TaxTMI 
TaxTMI 
2022 (3) TMI 1093
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.... Of Kartik Seth, AOR JUDGMENT NAGARATHNA J. INDEX 1. Bird's Eye View of Controversy ..........................................4 2. Submissions ......................................................................5 2.1. Submissions on behalf of Appellants: 2.1.1. Submissions on behalf of State of Karnataka....5 2.1.2. Submissions on behalf of State of Kerala..........9 2.2. Submissions on behalf of Respondents : 2.2.1. Submissions on behalf of State of Nagaland ......11 2.2.2. Submissions on behalf of State of Sikkim .........22 2.2.3. Submissions on behalf of State of Meghalaya...26 3. Reply Arguments.............................................................29 4. Points for Consideration..................................................34 5. Constitutional Scheme....................................................35 6. Acts under consideration : 6.1. The Lotteries (Regulation) Act, 1998..................62 6.2. The Karnataka Tax on Lotteries Act, 2004..........64 6.3. Kerala Tax on Paper Lotteries Act, 2005..............67 7. Para....
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....ch is a subject in Entry 40 of List I also encompasses the power to levy tax on the said lotteries? Consequently, whether under Entry 62 of List II the State Legislature is denuded of the power to levy tax on the said subject? In other words, whether the subject covered in Entry 40 of List I restricts the scope and ambit of Entries 34 and 62 of List II? If the answer is in the affirmative, whether the State Legislatures have no legislative competence to levy tax on lotteries organised by the Government of India or Government of a State. Consequently, the question in these cases is, whether, the legislature of States of Karnataka and Kerala had the legislative competence to enact Karnataka Act, 2004 and Kerala Act, 2005 respectively. Further, whether these Acts are unconstitutional as being extra territorial in operation? Submissions on behalf of Appellants: Submissions on behalf of State of Karnataka: 5. Sri N. Venkataraman, learned Senior Counsel and Additional Solicitor General appearing on behalf of the appellant-State of Karnataka contended that the impugned legislation passed by the Karnataka State Legislature does not seek to impose a tax on the sale of lottery ticke....
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....lature of gambling. The measure of taxation, in case of a bumper draw is Rs. 1,50,000/- and in case of any other draw is Rs. 1,00,000/-. 9. Learned Senior Counsel further referred to Paragraph 6 of Govind Saran Ganga Saran vs. Commissioner of Sales Tax - [AIR 1958 SC 1041] to state that when the source of taxation and occurrence of taxable event, along with the measure are available to tax a person, such a levy cannot be questioned. 10. Sri Venkataraman next urged that where a regulatory power and taxing power are traceable to different sources and are kept distinct under the Constitutional scheme, in such a case, the regulatory entry cannot subsume a taxing entry as was held in M.P.V Sundararamier and Co. vs. State of Andhra Pradesh - [AIR 1958 SC 468] and State of West Bengal vs. Kesoram Industries Limited - [(2004) 10 SCC 201]. He further relied upon a Seven Judge Bench decision in Synthetics and Chemicals Ltd. vs. State of Uttar Pradesh - [(1990) 1 SCC 109] wherein it was held that the power to regulate, develop or control would not include within its ken a power to levy tax or fee except when the said impost is only for a regulatory purpose. That it is permissible for th....
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.... to accept advance tax. In addition, a companion petition was filed challenging Section 10 of the aforesaid Act which was decided by the learned Single Judge of the High Court of Kerala on 10th January, 2007 and thereafter affirmed by the Division Bench on 30th March, 2007. The matter came up to this Court and vide Order dated 16th July, 2014 the High Court's finding was affirmed in respect of accepting advance tax; however, it did not accept the challenge to the aforesaid section. 14. Sri Shishodia, learned Senior Counsel, contended that opportunity was granted to the respondents to prove that the burden of tax paid during the period 2006-2010 was not passed on to consumers/purchasers of lottery tickets. That the same is contrary to law and was completely unwarranted in the present case. In support of his argument, he fervently relied on Mafatlal Industries Ltd. vs. Union of India - [(1997) 5 SCC 536] where it was held that there is a rebuttable presumption that an indirect tax borne by an assessee is passed on to consumers. Even when challenge to constitutionality of a tax succeeds, the relief of refund can be granted only when the assessee makes a claim to allege and establis....
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....ower of the State Legislature to make laws to regulate 'betting and gambling' and to impose 'taxes on luxuries, including taxes on entertainment, amusements, betting and gambling,' respectively. That although the expression 'betting and gambling' may be construed as the genus, within which 'lotteries' is a species, the specific field of lotteries organised by the Government of India or by the Government of any State, has been carved out of the genus of 'betting and gambling' and been placed under Entry 40 of List I, meaning thereby, that the same may be regulated or subjected to tax, only by the Parliament. In other words, it was contended that taxes on betting and gambling as envisaged under Entry 62 of List II, would be limited to those lotteries which are neither organised by the Government of India nor by the Government of any State. It was submitted that since the Act in question, enacted by the Legislature of the State of Karnataka, seeks to impose tax on the lotteries organised by the Central Government or by the Government of a State, it is beyond the legislative competence of State of Karnataka. That the State of Karnataka by enacting the impugned Act has attempted to legi....
