This article is written by Jaanvi Jolly. It seeks to analyse the judgement of the New Delhi Municipal Committee vs. the State of Punjab and others. The case deals with the issue of the levy of tax by the New Delhi Municipal Committee on the properties belonging to various states of India that were situated in the territory of Delhi and whether the exception provided under Article 289(1) would come into play. The brief history of Delhi in the administrative setup is also discussed, along with a brief discussion on the fiscal relationship between the Union and the states and the status enjoyed by the municipalities in the Constitution in light of the 94th Constitutional Amendment. The doctrines of ‘Reciprocal Territorial Tax Immunity’ and ‘Presumption of Constitutionality’ with respect to legislation are also discussed.

Introduction

The Indian federal fiscal system, whether seen as a federal or a quasi-federal model, finds its place among the various federal polities that have indubitably demonstrated exceptional resilience in satisfactorily answering the contemporary challenges of federalism and division of power. The provisions of Article 268 to 293 under Part XII of the Indian Constitution dealing with the financial relations between the union and the state have been drafted with the utmost care and caution and have attempted to predict and provide for any difficulties that may arise. 

The provisions of our Constitution give sufficient room for reconciliation of conflicts of interest that may arise within the federation. The architects of our Constitution, while drawing upon the experiences of other Federations that had to deal with the problem of conflicting tax jurisdiction, wisely decided to assign taxes with a wider economic base, such as income tax, corporation tax, excise duties, import and export duties, to the union and allocated to the states, subjects like agriculture, education, medical care, public health, irrigation, et cetera, which are part of the intimate life of the population and can be efficiently administered in a country like ours only by the state government. Despite an expressly stipulated framework, conflicts relating to competing interpretations often arise, as is presented in the present case.

In the Indian Fiscal Framework, we do follow a partial tax reciprocal immunity where the property of the union government is exempt from any taxation by the states, whereas the states only get this exemption for the land and income arising from direct taxes levied by the union government and would still be liable for the indirect taxes, as held in In Re: The Bill to Amend Section 20 of the Sea Customs Act, 1878, and Section 3 of the Central Excise and Salt Act, 1944 (hereinafter called as the ‘Sea customs case’). However, if we examine the lists provided in the Seventh Schedule, we would find that since the territory of India is divided into states, the power to levy taxes on ‘property’ falls within the ambit of the state government’s power. Then the question arises: was the term land in Article 289(1) a misnomer? Or whether it would apply in the case of Union Territories? It was held that it would apply in the case of union territories. This answer raised another question: whether the taxes levied by the union government (in the exercise of powers under Article 246(4)) to the properties situated in the Union Territories would apply to the properties of various states present in the territorial limits of the union territory or they would get an exemption under Article 289(1) by consideration of such a tax as Union Tax?

We will find the answer to this in the present case of New Delhi Municipal Committee vs. State of Punjab (1997).

Details of the case

• Case name: New Delhi Municipal Committee vs. State of Punjab (1997) 
• Court: Supreme Court
• Appellant: The New Delhi Municipal Committee
• Respondent: The Union of India and the states of Andhra Pradesh, Jammu & Kashmir, Rajasthan, Kerala, Tripura, Maharashtra, West Bengal, Haryana, and Punjab. The Municipal Corporation of Delhi appears as an intervener.
• Bench: Honourable Chief Justice A.M. Ahmadi, Honourable Mr. Justice J.S. Verma, Honourable Mr. Justice S.C. Agrawal, Honourable Mr. Justice B.P. Jeevan Reddy, Honourable Mr. Justice A.S. Anand, Honourable Mr. Justice B.L. Hensaria, Honourable Mr. Justice S.C. Sen, Honourable Mr. Justice K.S. Paripoornan, Honourable Mr. Justice B.N. Kirpal
• Date of judgement: 19th December 1996
• Case Type: Civil Appeal

Background of the case 

It was in 1911 that the British announced the shifting of the capital from Calcutta to Delhi, and the governor general was given authority over the territory of Delhi. So the Punjab Municipal Act, 1911, was directly applicable to Delhi, as at that time it was a part of the state of Punjab, and even in 1912, when Delhi was converted into a chief commissioners province. Other enactments, along with the Punjab Municipal Act, were made to continue by virtue of the Delhi Laws Act, 1912, and the Delhi Laws Acts, 1915, which made provisions for extension of the enactment in force in other parts of British India or the Chief Commissioner’s Province to Delhi. After independence, the Act was made to continue by virtue of the Part C Laws Act 1950 and the Union Territories Laws Act 1950.

