR 1939 FC 1 which reads as under: "It is not for the Court to express or indeed to entertain, any opinion on t....
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....r any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State." Article 246: "(1) Notwithstanding anything in clauses (2) and (3) Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the "Union List"). (2) Notwithstanding anything in clause (3), Parliament and subject to clause (1), the Legislature of any State also, have power to make, laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the "Concurrent List"). (3) Subject to clause (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the "State List"). (4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List." Article 13: "(1) All laws i....
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....lauses. Under el. (1), a pre-Constitution law subsists except to the extent of its inconsistency with the provisions of Part III; whereas, no post-Constitution law can be made contravening the provisions of Part III, and thereof the law, to that extent, though made, is a nullity from its inception. If this clear distinction is bone in mind, much of the cloud raised is dispelled. When cl. (2) of Art. 13 says in clear and unambiguous terms that no State shall make any law which takes away or abridges the rights conferred by Part III, it will not avail the State to contend either that the clause does not embody a curtailment of the power to legislate or that it imposes only a check but not a prohibition. A constitutional prohibition against a State making certain laws cannot be whittled down by analogy or by drawing inspiration from decisions on the provisions of other Constitution; nor can we appreciate the argument that the words "any law" in the second line of Art. 13(2) posits the survival of the law made in the teeth of such prohibition. It is said that a law can come into existence only when it is made and therefore any law made in contravention of that clause presupposes that t....
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....l position regarding the sale of REP Licence as concluded by VIKAS case holding it as goods. GREATER BOMBAY CO-OP. BANK LTD v. UNITED YARN TEX. (P) LTD [(2007) 6 SCC 236]. In this case it is relevant to refer to the following: "The express exclusion of cooperative societies in Schedule VII List I Entry 43 and the express inclusion of cooperative societies in List II Entry 32 separately and apart from but along with corporations other than those specified in List I and universities, clearly indicates that the constitutional scheme was designed to treat cooperative societies as institutions distinct from corporations. The constitutional intendment seems to be that the cooperative movement was to be left to the States to promote and legislate upon and the banking activities of cooperative societies were also not to be touched unless Parliament considered it imperative Cooperatives from a species of the genus "corporation" and as such cooperative societies with objects not confined to one States are read in with the Union as provided in List I Entry 44; the MSCS Act, 2002 governs such multi State cooperatives. Hence, cooperative banks performing functions for the public wit....
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....ropriate legislature. In the present case, we do not find that Parliament has, by creating any fiction, fixed the location of sale in case of the transfer of right to use goods. We, therefore, have to look into the decisional law. 31. It was then argued that if Section 4 of the Central Sales Tax Act is not applicable to the transaction of deemed sale under Article 366 (29-A)(d), the same may be applied by analogy for determining the situs of sale of the transfer of the right to use goods. We have already held that situs of sale can only be fixed by the appropriate legislature by creating a legal fiction like the omitted Explanation to Article 286 (1) (a) but situs of sale cannot be fixed by analogy by Section 4 of the Central Sales Tax Act." THE BULLION & GRAIN EXCHANGE LTD Vs. STATE OF PUNJAB [AIR 1961 SC 268]. In this case their Lordships were considering Punjab Forward Tax Act and its validity. The question was whether it falls within entry 62 of List II of Schedule VII. Their Lordships held that if the Act provides for a tax on betting and gambling then and then only it can come within item 62. It is the fact that though in form of an agreement of sale purports t....
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....x on lottery as 'sale of goods'. Incidentally, the court held that draw of lottery cannot be treated as sale of goods for the purpose of taxation. However, in this case it is to be seen that what is taxed is draw of lottery under law made in exercise of statutory power left on the legislature under entry 62 of the state List which specifically authorizes levy of tax among other things on 'gambling'. Going by the above referred decision of the Supreme Court in KESORAM INDUSTRIES case it is clear that the Constitution does not bar State from making law on taxation in respect of the same subject which is reserved for Parliament for regulatory legislation. In the circumstances, the contention of the petitioners that the power of taxation on lottery is vested in Parliament through entry 40 of the Union List, is not tenable. I uphold the contention of the State that impugned Act is a valid piece of legislation enacted in exercise of authority conferred on the State under entry 62 of the State List." 13. It is necessary to refer to certain provisions of the state Act. Objects and preamble refer to levy and collection of tax on lotteries (gambling). It extends to whole of the State of K....
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.... (e) the State Government itself shall conduct the draws of all the lotteries; (f) the prize money unclaimed within such time as may be prescribed by the State Government or not otherwise distributed, shall become the property of that Government; (g) the place of draw shall be located within the State concerned; (h) no lottery shall have more than one draw in a week; (i) the draws of all kinds of lotteries shall be conducted between such period of the day as may be prescribed by the State Government; (j) the number of bumper draws of a lottery shall not be more than six in a calendar year; (k) such other conditions as may be prescribed by the Central Government." 14. It is also relevant to refer to certain Articles of the Constitution. Article 245 refers to the power of the Parliament and the legislature of a State to make laws for the whole or any part of the territory of India and for the whole or any part of the State respectively. Sub-article (2) of Article 245 says that no law made by the parliament can be termed as invalid on the ground that it would have extra territorial operation. Article 246 (1) refers to the s....
