Holding

Property taxes levied by the municipal statutes in Delhi constitute Union taxation, and State properties are exempt under Article 289(1) unless used for trade or business, in which case the tax is valid.

Summary

The New Delhi Municipal Council (NDMC) and the Delhi Municipal Corporation (MCD) levied property tax on immovable properties owned by several State governments within the Union Territory of Delhi. The States challenged the levy, arguing that Article 289(1) of the Constitution exempts State property and income from Union taxation, and that the municipal statutes were not laws made under Article 289(2) to tax commercial activities. The Supreme Court held that any tax imposed in a Union Territory is "Union taxation" and that Delhi is not a "State" for purposes of Article 246, so the municipal Acts constitute Union legislation. Consequently, State properties are exempt from the municipal property tax unless they are used for trade or business, in which case the tax is valid. The Court also clarified that the assessment authorities must determine the nature of the use of the properties, and the judgment applies prospectively from the 1996‑97 financial year.

Issues considered

The nature and scope of "Union taxation" under Article 289(1) and whether municipal property taxes in Delhi fall within it.
Whether the Union Territory of Delhi qualifies as a "State" for the purposes of Articles 285, 289 and 246.
If the Punjab Municipal Act, 1911, the Delhi Municipal Corporation Act, 1957 and the New Delhi Municipal Council Act, 1994 are statutes made under Article 289(2) and thus capable of taxing State commercial activities.
The extent of the exemption provided by Article 289(1) – whether it covers all State property or only that not used for trade or business.
Who has the authority to determine whether a State property is being used for commercial purposes.

Legislation cited

Constitution of Indias. 239-A, s. 239-AA, s. 239-B, s. 245, s. 246(4), s. 285, s. 289, s. 366(28)
Delhi Municipal Corporation Acts. 115(4), s. 119, s. 61
Government of India Act, 1935s. 154, s. 155
New Delhi Municipal Council Acts. 62
Punjab Municipal Acts. 61

Subjects

Union taxationintergovernmental immunityArticle 289Delhi Union Territoryproperty taxmunicipal legislationconstitutional interpretationState exemption

Judgment

A NEW DELHI MUNICIPAL COUNCIL
v.
STATE OF PUNJAB ETC. ETC.

DECEMBER 19, 1996
B
[AM. AHMADI, CJ., J.S. VERMA, S.C. AGRAWAL, B.P. JEEVAN
REDDY, DR. AS. ANAND, B.L. HANSARIA, S.C. SEN, K.S.
PARIPOORNAN AND B.N. KIRPAL, JJ.)

Constitution of India, 1950 :
·c
Articles 285 and 289-Exemption of property of Union from State
taxation and exemption of property and income of State Government.; from
Union taxation-Held, the immunity created under Article 285(1) in favour
of the Union is absolute, but the immunity created under Article 289(1) in
D favour of the States is qualified by clause (2) and it can be denied by way of
a law made by parliament authorising imposition of any tax in respect of a
trade or business carried on by or on behalf of the Government of a State or
any property used or occupied for the purpose of such trade or business--Pun-
jab Municipal Act, 1911, Delhi Municipal Corporation Act, 1957 and New
Delhi Municipal Council Act, 1994 are enactments with reference to Article
E 289(2) and tax levied thereunder on properties owned by the State Govern-
ments and used or occupied for the purpose of trade or business is valid-It
ca1111ot be said that unless the law made under and with reference to Article
289(2) specifies the particular trading or business operations to be taxed, it
would not be a law within the meaning of clause (2)-Punjab Municipal Act,
F 1911, Delhi Municipal Corporation Act, 1957 and New Delhi Municipal
Council Ac~ 1994---Govemment of India Ac~ 1935-Ss. 154 and 155.

Mieles 246 and 289-Union taxation-Held, any tax levied within a
Union Territory is "Union Taxation"---Parliament is law making body for
G Union Territories-Legislatures for Union Territories under Government of
India Territories Act, 1963 are created by parliament.

Articles 1(2), 239-A, 239-AA, 239-B, 245(1), 246, 285 and
289-"State''-Held, Union Territory of Delhi is not "State''within the meaning
of Articles 246, 285 and 289-Definition of State providing in s. 3(58) of
H · General Clauses Ac~ 1897 is inapplicable to Article 246.
472
N.D.M.C. v. STAIB 473

Article 142----Exercise of power by Supreme Cowt-Judgment to be A:
operative prospectively.

Centre State, Relation~Taxation-Inter-govemmental immunity--
Maintaining balance between Union and State~~suggestion to Union of
India.
B
Punjab Municipal Act, 1911/Delhi Municipal C01poration Act,
1957/New Delhi Municipal Council Act, 1994:

S.61/s. 115(4)/s.62-Properties of State Govemme11ts situated withi11
U11io11 Territory of Delhi-Levy of tax on--Held, the provisions purport to levy C
tax 011 properties of States as well-But prope1ties used for purposes of
Govemme11t a11d 11ot for purposes of trade or busi11ess are exempt under
clause (1) of Article 289 of the Constitutio11.

Doctri11e of i11ter-govemmental immu11ity : bnmu11ity from inter-
govemmel!tal taxation-Applicability of with refere11ce to Co11stitution of D
India.

/11terpretation of Statutes :

Co11stitutio11ality of Statutes-Presumption-There is al'ways a
presumptio11 of constitutionality of a statute-What is 11ot covered by the E
constitutio11al ba11 should be held to be applicable and effective--Doctrine of
Presumption of constitutio11ality of Legislations.

Word!' and phrases :

''Property''-Occurri11g in Article 289(1) of the Constitution-Meaning F
of

The appellant, New Delhi Municipal Committee, which continued to
be governed at the relevant time by the Punjab Municipal Act, 1911, levied
property tax on the immovable properties of the respondent-States
situated within the Union Territory of Delhi. The respondents filed writ G
petitions before the High Court challenging the levy and ·the demand on
the ground that the properties of the State Governments were, by virtue of
Article 289(1) of the Constitution,'exempt from property taxes levied under
the municipal enactments in force in the Union Territory of Delhi. The
High Court, allowed the writ petitions. Aggrieved, the N.D.M.C. filed H
474 SUPREME COURT REPORTS[l996) SUPP.10 S.C.R.

A , appeals before this Court The appeals along with some other petitions were
listed before a Division Bench of this Court, which felt that in view of the
' previous decisions of the Court, the matter should be heard by a larger Bench;
and ultimately the matter was referred to a Bench of nine Judges.

It was contended for the N.D.M.C. that the property taxes levied
B either under the Punjab Municipal Act, 1911 or under the Delhi Municipal
Corporation Act, 1957 pertain to the State List (List-II of the Seventh
Schedule to the Constitution) and cannot be characterised as "Union
taxation" under Article 289(1); and, therefore, the States were bound to
pay the taxes to the N.D.M.C. or to the Municipal Corporation of Delhi.
c The contention of the respondent-States was that a Union Territory
is not a "State" within the meaning of Article 246. It was submitted that
the Punjab Municipal Act, 1911 (as extended and applied to the Union
Territory of Delhi by part 'C' States (Laws) Act, 1950) and the Delhi
Municipal Corporation Act, 1957 were Parliamentary laws enacted under
D and by virtue of the legislative power vested in the Parliament by clause
(4) of Article 246; the taxes levied by the said enactments thus constituted
"Union Taxation" within the meaning of Article 289(1) and, therefore, the
properties of the States in the Union Territory of Delhi were exempt from
the property tax.
E Disposing of the matters, this Court

HELD : Per Curiam :

(i) Any tax levied within a Union Territory is a "Union taxation".

F (ii) Union Territory of Delhi is not a "State" within the meaning of
1
Articles 246, 285 and 289' of the Constitution.

(iii) Article 289(1) of the Constitution generally exempts the property
and income of the States from Union taxation. But this exemption is
G subject to clause (2) of Article 289 which confers upon the Parliament the
power to enact law to tax commercial activities of State Governments. The
three clauses of Article 289 are interlinked; clause (2) of Article 289 is an
exception to clause (1) and clause (3) is an exception to clause (2).

Per Jeevan Reddy J. (For himself and for Dr. A.S. Anand, Suhas C.
H Sen, KS. Paripooman and B.N.Kirpal, JJ.)
N.D.M.C. v. STATE 475
1. The levy of property taxes under the Punjab Municipal Act, 1911, A
the Delhi Municipal Corporation Act, 1957 and the New Delhi Municipal
Council Act, 1994, on lands and/or buildings belonging to the State
Governments is invalid and incompetent by virtue of the mandate con-
tained in clause (1) of Article 289 of the Constitution. However, if any land
or building is used or occupied for the purpose of any trade or business B
carried on by or on behalf of the State government, such land or building
Shall be subject to levy of property taxes levied by the said enactments.
State property exempted under clause (1) means such property as is used
for the purpose of government and not for the purpose of trade or
business. [523-D-E]
c
2.1. The Property taxes levied by and under the Punjab Municipal
Act, 1911 the Delhi Municipal Corporation Act, 1957 and the New Delhi
Municipal Council Act, 1994 constitute "Union taxation" within the mean-
ing of clause (1) of Article 289 of the Constitution of India. [523-C]

Re. the Bill to amend Section 20 of the Sea Customs Act, 1878 and D
Section 3 of the Central Excises and Salt Act, 1944, [1964] 3 S.C.R. 787,
relied on.

2.2. Any tax levied by the legislative body of a Union Territory is
"Union taxation" within the meaning of Article 289(1); it cannot be called E
"State taxation". Under the constitutional scheme, there is no third kind
of taxation. Either it is Union taxation or State taxation. [503-D]

2.3. Article 1(2) read with Article 245(1) shows that in respect of the
Union Territories the only law making body is the Parliament. The legis-
lature of a State cannot make laws for a Union Territory; it can make laws F
only for the State. Clause (1), (2) and (3) of Article 246 speak of division
of legislative powers between the Parliament and the State legislatures.
This division is only between the Union and the States. There is no division
of legislative powers between
. the Union and the Union
. Territories. Similar-
Iy there is no division of legislative powers between States and Union
Territories. There is no such thing as List-I, List-II or List-III as regards G
the Union Territories. For them, it is clause (4) of Article 246 that is
relevant; it indicates that the only legislative body is Parliament • or a
legislature created by it · which has power to make laws for a Union
Territory with respect to any matter notwithstanding that such matter is
a matter enumerated in the State List. (502-D-F] H
476 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.

A 3.1. Union Territories are not "States" within the meaning of Article
246 (or for that matter Chapter I of Part XI) or Part VI or Articles 285 to
289 of the Constitution. The context of Article 246 - indeed of Chapter I in
Part XI - excludes the application of the amended definition of 'State' in
s. 3(58) of the General Clauses Act, 1897. [508-B; 507-B]

B T.M: Kanniyan v. Income Tax Officer Pondicherry & Anr., [1968] 2
S.C.R. 103, relied on.

Management of Advance lllsurance Co. Ltd. v. Shri Gurndasmal &
Ors., [1970] 3 S.C.R. 881; Shiv Kirpal Singh v. Shri V.V. Giri, [1971] 2 S.C.R.
C 197; Mithan Lal v. The State of Delhi & Anr., [1959] S.C.R. 445; Satpal &
Co. v. Lt. Govemor, [1979] 3 S.C.R. 651, referred to.

3.2. During the period intervening between the Constitution Seventh
(Amendment) Act, 1956 and the Constitution Fourteenth (Amendment)
Act, 1962, there was no provision for a legislature for any of the Union
D Territories. Article 239-A in Part-VII - "The Union Territories" - (which
before the Seventh Amendment was entitled "The States in Part-C of the
First Schedule") introduced by Constitution Fourteenth (Amendment) Act,
1962 did not· itself create a legislature for Union Territories; it merely
empowered the Parliament to create them for certain specified Union
E territories (excluding Delhi) and to confer upon them such powers as the
Parliament may think appropriate. Accordingly the Parliament created
legislatures for Union Territories under the Government of Union Ter-
ritories Act, 1963. [495-F-G; 504-G]

3.3. The Legislature created for certain Union Territories under the
F 1963 Act were not legislatures in the sense used in Chapter-III of Part-IV
of the Constitution, but were mere creatures of the Parliament-some sort
of subordinate legislative bodies. They owe their existence to and derive
their powers from the Act of the Parliament and are subject to its overrid-
ing authority. The State legislatures contemplated by Chapter-I of Part-XI
G are the legislatures of States referred to in Chapter-III of Part VI and not
the legislatures of Union Territories created by. the 1963 Act. [495-F-G]

3.4. Delhi had no legislatures with effect from November 1, 1956 until
the one created under and by virtue of the Constitution Sixty-Ninth
(Amendment) Act, 1991. Even here the legislature so created is not a full
1
H fledged legislature nor would it have the effect of - assuming that it would
N.D.M.C. v. STATE 477

• lifting the National Capital Territory of Delhi from Union Territory A
category to the category of States within the meaning of Chapter-I of Part
XI of the Constitution. Artick 239-B read with clause (8) of Article 239-AA
shows that the Union Territory of Delhi is in a class by itself but is certainly
;
not a State within the meaning of Article 246 of Part VI of the Constitution.
It is a Union Territory governed by Article 246(4). [505-A-C]
B
4.1. Power to tax is an incident of sovereignty. Basic premise is that
one sovereign cannot tax the other sovereign. Articles 285 and 289 manifest
a
this mutual regard and immunity but in manner peculiar to our con-
stitutional scheme. While the immunity created under Article 285(1) in
favour of the Union is absolute, the immunity created under Article 289(1) C
in favour of the States is a qualified one • qualified by clause (2) and it
can be denied by way of a law made by Parliament authorising the imposi-
tion of any tax in respect of a trade or business of any kind carried on by
or on behalf of the Government of a State or any operation connected
therewith or any property used or occupied for the purpose of such trade
or business. Clause (1) is thus qualified by clause (2) which in turn is D
qualified by clause (3). Clause (2) is an exception to clause (1) and clause
(3) is an exception to clause (2). [497-E-H]

Re, the Bill to amend Section 20 of the Sea Customs Act, 1878 and
Section 3 of the Central Excises and Salt Act, 1944, [1964] 3 S.C.R. 787 and E
Andhra Pradesh State Road Transport Corporation v. 77ie Income Tax
Officer, [1964] 7 S.C.R. 17, relied on.

R. C. Cooper v. Union of India, [1970] 1 S.C.C. 248, referred to.

4.2. When a claim for exemption is made under clause (1) of Article F
289, as has been made in the instant case, Court has to examine and
determine the field occupied by clause (1) by reading clauses (1) and (2)
together. If there is a law within the meaning of clause (2), the field
occupied by clause (1) gets curtailed to the extent specified in clause (2)
and the law made thereunder. [510-D; 518-C]
G
4.3. Validity of the Punjab Municipal Corporation Act, 1911, the
Delhi Municipal Corporation Act, 1957 and the NDMC Act can be sus-
tained with reference to clause (2) of Article 289. Delhi Municipal Cor-
poration Act, 1957 was enacted by Parliament. Hence, so far as the Delhi
Municipal Corporation area is concerned, the taxes are levied under and H
478. SUPREME COURT REPORTS(1996) SUPP. IO S.C.R.

A by virtue of a Parliamentary enactment. So far as the New Delhi Municipal
Council area is concerned, the taxes were levied till 1994 under the Punjab
Municipal Act, 1911 as extended and applied by the Part 'C' State (Laws)
Act, 1950 enacted by Parliament. Extension of an Act to an area has the
same effect as if that Act been made by the extending legislature for the
B area. Therefore, with effect from 1950, it is as if the property taxes are
levied by a Parliamentary enactment. In 1994, of course, Parliament itself
enacted the New Delhi Municipal Council Act (with effect from May 25,
1994) repealing the Punjab Municipal Act. Taxes levied under these
enactments cannot but be Union taxation-Union taxation in a Union
Territory._[508-C-I); G-H]
c
4.4. Since there is always a presumption of constitutionality in
favour of the statutes and also because the declaration of invalidity or
inapplicability of a statute should be only to the extent the enactment is
clearly outside the legislative competence of the legislative body making it
D or is squarely covered by the ban or prohibition in question, the declara-
tion of invalidity should not extend to the extent the enactments can be
related to and upheld with reference to some constitutional provision, even
though not cited by or recited in the enactment. Similarly, the 4eclaration
of inapplicability should only be to the extent the law is plainly covered by
the ban or prohibition, as the case may be. What is not covered by the
E constitutional bar should be held to be applicable and effective. [519-D-F]

Charanjit Lal Chowdhmy v. Union of India, [1950] S.C.R. 869 ;
Burrakur Coal Co. v. Union of India, A.l.R. (1961) S.C. 654 at 963 = [1962]
1 S.C.R. 44; Sanjeev Coke Manufactwing Co. v. .Mis. Bharat Coking Ltd. &
p Anr., A.l.R. (1983) S.C. 239 = [1983] 1 S.C.C. 147; Ram J?islma Dalmia
v. Justice Tendolkm; [1959] S.C.R. 279 and Rt. Rev. Msqor. Mark Netto v.
State of Kamataka & Ors., [1979] 1 SCC 23, referred to.

4.5. Section 61 of the Punjab Municipal Act, 1911, s. 115(4) of the
Delhi Municipal Corporation Act, 1957, ands. 62 of the N.D.M.C. Act levy
G property tax on all the properties within their~uri~diction. From the fact
that properties of the Union have been specifically exempted in terms of
Article 285 but the properties of the States have not been exempted in
terms of.Article 289 shows that so far as these enactments go, they purport
to levy tax on the properties of the States as well. The omission cannot be
H unintentional - particularly'ip the case of Delhi Municipal Corporation
N.D.M.C. v. STATE 479
Act and NDMC Act. The intention is clear and obvious : the enactments do not A
wish to provide for any exemption in favour of properties of the State situated
within their respective jurisdiction. Taxes are levied on all properties within their
jurisdiction (except the properties specifically exempted), irrespective of \tlio
ows them and to what use they are put. [518-E; 519-A]

5.1. The Punjab Municipal Act, the Delhi Municipal Corporation Act B
and the New Delhi Municipal Council Act are inapplicable to the proper·
ties of State governments to the extent such properties are governed and
saved by clause (1) of Article 289. In so far as properties used or occupied
for the purpose of a trade or business carried on by the State government
are concerned, the ban in clause (1) does not avail them and the taxes C
thereon must be held to be valid and effective. [522-D]

5.2. The expression "property'' occurring in Article 289(1) 1s m-
dubitably much wider than the expression "lands and buildings" as occur-
ring in s. 155 of the Government of India Act, 1935, the predecessor of
Article 289. The expression has to be given its natural and proper meaning. D
It includes not only lands and buildings but all forms of property. [514-D]

5.3. Both s. 155(1) of Government of India Act, 1935 and Article
289(1) exempt the income as well derived by a Provincial Government/State
Government from Union taxation. Both the property and income of the E
State are thus exempt under clause (1) of Article 289 subject, of course, to
clause (2) therefore. The language of proviso (a) to s. 155 and of clause (2)
of Article 289 is practically identical. The proviso says that where a trade
or business of any kind is carried on by or on behalf of the government of
a Province in any part of British India (outside that Province), nothing in
the sub-section shall exempt that Government from any federal taxation in F
respect of that trade or business or any operations connected therewith or
any income arising in connection therewith or any property (i.e., lands and
buildings) occupied for the purpose thereof. [514-F-H; 515-A]

Board of Revenue v. A.M. A11sa11; [1976] 3 S.C.C. 512 and State of G
Gujarat v. Raipur Manufacturing Company, [1967] 1 S.C.R. 618, referred to.

Town Investments Limited v. Department of Environment, [1977] 1 All.
E.R. 813 • H.L., referred to.

5.4. It cannot be said that unless the law made under and with H
480 SUPREME COURT REPORTS(l996) SUPP.10 S.C.R.

A reference to Clause (2) of Article 289 specifies the particular trading or
business operations to be taxed, it would not be a law within the meaning
of clause (2). The proviso to s. 155(1), which by its own force levied taxes
upon the trading and business operations carried on by the provincial ,.
Governments, did not either define the said expression or specily which.
B trading or business operations are subject to taxation, on this account, the
proviso was not and could not be said to have been in-effective or unen-
forceable. Clause (2) of Article 289 also similarly does not define or specify
- nor does it require that the law made thereunder should so define or
specify. [515-C-D]

C 5.5. In the light of the language of the proviso to section 155 and
clause (2) of Article 289, it is not possible to say that every activity carried
on by the government is governmental activity. A distinction has to be
made between governmental activity and trade and business carried on by
the government, at least for the purposes of this clause. It is for this reason
that unless an activity in the nature of trade and business is carried on
D with a profit motive, it would not be a trade or business contemplated by •
clause (2). Where there is no profit motive involved in any activity carried
on by the State government, it cannot be said to be carrying on a trade or
business within the meaning of the proviso/clause (2), merely because some
profit results from the activity. [515-G-H; 516-B]
E
6.1. It is for the appropriate assessing authorities under the relevant
enactments to determine with notice to the effected State government,
which land or building is used or occupied for the purposes of of any trade
to business carried on by or on behalf of that State government. [522-F]

F 6.2. The assessing authorities have to decide several questions includ-
ing the questions whether any land or building is being used for "charitable
purpose" or "public worship" or whether a land is an "agricultural land".
These are difficult c1uestions. But, for this reason, neither the exemption
can be held to be ineffective nor the authorities can be said to have no
G jurisdiction to decide these questions. Appeals are provided to civil courts
against the orders of the assessing authorities. [522-H; 523-A]

7. This judgment shall operate only prospectively. It will govern the
Financial Year 1996-97 (commencing on April 1, 1996) and onwards. For
this purpose power under Artide 142 of the Constitution is invoked for the
H reasons : (a) according to the judgment under appeal, the properties of the
N.D.M.C. v. STATE 481

States were exempt in toto whereas according to this judgment, some of the A
properties of the State situated within the Union Territory of Delhi may
become liable to tax. The assessees are the State governments and the taxes
are being levied under a Parliamentary enactment. This inter-State char-
acter of the dispute is a relevant factor; (b) from the year 1975 upto now,
there have been no assessments because of the judgment of the High Court; B
and (c) retrospective assessment of properties under relevant enactments
appears to be a doubtful proposition • at any rate, not an advisable thing
to do in all the facts and circumstances of this case. [523-G-H; 524-A-B]

8. It is for the Union of India to consider whether any steps are to
be taken to maintain the balance between the Union and the States in the C
matter of taxation. [583-B]

Per Ahmadi, GI (For himself vmd for J.S. Venna, S. C. Agrawal and
B.L. Hanswia, JJ.) - Expressing contrwy view 011 the question whether the
impugned legislations are enactments withi11 the meaning of clause (2) of
Article 289. D

1. The term "Union taxation" occurring in Article 289(1) of the
Constitution would mean "all taxes leviable by the Union" and it includes
within its ambit taxes on property levied within Union Territories; there-
fore, the State can avail of the exemption provided in Article 289(1) in E
respect of their properties situated within Union Territories. [584-D]

Re: The Bill to amend Section 20 of the Sea Customs Act, 1878 and
section 3 of the Central Excises and Salt Act, 1944, [1964] 3 SCR 787 and
Andhra Pradesh State Road Transport Corporation v. 171e Income-Tax Of-
ficer & Anr., [1969] 7 SCR 17, relied on. F

2.1. The term "Union Taxation" can and should be given the widest
amplitude, allowing it to encompass all taxes that are levied by the
authority of Parliamentary laws. As Clause (4) of Article 246 itself en-
visages situations where Parliame_nt is to make laws in respect of matters G
in the State List, it cannot be said that this is a rare or an unusual
circumstance. The Constitution does not contain any provision which
~ would indicate that the definition of "Union Taxation" should be restrictive-
ly interpreted so as to be within the confines of Article 246(1). Unless the
context requires otherwise· as in the case of Articles 249, 250, 252, 253 and
the Emergency Provisions in Part XVIII of the Constitution • the broad H
482 SUPREME COURT REPORTS(1996) SUPP. 10 S.C.R.

A definition of "Union Taxation" embracing all taxes Ieviable by Parliament
ought to be accepted for the purpose of interpreting Article 289(1).
' . ,,/., · [566-E-H; 567-A]
2.2. Under our Constitutional scheme, all taxation must fall within
eit~er of two)!jttegories; State Taxation or Urban Taxation. The phrase
B "Union Taxatfon'' will encompass Municipal taxes levied by Municipalities
in Union Territories. Since it is axiomatic that taxes levied by authorities
within a State, \YOUld amount to State taxation it would appear that the
words "or by any authority within a State" have beehadded in Article 285(1)
by way of abundant caution. [571-F]

C 3.1. The definition of 'State' provided in s. 3 (58) of the General
Clauses Act, 1897 which declares that the word 'State would include 'Union
Territory', is inapplicable to Article 246(4). [584-C]

T.M. Kanniyan v. Income-Tax Office1; Pondicheny & Anr., [1968] 2
D S.C.R. 103, relied on.

Management ofAdvance Insurance Co. Ltd. v. Shri Gwudasmal & Ors.,
(1970] 3 S.C.R. 881; Satya Dev Bushahri v. Padam Deo and Ors., [1955] 1
S.C.R. 549; Satya Dev Bushahri v. Padam Deo and Ors., [1955] 1S.C.R.561;
The State of Madhya Pradesh v. Shri /v,{aula Bux & Ors., [1962] 2 S.C.R. 794;
E Ram Kishore Sen v. Union of India, [1966] 1 S.C.R. 430 and S.K. Singh v.
Shri V.V. Giri, [1971] 2 S.C.R.197, referred to.
"
3.2. Under the scheme of the Indian Constitution, the position of the
Union Territories cannot be equated with that of the States. They are under
the supervision of the Union Government. Despite the fact that, of late,
F Union Territories have been granted greater powers, they continue to be very
much .under the control and supervision of the Union Government for their
governance. It cannot be said that their position is akin to that of States. ·
Though they do have a separate identity within the Constitutional
framework, this will not enable them to avail of the privileges available to
G the States. It is possible that since Parliament may not have enough time at
its disposal to enact entire volumes of legislations for certain Union Ter-
ritories, it may decide, at least in respect of those Union Territories whose
importance is enhanced on account of the size of their territories and their
geographical location, that they should be given more autonomy in legisla-
tive matters. However, these changes will not have the effect of making such
H Union Territories as independent as the States. [566-C; 565-E-G]
484 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.

A Mc Culloch v. Ma1yland, 4 L. Ed 579 (1890) and South Carolina v.
United States, 199 U.S. 437 (1905) & Collector v. Day, 11. Wall. 113 (1871),
referred to.

B. Shiva Rao, The Framing of the Indian Constitution : A Study N.M.
B Tripathi Pvt. Ltd., Bombay (1968) pp. 649-99, referred to.

4.3. Comparing the text of Section 154 and 155 of Government of
India Act, 1935 it becomes clear that even under the scheme of the Act, the
ambit of the reciprocal immunities was not equal in length and breadth;
while Section 154 exempted the property of the Federal Government from
C "all taxes'', the Provincial Governments and Rulers of Federated States were
entitled to an exemption only in respect of "lands or buildings" situated in
British India and "Income" accruing thereof. The present Article 285 is
much the same as its predecessor Section 154. [556-H; 557-A; 558-D]

D 4.4. Under the scheme of the 1935 Act, those lands or buildings of
the Provinces and Federated States which were situated within the Chief
Commissioner's Provinces. were, by virtue of Section 155(1), exempted
from Federal Taxation. There can be no dispute about such a construction
of the provision for, otherwise, the exemption in Section 155(1) would have
E no meaning. Section 155(1) formed the basis for the present Article 289(1)
and, having closely examined the various stages by which Article 289(1)
replaced Section 155(1), this position was never sought to be deviated
from. The presumption, therefore, is that it was the intention of the
framers of the Constitution to maintain the status quo with respect to the
position regarding the Chief Commissioner's provinces which are now
F called "Union Territories". [567-C-F]

4.5. Unlike other Federations, the Union of India has a sizeable
territory of its own comprising the Union Territories which have been
specified in the First Schedule to the Constitution. Therefore, the recipro-
G cal inter-governmental immunity bestowed by the Constitution in Articles
285 and 289 is given fuller meaning by virtue of the adoption of the wider
meaning of "Union Taxation"; this would mean that, just as the properties
of the Union are exempt from taxes on property leviable by the States, the
properties of the States will also be exempt from taxes on property leviable
H by the Union in areas falling within its territorial jurisdiction. [567-F-G]
N.D.M.C. v. STATE 485

4.6. The Framers of Constitution did not expressly confer upon the A
Union the power to tax commercial activities of State Governments. The
exercise of such a power is made conditional upon the enactment of a
special, duly considered, legislation. It is also important to note that clause
(2) of Article 289 has made a departure from the proviso to Section 155(1).
Under the present scheme, the power to tax is not automatic and the B
responsibility of specifying the trading and business activities of State
Governments which would be liable to Union Taxation is expressly vested
in Parliament. [579-F-G]

Mc Cu/loch v. Maryland, 4. L Ed. 579 (1890); South Carolina v. United
States, 199 U.S. 437 (1905); New York v. United States 326 U.S. 572; 90 L. C
ED. 326 (1946) and South Australia v. Commonwealth, (1942) 65 C.L.R. 373,
referred to.