The term union territory was not found in the original Constitution and was introduced for the first time by the Seventh Constitutional Amendment Act 1956, which in effect incorporated the various recommendations of the State Reorganisation Commission. Prior to such an amendment, the states in India were divided into four categories, namely Part A, Part B, Part C, and Part D states. Delhi was included within the Part C states. Articles 239 to 242 deal with these states. Article 239 specifically provided that these states were to be administered by the President himself, acting through a chief commissioner or a lieutenant governor. Article 240 empowers the Parliament to create a local legislature, a council of ministers, or both for such states. The State Reorganisation Commission, which was set up in 1953, discussed the functionality of Part C states in its report and was of the view that these states were neither financially nor functionally efficient and recommended their amalgamation with neighbouring states or to make them a centrally administered territory. After the Seventh Amendment Act was passed, the division of territories in India was made into two categories: the first category comprising the states, and the second category, which comprised erstwhile Part C and Part D states, which were now called the union territories. Delhi was part of the Union territories. Further, the Seventh Amendment replaced the content of the former provisions of Articles 239 and 240, and now, under the amended Article 240, the President is empowered to make regulations for certain union territories. 

By the 69th Amendment Act, 1991, of the Constitution, Articles 239AA and 239AB were added for the union territory of Delhi. Numerous changes were ushered in by the amendment. Firstly, Delhi was to be now called the ‘National Capital Territory of Delhi’ and would have its own legislative assembly, which would be empowered to legislate on matters mentioned under lists two and three of the Seventh Schedule, with the exception of a few entries, which included land, police, and public order. 

The genesis of this lis lies in the application of the Punjab Municipal Act of 1911 to the union territory of Delhi. The Act empowered the New Delhi municipal committee to levy tax on the immovable property belonging to the respondent states but which was situated within the territorial limits of the Union territory. The respondent filed a petition in the Delhi High Court challenging such an imposition of tax by seeking support from Article 289(1) of the Indian Constitution. They claimed that this Article provided them with an exemption from the levy of such taxes. The Delhi High Court, referred to the judgement passed by a 9 judges constitutional bench in the Sea Customs case, which was reaffirmed in the case of Andhra Pradesh State Road Transport Corporation vs. The Income Tax Officer & Another (1969), decided to quash the house tax assessment and demands made on the properties of the respondent states and further restrain future levy of tax by the appellant.

Consequent to the judgement, the appellant filed an application under Article 133(1)(c) of the Constitution seeking the grant of a certificate for leave to appeal to the Supreme Court. The High Court granted the leave and observed that the question arising in this case has great constitutional implications and requires a decision by the apex court.

The matter was first presented on 1 January 1976, before a division bench of the Supreme Court, which allowed the appellant to make tax assessments on the properties of the respondent states; however, no action was to be taken towards the realisation of such taxes. Subsequently, on October 29, 1987, another division bench of the Supreme Court directed that this matter must be listed before a constitutional bench considering the importance of the matter in issue.

Consequently, a constitutional bench was constituted, which heard the arguments and, on 4 October 1994, observed that the matter must be referred to a 9-judge bench. The court stated the reasons for its reference to a bigger bench were that, after considering the arguments raised before it and the decision in the Sea Customs case, it was of the opinion that the issue of point in the present case was also discussed in the Sea Customs case. However, the arguments which were raised in the present case were substantially plausible and required consideration and were not discussed in the Sea Customs case. The latter being a 9-judge bench decision binding on the current 5-judge bench, the Constitution of a 9-judge bench was necessitated for authoritative disposal of the issues involved in the case.

Facts of NDMC vs. State of Punjab (1997) 

The civil appeals and the special leave petitions in this case were filed against the judgement of the Delhi High Court dated March 14, 1975. The appellant in the case is the New Delhi municipal committee, and the respondents are the Union of India along with the states of Andhra Pradesh, Gujarat, Haryana, Jammu and Kashmir, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tripura, and West Bengal. The Municipal Corporation of Delhi appears as an intervenor. The Punjab Municipal Act, 1911, was applicable to the union territory of Delhi. Under the provisions of the 1911 Act, the New Delhi Municipal Committee was levying property tax on the immovable properties which belonged to the respondent states but were situated within Delhi. Such imposition was challenged by the respondent by contending that these properties would fall within the exemption provided under Article 289(1) of the Constitution. The Delhi High Court accepted the contention of the respondents by relying on the Sea Customs Case, quashed the assessment, demanded house tax in respect of these properties, and restrained the New Delhi municipal committee from levying such tax in the future. This decision was challenged by the appellant in the Supreme Court.