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.... is also not inclusive of State organised lotteries. 21. It was further urged in this regard that if Entry 34 of List II is a general entry which deals with the regulatory power of the State Legislature in the area of 'betting and gambling', Entry 62 of List II vests a more specific power of taxation over 'betting and gambling' with the State Legislature. Once it has been held that a given expression, as appearing in a general entry would be construed to exclude a certain item, then it would naturally follow that such item would also be excluded from a specific entry which employs the said expression. In the instant case, lotteries organised by the Government of India or the Government of any State have been specifically excluded from the ambit of 'betting and gambling' as appearing in Entry 34 of List II, therefore, it would follow that it would also be excluded from Entry 62 of List II which is a narrower power, only dealing with taxation. Reference was made to Prof. Yashpal vs. State of Chhattisgarh - [2005 (5) SCC 420] wherein it was held that a narrow or restrictive interpretation would generally not be accorded to a legislative heading which is general in nature. In this r....
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....f lottery tickets which is not permissible. 24. In support of the said contention, the statement of objects and reasons of the impugned Act was referred to, which provides that it has been enacted with an intention "to regulate the actual number of draws held by any lottery promoter." It was submitted that while the statement of objects and reasons has been worded in a manner as if the legislation would seek to regulate the quantum of betting and gambling activities or the number of draws held by a lottery promoter, in effect, the tax sought to be imposed by the impugned legislation is in the nature of sales tax. That tax was being levied on the proceeds from the sale of lottery tickets and this would point to the tax being in the nature of sales tax. It was submitted that the impugned Act does not expressly employ the term 'sale of lottery tickets' but seeks to tax the same under the guise of regulating the number of draws held by a promoter. 25. Alternatively, it was contended that even if it is assumed for the sake of argument that the tax was being imposed, not on the sale of lottery tickets but on the conduct of lottery activities, including formulation and notification ....
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....ertaining to the lottery and prize competitions, were all conducted within the State of Bombay and it was in that context that this Court held that the State of Bombay possessed legislative competence to enact the Bombay Lotteries and Prize Competitions Control and Tax Act, 1948 which sought to control and levy tax on lotteries and prize competitions in the State of Bombay. In the said case, two conditions were laid down by this Court in order to establish territorial control: (a) real and not illusory connection; (b) the liability sought to be imposed must necessarily pertain to the said connection. In this context, it was urged that the State Acts impugned in these cases would satisfy the aforestated conditions only qua the sale and distribution of lottery tickets, which activity is in any case not taxable. Therefore, reliance placed by the appellants on the said case was misplaced. Contentions pertaining to the exigencies faced by North-Eastern States in generating revenue: 28. It was submitted that Section 10 of the impugned legislation requires the State which organises the lottery sought to be taxed, to deposit taxes in advance. This has resulted in a situation which is....
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....t may be construed that 'lotteries' organised by the Government of India or the Government of a State are not included within the expression 'betting and gambling' appearing in Entry 34 as well as Entry 62 of List II. In support of this contention, reference was made to a decision of this Court in R.M.D. Chamarbaugwala (supra) wherein a co-relation was established by the Court between the expression 'betting and gambling' as appearing under Entry 34 of List II and Entry 62 of List II, by holding that once it is held that a legislation falls under the topic of 'betting and gambling' under Entry 34 of List II, it would follow that the tax imposed by the same legislation would fall under Entry 62 of List II. In this context, it was contended that since it has been unequivocally declared that the tax imposed on 'betting and gambling' under Entry 62 of List II seeks to tax the same activity which is regulated under Entry 34 of List II, it logically follows that the expression 'betting and gambling' must be given the same meaning and interpretation in both these entries. In other words, an interpretation which suggests that 'lotteries' has been carved out of 'betting and gambling,' shoul....
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....njoint reading of Section 7 and 8 of the impugned Act, the only deduction that could be made would be that the event taxed was the sale of lotteries. 34. In reply to the contention advanced on behalf of the State of Kerala, to the effect that the burden of tax imposed on the State of Sikkim was being passed on to the consumer and therefore, the State of Sikkim was not entitled to claim refund of tax imposed even in the event that the impugned Act was struck down, as receiving a refund would amount to unjust enrichment, it was urged that the doctrine of unjust enrichment was not applicable to a State vide Mafatlal Industries Ltd. (supra). Therefore, the amount of tax collected by the State of Kerala without jurisdiction is liable to be refunded. Submissions on behalf of the State of Meghalaya: 35. Sri Arvind P. Datar, learned Senior Counsel appearing for the State of Meghalaya and Sri Amit Kumar, learned Advocate General for the State of Meghalaya adopted the contentions of Sri C. Aryama Sundaram, learned Senior Counsel appearing for the State of Nagaland. He made an additional argument as regards the exclusive Parliamentary power to impose taxation on lotteries organised b....
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....he statute pose a threat to the principle of inter-governmental immunity, which is well recognised and currently operating in India. 38. Learned Senior Counsel appearing for the State of Meghalaya urged that the doctrine of pith and substance and the aspects theory have no relevance to the instant matter. That the doctrine of pith and substance is employed by a Court to save a statute from being declared ultra-vires, when the main purpose of the statute is to legislate on an aspect which is within the legislative competence of the legislature that has enacted it, while an incidental or ancillary purpose sought to be achieved by the statute has the effect of branching into another list. However, in the instant case, the impugned Statutes have only one purpose viz. taxing Central and State organised lotteries. Therefore, they are in their entirety encroaching on the exclusive legislative domain of the Parliament. In a similar vein, it was contended that the aspects doctrine cannot be pressed into service in order to uphold the vires of the impugned Legislations as the said doctrine may be employed only when two aspects are found in the statute and each of such aspects is traceable....
