Taxing Power PDF

CHAPTER-4
Allocation of Taxing Powers
Just as the legislative and executive powers have to be divided as

between the federal and state Governments, so also the power to raise the
necessary financial powers must be divided, under any federal Constitution.
Since in an ideal federal system, the national and provincial Governments are to
be autonomous in their respective spheres as outlined by the Constitution,
independent of each other, it follows that, in distributing the financial powers it
should be ensured-
(a) That each of the two Governments must have the power to raise financial
resources necessary to perform its executive functions.1 In the words of
Hamilton:
“It is...a necessary that the State governments should be able to

command the means of supplying their wants, as that the national government
should possess the like faculty in respect of the wants of the Union”.2 3
(b) That the power of the respective governments in this behalf should be
independent of each other , for, if the State Governments have to depend, in any
substantial degree, upon federal bounty, they might indirectly be deprived of
their autonomy in other matters.
In practice, however, the above two principles of an ideal distribution

have not been observed under any federal Constitution. The reason is that no
Constitution, made at a point of time, can envisage with precision, the financial
requirements of a growing social economy. In the result, under almost every
federal Constitution, the inadequacy of provincial finances has to be met by
discretionary grants made by the Union to the State Governments which, as we
shall see, brings in some degree of federal control over local affairs.
1 Wheare, Federal Government, 1953, p.96.

2 Hamilton, Federalist, No.XXXI, p. 149.
3 D.D.Basu, Commentary on The Constitution of India, vol. K,(S.C.Sarkar & sons Ltd. 1986)
p.249
103
The complete separation of Union state taxing powers is one of the two
chief characteristics of the financial provisions of the Indian federal system. The
entire taxing area has been divided between the Union and the States and in that
way, the possibility of double taxation has been totally precluded. The
. Constitution of India provides separate legislative heads of taxation to the centre
and states. The taxes enumerated in the Union List (List I, Entries 82 to 92, 92A,
92B, 96 & 97) are leviable by the Centre exclusively. The taxes enumerated in
the States List (List II, Entries 45 to 63 and 66) are leviable by the state
exclusively. There are a few tax entries in the Concurrent List (List III Entries
35, 44 and 47). It is so to avoid problems of overlapping4 and multiple -
taxation5 between the Centre and the States which have arisen in other
federation.6 In effecting a division of resources, the constitution ensures the
supremacy of the action of the Union Government over the fairly comprehensive
Union List as also over concurrent jurisdiction. Allocation of the heads of
taxation between the union and the states is based on the broad principle that
taxes which are location - specified relate to subject of local consumption have
been assigned to the States.
Those taxes like for example income tax which is of inter - state
significance and where the place of residence is not a correct guide to the true
incidence of tax or which should be levied on a uniform basis throughout the
country and not vary from state to state or which can be collected more
conveniently by the centre rather than the states have been vested in the Union.
This clear-cut division of heads of taxation between the centre and states has
minimised the scope for conflicts and litigation between them which have arisen
in other federations because of concurrent taxing powers of the Union and
States.
4 ‘Overlapping taxation’ arises when central and state taxes operate simultaneously on the same
tax base. It is the result of vertical competition between the Centre and the State.
5 ‘Multiple taxation’ arises when several states levy similar taxes on one and the same tax base. It
is result of horizontal competition among the several taxing states i.e. many states can
simultaneously levy these taxes on the same base on the ground of nexus.
6 In the federations of America, Canada and Australia, there is no rigid separation of taxing
powers between the Union and the States and both may levy many similar taxes simultaneously
on the same tax base. This has given rise to many acute problems of overlapping and multiple
taxation in these countries.
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Principle of the Interpretation of the Lists
The entries in the three lists cannot be claimed to be scientifically perfect

and there happens to be overlapping between the subjects enumerated in the
three lists in such a case, question arise whether a particular matter falls within
the ambit of one or other government or questions regarding interpretation of
these entries and their mutual relations, are determined by the Courts by
applying various principle of interpretation. An important principle to interpret
the entries is that none of them should be read in a narrow sense; that the ‘widest
possible’ and ‘most liberal’ construction be held to extend to all ancillary or
subsidiary matters which can fairly and reasonably be said to be comprehended
in it. The Supreme Court has enunciated this principle of interpretation of the
entries as follows:
“The cardinal rule of interpretation is that the entries in the legislation