Issues raised 

The 2 main issues before the apex court were:

1. Whether the properties owned and occupied by the various states in the national capital territory of Delhi are entitled to be exempted from the levy of tax under the Act by the exception provided in Article 289(1)? 
2. Whether, by virtue of Article 289(1), the states are entitled to exemption from the levy of taxes imposed by laws made by Parliament under Article 246(4) upon their properties situated within union territories?

Arguments of the parties

Petitioners 

1. The word union taxation, which is found in Article 289(1), has not been defined in the Constitution. The petitioners claimed that two interpretations could be given to the term. First, any tax that the Parliament levies is in exercise of its powers under Article 246(1) of the Constitution and is only limited to entries in list one of the Seventh Schedule, which specifically empowers the union to make laws on it; and second, any tax that the Parliament levies via legislation, which may be on subjects falling under lists two and three of the Seventh Schedule. The petitioners claimed that the first interpretation must be accepted by the court, and consequently, the exemption under Article 289(1) relating to the properties of the state must be limited to the tax levied by the Parliament in the exercise of powers under Article 246(1) and thus limited to entries under the union list. Further legislations made in the exercise of powers under Articles 246(4), 249, 250, 252, etc. are extraordinary in nature, wherein the Parliament can make laws on entries found in list two.
2. In light of the provisions of Part XII of the Constitution, which deal with the distribution of revenues between the union and the states, the petitioner sought to emphasise that the union territories are an independent constitutional entity like the states and that they exist separately from that of the union government, and argued that in the present context, the union territory must be considered akin to the state.
3. It was further argued that the issue in the present case did not arise for adjudication in the Sea Customs Case; it was stated that the issue relating to union territories was not raised in that case, and the observation that ‘The properties of the states situated in union territories were exempt from taxation’ and that the Parliament can directly impose a tax on property was only intended to mean that it was not only the states that could levy the taxes directly on property under the Constitution. Thus, the observation of Chief Justice Sinha must only be considered an obiter dicta on the point.
4. Further, it was contended that the taxes levied by the New Delhi municipal committee are in the nature of municipal taxes and could not be considered to fall under union taxation. The 74th Amendment Act 1992 was referred to, which incorporated Part IX in the Constitution, which deals with municipalities, and gave them constitutional status. They are now equipped with wide ranging powers to fix taxes, devise machinery for collecting taxes, and utilise the proceeds. Relying on Article 285, which specifically exempts taxes imposed by local authorities, and such exemption is not referred to in Article 289(1) concludes that municipal taxes were not covered in the exception provided by Article 289(1), and thus the states would not enjoy the exemption in this case.
5. Next, it was argued that to determine whether a tax falls under the ambit of union taxation, the test should be the subject of the levy, that is, the theme, the context, and the specific circumstances under which the tax is levied rather than the legislating authority or the author of the tax, and therefore, on that line of interpretation, union taxation must be limited to situations where Parliament makes the laws imposing taxes under Article 246(1).
6. It was further argued that Article 289 and 285 of the Constitution are not the only provisions dealing with taxation; the Parliament is required to make laws in extraordinary circumstances on subjects that fall under List two of the Seventh Schedule. For instance, under Articles 249, 250, 252, and 246(4), these cannot be considered as union taxation, even though the Parliament legislates on them in particular circumstances.
7. Further, to emphasise the independence and autonomous status of the union territories, it was argued that union territories can be considered as nascent states, that is, they are akin to states, and thus the Parliament is not expected to draft legislation for the union territories regularly, giving them autonomy to deal with their matters.

Respondents  

1. The respondents placed reliance on the doctrine of immunity, which allegedly was the rationale for the inclusion of Articles 285 and 289, which seek to establish intergovernmental tax immunity. These two Articles incorporate reciprocal tax immunity between the union and the states. Such immunity is prevalent in the USA, Canada, and Australia, among other countries. The union has, in the form of the union territories, a sizable territory to make laws for levying and collecting taxes, and these territories must come within the reciprocal tax immunity.
2. Further, Article 265 of the Constitution was discussed, which was interpreted to mean that only two legislatures are competent to tax: that is the Parliament for the Union and the legislature of the State. The local authorities thus cannot be considered to have an independent power to tax, which explains the absence of an exemption for municipal taxes, independent of the exemption for state or union taxation.
3. On the issue of the interpretation that was to be given to the term ‘union taxation’, it was contended that it should be interpreted the same way as state taxation has been defined in Article 285 of the Constitution. It states that every tax which is either imposed by the state or by authority within the state would be considered as state taxation, and argued that on the same line union taxation would include all taxes imposed by the union. This interpretation would make the tax imposed by the New Delhi municipal committee to be included in union taxation, and thus the states would be exempt from it under Article 289(1).
4. Further, reliance was placed on the Sea Customs case, and it was stated that both the minority and majority opinions in that case held that the properties of states situated in union territories are to be exempt from union taxation under Article 289(1).
5. It was also argued that despite Delhi being given special status under Article 239AA and 239AB of the Constitution, the power to legislate is circumscribed by certain restrictions and subject to the legislative power of the Parliament in respect of expressly stipulated matters related to union territories (reference to Article 246(4)). Thus emphasising that the lawmaking powers of the legislative bodies of the union territories are not planetary powers comparable to the state legislatures.
6. It was further submitted that the taxes which were imposed by the Parliament but collected from the union territories form part of the total tax revenue of the union government. Further, even the non-tax revenue receipts of the union territories are considered as receipts of the union government, and thus it can be seen that the taxes levied by the Parliament in the union territories form part of the union taxation.