A Note on wtain clauses by the Constitutional Adviser, B. Shiva Rao,
Vol. III, p. 197; Report of the Expert Committee, B Shiva Rao, Vol. III p.
260; Text of draft Article 266, B. Shiva Rao, Vol. IV, p. 676; Revised draft by D
the Ministry of Finance, B. Shiva Rao, Vol. IV, pp. 731- 732 and Constituent
Assembly Debates, Vol. IX pp. 1167-69, referred to.

5.1. The Punjab Municipal Act and the Delhi Municipal Corporation
Act do not and cannot purport to be laws made by Parliament under E
Article 289(2). They are ordinary Municipal legislations. Neither the Pun-
jab Municipal Act, which is a 1911 enactment, nor the Delhi Municipal
Corporation Act, can qualify as laws under Article 289. They do not specify
which of the trading activities of State Governments aere liable to taxation;
indeed by their very nature, they cannot purport to do so. The Punjab
Municipal Act and the Delhi Municipal Corporation Act are not Par- F
liamentary Laws in the sense envisaged by Article 289(2). Though the Act
is sought to be construed as a post-Constitutional, Parliamentary enact-
ment, the fact remains that it is a pre-Constitutional, colonial legislation.
As for the Delhi Municipal Corporation Act, it is, in essence, an ordinary
Municipal legislation enacted by Parliament instead of by State legislature. G
[578-C; 580-A-B; C]
5.2. It would be quite dangerous to assume that when Parliament
enacted the Delhi Municipal Corporation Act, it had intended that the
enactment should secure the purpose enshrined in Article 289(2). While
enacting the Delhi Municipal Corporation Act, Parliament must have H
..
486 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.

A 'transplanted' a municipal legislation existing in a certain State, made the
necessary changes and completed the procedural formalities. That would
explain why the Delhi Municipal Corporation Act (as also the New Delhi
Municipal Council Act, 1994) contains an exemption on the lines of the
one prescribed by Article 285 - This is a typical feature of ordinary
Municipal legislations, which are enacted by State legislatures who are
B conscious of the Mandate of Article 285. Moreover, such legislations do not
contain exemption in favour of properties of State Governments because,
within the territory of a State, the properties of other State Governments
are liable to taxation. So. when such a legislation is 'transplanted' almost
verbatim into a Union Territory, it will obviously not contain an exemption
C in favour of properties of State Governments. [580-G-H'; 581-A-B]

Ramesh Birch v. Union of India, [1989] Supp. 1 SCC 430; Gulabbhai
v. Union of India, AIR (1967) SC 1110; In Re the Central Provinces & Berar
Act No. XIV of 1938, (1939) FCR 18 and Diamond Sugar Mills Ltd. v. The
D State of U.P., [1961] 3 SCR 242, referred to.

5.3. The Doctrine of Presumption of Constitutionality of Legislations
is not one of infinite application; it has recognised limitations. There
seems to be no pressing reason for invoking the doctrine. In the face of the
actual conditions which govern the enactment of laws for Union Territories
E by Parliament, it cannot be assumed that the omission of an exemption in
the Delhi Municipal Corporation Act in favour of State Governments, is
deliberate. The Punjab Municipal Act and the Delhi Municipal Corpora-
tion Act cannot, therefore, be said to meet the special requirements which
have been expressed by the framers to be necessary for complying with the
p spirit of Article 289(2). [581-H; 581-C-D]

6.1. The decision whether the properties of State Governments oc-
cupied for commercial purposes should be subject to the levy of Union
taxes is one that is required by Article 289(2) to be made by a legislation
which specifies the activities which would be liable to tax. This decision
G cannot be entrusted to municipal functionaries. Therefore, it cannot be
said that the properties of State Governments occupied by them for trade
or business purposes are subject to the levy of taxes under the Punjab
Municipal Act and the Delhi Municipal.~orporation Act. [583-G-H]

H Re : 771e Delhi Laws Act case, AIR (1951) SC 324, referred to.
N.D.M.C. v. STATE [REDDY,J.] 487

6.2. Tl!ere is no provision in the Delhi Municipal Corporation Act A
which states that the trading and business operations of State Govern-
. ments would be subject to property taxes. The Punjab Municipal Act is
equally silent on this aspect. ~onsequently, no guidlines in this behalf are
to be found within the parameters of these legislations. Under these'
circumstances, in the complete absence of any statutory policy or any B
guidelines for the delegation of such a policy, it would be impermissible
and hazardous to directly assign such a function, any power, to executive
Municipal authorities. [583-E-F]

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1388-90
of 1975 Etc. Etc. C

From the Judgment and Order dated 14.3.75 of the Delhi High Court
in C.W. No. 342/69, 845 and 567 of 1973.

Ashok H. Desai Attorney General, B. Sen, A.M. Singhvi, A.K. Gan-
guli, A.S. Nambiar, U.N. Bachawat, P.P. Rao, (J. Chalmeswar) Additional D
Advocate General for State of A.P., Ranjit Kumar, Ms. Binn Tamta, Yatish
Mohan, Ms. Anu Mohla, R.K. Maheshwari, R.N. Keshwani, Vineet
Maheshwari, A. Subba Rao, B.K. Prasad, Arnn K. Sharma, Ms. Vandana
Sharma, K.B. Rohatgi, Ms. Aparna Rohatgi, Praveen Jain, Baldev Atreya,
K. Ram Kumar, Ms. Asha Nair, C. Balasubranianiam, A. Mariarputham, E
Ms .. Aruna Mathur, G. Prakash, S.K. Agnihotri, Sapam Biswajit Meitei,
Ashok Kr. Singh, (J.R. Das) 'fbr Sinha & Das Co., Prem Malhotra, K.R.
Nambiar, C.S.S. Rao, T.T. Kunhikannan, T.C. Sharma, G.M. Kawoosa for
Ashok Mathur, M.A. Firoz, Ms. Mona Chakraverty for Raj Kumar Mehta,
Aruneshwar Gupta, S.K. Ningomban, Manoj Swamp, Ms. Hemantika F
Wahi, Ms. S. Hazarika, Ms. N. Singh, Ms. M. Kaur, D.M. Nargolkar, Rajiv
Khanna for Raju Ramachandran and D.P. Mohanty for the appearing
parties.

The Judgments of the Court were delivered by
G
B.P. JEEVAN REDDY, A.S. ANAND, SUHAS C. SEN, K.S.
, PARIPOORNAN AND B.N. KIRPAL, JJ. Article 289(1) of the Constitu-
-...
tion of India declares that the "property and income of a State shall be
exempt from Union taxation". The question in this batch of appeals is
whether the properties of the States situated in the Union Territory of H
488 SUPREME COURT REPORTS(l996] SUPP. 10 S.C.R.

A Delhi are exempt from property taxes levied under the municipal enact-
ments in force in the Union Territory of Delhi. The Delhi High Court has
taken the view that they are. That view is challenged in these appeals
preferred by the New Delhi Municipal Council and the Delhi Municipal
Corporation.
B
Leave granted in the Special Leave Petitions.

Prior to 1911-12, a large part of the territory now comprised in the
Union Territory of Delhi was a district of the Province of Punjab. By a
Proclamation dated September 17, 1912, the Governor General took the
c said territory under his immediate authority and management, to be ad-
ministered as a separate Province to be known as the Province of Delhi.
(This was in connection with the decision to shift the Capital from Calcutta
to Delhi.) In the same year, the Delhi Laws Act, 19U (1912 Act) was
enacted. It came into force on and with effect from the 1st day of October,
D 1912. Schedule-A to the Act defined the "territory" covered by the new
Province. Sections 2 and 3 of the 1912 Act provided inter a/ia that the
creation of the new Province of Delhi shall not effect any change in the
territorial application of any enactment. One of the Acts so applying to the
territory comprised in the new Province of Delhi was the Punjab Municipal
E Act, 1911.

In the year 1915, another Act called ''The Delhi Laws Act, 1915"
( 1915 Act) was enacted. Under this enactment, certain areas formerly
comprised in the United Provinces of Agra and Oudh were included in
F and added to the Province of Delhi with effect from Ist April, 1915. Section
2 of the 1915 Act also contained a saving clause similar to Section 2 of the
1912 Act.

In the Constitution of India, 1950, as originally enacted, the First
Schedule contained four categories of States, viz., Part 'A', Part 'B' Part
G 'C' and Part D. Part 'D' comprised only of Andaman and Nicobar Islands.
The Chief Commissioner's Province of Delhi was one of the Part 'C' States.
By virtue of the Part 'C' States (Laws) Act, 1950, the laws in force in the
erstwhile Chief Commissioner's Province of Delhi were continued in the
Part 'C' State of Delhi. This Act came into force on the 16th day of April,
H 1950.
N.D.M.C. v. STATE (REDDY, J.] 489

In the year 1951, the Parliament enacted the Government of Part 'C' A
States Act, 1951. This Act contemplated that. there shall be a legislature
for each of the Part 'C' States specified therein which included Delhi.
Section 21 stated that the legislature of a Part 'C' State shall have the power
to make laws with respect to any of the matters enumerated in List-II and
List-III of the Seventh Schedule to the Constitution. In the case of Delhi B
legislature, however, it was provided that it shall not have power to make
law with respect to matters specified therein including "the constitution and
powers of municipal corporations and other local authorities, of improve-
ment trusts and of water supply, drainage, electricity, transport and other
public utility authorities in Delhi or in New Delhi". Section 22 provided
that any law made by the legislature of a Part 'C' State shall, to the extent C
of repugnancy with any law made by Parliament, whether enacted earlier
or later, be void. It is necessary to notice the two distinctive features of the
. legislatures of Part 'C' States; not only were they created under an Act
made by Parliament, the laws made by them even with respect to any of the
matters enumerated in List-II were subject to any law made by the Parlia- D
ment. In case of repugnancy, the law made by legislature was to be of no
effect so far Delhi is concerned, the Parliament placed certain additional
fetters referred to in Section 26.

It is stated that in the year 1952, a legislature was created for Delhi
which functioned upto November 1, 1956 when the Government of Part 'C' E
States Act, 1951 was repealed by Section 130 of the States' Reorganisation
Act, 1956. While· repealing the Government of Part 'C' States Act, 1951,
the States' Reorganisation Act, 1956 did not provide for the creation or
continuance of legislatures for the part 'C' States. The legislature con-
stituted for Delhi thus came to an end. F

By Constitution Seventh (Amendment) Act, 1956, some of the Part
'C' States cased to exist, having been merged in one the other State while
some others continued - designated as Union territories. The categorisa-
tion of the States into Part A, B, C and D was done away with. In its place,
the First Schedule came to provide only two categories, viz., "(i) the States" G
and "(ii) the Union territories". The Seventh (Amendment) Act specified
six Union territories, "viz., Delhi, Himachal Pradesh, Manipur, Tripura,
Andaman and Nicobar Islands and Laccadiv Minicoy and Amindivi Is-
lands. Delhi thus became a Union territory. With the inclusion of Goa and
other former Pcirtugese territories in the Union, the number of Union H
490 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.

A territories grew to eight by 1962. In that year, the Constitution Fourteenth
(Amendment) Act, 1962 was enacted. Pondicherry was added as a Union
territory at SL No. 9. More important, the said Amendment Act introduced
Article 239-A. The new Article provided that "Parliament may by law create
for any of the Union territories of Himachal Pradesh, Manipur, Tripura,
B Goa, Daman and Diu and Pondicherry, a body, whether elected or partly
nominated, and partly elected to function as a legislature for the Union
territory, or a council of ministers, or both with such constitutio11al powers
011d functions i11 each case, as may be specified in the law" (Emphasis
added). It is significant to note that the said article did not provide for
creation of a legislature or a council of ministers, as a case may be, for the
C Union Territory of Delhi.

Pursuant to Article 239-A, Parliament enacted the Government of
Union Territories Act, 1963 (1%3 Act). Obviously, this Act applied only
to those Union territories as were referred to in Article 239-A. It did not
D .apply to Delhi. This Act provided for creation of Legislative Assemblies
for the Union territories mentioned in Article 239-A and the extent of their
legislative power. Section 3(1) declared that "there shall be a Legislative
Assembly for each Union territory'' whereas Section 18(1) provided that
"subject to the provisions of this Act, the Legislative Assembly of a Union
territory may make laws for the whole or any part of the Union territory
E with respect to any of the matters enumerated in the State List or the
Concurrent List in the Seventh Schedule to the Constitution insofar as any
such matter is applicable in relation to Union territories." Sub-section (2)
of Section 18 read with Section 21, however, conferred over- riding power
upon the Parliament to make any law with respect to any matter for a
F Union territory or any part thereof. In case of inconsistency between a Law
made by Parliament and a law made by the legislature of any of these
Union territories, the latter was to be void to the extent of repugnancy,
notwithstanding whether the Parliamentary law was earlier or subsequent
in point of time. Section 19 of the Act exempted the property of the Union
from all taxes imposed by or under any law made by the Legislative
G Assembly of a Union territory except insofar as is permitted by a law made
by a Parliament.

By the Constitution Sixty Ninth (Amendment) Act, 1991, Article
239-AA was introduced in Part VIII of the Constitution. This Article
H re-named the Union Territory of Delhi" as the "National Capital Territory
N.D.M.C. v.• STATE [REDDY,J.) 491

of Delhi"and provided that there shall be a Legislative Assembly for such A
National Capital territory. The Legislative Assembly so created was em-
powered by clause (3) of the said Article "to make laws for the whole or
any part of the National Capital Territory with respect to any of the matters
enumerated in the State List or in the Concurrent List, insofar as any such
matter is applicable to Union territories, except matters with respect to B
Entries 1, 2 and 18 of the State List and Entiries 64, 65 and 66 of the List .
insofar as they relate to the said En!ries 1, 2 and 18". Clause (3l further
provided that the power conferred upon the Legislative Assembly of Delhi
by the said Article shall not derogate from the powers of the Parliament
"to make laws with respect to any matter for a Unif#l territory or any part
thereof'; It further provided that in the case of repugnancy, the law made C
by Parliamentshall prevail, whether the Parliamentary law is earlier or later
to the law made by the Delhi Legislative Assembly. The parliament is also
empowered to amend, vary or repeal any law made by the Legislative
Assembly. Article 239-AA came into force with.effect from February 1, 1992.
Pursuant to the article, the Parliament enacted the Government of National D
Capital Territory of Delhi Act, 1991. It not only provided for constitution of
a Legislative Assembly but also its powers a5 contemplated by Article 239-AA.
This Act too came into force on February 1, 1992. The subordinate status of
the Delhi Legislature is too obvio~ to merit any emphasis.

So far as the MUNICIPAL LAWS GO~RNING THE TER- E
RITORY OF DELHI is concerned, the following is the position: by Delhi
Law Act, 19U, referred to supra, the Punjab Municipal Act continued to
govern the territory comprised in the Chief Commissioner's Province of
Delhi. The Act is stated to have been extended to Part 'C' State of Delhi
under a notification issued upder Part 'C' State (Laws) Act, 1950. In the F
impugned judgment, the High Court has stated the following facts :

"The various Punjab enactments which were then in force in the

- territory of Delhi continued to be in force by virtue of the Delhi
Laws Act of 19U and later by the Part C States Laws Act of 1950
and the Union Territories Laws Act of 1950. The application and G
the later extension of this law to the Union Territory of Delhi was,
therefore, not by the authority of the State, Le..gi§.lature but that of
the Central Legislature, that is, the Central·Legislature under the
Government of India Act followed by the Central legislature under
the Constitution of India, that is, the Parliament of India.... The H
492 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.~.

A Delhi Laws Act 1912, the Union Territories (Laws) Act, 1950 as
indeed the Part C States (Laws) Act, 1950 were all central statutes
and when a provincial Act or an Act which may be treated as a
provincial Act or State Act was extended to a territory by a
particular legislature, it would be deemed to be the enactment of
such a legislature and this principle is clearly recognised by the
B
Supreme Court in the case of Mithan Lal v. 17ze State of Delhi and
Another, [1959) S.C.R. 445 ... It is thus clear that on the extension
of the Act to the Union Territory of Delhi by the various Central
Legislative enactments referred to above, it became a Central Act
or an Act of J>arliament as if made by virtue of power of Parlia~
c ment to legislate for the Union Territory of Delhi by virtue of
clause (4) of Article 246 of the Constitution of India."

The correctness of the above factual statement has not been disputed
by anyone before us. Indeed, the contention of Sri P.P. Rao, who led the
D argument on ~ehalf of the respondents-State governments was to the same
effect. He contended that inasmuch as the Punjab Municipal act has been
extended to Part 'C' State of Delhi under the Part 'C' State (Laws) Act,
1950 with effect from April, 16, 1950, it is a post-constitutional enactment
made by Parliament and hence the taxes levied there~nder constitute
Union taxation. He placed strong reliance upon decision in Mitltan Lal v.
E The State of Delhi & Anr., (1959) S.C.R. 445 and also certain observations
in T.M. Kanniyan v. lncome Tax Officer, Pondiclterry & Anr., (1968) 2 S.C.R.
103 in that behalf. It is obvious that this was also the case of the State
governments before the Delhi High Court. We, therefore, proceed on the
basis that the Punjab Municipal Act was extended to Part 'C' State of Delhi
F under and by virtue of the Part 'C' State (Laws) Act, 1950 which came into
force on April 16, 1950.

By virtue of the Constitution Seventh (Amendment) Act, 1956, the
Part 'C' State of Delhi was·designated as a Union Territory. The Punjab
Municipal Act continued to govern the Union Territory of Delhi. In the
G year 1957, the Parliament enacted the Delhi Municipality Act, 1957. The
First Schedule to the Act specified the boundaries of New Delhi within
which area the Punjab Municipal Act continued to be in force. The
remaining area was designated as the Delhi Municipal Corporation area
and the Delhi Municipal Corporation Act, 1957 was made applicable to it.
H In the year 1994, the Parliament enacted the New Delhi Municipal Council
N.D.M.C. v. STAIB [REDDY,J.) 493

Act, 1994 repealing Punjab Municipal Act, 1911. This Act has been brought A
into force with effect from May 25, 1994. It is, however, confined in its
application to the area comprised in the New Delhi Municipal Council.
Delhi and New Delhi are thus governed by different municipal enactments.
The Delhi Municipal Corporation Act and Ne\\ Delhi Municipal Council
Act are, without a doubt, post-constitutional laws enacted by Parliament.
B
PART- II

Article 1(1) of the Con8titution of India declares that India, i.e.,
Bharat, shall be a Union of States. As amended by the Constitution Seventh
(Amendment) Act, clause (2) and (3) of Article 1 read : C
"(2) The States and the territories thereof shall be as specified in
the First Schedule.

(3) The territory of India shall comprise -

(a) the territories of State;
D

(b) the Union territories specified in the First Schedule; and

(c) such .other territories ~s may be acquired."

Clause (30) in Article 366 defines the "Union territory" in the follow- E
ing words:

'"Union Territory' means any Union Territory specified in the First
Schedule and includes any other territory comprised with the
territory of India but not specified in that Schedule."
F
The expression "State" is not defined in the Constitution. It is defined
in the General Clauses Act, 1897 which is made applicable to the inter-
pretation of the Constitution by Article 367. As on the date of the com-
mencement of the Constitution, clause (58) in Section 3 of the General
Clause Act defined "State" in the following words" G
"(58). 'State' shall mean a Part A State, a Part B State or a Part
C State."

The said definition was amended by the Adaptation of Laws Order
No. 1 of 1956 issued by the President in exercise of the power conferred H
494 SUPREME COURT REPORTS(1996] SUPP.10 S.0.R ..

A upon him by Articl~ 372-A of the Constitution introduced by the Constitu-
tion Seventh (Amendment) Act. The amended definition reads thus :

"(58) 'States' -

(a) as respects any period before the commencement of the Con-
B stitution (Seventh Amendment) Act, 1958), shall mean a Part A
State, a Part B State or a Part C State; and

-(b) as respects any period after such commencement, shall mean
a State specified in the First Schedule to the Constitution and shall
include a Union territory."
c
The definitions in the General Clauses Act, it is necessary to remem-
ber, have to be read and applied subject to the opening words in Section
3, viz., "unless there is anything repugnant in the subject or context .... ".

D Part-XI of the Constitution contains provisions governing relations
between the Union and the States. This part is divided into two chapters,
viz., Chapter-I containing Articles 245 to 255 and Chapter-II containing
Article 256 to 263. Chapter-I carries the title "Legislative relations" while
Chapter-II is called "Administrative relations". Article 245, which carries
the heading/marginal note "The extent of laws made by Parliament and the
E Legislature of States" contains two clauses. Clause (1) says that subject to
the provisions of this Constitution, Parliament may make laws for the whble
or any part of the territo1y of India and the legislature of a State may make
laws for the whole or any part of the State." Article 246 is of crucial
relevance herein and must, therefore, be set out in its entirety :
F
"246. Subject-matter of laws made by Parliament and by the Legis-
lature of States. - (1) Notwithstanding anything in clauses (2) and
(3), Parliament has exclusive power to make laws with respect to
any of the matter enumerated in List I of the Seventh Schedule to
the Constitution referred to as the 'Union List').
G
(2) Notwithstanding anything in clause (3), Parliament, and, sub-
ject 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 to the Constitution referred to as the
H 'Concurrent List').
N.D.M.C. v. STATE [REDDY,J.] 495

(3) Subject to clauses (1) and (2), the Legislature of any State ....has A
exclusive power to make law for such State or any Part thereof
with respect to any of the matters enumerated in List II in the
Seventh Schedule to the Constitution referred to as the 'State
List').
B
(4) Parliament has power to make laws with respect to any matter
for any of the te1Tit01y of India not included in a State notwithstand-
ing that such matter is a matter enumerated in the State List."

(Emphasis added)
c
It is relevant to point out that in clauses (2) and (3), as originally
enacted - and upto the Seventh (Amendment) Act - the expression
"State" was followed by the words "specified in Part - A or Part-B of the
First Schedule". Similarly, the words, "in the Stat~" in clause (3), were,
followed by the words "in Part-A or Part-B of the First Schedule". In D
other words, clauses (2) and (3) of Article 246 expressly excluded Part
'C' and Part 'D' States from their purview. The position is no different
after the Constitution Seventh (Amendment) Act, which designated the
Part-C States as Union territories. They ceased to be States. As rightly
pointed out by a Constitution Bench of this Court in T.M. Kanniyan, the E
context of Article 246 excludes Union territories from the ambit of the
expression "State" occurring therein. As a matter of fact, this is true of
Chapter-I of Part- XI of the Constitution as a whole. It may be remem-
bered that during the period intervening between The Constitution
Seventh (Amendment) Act, 1956 and The Constitution Fourteenth
F
(Amendment) Act, 1962! there was no provision for a legislature for any
of the Union territories. Article 239-A in Part-VII - "The Union Ter-
rit~ries" - (which before the Seventh Amendment was entitled "The
States in Part-C of the First Schedule") introduced by Constitution
Fourteenth (Amendment) Act did not itself create a legislature for
Union territories; it merely empowered the Parliament to create them G
for certain specified Union territories (excluding Delhi) and to confer
upon them such powers as the Parliament may think appropriate. Thus,
the legislatures created for certain Union territories under the 1963 Act
were not legislatures in the sense used in Chapter-III of Part-IV of the
Constitution, but were mere creatures of the Parliament - some sort of H
496 SUPREME COURT REPORTS[l996] SUPP.10 S.C.R.

A subordin~te legislative bodies. They were unlike the legislature con-
templated by Chapter-III of Part-VI of the Constitution which are supreme
.in the field allotted to them, i.e., in the field designated by List-II of the
Seventh Schedule. The legislatures created by the 1963 Act for certain
Union territories owe their existence and derive their powers from the Act
B of the Parliament and are subject to its over-riding authority. In short, the
State legislatures contemplated by Chapter-I of Part-XI are the legislatures
of State referred to in Chapter-III of Part-VI and not the legislatures of
Union territories created by the 1963 Act. Union territories are not States
for the pm.poses for Part-XI (Chapter-I) of the Constitution.

C Article 248 confers the residuary legislative power upon the Parliament.
The said power includes the power to make any law imposing a tax not
me~1uoned in either List-II or List-III. Articles 249, 250, 252 and 357 confer
upon the Parliament power to make laws with respect to matters enumerated
in List-II in certain exceptional situations, which may, for the sake of con-
D venience, be called a case of "substitute legislation". It would be enough to
refer to the marginal headings of these four Articles. They read :

"249. Power of Parliament to legislate with respect to a matter in
the State in the. national interest.

E 250. Power of Parliament to legislate with respect to any matter in
the State List if a Proclamation of Emergency is in operation.

"252. Power of Parliament to legislate for two or more States by
consent and adoption of such legislation by any other State.

F 357. Exercise of legislative powers under Proclamation issued
under article 356."

We may now set out ARTICLES 285 AND 289:

"285. Exemption of property of the Union from State taxation.- (1)
""'G
The property of the Union shall, save in so far as Parliament may
by law otherwise provide, be exempt from all taxes imposed by a
State or by any authority within a State.

(2) Nothing in clause (1) shall, until Parliament by law otherwise
H provides, prevent any authority within a State from levying any tax
N.D.M.C. v. STATE (REDDY,J.] 497

on any property of the Union to which such property was imme- A
diately before the commencement of this Constitution liable or ·.
treated as liable, so long as that tax continues to be levied in that
State.

289. Exemption of property and income of a State from Union
taxation. -- (1) The property and income of a State shall be exempt B
from Union taxation.

(2) Nothing in clause (1) shall prevent the Union from imposing
or authorising the imposition of, any tax to such extent, if any, as
Parliament may by law provide in respect of the trade or business C
of any kind carried on by, or on behalf of, the Government a State,
or any operations connected therewith, or any property used or
occupied for the purposes of such trade or business or any income
accruing ·in connection therewith.

(3) Nothing in Clause (2) shall apply to any trade or business, or D
to any class of trade or business, which Parliament may by law
declare to be incidental to the ordinary functions of Government."

A Federation Pre-supposes two coalescing units : the Federal

- Government/Centre and the States/Provinces. Each is supposed to be
supreme in the sphere allotted to it/them. Power to tax is an incident of E
sovereignty. Basic premise is that one sovereign cannot tax the other
sovereign. Articles 285 and 289 manifest this mutual regard and immunity
but in a manner peculiar to our cons.titutional scheme. While the immunity
created in favour of the Union is absolute, the immunity created in favour
of the States is a qualified one. We may elaborate : Article 285 says that F
"the property of the Union shall.. :be exempt from all taxes imposed by a
State or by any authority within a State" unless, of course, Parliament itself
permits the same and to the extent permitted by it. (Clause (2) of Article
285 saves the existing taxes until the Parliament otherwise provides, but this
is only a transitional provision.) The ban, if it can be called one, is absolute G
and emphatic in terms. There is no way a State legislature can levy a tax
upon the property of the Union. So far as Article 289 is concerned, the
position is different. Clause (1), had it stood by itself, would have been
similar to clause (1) of Article 285. It says that "the property - and income
- of a State shall be exempt from Union taxation". But it does not stand
alone. It is qualified by clause (2) and clause ·(3) is an exception to clause H
'-
498 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.

A (2). But before we refer to clause (2), a word with respect to the meaning
and ambit of the expression "property" occurring in this Article. Expression
"Property" is wide enough to take in all kinds of property. In Re. the Bill
to amend Section 20 of the Sea Customs Act, 1878 and Section 3 of the
Central Excises and Salt Act, 1944 [1964] 3 S.C.R. 787, all the learned
B Judges (both majority and dissenting) were agreed that the expression must
be understood in its widest sense. There is no reason to put a restricted
construction thereon. Indeed, there is no controversy about this proposi-
tion before us. Coming to clause (2), it says that the ban imposed by clause
(1) shall not prevent the Union from imposing or authorising the imposi-
tion of any tax to such extent, if any, as the Parliament may by law provide,
C in respect of (a) trade or business of any kind carried on by or on behalf
of the Government of the State or (b) any operations connected with such
trade or business or ( c) any property used or occupied for the purposes of
such trade or business or (d) any income accruing or arising in connection
with such trade or business. (The inspiration for this provision may perhaps
D be found in certain United States" decisions on the question of the power
of the units of the federal polity to tax each others' properties.) Clause (3)
empowers the Parliament to declare, by law, which trade or business or
any class of trades or businesses is incidental to the ordinary functions of
the Go.vernment, whereupon the trades/businesses so specified go out of
the purview of clause {2).
E
It would be appropriate at this stage to notice the ratio of two
judgments of this Court dealing with Article 289. In Re.: Sea Customs Act,
a Special Bench of nine learned Judges, by a majority, laid down the
following propositions: (a) clause (1) of Article 289 provides for exemption
F of property and income of the States only from taxes imposed directly upon
them; it has no application to indirect ·taxes like duties of excise and
customs; (b) duties of excise and customs are not taxes on property or
income; they are taxes on manufacture/production of goods and on im-
port/export of goods, as the case may be, and hence, outside the purview
of clause (1) of Article 289. The other decisionin Andhra Pradesh State
G Road Transport Corporation v. The Income Tax Officer, [1964] 7 S.C.R. 17
is the decision of a Constitution Bench. The main holding in this case is
that income of the A.P.S.R.T.C. is not the income of the State of Andhra
Pradesh since the former is an independent legal entity and hence, Article
298(1) does not avail it. At the same time, certain observations are made
H in the decision regarding the scheme of Article 289. It is held that clause
N.D.M.C. v. STATE [REDDY, J.] 499

(2) is an exception or a proviso to clause (1) and as such whatever is A
included in clause (2) must be deemed to be included in clause (1). In
other words, the trading and business activities referred to in clause (2) are
included in clause (1) and precisely for this reason the exception in clause
(2) was provided. Clause (3), it was held, is an exceprion to clause (2). In
the words of the Constitution Bench :
B
"The scheme of Art. 289 appears to be that ordinarily, the income
derived by a State both from government and non- governmental
or commercial activities shall be immune from income-tax levied
by the Union, provided, of course, the income in question can be
said to be income of the State. This general proposition flows from C
clause (1).