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....r mutilated, it cannot be read by implication as held in M.P.V. Sundararamier (supra). 43. In respect of the submission relating to Article 289, Sri Venkataraman pointed out that there is a 'Constitutional bar' against the Union taxing the Income of a State, and the same cannot be taxed by virtue of Article 289. He stated that any activity conducted per se by the State, in this case conducting State Lotteries, cannot be taxed under Article 289. 44. Learned Senior Counsel then addressed the submission raised by the State of Nagaland that since the Union is imposing tax on lotteries under the GST regime, the power of taxation would vest with the Union even under the pre-GST era. He stated that the aforesaid submission was not right as it was incorrect to say that the Union is taxing under the GST regime. It was urged that GST is a unique tax traceable to Article 246A both in terms of power and field of legislation, under which the taxable event is one, namely supply and the taxing power vests both with the Union and the States. However, in the present case at hand, Article 246 is the source of power and Entries in List I and II are fields of legislation which have to be interpr....
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....1977 (1) SCC 155] in this behalf. 49. It was further urged that the respective contexts of the expression 'betting and gambling' under Entry 34 and Entry 62 both in List II are very different. Entry 34 of List II describes the legislative field of regulatory powers of the State over 'betting and gambling' while Entry 62 of List II describes the legislative field of taxation on 'betting and gambling' by States. Learned Senior Counsel for the State of Kerala emphasized upon the judgment of this Court in Kesoram Industries Limited (supra) and stated that the principles in the aforesaid case have also been approved in the case of Jindal Stainless Limited (supra). 50. Learned Senior Counsel submitted that there were several examples where regulatory powers are with the Centre and the taxing power is with the States. To fortify his argument, he relied upon State of Uttar Pradesh vs. Vam Organic Chemicals Limited and Ors. - [2004 (1) SCC 225] wherein it was held that the tax or fee imposed for regulatory purposes must not be mistaken as tax under taxing entry. The regulatory power cannot be used for plenary taxation. However, the levy of some regulatory charges under the Lotteries A....
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....eration. 246. Subject matter of laws made by Parliament and by the Legislatures of States - (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 clauses (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. 246A. Special provision with respect to goods and services t....
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....s in the Lists are the fields of legislative powers conferred under Article 246 of the Constitution. In other words, the Entries define the areas of legislative competence of the Union and State Legislature. 55. Article 246 deals with subject matter of laws made by Parliament and by the Legislatures of States as follows : (a) Clause (1) of Article 246 states that 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 (Union List). In this case, we are concerned with Entry 40 of List I, which deals with Lotteries organised by the Government of India or the Government of a State. (b) Clause (2) of Article 246 of the Constitution, states that notwithstanding anything in clause (3), the Parliament and the Legislature of any State also have the power to make laws with respect to any matters enumerated in List-III (Concurrent List). (c) Clause (3) thereof, states that the Legislature of any State has exclusive power to make laws for the State with respect to any matters enumerated in List-II (State List). However, clause (3) of Article 246, is subject to clauses (1) ....
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....bstance within the competence of the Legislature which has made it, it will not be invalid because it incidentally touches upon the subject lying within the competence of another Legislature vide State of Bombay vs. FN Balsara - [AIR 1951 SC 318]. 58. In Atiabari Tea Company Ltd. vs. State of Assam - [AIR 1961 SC 232], it has been observed by this Court that the test of pith and substance is generally and more appropriately applied when a dispute arises as to the legislative competence of the Legislature and it has to be resolved by reference to the Entries to which the impugned legislation is relatable. When a question of legislative competence is raised, the test is to look at the legislation as a whole and if it has a substantial and not merely a remote connection with the Entry, the same may well be taken to be a legislation on the topic vide Ujagar Prints vs. Union of India - [AIR 1989 SC 516]. 59. The expression used in Article 246 is 'with respect to' any of the matters enumerated in the respective Lists. The said expression indicates the ambit of the power of the respective Legislature to legislate as regards the subject matters comprised in the various Entries includ....
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....the Entries in a different List or in the same List may overlap or may appear to be in direct conflict with each other, in such a situation, a duty is cast on the Court to reconcile the Entries and bring about a harmonious construction. Thus, an effort must be made to give effect to both Entries and thereby arrive at a reconciliation or harmonious construction of the same. In other words, a construction which would reduce one of the Entries nugatory or dead letter, is not to be followed. 63. The sequitur to the aforesaid discussion is that if the Legislature passes a law which is beyond its legislative competence, it is a nullity ab-initio. The Legislation is rendered null and void for want of jurisdiction or legislative competence vide RMDC vs Union of India - [AIR 1957 SC 628]. 64. Since these appeals concern interpretation, inter alia, of Entry 62 of List II, which is a taxation entry, it would be useful to refer to certain other articles of the Constitution. Article 265 of the Constitution of India states that no tax shall be levied or collected except by authority of law. That means not only the levy but also the collection of a tax must be authorized by law. The tax to ....
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....ry for the recovery of tax. In imposing taxes, the Legislature can also appoint authorities for collecting taxes and may prescribe the procedure for determining the amount of tax payable by any individual and also ensure that there is no evasion of tax. All these provisions are subsidiary to the main power to levy a tax vide Khyerbari Tea Co. Ltd. vs. State of Assam - [AIR 1964 SC 925]. 68. If a tax is ultra vires or unconstitutional then the party is entitled to have a refund of it from the government whether it has been paid under protest or not. This Court has held that the payment of tax which is without authority of law is payment made under a mistake within the meaning of Section 72 of the Indian Contract Act. Then, in such a case, question would arise, whether, the government to whom the payment had been made by mistake must repay it. Thus, the principle of restitution or repayment of the tax simpliciter has been considered in light of the doctrine of unlawful enrichment. The doctrine envisages that when the State collects a tax from the tax payer without authority of law, but if the taxpayer has already passed on the burden of the tax money paid by him to the State to so....