Laws discussed in NDMC vs. State of Punjab (1997)

Article 285(1) of the Constitution 

This Article is a constituent of Part XII of the Constitution and aims to maintain the financial autonomy of the union government from any interference by the state government, which would hamper effective functioning, and without any fiscal burden presented by the states. It exempts the property of the union from any and all the taxes which the state or any authority within the state may impose, unless the union was liable to pay any such tax on the property before the commencement of the Constitution. However, the Parliament was given the authority to provide otherwise. The object behind this provision is to ensure that no additional burden to pay tax is put on the union government in respect of its properties and assets. 

Article 289 of the Constitution 

This provision was aimed to facilitate the autonomous and independent existence and working of the state units and is an example of the intergovernmental reciprocal tax immunity principle.

1. This Article provides an expansive sphere of protection to the state from tax levied by the union government on its property and income.
2. This subclause presents an exception to the wide general rule provided in the above subclause. It enables the Parliament to levy tax in respect of a trade or business which is carried on directly by the state or on its behalf, on any property used for the purposes of such trade or business, or on any income which occurs in connection with such trade or business.
3. This subclause is further an exception to subclause (2) and protects any trade or business or class of trade or business that is declared by the Parliament by law to be incidental to the ordinary functions of the government as distinguished from commercial purposes.

Thus, it can be rightly concluded that subclause (3) is an exception to subclause (2) and subclause (2), is an exception to subclause (1).

Article 246 of the Constitution

This provision deals with the division of power between the union and the states as to the subject matter’s jurisdiction. The Seventh Schedule of the Constitution provides for three lists with numerous entries on which the appropriate government is empowered to legislate. The first list is known as the union list and consists of 97 subjects. The matters falling under this list fall within the exclusive ambit of the Union legislature. The second list is known as the state list, consisting of 66 subjects on which the state legislature has exclusive power to legislate, and the third list is known as the concurrent list, which has 47 subjects on which both the union and state legislature have the power to legislate. The Seventh Schedule is read with Article 246. The first clause begins with a non-obstante clause in reference to subclauses (2) and (3) and gives Parliament exclusive power to make laws on the subjects of the union list. The second clause also starts with a non-obstante clause, but only in reference to subclause (3). It is subject to the power of the Parliament provided in subclause (1), which empowers the state legislature to make laws on the matters enumerated in the concurrent list. The third clause empowers the state legislature to make laws on the subjects mentioned in the state list. However, this is made subject to subclauses (1) and (2). The fourth clause states that the Parliament can make laws on the subjects included in the state list in respect of territories that do not fall within any of the states, which effectively makes this provision applicable to the union territories.

Judgement of the case

The decision was given in favour of the respondents, and it was held that the land belonging to the states that is situated within the territorial limits of the union territories would also get the exemption provided under Article 289(1).

Issue-wise judgement 

Application of the decision rendered in the Sea Customs case and reaffirmed in Andhra Pradesh State Road Transport Corporation vs. the income tax officer and another (1969) to the present case

The Sea Customs case was related to the amendments, which intended to impose indirect taxes of excise and custom duties on the properties of the states which were being used for the purpose of trade or business as per Article 289(2). The judgement was a 5:4 decision, where the majority opinion was authored by Chief Justice Sinha. It was argued before the court that such a law would go against the principle of Article 289(1). The court held that immunity from union taxation only related to direct taxes and customs, and excise duty being indirect taxes, would not be covered by the exemption. It was noted that exemption under Article 289(1) was restricted to taxes other than agriculture income, as such income fell squarely within the state list and thus came within the ambit of state taxation. It would mean that the income of the state was exempt only from taxes on income, as contrasted with the words property and income in Article 289(1), and would mean that the property is only exempt from direct taxes. But the states contended that list one does not have any entry which enables the Parliament to tax the property, and thus the intention of the framers would have been to exempt the property of the state from all taxes, direct or indirect. The court held that although list one contains no entry that deals with tax on property, that does not mean that the union has no power to impose tax on property in any situation, and Article 246(4) of the Constitution enables the Parliament to make laws for the union territories, even on the subjects that are covered in the state list. 