Clause (2) then provides an exception and authorises the Union
to impose a tax in respect of the income derived by the Govern-
ment of a State from trade or business carried on by its, or on its D
behalf; that it to say, the income from trade or business carried on
by the Government of a State or on its behalf which would not
have been taxable under clause (1), can be taxed, provided a law
is made by Parliament in that behalf. If clause (1) had stood by
itself, it may not have been easy to include within its purview
income derived by the State from commercial activities, but since E
clause (2), in terms, empowers Parliament to make a law levying
a tax on commercial activities carried on by or on behalf of a State~
the conclusion is inescapable that these activities were deemed to
have been included in cl. (1) and that alone can be the justification "
for the words in which cl. (2) has been adopted by the Constitution. F
It is plain that cl. (2) proceeds on the basis that but for its provision,
the trading activity which is covered by it would have claimed
exemption from Union taxation under cl. (1). That is the result of
.. reading clauses (1) and (2) together.

Clause (3) then empowers Parliament to declare by law that G
any trade or business would be taken out of the purview of cl. (2)
and restored to the area covered by cl. (1) by declaring that the
said trade or business is incidental to the ordinary functions of
government. In other words, cl. (3) is an exception to the exception
prescribed by cl. (2). Whatever trade or busitiess is declared to be H
500 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.

A incidental to the ordinary functions of government, would cease to
be governed by cl. (2) and would then be exell1pt from Union '
taxation. That, broadly stated appears to be the result of the
scheme adopted by the three clauses of Art. 289."

PART - III
B
The crucial question arising in this batch of appeals pertains to the
meaning of the expressiop "Union taxation" occurring in Article 289(1).
According to the appellant-municipal corporations, the property taxes
levied either by Punjab Municipal Act, 1911, as extended to and applicable
C in the New Delhi Municipal Council area or by the Delhi Municipal
Corporation Act, 1957 applicable to the Delhi Municipal Corporation area
do not fall within the ambit of the expression "Union taxation". According
to them, "Union1 taxation" means levy of any of the taxes mentioned in the
Union List (List-I in the Seventh Schedule to the constitution). May be, it
D may also take in levy of Stamp duties (which is the only taxation entry in
the Concurrent List) by Parliament, but by no stretch of imagination, they
contend, can levy of any tax provided in the State List (List-II in the
Seventh Schedule) can be characterised as Union taxation. Merely because
the Parliament levies the tax provided in List-II, such taxation does not
amount to Union taxation. These are many situations where the Parliament
E is empowered by Constitution to make laws with respect to matters
enumerated in List-IL For example, Articles 249, 250, 252 and 357 em-
power the Parliament to make laws with respect to matters enumerated in
List-II in certain specified situations. If any taxes are levied by Parliament
while legislating under any of the above articles, such taxation cannot
F certainly be termed as "Union taxation". It woi.Jld still be State taxation. The
levy of taxation by Parliament within the Union territories is of a similar
nature. Either because the Union territory has no legislature or because
the Union territory has a legislature but the Parliament chooses to act in
exercise of its over-riding power, the taxes levied by a Parliament enact-
ment within such Union territories would not be Union taxation. It is
G relevant to notice, the learned counsel contend, that the legislatures of the
Union territories referred to in Article 239-A as well as the legislature of
Delhi created by Article 239-AA are empowered to make laws with respect
to any of the matters enumerated in List-II and List-III of the Seventh
Schedule, just like any other State legislature; any taxes levied by these
H legislatures cannot certainly be characterised as "Union taxation". Merely
N.D.M.C. v. STATE [REDDY, J.] 501

because the Parliament has been given an over-riding power to make a law A
with respect to matter enumerated even in List-II, in supersession of the
law made by the legislature of the Union territory, it does not follow that
the law so made is any the less a law belonging to the sphere of the State.
The test in such matters - it is contended - is not who makes the law but
to which matter in which List does the law in question pertain. Clause (4) B
of Article 246 specifically empowers the Parliament to make laws with
respect to any matter enumerated in List-II in the case of Union territories.
This shows that even the said clause recognises the distinction between
List-I and List-II in the Seventh Schedule, it is submitted.

The learned Attorney General appearing for the Union of India C
supported the contentions of the appellants-municipal corporations.

On the other hand, the contentions of the learned counsel for the
respondents are to the following effect : a Union territory is not a "State"
within the meaning of Article 246. Even prior to the Seventh (Amendment) D
Act, Part 'C' States, or for that matter Part-D States, were not within the
purview of the said Article. The division of the legislative powers provided
by clauses (1), (2) and (3) of Article 246 has no relevance in the case of a
Union Territory. Union territory, as the name itself indicates, is a territory
belonging to Union. A Union territory has no legislature as contemplated
by Part-VI of the Constitution. A Union territory may have a legislature or E
may not. Even if it is bestowed with one, it is not by virtue of the
Constitution but by virtue of a Parliamentary enactments, e.g., Government
of Part 'C' States Act, 1951 (prior to November 1, 1956) and Government
of Union Territories Act, 1963. Even the legislature provided for Delhi by
Article 239-AA of the Constitution with effect from February 1, 1992 is not F
a legislature like that of the States governed by Part-VI of the Constitution.
Not only the powers of the legislature are circumscribed by providing that
such legislature cannot make laws with reference to certain specified
... entries in List-II but any law made by it even with reference to a matter
enumerated in the State List is subject to the law made by Parliament. In G
any event, the position obtaining in Delhi after February 1, 1992 is not
relevant in these appeals since these appeals pertain to a period anterior
to the said date. The Punjab Municipal Act, 1911 (as extended and applied
to the Union Territory of Delhi by Part 'C' States (Laws Act) and the Delhi
Municipal Corporation Act, 1957 are Parliamentary laws enacted under
and by virtue of the legislative power vested in Parliament by clause (4) of H
502 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.

A Article 246. The taxes levied by the said enactments constitute "Union
• taxation" within the meaning of Article 289(1) and hence, the properties of
the States in the Union Territory of Delhi are exempt there from. Reliance
is placed upon the majority opinion in Re. : Sea Customs Act in support of
the above propositions. It is submitted that there are no reasons to take a
B different view now.

On a consideration of rival contentions, we are inclined to agree with
the respondents-States. The States put together do not exhaust the territory
of India. There are certain territories which do not from part of any State
and yet are the territories of the Union. That the States and Union
C territories are .different entities, is evident from clause (2) of Article 1 -
indeed from the entire scheme of the Constitution. Article 245(1) says that
while Parliament may make laws for the whole or any part of the territory
of·lndia, the legislature of a State may make laws for the whole or any part
of the State. Article 1(2) read with Article 245(1) shows that so far as the
D Union territories are concerned, the only law-making body is the Parlia-·
ment. The legislature of a State cannot make any law for a Union territory;
it can make laws only for that State. Clauses (1), (2) and (3) of Article 246
speak of division of legislative powers between the Parliament and State
legislatures. This division is only between the Parliament and the State
legislatures, i.e., between the Union and the States. There is no division of
· E legislative powers between the Union and Union territories. Similarly,
there is no division of powers between States and Union territories. So far
as Union territories are concerned, it is clause (4) of Article 246 that is
relevant. It says that the 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.
F Now, the Union territory is not included in the territory of any State. If so,
Parliament is the only law-making body available for such Union territories.
It is equally relevant to mention that the Constitution, as originally enacted,
did not provide for a legislature for any of the Part 'C' States (or, for that
matter, Part 'D' States). It is only by virtue of the Government of Part 'C'-
G States Act, 1951 that some Part 'C' States including Delhi got a legislature.
This was put an end to by the States Reorganisation Act, 1956. In 1962,
the Constitution Fourteenth (Amendment) Act did provide for crea-
tion/constitution of legislatures for Union territories (excluding, of course,
Delhi) but even here the Constitution did not itself provide for legislatures
for those Part 'C' States; it merely empowered the Parliament to provide
H for the same by making a law. In the year 1991, the Constitution did provide
N.D.M.C. v. STATE [REDDY,J.] 503

for a legislature for the Union Territory of Delhi (National Capital Ter- A
ritory of Delhi) by Sixty-Ninth (Amendment) Act (Article 239AA) but even
here the legislature so created was not a full fledged legislature nor did
have the effect of - assuming that it could - lift the National Capital
Territory of Delhi from Union territory category to the category of States
within the meaning of Chapter-I of Part XI of the Constitution. All this
necessarily means that so far as the Union territories are concerned, there B
is no such thing as List-I, List-II or List-III. The only legislative body is
Parliament - or a legislative body created by it. The Parliament can make
any law in respect of the said territories - subject, of course, to constitu-
tional limitation; other than -those specified in Chapter-I of a Part-XI of
the Constitution. Above all, Union Territories are not "States" as con- C
templated by Chapter-I of Part-XI; they are the territories of the Union
. falling outside the territories of the States. Once the Union territory is a
part of the Union and not part of any State, it follows that any tax levied
by its legislative body is Union taxation. Admittedly, it cannot be called
"State taxation" - and under the constitutional scheme, there is no third
kind of taxation. Either it is Union taxation or State taxation. This is also D
the opinion of the majority in Re. : Sea Customs Act. B.P. Sinha, CJ.,
speaking on behalf of himself, P.B. Gajendragadkar, Wanchoo and Shah,
JJ. - while dealing with the argument that in the absence of a power in the
Parliament to levy taxes on lands and buildings (which power exclusively
belongs to State legislatures, i.e., Item 49 in List- II), the immunity provided
by Article 289(1) does not make any sense - observed thus : E

'It is true that List I contains no tax directly on property like List
II, but it does not follow that the Union has no power to impose
a tax directly on property under any circumstances. Article 246(4)
gives power to Parliament to make laws with respect to any matter F
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. This means that so far as Union territories are con-
cerned Parliament has power to legislate not only with respect to
items in List I but also with respect to items in List II. Therefore,
so far as Union territories are concerned, Parliament has power G
to impose a tax directly on property as such. It cannot therefore
be said that the exemption of States' property from Union taxation
directly on property under Art. 289(1) would be meaningless as
Parliament has no power to impose any tax directly on property.
If a State has any property in any Union territory that property H
504 SUPREME COURT REPORTS(1996) SUPP. 10 S.C.R.

A would be exempt from Union taxation on property under Art.
289(1). The argument therefore that Art. 289(1) cannot be con-
fined to tax directly on property because there is no such tax
provided in List I cannot be accepted."

B Rajagopala Iyyengar, J. agreed with Sinha, CJ. on this aspect, as
indeed on the main holding. The decision in Re. : Sea Customs Act has
been rendered by a Bench of nine learned Judges. The decision of the
majority is binding upon us and we see no reason to take a different view.
Indeed, the view taken by the majority accords fully with the view expressed
by us hereinabove.
c
Now, so far as the analogy of laws made by Parliament under Article
249, 250, 252 and 357 are concerned, we think the analogy is odious.
Articles 249, 250 and 357 are exceptional situations which call for the
Parliament to step in and make laws in respect of matters enumerated in
D List-II and which laws have effect for a limited period. Article 252 is a case
where the State legislatures themselves invite the Parliament to make a law
on their behalf. These are all situations of what may be called "Substitute
legislation" - either because of a particular situation or because there is no
legislature at a given moment to enact laws. As against these provisions,
E clause (4) of Article 246 is a permanent feature and laws made thereunder
are laws made in the regular course.

In this connection, it is necessary to remember that all the Union
Territories are not situated alike. There are certain Union territories (i.e.,
Andaman and Nicobar Islands and Chandigarh) for which there can be no
F legislature at all - as on today. There is a second category of Union
Territories covered by Article 239- A (which applied to Himachal Pradesh,
Manipur, Tripura, Goa, Daman and Diu and Pondicherry- now, of course,
only Pondicherry survives in this category, the rest having acquired
Statehood) which have legislatures by courtesy of Parliament. The Parlia-
G ment can, by law, provide for constitution of legislatures for these States
and confer upon these legislatures such powers, as it may think ap-
propriate. The Parliament had created legislatures for these Union ter-.
ritories under the "The Government of India Territories Act, 1963",
empowering them to make laws with respect to matters in List~II and
H List-III, but subject to its over-riding power. The third category is Delhi.
N.D.M.C. v. STATE [REDDY, J.] 505

It had no legislature with effect from November 1, 1956 until one has been A
created under and by virtue of the Constitution Sixty- Ninth (Amendment)
Act, 1991 which introduced Article 239-AA. We have already dealt with the
special features of Article 239-AA and need not repeat it. Indeed, a refer-
ence to Article 239-B read with clause (8) of Article 239-AA shows how the
Union Territory of Delhi is in a class by itself but is certainly not a State B
within the meaning of Article 246 or Part-VI of the Constitution. In sum, it
is also a territory governed by clause (4) of Article 246. As pointed out by
the learned Attorney General, various Union territories are in different
stages of evolution. Some have already acquired Statehood and some may
be on the way to it. The fact, however, remains that those surviving as Union C
territories are governed by Article 246(4) notwithstanding the differences in
their respective setups - and Delhi, now called the "National Capital Ter-
_ritory of Delhi", it yet a Union territory.

It would be appropriate at this stage to refer to a few decisions on
this aspect. In T.M. Kanniyan, a Constitution Bench speaking through D
Bachawat, J. had this to say:

"Parliament has plenary power to legislate for the Union territories
with regard to any subje~t. With regard to Union tenitories, there is E
no distribution of legislative power. Article 246(4) enacts that 'Par-
liament 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.' In R.K
Sen v. Union, (1966) l S.C.R. 430, it was pointed out that having
regard to Art, 367, the definition of 'State' ins. 3(58) of the General F
Clause Act, 1897 applies for the interpretation of the Constitution
Unless there is any thing repugnant in the subject or context.
Under that definition, the expression 'State' as respects any period
after the commencement of the Constitution (Seventh Amend-
ment) Act, 1956 'shall mean a State specified in the First Schedule G
to the Constitution and shall include a Union territory'. But this
inclusive definition is repugnant to the subject and context of Art.
246. There, the expression 'State' means the States specified in the
1 First Schedule. There is a distribution of legislative power between
Parliament and the legislatures of the States. Exclusive power to
legislate with respect to the matters enumerated in the State List H
506 SUPREME COURT REPORTS(1996) SUPP. 10 S.C.R.

A is assigned to the legislatures of the States established by Part VI.
There is no distribution of legislative power with respect to Union
territories. That is why Parliament is given power by Art. 246(4) to
legislate even with respect to matters enumerated in the State List.
If the inclusive definition of 'State' in s. 3(158) of the General
Clauses Act were to apply to Art. 246(4), Parliament would have
B no power to legislate for the Union territories with respect to
matters enumerated in the State List and until a legislature em-
powered to legislate on those matters is created under Art. 239A
for the Union territories, there would be no legislature competent
to legislate on those matters; moreover, for certain territories such
c as the Andaman and Nicobar Islands no legislature can be created
under Art. 239A, and for such territories there can be no authority
competent to legislate with respect to matters enumerated in the
State List. Such a construction is repugnant to the subject and
context to Art. 246. It follows that in view of Art. 246(4), Parlia-
ment has plenary powers to make laws for Union territories on all
D
matters. Parliament can by law extend the Income-tax Act, 1961 to
a Union territory with such modifications as it thinks fit. The
President in the exercise of his powers under Art. 240 can make
regulations which have the same force and effect as an .Act of
Parliament which applies to that territory. The President can
E therefore by regulation made under Art. 240 extend the Income-tax
Act, 1961 to that territory with such modifications as he thinks it.

The President can thus make regulations under Art. 240 with
respect to a Union territory occupying the same field on which
F Parliament can also make laws. We are not impressed by the
argument that such overlapping of powers would lead to a clash
between the President and Parliament. The Union territories are
centrally administered through the President acting through an
administrator. In the cabinet system of Government the President
acts on the advice of the Ministers who are responsible to Parlia-
G ment. ... It is not necessary to make any distribution of income-tax
with respect to Union territories as those territories are centrally
administered through the President."

H (Emphasis added)

, I
N.D.M.C. v. STATE [REDDY,J.) · 507

We respectfully agree with the above statement of law. A
We do not think it necessary to refer to or discuss the propositions
laid down in Management of Advance Insurance Co. Ltd. v. Shri Gwudas-
mal & Ors., [1970) 3 S.C.R. 881 holding that the amended definition of
"State" in clause (58) of Section 3 of the General Clauses Act applies to B
interpretation of Constitution by virtue of Article 372-A nor with the
contrary proposition in the dissenting judgment of Bhargava, J. in Shiv
Ki,rpal Singh:v. Shri V.V. Giri, [1971) 2 S.C.R. 197 at 313. It is enough to
say that context of Article 246 - indeed of Chapter-I in Part XI - excludes
the application of the said amended definition.
c
In Mithanlal (supra), T.L. Venkatrama Iyer, J., speaking for the
Constitution Bench, wJiiie dealing with an argument based on Article
248(2) observed :

"That Article has reference to the distribution of legislative powers
between the Centre and the States mentioned in Parts A and B D
Under the three Lists in Sch. VII, and it provides that in respect
of matters not enumerated in the Lists including taxation, it is
Parliament that has power to enact laws. It has no application to
Pait C States for· which the governing provision is Art. 246(4).
Moreover, when a notification is issued by the appropriate Govern- E
ment extending the law of a Part A State to a Part C State, the
law so extended derives its force in the State to which it is extended
from s. 2 of the Part C States (Laws) Act enacted by Parliament.
The result of a notification issued under that section is that the
provisions of the law which is extended become incorporated by
reference in the Act itself, and therefore a tax imposed thereunder F
is a tax imposed by Parliament. There is thus no substance in this
contention."

(Emphasis added)
G
To the same effect is the decision of a Division Bench in Satpal &
Co. v. Lt. Governor, [1979) 3 S.C.R. 651.

It is then argued for the appellants that if the above view is taken, it
would lead to an inconsistency. The reasoning in this behalf runs thus : a
law made by the legislature of a Union territory levying taxes on lands and H
508 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.

A buildings would be "State taxation", but if the same tax is levied by a law
made by the Parliament, it is being characterised as "Union taxation"; this
is indeed a curious and inconsistent position, say the learned counsel for
the appellants. In our opinion, however, the very premise upon which this
argument is urged is incorrect. A tax levied under a law made by a
B legislature of a Union territory cannot be called "State taxation" for the
simple reason that Union territory is not a "State" within the meaning of
Article 246 (or for that matter, Chapter-I of Part-XI) or Part-VI or Articles
285 to 289.

Lastly, we may refer to the circumstance that Delhi Municipal Cor-
C poration Act, 1957 was enacted by Parliament. Hence, so far as the Delhi
Municipal Corporation area is concerned, the taxes are levied under and
by virtue of a Parliamentary enactment. So far as the New Delhi Municipal
Council area is concerned, the taxes were levied till 1994 under the Punjab
Municipal Act, 1911 as extended and applied by the Part 'C' State (Laws)
D Act, 1950 enacted by Parliament. it is held by this Court in Mithanlal that
extension of an Act to an area has the same effect as if that Act has been
made by the extending legislature for the area. The Court said :

"Moreover, when a notification is issued by the appropriate
Government extending the law of a Part A State to a Part C State,
E the law so extended derives its force in the State to which it is
extended from s. 2 of the Part C States (Laws) Act enacted by
Parliament. The result of a notification issued under that section
is that the provisions of the law which is extended become incor-
porated by reference in the Act itself, and therefore a tax imposed
thereunder is a tax imposed by Parliament. There is thus no
F substance in this contention."

(Also See T.M. Kanniyan [1968] 2 S.C.R. 103 at 108.)

It must accordingly be held that with effect from 1950, it is as if the
G property taxes are levied by a Parliamentary enactment. In 1994, of course,
Parliament itself enacted the New Delhi Municipal Council Act (with effect
form May 25, 1994) repealing the Punjab Municipal Act. Taxes levied
under these enactments cannot but be Union taxation - Union taxation in
a Union Territory.

H For all the above reason, we hold that the levy of taxes on property
N.D.M.C. v. STATE [REDDY,J.] 509

by the Punjab Municipal Act, 1911 (as extended to Part 'C' States of Delhi A
by Part 'C' States (Laws) Act, 1950), the l)elhi Municipal Corporation Act,
1957 and the New Delhi Municipal Council Act, 1994 (both Parliamentary
enactments) constitutes "Union taxation" within the meaning of Article
289(1).

PART-W B

The Delhi Municipal Corporation Act, 1957, the Punjab Municipal
Act, 1911 (as extended to the Union Territory of Delhi) and the New Delhi
Municipal Council Act, 1994 (N.D.M.C. Act) specifically exempt the
properties of the Union from taxation. Section 119 of the Delhi Municipal C
Corporation Act is in terms of Article 285 of the Constitution. It reads :

"119. Taxation of Union prope1ties - (1) Notwithstanding anything
contained in the foregoing provisions of this Chapter, lands and
buildings being properties of the Union shall be exempt from the
property taxes specified in section 114 : D

Provided that nothing in this sub-section shall prevent the
Corporation from levying any of the said taxes on such lands and
buildings to· which immediately before the 26th January 1950, they
were liable or treated as liable, so long as that tax continues to be
levied by the Corporation on other lands and buildings." E
Sub-section (3) of Section 61 is also in terms of Article 285 of the
Constitution. It reads :

"Nothing in this sub-section shall authorise the imposition of any
tax which the provincial legislature has no power to impose in the F
Province under the Constitution-

Provided that a committee which immediately before the com-
mencement of the Constitu.tion was lawfully levying any such tax
under this section as then in force may continue to~evy such tax G
until provision to the contrary is made by Parliament."

Sub-section (1) of Section 65 of the N.D.M.C. Act is again in the
same terms as Article 285.

None of the above enactments provide any exemption in favour of H
510 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.

A the properties of a State. Section 115(4) of the Delhi Municipal Corpora-
tion Act, Section 61 of the Punjab Municipal Act and Section 62 of the
N.D.M.C. Act levy property tax on all the properties within their jurisdic-
. tion. From the fact that properties of the Union have been specifically
exempted in terms of Article 285 but the properties of the States have not
B been exempted in terms of Article 289 shows that so far as these enact-
ments go, they purport to levy tax on the properties of the States as well.
The State governments, it is equally obvious, are not claiming exemption
form municipal taxation under any provision of the concerned State enact-
ment but only under and by virtue of Article 289 of the Constitution. They
are relying upon clause (1) of Article 289 which is undoubtedly in absolute
C terms. Clause (1) of Article 289 says, "the property and income of a State
shall be exempt from Union taxation". But clause (1) does not stand alone.
It is qualified by clause (2) - which in turn is qualified by clause (3). Where
an exemption is claimed under clause (1), we cannot shut our eyes to the
said qualifying clause and give effect to clause (1) alone. In the decision in
D A.P.S.R.T.C., this Court has held that clause (2) is an exception to clause
(1) and that clause (3) is an exception to clause (2). When a claim for
exemption is made under clause (1) of Article 289, the Court has to
examine and determine the field occupied by clause (1) by reading clauses
(1) and (2) together: If there is a law made by Parliament within the
meaning of clause (2);·the area c~vered by that law will be removed from
E the field occupied by clause (1). By way of analogy, we may refer to sub-
clause (f) of clause (1) and clause (5) of Article 19, which has been
explained by a Special Bench of eleven Judges in R.C. Cooper v. Union of
India, (1970) 1 S.C.C. 248 in the following words : "Clause (5) Article 19
and clauses (1) and (2) of Article 31 prescribe restrictions upon State
p action, subject to which the right to property may be exercised". But before
we elaborate this aspect, it would be appropriate to examine the meaning
and scheme of Article 289 and the object underlying it.

Since Article 289 is successor to Section 155 of the Government of
India Act, 1935 - no doubt, with certain changes - it would be helpful to ,•

G refer to and examine the purport and scope of Section 155 (as it obtained
prior to its amendment in 1947). We would also be simultaneously examin-
ing the scheme and purport of Article 289. It would be appropriate to read
both Article 289 and Section 155 together :

H
N.D.M.C. v. STAIB [REDDY,J.] 511

"289. Exemption of property and 155. (1) Subject as hereinafter A
income of a State from Union provided, the Government of a
taxation - (1) The property and Province and the Ruler of a
income of a State property and Federnted State shall not be liable
,. income of a State shall be exempt to Federal taxation in respect of
from Union taxation. lands or buildings situate in British
B
India or income accruing, arising or
(2) Nothing in clause (1) shall received in British India;
prevent the Union from imposing,
or authorising the imposition of, Provide that -
any tax to such extent, if any, as
Parliament may by law provide in (a) where a trade or business of any C
respect of a trade or business of kind is carried on by or on behalf of
any kind carried on by, or on the Government of a Province in
behalf of, the Government of a any part of British India, outside
State, or any operations that Province or by a Ruler in any
connected therewith, or any part of British India, nothing in this D
property used or occupied for the sub-section shall exempt that
purposes of such trade or Government or Ruler from any
business, or any income accruing Federal taxation in respect of that
or arising in connection there- trade or business, or any operations
with. connected therewith, or any income
' arising in connection therewith, or E
(3) Nothing in clause (2) shall any property occupied for the
apply to any trade or business, purposes thereof;
which Parliament may by law (b) nothing in this sub-section shall
declare to be incidental to the exempt a Ruler from any Federal
ordinary functions of taxation in respect of any lands, p
Government. buildings or income being his
personal property or personal
income.

(2) Nothing in this Act affects any
exemption from taxation enjoyed as G
of right at the passing of this Act by
the Ruler of any Indian State in
respect of any Indian Government
securities issued before that date."
H
512 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.

A The first distinguishing feature to be noticed is that while Section 155
spoke of "lands and buildings" belonging to the Government of a Province
situate in British India being exempt from Federal taxation (we are leaving [
out the portion relating to Rulers of Acceeding States/Federating States),
·Article 289(1) speaks of "the property' of a State being exempt from Union
taxation. The second material difference is between proviso (a) to Section
B 155(1) and clause (2) of Article 289 corresponding to it. Under the proviso,
trade or business carried on by a Provincial government was excluded from
the exemption provided in the main limb of sub-section (1) whereas clause
(2) does not itself deny the exemption to such trade or business; it merely
enables the Parliament to make a law levying tax on such trade or business.
C This change has a certain background, which we shall refer to later. The
third distinguishing feature between the said proviso and clause (2) is this :
while the denial of exemption provided by the proviso was to the trade or
business carried on by a Provincial government outside its territory, clause
(2) of Article 289 contains no such restrictive words. The fourth distinguish-
D ing feature is the provision in clause (3) of Article 289, which enables the
Parliament to declare which trades/businesses are incidental to ordinary
functions of government, in which event those trades/businesses go out of
the purview of clause (2); no such provision existed in Section 155.

Even under the Government of India Act, 1935 the power to levy
E taxes on lands and buildings was vested in the Provincial legislatures alone.
Federal legislature had no power to levy such taxes. If so, the question
arises - why did the British Parliament provide that the lands and buildings
of a Provincial government situated in British India are exempt from
Federal taxation. Since, no Federal tax could ever have been levied by the
p Federal legislature on lands or buildings, is the exemption meaningless?
This is the question which was also agitated before the learned Judges who
answered the Presidential reference in Re.: Sea Customs Act. Sri P.P. Rao
and other learned counsel appearing for the State governments submit that
the said exemption is neither meaningless nor unnecessary. They submit
that the language used in the main limb of sub-section (1) of Section 155
G was used advisedly' to meet a specific situation. Their explanation, as
condensed by us in our words, is to the following effect :

even at the time of enactment and commencement of the Govern-
ment of. India Act, 1935, the area now comprised in the Union
H Territory of Delhi was comprised in the Chief Commissioner's
N.D.M.C. v. STATE [REDDY, J.] 513

Province of Delhi; besides Delhi, there were several other Chief A
Commissioner's Provinces within British India; every Provincial
government and almost every major native State had properties in
Delhi for one or the other purpose; prior to the commencement
of the 1935 Act, there was no such thing as division of powers
between the Centre and the Provinces; Provinces were mere ad-
ministrative units; the concept of division of powers between the B
Federation (Centre) and its units (Provinces), i.e., the concept of
a Federation, broadly speaking, was introduced by the said Act for
the first time; in such a situation, it was necessary that the mutual
respect and regard between the Centre and the Provinces basic to
a federal concept, is affirmed and given due constitutional recog- C
nition; even before the enactment of the Delhi Laws Act, 1912, the
Governor General in Council with the sanction and approbation
of the Secretary of State for India, had, by proclamation published
in Notification No. 911 dated the 17th day of September, 1912,
taken under his immediate authority and management, the ter-
ritories mentioned in Sc~Ie-A to the Act (the portion of the D
district of Delhi compri'Sing the tehsil of Delhi and police station
of Mehrauli) which were formerly included in the Province of
Punjab, with a view to provide for the administration thereof by a
Chief Commissioner as a separate Province to be known as the
Province of Delhi; it was the said status which was affirmed by the
Delhi Laws Act, 1912; Section 5 of the Government of India Act, E
1935 made a clear distinction between the Provinces and the Chief
Commissioner's Provinces; while the Provinces were provided with
legislatures (Chapter-III of Part-III of the Act), the Chief
Commissioner's Provinces, governed by Part-IV of the Act, had no
legislatures of their own; the only legislature for them was the F
Federal legislature; any tax levied in the Chief Commissioner's
Province could have been levied only by the federal legislature or
the Governor General, as the case may be; Section 99( 1) of the
Act provided that "the Federal Legislature may make laws for the
whole or any part of British Indian or for any Federated State and
a Provincial Legislature may make laws for the Province or for any G
part thereof'; all this shows that the tax on lands or buildings in
~. the Chief Commissioner's Provinces including Delhi could have
been levied only by Federal legislature; Section 155(1) was meant
to exempt the lands or buildings of Provincial governments from
such federal taxation - it is submitted.
H
514 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.