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....dhra Pradesh from taking proceedings for imposing tax on certain sales effected by them in favour of merchants who were residing or carrying on business in what was the erstwhile State of Andhra Pradesh, on the ground, inter alia, that the said sales were made in the course of inter-State trade, and that no tax could be levied on them by reason of the prohibition contained in Article 286(2) of the Constitution. One of the questions considered in the said case was, whether, tax on inter-State sales was within the exclusive competence of Parliament, and whether the Act impugned in the said case (Madras General Sales Tax Act, 1939; 'Madras Act', for short) and the amendment made thereof by the Madras General Sales Tax (Amendment) Act No.25 of 1947, was in consequence bad, as it authorized the State to levy the sales tax. 73. The contention was that Entry 42 of List I dealt with inter-State trade and commerce and under that Entry, the Parliament had the exclusive power to enact laws in respect of inter-State trade and commerce which also included the power to impose a tax on inter-State sales and the State Legislature had therefore no competence under the Constitution to enact a law....
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....I is "Railways", and Entry 89 is "Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights". If Entry 22 is to be construed as involving taxes to be imposed, then Entry 89 would be superfluous. Entry 41 mentions "Trade and commerce with foreign countries; import and export across customs frontiers". If these expressions are to be interpreted as including duties to be levied in respect of that trade and commerce, then Entry 83 which is "Duties of customs including export duties" would be wholly redundant. Entries 43 and 44 relate to incorporation, regulation and winding up of corporations. Entry 85 provides separately for corporation tax. Turning to List II, Entries 1 to 44 form one group mentioning the subjects on which the States could legislate. Entries 45 to 63 in that List form another group, and they deal with taxes. Entry 18, for example, is "Land" and Entry 45 is "Land revenue". Entry 23 is "Regulation of mines" and Entry 50 is "Taxes on mineral rights". The above analysis - and it is not exhaustive of the Entries in the Lists - leads to the inference that taxation is not intended to be comprised in the main subject in which ....
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.... the Constitution was amended to vest the power to tax inter-State sales with the Centre. Kesoram Industries Ltd. 77. In this case, the controversy centered around Entries 52, 54 and 97 of List I and Entries 23, 49, 50 and 66 of List II and also the extended purport of the residuary power of legislation vested in the Union of India. The judgment dealt with the imposition of levies on coal, tea, brick-earth and minor minerals. While dealing with the aforesaid Entries of List I and List II, reliance was placed on Hoechst Pharmaceuticals Ltd. (supra) on the interpretation of various Entries in the three Lists. The amplitude of legislative power under a general Entry vis-à-vis taxation Entry was discussed in paragraph 31 which is reproduced as under: "31. Article 245 of the Constitution is the fountain source of legislative power. It provides - subject to the provisions of this Constitution, Parliament may make laws for the whole or 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. The legislative field between Parliament and the legislature of any State is divided by Article 246 of the Constit....
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....4) The entries in the lists being merely topics or fields of legislation, they must receive a liberal construction inspired by a broad and generous spirit and not in a narrow pedantic sense. The words and expressions employed in drafting the entries must be given the widest-possible interpretation. This is because, to quote V. Ramaswami, J., the allocation of the subjects to the lists is not by way of scientific or logical definition but by way of a mere simplex enumeratio of broad categories. A power to legislate as to the principal matter specifically mentioned in the entry shall also include within its expanse the legislations touching incidental and ancillary matters. (5) Where the legislative competence of the legislature of any State is questioned on the ground that it encroaches upon the legislative competence of Parliament to enact a law, the question one has to ask is whether the legislation relates to any of the entries in List I or III. If it does, no further question need be asked and Parliament's legislative competence must be upheld. Where there are three lists containing a large number of entries, there is bound to be some overlapping among them. In such....
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....d, but is treated as a distinct matter for purposes of legislative competence. And this distinction is also manifest in the language of Article 248 clauses (1) and (2) and of Entry 97 in List I of the Constitution. Under the scheme of the entries in the lists, taxation is regarded as a distinct matter and is separately set out." 79. Further, the entries in List I and List II must be construed if possible, so as to avoid conflict. If there appears to be a conflict between Entries of List I and List II, what has to be decided is whether there is any real conflict. If there is none, the question of application of the non - obstante clause 'subject to' does not arise. If there is a conflict, the correct approach to the question is to see, whether, it is possible to effect a reconciliation between the two entries so as to avoid a conflict and overlapping. It was reiterated that in the event of a dispute arising it should be determined by applying the doctrine of pith and substance in order to find out whether between two Entries or legislative fields assigned to two different legislatures, the particular subject of the legislation falls within the ambit of the one or the other. Where....
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....xation to the following effect : "There is no such thing as taxation by implication. The burden is always upon the taxing authority to point to the act of assembly which authorizes the imposition of the tax claimed." Thus, the power to tax is not an incidental power. Although legislative power includes incidental and subsidiary power under a particular Entry dealing with a particular subject, the power to impose a tax is not such a power which could be implied under our Constitution. Therefore, it was held that the power to legislate in respect of inter-State trade and commerce (Entry 42 List I) did not carry with it, the power to tax the sale of goods which are subject of inter-State trade and commerce, before the insertion of Entry 92A in List I and such power belonged to the States under Entry 54 in List II subject to Article 286 of the Constitution. 84. Delving further on the distinction between the power to regulate and control and the power to tax, it was observed by this Court that there is a significant distinction between the two primary purposes of legislation. The primary purpose of taxation is to collect revenue. Power to tax may be exercised for the purp....