lists are not to be read in narrow sense and that each general word should be held
to extend to all ancillary or subsidiary matters which can fairly an reasonably be
said to be comprehended in it. The widest possible construction, according to the
ordinary meaning of the words in the entry, must be upon them....In construing
the words in a constitutional document conferring legislative power the most
liberal construction should be put upon the words so that the same may have
effect in their widest amplitude.”7
The Supreme Court laid stress upon that the various entries in the three
Lists are not powers but are fields of legislation. The power to legislate is given
by Article 246. The entries demarcate the area over which the concerned
legislature can operate, and that the widest importance and significance must be
given to the language used in these entries. In the apt words of the Supreme
Court, “Thus it is settled principle of inteipretation that legislative entries are
required to be interpreted broadly and widely so as to give power to the
legislative to enact law with respect to matters enumerated in the legislative
entries. Substantive power of the legislative to enact law in under Article 246 of
the Constitution and legislative entries in the respective list I to III of the
7 The Elel Hotels and Investment Ltd. V. Union of India AIR 1990 SC 1664.
105
Seventh scheduled are of enabling character, designed to define and delimit the
respect area of legislative competence of the respective legislative.”8
Thus, power to legislative includes power to legislative retrospectively as

well as prospectively.9 It has been held that under a tax entry, it is possible for a
legislature to levy a tax not only prospectively but even retrospectively.10 The
rule of pith and substance and rule of colourable legislation are also applied with
respect to tax laws. Of course a law may also dubbed as colourable where it seek
to override the federal distribution of powers, while the legislature concerned
ostensibly pretends to exercise its legitimate power, easy, while exercising a
power under list I or List III, the union parliament really wants to legislate or a
state subject under List II. But before coming to any such conclusion, the court
must scan the pith and substance of the true scope and effect of the impugned
provision; if that comes under the union power, it cannot be struck down as
colourable. Ultimately, thus it comes back to the question of legislative
competence, apart from any question of motive of the legislature in question.*11
These rules are applied for determining the true nature and character of law in
question if a law passed by a legislature is struck down by the courts for one
infirmity or another, the legislature can cure the infirmity by passing a law and
removing the infirmity in question and making the provisions of the earlier law
effective from the rate it was passed and retain the collection made under the
original law as being made under the validating law. However, the most
important condition is that the legislature must have the power to impose tax
otherwise the action remains ineffective and illegal.12
Central Taxes
Central taxes are those taxes levied exclusively by Central Government

under List I (Union List, Entries 82 to 92, 92A, 92B, 96&97) of the 7th Schedule
of the Constitution of India. Union taxes are of several types. There are some
taxes such as stamp duties are imposed by the Union but are collected and taken
8 R.S. Rehchand Mahota Spg.& wvg. Mills Ltd. V.State of Maharashtra, AIR 1997 SC 2591.
9 M.P. Jain, “Indian Constitutional Law.” Wadhwa&Wadhwa Co. Vth ed. 2003, vol.l, p.667
10 Tata Iron Steel Co. v. State of Bihar AIR 1958 SC 452
11 Jaora Sugar Mills v. State of M.P., AIR 1966 SC 416.
12 M.P. Jain, “Indian Constitutional Law” p.665, 5th edn.2003 Vol. 1
106
by the States.13 Second, taxes, for example succession and estate duties (except
on agricultural land), taxes on railway fares and freights, etc. are imposed an
collected by the Union, but the entire proceeds are distributed among the
States.14 Third, there are some taxes such as taxes on non-agricultural income
(and the Union excise duties which may be shared with the State) which are
levied and collected by the Union, but the proceeds thereof are shared between
Union and State.15 Fourth, there are certain taxes such as corporation tax; custom
duties are levied, collected and appropriated by the Union. Besides, the Union
Parliament is authorised by the Constitution to increase any of the duties or taxes
mentioned m Articles 269 and 270 by surcharge for exclusive Union purposes.
82. Taxes on income other than agricultural income
The power to levy income-tax is divided between the Centre and the
states. The Centre can levy a tax on non-agricultural income, while tax on
agricultural income is assigned to the states (entry 46, List II).17 The tax under
Entry 82 of List 1 includes income from property even where such property is in
the owner’s own occupation, as in the case of a housed or that which can be
I Q
converted into income. The word ‘income’ is not defined in the Constitution.
So the word is to be interpreted according to its natural and grammatical
meaning which means a thing that comes in and is thus a word of the broadest
connotation. 19
•
In Navinchandra Mafatlal v. Commissioner of Income Tax,20