A We find the above explanation cogent and acceptable. It fully ex-
plains the use of the words "lands and buildings" in Section 155(1) of the
Act. We think it unnecessary to repeat the whole reasoning once again.

As against the words "lands and buildings" belonging to a Provincial
Government in Section 155 of the Government of India Act, 1935, Article
B 289(1) uses a single expression ''Property" and says that property of a State
shall be exempt from Union taxation. The expression "Property" is in-
dubitably much wider. It takes in not only lands and buildings but all forms
of property. While the Constituent Assembly debates do not throw any light
upon the reason for this change - from "lands or buildings" to "property" -
C it is, in all probability, attributable to the large number of representations
made by several Provincial governments to the Constituent Assembly that
not merely the lands or buildings but any and every trade and business
carried on by a State government should equally be entitled to exemption.
Sri B. Sen invited our attention to those representations and submitted that
it is these representations which induced the Constituent Assembly to draft
D clause (2) of Article 289 in a manner different from proviso (a) to Section
155(1). Be that as it may, the fact remains that the expression "property"
in Article 289(1) has to be given its natural and proper meaning. It includes
not only lands and buildings but all forms of property. The explanation
.offered by the learned counsel appearing for the States, set out. in extenso
E hereinabove, for the use of the words "lands or buildings" in Section 155(1)
is equally valid from clause (1) of Article 289 insofar as it pertains to lands
and buildings.

It must be remembered that both Section 155(1) and Article 289(1)
exempt the income as well derived by a Provincial Government/State
F government from Union taxation. Both the property and income of the
States are thus exempt under clause (1) of Article 289 subject, of course,
to clause (2) thereof.

Now what does clause (2) of Article 289 say? It may be noticed that
the language of the first proviso to Section 155 and of clause (2) of Article
G 289 is practically identical (except for the two distinguishing features
mentioned hereinbefore). It would, therefore, suffice if we discuss the
proviso. It says - omitting refrains to Princely States - that where a trade
or business of any kind is carried on by or on behalf of the government of
a Province in any part of British India (outside that Province), nothing in
H sub-section (1) shall exempt that Government from any Federal taxation in
N.D.M.C. v. STATE [REDDY, J.) 515

respect of that trade or business or any operations connected therewith or A
any income arising in connection therewith or any property (i.e., lands and
buildings) occupied for the purposes thereof. It is necessary to emphasise
that the proviso to Section 155(1) which by its own force levied truces upon
the trading and business operations carried on by the provincial govern-
ments did not either define the said expressions or specify which trading B
or business operations are subject to trocation. On this account, the proviso
was not and could not be said to have been, ineffective or unenforceable.
It was effective till January 26, 1950. Clause (2) of Article 2B? also similarly
does not define or specify - nor does it require that the law made there-
under should so define or specify. It cannot be said that unless the law
made under and with reference to clause (2) specifies the particular trading C
or business operations to be truced, it would not be a law within the
meaning of clause (2). Coming back to the language of clause (2), a
question is raised, why does the proviso speak of trocation in respect of trade
or business when the main limb of sub- section (1) .speaks only of truces in
respect of lands or buildings and income? Is the ambit of proviso wider D
than the main limb? Is it an independent provision of a substantive nature
notwithstanding the label given to it as a proviso? Or is it only an excep-
tion? It is asked. We are, however, of the considered opinion that it is more
important to give effect to the language of and the intention underlying
proviso than to find a label for it. It is clarificatory in nature without a E
doubt; it appears to be more indeed. It is concerned mainly with the
"income" (of Provincial governments) referred to in the main limb of
sub-section (1). It speaks of true on the "lands or buildings" in that context
alone, as we shall explain in the next paragraph. The idea underlying the
proviso is to make it clear that the exemption of inco~e of Provincial
government operates only where the income is earned or received by it as F
a government; it will not avail where the income is earned or received by
the Provincial government on account of or from any trade or business
carried on by it - that is a trade or a business carried on with profit motive.
In the light of the language of the proviso to Section 155 and clause (2) of
Article '2B9, it is not possible to say that every activity carried on by the G
government is governmental activity. A distinction has to be made between
governmental activity and trade and business carried on by the governme~t,
at least for the purposes of this clause. It is for this reason, we say, that unless
an activity in the nature of trade and business is carried on with a profit move,
it would not be a trade or business contemplated by clause (2). For example, H
516 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.

A mere sale of government properties, immovable or movable, or granting of
leases and licences in respect of its properties does not amount to carrying
on trade or business. Only where a trade or business is carried on with a
profit motive - or any property is used or occupied for the purpose of carrying
on such trade or business - that the proviso (or for that matter clause (2) of
Article 289 would be attracted. Where there is no profit motive involved in
B
any activity carried on by the State government, it cannot be said to be carrying
on a trade or business within the meaning of the proviso/clause (2), merely
because some profit results from the activity.* We may pause here a while and
explain why we are attaching such restricted meaning to be words "trade or
business" in the proviso to Section 155 and in clause (2) of Article 289. Both
c the words import substantially the same idea though, ordinarily speaking, the
expression ''business" appears to be wider in its content. The expression,
however, has no definite meaning; its meaning varies with the context and
several other factors. See Board of Revenue v. A.M. Ansari, [1976] 3 S.C.C.
512 and State of Gujarat v. Raipur Manufacturing Company, [1967] 1 S.C.R.
D 618. As observed by Lord Diplock in Town Investments Limited v. Depart-
ment of Environment, (1977) 1 All. E.R. 813 - H.L., "the word 'business' is
an etymological chameleon; it suits its meaning to the context in which it
is found. It is not a term of legal art and its dictionary meanings, as Lindley,
C.J. pointed out in Rolls v. Miller, embrace 'almost anything which is an
occupation, as distinct from a pleasure - anything which is an occupation or a
E duty which requires attention is a business ... .'." Having regard to the context
in which the words "trade or business" occur whether in the proviso to Section
155 of the Govermnent of India Act, 1935 or in clause (2) of Article 289 of
our Constitution - they must be given, and we have given, a restricted meaning,
the context being levy of tax by one unit of federation upon the income of the
other unit, the manifold activities carried on by governments under our
F
constitutional scheme, the necessity to maintain a balances between the Centre
and the States and so on.

Proviso (i) not only speaks of trade or business carried on by the
G Provincial governments (outside their respective territories) but also "any
For example, almost evety State government maintains one or more guest-houses in
Delhi for accommodating their officials and others connected with the affairs of the
State. But, when some rooms/accommodation are not occupied by such persons and
remain vacant, outsiders are accommodated therein, though at higher rates. This
activity cannot obviously be called cartying on trade or business nor can it be said that
the building is used or occupied for the purpose of any trade or business carried on
H by the State government.
N.D.M.C. v. STATE [REDDY, J.] 517

operations connected therewith or any income arising in connection there- A
with or any property occupied for the purposes thereof." So far as opera-
tions connected with the trade or business is concerned, they naturally go
along with the main trade or business. No difficulty is expressed by anyone
on this count. Similarly, with respect to any income arising in connection
with such trade or business too, no difficulty is expressed since the income B
is an incident of the trade or business. Difficulty is, however, expressed
regarding the other set of words "or any property occupied for the purposes
thereof'. The said words, in our opinion, mean that if any property, i.e.,
any land or building is occupied by the Provincial government for the
purpose of any trade or business carried on by the Provincial government,
such land or building too loses the benefit of exemption contained in the C
main limb of sub-section (1); it becomes liable to Federal taxation. To
repeat, the central idea underlying the proviso is to remove the trading or
business operations from the purview of the main limb of sub- section (1)
of Section 155. Now, coming to clause (2) of Article 289, position is the
same with the two distinguishing features mentioned supra, viz., (a) under D
this clause, removal of exemption is not automatic; it comes about only
when the Parliament makes a law imposing taxes in respect of any trade
or business carried on by a State government and all activities connected
there~th or any property used or occupied for the purposes of such
business as also the income derived therefrom. If any property - whether
movable or immovable - is used or occupied for the purpose of any such trade E
or business, it ean be denied the exemption provided by clause (1) but this
denial can be only by way of a law made by Parliament and (b) the exception
contemplated by clause (2) is not confmed to trade and business carried on
by a State outside its territory as was provided by the first proviso to Section
155. Even the trade or business carried on by a State within its own territory p
can also be brought within the purview of the enactment made (by Parliament)
in terms of the said clause.

Adverting to the matters before us, the question is whether the Parlia-
ment has made any law as contemplated by clause (2) of Article 289? For, if
no such law is made, it is evident, all the properties of State government in G
the Union Territory of Delhi would be exempt from taxation. (Parliament has
admittedly not made any law as contemplated by clause (3) of Article 289.)
We have observed hereinbefore that the claim of exemption put forward by
State governments in respect of their properties situated in N.D .M.C. and
Delhi Municipal Corporation areas is founded - and can only be founded - on H
518 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.

A Article 289. The State invoke clause (1) of the article but we are of the
considered opinion that clause (1) cannot be looked at in isolation; it must
be read subject to clause (2). All the three clauses of Article 289 are parts
of one single scheme. Hence, when a claim for exemption with reference
B to clause (1) is made, one must see what is the field on which it operates
and that can be determined only by reading it along with clause (2). The
exemption provided by Article 289(1) is a qualified one - qualified by
clause (2), as explained hereinbefore. It is not an absolute exemption like
C the one provided by Article 285(1). If there is a law within the meaning of
clause (2), the field occupied by clause (1) gets curtailed to the extent
specified in clause (2) and the law made thereunder. It is, therefore,
necessary in this case to determine whether the Punjab Municipal Act,
D Delhi Municipal Corporation Act and N.D.M.C. Act are or can be deemed
to be enactments within the meaning of clause (2) of Article 289. These
enactments - and certai111y the Delhi Municipal Corporation Act and
N.D.M.C. Act - are post-constitutional enactment. As stated hereinbefore,
E these enactments while specifically exemp_flng Jbe Umon p~operfy rermsQJ"~:_ ffi
Article 285, do not exempt the properties of the State!fTh term8 orl\tth::le
289.* The omission cannot be said to be unintentional - particularly in the

• As a n1atter of fact, Section 115(4) of the Delhi Municipal Corporation Act and Section
F 62(1) of the N.D.M.C. Act expressly exempt properties useCI exclusively for 'charitable
purposes' or 'for public worship' (as defined by them) but do not provide for an
exemption in the case of the properties of the State in terms of Article 289. It cannot
be said, or presumed, that Parliament was not aware of, or conscious of, Article 289
while enacting the said Acts. Section 62(1) and (2) of the N.D.M.C. Act read : "62(1).
G Save as othenvise provided in this Act, the property tax shall be levied in respect of all
lands and buildings in New Delhi except - (a) lands and buildings or portions of lands
and buildings exclusively occupied and used for public worship or by a society or body
for a charitable purpose :
Provided that such society or body is supported wholly or in part by voluntary contribu-
H tions, applies its profits, if any, or other income in promoting its objects and does not
pay any dividend or bonus to its members.
Explanation.- 'Charitable purpose' includes relief of the poor, education and medical
relief but does not include a purpose which relates exclusively to religious teaching;
(b) lands and buildings vested in the Council, in respect of which the said said tax, if
levied, would under the provisions of this Act be leviable primarily on the Council;
(c) agricultural lands and buildings (other than dwelling houses).
--
(2) Lands and buildings or portions thereof shall not be deemed to be exclusively
occupied and used for public worship or for a charitable purpose within the meaning
of clause (a) of sub- sectioo. (1) if any trade or business is carried on in such lands and
buildings or portions thereof or if in respect of such lands and buildings or portions
thereof, any rent is derived.
N.D.M.C. v. STATE [REDDY,J.] 519

case of Delhi Municipal Corporation Act and N.D.M.C. Act. The intention A
is clear and obvious : the enactments do not wish to provide for any
exemption in favour of properties of the State situated within their respec-
tive jurisdictions. Taxes are levied on all properties within their jurisdiction
(except the properties specifically exempted), irrespective of who owns
them and to what use they are put. In such a situation, the question is, how
B
should they be understood? Two views can be taken: one that since the
said enactments do not expressly purport to have been made under and as
contemplated by clause (2) of Article 289, they should not be read and
understood as laws contemplated by or within the meaning of the said
clause (2). The effect of this view would be that the properties of the State
in Union· Territory of Delhi will be totally exempt irrespective of the c
manner of their use and occupation. In other words, the consequence
would be that the relevant provisions of the said enactments would be
ineffective and unenforceable against all the properties held by the States
in the Union Territory/National Capital Territory of Delhi, irrespective of
the nature of their user or occupation. The second view is that since there
D
is always a presumption of constitutionality in favour of the statutes and
also because the declaration of invalidity or inapplicability of a statute
should be only to the extent the enactment is clearly outside the legislative
competence of the legislative body making it or is sq~arely covered by the
ban or prohibition in question, the declaration of invalidity should not
extend to the extent the enactments can be related to and upheld with E
reference to some constitutional provision, even. though not cited by or
recited in the enactment. Similarly, the declaration of inapplicability should
only be to the extent the law is plainly covered by the ban or prohibition,
as the case may be. What is not covered by the constitutional bar should
be held to be applicable and effective. In our respectful opinion, the latter F
view is consistent with the well-known principles of constitutional inter-
pretation and should be preferred. We may pause here and explain our
view-point. If the law had expressly stated that it is a law made under and
with reference to clause (2) of Article 289, no further question would have
arisen. The only question is where it does not say so,* can its validity or
applicability be sustained with reference to clause (2). In our considered G

This is the nonual situation. No enactment states that it is made under and with
reference to a particular head of legislative in the Seventh Schedule to the Constitution
or a provision in the Constitution. Only when the enactment is questioned on the
ground of legislative competence, is the court required to to ascertain the head of
legislation or provision to which the enactment is referable. H
520 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.

A opinion, it should be so sustained, even though it may be that the appel-
lant-corporations have not chosen to argue this point specifically. As would
be evident from some of the decisions referred to hereinafter, the fact that
a party or a government does not choose to put forward an argument
cannot be a ground for the court not to declare the correct position in law.
B The appellants are saying that all the properties of the States are not
exempt because the taxes levied by them do not constitute "Union taxation"
within the meaning of clause (1) of Article 289. We have not agreed with
them. We have held that the taxes levied by the aforesaid enactments do
constitute, "Union taxation" within the meaning of clause (1) of Article 289
and that by virtue of the exemption provided by clause (1), taxes are not
C leviable on State properties. In view of the fact that clauses (1) and (2) of
Article 289 go together, form part of one scheme and have to be read
together, we cannot ignore the operation and applicability of clause (2), at
the same time. Reference to a few decisions would ~ear out our view. In
Charanjit Lal Chowdhary v. Union of India, [1950] S.C.R. 869, Fazl Ali, J.
D stated : 11 •••• .it is the accepted doctrine of the American Courts, which I
consider to be well-founded on principle, that the presumption is always
in favour of the constitutionality of an enactment, and the burden is upon
him who attacks it to show that there has been a clear transgression of the
constitutional principles". In BwTakur Coal Co. v. Union of India, A.l.R.
(1961) S.C. 654 at 963 = [1962] 1 S.C.R. 44, Mudholkar, J., speaking for
E the Constitution Bench, observed : "Were the validity of a law made by a
competent legislature is challenged in a Court of law, that Court is bound
to presume in favour of its validity. Further, while considering the validity of
the law the court will not consider itself restricted to the pleadings of the State
and would be free to satisfy itself whether under any provision of the Con-
F stitution the law can be sustained. 11 In Rt. Rev. Msqr. Mark Netto v. State of
Kerala & Ors., [1979] 1 S.C.C. 23, the Constitution Bench considered the
question whether a rule made by the Government of Kerala is violative of
the right conferred upon the minorities by Article 30. It was held :

"In that view of the matter the Rule in question its wide amplitude
G sanctioning the withholding of permission for admission of girl
students in the boys minority school is violative of Article 30. If so
widely interpreted it crosses the barrier or regulatory measures
and comes in the region of interference with the administration of .
the institution, a right which is guaranteed to the minority under
Article 30. The Rule, therefore, must be interpreted narrowly and
H
N.D.M.C. v. STATE [REDDY,J.] 521

is held to be inapplicable to a minority educational institution in A
a situation of the kind with which we are concerned in this case.
We do not think it necessary or advisable to strike down the Rule
as a whole but do restlict its operation and make it inapplicable to
a minority educational institution in a situation like the one which
arose in this case."
B
ileference may also be made to another Constitution Bench decision
in Sanjeev Coke Manufacturing Co. v. Mis. Bharat Coking Ltd. &Anr., A.LR.
(1983) S.C. 289 = (1983) 1S.C.C.147. The following observations in Para
26 are apposite :
c
"The deponents of the affidavits filed into Court may speak for the
parties on whose behalf they swear to the statements. They do not
speak for the Parliament. No one may speak for the Parliament
and Parliament is never before the Court. After Parliament has
said what it intends to say, only the Court may say what the D
Parliament meant to say. None else. Once a statute leaves Parlia-
ment House, the Court's is the only authentic voice which may
echo (interpret) the Parliament. This the Court will do with refer-
ence to the language of the statute and other permissible aids. The
executive Government may place before the Court their under-
standing of what Parliament has said or intended to say or what E
they think was Parliament's object and all the facts and circumstan-
ces which in their view led to the legislation. When they do so,
they do not speak for Parliament. No Act of Parliament may be
struck down because of the understanding or misunderstanding of
Parliamentary intention by the executive government or because F
their (the Government's) spokemen do not bring out relevant
circumstances but indulge in empty and self- defeating affidavits.
They do not and they cannot bind Parliament. Validity of legisla-
tion is not be judged merely by affidavits filed on behalf of the
State, but by all the relevant circumstances which the Court may
ultimately find and more especially by what may be gathered from G
what the legislature has itself said."

Lastly, we may quote the pertinent propositions enunciated in Ram
Krishna Dalmia v. Justice Tendolkar, (1959) S.C.R. 279 to the following
effect: H
522 SUPREME COURTREPORTS[1996] SUPP.10 S.C.R.

A "(b) that there is always a presumption in favour of the Con-
stitutionality of an enactment and the burden is upon him who
attacks it to show that there has been a clear transgression of the
constitutional principles;

(e) that in order to sustain the presumption of constitutionality the
B
Cour:t may take into consideration matters of common knowledge,
matters. of common repoTt, the history of the times and assume every
state of facts which can conceived existing at the time legislation;
and ......"

C These are well-settled propositions. Applying them, it must be held that
the aforesaid Municipal Laws are inapplicable to the properties of State
governments to the extent such properties are governed and saved by
clause (1) of Article 289 and that insofar as the properties used or occupied
for the purpose of a trade or business carried on by the State government
D (as explained hereinbefore) are concerned, the ban in clause (1) does not
· avail them and the taxes thereon must be held to be valid and effective. It
may be reiterated that the Delhi Municipal Corporation Act, 1957 and the
N.D.M.C. Act, 1994 are post-constitutional enactments and that the Punjab
Municipal Act too must be deemed to be a post-constitutional enactment
for the reasons given hereinabove. It must, therefore, be held that the levy
E of property taxes by the said enactments is valid to the extent it relates to
lands and buildings owned by State governments and used or occupied for
the purposes of any trade or business carried on by such State government.
In other words, the levy must be held to be invalid and inapplicable only
to the extent of those lands and buildings which are not used or occupied
F for the purposes of any trade or business carried on by the State govern-
ment, as explained hereinbefore. It is for the appropriate assessing
authorities to determine which land/building falls within which category in
accordance with law and in the light of this judgment and take appropriate
further action. In this connection, we may mention that the assessing
authorities under the Act have to decide several questions under the Act
G including the questions whether any land or building is being used for
"charitable purpose" or "public worship". They also have to decide whether
a land is an "agricultural land". These are difficult questions as would be
evident from a reference to the plethora of decisions under the Income
Tax Act where these expressions occur. For this reason, neither the exemp-
H tion can be held to be ineffective nor the authorities can be said to have
N.D.M.C. v. STATE [REDDY,J.] 523

no jurisdiction to decide these questions. Appeals are provided to civil A
courts against the orders of the assessing authorities.

In the light of the above position of law, it is for Union of India to consider
whether any steps are to be taken to maintain the balance between the
Union and the States in the matter of taxation.
B
PARTY c V

The following conclusions flaw from the above discussion :

(a) the property taxes levied by and under the Punjab Municipal Act, C
1911, the New Delhi Municipal Council Act, 1994 and the Delhi Municipal
Corporation Act, 1957 constitute "Union taxation" within the meaning of
clause (1) of Article 289 of the Constitution of India;

(b) the levy of property taxes under the aforesaid enactments on
lands and/or buildings belonging to the State governments is invalid and D
incompetent by virtue of the mandate contained in clause ( 1) of Article
289. However, if any land or building is used or occupied for the purposes
of any trade or busin-::ss - trade or business as explained in the body of this
judgment - carried on by or on behalf of the State government, such land
or building shall be subject to levy of property taxes levied by the said E
enactments. In other words, State property exempted under clause (1)
means such property as is used for the purpose of the government and not
the purposes of trade or business;

(c) it is for the authorities under the said enactments to determine
with notice to the affected State government, which land or building is used F
or occupied for the purposes of any trade or business carried on by or on
behalf of that State government.

We direct that this judgment shall operate only prospectively: It will
govern the Financial Year 1996-97 (commencing on April 1, 1996) and
• onwards. For this purpose, we invoke our power under Article 142 of the G
Constitution. The reasons are the following :

(a) according to the judgment under appeal, the properties of the
State were exempt i11 toto whereas according to this judgment, some of the
properties of the State situated within the Union Territory of Delhi may H
524 SUPREME COURT REPORTS(l996] SUPP. 10 S.C.R.

A become liable to tax. The assessees are the State governments and the taxes
are being levied under a Parliamentary enactment. This inter-state charac-
ter of the dispute is a relevant factor;

(b) from the year 1975 upto now, there have been no assessments
B because of the judgment of the High Court; and

( c) retrospective assessment of properties under the above enact-
ments appears to be a doubtful proposition - at any rate, not an advisable
thing to do in all the facts and circumstances of this case.

C Before parting with this case, it would be appropriate to refer to a
submission of Sri B. Sen. He submitted that the exemption provided by
clause (1) of Article 289 does not and cannot apply to compensatory taxes
like water tax, drainage tax and so on. Even where the enactment does not
specifically and individually enumerate these components of property taxes,
D i.e., where the levy is of a composite tax known as "Property tax", it must
be presumed, says Sri B. Sen, that part of the property taxes are compen-
satory in nature. We are, however, not inclined to express any opinion on
this aspect in the absence of any material placed in support thereof. We
cannot permit this new plea, which does not appear to be a pure question
of law, to be raised for the first time at the time of ar~ents in these
E .appeals/writ petitions.

The appeals and writ petitions are accordingly disposed of in the
above terms. The judgment of the High Court shall stand modified to the
extent it is contrary to this judgment.
F
There shall be no order as to costs.

AHMADI, CJ. These civil appeals and special leave petitions have
been filed against the judgment and. order of the Delhi High Court dated
March 14, 1975 in Civil Writ Petition No. 342 of 1969 and other orders
G which follow this judgment. The appellant in all these matters is the New
Delhi Municipal Committee (hereinafter called "the NDMC"). The respon-
dents are the Union of India and the States of Andhra Pradesh, Gujarat,
Haryana, Jammu & Kashmir, Kerala, Madhya Pradesh, Maharashtra, Oris-
sa, Punjab, Rajasthan, Tripura and West Bengal. The Municipal Corpora-
H tion of Delhi (hereinafter called "the MCD") appears as an intervenor.
N.D.M.C. v. STATE [AHMADI, CJ.] 525

The Case History A

The developments that occasioned che setting up of the Constitution
Bench may now be briefly set out. The Punjab Municipal Act, 1911
(hereinafter called "the Act") is applicable to the Union Territory of Delhi
and under the provisions of this Act, the NDMC had been levying property B
tax on the immovable properties of the respondent State situated within
Delhi.· The respondents challenged the imposition of such a tax on their
properties before the Delhi High Colirt by contending that it would fall
within the exemption provided for in Article 289( 1) of the Constitution. In
the impugned judgment, the Delhi High Court, while accepting this con-
tention, relied upon the relevant observations of the 9-Judge Constitution C
Bench of this Court in In Re The Bill to amend Section 20 of the Sea
Customs Act, 1878 and Section 3 of the Central Excises and Salt Act, 1944,
[1964] 3 S.C.R. 787 (hereinafter called "The Sea Customs Case"), to quash
the assessment and demands of house-tax in respect of the properties of
the States and restrained the NDMC from levying such a tax in future. The D
NDMC filed an application under Article 133(1)(c) of the ConstitutiO~
seeking the grant of a certificate for leave to appeal to the Supreme Court;
while granting the Certificate, the High Court observed that the principal
question before it had grave constitutional implications which req~ired an

.
authoritative decision by this Court.
E
On January 1, 1976 a Division Bench of this Court directed that the
NDMC could continue to make assessments but it was not to issue demand
notices or make any attempts towards realisation of the taxes. On October
29, 1987, another Division Bench of this Court directed that the matter be
listed before a Constitution Bench. On January 14, 1993, a 5-Judge Con- F
stitution Bench of this Court began hearing arguments and after consider-
ing the rival submissions, on October 4, 1994, passed an order referring the
matter to a 9-Judge Bench. In the said order, the Bench observed that it
had considered the decision in the Sea Customs Case and was of the
opinion that the point at issue in these matters was covered therein. The
decision in the Sea Customs case having been reaffirmed by the decision G
of this Court in Andhra Pradesh State Road Transport Corporation v. The
Income Tax Officer & Another, [1969] 7 S.C.R. 17 (hereinafter called "the
APSRTC case"), the Bench considered itself bound by the decision; how-
ever it was of the view that the arguments advanced before it, which were
not considered by the earlier decisions, were plausible and required con- H
526 SUPREME COURT REPORTS[l996J SUPP. 10 S.C.R.

A sideration which necessitated the setting up of a 9-Judge Bench to hear the
matter.

17te Impugned Judgment

An analysis of the impugned judgment may now be resorted to in
B
order to gain an insight into the various Constitutional questions that will
require our consideration. Before the High Court, the various States con-
tended the following; by virtue of Article 289(1) of the Constitution, the
property of the States is exempt from Union Taxation; the undefined
phrase "Union Taxation" in Article 289(1) would mean all taxes which the
C Union is empowered to impose; under the Constitutional scheme and,
specifically under Part VIII of the Constitution, Union Territories are to
be administered by the President of India through the laws of Parliament;
Parliament is the law-making body for all Union Territories and by virtue
of Article 246(4), while legislating for Union Territories, the power of
D Parliament to make laws extends to all the three lists in Schedule VII of
the Constitution pertaining to legislative competence; insofar as the Act
and its application to tlie Union Territory of Delhi is concerned, though it
relates to a matter in the State List, it would still amount to "Union
Taxation" becz.use, by virtue of its application to the Union Territory of
E Delhi, it would be deemed to have been incorporated in law made by
Parliament and would therefore be a Union Law imposing tax; since the
tax imposed by the Act amounts to Union Taxation, the exemption in
Article 289(1) of the Constitution which makes the property of the States
immune from Union Taxation would be attracted, and the properties of
the States situated in Delhi would be exempt from all taxes on property.
F
For the NDMC, it was contended : the phrase "Union Taxation"
would not extend to legislations in Union Territories and its interpretation
should be restricted to laws made by Parliament in respect of the entries
in List I; the Union had no power to impose taxes on entries relating to
G property as they fall under List II; the Act being a State Legislation could
not be treated as a Central Legislation for the purpose of attracting Article
289(1); the test to determine whether a tax forms part of "Union Taxation"
is to check if the proceeds thereof form part of the Consolidated Fund of
India; since the proceeds of taxes on property under the Act did not form
H part of the Consolidated Fund of India but were retained by the
N.D.M.C. v. STATE [AHMADI, CJ.] 527

Municipality for its own purposes, such a tax would not form part of "Union A
Taxation" and the States were therefore not entitled to be exempted from
paying it under Article 289(1); the scheme of the Constitution indicates
that Part C states, which later came to be called Union Territories, were
carved out as separate entities and were not to be regarded as part and
parcel of the Union Government; when the Union Government legislates B
for Union Territories, it does so in a special and different capacity, and
not as the Union Legislature; it would therefore be erroneous to treat such
laws made by the Union Government for the Union Territories as part of
Union laws that would account for "Union Taxation" under Article 289(1).

