1. Presidential reference under Art. 143(1) concerning the constitutional validity of amending the Sea Customs Act and Central Excises and Salt Act to tax State property. (Para 2 , 37 )
Back
Next 
1963 Supreme(SC) 183
Supreme Court Of India
CONSTITUTION OF INDIA
Versus
Sea Customs Act (1878),s. 20 (2)
Decided On : May 10, 1963
Article 289(1) of the Constitution grants States immunity from direct Union taxes on property and income, but does not preclude the imposition of indirect taxes, such as customs and excise duties, which are taxes on events (import, export, or manufacture) rather than on the property itself.
Headnote:(A) Constitution of India - Articles 285, 289, 366(28) - Sea Customs Act, 1878 - Section 20 - Central Excises and Salt Act, 1944 - Section 3 - Immunity of State property from Union taxation - Scope of Article 289 - Whether customs and excise duties on property of a State used for non-trading purposes are precluded by the constitutional immunity - Distinction between direct tax on property and indirect tax in relation to property - Customs and excise duties are taxes on the event of import, export, or manufacture and not taxes on property as such - Immunity under Article 289(1) is restricted to direct taxes on property and income. (Paras 15, 16, 31)
(B) Interpretation of Constitutional Provisions - Article 289(1) must be read in harmony with Article 285 and the overall scheme of the Constitution - The power of the Union to regulate trade and commerce would be crippled if Article 289 were interpreted as an all-embracing exemption from all Union taxes. (Paras 10, 15)
(C) Article 289(2) - Exception for trade or business - The distinction between trading activities and governmental functions indicates that the immunity in clause (1) is not absolute but limited to the nature of the tax. (Paras 16, 31)
Facts of the case:
The Union proposed to amend the Sea Customs Act, 1878 and the Central Excises and Salt Act, 1944 to extend the levy of customs and excise duties to all goods belonging to a State government, regardless of whether such goods were used for trade or business. Certain States contended that such amendments were constitutionally invalid as Article 289, read with Article 366(28), precludes the Union from imposing any tax, including customs and excise duties, on State property.
Findings of Court:
The immunity granted by Article 289(1) is limited to direct taxes on property and income. Customs duties and excise duties are indirect taxes levied on the events of importation, exportation, or manufacture, and are not taxes on property as such.
Issues: Whether Article 289 of the Constitution precludes the Union from imposing customs and excise duties on the property of a State used for purposes other than trade or business, and whether the proposed amendments to the Sea Customs Act and Central Excises and Salt Act are inconsistent with Article 289.
Ratio Decidendi: The court held that the exemption from Union taxation under Article 289(1) applies to taxes directly on property and income. Customs and excise duties are not taxes on property but are imposts on the movement or production of goods. A wider interpretation would impair the Union's exclusive power to regulate foreign trade and commerce.
Result: Answers to the three questions referred are in the negative.
Legal Category Hierarchy
Table of Contents
2. Union argues Art. 289(1) exempts only direct taxes on property; States contend it grants absolute immunity from all Union taxes, including indirect customs and excise duties. (Para 3 , 4 )
3. The court analyzed the definition of taxation under Art. 366(28), the scheme of Part XII, and compared the Indian framework with Canadian and Australian constitutional precedents. (Para 14 , 15 , 16 , 21 , 22 , 64 , 66 )
4. Art. 289(1) provides immunity only from direct taxes on property and income, not from indirect taxes like customs and excise duties, which tax specific events. (Para 15 , 16 )
5. The Union is not precluded from imposing customs and excise duties on State property, and the proposed legislative amendments are not inconsistent with Art. 289. (Para 31 , 136 )
6. Does Art. 289(1) exempt State property from all Union taxes?
No, the immunity is restricted to direct taxes on property and income. It does not extend to indirect taxes, such as customs or excise duties, which are levied on the event of importation, exportation, or manufacture rather than on the property itself. (Para 15 , 16 )
7. Are customs and excise duties considered taxes on property under Art. 289?
No, customs duties are taxes on the act of importing or exporting goods, and excise duties are taxes on the production or manufacture of goods. They are indirect taxes and not taxes on property as such. (Para 3 , 15 , 25 , 26 )
8. How does the definition of taxation in Art. 366(28) affect the interpretation of Art. 289(1)?
While Art. 366(28) defines taxation broadly to include any tax or impost, the juxtaposition of the words property and income in Art. 289(1) limits this exemption to direct taxes on those specific subjects. (Para 3 , 14 , 15 )
9. Does the exception for trade or business in Art. 289(2) imply that governmental functions are exempt from all Union taxes?