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....ent and quantification is similar, the two taxes cannot be said to be overlapping. This is the distinction between the subject of a tax and the measure of a tax. (3) The nature of tax levied is different from the measure of tax. While the subject of tax is clear and well defined, the amount of tax is capable of being measured in many ways for the purpose of quantification. Defining the subject of tax is a simple task; devising the measure of taxation is a far more complex exercise and therefore the legislature has to be given much more flexibility in the latter field. The mechanism and method chosen by the legislature for quantification of tax is not decisive of the nature of tax though it may constitute one relevant factor out of many for throwing light on determining the general character of the tax. (4) The entries in List I and List II must be so construed as to avoid any conflict. If there is no conflict, an occasion for deriving assistance from non obstante clause "subject to" does not arise. If there is conflict, the correct approach is to find an answer to three questions step by step as under: One - Is it still possible to effect reconciliation between tw....
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....basis of a single digit; (b) the State Government shall print the lottery tickets bearing the imprint and logo of the State in such manner that the authenticity of the lottery ticket is ensured; (c) the State Government shall sell the tickets either itself or through distributors or selling agents; (d) the proceeds of the sale of lottery tickets shall be credited into the public account of the State; (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." 88. The Central Government may a....
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....ndia or the Government of a State or a Union Territory or any other country having bilateral agreement or treaty with the Government of India. The definition of the expression 'lottery' would indicate that the object and purpose is of levying the tax on a lottery scheme is only when the lottery scheme is organised by the Government of India or the Government of a State or a Union Territory or any other country having bilateral agreement or treaty with the Government of India. Thus, this Act does not levy any tax on lotteries conducted by any private entities. Sub-Section 5 of Section 2 defines a 'promoter' to be the Government of India or a Government of a State or a Union Territory or any country organising, conducting or promoting a lottery and includes any person appointed for selling lottery tickets in the State on its behalf by such Government or country, where such Government or country is not directly selling lottery tickets in the country or a State. The Karnataka Act, 2004 enables payment of tax in advance by the registered promoter. Section 8 of the Act deals with registration of promoters and sellers. 92. The Karnataka Act, 2004 is a comprehensive legislation on levy ....
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.... collection of tax on the conduct of paper lotteries in the State of Kerala. 99. Section 7 of the said Act requires promoters to get registered under the Act on payment of a fee and deposit of security. However, the Act does not require registration of persons who ordinarily sell lottery tickets in retail. 'Promoter' has been defined to include the Government of India or a Government of a State or a Union Territory or any country organising, conducting or promoting a lottery, within the State of Kerala, or any person or entity appointed by the said Government or Country in this behalf. Therefore, the Act only provides for taxation of lotteries conducted within the State of Kerala, by or on behalf of the Government of India, the Government of any State or of a foreign Country and not for taxation on lotteries organised by private entities. Section 11 of the Kerala Act, 2005 provides for payment of tax on every draw, in advance. 100. The Kerala Act, 2005 is a comprehensive legislation and also provides for all matters incidental to the levy and collection of tax on paper lotteries such as, the procedures for assessment of tax due, the right of the assessee to prefer appeals, po....
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....f events such as formulation and notification of scheme of lotteries, printing, transportation and sale of lottery tickets etc., all these events constituting the conduct of the lotteries are ultimately for the participation of persons, within the State of Karnataka or Kerala. Therefore, the subject of tax is the conduct of lottery schemes, within the State of Karnataka or Kerala, which is enabled by the propensity of persons to participate in the lottery schemes. (ii) The measure of taxation in the instant case is the 'draw.' The impugned legislations contemplate two kinds of draws, namely bumper draw and draw other than a bumper draw. (iii) The rate of tax, is a dependent variable and is to be determined based on the measure. In the instant case, the rate of tax under the Karnataka Act, 2005 is Rupees One Lakh and fifty thousand in respect of a bumper draw and Rupees one lakh in respect of any other draw. Similarly, in the Kerala Act, 2005, the rate of tax is Rupees ten lakhs in respect of a bumper draw and Rupees two lakhs and fifty thousand in respect of any other draw. (iv) The incidence of the tax is on the promoters of the lotteries, i.e. on the Go....
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....ionary meaning : (i) Black's Law Dictionary defines 'gambling' to mean: "The act of risking something valuable, especially money for a chance to win a prize." (ii) Similarly, in Advanced Law Lexicon, P. Ramanatha Aiyar (6th Edition) at page 612 'betting and gambling' has been described as follows: "Putting a stake on something of value, particularly money with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring." (iii) In Words and Phrases (Permanent Edition) Vol. 25-A at page 439 a 'lottery' has been defined to mean 'a species of gambling.' At page 444, it has been stated as follows: "The term 'lottery' as popularly and generally used referring to a gambling scheme in which chances are sold or disposed of for value and the sums thus paid are hazarded in the hope of winning a much larger sum, a scheme for the distribution for the distribution of prizes by chance." (iv) In Advanced Law Lexicon, P. Ramanatha Aiyar (1997 Edition) 'Lottery' has been defined as follows: "Scheme for disposal or distributio....