To reach its conclusion, the High Court conducted an examination
c
of the legislative history of the Act and its extension to the Union Territory
of Delhi; studied the scheme of the Constitution with regard to the dis-
tribution of legislative powers between the States and the Union; con-
sidered. the historical Constitutional position of Union Territories;
scrutinised the series of decisions of this Court on the issue whether a D
Union Territory is to be regarded as a State, and analysed the decision in
the Sea Customs case to appreciate the true import of Article 289(1). In
arriving at its conclusion, the High Court rejected the test of the proceeds
of taxes being part of the Consolidated Fund of India as being determina-
tive of the nature of Union Taxation. It accepted the contention that all E
laws applicable in a Union Territory would be deemed to be laws made by
Parliament and would therefore be part of "Union Taxation" and relied
upon the following observation in the Sea Customs case (at p. 812) for
support:

·"If a State has any property in any Union Territory that property F
would be exempt from Union Taiation on property under Article
289(1)."

The High Court rejected the contenticm that the Act was a State enactment
and stated that under the scheme of the Constitution, the term "Union G
Territory" was distinct from "State" and therefore, the Union Territories
could not claim to be States for the purpose of attracting the exemption in
Article 289(1).

Faced with such a vast gamut of issues of Constitutional import, we H
are of the view that before we analyse the submissions put forth before us
528 SUPREME COURT REPORTS[l996] SUPP. 10 S.C.R.
A by the learned counsel for the various parties, it would be convenient if the
historical background of certain aspects of the matter could be set out so
as to provide a setting where the rival contentions can be better under-
stood.

Constitutional histmy of the areas that are now called "Union Ter-
B litories"

In the pre-Constitutional era, these territories were called Chief
Commissioner's Provinces. The Government of India Act 1919 contained
specific provisions for the governance of these areas. Under the Scheme
c of the Government oflndia Act, 1935 (hereinafter referred to as "the 1935
Act"), the Federation of India comprised : (a) the Provinces called
Governor's Provinces; (b) the Indian States which had acceded to or were
expected to accede to the Federation; and (c) the Chief Commissioner's
Provinces. Part IV of the 1935 Act dealt with the Chief Commissioner's
Provinces and Section 94 listed them as : (i) British Baluchistan (ii) Delhi
D (iii) Ajmer-Marwara (iv) Coorg, (v) Andaman & Nicobar Islands, and (vi)
. the area known as Panth Piploda : and provided that these areas were to
be administered by the Governor General, acting through a Chief Commis-
s10ner.
.. .
E On July 31, 1947, during the incipient stages of the framing of the
Constitution, a Committee under the Chairmanship of Dr. B. Pattabhi
Sitaramayya was established to study and report on the Constitutional
changes required in the administrative structure existing in the Chief
Commissioner's provinces to give to the people of these provinces a due
place in the democratic governance of free India. After the recommenda-
F tions of this Committee were sanctioned by the Drafting Committee, they
were placed before the Constituent Assembly for its consideration.

The Constituent Assembly considered all aspects of the issue with a
view to providing an appropriate administration for what were called Part
C States, which included three former Chief Commissioner's Provinces -
G Delhi, Ajmer and Coorg - and some erstwhile Indian States which were
retained a:s centrally administered areas after their merger with India; the
latter group consisted of the following areas : Himachal Pradesh, Bhopal,
Bilaspur, Cooch-Bihar, Kutch, Tripura, Manipur and Vindhya Pradesh. It
was decided that the decision whether these territories should have legis-
H latures and Councils of Ministers ought to be left to Parliament and, for
this purpose, an enabling provision should be incorporated within the
N.D.M.C. v. STATE [AHMADI, O.] 529

Constitution. It was also provided that these Part C States would be A
administered by the President, acting to such extent as he thought fit,
through a Chief Commissioner or a Lieutenant Governor to be appointed
by him, or through the Governor of a neighbouring State, subject to certain
procedural requirements. Accordingly. Article 239 and 240 were inserted
in the final draft of the Constitution.
B
Under the Constitution of India, as initially enacted, the States were
divided into Part A States, Part B States, Part C States and the territories
in Part D. The First Schedule to the Constitution provided details of the
States falling within each of these categories. The Part C States comprised
: (i) Ajmer; (ii) Bhopal; (iii) Bilaspur; (iv) Cooch-Bihar; (v) Coorg; (vi) C
Delhi; (vii) Himachal Pradesh; (viii) Manipur; and (ix) Tripura. The only
territory under Part D was Andaman· & Nicobar. Part VIII of the Constitu-
tion, comprising Articles 239-242, dealt with Part C States. Article 239
provided that Part C States were to be administered by the President acting
through a Chief Commissioner or a Lieutenant Governor. Article 240
provided that Parliament could, by law, create a local legislature or a D
Council of Ministers or both for a Part C State and such a law would not
be construed as a law amending the Constitution. Article 241 allowed
Parliament to constitute High Courts for the States in Part C States. Article
242 was a special provision of Coorg. Article 243, which also constituted
Part IX of the Constitution, stated that territories in Part D would be
administered by the President through a Chief Commissioner or other E
authority to be appointed by him.

In exercise of its powers under Article 240 (as it then stood), Parlia-
ment enacted the Government of Part C States Act, 1951 whereunder
provisions were made in certain Part C States for a Council of Ministers
to aid and advise the Chief Commissioner and also for a legislature F
comprising elected representatives. Section 22 of this legislation made it
clear that the legislative powers of such Part C States would be without
prejudice to the plenary powers of Parliament to legislate upon any subject.

The States Reorganisation Commission which was set up in Decem- G
ber, 1953, while studying the working of the units of the Union, took up
the functioning of the Part C States for examination as an independent
topic. In its Report, submitted in 1955, the Commission expressed the
view that Part C States were neither financially viable nor functionally
efficient, and recommended that each of them should either be amal-
gamated with the neighbouring States or made a centrally administered H
530 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.

A territory.

Substantial changes were made by the Constitution (Seventh
Amendment) Act, 1956 (hereinafter called "the Seventh Amendment
Act"), which incorporated the recommendations of the States Reor-
ganisation Commission and was to have effect in concert with the States
B Reorganisation Act, 1956. The four categories of States that existed
prior to these Acts were reduced to two categories. The first of these
categories comprised one class, called 'States,' and there were 14 such
'States'. The second category comprised the areas which had earlier
been included in Part C and Part D States; these areas were called
C "Union Territories" and were six in number. Some additions and dele-
tions were made to the existing lists. While Ajmer, Bhopal, Coorg,
Bilaspur and Kutch-Bihar became parts of other States, the Laccadive,
Minnoy and Amindivi Islands became a Union Territory. The six Union
Territories, therefore, were; (1) Delhi (2) Himachal Pradesh (3)
Manipur; (4) Tripura; (5) Andaman & Nicobar Islands; (6) The Lac-
D cadive, Minnoy & Amindivi Islands.

The Seventh Amendment Act also replaced Articles 239 & 240 by
new provisions; the new Article 240 allowed the President to make
regulations for certain Union Territories and this provision continues to
this day. It also repealed Article 242 & 243 of the Constitution.
E
Subsequently, Dadra & Nagar Haveli became a Union Territory
by the Constitution (Tenth Amendment) Act 1961; Goa, Daman & Diu
and Pondicherry became Union Territories by the Constitution (Twelfth
Amendment) Act, 1962; Chandigarh became a Union Territory by the
Punjab (Reorganisation) Act, 1966.
F
The Constitution (Fourteenth Amendment) Act, 1962 replaced
the old Article 240 as Article 239 A, enabling Parliament to create a
Legislature and/or a Council of Ministers for Himachal Pradesh,
Manipur, Tripura, Goa, Daman and Diu and Pondicherry. Thereafter,
G by the Government of Union Territories Act, 1963, Parliament did
create Legislative Assemblies, comprising three nominated persons, for
these territories.

Himachal Pradesh ceased to be a Union Territory by virtue of the
State of Himachal Pradesh Act, 1970. Manipur and Tripura became
H. states by virtue of the North-Eastern Areas (Reorganisation) Act, 1971.
N.D.M.C. v. STATE [AHMADI, O.J 531

Arunachal Pradesh, Mizoram and Goa, Daman & Diu ceased to be Union A
Territories by virtue of the State of Arunachal Act 1986, the State of.
Mizoram Act, 1986 and the Goa, Daman & Diu (Reorganisation) Act, 1987
respectively. The Laccadive, Minicoy and Amindivi Islands (Alteration of
Names) Act, 1973 changed the name of these Islands to 'Lakshadweep' but
it continued to remain a Union Territory.
.B
The present list of Union Territories is as follows : (i) Delhi; (ii)
Andaman & Nicobar; (iii) Lakshadweep; (iv) Dadar & Nagar Haveli;
(v) Daman and & Diu; (vi) Pondicherry and (vii) Chandigarh. However,
it is to be noted that all the Union Territories do not have the same
status, By the Constitution (Sixty-Ninth Amendment) Act, 1991, Article C
239AA and 239AB, which are special provisions in relation to Delhi,
wytrt? added. They provide that Delhi, which is to be called the National
Capital Territory of Delhi, is to have a Legislative Assembly which will
be competent to enact laws for matters falling in Lists II & III barring
a few specific entries. As the position stands at the present moment, the
Union Territories can be divided into three categories : D
(i) Union Territories without legislatures - comp;ising Andaman
& Nicobar, Lakshadweep, Dadar & Nagar Haveli, Daman &
Diu and Chandigarh.

(ii) Union Territories for which legislatures have been established E
by Acts of parliament under Article 239A - Pondicherry is
the sole occupant of this category.

(iii) Union Territories which have legislatures created by the
Constitution (Articles 239AA and 239AB) - The National
Capital Territory of Delhi is the sole occupant of this F
category.

The Constitutional History of the National Capital Tenitory of
Delhi and the application of the Act to it.
~-· --
The area tha:t-:m:--p_ow known as the National Capital Territory of G
Delhi was, until .1911, -claSSified- as a District of the State of Punjab.
Following the announcement of the decision to transfer the capital of
British India from Calcutta to Delhi. Government Notification No. 911
dated September 17, 1912 was issued authorising the Governor General
to take under his authority the territory comprising the Tehsil of Delhi H
532 SUPREME COURT REPORTS(1996J SUPP.10 S.C.R.

A and adjoining areas. The Notification provided for the administration of
these areas as a separate province under the Chief Commissioner. The
Delhi Laws Act, 1912 and the Delhi Laws Act; 1915 made provisions for
the continuance of laws in force in the territories comprising the Chief
Commissioner's Province in Delhi and for the extension of other enact-
B ments in force in any part of British India to Delhi by the Governor-
General-in-Council. Under the Government of India Act, 1919, the Indian
Legislature had the power to enact laws for the province of Delhi. How-
ever, legislation for Delhi was made by extension of laws in force in Punjab
and other States by Notifications issued under the Delhi Laws Act, 1912
and 1915. This enabled the Governor-General-in- Council to ensure, as for
C as possible, uniformity of laws with punjab, since a substantial part of Delhi
had originally formed an administrative district of that province. After
Independence, Delhi continued to be administered directly by the Govern-
ment of India and the different Departments of that Government began to
deal directly with corresponding.Departments in the Chief Commissioner's
D Office. This arrangement continued till shortly after the commencement of
the Constitution.

In the period immediately after the commencement of the Constitu-
tion, the part C States Act, 1951 contained a specific provision, Section
E 21, in respect of Delhi which enabled it to have a Legislative Assembly
and a Council of Ministers with restrictive powers to make laws. As a
result of this provision, Delhi continued to have a Legislative Assembly
and a Council of Ministers till 1956.

p The States Reorganisation Commission devoted special attention to
the needs of the National Capital. It noted that the dual control arising
from the division of responsibility between the Union Government and
the State Government of Delhi had not only hampered the development
of the capital, but had also resulted in a "marked deterioration of ad-
..
ministrative standards in Delhi". The Commission came to the conclusion
G that the National Capital must remain under the effective control of Union
Government. With reference to the plea for a popular Government, it
observed : "we are definitely of the view that municipal autonomy in the
form of the Corporation which will provide grater local autonomy than is
the case in some of the important federal capitals, is the right, in fact, the
H only solution of the problem of Delhi State."
N.D.M.C. v. STATE [AHMADI,CJ.] 533

_ After the Seventh Amendment Act came into force, following the A
' recommendations of the States Reorganisation Commission, the Legisla-
tive Assembly and the Council of Ministers for Delhi ceased to exist with
effect from November 1, 1956. Furthermore, the Delhi Municipai Act,·
1957 was enacted constituting a Municipal Corporation for the whole of
Delhi with members elected on the basis of adult franchise. The jurisdic- B
tion of the MCD covered almost the entire Union Territory of Delhi,
including both urban and rural areas. The areas within the limits of
NDMC and Delhi Cantonment Board were kept outside due jurisdiction
of the MCD, but the territorial jurisdiction of the NDMC was reduced.
As already mentioned, the Constitution (Sixty-Ninth Amendment) Act,
1991 introduced Articles 239AA and 239AB into the Constitution which C
provided for a Legislative Assembly and a Council of Ministers for Delhi.
Subsequently, the Government of National Capital Territory of Delhi Act,
1991 was enacted to supplement these constitutional provisions.

The Act, which was enacted in 1911, was directly applicable to Delhi
since at that point of time, it was a district of the State of Punjab. In 1912, D
when Delhi became </- Chief Commissioner's Province, the provisions of
the Act and various other Punjab enactments were made to continue in
force in the territory of Delhi by virtue of the Delhi Laws Act of 1912 and
the Delhi Laws Act of 1915. After the Constitution came "into being, the
Act was made to continue by virtue of the provisions of the Part C States E
Laws Act of 1950 and the Union Territories Laws Act of 1950.

Therefore, at the time when the present dispute arose, the Act was
still in force. However, in 1994, the Legislative Assembly of the National
Capital Territory of Delhi enacted the New Delhi Municipal Committee
Act, 1994 which is the law in force today. The MCD levied property tax F
on properties situated within the local limits of its jurisdiction by virtue
of the provisions of the Delhi Municipal Corporation Act, 1957. How-
ever, for the purposes of deciding the case, we are concerned only with
the provisions of the Act. ·
G
Before this Court, a number of parties have advanced arguments
on the various issues involved in the case. Mr. B. Sen, counsel for the
appellants, NDMC, as also the intervenor, MCD, began by challenging
the essential premises of the impugned judgment and advanced
elaborate arguments on the manner in which the various Constitutional
provisions that are germane to the case, ought to be interpreted. The H
534 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.

A learned Attorney General for India, appearing for the Union of India,
supported the stance ad6pted by the NDMC. These submissions were
strenuously opposed by Mr. P.P. Rao, learned counsel for the State of
Punjab and in this endeavour, he was assisted by Mr. A.K. Ganguli, learned
counsel for the State of Tripura who buttressed the position of the States
with his own submissions. The learned counsel appearing for the State of
B Rajasthan lent support to the same.

17ie Central Issues

As before the High Court, so before us, the controversy between
the parties has, in the main, centred around the question whether the
C properties owned and occupied by the various States within the National
Capital Territory of Delhi are entitled to be exempted from the levy of
taxes under the Act by virtue of the provisions of Article 289(1). The
larger question involved, which will consequently require our considera-
tion, is whether by virtue of Article 289(1), the States are entitled to
D exemption from the levy of taxes imposed by laws made by Parliament
under Article 246(4) upon their properties situated within Union Ter-
"t .
n.ones.

At this stage, we may set out the provisions that are central to the
adjudication of the present matter. In the following table, for the pur-
E · poses of clarity and convenience, Articles 285 and 289 of the present
Constitution have been contrasted against their immediate predeces-
sors, viz., Sections 154 & 155 of the 1935 Act.

GOVERNMENT OF INDIA ACT, CONSTITUTION OF
1935 INDIA
F 4 Sec. 154
Exemption of certain public Art. Exemption of property of the
property from taxation - 285 Union from State taxation -
Property vested in His Majesty (1) The property of the
for purposes of the government Union shall, save in so far as
G of the Federation shall, save in Parliament may by law
so far as any Federal law may otherwise provide, be
otherwise provide, be exempt exempted from all taxes
from all taxes imposed by, or imposed by a State or by any
by any authority within, a authority within a State.
Province of Federated State.
H
N.D.M.C. v. STATE (AHMADI, O.] 535

Provided until any Federal law (2) Nothing rn clause (1) A
otherwise provides, any shall, until Parliament by law
property so vested which was otherwise provides, prevent
'immediately before the any authority within a State
commencement of Part III of from levying any tax on any
this Act liable, or treated as property of the Union to B
liable, to any such tax, shall, so which such property was
long as that tax continues, immediately before the
continue to be liable, or to be commencement of this
treated as liable, thereto. Constitution liable or treated
as liable, so long as that tax
continues to be levied in that C
State.
Sec. 155
5 Exemption of Provincial Art. Exemption of property and
Governments and ,Rulers of 289 income of a State from Union
Federated States in respect of taxation - (1) The property D
Federal taxation - (1) Subject as and income of a State shall
hereinafter provided, the be exempt from Union
Government of a Province and taxation.
the Ruler of a Federated State
shall not be liable to Federal (2) Nothing in clause (1) E
taxation in respect of lands or shall prevent the Union
buildings situate in British India from imposing, or
or income accruing, arising or authorising the imposition
received in British India; of, any tax to such extent, if
any, as Parliament may by
Provided that - law provide in respect of a F
(a) where a trade or business of trade or business of any
any kind is carried on by or on kind carried on by,, or on
behalf of the Government of a behalf of, the Government
Province in any part of British of a State, or any operations
India outside that Province or connected therewith, or any G
by a Ruler in any part of British property used or occupied
India, nothing in this sub- for the purposes of such
section shall exempt that trade or business, or any
Government or Ruler from any income accruing or arising
Federal taxation in respect of in connection therewith.
H
536 SUPREME COURT REPORTS(l996] SUPP.10 S.C.R.

A that trade or business, or any (3) Nothing in clause (2)
operations connected shall apply to any trade or
therewith, or any income business, or to any class of
arising in connection therewith, trade or business, which
or any property occupied for Parliament may be laow
the purposes thereof; declare to be incidental to
B
be ordinary functions of
government.
(b) nothing in this sub-section
shall exempt a Ruler from any
Federal taxation in respect of
c any lands buildings or income
being his personal property or
personal income.
(2) Nothing in this Act affects
any exemption from taxation
D enjoyed as of right at the
passing of this Act by the Ruler
of an Indian State in respect of
any Indian Government
securities issued before that ,
E date.

Submissions of Counsel

Mr. Sen prefaced his submissions for the NDMC and the MCD by
p pointing out that the phrase "Union Taxation" used in Article 289(1) of the
Constitution has not been defined either in the text of the Constitution or
in any of the decisions rendered by this Court. Pointing out the difference
between Articles 285 & 289, Mr. Sen stated that (i) the former exempts
"all taxes" whereas the latter. limits its exemption to taxes relating to
"property and income"; and (ii) the former uses the words "imposed by a
G State or by any authority within a State" whereas the latter uses the phrase
"Union Taxation". Thereafter, Mr. Sen contrasted Article 289(1) and Sec-
tion 155 of the 1935 Act by pointing out that while Section 155(1) uses the
words "lands & buildings", Article 289(1) uses the word "property". This,
he explained, was on account of the strong position adopted by repre-
H sentatives of the States in the Constituent Assembly who had insisted that
N.D.M.C. v. STATE [AHMADI, CJ.] 537
the ambit of the exemptions be cast wider. A
At this juncture, we may ref~r to Article 246 which reads as follows:

"246. Subject-matter of laws made by Parliament and by the Legis-
latures of States - (1) Notwithstanding anything in clauses (2) and
(3), Parliament has exclusive power to make law with respect to B
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, sub-
ject to clause (1) theLegislature of any State also, have power to C
make laws with -;espect 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. D
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 E
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."

Mr. Sen then submitted that two possible meanings could be ascribed to
the phrase "Union Taxation" : (i) Taxes that are levied by Parliament in F
exercise of its powers under Article 246(1) and pertain only to entries in
List I of the Seventh Schedule; (ii) Any tax that is levied as a result of a
law passed by Parliament including those that are relatable to entries in
List II and List III of the Seventh Schedule. Mr. Sen vehemently urged that
the former interpretation be adopted by this Court. According to him, G
acceptance of the latter would lead to anomalous results. He submitted
that when Parliament makes laws in exercise of its powers under Article
246(4) and in doing so, legislates on entries in List-II, it is doing so in a
different capacity and the character of these laws is different from ordinary
Union legislations. To drive home the argument, Mr. Sen led us through
certain other provisions of the Constitution, such as, Articles 249, 250, 252 H
538 SUPREME COURT REPORTS[1996J SUPP. 10 S.C.R.

A and the Emergency Provisions in Part XVIII of the Constitution which
empower Parliament to make laws on entries in List II, but the nature and
effect of these legislations requires that they be not treated as ordinary
Union legislations.

Thereafter, he took us through various provisions in Part XII of the
B Constitution with a view to analysing the distribution of revenues between
the Union and the States. Having done so, he invited our attention to the
provisions of Part VIII of the Constitution to support his stand that a Union
Territory is an independent Constitutional entity akin to a State and that
it has an identity separate from that of the Union Government. To this
C end, he drew our attention towards several decisions of this Court on the
question whether a Union Territory is a State and sought to convince us
that, in the present context, the answer to this query must be in the
affirmative.

D Referring to the two decisions of this Court on the interpretation of
Article 289(1) rendered in the Sea Customs case and the APSRTC case,
Mr. Sen contended that the issue arising before this Court in the present
matter had not arisen for adjudication in either of these two cases. He
submitted that the observation made by Sinha,. C.J. in the former case
would, therefore, have to be regard as obiter dicta since the issue of laws
E relating to Union Territories was not before the Court. He explained that
such an observation was made in the context situations where Parliament
can directly impose a tax on property to counter the argument that only
States could levy taxes directly on property under the Constitution. Mr. Sen
stated that the obsyrvation was founded on misconceived premises and that
p there were other, more appropriate situations where Parliament could
impose taxes directly on Property, such as, in the ·case of Entry 3, List I
which deals with Cantonments and the Cantonments Act, 1924 which
allows Parliament to levy taxes for Contonments. Mr. Sen then contended
that such a power would be available to Parliament even when it enacts a
legislation by using Entry 49, List I which relates to patents, inventions and
G designs, and also in the case of a few other entries in List I.

Thereafter, Mr. Sen contended that, in any event, the taxes levied by
NDMC would not amount to Union Taxation because they are in the
nature of a Municipal Tax. Our attention was drawn towards the Constitu-
H tion (Seventy-Fourth) Amendment Act, 1992 which incorporated Part
N.D.M.C. v. STATE [AHMADI, CJ.) 539

IXA, dealing with Municipalities in our Constitution. He argued that · A
Municipalities now have an elevated Constitutional status and that since
they have their own machinery for collecting taxes besides having control
over the fixing and charging of the taxes, these taxes cannot be regarded
as ·part of "Union Taxation" . He then took us through the relevant
provisions of the Act, the New Delhi Municipal Corporation Act, 1994 and . B
the Delhi Municipal Corporation Act, 1957 to indicate that each of these
bodies has been vested with wide powers of fixing the rates of taxes,
collecting them and then using the proceeds, which go to specially created
Municipal funds, towards securing their objectives. Drawing sustenance
from the language of Article 285, which specifically exempts taxes imposed
by local authorities, Mr. Sen submitted that since an express exemption is C
not referred to in Article 289(1), municipal taxes were not meant to be
covered within its exemption and, therefore, the States are bound to pay
these taxes to the NDMC and the MCD.

The learned Attorney General for India began by stating that it is D
not the identification of the legislature that imposes the law which is
determinative of the issue of "Union Taxation". According to him, to
determine the true character of Union Taxation, the subject of the levy
must be _analysed. He submitted that when Parliament makes use of i_ts
power under Article 246(4), it does so in an unusual circumstance where
the 'theme' of the legislation undergoes a change. He, therefore, stressed E
that in determining the scope of "Union Taxation" attention must be paid
to the 'theme', (i.e., the context and the specific circumstances in which the
tax is levied) rather than to the 'author' (i.e. the body which is levying the
tax). He, therefore, submitted that the interpretation of "Union Taxation"
should be restricted to situations where Parliament makes laws imposing p
taxes under Article 246(1).
'
His next submission was that Articles 285 and 289 do not exhaust the
entire area of taxation under the Constitution. Referring to certain other
provisions where Parliament is required to make laws for subjects in List G
II, the learned Attorney General drew our attention towards Articles 249,
250, 252, 253 and 357. He then submitted that these provisions envisage
unusual situations where, although Parliament is the law making body, the
resulting laws are not Union laws in the ordinary sense and the taxes
imposed by these laws cannot be said to form part of "Union Taxation".
He then contended that similarly, laws made by Parliament under Article H .
540 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.

A 246(4) are not the norm and cannot be said to form part of "Union
Taxation". Thereafter, the learned Attorney General took us through the

-
constitutional history of Union Territories and more specifically, that of the ·
National Capital Territory of Delhi. Having done so, he stated that such
an analysis would reveal that though Union Territories are not States, they
B are akin to States, being nascent States. He explained that the practice in
this regard shows that, in most cases, when a territory is acquired by the
Union and before it is admitted to the Indian Union as a full-fledged State,
it is groomed for Statehood by being nurtured as a Union Territory. He
then referred us to the decision of this Court in Ramesh Birch v. Union of
India, [1989] Supp. 1 SCC 430 at 471, to buttress his stance that Parliament •
C cannot be expected to draft legislations for Union Territories on a regular
basis and to explain how it meets with its obligations in this regard.

Mr. P.P. Rao, learned counsel for the States of Punjab & Haryana,
began his submissions by explaining the doctrine of immunity of instrumen-
D talities, which is said to be the legal basis for the incorporation of Articles
285 and 289 into our Constitution, and also mentioned the comparative
positions in the American, Canadian and Australian jurisdictions. He
submitted that the doctrine postulates that in a federal set up, there should
be inter-governmental tax immunities between the federal and State wings..
Such an immunity is a Constitutional limitation on the law-making power
E of the respective legislatures in the field of taxation as a whole. After its
genesis in the U.S., the doctrine has come to be accepted in Canada and
Australia. Mr. Rao conceded that though both the 1935 Act as well as the
Constitution had incorporated such reciprocal tax immunities, they were
not adopted to the same extent as in Canada and Australia. However unlike
F in these countries, the Union of India has sizeable territory of its own
comprising all the Union territories specified in the First Schedule. The
power to make laws including authorising levy or collection of taxes of all
kinds is conferred exclusively on the Union Parliament arid these territories
would form an important part of the reciprocal tax immunities.

G He then drew our attention to Article 265 which incorporates an
important constitutional limitation on the power of taxation when it states
that "no tax shall be levied or collected except by authority of law". In India,
.J:here are only two legislatures that are competent to tax : 'Parliament for
the Union' and the 'legislature of a State'. Therefore, all taxation must fall
H within either of the categories - Union Taxation or State Taxation.
N.D.M.C. v. STATE [AHMADI, CT.] 541

Municipalities and other local authorities cannot have an independent A
power to tax and that is why there can be no exemption for Municipal taxes
independent of the exemption for State of Union Taxation. To that extent,
he submits, the contention of Mr. Sen, that Article 289 exempts only Union
Taxation without mentioning municipal taxes which would imply that the
States would not be exempt from paying the latter, cannot be accepted.
B
Moving on to the definition of the term "Union Taxation", Mr. Rao
pointed out that in Article 285 the term "State Taxation" has been defined
as "all taxes imposed by a State or by any authority within a State'. He
urged us to adopt a similar interpretation for "Union Taxation" even though
Article 289 does not contain any such definition by pointing out that being C
corollaries of each other, these terms would have been used to convey a
similar meaning. If this definition were to be accepted, "Union Taxation"
would mean "all taxes imposed by the Union" and, therefore, the State
would be entitled for exemption from the taxes imposed by NDMC. To
explain the language and ambit of Articles 285 and 289, Mr. Rao took us D
through a detailed examination of the provisions of the 1935 Act with a
view to appreciating the true import of the predecessors of these two
provisions, namely, Sections 154 and 155 of the said Act. To this end, we
were taken through Sections 5, 6, 94, 99, 100, 104, 154 and 155 and Lists I
& II of the Seventh Schedule to the 1935 Act. Mr. Rao, thereafter, E
contended that under the scheme of the 1935 Act, it was quite clear that
by virtue of Section 155, the Provinces (predecessors of "States") were
entitled to exemption from taxes on 'lands and buildings' in the Chief
Commissioner's Provinces (predecessors of "Union Territories"). He con-
tends that the position continues in the present Article 289 and, in fact, the
immunity is much wide in scope since 'property' is wider than 'lands and F
buildings'. Mr. Rao also led us through the relevant passages of the Sea
Customs case and stressed that both the minority _iJild the majority opinions
in that case had taken the view that the properties of States situated in
Union Territories were exempt from taxation. To sum up, Mr. Rao put forth
his submissions to counter those put forth by Mr. Sen and the learned G
Attorney General towards establishing that, even while exercising its powers
under Article 246(1), Parliament can levy taxes directly on property.