No, the court held that clause (2) is explanatory or limited to property taxes. The general immunity in clause (1) remains restricted to direct taxes regardless of whether the activity is governmental or commercial. (Para 3 , 15 )
Judgment
SINHA, C. J. : (ON BEHALF OF HIMSELF AND GAJENDRAGADKAR, WANCHOO AND SHAH JJ.), J.
( 1 ). THE main question, on this reference by the President of India under Art. 143 (1) of the Constitution, depends upon the true scope and interpretation of Art. 289 of the Constitution relating to the immunity of States from Union taxation. On receipt of the reference notices were issued to the Attorney General of India and to the Advocates General of the States. In pursuance of that the case of the Union government has been placed before us by the learned Solicitor-General and that of the States of Andhra Pradesh, Assam, Bihar, Gujarat, Kerala, Madhya Pradesh, Madras, Maharashtra, Mysore, orissa, Punjab and West Bengal was presented to us by their respective counsel. On the date the hearing of this case started, an application was made on behalf of the State of Uttar Pradesh also to be heard, but no statement of case had been put in on behalf of that State, and as no grounds were made out for condoning the delay, we refused the application.
( 2 ) THE reference is in these terms `whereas Ss. (1) of section 20 of the Sea Customs Act, 1878 (Act 8 of 1878), provides for the levy of customs duties on goods imported or exported by sea to the extent and in the manner specified in the said Ss. ; And whereas Ss. (2) of section 20 of the said Act applies the provisions of Ss. (1) of that section in respect of all goods belonging to the government of a State and used for the purposes of a trade or business of any kind carried on by, or on behalf of, that government, or of any operations connected with such trade or business as they apply in respect of goods not belonging to any government; And whereas it is proposed to amend Ss. (2) of section 20 of the said Act so as to apply the provisions of Ss. (1) of that section in respect of all goods belonging to the government of a State; irrespective of whether such goods are used or not for the purposes set out in the said subsection (2) as at present in force; And whereas Ss. (1) of section 3 of the central Excises and Salt Act, 1944 (Act 1 of 1944), provides for the levy of duties of excise on all excisable goods other than salt which are produced or manufactured in India and a duty on salt manufactured in, or imported by land into any part of India in the manner specified in the said sub-section; And whereas Ss. (IA)of section 3 of the said Act applies the provisions of Ss. (1) of that section in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of, the government of a State and used for the purposes of a trade or business of any kind carried on by, or on behalf of, that government, or of any operations connected with such trade or business as they apply in respect of goods which are not produced or manufactured by any government; And whereas it is proposed to amend Ss. (IA) of section 3 of the said Act so as to apply the provisions of Ss. (1) of that section in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of the government of a State, irrespective of whether such goods are used or not for the purposes set out in the said Ss. (IA) as at present in force; And whereas it is proposed to introduce in Parliament a Bill, the draft of which is annexed here to and marked `annexure, to amend for the purpose aforesaid Ss. (2) of section 20 of the Sea Customs Act, 1878 (Act 8 of 1878) and Ss.- (IA) of section 3 of the central Excises and Salt Act, 1944 (Act 1 of 1944); And whereas governments of certain States have expressed the view that the amendments as proposed in the said draft of the Bill may not be constitutionally valid as the provisions of article 289 read with the definitions of taxation and -tax in clause (28) of article 366 of the Constitution of India preclude the Union from imposing or authorising the imposition of any tax, including customs duties and excise duties; or in re