Thus, the Parliament also has the power to impose tax directly on property, but only in the case of union territories. Therefore, the argument that the exemption under Article 289(1) to property would be meaningless cannot stand, as if the state has any property in the union territory, the union could make a law dealing with taxation on property in the union territories, and in case a state has property in any union territory, the exemption under Article 289(1) would be available to the states. Thus, concluding that the exemption only relates to direct taxes. Even in the dissenting judgement, which was authored by Justice Das, who stated that, it cannot be reasonably thought that the Constitution provided for exemption to property tax for state property in a rare case, which is contemplated by 246(4), where the property is situated in the union territory. It must be noted that, despite refusing to accept such an argument, he implicitly accepted that such rare cases would fall within the exemption of 289(1).

Thus, in the present case, the court, after discussing the analysis of the Sea Customs case, held that this particular issue was specifically answered by the court. Although the issue of legislation dealing with tax on property applicable in union territories was not specifically in question, it incidentally arose for consideration when the court was analysing parliament’s power to levy taxes on property directly and thus cannot in any way be called obiter dicta. The Sea Customs case was reaffirmed in the case of Andhra Pradesh State Road Transport Corporation vs. the income tax officer and another (1969) by a constitutional bench.

Interpretation of ‘union taxation’ in Article 289(1) and the scope of its ambit

Progression from Section 155 to Article 289 and Section 154 to Article 285

Articles 285 and 289 of the Constitution deal with reciprocal immunities between the union and the state on the issue of taxation. These resemble the provisions of Sections 154 and 155 of the Government of India Act 1935 (hereinafter referred to as the 1935 Act for brevity), which sought to establish the same balance between the federal government on the one hand and the governments of provinces and federal states on the other. Both the federal legislative list and the provincial legislative list had entries that dealt with levy of tax. However, the federal legislative list did not have an entry that would empower the federal legislature to directly levy taxes on property, and it was the provincial legislature that was exclusively empowered to levy taxes, specifically on lands and buildings. 

In the 1935 Act, under Section 154, while the property of the federal government was exempt from all the taxes imposed by the provincial governments, the latter, as per Section 155(1), were granted exemption from federal taxation only in respect of lands and buildings situated in British India and the income accruing from them. Thus, it is evident that even within the 1935 Act, the scope and expanse of the reciprocal immunities in matters of taxation were not equal in length and breadth. 

The term federal tax was not defined in the 1935 Act. However, some help was sought from Sections 99 and 100 to decipher its meaning. As discussed above, the federal legislative list did not provide for the levying of taxes on lands and buildings, and this subject was exclusively marketed for the provincial legislative list, which would prima facie appear to make the exemption granted in Section 155 redundant. However, if we examine Section 100(4), which empowers the federal legislature to legislate for territories apart from the provinces, even on the matters provided in the provincial legislative list, which in effect would mean exemption of provinces and rulers of federal states from federal tax in respect of land or buildings that were situated in the chief commissioner’s provinces. Thus it becomes clear that under the 1935 Act, federal taxation included the taxes that were levied by the federal government in the chief commissioners provinces, and the properties of the provinces and rulers of the federal states that were situated within the territorial limits of these chief commissioners provinces would also be exempt from such federal taxation. The court took on the examination to see whether this position was changed during the process of transformation from the 1935 Act to the present-day Constitution of India. 

In the process of the birth of the present Constitution, the financial relations between the centre and the units were analysed by two committees, the Union Power Committee and the Union Constitution Committee, which recommended that the scheme that was in place by 1935 should be generally followed in the new Constitution. The present Article 289 was clause 207 in the draft Constitution, which provided that the government of a state would be exempt from federal taxation in respect of lands or buildings that are situated in the territories of the federation or income accruing, arising, or received within these territories. It provided for two exceptions: firstly, any income accruing to the state government via trade or business relating to the land, and second, the personal property or income of the ruler of the Indian state. Therefore, a major change was seen in Section 155 of the Government of India Act 1935. This provision was argued against by the state, which sought to claim a complete exemption. After due discussions, the term ‘lands or buildings’ was replaced by the term ‘property’ resulting in an expansion of its ambit to include even movable property. On the issue of trade and business, a proviso was added, which would enable the Parliament to declare which of the trading is business. Activities of the state would be the ordinary functions of the government and thus would receive exemption; other activities that were of a commercial nature would be made liable to tax. 