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....es. This is the implication arising out of a proper construction of entry 40 of list I and entry 34 of List II of the VII schedule. 15. In Anaraj's case the question arose was whether Govt. of Maharashtra could not impose a ban on the sale of lottery tickets of other States by virtue of entrustment of power by Art. 258 of the Constitution. By referring to Art, 73 & 298 it was held that these 2 articles in fact have to be read and considered together. By reading so, it is clear that the executive power of a state in a matter of carrying on any trade or business in respect of which the State Legislature may not make laws is subject to legislation by Parliament but is not subject to the executive power of the union. Hence, there is no obligation to obtain the permission of the Union Govt. so as to organise its lotteries in the absence of parliamentary legislation. Even assuming that such permission is required, a condition imposed by such permission that lottery tickets of one state may not be sold in another State, cannot be enforced by the other State. It was held that the other State cannot make laws in regard to the lotteries organised by the first State. Its executive power by....
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.... The entire sale proceeds would be used for the benefit of the public at large and this gives clear indication that it is not in the hands of individuals or associations. Inspite of all this the element of chance to win will persist. Therefore, their Lordships said that even the State organised lotteries will not go out of claim gambling. It would be useful to refer to another important decision which is already stated above i.e. SUNRISE ASSOCIATES vs. GOVT. OF DELHI. In this case, the question that arose before the Constitution bench of the Supreme Court was whether the decision in H. Anraj's case that lottery tickets are goods is correct or not. After elaborate discussion their Lordships held that the argument that the lottery tickets itself is the subject matter of sale which is assessable to sales tax was rejected. The lottery ticket has no value in itself and it is a mere piece of paper. Therefore, its value lies in the fact that it re[presents a chance or a right to a conditional benefit of winning a prize of a greater value than the consideration paid for the transfer of that chance. Hence, it is nothing but a token or evidence of such right. The sale of lottery ticket....
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....ernment of India or Government of a State. Entry 97 of the Union list refer to any other matter not enumerated in list II or III including any tax not mentioned in either of those list. However, by Judge made law in the decision of B.R. ENTERPRISES vs. STATE OF U.P. their Lordships held that even the lotteries organised by the Govt. of India or the lotteries by the State would fall within the realm of 'gambling' as element of chance persists with no element of skill. Therefore, there is no change in the character between the lotteries under Entry 34 list II and the lotteries organised by the State under Entry 40. 16. However, one has to see whether the State of Karnataka could impose tax on event takes place outside the State of Karnataka. 17. In the case of a SUNRISE ASSOCIATES Versus GOVT. OF NCT OF DELHI - (2006) 5 SCC 603, it was held that lotteries are actionable claim and are expressly excluded from the definition of goods for the purpose of sales tax laws. Contention that lottery ticket itself which is assessable to tax was rejected. The Larger Bench of the Apex Court in this case held that there was no sale of goods within the meaning of sales tax of the different Sta....
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....sociates, there cannot be imposition of sales tax on the sale of lotteries. According to the respondents, there is no imposition of tax on the sale of tickets as the levy of tax is irrespective of quantum of sale and the levy is on the factum of draw. Once a promoter registers within the State and does not sell a single ticket, according to the respondents, tax becomes due and payable. In that event, the payment of tax is not on draw but on conducting the lottery. As per the above decision the sale of tickets is a transfer of actionable claim and the winner is entitled for money only when draw takes place. When the event of draw, a taxable event happens outside the State of Karnataka (extra territorial), and all other activities other than sale happens outside the State of Karnataka, can the activity of sale alone be independently called as taxable event? It is not denied by the respondent/State that for any reason if the draw is cancelled, the payment of tax in advance would be refunded by the respondent/State to the State through their promoters by way of adjustment in final reconciliation. This would mean that tax is charged and levied only on draws and not on sale of tickets, a....
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....State does not wish to sell tickets of its own organised lotteries in the respondent/State, it need not get itself registered as a promoter. Then it is not liable to pay any tax. Such State though organises lottery is not liable to pay tax in the Karnataka because it does not sell the tickets within the State of Karnataka. 24. From 1.4.2007 the State of Karnataka declared a lottery free zone for the purpose of sale of tickets of lotteries organised by the State Government including lotteries organised by the State of Karnataka. Thus organising States can organise their lotteries and also can sell their tickets in other lottery operating States. By this, there is no sale of lottery ticket in the State of Karnataka and therefore, there is no tax levied under section 6 of the State Act. In such a situation, the other State will be organising and conducting their lotteries and even holding draws. Then indirectly it would mean, it is tax on the sale of lottery tickets and it cannot be said to be a tax on lottery, per draw. The law declared in Sunrise Associates is no tax can be levied on sale of lottery tickets since there is no sale of goods. The expression of 'sale' is not used tho....