Mr. AK. Ganguli, learned counsel for the State of Tripura, lent
support to the submissions of Mr. Rao on the issue of Parliamentary laws· H.
542 SUPREME COURT REPORTS(l996J SUPP. 10 S.C.R.

A being applicable to Union Territories; he emphasised that even after the
introduction of Articles 239AA and 239AB in the Constitution, the Delhi
Legislature could not be said to be a legislative body with plenary powers.
The legislative powers conferred on such a body are restricted and limited
to certain spheres and are subject to the powers of the Parliament to make
.B laws with respect to any matter for the Union Territories, which obviously
refers to Article 246(4) of the Constitution. By way of an analogy, he
referred us to Article 244 and the Sixth Schedule to the Constitution which
contain provisions for the administration of Tribal areas in the States of
Assam, Meghalaya, Tripura and Mizoram and provide for bodies with
C legislative powers. He led us through decisions of this Court on the point
that the law making powers of these bodies, though conferred by the
Constitution itself, are not plenary powers as those of Parliament or of the
State legislatures.

Counsel submitted that the provisions contained in Part XII of the
D Constitution relating to distribution of revenue between the Union and the
States are not determinative of the scope of the expression "Union Taxa-
tion" in Article 289(1) as they only indicate that though a large number of
taxes are levied by the Parliament and collected by the Union Government,
eventually, a substantial portion thereof is distributed amongst the States.
E
After submitting that the main controversy in this case is squarely
covered by the decision in the Sea Customs case, Mr. Ganguli pointed out
that the Government of India, while preparing its Receipt Budget, has
always treated taxes imposed by Parliament and collected from the Union
F Territories as part of the total tax revenue of the Union Government in
which other taxes such as corporation tax, taxes on income, customs duties
and union excise duties are also included. He submitted that even in
respect of non-tax revenue, the receipts from the Union Territories are
treated as receipts of the Union Government. He, therefore, contended
that even the Union Government was of the view that "Union Taxation"
G included taxes.levied by Parliament in Union Territories.

Learned counsel for the State of Rajasthan, Mr. Gupta, sought to
bring to our notice a wider comparative position of the manner in which
countries around the world have adopted the American doctrine of
H reciprocal immunity.
N.D.M.C. v. STATE [AHMADI, CJ.] 543

Having noticed the submissions of the counsel for the various parties A
before us, we may now proceed to express our opinion on the diverse
points raised in the present case. .

Analysis of the decisions rendered in the Sea Customs case and the
APSRTC case.
B
The decision in the Sea Customs's case was occasioned by the
emanation of a proposal to introduce in Parliament a Bill to amend Section
20 of the Sea Customs Act, 1878, and Section 3 of the Central Excise and
Salt Act, 1944. These amendments would have led to the imposition of
indirect taxes, namely excise and customs duties upon the properties of C
various States which were being used for purposes other than those
specified in Article 289(2), i.e., for purposes not relating to trade or
business. A number of State Governments objected that such a law would
fall foul of the interdiction in Article 289(1) and, in view of the resulting
controversy, the President referred, under Article 143, the issue of the
constitutionality of the proposed amendments to this Court. The issue was D
decided by a majority of 5 : 4. It was held that the immunity granted to
States in respect of Union Taxation under Article 289 extends only to those
taxes that are directly leviable upon the property and income of the States;
since excise and customs duties are indirect taxes, they would not fall within
the ambit of the exemption in Article 289 and Parliament could impose such E
duties upon the property and income of the States. There were two opinions
outlining the majority view and an equal number for the minority. Sinha, CJ.
delivered the first of the majority judgments on behalf of himself,
Gajendragadkar, Wanchoo and Shah, JJ. while Rajagopala Ayyangar, J.
delivered a separate, concurring opinion. S.K Das, J. delivered the first of the
minority opinions on behalf of himself, Sarkar and Das Gupta, JJ. while F
Hidayatullah, J. rendered a separate minority opinion.

A number of submissions were advanced before the Court with a view to
facilitating a true construction of Article 289(1). In this regard, com-
parisons were drawn with its corollary, Article 285 and with the provisions
which inspired the adoption of these two provisions, namely, Sections 154 G
and 155 of the 1935 Act. The Court was also required to analyse the
scheme of the Constitution relevant to the issue. For the moment, it is not
necessary for us to analyse those aspects of the decision since, in any event,
we will be required to give our independent consideration to these matters.
We can, therefore, confine ourselves to those observations that have a H
544 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.

A direct bearing upon the point at issue with which we are presently con-
cerned; this aspect was, however, not specifically adverted to in all the
four opinions.

In his opinion for the majority, Sinha, C.J. has referred to the
essential contentions urged before the Court. The Union urged that the
B exemption in clause (1) of Article 289 be interpreted restrictively, limiting
its applicability to direct taxes on the property and the income of States;
the States, on the other hand, canvassed for an expansive interpretation
which would exempt them from taxes having any relation whatsoever to
their property and income. The learned Chief Justice noted that it was not
C disputed that the exemption in Article 289 (1) was, as far as taxes on
income are concerned, restricted to "Taxes other than on agricultural
income", which is the only entry (Entry 82) in List I of the Seventh Schedule
which enables Parliament to legislate on taxes relating to income. The
learned Chief Justice considered this to be a significant fact as it meant
D that if the income of State was exempt only from taxes on income, the
juxtaposition of the words "property and income" in Article 289(1) would
lead to the inference that property is also exempt only from direct taxes
on property. However, it was pointed out by the States that List I does not
contain any specific tax on property which would enable Parlia~ent to pass
a law relating to taxes on property and, that being so, that intention of the
E framers of the Constitution must have been to exempt the property of
States from all taxes, be they direct or indirect. To meet this argument, the
learned Solicitor General, appearing for the Union, put forth several
arguments, one of which came to be accepted by the learned Chief Justice
as the main plank upon which he based his rejection of the contention of
F the States. Since these observations are directly relevant to the present
case, they may be extracted here (at p. 812) :

"It is true that List-I contains no tax directly on property like
List-II, but it does not follow from that the Union has no power
to impose a tax directly on property under any circumstances.
G Article 246(4) gives power to Parliament to make laws with respect
to any matter for any part of the territory of India not included iri ..
a State notwithstanding that such matter is a matter enumerated
in the State List. This means that so far as Union territories are
concerned Parliament has power to legislate not only with respect
H to items in List I but also with respect to item in List II. Therefore,
N.D.M.C. v. STATE [AHMADI, O.] 545

so far as Union terri~es are concerned, Parliament has power A ·
to impose a tax directly on property as such. It cannot therefore
be said that the exemption of State's property under Article 289(1)
would be meaningless as Parliament has no power to impose any
tax directly on property. If a State has any property in any Union
territory that property would be exempt from Union taxation on B
property under Article 289(1). The argument therefore that Article
289(1) cannot be confined to tax directly on property because there
is no such tax provided in List I cannot be accepted."

(Emphasis added)
c
Thereafter, having referred to the language of Article 285 and the intention
of the framers as perceived by him, the learned Chief Justice came to the '
conclusion that the immunity granted by Articles 285 and 289 was of similar
ambit and extended only to dire.ct.____taxes without exempting indirect taxes
such as excise and customs duties. -
D
Das, J ., in his dissenting opinion, noted the objection of the States
that List I had no entry which would enable Parliament to levy a tax directly
on property. He took note of the counter- arguments advanced by the
learned Solicitor General in relation to this aspect but could not bring
himself to agree with the correctness of those propositions. While referring E
to the argument on Article 246(4), he noted (at p. 843) :

"... It would be a case of much ado about nothing if the Constitution
solemnly provided for an exemption against 'property tax' on State
property only for such rare cases as are contemplated in Art. p
246(4), the situation of State property in territory not included in
a State. Such situation would be very rare, and could have hardly
necessitated a solemn safeguard at. the inception of the Constitu-
tion when the States were classed under Part A or Part B of the
First Schedule. If the wider interpretation of clause (1) of Article
289 is accepted, such property would also be exempted from Union G
taxation except in cases covered by clause (2) of the article. We
fmd it difficult to accept the contention that clause (1) of Article
289 was meant only for cases covered by Article 246(4) ... "

(Emphasis added) H
546 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.

A At this juncture, we may note that both Mr. Rao and Mr. Ganguli were at
pains to point out that though Das, J. rejected the overall contention of the
learned Solicitor General, he had, by stating that the exemption could not
have been provided "only for such rare cases as are contemplated in
Article 246(4)'', implicitly accepted that these cases would fall within the
B exemption in Article 289(1).

Rajagopala Ayyangar, J., in his separate majority judgment, makes a
specific reference to this contention of the learned Solicitor General (at
pp. 918-19 ) but, aside from stating that "the submission of the learned
Solicitor General are not without force" (at p. 919), he did not make any
C further reference to the matter. Hidayatullah, J., in his separate minority
opinion, did not advert to this issue.

The preceding analysis reveals that the issue at hand was specifically
answered by this Court in the Sea Customs's case. We find it difficult to
D accept Mr. Sen's contention that the observations of Sinha; CJ. were made
by way of obiter dicta. Though the issue of legislations applicable in Union
Territories was not specifically before the Court, it did arise for considera-
tion during its analysis of the power of Parliament to levy taxes directly
upon property. The latter question was squai:ely before the Court and the
issue relating to Union Territories, though incidental to the main question,
E necessarily required consideration. The observations of Sinha, C.J. arc
unequivocally in favour of the position adopted by the States before us,
who find themselves in the enviably advantageous position of being able to
draw sustenance form even the observations in the dissenting judgment of
Das. J.
F
The decision in the Sea Customs's case was reaffirmed by a Constitu-
tion Bench of this Court in the APSRTC case which was a matter relating
to assessment of income-tax. The facts of that case are not directly relevant
for our purpose but, what is of considerable interest to us is the manner
in which the scheme of Article 289 and its three clauses were construed.
G Speaking for the Court, Gajendragadkar, C.J. outlined the scheme of
Article 289 (at p. 25) which can be stated as follows : The general
proposition that flows from clause (1) is that ordinarily, the income derived
by a State both from governmental and non- governmental or commercial
activities shall be immune from income-tax levied by the Union. Clause (2)
H then provides an exception and empowers Parliament to make a law
N.D.M.C. v. STATE [AHMADI, CJ.] 547

imposing a tax on the income derived by the Government of a State from A
trade or business carried on by it, or on its behalf. If clause (1) had stood
by itself, it would not been possible to include within its purview income
derived by a State from commercial activities but since clause (2) em-
powers Parliament to enact a law levying taxes on such activities of a State,
the inescapable conclusion is that activities inust be deemed to have been B
included in clause (1) and that alone can be the justification for the words
in which clause (2) has been couched in the Constitution. Thereafter,
clause (3) empowers Parliament to declare by law that any trade or
business would be taken out of the purview of clause (2) and restore it to
the area covered by clause (1) by declaring that the said trade or business
is incidental to the ordinary functions of Government. In other words, C
clause (3) is an exception to the exception prescribed by clause (2).
Whatever trade or business is declared to be incidental to the ordinary
functions of Government, would cease to be governed by clause (2) .and
would then be exempt from Union taxation.

These observations of Gajendragadkar, CJ. having been made in the D
context of income tax levied in the facts of that case, mention only taxes
relating to income. They are equally applicable to the taxes relating to
property referred to in Article 289. The essence of this analysis is that
clause (3) of Article 289 is an exception to clause (2), which in turn. is an
exception to the first clause of the Article. E

Analysis of this Court's previous rulings on the Constitutional status of
Union Territories.

We may now refer to a catena of decisions of this Court on the F
seemingly innocuous issue whether or not a Union territory has, under the
scheme of our Constitution, a status distinct from that of the Union and
the States. The fact that so niany decisions of this Court exist on the issue
would indicate that the matter is not one that can be disposed of by simply
pointing to the separate parts of the Constitution which deal with Union
Territories as distinct units. G

Before dealing with the specific circumstances of, and the decision
in, each of these cases, it is necessary that a few provisions which figure
prominently be dealt with. Article 246(4) of the Constitution, as it stood
on January 26, 1950, allowed Parliament to "make laws with respect to any H
548 SUPREME COURT REPORTS[1996] SUPP. 10 Si. C.R.

A matter for any part of the territory of India not included in Part A or Part
B of the First Schedule". The Seventh Amendment Act brought about a
number of changes affecting Union Territories, some of which have already
been noticed by us. The other changes brought about by it are also relevant;
it causBd Article 246 to be changed to its present form where Parliament
B is empowered to make laws with respect to "any part of the territory of
India not included in a State". The word "State" has not been defined in
the Constitution. Article 1(3) defines the territory of India as comprising :
(a) the territories of the States; (b) the Union Territories specified in the
First Schedule; and (c) such other territories as maybe acquired. The word
'Union Territory' has been defined in Article 366(30) to mean "any Union
C Territory specified in the First Schedule and includes any other territory
comprised wit~ the territory of India but not specified in that Schedule".

Though not defined in the Constitution, the word "State" has been
defined in the General Clauses Act, 1897 (hereinafter called "the General
D Clauses Act"). Article 367 of the Constitution states that the General
Clauses Act, 1897 shall, unless the context otherwise requires and subject
to any adaptations and modifications made under Article 372, apply for the
interpretation of the Constitution. Therefore, on a plain reading of the
provisions involved, 1t would appear that the definition of "State" in the
E General Clauses Act would be applicable for the purposes of interpreting
the Constitution. Article 372 is the saving clause of the Constitution which
enables all laws in force before the commencement of the Constitution to
continue in the territory of India. Article 372A, which, once again, owes its
origin to the Seventh Amendment Act, empowers the President to make
F further adaptations in particular situations.

Section 3(58) of the General Clauses Act, having been amended by
the Seventh Amendment Act, reads as follow :

"3. Definitions. - In this Act, and in all General Acts and Regula-
tions made after the commencement of this Act, unless there is
G
anything repugnant in the subject or context, -

(58) "State", -

(a) as respects any period before the commencement of the
H Constitution (Seventh Amendment) Act, 1956, shall mean a
)

N.D.M.C. v. STATE (AHMADI, CT.] 549

Part A State, a Part B State or a Part C State; and ,A
(b) as respects any period after such commencement, shall mean
a State specified in the First Schedule to the Constitution and
shall include a Union territory;"

(Emphasis added) B
The latter part of the definition, which states that a Union Territory is
included within the definition of a State, has introduced an element of
controversy in the interpretation of the Constitution.

While appreciating the reasoning of this Court in dealing with cases C
where it had to confront the issue of the status of Union Territories, the
time-frame and the history of the Union Territories which we have ad-
verted to in the earlier part of this judgment, must be borne in mind. The
first of these cases was that of Satya Dev Bushahri v. Padam Deo and Ors.,
(1955] 1 S.C.R. 549. This was a case relating to election law and one of the D
contentions of the appellant, who was seeking to disqualify the respondents
under the provisions of the Representation of Peoples' Act, 1951, was that
contracts entered into by the respondents with the Part C States were, in
effect, contracts entered into with the Central Government. This conten-
tion was based on the reasoning that the executive action of the Central
Government is vested in the President; the President is also the Executive E
Head of the Part C States; therefore, contracts with the Part C States are
contracts with the Central Government. The Court, speaking through
Venkatarama Ayyar, J., rejected this contention and stated that when the
President exercised functions as the Head of the Part C States, he occupied
a position analogous to the Governor in Part A States. Furthermore, F
Section 38(22) of the Government of Part C States Act, 1951 clearly
provided that all executive action of the State would be taken in the name
of the Chief Commissioner. It was, therefore, held that contracts with the
Part C States could not be said to be contracts with the Central Govern-
ment. Analysing Articles 239, 240 and 241 of the Constitution, the Court G
held that it could not be said that these had the effect of converting Part
C States into the Central Government and that they have a distinct status.
However when the case came up for review in Satya Dev Bushahri v. Padam
Deo and Ors., (1955) 1 S.C.R. 561, the Court, after having been directed ·
towards, and having taken note of the provisions of, Section 3(8) and
, Section 3(60) of the General Clauses Act Which define "Central Govern- H
550 SUPREME COURT REPORTS(l996) SUPP. 10 S.C.R.

A ment" and "State Government" respectively, and stipulate that for Part C
States, references to "State Government" would mean the "Central Govern-
ment", held that a contract with the Chief Commissioner in a Part C State
is a contract with the Central Government. It, however, added that this
would not affect the status of Part C States as independent units, distinct
B from the Union Government under the Constitution.

The State of Madhya Pradesh v. Sh1i Maula Bux & Ors., [1962] 2
S.C.R. 794, a decision rendered by a Constitution Bench, concerned the
State of Vindhya Pradesh which, at the relevant time, was a Part C State
and raised the issue whether, in a civil suit, the State of Vindhya Pradesh
C was the proper party to be sued under Section 79(a) of the Code of Civil
procedure, 1908. The argument of the respondents, based on Sections 3(8)
and 3(60) of the General Clauses Act, was that if, in case of the Part C
States, "State Government" means the "Central Government", the proper
party to be sued would be the Union of India instead of the State of
D Vindhya Pradesh. Hidayatullah, J., speaking for the Constitution Bench, at
pp. 798-802, relied on the observations in the first of the Satya Dev cases
to the effect that Part C States had a separate existence and were not
merged with the Central Government and went on to hold that the State
of Vindhya Pradesh, having a distinct identity, was the proper party to be
sued. Although the reviewed decision in Satya Dev's case was not referred
E to, since the proposition relied upon by Hidayatullah, J. was in fact reaf-
firmed in the review, the relevant proposition of law laid down in the case
does not suffer from any infirmity.

These cases are useful for our purpose to the limited extent that they
F declare that Union Territories are not part of the Central Government and
are, to that extent, distinct Constitutional entities. However, the issue
whether Union Territories are distinct from States was not considered in
these cases; it did however arise for consideration in the following cases.

In Ram Kishore Sen v. Union of India, [1966) l S.C.R. 430, the Court
G had to consider· whether the word "State used in Article 3(c) of the
Constitution would include Union Territories; the Constitution Bench
followed the stipulation in Articles 367 and 372 to notice the definition of
"State" in Section 3(58) of the General Clauses Act and the context of
Article 3 to hold that the word 'State' in Article 3(c) would have to be
H interpreted in the light of Section 3(58) of the General Clauses Act and
N.D.M.C. v. STATE [AHMADI, CJ.] 551

would include Union Territories. The correctness of this proposition was A
doubted by Hidayatullah, J in a subsequent case which we will refer to in
due course. The fact however remains that and definition in Section 3(58)
of the General Clauses Act has been utilised for interpreting a Constitu-
tional provision. The question that therefore arises is whether this will
affect the status of Union Territories in matters relating to Article 246, to B
which an answer was provided in a subsequent case to which we shall
immediately advert.

T.M. Kanniyan v. Income-Tax Officer, Pondicherry & Anr., [1968) 2
S.C.R. 103, was a case in which the petitioners had challenged the vires of
a regulation by which the President had, in exercise of powers under C
Article 240, repealed the laws in force in relation to Income-Tax within the
Union Territory of Pondicherry and had made the Income-Tax Act, 1961
applicable to it. Explaining that Parliament, and through it the President,
had plenary powers to make laws for Union Territories on all matters,
Bachawat, J., speaking for the Constitution Bench, stated as follows (at pp. D.
108-109) :

"Parliament has plenary powers to legislate for the Union Ter-
ritories with regard to any subject. With regard to Union T.er-
,_ .
ritories there is no distribution .of legislative powers... (The
inclusive definition (in Section 3(58) of the General Clauses Act) E
is repugnant to the subject and context of Article 246. There, the
expression "State" means the States specified in the first Schedule.
There is a distribution of legislative power between Parliament and
the legislatures of the States. Exclusive power to legislate with
respect to the matters enumerated in the State List is assigned to F
the legislatures of the States established by Part VI. There is no
distribution of legislative power with respect to Union Territories.
That is why Parliament is given power by Article 246(4) to legislate
even with respect to matters enumerated in the State List. If the
inclusive definition of "State" in Section 3(58) of the General G
Clause Act were to apply to article 246(4), Parliament would have
no power to legislate for the Union Territories with respect to
matters enumerated in the State List and until a legislature em-
powered to legislate on those matters is created under Article
239A for the Union Territories, there would be no legislature
competent to legislate on those matters; moreover, for certain H
552 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.

A territories such as the Andaman and Nicobar Islands, no legislature
can be created under Article 239A, and for such territories there
"'
can be no authority competent to legislate with respect to matters
enumerated in the State List. Such a construction is repugnant to
the subject and context of Article 246(4), Parliament has plenary
powers to make laws for union Territories on all matters."
B
The Court, therefore, held that Parliament was empowered to make laws
for Union Territories on all matters and the regulation made by the Presi-
dent in exercise of his power under Article 240 was valid. The ratio of this
decision, therefore, is that the definition of "State" provided by Section 3(58)
c of the General Clauses Act would not apply for the purposes of Article 246.
This ratio is equally applicable at the present moment for, despite several
changes having been made in respect of Union Territories since the
decision in Kanniyan's case, of the seven existing Union Territories, as
many as five do not have Legislatures of their own. The controversy was
not, however, put to rest by the decision in Kanniyan's case.
D
In Management of Advance Insurance Co. Ltd. v. Shri Gurudasmal & Ors.,
(1970] 3 S.C.R. 881, the main issue before another Constitution Bench was
whether the word "State" used in Entry 80 of List I of the ~eventh Schedule I.
could be said to exclude the application of the definition in Section 3(58) .
E of the General Clauses Act. Relying on the decision in Kanniyan's case,
Hidayatullah, J. held that, ordinarily, the defmition would apply in the
interpretation of the Constitution unless it is repugnant to the subject or
context. However, he noted, that after the Seventh Amendment Act where
Union Territories have been mentioned as separate entities, the distinction
F between "Union Territories" and "States" cannot be lost sight of. He ex-
pressly approved the reasoning of Bachawat, J. in holding that in the
context of Article 246, the definition provided in Section 3(58) would not
apply; however, on the facts and in the circumstances of the case before
him, he felt that the subject and context of Entry 80 of the Union List
required the application of the definition given in Section 3(58). While
G referring to the decision in Ram !Ushore's case, Hidayatullah, J. noted that
this decision was per incuriam for the reason that it referred to Article 372
whereas the proper reference ought to have been to Article 372A.

The same issue was thereafter considered by a Constitution Bench in S.K.
H Singh v. Shri V.V. Giri, (1971) 2 S.C.R. 197, wherein Bhargava, J., while
N.D.M.C. v. STATE [AHMADI, CJ.] 553

delivering an opinion concurring with the majority, reached the conclusion A
that the definition in Section-3(58) of the General Clauses Act would not
apply to matters involving interpretation of the Constitution. The case,
which involved a challenge to the election of Shri V.V. Giri as the President
of India, required the Court to consider the issue in the context of Article
54 which provides that the electoral college for the President consists of B
the elected members of .both Houses of Parliament, and the elected
members of the Legislative Assemblies of the States. Relying on the
definition of "State" in Section 3(58) of the General Clauses Act, it was
argued that Union Territories are also States and, consequently, the
elected members of the Legislative AsseJ;nblies of the Union Territories
must alscr be included in the electoral college; their omission was said to C
be a material irregularity which would vitiate the election. Responding to
this contention, the learned Judge held as follows (at pp. 313-314) :

"Article 54. no doubt, lays down that all elected members of the
legislative assemblies of the States are to J:ie included in the D
electoral college; but the word 'States' used in this Article cannot
include Union Territories. It is true that, under Article 367, the
General Clauses Act applies for interpretation of the Constitution
as it applies for the interpretation of an Act of the legislature of
the Dominion of India; but that Act has been applied as it stood
on 26th January, 1950, when the Constitution came into force, E
subject only to any adaptations and modifications that may be
made therein under Article 372. The General Clauses Act, as it
was in 1950 and as adapted or modified under Article 372, did not
define "State" so as to include a Union Territory. The Constitution
was amended by the Constitution (Seventh Amendment) Act, 1956, F
which introduced Article 372A in the Constitution permitting
adaptations and modifications of all laws which may be necessary
or expedient for the purpose ofbringing the provisions of the law
into accord with the Constitution as amended by the Seventh
Amendment Act, 1956. It was in exercise of this power under
Article 372A that Section 3(58) of the General Clauses Act was G
amended, so that, thereafter, "State" as defined included Union
Territories also. The new definition of "State" in Section 3(58) of
the General Clauses Act as a result of modifications and adapta-
tions under Article 372A would, no doubt, apply to the interpreta-
tion of all laws of Parliament, but it cannot apply to the H
I
554 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R..

A interpretation of the Constitution; because Article 367 was not
amended and it was not laid down that the General Clauses Act,
as adapted or modified under any Article other than Article 372,
will also apply to the interpretation of the Constitution. Since, until
its amendment in 1956, Section 3(58) of the General Clauses Act
did not define "State" as including Union Territories for purpose
B · of interpretation of Article 54, the Union Territories cannot be
treated as included in the word "State"."

This view of the learned Judge does seem to have considerable force
and it is also to be remembered that Hidayatullah, J. had doubted the
C correctness of the proposition laid down in Ram Kishore's case on the
ground that the proper reference in it should have been to Article 372A,
rather than to Article 372. However, we must refrain from making any
comment because the issue whether or not the General Clause Act applies
to the interpretation of the Constitution is not properly before us in the
facts and circumstances of the present case; what is more, no arguments
D have been canvassed before us on this issue. For the present, we can draw
support 'from the observations in Kanniyan's case as affirmed in the Ad-
vance Insurance case to the effect that the definition in Section 3(58) of the
General Clauses Act is repugnant to the subject and context of Article 246.
We can, therefore, proceed on the assumption that for our purposes, a
E Union Territory is not a State; we must, however, hasten to add that this
assumption will be open to reconsideration subsequent to our analysis of
the Constitutional scheme regarding the issue before us.

Interpretation of "Union Taxation" in Article 289(1) and scope of its
ambit.
F
We may now address the central issue in the case which involves the
determination of the ambit of Article 289(1). In order to appreciate the
true import of the words used in this provision, it will be to our benefit to
examine the Constitutional history of Article 289 as well as that of its
G corollary, Article 285.

Articles 285 and 289 are modified versions of Sections 154 and 155
of the 1935 Act, as is obvious from a comparative study made in the earlier
part of this judgment. While Articles 285 and 289 seek to provide recipro-
cal immunities within the Republic of India to the Union and the States
·H from each other's taxing powers, Sections 154 and 155 strove to achieve
N.!'!.M.C. v. STATE [AHMADI, CJ.] 555

the same result within.British India in respect of the Federal Government A
on the one hand, and the Governments of the Provinces and the Federated
States on the other. However, in the process of adopting the provisions of
the 1935 Act for our Constitution, a number of changes occurred and we
must analyse some of these in greater detail for they are extremely relevant
for our purposes. B
To appreciate the true import of Sections 154 and 155, it will be
necessary to refer to a few provisions of the 1935 Act so as to obtain an
understanding of its general scheme. Section 5 of the 1935 Act stated that
the Federation of India would comprise the Provinces, the Indian States
and the Chief Commissioner's Provinces. Section 6 defined a 'Federated C
State' as an Indian State which had acceded to or might accede to the
Federation~ Section 94 provided a list of the Chief Commissioner's Provin-
ces and stated that they would be administered by the Governor General
acting through a Chief Commissioner. Section 99, which provided the
manner in which legislative powers were to be distributed between the D
Federal and Provincial legislatures, stated that the Federal Legislature was
empowered to make laws for the whole or any part of British India or for
any Federated State, while the Provincial Legislatures were empowered to·
make laws for the provinces. Section 311(1) defined 'British India' as "All
"territories for the time being comprised within the Governor's Provinces
and the Chief Commissioner's Provinces". Section 100, which dealt with E
the subject matter of Federal and Provincial laws provided that the Federal
Legislature would have power to make laws with respect to_ matters
enumerated in List I of the Seventh Schedule to the 1935 Act, which was
to be called the "Federal Legislative List"; the Provincial Legislature. would
have powers to make laws in respect of matters in List II of the Seventh F
Sc;hedule, called "the Provincial Legislative List"; and, in respect of matters
provided in List ·m of the Seventh Schedule, called "the Concurrent
Legislative List", both the Provincial and the Federal Legislature would
have jurisdiction. Clause (4) of Section 100, which is of considerable
importance for our purpose, provided in express terms that the Federal G
Legislature would. have "power to make laws with respect to matters
enumerated in the Provincial Legislative List except for a Province or any
part thereof'. It was, therefore, clearly contemplated that the Federal
Legislature would have the power to make laws for matters in the Proviu-
cial Legislative List in respect of the Chief Commissioner'_s Provinces and
the Federated States. Under the scheme of the 1935 Act, situations where H
556 SUPREME COURT REPORTS(1996) SUPP.10 S.C.R.
A the Federal Legislature could enact laws with respect to matters in the
Provincial Legislative List were, therefore, not considered to be rare or
unusual.