Thus, the Parliament could now make a law that would declare the trading and business operations of the state liable to union taxation after giving due consideration to the general interest of trade and industry in the whole country. The present Article 285 is substantially the same as Section 154, its predecessor. Article 285(1) exempts the property of the union from all taxes without any exception. Article 289(1) provides the general rule that ordinarily the property of the state and income that is derived by the state from governmental or non-governmental commercial activities shall be immune from the income tax which is levied by the union. Clause (2) then provides an exception and gives the Parliament the power to make legislation imposing tax on the income that is derived by the state from trade or business that is carried on by it or on its behalf. In effect, we can see that the absolute rule under clause (1) is watered down by clause (2). Further clause (3) empowers the Parliament to take out of view clause (2) any trade or business which is incidental to the ordinary functions of the government by making legislation to that effect, thus effectively placing that area of trade or business into the exemption provided under clause (1) and thus exempt from union taxation. Thus, it can be concluded that clause (3) of Article 289 is an exception to clause (2), which in turn is an exception to clause (1) of the Article.

Deciphering the meaning of the word ‘union taxation’ 

The term ‘union taxation’ is only found in Article 289 of the Constitution. The majority judgement in the Sea Customs case refused to seek aid from Article 366(28), which defines taxation as including any tax imposed, whether general, local, or special, unless the context otherwise requires. The same view was adopted in the present case as well: that this definition cannot be used for the purpose of interpreting Article 289. To resolve the central issue, the court proceeded to analyse the provisions of Part 11, which deal with the legislative relations between the union and the states. The court analysed various provisions under which the Parliament is empowered to make laws on the subjects of the state list in extraordinary situations. Article 279 allows the Parliament to legislate on the matters of list two if the Rajya Sabha declares by resolution that such move is warranted in the national interest; Article 250 empowers legislation by the Parliament on the matters of the state list while the emergency is in operation; Article 252 allows the Parliament to make clause on the matters of the state list where two or more states decide that such legislation is desirable; Article 253 gives the Parliament the exclusive power to make laws for the whole territory to give effect to any treaty agreement or convention with another country or a decision taken at an international conference or meeting. Now the question arises whether the exercise of power by the legislature under Article 246(4), wherein legislation for the union territories can be treated as a situation similar to the above-mentioned exceptional circumstances, which fall beyond the ordinary constitutional scheme, and thus cannot be a part of union taxation.

The court, after analysing the scheme of Part VIII of the Constitution and the changes in the expanse of the powers of the union territories, stated that despite the union territories being given wider powers, they still exist under the supervision of the union government, and due to the paucity of time and the size of their expenses, they have been given more autonomy in the square of their legislative matters, but these must not be seen to have the effect of establishing the independence of the union territories akin to the states. The court discusses the example of Delhi, which enjoys abundant autonomy with a legislature. Still, as per Article 239AA subclauses 3(b) and 3(c), the supervisory nature of the union government is established by stating that the plenary power of legislation on any matter relating to Delhi vests with the Parliament, and in case of a conflict, the law made by the parliament will supersede. Thus, despite having a separate identity in the federal constitutional setup as held in Satya Dev Bushahri vs. Padam Del (1955), the union territories cannot be equated to the states.

The court, while dealing with the contention that union taxation must be interpreted in light of Article 246, which deals with the subject matter of legislation, should be limited to the matters enumerated in the union list. The court refused to apply any such restrictive or limiting interpretation and sought to give it an expansive ambit, and held that it should include all the taxes which are levied by the authority of the laws legislated by the Parliament. The court took support from the majority judgement in the Sea Customs case, which also included all taxes leviable by the union in the term union taxation.

Further, the court held that the legislative powers given to the Parliament to legislate, even on matters falling under the state list, as per Article 246(4) are not rare circumstances. Further, no provision in the Constitution dictates or indicates a restrictive interpretation of the term union taxation. The court considered the specific situations under Articles 240, 250, 252, and 253 and the emergency provisions as special circumstances that could be considered as exceptions to the general rule. Apart from these situations, the term union taxation was held to be all-encompassing for the purpose of Article 289(1). 

Position of union territories under our Constitution: a status distinct from that of the Union and the states

The term union territory has not been defined in the Constitution; these are territories which are situated in the midst of contiguous territories that have a proper legislature and fall within the legislative domain of the Parliament. 