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....that involves both an element of chance and an element of skill; (ii) A game that involves an element of chance that can be eliminated by superlative skill; and (iii) A game that is presented as involving an element of chance, but (iv) Does not include a sport. The Report however states that the expression 'gaming' may not include video gaming and social gaming as such but is used in a statutory sense viz., section 6 of Gambling Act, 2005. Lotteries is defined as a type of gambling that has three essential elements : (i) Payment is required to participate; (ii) One or more prizes are awarded; and (iii) Those prizes are awarded by chance. In England, the Gambling Act, 2005 has been enforced as a comprehensive legislation with effect from 1st September, 2007 to include betting, gaming and lotteries. While the Gambling Act, 2005 defines each of the forms of gambling, the underlying concept 'game' and 'bet' are not defined. (ii) Kent R. Grote and Victor A. Matheson (Department of Economics and Business, Lake Forest College and Department of Economics, College of the Holy Cross, Worcester respectively) in their Article 'T....
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.... activities, in their very nature include any competition wherein success does not depend to a substantial extent on skill of the participant, but on an element of chance. As regards those competitions in which prizes are offered for forecasts of the results either of a future event or an event that has occurred in the past for which the result is unknown, this Court held that the said category of competitions were also of 'gambling' nature. This Court concluded that the activity being conducted by the respondent-promoter therein was a lottery and such activity could be regarded as gambling inasmuch as it was not a competition in which skill, knowledge and judgment were in real and effective play. (b) In RMDC vs. State of Mysore (supra), the challenge was to the constitutionality of the Mysore Lotteries and Prize Competitions Control and Tax Act, 1951 ('Mysore Act' for short) passed by the Mysore Legislature which came into force from 21st June, 1951 and the Rules made thereunder, which came into force on 1st February, 1952. Earlier to that, the Bombay High Court had observed that the amendment made to the Bombay Lotteries and Prize Competition Control and Tax Act, 1948 ('....
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.... Article 252 of the Constitution, did not take away the power of the State to impose tax under Entry 62 of List II and the said power could not have been said to have been surrendered. That by passing the resolutions, the States did not surrender their power of taxation and neither was Clause (2) of Article 252 of the Constitution violated by the amendment of the Mysore Act. That the tax imposed under the Mysore Act was in exercise of the powers which the legislature possessed of imposing tax under Entry 62 of List II. In RMDC vs. State of Mysore (supra), after referring to R.M.D. Chamarbaugwala (supra), it was categorically observed as follows:- "The fact that regulatory provisions have been enacted to control gambling by issuing licences and by imposing taxes does not in any way alter the nature of gambling which is inherently vicious and pernicious." Considering Entries 34 and 62 of List II, it was observed that the subject of 'betting gambling' given in Entry 34 of List II and the taxes on 'betting gambling' as given in Entry 62 of List II have to be read separately as separate powers and therefore when control and regulation of prize competitions was surrendered....
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....ture lacked legislative competence to enact such amendment. This Court considered the question as to whether sales tax could be levied by a State Legislature on the sale of lottery tickets within its territory, based on the power vested with it under Entry 54 of List II which at the time pertained to 'taxes on the sale or purchase of goods other than newspapers.' In that background, this Court undertook an analysis of the nature of lottery tickets, with a view to determine whether they may be construed to be 'goods' as defined under the Sale of Goods Act, the sale of which 'goods' may be subjected to sales tax. This Court concluded that lottery tickets were 'goods' inasmuch as they carried with them the entitlement to participate in a draw. That when lottery tickets were sold, a beneficial interest in movable property of incorporeal or intangible character, was being transferred. It was held that when a lottery ticket is purchased, it carried with it a right to participate in a draw, and therefore, sales tax may be imposed on the same, in a similar manner as is imposed when any other 'dealer's merchandise' which is bought and sold in the market, is transferred. (e) In M/s Sum....
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....im to be 'organised' by the State." The aforesaid were said to be a minimal criteria which rendered a lottery to be eligible to be called 'organised' by a State. Thus, a distinction was made by this Court between the said organized lottery and a lottery which is authorised by the State. Further it was observed that the Government order of Tamil Nadu impugned therein was construed to apply to lotteries organized by the States in terms of the Entry 40 of List I, while Entry 34 of List II dealt with 'betting and gambling'. (f) The nature and character of the lotteries was again deliberated upon in B.R. Enterprises (supra) wherein it was held that lotteries are a form of gambling. However, it was contended that State lottery, if it is gambling, would lose its character as such. While considering the said issue, reliance was placed by this Court on R.M.D. Chamarbaugwala (supra), to hold that gambling activities are in their very nature and essence, res extra commercium. That, even if lotteries were permitted under the regulating power of the State, it could not be given status of 'Trade and Commerce' as understood in common parlance. The ingredients of a contract of lottery ticket....
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....be 'Trade and Commerce' within the meaning of Chapter XIII of the Constitution was considered. Noting that, there had been a distinction made under the Government of India Act, 1935 between State lotteries and other forms of lotteries which have been placed in different Lists and the same pattern had been followed under the Constitution, this Court made a distinction between 'gambling' and 'trade' and observed that gambling inherently involved an element of chance, with no skill, while trade involved skills, with no chance. That even though the State may conduct lotteries, the element of chance remains, with no skill involved and even the organisation and conduct of the lotteries by the State Government are within the boundaries of gambling. That the only purpose of having stringent measures vis-à-vis lotteries being conducted by the State was to inculcate faith in the participants of such lottery being conducted fairly with no possibility of fraud or misappropriation and deceit and assure the hopeful recipients of high prizes that all is fair and safe. That the object was to assure the participants that the proceeds from the sale of lottery tickets are credited to the publi....