. While both the Federal Legislative List and the Provincial Legislative
List contained entries allowing the levy of taxes, the Federal Legislative
B List did not contain any entry which allowed the Federal Legislature to
levy taxes directly on property. Entry 42 of the Provincial Legislative List
empowered the Provincial Legislatures to levy taxes specifically on lands
and buildings. The Concurrent Legislative List contained only one entry
relating to taxes, namely, Entry 13 which referred to stamp duties.
c Section 154, in material terms, provided that the property of the
Federal Government would be exempt from all taxes imposed by Provinces
and Federated States arid the local liuthorities within them. The proviso
added that, in the absence of any federal law stipulating otherwise, those
properties of the Federal Government which were subject to the levy of
D taxes before the commencement of part III of that Act would continue to
be liable to pay them. The exemption in Section 154, therefore, did not
extend to such taxes, including taxes levied under Municipal laws. It is to
be noted that Section 154 did not provide for an exemption in respect of
the income of the Federal Government Primarily because the Provinces
E . lacked the legislative competence to enact laws levying taxes on income.
Section 155(1) stated that the Government of a Province and the
ruler of a Federated State would not be liable to "Federal Taxation" in
respect of "lands or buildings situated in British India". Proviso (a) stipu-
lated that all the trading and business activities carried on by Provinces and
F the Federated States outside their territorial jurisdiction would be sub-
jected to Federal Taxation in British India. Proviso (b) stipulated that the
personal property and income of a Ruler of a Federated State would also
be subject to Federal Taxation. Clause (2) of the Section being self-ex-
planatory, does not require elucidation. In response to a query from us,
G Mr. Sen sought to find the reason for the existence of the exemption in
Section 155(1); it appears that the purpose was to avoid the liabilities
imposed by Sections 3 and 9 of the Income Tax Act, 1912 upon the
Provinces.

Comparing the text of Sections 154 and 155, it becomes clear that
H even under the scheme of the 1935 Act, the ambit of the reciprocal
N.D.M.C. v. STATE [AHMADI, O.] 557

immunities was not equal in length and breadth; while Section 154 ex- A
empted the property of the Federal Government from "all taxes", the
Provincial Governments and Rulers of Federated States were entitled to
an exemption only in respect of "lands or buildings" situated in British India
and "Income" accruing thereof. This feature will gain some importance
when we deal with the comparative Constitutional position at a later stage. B

The term "Federal Taxation" was not defined in the 1935 Act but some clue
to its meaning can be discerned by referring to sections 99 and 100 which
_described the legislative powers of the Federal Legislature. As we have
already seen, the Federal Legislative List did not allow the Federal Legis-
lature to levy taxes on lands and buildings; in fact this subject was expressly C
included in the Provincial Legislative List. On the face of it, this would
make the exemption in Section 155 otiose. However, the confusion clears
when one notices Clause (4) of Section 100 which expressly enables the
Federal Legislature to legislate in respect of matters in the Provincial
Legislative List for territories apart from the Provinces. Viewed in this D
context, and taking into account the definition of "British India" in Section
311(1), Section 155 would have to be read as exempting the Governments
of Provinces and the rulers of Federated States from "Federal Taxation" in
respect of lands or buildings situated in the Chief Commissioner's Provin-
ces. This is the only possible interpretation which will give meaning to the
words of Section 155. Since, at the time to of the enactment of the E
legislation, there were only six territories classified as Chief
Commissioner's Provinces, the exemption could not be said to be at par
with the exemption provided in Section 154 but, all the same, in terms of
the revenue amount involved, it could not be considered insignificant
either. It therefore becomes clear that, under the scheme of the 1935 Act, p
"Federal Taxation" included taxes leviable by the Federal Government in
the Chief Commissioner's Provinces and that the Properties of the Provin-
ces and the Rulers of the Federated States situated within these Chief
Commissioners Provinces would be exempt from such "Federal Taxation".
It remains to be seen whether the position came to be changed during the
process of transformation of these sections into the existing provisions of G
the Constitution.

In the earlier stages of the framing of the Constitution, the issue of
financial relations between the Centre and the units was addressed by two
Committees -the Union Powers Committee and the ·Union Constitution H
558 : SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.

A Committee. These Committees recommended that the schemes envisaged
by the 1935 Act should be generally followed. In the Draft Constitution
prepared by the Constitutional Adviser, Sri B.N. Rau, in October 1947.
Clauses 205 and 207 were modified versions of Sections 154 and 155. On
October 2, 1947, an Expert Committee on Financial Provisions was ap-
B pointed to make recommendations as to the provisions on the subject to
be embodied in the new Constitution after taking into account the views of
the States and also the Draft prepared by the Constitutional Adviser. The
Drafting Committee of the Constitution took up the issue in January.1948
and took into consideration the Drafts prepared by the Constitutional
Adviser as also the Expert Committee on Financial Provision. Thereafter,
C these provisions came to be numbered as Articles 264 and 266 of the Draft
Constitution. After the Constituent Assembly had considered the matter at
length and formally approved these provisions, they came to be renum-
bered as Article 285 and 289.

D The present Article 285 is much the same as its predecessor Section
145 and, though there were some changes in its text as the provision
charted its course through the ~tages enumerated above, not being relevant
for our purposes, we shall ignore its discussion.

The present Article 289 was Clause 207 in the Draft Constitution
E prepared by the Constitutional Adviser. It provided that the Govern-
ment of a unit would not be liable to Federal Taxation in respect of
lands or buildings situated within the territories of the Federation or
income accruing, arising or received within such territories; the two excep-
tion provided were in favour of (a) any income accruing to a unit's
F Government through trade or business and (b) the personal property or
the personal income of the Ruler of Indian State. As we have observed,
under Section 155, the Provinces and Federated States were liable to
taxation only in respect of trade and business operations carried on by
them outside their own territories. T-0 that extent Clause 207 had made a
substantial departure. The Constitutional Adviser relied on the decisions
G of the Supreme Court to the United States of America in Mc Culloch v.
Maryland, 4 L. Ed 579 (1890) and South Carolina v. United States, 199 U.S.
437 (1905), to butteress his stance that the Federation should have the
power to tax the units, but not vice versa for the reason that when the
Federation taxed the instrumentalities of the units, it taxed its constituents,
H whereas when a unit taxed the operations of the Federal Government, it
N.D.M.C. v. STAIB [AHMADI, CJ.) 559
acted upon instrumentalities created, not by its own constituents, but by A
people over whom it could claim no control.

The Expert Committee on Financial Provisions approved the Con-
stitutional Adviser's recommendation that the trading operations of the
units, as also of local bodies, whether carried on within or without their B
jurisdiction should be liable to central taxation; they, however, suggested
that quasi-trading operations incidental to the normal functions of Govern-
ment should be exempt from such taxation.

When the Drafting Committee took up the matter, it duly noted the
recommendations of the Constitutional Adviser and the Expert Committee C
and, in July 1949, convened a Premier's Conference to discuss these
provisions. Draft Article 266 came in for a lot of criticism and a number
of States suggested that insofar as Article 266 did not exempt the trading
and business operations of State Governments from Union Taxation, it be
dispensed with altogether. Other suggestions were also forwarded to the D
Drafting Committee : a number of States were of the view that the
provision was inequitable and one-sided insofar as it sought to subject
trade and business operations of the State Government to Union Taxation,
while under Article 264, State.s were debarred from taxing the property of
the Union. Such a provision, it was felt, was bound to retard the industrial
development of the Provinces taking away the incentive for State E
enterprise.

Reconsidering the provisions in the light of the comments of the
Provincial Governments, the Drafting Committee decided, in consultation
with the Central Ministry of Finance, to introduce some important changes F
in Article 266. The ambit of the exemption in Clause (1) was expanded by
including 'property' instead of 'lands or buildings' thereby bringing within
its purview, movable property as well. On the issue of trade and business,
a provision similar to the present Article 289(2) was included. This
provision would enable Parliament to pass a law to declare which of the
trading and business activities of the States were to be classified as ordinary G
functions of the Government allowing them to be exempted, and making
the rest of the activities liable to tax. Draft Article 266 was considered by
·-~ the Constituent Assembly on September 9, 1949. Some members repre-
senting the States of Travancore-Cochin and Mysore expressed apprehen-
sions that Union Taxation of industrial and commercial activities would H
560 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R. J
•
'
A check the expansion of industrialisation and would reduce the capacity of
State to discharge their ordinary governmental functions. Mr. P.T. Chacko
from Travancore-Cochin referred to the principle of immllnity from inter-
governmental taxation as it stood in the United States of America and the
fact of its incorporation in Draft Article 264; he sought the extension of
.B the doctrine to States as well. While allaying their apprehensions, Mr.
Alladi Krishnaswami Ayyar noted the fact that the Australian, Canadian
and American Constitutions had incorporated the principle of inter-
governmental immunities. He stated that the Australian and Canadian
experiences were irrelevant for the purpose of the Indian Constitution for,
when they were drafted, it was not envisaged that large schemes of
C socialisation would be implemented. Referring to the American position,
he pointed out that even within that jurisdiction, the doctrine had begun
to lose favour and was in the process of being discarded. Thereafter, he
observed that under the provision as it was placed before the Constituent
Assembly, Parliament was left with the option of making the law which
D would declare those trading and business operations of the States which
would be liable to Union Taxation after taking into account the general
interests of trade and industry of the whole country and other democratic
factors. He therefore felt that the provision was "very salutary''. Sub-
sequently, following the reassurances given by the C_entral Finance Mini-
ster, the amendments were withdrawn and Draft Article 266 was accepted
E in toto. (Note : For a study of evolution of Articles 285 and 289 within the
Constituent Assembly, See B. Shiva Rao, The Framing of the Indian
Constitution : A Study, N.M. Tripathi Pvt. Ltd., Bombay (1968) pp. 649-99;
for reference to original documents, See B. Shiva Rao, ibid, Vols. III &
IV).
F
Mr. P.P. Rao and the other learned counsel appearing for the State
have argued before us that the present Articles 285 and 289 are based on
the U.S. doctrine of reciprocal immunity of instrumentalities which has also
been incorporated in the Canadian and Australian Constitution, apart from
certain other Constitutions. Before we begin to examine the text of Article
G 285 and 289 with a view to finding a solution to the Constitutional conun-
drum posed by the case before us, we must analyse this proposition closely.

The doctrine of inter-governmental immunity has been the subject
of some controversy in the country of its origin, the United States of
H America. The origin of this doctrine is ascribed to the judgment of Chief
N.D.M.C. v. STATE [AHMADI, CJ.). 561

Justice John Marshall in the case of Mc Culloch v. Maryland (supra). A
However, as pointed out by commentators, on the facts of the case, where
a State Tax sought to be levied on a Federal Bank was held to be void, the
decision was more in favour or declaring the supremacy of the Federal
Government than of upholding the rights of States. It was, therefore, the
basis for establishing federal immunity from State Taxation. However, later B
decisions interpreted the judgment to hold that its corollary; that the
property of States would be exempt from Federal Taxation was equally
applicable; more than 50 years after the decision in Mc Culloch's case, the
Supreme Court, in Collector v. Day, 11 Wall. 113 (1871) made the theory
of inter-governmental immunity reciprocal. The doctrine, as propounded
in Collector v. Day, was never applied widely and, in subsequent years, C
underwent significant modifications. In The South Carolina case, which was
the second case relied upon by the Constitutional Adviser in preparing
Clause 207 of his Draft Constitution, the Supreme Court dealt a further
blow to the concept of immunity of State from Federal Taxation, when it
held that South Carolina was bound to pay a National Excise Tax on D
liquor-dealers which wa5 being levied by the Federal Government. The
Supreme Court drew a distinction between State functions which were
strictly governmental and those which were commercial in nature; it was
held that th~ governmental functions of State would be immune from
taxation but when the States entered into ordinary business, no immunity
would exist. This created fresh problems and over time, several Judges of E
the Supreme Court protested against the illogical distinction between
governmental and business activities, calling for a complete re-examination
of the entire doctrine. In later years, the doctrine was considerably
modified. In recent years, the Supreme Court has come to recognise a
narrower tax immunity for ~he States than for the National Government on F
the basis of a theory that combines the principle of national supremacy with
the argument that the interests of States received more representation in
Congress than national interest received in State Legislature. It is to be
noted that we have had this position from the time that the Constitution
was originally enacted.
G
As we have already noticed, the Constitutional Adviser relied upon
the decisions in Mc Culloch's case and The, South Carolina case, for
justifying the reduction in the ambit of the immunity of State from Union
Taxation rather than for establishing reciprocal immunity between the
States and the Union. Furthermore, in the Constit11ent Assembly, Mr. H
562 SUPREME COURTREPORTS(l996] SUPP.10 S.C.R. -

A Alladi Krishnaswami Ayyar had doubted the applicability of the doctrine
to the Indian Constitution and had instead co=ended the present scheme
whereby the troublesome issue of determining which of the trading and
business operations of state should be subject to Union Taxation has been
left to Parliament; while enacting such a law Parlill!llent would be forced
B to cater to the interests of the States on account of the presence of their
representatives in it. The usefulness of any further discussion on the
applicability of this doctrine to the Indian Constitution is rendered ques-
tionable by virtue of the fact that this Court had, on earlier occasions,
rejected it. In State of West Bengal v. Union of India. (1964] 1 s:C.R. 371,
Sinha, C.J., speaking for the majority in a six-Judge Constitution Bench
C expressly held (at p. 407) that the doctrine of immunity of instrumentalities
had been rejected by the Privy Council as inapplicable to the Canadian and
Australian Constitutions and having practically been given up in the United
States, it was equally inapplicable to the Indian Constitution. In the
APSRTC case (supra), at p. 24, the Court rejected the contention of the
D Advocate-General of Andhra Pradesh urging it to adopt the American
doctrine, by relying upon these observations of Sinha, CJ.

It is, therefore, clear that in seeking a solution to the problem faced
by us, we must rely primarily on t~e bare text of Articles 285 and 289.
Comparing these provisions, it becomes evident that the Constitution does
E envisage some form of inter-governmental immunity. Article 285(1), while
exempting the property of the Union from all taxes, does not attempt to
provide an exemption in respect of income as the States do not possess
legislative competence to levy taxes on income as such; however, taxes
relating to income that have a bearing on property such as the taxes on
F agricultural income levied by using Entry 46 of the State List will also be
exempt in view of the wide-ranging all- embracing nature of the exemption.
Article 285(2) saves, until Parliament by law decides otherwise, all pre-
Constitutional taxes applicable to Union property.

With respect to Article 289, we have already examined the manner
G in which this provision was analysed by this Court in the APSRTC case.
We are in agreement with the proposition that the three clauses of Article
289 are interlinked, in that, Clause (3) is an exception to Clause (2) which
in turn is exception to Clause (1). As we have noticed for ourselves, the
framers of the Constitution had consciously conferred Parliament with the
H option of deciding which of the trading and business activities of the States
N.D.M.C v. STAIB [AHMADI, CJ.) · 563

would be subject to the levy of Union taxes. So, while Article 289(1) A
generally exempts the property and income of the Sates from Union
taxation, Clauses (2) and (3) grant to Parliament the aforementioned
prerogatives.

Having understood the scheme. of Articles 285 and 289, we must B
sharply focus on the specific wording of Article 289(1) and, in particular,
on the meaning of the phrase "Union Taxation". It may be noted that the
phrase "Union Taxation" appears in only two:places in the entire Constitu-
tion - in the marginal heading of Article 289 and in the main text of Article
289(1). It is suggested that some guidance may be obtained by analysing
the term " State Taxation" which appears in the marginal heading of Article C
285 and has been described in the text of Article 285 (1) as "all taxes
imposed by a State". On that reasoning, "Union Taxation" would mean "all
taxes imposed by the Union".

The word "taxation" has been defined in Article 366(28) which states D
that unless the context otherwise requires, the word "taxation" includes "the
imposition of any tax or impost, whether general or local or special and,
'tax' shall be construed accordingly". This definition was accepted by Das.
J. and Hidayatullah, J. in their minority opinions (at pp. 8~4-35 and 893-94
respectively) in the Sea Customs case for interpreting Article 289(1).
However, Sinha, C.J., in his majority opinion (at pp. 923-34), rejected the E
application of this definition to Article 289(1) as, in his opinion, the context
of Article 289(1) precluded the application of the definition. Rajagopala
Ayyangar, J., in his separate majority opinion (at pp. 921- 93), also felt that
the definition would not apply. We concur with the majority view in the
Sea Customs case that the definition of "taxation" provided in Article F
366(28) will not apply for the purpose of interpreting Article 289(1).

Our attention has been drawn towards the provisions contained in
Part XII of the Constitution which has a bearing on the scheme of the
Constitution with respect to financial relations between the Union and the G
States. Since this aspect and its relevance to Article 289(1) was discussed
at length in the Sea Customs case, we may advert to those observations.
Das, J. (at p. 852), was of the opinion that the provisions of Part XII of
the Constitution would have no bearing on the import of Articles 285 and
289 which ought to be construed on their own terms. Sinha, C.J., however,
analysed these provisions at length and the relevant observations in this H
564 SUPREME COURT REPORTS(1996) SUPP. 10 S.C.R.

A behalf may be reproduced (at pp. 809-10) :

"It will thus appear that Part XII of the Constitution has made
elaborate provisions as to the revenues of the Union and of the
States, and as to how the Union will share the proceeds of duties
and taxes imposed by it and collected either by the Union or by
B the States. Sources of revenue which have been allocated to the
Union are not meant entirely for the purposes of the Union but
have to be distributed according to the principles laid down by
Parliamentary legislation as contemplated by the Articles
aforesaid. Thus all the taxes and duties levied by the Union and
c collected either by the Union or by the State do not form part of
the Copsolidated Fund of India but many of those taxes and duties
are distributed amongst the States and from part of the Con-
solidated Fund of the States. Even those taxes and duties which
constitute the Consolidated Fund of India may be used for the
purposes of supplementing the revenues of the States in accord-
D
ance with their needs. .. ..The financial arrangement and adjust-
ment suggested in Part XII of the Constitution has been designed
by the Constitution-makers in such a way as to ensure an equitable
distributi_on of the revenues between the Union and the States,
even though those revenues may be derived from taxes and duties
E imposed by the Union and collected by it or through the agency
of t~e States. .. ..It will thus be seen that the powers of taxation
assigned to the Union are based mostly on considerations of
convenience of imposition and collection and not with a view to
allocate them sqlely to the Union; that is to say, it was not intended
that all taxes ruid duties imposed by the Union Parliament should
F-
be expended on the activities of the Centre and not on the activities
of the States .....The resources of the Union Government are not
meant exclusively for the benefit of the Union activities; they are
also meant for subsidising the activities of the States in accordance
with their respective needs, irrespective of the amounts collected
G by or through them. In other words, the Union and the State
together form one organic whole for the purpose of utilisation of
the resources of the territories of India as a whole."

We are of the view that an analysis of some of the provisions in
H Part XI, Chapter I of the Constitution, which deals with the legislative
N.D.M.C. v. STATE [AHMADI, CJ.) 565

relations between the Union and the States will be crucial to the deter- A
mination of the central issue in this case. We may first notice certain
provisions in the Constitution which enable Parliament to make laws for
subjects contained in the State List, to which our attention was drawn by
counsel for the appellants as also the learned Attorney General. We must
note that these provisions conceive of extraordinary situations. Article 249 B
provides for a situation where, if the Council of States declare by a
~solution that it is necessary in the national interest to do so, Parliament
may make laws in respect of matters enumerated in the State List. Article
250 empowers Parliament to make laws for the whole or any part of India
in respect of matters enumerated in the State List while a Proclamation of
Emergency is in operation. Article 252 empowers Parliament to make laws C
with respect to matters enumerated in the State List if two or more states
resolve that such course of action is desirable. Article 253 reserves to
Parliament the exclusive power to make laws for the whole or any part of
the territory of India for implementing any treaty, agreement or convention
with any other country or any decision made at any international con- D
ference, association or any other body. The emergency provisions outlined
in Part XVIII of the Constitution and comprising Articles 352 to 360
conceive of special situations in which Parliament is empowered to enact
laws on matters in List II.

It has been urged that when Parliament legislates for Union Ter- E
ritories in exercise of powers under Article 246(4), it is a situation similar
to those enumerated above and is to be treated as an exceptional situation,
not forming part of the ordinary constitutional scheme and hence falling
outside the ambit of "Union Taxation". Having analysed the scheme of Part
VIII of the Constitution including the changes brought into it, we are of F
the view that despite the factthat, of late, Union Territories have been
granted greater powers, they continue to be very much under the control
aiid supervision of the Union Government for their gm'ernance. Some clue
as to the reasons for the recent amendments in Part VIII may be found in
the observations of this Court in Ramesh Birch's case, which we have
extracted earlier. It is possible that since Parliament may not have enough G
time at its disposal to enact entire volumes of legislations for certain Union
Territories, it may decide, at least in respect of those Union Territories
whose importance is enhanced on account of the size of their territories
and their geographical location, that they should be given more autonomy
in legislative matters. However, these changes will not have the effect of H
566 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.

A making such Union Territories as independent as the States. This point is
best illustrated by referring to the case of the National capital Territory of ·
Delhi which is today a Union Territory and enjoys the maximum autonomy
on account of the fact that it has a Legislature created by the Constitution.
However, Clauses 3(b) and 3(c) of Article 239AA make it abundantly clear
B that the plenary power to legislate upon matter affecting Delhi still vests
with Parliament as it retains the power to legislate upon any matter relating
to Delhi and, in the event of any repugnancy, it is the Parliamentary law
which will prevail. It is, therefore, clear that Union Territories are in
fact under the supervision of the Union Government and it cannot be
contended that their position is akin to that of th"e States. Having
C analysed the relevant ConstitUtional provisions as also the applicable
precedents, we are of the view that under the scheme of the Indian
Constitution, the position of the Union Territories cannot be equated
with that of the States. Though they do have a separate identity within
the Constitutional framework, this will not enable them to avail of the
D privileges available to the States.

It has been urged before us that the phrase "Union Taxation" has
to be interpreted in the context of Article 246, which deals with the
s.ubject matter of laws made by Parliament and the State Legislatures~
and that the context of "Union Taxation" should be limited to those
E matters falling within Articles 246(1), where Parliament has the legisla-
tive competence to levy taxes with respect to matters enumerated in the
union.List. We see no reason why such a limiting principle must be read
into the definition of the phrase "Union Taxation". In our view, the term
can and should be given the widest amplitude, allowing it to encompass
F all taxes that are levied by the authority of Parliamentary laws. Though
the amplitude of the term "Union Taxation" was not expressly before
the Court in the Sea Customs case, it is clear from an analysis of the
majority judgments that the learned Judges considered the term "Union
Taxation" to mean all taxes leviable by the Union. As Clause (4) of
Article 246 itself envisages situations where Parliament is to make laws
G in respect of matters in the State List, it cannot be said that this is a
rare or an unusual circumstance. The Constitution does not contain any
provisions which would indicate that the definition of "Union Taxation"
should be restrictively interpreted so as to be within the confines of
Article 246(1). The specific,situations envisaged in Articles 249, 250,
H 252, 253 and the Emergency Provisions in Part XVIII of the Constitution
N.D.M.C. v. STATE [AHMADI, CJ.) 567
do not make for the creation of any anomalous situations. These Articles, A
·· which provide for unusual exercises of Parliamentary power involving the
matters enumerated in the State List, can be regarded as exceptions to
the general rule. We are, therefore, of the view that, unless the context
requires otherwise - as in the case of Articles 249, 250, 252, 253 and the
Emergency Provisions in Part XVIII of the Constitution - the broad B
~efinition of "Union Taxation" embracing all taxes leviable by Parliament
ought to be accepted for the purpose of interpreting Article 289(1).

As already noticed by us, under the scheme of the 1935 Act, those
lands or buildings of the Provinces and Federated States which were
situated within the Chief Commissioner's Provinces were, by virtue of C
Section 155(1), exempted from Federal Taxation. There can be no dispute
about such a construction of the provision for, otherwise, the exemption in
Section 155(1) would have no meaning. Section 155(1) formed the basis for
th present Article 289(1) and, having closely examined the various stages
, by which Article 289(1) replaced Section 155(1), we find that this position -D
was never .sought to be deviated from. The presumption therefore, its that
it was the intention of the framers of the Constitution to maintain the status
quo with respect to the position regarding the Chief Commissioner's
Provinces which are now called "Union Territories". That presumption is
further reinforced by the general scheme of the Constitution which furthers
the interpretation that we have sought to give to Article 289(1) and its E
applicability in respect of the Union Territories.

Unlike other Federations, the Union of India has a sizeable territory
of its own comprising the Union Territories which have been specified in
the First Schedule to the Constitution. Therefore, the limited reciprocal F
inter-governmental immunity bestowed by the Constitution in Articles 285
and 289 is given fuller meaning by virtue of the adoption of the wider
meaning of "Union Taxation"; this would mean that, just as the properti~s
of the Union are exempt from taxes on property leviable by the States, the
properties of the States will also be exempt from taxes on property leviable
by the Union in areas falling within its territorial jurisdiction. G

While attempting to demonstrate that the reasoning of Sinha, C.J. in
the Sea Customs case was incorrect insofar as his acceptance of the
contention that Article 246(4) enables Parliament to levy taxes directly on
property was concerned, Mr. B. Sen contended that Article 246(4) was not H
568 SUPREME COURT REPORTS[1996) SUPP.10 S.C.R.

A in the contemplation of the framers of the Constitution when they carved
out the exemption in favour of the property of the States from Union
Taxation; he then proceeded to cite examples of specific circumstances in
which Parliament can levy taxes directly on property which, according to
him, was what the framers had intended to exempt under Article 289(1).
B He drew our attention to Entry 3 of the Union List ("Delimitation of
Cantonment areas, local self-government in such areas, the constitut~on
and powers within such areas of cantonment authorities and the regulation
of home accommodation (including the control of rents) in such areas")
and stated that by virtue of this on entry, Parliament is rendered competent
to levy taxes on the use or oc~µpation of properties located within areas
C declared as Cantonments. He then referred to Entry 54 of the Union List
C'Regulation of mines and mineriil development to the extent to which such
regulation and development under the control of the Union is declared by
Parliament by law to be expedient in the public interest") and to the Mines
and Minerals (Regulation & Development) Act, 1956 which together em-
D power Parliament to levy taxes on mines and minerals which would be in
the nature of a tax on property. Referring to Entry 49 of the Union List
("Patents, Inventions and Designs; copyright; trade-marks and merchandise
marks"), Mr. Sen contended that since these subjects are regarded as
intangible or incorporeal properties, taxes levied by Parliament upon them
would also amount to taxes on property. Additionally, Mr. Sen has referred
E to the following Entiries in the Union Lists : Entries 24 & 25 (relating to
Shipping activities), Entry 47 ("Insurance"), Entry 52 ("Industries, the con-
trol of which by the Union is declared by Parliament by law to be in the
public interest") : to demonstrate that Parliament does have power to levy
taxes directly on property.
F
Mr. A.K. Ganguli controverted Mr. Sen's contention in this respect;
he argued that Entry 3 of the Union List does not contemplate the levy of
taxes by Parliament. With respect to Entries 47 & 54, he argued that these
·entries would be covered by Article 289(2) of the Constitution. The same
contention would, presumably, be applicable in respect of the other entries
G cited by Mr. Sen.

In our opinion, there is no warrant for an authoritative pronounce- ·
ment upon this aspect for, even if we assume that Mr. Sen's contention is
correct and that all these Entries do in fact empower Parliament to levy
H taxes directly on property, it would not in any way detract from the
N.D.M.C. .v. STATE [AHMADI, CJ.) 569
correctness of our interpretation that the levy of taxes under Article 246(4) A
is covered by the phrase "Union Taxation" in Article 289(1); these Entries
would then provide additional areas in respect of which the States can
claim exemption from Union Taxation under Article 289(1), thus lending
greater weight to the solemnity and the actual worth, in real terms, of the
phraseology 9f Article 289(1). ,B

However, we find ourselves unable to agree with Mr. Sen when he
contends that the entries cited by him were the only instances kept in
contemplation by the framers at the time of the drafting of Article 289(1).
If that were so, the ambit of the exemption would traverse an extremely
narrow field which would then lend credence to the observation of Das, J. C
in the Sea Customs case, albeit made in the converse context, that the
exemption in Article 289(1) would amount to "much ado about nothing".

Classification of taxes imposed by Municipalities

We may now turn to Mr. Sen's alternative submission that the taxes D
levied by the NDMC under the Act would not be covered by the exemption
in Article 289( 1) as that provision cannot be construed to encompass
Municipal Taxes.