The term state is also not defined in the Constitution; however, it is defined in the General Clauses Act, 1897. The usage of such a definition in the case of the constitutional interpretation of the term ‘state’ is subject to Article 367, which states that the General Clauses Act of 1897 can be used for the interpretation of the Constitution, unless the context otherwise requires.

Section 3(58) defines ‘State’ as a state that is specified in the First Schedule and shall include a union territory. The question arose: whether, in the present case, the context for a different interpretation exists. In the case of T.M. Kanniyan vs. Income Tax Officer, Pondicherry (1968), Justice Bachawat, speaking for the constitutional bench, stated that with regard to the union territories, the Parliament has expansive powers to legislate on any subject, and there is no distribution of legislative powers. The inclusive definition found under the General Clauses Act is repugnant to the context of Article 246, and the expression state here includes only the states specified in the First Schedule. The Parliament is given the power to pass legislation on the matters of the state list for the union territories by virtue of Article 246(4). If the interpretation as per the General Clauses Act was accepted, it would rob the Parliament of its power to legislate for union territories concerning the matters of List Two. This interpretation runs opposite to the subject and context of Article 246.

Doctrine of reciprocal immunity as originated in the United States and the foundation of Articles 285 and 289

The doctrine owes its origins to the case of McCulloch vs. Maryland (1819), wherein the state tax was sought to be levied on the federal bank and was held to be void. While the decision aimed to declare federal supremacy, it was later interpreted to hold that the property of the states would also be exempt from federal taxation as the property of the federal government is exempt from state taxation. However, in the later cases of Collector vs. Day (1870) and South Carolina vs. United States (1905), the doctrine was watered down and a distinction was drawn between the state functions that could be called strictly sovereign and those that were commercial, and only the former would be exempt. These cases were discussed by the constituent assembly to provide for a reduction in the ambit of state immunity from union taxation. Further, in the case of State of West Bengal vs. Union of India (1964), it was held by a six judge constitutional bench that this doctrine of immunity was rejected by the Privy Council as being inapplicable to Australia and Canada and has also been given up by the United States, and thus there remains no rationale to consider it applicable to India. This view was reiterated in Andhra Pradesh State Road Transport Corporation vs. the income tax officer and another (1969). Thus, Articles 285 and 289 must be interpreted in light of the language of the Articles themselves. 

Nature of taxes levied by the municipalities

The court held that considering Article 265 of the Constitution, which directs that no tax can be levied or collected except by authority of law, and under the Constitution, there are two principal bodies that have been given the powers to make laws, especially in matters relating to revenue: the Union Parliament and the State Legislature. While certain other bodies have been vested with legislative power along with the power to levy taxes, these are only limited to specific purposes and are a form of delegated power. In this regard, we still resort with the union and the state legislature. As per Article 243X of the Constitution. It is stated that it is the legislature of the state that can authorise a municipality by law to levy and collect taxes. Such powers would be exercised in accordance with the procedures and limitations specified in the law made by the legislature. Such provision in the case of union territories would mean a legislative assembly of the union territory in place of the legislature of the state, and in union territories that do not have legislative assemblies of their own, such power would have to be delegated by the Parliament. Thus, even after the 74th Amendment Act, despite being given more powers than ever before, they are still dependent on the parent legislature for the grant of such privileges.

Application of Article 289(2) to validate the levy of tax under the Punjab Municipal Act, 1911, and the Delhi Municipal Corporation Act, 1950, upon state government properties being used for commercial purposes

It was contended that the Delhi Municipal Corporation Act and the Punjab Municipal Act have specific provisions that exempt the union properties from local taxation in line with Article 285, but no such exemptions are created in favour of the properties of the state, and this omission must be considered to be deliberate. The court held that neither of these enactments have been ported to be made in the exercise of power under Article 289(2), thus they must not be treated to be enacted for that purpose and therefore should be held to be incapable of living taxes on property of the state governments, which are either used for governmental or for trading purposes. Thus, the court applied Article 289(1) and not (2) in answer to this question. 

The court explained that Article 289(2) was a well-considered compromise that sought to balance the demands of the state, which demanded complete exemption for commercial activities from union taxation, and the demands of people who were in favour of levying such union taxes. The constituent assembly rightly made the decision to leave the determination of which trade and business activities of the state government would be subject to union taxation to the Parliamentary wisdom. They were conscious of the difficulty that may arise in demarcating a line between the government and commercial functions, as it would require consideration of the relevant factors of the relevant times before a law was enacted to make the activities liable to union taxation. Therefore, in the present scheme, the union‘s power to tax is not automatic, and it is duty-bound to specify by law which trading and business activities of the state government would be liable to union taxation. Neither the Punjab Municipal Act, 1911, nor the Delhi Municipal Corporation Act, 1950, would qualify as ‘law’ under Article 289(2), as they do not specify which trading activities would be liable to taxation and cannot be considered parliamentary laws as envisaged by Article 289(2). While the former is a pre-constitutional colonial law, the latter is a mere Municipality Act, and neither comes within the ambit of interpretation of ‘law’ under Article 289(2).