according to Supreme Court the term income would embrace any profit or gain
which is actually received. The word “income” embraces within it every kind of
receipt or gain either of a capital nature or of a revenue nature. Accordingly, the
court has ruled that a tax on gross receipts of certain categories of hotels does
13 Article 268(1).
14 Article 269(1).
13 Article 270(1) and 272.
16 Article 271.
17 M.P. Jain, op. cit., p. 667.
18 Bhagwan v. Union of India. AIR 1981 S.C. 907.
19 Ibid.; Kamakhya v. Commr. Of I.T. AIR 1943 P.C. 153.
20 AIR 1955 S.C. 58.
107
not fall outside entry 82, List I, and the Hotel Receipts Tax Act, 1980, has been
held as not falling out of the entry and hence valid.21 It would include—
(i) A tax on capital gain e.g. the sale proceeds of certain properties
which formed the Capital of a business concern.22
(ii) Not only income which has actually accrued but also income which is
supposed by the Legislature to have notionally accrued.23
(iii) Not only what is received by exploiting the use of property, but also
what can be converted into income, or what one saves by using the
property oneself.24
(iv) All items which were chargeable under the Income-tax Act, 1922,
which was in force when the Constitution was adopted.
(v) The gross receipts of a person and is not necessarily restricted to his
profits or receipts after deducting his expenses.26
(vi) The Entry is wide enough to confer power to prevent evasion of
income-tax.27
Taxes on the income from trade or profession (Entry 60, List II) are
excluded from the scope of the present Entry, by Art, 276. A tax on income is
defined to include a tax in the nature of an excess profits tax. The Income Tax
Act. 1961, is a law made under this entry.
83. Duties of customs including Export Duties
A duty of customs being a tax on the act of importation or exportation.

90
The Centre can levy duties on imports into, and exports from, the country.
Customs is a tax on consumption outside the taxing State or on home
consumption of goods imported from abroad.
21 The Elel Hotels and Investment Ltd. V. Union of India AIR 1990 SC 1664.
22
Op. cit. n.
23
Commr. Of I.T. v. Bhagilal, AIR 1954 S.C. 155.
24
Op. cit. n.
25
Ibid.
Travancore Rubber Co. v. State of kerala. AIR 1964 S.C. 572.
27 Punjab Distilling Industries v. C.I.T. AIR 1965 S.C. 1862.
28 D.D. Basu, Shorter Constitution of India. 2006.
29 M.P. Jain, “Indian Constitutional Law” p.665, 5th edn.2003 Vol. 1.
108
84. Duties of excise on tobacco and other goods manufactured or produced
in India except - (a) alcoholic liquors for human consumption; (b) opium,
Indian hemp and other narcotic drugs and narcotics, but including
medicinal and toilet preparations containing alcohol or any substance
include in sub-paragraph (b) of this entry.
Under Entry 84 of List I, the Union has the power to levy excise duty on
(a) tobacco; and (b) medicinal and toilet preparations containing alcohol, or
opium, hemp or other narcotic drugs and narcotics.30 The term ‘goods’ includes
■3 i
all materials, commodities and articles. The term ‘goods’ in this entry refers to
'vy
such goods which are capable of being sold to consumers. A duty of excise is
primarily levied upon a manufacturer or producer in respect of the commodity
manufactured or produced, even though it may be levied at a stage subsequent to
the manufacture. It is a tax upon goods, not upon sales or the proceeds of sale of
goods.33
The definition of the word ‘manufacture’ in this entry has raised some
controversy. The taxable event under excise law is ‘manufacture’ of goods. The
Supreme Court has defined ‘manufacture’ as follows: “The moment there is
transformation into a new commodity commercially known as a distinct and
separate commodity having its own character, use and name, whether it be the
result of one process of several processes, ‘manufacture’ takes place and liability
to excise duty is attracted.34 Conversion of raw ground-nut and til oil refined oil
after deodorization is manufacture. ‘Manufacture’ is not equal to ‘processing’.
According to Supreme Court in Union of India v. Ramlal Mansukhrai,
‘Manufacture’ means “bringing into existence a new substance’ and does not
mean merely “to produce some change in a substance”, however minor in
consequence the change may be.35 Excise duty is levied on the manufacture or
production of goods, though for the sake of convenience, it may be collected at
0 Sakti Ousadhalaya v. Union of India. AIR 1963 S.C. 622 (623).