To appreciate this contention, we will be required to analyse certain
provisions of the Act as also those of the Constitution. Section 61 of the E
Act, which is the. charging Section, at the relevant time, empowered the
Municipality to levy a tax payable by the owner on lands and buildings
subject to, and to the extent of, the qualifying conditions provided therein.
It is clear from an analysis of this provision that it provides for the levy of
a consolidated tax, combining within it the tax element and ... the service F
element. Section 51 of the Act provides for the constitution of a Municipal
-: fund and states that all sums received by the Municipal Committee are to
be credited to it. Section 52 of the Act provides the manner in which the
sums collected in the Municipal Funds are to be applied by the Municipal
Committee. Our attention has also been drawn towards analogous G
provisions in- the New Delhi Municipal Committee Act and the Delhi
Municipal Committee Act to form the foundation of the argument that,
under all.these legislations, the Municipalities have been vested with a great
deal of financial autonomy; they have the power to fix their own budgets,
levy taxes within prescribed limits, collect the proceeds of such imposition
which are to be diverted to Municipal Funds which function entirely under H
570 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
' I

A the supervision of the Committees. It is argued that such a stance is further
reinforced by the introduction of Part IXA into the Constitution which
allows for Municipalities to be vested with substantial powers, including
the power to tax, thereby providing Constitutional support. The argument,
therefore, is that now that the Constitution itself recognises Municipal taxes
as a separate category of taxes, they should not be construed to fall within .
B the exemption pro,vided by Article 289(1). Another limb of this submission
is that while under Article 285, taxes imposed by any "authority within a
State", which would necessarily include Municipal taxes, have been express-
ly exempted, Article 289 does not provide for any such facility and, to that
extent, taxes levied by Municipalities within the Union Territories are not
C covered by the exemption in Article 289(1).

We have great difficulty in accepting this assertion. Article 265 of the
Constitution emphatically mandates that "no tax shall be levied or collected
except by authority of law" . Under the framework of the Constitution
D there are two principal bodies which have been vested with plenary powers
to make laws, these being the Union Legislature, which is described by
Article 79 as "Parliament for the Union" and the State Legislatures, which
are described by Article 168 in the singular as "Legislature of a State".
While certain other bodies have been vested with legislative power, includ-
ing the power of levying taxes, 'by the Constitution for specific purpose, as
E in the· case of District Committees and Regional Councils constituted
under the aegis of the Sixth Schedule to the Constitution, the plenary power
to legislate, especially in matters relating to revenue, still vests with the
Union and the State Legislatures. Even if the submission that
Municipalities now possess, under Part IXA of the Constitution, a higher
F juridical status is correct, the extension of that logic to the proposition that
they have Plenary powers to levy taxes is not, as is clear from a perusal of
relevant part of Article 243X of the Constitution which reads as under :

"243X. Power to impose taxes by, and Funds of, the Municipalities.
- The Legislature of a State may, by Law, -
G
(a) authorise a Municipality to levy, collect and appropriate such
taxes, duties, tolls and fees in accordance with such procedure
and subject to such limits;

H (b)
N.D.M.C. v. STATE [AHMADI, CJ.] 571

.I
(c) A

(d)

as may be specified in law."
B
Article 243ZB provides that this provision will be applicable to
Union Territories and the reference to the legislature of a State would .
apply, in relation to a Union Territory having a Legislative Assembly, to
that Legislative Assembly.

It is, therefore, clear that even under the new ·scheme, Municipalities C
do not have an independent power to levy truces. Although they can now
be granted more substantial powers than ever before, they continue to be
dependent upon their parent Legislatures for the bestowal of such
privileges. In the case of Municipalities within States, they have to be
specifically delegated the power to true by the concerned State Legislature. D
·In Union Territories which do not have Legislative Assemblies of their
own, such a powe~ would have to be delegated by Parliament. Of the rest,
those which have I Legislative Assemblies of their own would have to
specifically empowbr Municipalities within them wit4 the power to levy
truces.
E
We have already held that despite that fact that certain Union
Territories have Legislative Assemblies of their own, they are very mucli
under the supervision of the Union Government and cannot be said to have
an independent status. Under our Constitutional scheme, all taication must
fall within either of two categories : State Taication or Union Taication. F
Since it is aiciomatic that truces levied. by authorities within a State would
amount to State taication, it would . appear that the words "or by any
authority within a State" have been added in Article 285(1) by way of
abundant caution. It could also be that these words owe their presence in
the provision to historical reasons; it may be noted that Section 154 of the G
1935 Act was similarly worded. The fact that Article 289(1), which in its
phraseology is different from Section 155 of the 1935 Act having been
drafted by the Drafting Committee to meet specific objections, does not
contain words similar to those in Article 285(1), will not in any way further
the case of the appellant, because the phrase "Union Taication" will encom-
pass Municipal truces leVied by Municipalities in Union Territories. H
572 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.

A Before we part, we must refer to Part IV of the judgment of Jee.van
Reddy, J. where Clause (2) of Article 289 has been invoked to validate the
levy of taxes under the Act and the Delhi Municipal Corporation Act upon
those properties of State Governments which are being occupied for
commercial or trade purposes.
B
At the outset, we must express our great reluctance to deal with this
proposition, for it is not based on any contention advanced by any of the
counsel who appeared before us, either in their written pleadings or in their
oral submissions. This is not because we feel constrained to restrict our-
C selves to the parameters prescribed by the submissions of counsel, but
because we feel that the opposite side did not have a fair opportunity to
answer the line of reasoning adopted in that behalf. The view taken by
Reddy, J. has the effect of imposing considerable tax liabilities upon the
properties of the State Governments and, in our view, it would only be ·
D proper that their views in this behalf be obtained before visiting them with
such liability. We have only the rule of caution in mind which warns that
ordinarily, courts should, particularly in constitutional matters, refrain from
expressing opinions on points not raised or not fully and effectively argued
by counsel on.either side.
,
E
Be that as it may, we must, for the record, express ourselves on the
view taken by Reddy, J. after closely examining it. Reddy, J. begins his
examination of the issue by noting tliat the Act, the Delhi Municipal
Corporation Act and the New Delhi Municipal Committee Act contain
F specific provisions exempting the properties of the Union from local taxa-
tion in accordance with Article 285. It is then Stated that since none of
these Acts contain similar exemptions in favour of the properties of States,
it is clear that they purport to levy taxes on them. This is followed by the
observation that though the States seek an exemption, from such levies on
the basis of clause (1) of Article 289, as per the ratio of the APSRTC case,
G clause (1) has to be read in the context of clauses (2) and (3) of that
Article. This would, it is stated, lead to the consequence that if a Par-
liamentry law within the meaning of clause (2) of Article 289 is made, the .
area covered by that law would be removed from the field occupied in
clause (1); for support, an analogy is drawn from the decision in R.C.
H Cooper v. Union of India, [1970] 1 SCR 248.
N.D.M.C. v. STATE [AHMADI, CJ.] 573

Thereafter, the meaning and scope of Article 289 as well as its A
underlying objective are ascertained by contrasting it with Section 155 of
the 1935 Act. The use of the words "lands and buildings" in Section 155(1)
is analysed to arrive at the conclusion that these words were included to
empower the federal legislature to levy taxes on lands and buildings
situated within the Chief Commissioner's Provinces. It is then noted that B
Article 289 uses the wider expression 'property', but that the same reason-
ing holds good for the present Union Territories, making the property and
income of States situated within Union Territories exempt from "Union
Taxation". With respect to the proviso to Section 155(1), it is observed that
the provision was automatically applicable on its own force. It did not C
define the trading and business operations of Provincial Governments, nor
did it specify which of these operations would be subject to Federal·
Taxation. It is then stated that the same position continues in Article 289
with the only difference being the requirement of a enactment of a law by
Parliament in this behalf. Thereafter, it is observed that the exemption in
clause {1) of Article 289 is subject to clause (2) of Article 289. Clause (2) D
is analysed and interpreted as clarifying clause {1) to the extent that the
exemption upon the income of Provincial Government operates only when
such income is carried on for the purpose of governmental functions and
not for trade and business activities, carried on with the profit motive. It is
stated that though "trade and business" ordinarily has a very wide and E
ambiguous meaning (certain English and Indian authorities are cited to
illustrate this point), but, for the purpose of clause (2) of Article 289, they
have to be given a restricted meaning. It is, therefore, stated that under
Article 289{2), the trading and business activities of State Governments,
which are carried on with the profit motive, will be liable to tax and cannot F
avail to the exemptions in Article 289{1).

Clause {2) is further analysed and is interpreted as having been
included for the purpose of removing the trading and business activities of
State Governments from the purview of the exemption in clause {1).
However, it is stated, such a removal is not ·automatic and is dependent G
upon the enactment of a Parliamentary Law which impose taxes on
specified trading and business activities of State Governments.

Thereafter, the question whether Parliament has, in exercise of
powers under Article 289(2), imposed taxes on the trading and business H
574 SUPREME COURT REPORTS[1996) SUPP.10 S.C.R.

A activities of State Governments, is sought to be addressed. In this respect,
the Act, the New Delhi Municipal Committee Act and the Delhi Municipal
Corporation Act, which are deemed to be post-Constitutional enactments,
are examined. It is noted that while these enactments contain specific
exemptions in favour of properties of the Union and also exempt properties
B used for 'charitable purposes' and 'public worship', they do not exempt
properties of State Governments. It is stated that the latter omission must
be deemed to be deliberate. Thereafter, it is stated that two views are possible
in this regard. The first is to adopt the position that since neither of these
enactments are purported to have been made under Article 289(2), they
C should not be treated as having been enacted for that purpose and,
consequently, should be held to be incapable to levying taxes on any .
property, whether occupied for government for governmental or trading
purposes, of the State Governments. The second view, which Reddy, J.
adopts, is to take the position that the Doctrine of Presumption of Con-
D stitutionality of Legislations points in favour of holding that the Act and
the Delhi Municipal Corporation Act are laws made by Parliament under
Article 289(2), and taxes imposed by them upon the properties occupied
for trading and business activities by State Governments would be valid
and effective. A number of decisions of this Court are cited to show the
jurisprudential basis of this tool of Constitutional interpretation. It is
E pointed out that though neither of these legislations purport to have been
·made under Article 289(2), but, since this is normal practice in that no
legislation specifies the provision of the Constitution that it is enacted
under, this fact need not be over-emphasised. It is, therefore, held that the
levy of property taxes by these enactments is valid to the extent that it
F relates to lands and buildings owned by State Governments and used by
them for trade and business purposes. (In an earlier part of the opinion,
the difficulty in drawing a distinction between governmental and business
functions is noted and an example in respect of guest- houses maintained
by State Governments is supplied). Thereafter, it is stated that it is for the
G "appropriate assessing authority" to determine "which land/building falls
within which category in accordance with law and take appropriate further
action". It is then stated that since, under these enactments, the assessing
authorities .are required to decide several difficult questions as to what
amounts to 'charitable purpose' etc., the obligation imposed by such direc-
H tions would not prove to be too onerous to discharge. Reddy, J. sums up
N.D.M.C. v. STATE [AHMADI, CJ.] 575

the issue by recommending to the Union that it consider granting total A
exemption in favour of all properties of State Government.

We are of the opinion that of the two possible views expressed by
Reddy, J ., it is the first which ought to be preferred. We think that the
second view is fraught with several difficulties. Such a construction, while
being violative of the scheme envisaged by the framers of the Constitution, B
may well result in a situation that was sought to be avoided by them. The
directions may also lead to grave practical difficulties; moreover since the
\ effect of the directions would be to vest the executive authorities with
substantial policy making powers, their issuance might well be offensive to
established principles of delegation of powers. c
We shall now set out the reasons which cause us to so think; in doing
so, we may have to revisit some of the ground that has already been
traversed by us, but the repetition can be justified by narrower focus that
will now be imparted to those aspects.
D
· Articles 285 and 289, and their predecessors in the 1935 Act, owe
their origin to the American doctrine of Inter-governmental Tax Immunity.
This doctrine was enunciated in the case of Mc Cu/loch v. Maryland
(supra). However, die doctrine was substantially modified by the decision
in South Carolina v. United States (supra) which drew a distinction between E
strictly governmental and business functions of governments. Jn the latter
case, it was held that the governmental functions of State Governments
would be exempt from Federal Taxation but their commercial functions
would be subject to the levy of Federal Taxes. This case imposed upon
Courts the heavy burden of determining in specific cases when a particular p
function was or was not governmental. A number of conflicting decisions
were rendered and caused a great deal of confusion as to which of the
activities of governments were to be classified as 'business' or 'proprietary'
and were, therefore to be liable to Federal Taxation. The controversy was
set at rest by a unanimous decision of the U.S. Supreme Court in New York
v. United States, 326 U.S. 572; 90 L. ED. 326 (1946) wherein it was G
concluded that the artificial distinction between governmental and
proprietary/business functions of States was unworkable and required to
be abandoned.

The difficulty in determining the distinction between a governmental H
576 SUPREME COURT REPORTS[l996J SUPP. 10 S.C.R.

A' function and a trading or busi~e~s function of the State has also been felt
and recognised in Australia. In South Australia v. Commonwealth, (1942)
65 C.L.R. 373, the changing character of government functions of the State
was noted and it was held that, "In a fully self-government ·country where
a Parliament determines legislative policy and an executive government
B carries it out, any activity may become a function of government if Parlia-
ment so determines" (supra) at p. 423). The Court in this decision came to
the conclusion that the best way to avoid the controversy was to allow
Parliament to 4ecide, by law, which of the activities of the State would be
classified as relating to business and would consequently be liable to
taxation.
c
Under the predecessor of Article 289, i.e., under proviso (a) to
Sections 155(1) of the 1935 Act, the Federal Government was empowered
to levy taxes on lands and buildings of Provincial Governments used by
them for trade or business. The provision itself vested the Federal Govern-
D ment with the power to levy such taxes and there was no requirement for
the enactment of a specific law in that behalf. This position continued till
the Constitution came into force.

When Sir B.N. Rao prepared his Draft Constitution, Clause 207
E (present Article 289) was drafted on the basis of Section 155 of the 1935 .
Act. An attempt was made to incorporate the U.S. position prevailing after
the decision in the South Carolina case (supra) by stipulating that all
trading activities of State Governments would be liable to Union Taxation.
However, even under this provision, the powers to tax was automatic and
F did not require a specific law. (See : A Note on certain clauses by the
Constitutional Adviser, B. Shiva Rao, Vol. III, p. 197 at pp. 204-205.

· The Expert Committee on Financial Provisions, however, recom-
mended that quasi-trading activities of State Governments should be ex-
empt from Union Taxation. (See : Report of the Expert Committee, B. Shiva
G Rao, Vol. III, p. 260 at p. 266).

Even when the Drafting Committee incorporated the provision as
Draft Article 266 and subsequently modified it, there was no stipulation
for a law before the power to tax could be exercised. (See the text of Draft
H Article 266, B. Shiva Rao, Vol. IV, p. 676). At the Premier's Conference
N.D.M.C. v. STATE [AHMADI, CJ.] 577

held in July, 1949, the provision met with severe criticism. The Premier of A
the United Province suggested that all trading and business activities of 1.

State Governments be exempt from Union Taxation. Several other Provin-
ces also made similar representations. Based on these representations. The
Drafting Committee made a substantial change in the text of Draft Article
266. A provision similar to the present Article 289(2), whereby Parliament B
would have the power to determine which of the trading and business
activities of State Governments would be liable to Union Taxation was
incorpo~ated. (See : Revised draft by the Ministry of Finance, B. Shiva Rao,
Vol. IV pp. 731-732.
i
when Draft Article 266 was discussed in the Assembly, a number of C
members' expressed fears that Union Taxation of commercial activities of
State Governments would check the expansion of industrialisation and
reduce the capacity of States to perform their ordinary functions. They,
therefore, demanded that the trading and business activities of State
Governments be exempt from Union Taxation. Alladi Krishnaswamy Ayyar D
sought to allay these apprehensions by making an elaborate statement, the
relevant part of which is quoted below (Constituent Assembly Debates,
Vol. IX, pp. 1167-69) :

".... It is a permissive power that is given to Parliament under the
section. There is no duty cast upon Parliament to levy a lax and I E
am sure in the larger interest of trade and industry, Parliament will
certainly not go to the length of taxing ... industries which have
been thriving ..... So far as the United States is concerned in the
early days though there was no express provision through the
medium of the doctrine of Instrumentality, they held that the State F
cannot tax the Federal Government and the Federal Government
cannot tax the State instrumentality because both are parts of a
single composite mechanism and if you permit one to tax the other,
it may destroy the whole mechanism. Later, the doctrine of in-
strumentality itself was felt to be not in the large interest of the G
State, and quite recently the swing of the pendulum is the other
way. The other day one of the most enlightened of Sup'reme Court
Judges held in what is known as the Spring of the State of New
York, in regard to certain springs which were worked by the State
of New York - for this part of business they held that there is no
immunity of the State from tax. They said 'You have to draw some H
578 SUPREME COURTREPORTS[1996] SUPP.10 S.C.R.

A line between one kind of activity of a State and another kind of
activity. Of course it cannot be a rigid definition. What may be in
one sphere may easily pass into another sphere with the progress
of the State and with the development of the polity in the particular
State'. (In all probability, this is a reference to the opinion of
Frankfurter, !. in New York v. United States (supra) which upheld
B
the application of a Federal Excise Tax to the sale of mineral waters
bottled by the State of New York with a view to providing funds for
a State health.resort) . ..... (N)ormally speaking, you cannot regard
at the present day under existing conditions the carrying on the
trade and business as a normal or ordinary function of the Govern-
c ment. It may develop into ordinary function - certain aspects of it,
especially the transport service and certain key industries, may
soon become the parts of the State enterprise. The Parliament will
take note of the progressive tendency of the particular times and
may at once declare accordingly. It might not have been the
ordinary function of Government before. Now it may become an
D
ordinary function. There will be sufficient elasticity in clause (3)
to enable the Government to exempt from taxation particular
trades or industries with are started as public utility services or
declare them as regular State industries. Nobody can question a
law made by Parliament because the Parliament has stated that a
E particular industry is an ordinary function of the State whereas
according to the notions of an individual economist A or B it is
not a ordinary function of a Government. Parliament will lay down
the law of the land and it will be the sole arbiter of the question as
to whether it is an ordinary function of Government or not.
F
Therefore having regard :

(a) to the plenary power of Parliament tci exempt any particular
industries, and particular business from the operation of the
tax provision.
G
(b) having regard to the fact that it is not obligatory on Parliament
to levy any tax.

(c) that the very conception of State industry may change with
H the further evolution of the State and changing times, and
•

N.D.M.C. v. STATE [AHMADI, CJ.]. 579

(d) to the inter-connection between one State and another. A
it will be very difficult to differentiate between particular States,
between States which have been working certain industries and
other State ..... (T)o lay down a 'general principal of law that even
at the present day before _the provinces are on their feet every trade
or business is exempt from taxation will lead to wild-goose schemes B
being started by various provinces. They may not take into account
the general interests of the trade and industry in the whole country.
They may not have regard to the difference between one kind of
"industry and another. Under those circumstances the particular
provision which has been inserted by Dr. Ambedkar is a very C
salutary one and is consistent with the most advanced principles
of democratic and federal policy in all the countries."

(Comment and Emphasis supplied)

It is, therefore, clear that clause (2) of Article 289 was well con- D
sidered compromise which was arrived at after balancing the demands of
those who sought complete exemption of commercial activities of State
Governments from Union Taxation and those who were in favour of levying
such Union Taxes. The framers desired that the issue whether the trading
and business activities of State Governments should be subject to Union E
Taxation, be left to the wisdom of Parliament. As is evident from the
reference to New York v. United States (supra) in the extracted portion, the
framers were conscious of the difficulty in drawing a line between the
governmental and commercial functions of State Governments and they
hoped that Parliament would take into account a host of relevant factors
before enacting a law which would specify the trading activities of State F
Government making them liable to Union Taxation. It is important to note
that the framers did not expressly confer upon the Union the power to tax
commercial activities of State Governments. The exercise of such a power
is made conditional upon the enactment of a special, duly considered,
legislation. It is also important to note that clause (2) of Article 289 has G
made a depatture from the proviso to Section 155(1). Under the present
scheme, the power to tax is not automatic and the responsibility of specify-
ing the trading and business activities of State Governments which would
be liable to Union Taxation is expressly vested in Parliament.

Neither the Act, which is a_ 1911 enactment, nor the Delhi Municipal H
•

580 SUPREME COURT REPORTS[l996) SUPP. 10 S.C.R.

A Corporation Act, can qualify as laws under Article 289. They do not specify
which of the trading activities of State Governments are liable to taxation;
indeed, by their very nature, they cannot purport to do so. It must be
remembered that the Act and the Delhi Municipal Corporation Act are
not Parliamentary Laws in the sense envisaged by Article 289(2). Though
B the Act is sought to be construed as a post-Constitutional, Parliamentary
enactment, the fact remains that it is a pre-Constitutional, colonial legisla-
tion. As for the Delhi Municipal Corporation Act, it is, in essence, an
ordinary Municipal legislation. What makes it special is the fact, oc-
casioned in its case by geographical and historical factors, that it was
C enacted by Parliament instead of by a State legislature. In this regard, we
may recall the submissions of the learned Attorney General in respect of
how Parliament discharges its obligation towards enacting laws for Union
Territories. After stating that Parliament cannot afford to undertake
threadbare discussions before legislating for Union Territories, the learned
Attorney General referred us to the following of the decision of this Court
D in Ramesh Birch v. Union of India, [1989) Supp. 1 SCC 430 at 471 :

"(Union Territories) are territories situated in the midst of con-
tiguous territories which have a proper legislature. They are small
territories falling under the legislative jurisdiction of Parliament
E which has hardly sufficient time to look after the details of all their
legislative needs and requirements. To require or expect Parliame11t
to legislate for them will elttail a disproportionate pressure on its
legislative schedule. It will also mean the unnecessary utilisation of
the time of a large number of members of Parliament for, except
the few (less than ten) members returned to Parliament from the
F Union territory, none else is likely to be interested in such legis-
lation. In such a situation, the most convenient course of legislating
for them is the adaptation, by extension, of laws in force in .other
areas of the country. As Fazal Ail, J. pointed out in the Delhi Laws
Act case, it is not a power to make laws that is delegated but only
G a power to 'transplant' laws already in force after having undergone
scrutiny by Parliament or one of the State legislaturer, and that
too, without any material change."

It is, therefore, clear that it would be quite dangerous to assume that
H when Parliament enacted the Delhi Municipal Corporation Act, it had
N.D.M.C. v. STATE [AHMADI, O.J 581

intended that the enactment should secure the purpose enshrined in Ar- A .
. tide 289(2). If any safe assumption is to be drawn, it is this : in all
probability, while enacting the Delhi Municipal Corporation Act, Parlia-
ment must have 'transplanted' a municipal legislation existing in a certain
State, made the necessary changes and completed the procedural for-
malities. That would explain why the Delhi Municipal Corporation Act (as B
also the New Delhi Municipal Committee Act) contains an exemption on
the lines of the one prescribed by Article 285 - this is a typical feature of
ordinary municipal legislations, which are enacted by State legislatures who
are conscious of the mandate of Article 285. Moreover, such legislations
do not contain exemptions in favour of properties of State Governments C
because, within the territory of a State, the properties of other State
Governments are liable to taxation. So, when such a legislation is
'transplanted' almost verbatim into a Union Territory, it will obviously not
contain an exemption in favour of properties of State Governments. In the
face of the actual conditions which govern the enactment of laws for Union
Territories by Parliament, (these conditions have been statutorily provided; D
moreover this Court has already taken notice of them) it is difficul~ to
assume that the omission of an exemption in the Delhi Municipal Corpora-
tion ·Act in favour of State Governments, is deliberate. The Act and the
·· Delhi Municipal Corporation Ad cannot, therefore, be said to meet the
special requirements which have been expressed by the framers to be E
necessary for complying with the spirit of Article 289(2).

Reddy, J. has taken the view that the Doctrine of Presumption of
Constitutionality of Legislations requires the saving of the taxes which these
Acts impose upon the commercial activities of State Governments. The Act
is a pre-Constitutional enactment. The basis of this doctrine is the assumed F
intention of the legislators not to transgress Constitutional boundaries. It
is difficult to appreciate how that intention can be assumed when, at the
time that the law was passed, there was no such barrier and the limitation
was brought in by a Constitution long after the enactment of the law. (This
Court has in a Constitution Bench decision, Gulabbhai v. Union of India, G
AIR (1967) SC 1110at1117, raised doubts along similar lines). The framers
obviously wanted the law under Article 289(2) to be of a very high stand-
ard. Can these laws, which are silent on the most important aspect required
by Article 289(2), i.e,, the specification of the trading activities of State
H
582 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.

A Governments which would be liable to Union taxation, be said to meet with
that standard?

The Doctrine of Presumption of Constitutionality of Legislations is
not one of infinite application; it has recognised limitations. It is settled law
B that if any interpretation is possible which will save an Act from the attack
of unconstitutionality, that interpretation should always be accepted in
preference to an alternative interpretation that might also be possible,
under which the statute would be void. However, this Court has consistent-
ly followed a policy of not putting an unnatural and forced meaning on the
words that have used by the legislature in the search of an interpretation
C which would save the statutory provisions. We are•not "free to stretch or
pervert the language of the enactment in the interests of any legal or
Constitutional theory" See In Re the Central Provinces & Berar Act No. XIV
of 1938, (1939) FCR 18 at p. 37; also see : Diamond Sugar Mills Ltd. v. The
State of U.P., (1961] 3 SCR 242 at 248-249.
D
The Act and the Delhi Municipal Corporation Act are ordinary
Municipal Legislations. They do not, and cannot, purport to be laws made
by Parliament under Article 289(2). These is no reason why such a
strained reasoning should be employed to save some of the taxes that may
E be capable of being imposed on certain properties of State Government.
There seems to be no pressing reason for invoking the doctrine. Reddy, J.
has, in the earlier part of his opinion, held that a large number of properties
of State Governments would be exempt form taxes leviable under these
Acts due to the operation of Article 289(1). To employ such reasoning to
F construe Article 289(2) in a bid to save what would only be a reduced
amount, does not seem justified.

The practical effect of the directions recommended by Reddy, J. is
also worth noticing. It is abundantly clear that the task of determining
which of the activities of Governments are governmental and which are
G commercial, is an extremely difficult one. Reddy, J. entrusts this assignment
to the "assessing authorities under the Acts" who can only be municipal ,
authorities. This is an issue which has confounded court in the U.S. and in · · '
Australia for several years. This issue was considered to be so troublesome
by the framers that they entrusted it to Parliament in the hope that it would
H fully deliberate the matter before enacting a comprehensive legislation.
N.D.M.C. v. STATE [AHMADI, CJ.) 583

In the In Re: The Delhi Laws Act case, AIR (1951) SC 324, this Court A .
authoritatively held that the legislature cannot delegate its essential policy-
making function. Over the years, this Court has elaborated this proposition
to hold that the legislature can delegate some of its legislative functions
provided it lays down the policy in clear terms. The legislature is required
to declare the policy of law in unambiguous terms, lay down elaborate legal B
principles and provide illuminating standards for the guidance of the
delegate. Even though this Court has, on occasions, sanctioned very broad
delegations of taxing power to municipal bodies, to delegate the task of
carving out the distinction between governmental and business functions of
State Governments to municipal authorities would clearly be against the
interdiction in the Delhi Laws Act case as the assignment requires not only C
the making of policy, but indeed, the making of very difficult and challeng-
ing policy choices. Reddy, J. has noted that the Delhi Municipal Corpora-
tion Act provides exemptions in favour of activities that are capable of
being classified as 'charitable purpose', 'public worship' etc. and states that
to ascertain the ambit of these categories is an equally difficult task which D
is already being discharged by the assessing authorities. However, the point
that needs to be emphasised, is that Section 115 of the Delhi Municipal
Corporation Act defines these terms and provides guidelines in respect
thereof. Howeve~, there is no provision in the Delhi Municipal Corporation
'\ Act which states that the trading and business operations of State Govern-
ments would be subject to property taxes. The act is equally silent on this E
aspect. Consequently, no guidelines in this behalf are to be found within
the parameters of these legislations. Under these circumstances, in the
complete absence of any statutory policy or any guidelines for the delega-
tion of such a policy, we believe that it would be impermissible and
hazardous to directly assign such a function, anq power, to Executive p
Municipal authorities.

The decision whether the properties of State Governments occupied
for commercial purposes should be subject to the levy of Union taxes is
one that is required by Article 289(2) to be made by a legislation which
specifies the activities which would be liable to tax. This decision cannot G
be entrusted to municipal functionaries. For these reasons, we find oursel-
ves unable to agree with Reddy, J. in his finding that the properties of State
Governments occupied by them for trade or business purposes are subject
to the levy of taxes under the Act and the Delhi Municipal Corporation
~. H
584 SUPREME COURT REPORTS[l996] SUPP.10 S.C.R.

A We may now summarise our conclusions:

(i) The central issue in the present matter, namely, whether the
properties owned by the States which· are situated within
Union Territories are exempt from paying property taxes, was
specifically answered in the affirmative in the Sea Customs
B case; the observations in this regard are part of the ratio
decidendi of the case and having been re-affirmed by a Con-
stitution Bench which was hearing a litigation inter partes in
theAPSRTC case, they constitute good law;

(ii) The definition of 'State' provided in Section 3(58) of the
c General Clauses Act, which declares that the word 'State'
would include 'Union Territory', is inapplicable to Article
246(4);

(iii) The term "Union Taxation" used in Article 289(1) will or-
dinarily mean "all taxes leviable by the Union" and it includes
/
D
within its ambit taxes on property levied within Union Ter-
ritories; therefore, the States can avail of the exemption
provided in Article 289(i) in respect of their properties
situated within Union Territories;
;''

E (iv) Property taxes levied by municipalities within Union Ter-
ritories are properly within the ambit of the exemption
provided in Article 289(1) and the State can avail of the
. exemption.

In the result, the Civil Appeals and the Special Leave Petitions are
F dismissed. There shall be no order as to costs.

R.P. Matters disposed of.