Further, the court discussed the practice by which the Parliament may have transplanted municipal legislation existing in a certain state to the union territory of Delhi. Such legislation would not contain exemptions in favour of the properties of the state government, as they were originally legislated for the state, where the properties of other state governments are liable to taxation and are not exempt, thus, when a verbatim transplantation is made to a union territory, it will not contain an exemption in favour of the properties of the state. The government’s omission of an exemption in the Delhi Municipal Corporation Act in favour of the state government cannot be considered to be a deliberate omission with a special meaning.

In line with the decision in respect of all the issues involved in the case, the civil appeals and the special leave petitions were dismissed.

Analysis of NDMC vs. State of Punjab (1997) 

The matters of revenue and financial division are often arenas of stiff resistance and conflict. The states would, in every situation, try to seek exemption wherever such scope is presented by the Constitution, while the union would aim to collect as much tax as it could. While the financial relationship between the states and the union is expressly provided for in the Constitution, such provisions in regard to union territories are not very clear. The union territories, even after substantial power has been bestowed upon them by various constitutional amendments, continue to remain very much under the control and supervision of the union government, which is axiomatic to their name itself, which translates to the territories which are owned or controlled by the union. 

Under our Constitution, only two kinds of taxation are envisaged that are either state taxation or union taxation, and no separate category has been carved out for the union territories since it would have been considered by the framers that as the taxes levied by the state and its authorities would constitute state taxation, the taxes levied by the union and its authorities would be considered union taxation, and this would include, as per the decision in the present case, the municipal taxes levied by the municipalities in the union territories. 

Conclusion 

The Constitution of India is a meticulously balanced document. It is designed to provide for a national government that is sufficiently strong as well as flexible to meet the needs of the republic as a whole, and on the other hand, it  provides for the state government to deal with aspirations and needs that are more localised in nature. What we see is a beautiful division of power envisaged by the constitution via lists provided under the seventh schedule and the separation of avenues to collect taxes. The position was particularly clear in regard to the states and the unions; however, the status of union territories remained uncharted. By the decision in the present constitutional bench case, the fog was cleared and union taxation was held to include the taxes levied by the union government in the union territories, which once again reiterated that the effective control of these territories lies with the union. Hence, by granting exemptions to the states in reference to the properties of the states that were situated in the union territories, the constitutional principle of separation of power was resounded by the Apex Court.

Frequently Asked Questions (FAQs)

What is the doctrine of ‘reciprocal immunity’ in taxation?

The doctrine of intergovernmental or reciprocal tax immunity owes its origin to the case of McCullough vs. Maryland (1819), in which it was held that the state has no competence to impose tax upon a federal entity; it was later interpreted to include a reciprocal exemption from taxation for the state from federal taxes. The expanse of the latter, however, is narrower. In the case of South Carolina vs. United States (1905), it was stated that the reciprocal immunity enjoyed by the state is restricted to its functions, which are strictly those of a ‘governmental character’ and would not extend to the functions where the state is carrying on a private business, thus destroying the immunity of functions carried on by the state in a corporate capacity. It is based on the theory that it is necessary for the protection of national and state governments in their respective spaces in our constitutional setup and the maintenance of the dual nature of polity.

What is the doctrine of ‘Presumption of Constitutionality of Legislations’?

The doctrine of presumption of constitutionality of legislation is a legal principle that is used by courts to interpret legislation. The legislature, which is the lawmaking body in a democratic setup, is presumed to enact a law that is constitutional and valid; it is presumed to be constitutional unless it ex facie violates an essential constitutional principle. In the case of ML Kamra vs. New India assurance (1992), Justice K. Ramaswamy opined that the court ought not to interpret the statutory legislation in a manner that would make them unconstitutional unless compelled by their language. In the present case, it was observed that the doctrine does not apply universally and has its own recognised limitations. The court must not give unnatural or forced meaning to the words in order to save the statutory provisions from being declared unconstitutional.

References

• https://scholarship.law.marquette.edu/cgi/viewcontent.cgi?Article=3739&context=mulr
• https://www.barandbench.com/columns/legal-notes-by-arvind-datar-doctrine-of-inter-governmental-immunity