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....RMDC vs. State of Mysore (supra). Therefore, the said principles would be equally applicable to State lotteries. (g) In Sunrise Associates vs. Government of NCT of Delhi - [(2000) 10 SCC 420], a decision rendered by the High Court of Delhi, following the ratio laid down in Anraj II, was challenged before this Court on the principal ground that the judgment in Anraj II required reconsideration. This Court noted that Anraj II proceeded on the view that purchase of a lottery ticket carried with it the right to participate in a draw. It however, had not taken into account that the transaction of sale of lottery tickets involved two elements which were inextricably linked to each other, namely, (i) the right to participate in a draw; and (ii) the right to win the prize, dependent on chance. It was held in light of the second of the two elements, that the sale of a lottery ticket may, in fact, be a transfer of a chose in action and not transfer of a good. Having regard to the said ambiguity as to the nature of right being transferred when a lottery ticket is sold, the matter was referred to a Bench of five Judges, who clarified the law on the point in Sunrise Associates vs. Government....
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....d would therefore be excluded from the definition of "goods" under the Sale of Goods Act and the sales tax statutes. This was also accepted in H. Anraj [(1986) 1 SCC 414 : 1986 SCC (Tax) 190] when the Court said that to the extent that the sale of a lottery ticket involved a transfer of the right to claim a prize depending on chance, it was an assignment of an actionable claim. Significantly in B.R. Enterprises v. State of U.P. [(1999) 9 SCC 700] construing H. Anraj [(1986) 1 SCC 414 : 1986 SCC (Tax) 190] the Court said: (SCC p. 746, para 52) "52. So, we find three ingredients in the sale of lottery tickets, namely, (i) prize, (ii) chance, and (iii) consideration. So, when one purchases a lottery ticket, he purchases for a prize, which is by chance and the consideration is the price of the ticket." Thus, the Constitution Bench held that the lottery ticket would represent an actionable claim and hence is excluded from the definition of 'Goods' under the Sale of Goods Act and the sales tax statutes. It was further observed that the distinction drawn in H. Anraj II (supra) between the chance to win and the right to participate in the draw was unwarranted because the rig....
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....ution of India. The following questions of law were taken up for consideration in the said Writ Petition:- "12. ... (I) Whether the writ petition is not maintainable under Article 32 of the Constitution of India since the writ petition relates to lottery, which is res extra commercium and the petitioner cannot claim protection under Article 19(1)(g)? (II) Whether the inclusion of actionable claim in the definition of goods as given in Section 2(52) of Central Goods and Services Tax Act, 2017 is contrary to the legal meaning of goods and unconstitutional? (III) Whether the Constitution Bench judgment of this Court in Sunrise Associates (supra) in paragraphs 33, 40, 43 and 48 of the judgment has laid down as the proposition of law that lottery is an actionable claim or the observations made in the judgment were only an obiter dicta and not declaration of law? (IV) Whether exclusion of lottery, betting and gambling from Item No. 6 Schedule III of Central Goods and Services Tax Act, 2017 is hostile discrimination and violative of Article 14 of the Constitution of India? (V) Whether while determining the face value of the lottery tic....
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....was no rationale for including these three actionable claims for tax purposes. Regulation including taxation in one or other form on the activities namely lottery, betting and gambling has been in existence since last several decades. When the parliament has included above three for purpose of imposing GST and not taxed other actionable claims, it cannot be said that there is no rationale or reason for taxing above three and leaving others. 71. It is a duty of the State to strive to promote the welfare of the people by securing and protecting, as effectively as it may, a social order in which justice, social, economic and political, shall inform all the institutions of the national life. The Constitution Bench in State of Bombay v. R.M.D. Chamarbaugwala (supra) has clearly stated that Constitution makers who set up an ideal welfare State have never intended to elevate betting and gambling on the level of country's trade or business or commerce. In this country, the aforesaid were never accorded recognition of trade, business or commerce and were always regulated and taxing the lottery, gambling and betting was with the objective as noted by the Constitution Bench in the ca....
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....ple shows that there should be three elements to establish a lottery such as; prize, chance and consideration." It may be noted that in the aforesaid case too, the passage reproduced below is included. "A lottery is the distribution of prizes by chance where the person taking part in the operation, or a substantial number of them, make a payment or consideration in return for obtaining their chance of a prize." 109. What emerges from the discussion of the decisions of this Court referred to above is that 'lotteries' are a species within the genus of 'gambling.' That one of the essential features of a lottery is its inherent gambling nature, which persists irrespective of whether the lottery scheme is conducted by the Government of India, Government of a State or by a private entity. 'Gambling' activities include a whole gamut of activities, including, but not limited to 'lotteries.' 110. It is also settled that the sale of a lottery ticket involves two elements, namely, (i) the right to participate in a draw; and (ii) the right to win the prize, dependent on chance. Therefore, sale of a lottery ticket is in the nature of a transfer of an actionable claim or a chos....
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....ch states that no tax shall be levied or collected except by authority of law, ought to be borne in mind. In the instant cases, authority of law would imply the competence of the State Legislatures of Karnataka and Kerala in enacting the impugned laws. 113. In view of the detailed discussion made above, we find that the dictum of this Court in M.P.V. Sundararamier analysing the entries in Lists I and II dealing with various subjects of legislation and entries concerning taxation being separate and distinct must be borne in mind while interpreting the impugned Acts. That is the constitutional scheme. In this regard, we reiterate what has been observed in Hoechst Pharmaceuticals Ltd., to the effect that taxation is considered to be a distinct matter for purposes of legislative competence and the power to tax cannot be deduced from the general legislative Entry as an ancillary power. This is because, as already stated, the general subjects of legislation are dealt with in one group of Entries and the power of taxation in a separate group. Also, a power to legislate as to the principal matter specifically mentioned in the Entry shall also include within its expanse legislation touch....
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....axation Entry in the State List could such a power be traced to Entry 97 of List I in the residuary list provided such a power is not also traceable to any Entry in the Union List. This is because in List I itself the entries concerning taxation are separate and distinct. Such Entries are from Entries 82 to 92B and Entry 96 of List I deals with fees in respect of any of the matters in the List but not including fees taken in any court. Therefore, even in respect of any subject in any Entry in List I, the power to tax cannot be implied or read under Entry 97 of the said List which is only a residuary entry, if the same is enumerated in List II in which case it would come within the legislative competence of the State Legislature. 117. In the above backdrop, we shall now consider Entry 40 of List I and Entries 34 and 62 of List II to assess whether there is any apparent conflict/overlapping between the same. We have already discussed in detail the concept of 'betting and gambling' as well as 'lotteries'. It is not in dispute that a scheme of lottery is a form of gambling. As rightly contended by Sri C. Aryama Sundaram, learned Senior Counsel appearing for the State of Nagaland, th....
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....es of Karnataka and Kerala in the instant cases had no legislative competence to enact the impugned Acts. We have already stated that only lotteries organised by the Government of India or the Government of a State is carved out of the subject, 'betting and gambling' in Entry 34 of List II and is placed in Entry 40 of List I and Entry 62 of List II, inter alia, speaks of tax on 'betting and gambling'. By that, we do not think by that the State Legislatures have been denuded of their power to levy tax under Entry 62 of List II on lotteries organised by Government of India or Government of a State. We say so for the following reasons: (a) Entry 62 of List II is a specific taxation entry on luxuries, including taxes on entertainments, amusements, betting and gambling. The expression 'betting and gambling' would have to be read ejusdem generis with entertainments and amusements. The tax is thus on the activity of 'betting and gambling' as it is on an activity. (b) The expression 'betting and gambling' is also found in Entry 34 of List II. We have discussed at length above the content of the said expression and as to what it encompasses. The activity of 'betting and ga....
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....the Government of India or the Government of any State. This is because irrespective of who organises a lottery scheme, it is ultimately a species of gambling. It is nobody's case that participation in a lottery scheme is not gambling. The said activity i.e. lottery scheme can be conducted throughout the territory of India provided a particular State grants permission to organise and conduct the said activity in that State. Thus, organisation and conducting of lottery can be a pan India activity of gambling and when a particular State permits a lottery scheme conducted by the Government of India or the Government of any State in that State, a tax is leviable on the same, which is a tax on gambling. Thus Entry 62 of List II empowers the State Legislatures to impose tax on 'gambling' irrespective of who or which entity is conducting it including the Government of India or Government of any State. (iv) Fourth, 'betting and gambling' is a subject enumerated in Entry 34 of List II and is a State subject. Therefore, the permission for conducting any betting and gambling activities within a State, including conduct of a lottery scheme under the said Entry, gives competence to the....
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....lottery conducted by Government of India or any Government of a State from the purview of the said Entry and read into Entry 40 of List I by implication. (viii) Eighth, such a power to levy taxes cannot be read into Entry 40 of List I by implication or into Entry 97 of List I as a residuary power. Such interpretation, if endorsed, it would do violence to the manner of interpretation of Entries in the Lists and prove to be contrary to the Articles of the Constitution and judgments of this Court cited above. (ix) Ninth, if the State Government does not permit a particular species of betting and gambling activity in the State including the organisation and conduct of lotteries by the Government of India or the Government of any State then obviously it cannot tax such an activity. But if it permits any species of betting and gambling activity within the State in terms of Entry 34 of List II then the State has legislative competence to tax such an activity of betting and gambling including lotteries irrespective of who conducts it as per Entry 64 of List II. (x) Tenth, Entry 40 of List I is meant only for the regulation of lotteries organised by the Government....
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.... every kind, whether organized by the Government of India or the Government of a State or by a private entity is included within the genus of 'gambling', we find no reason to hold that State organized lotteries are excluded from the ambit of 'betting and gambling' as appearing in Entry 62 of List II. We are not inclined to accept the view that 'lotteries organized by the Government of India or the Government of a State' are to be excluded from the expression 'betting and gambling' as appearing in Entry 62 of List II which deals with taxes on gambling activities, simply because such category of lotteries is excluded from the regulatory field relatable to betting and gambling under Entry 34 of List II and included in Entry 40 of List I. Exclusion of a legislative field from a term appearing in a general Entry, does not necessarily mean that such field ought to be excluded from the taxation Entry. This means that the term 'betting and gambling' in Entry 62 of List II is being construed in the same way as in Entry 34 of List II. The expression is accorded the same meaning and interpretation in both the Entries, i.e., that gambling includes lotteries. However, 'lotteries organized by th....
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....ear that 'lotteries' is a species of gambling activity and hence lotteries is within the ambit of 'betting and gambling' as appearing in Entry 34 List II. (iii) The expression 'betting and gambling' is relatable to an activity which is in the nature of 'betting and gambling'. Thus, all kinds and types of 'betting and gambling' fall within the subject of Entry 34 of List II. The expression 'betting and gambling' is thus a genus it includes several types or species of activities such as horse racing, wheeling and other local variations/forms of 'betting and gambling' activity. The subject 'lotteries organised by the Government of India or the Government of a State' in Entry 40 of List I is a Union subject. It is only lotteries organised by the Government of India or the Government of State in terms of Entry 40 of List I which are excluded from Entry 34 of List II. In other words, if lotteries are conducted by private parties or by instrumentalities or agencies authorized, by Government of India or the Government of State, it would come within the scope and ambit of Entry 34 of List II. (iv) Thus, the State legislatures are denuded of their powers under Entry 34 of L....