31 Art. 366(12).
32 Union Carbide India Ltd. v. Union of India, AIR 1986. S.C. 1097.
33 Abdul Kadir v. State of Kerala, AIR 1976 S.C. 182; In re C.P. & Berar Motor Spirit Taxation
Act 1938. AIR 1939. F.C. 1.
34 M.P. Jain, op. cit. n.
35 Union of India v. Delhi Cloth & General Mills, AIR 1963. S.C. 791; Union of India v. Ramlal
Mansukhrai, Air 1971 S.C. 2333.
109
the stage of removal of goods from the factory. If no excise duty was leviable at
the time of manufacture of goods, it cannot be levied at the stage of removal of
the said goods.36
An ayurvedic medicine “Mritsanjibini”, is a medicinal preparation

containing alcohol and falls under this entry.37 Medicinal and toilet Preparations
(Excise Duties) Act, 1955, is a law made under this entry.
85. Corporation Tax
A ‘corporation tax’ is a tax on income payable by companies, in case of

which the following conditions are fulfilled: -
(1) it is not chargeable in respect of agricultural income;

(2) The companies paying the tax are not authorized to deduct the same
from dividends payable by the companies to individuals;
(3) No provision exists for taking the tax so paid into account in
computing for the purposes of income-tax the total income of
individuals receiving such dividends or in computing tax payable by
■3 o
or refundable to, such individuals.

86. Taxes on capital values of assets exclusive of agricultural land, of
individuals and companies; taxes on the capital of companies.
The Centre can levy wealth-tax under this entry.39 Under Entry 86 of List
I, the basis of taxation is the total capital value of assets (including lands and
buildings) minus the debts and liabilities and so falls under this entry, it is not
imposed on the components of the assets of the assessee but on the totality of all
the assets owned by the assessee; its principle is aggregation.40 The wealth Tax
Act enacted by Parliament was challenged on the ground that the expression ‘net
wealth’ in that Act included non-agricultural lands and buildings and so the tax
fell within the domain of the state legislatures under entry 49, list II.
36 CCE v. Vazier Sultan Tobacco Co. Ltd., AIR 1996. S.C. 3025.
37 M.B.S. Oushadhalaya v. Union of India. AIR 1963 S.C. 622.
38 Art. 366 (6).
40 Union of India v. H.S. Dhillon. Air 1972 S.C. 1061
110
The Supreme Court rejected the contention and ruled that, wealth-tax is
not levied directly on land and building. It is levied on the total assets of a
person of which land building may be component and so wealth tax does not fall
under entry 49, List II which envisages the levy of tax on lands and buildings or
both as units. Tax on lands and buildings is directly imposed on lands and
buildings and bears a definite relation to it. Entry 49 is more general in nature,
while entry 86 is more specific in nature. Therefore in case of conflict between
entry 86, List I, and entry 49, List II, entry 86 prevails.41 A tax under Entry 86 of
List I is assessed on an individual, and the capital value is found after deducting
his liabilities. The word ‘individual’ includes an association or group of
individuals, such as a Hindu undivided family, where the capital assets are
owned by such association or group.42
87. Estate duty in respect of property other than agricultural land
“Estate duty” means a duty to be assessed on or by reference to the

principal value, ascertained in accordance with such rules as may be prescribed
by or under laws made by Parliament or the Legislature of a State relating to the
duty, of all property passing upon death or deemed, under the provisions of the
said laws, so to pass.4j
88. Duties in respect of succession of property other than agricultural land
There are real and substantial differences between Succession Duty and
Estate Duty.44 There is one feature common to both taxes, viz, that the occasion
for the levy is the death of a person, but while Succession Duty (Entry 88 of List
I) has reference to the acquisition of the property by the successor and generally
takes into account the extent of the benefit derived by him and other
considerations relevant from that point of view,—the Estate Duty has reference
to the value of the property constituting the estate of the deceased and is
independent of the question as to who takes it45 While a succession duty falls
41 Sudhir Chandra Nawn v. W.T.O., Air 1969 S.C. 59; Asst. Commr. Of Urban Land Tax v. B.
& C. Co., AIR 1970 S.C. 169; CWT v. Karan Singh 1993 Supp (4) SCC 500; Lt. Colonel Sawai
Bhawani Singh v. State of Rajasthan. (1996) 3 SCC 105.
42 Banarasi v. Wealth Tax Officer, AIR 1965 S.C. 1387.
43 Art. 366 (9).
45 In the matter of Duty on Non-agricultural Property, AIR 1944 F.C. 73.
Ill
upon the person who takes the property of the deceased, an estate duty falls upon
the property whoever may be the successor to the property on the death of the
previous owner. Since the word ‘succession’ implies the passing of property on
the death of a person to another, a tax on a gift inter vivos would not come under
the present Entry.46
89. Terminal taxes on goods or passengers carried by railway, sea or air;

taxes on railway fares and freights:
While the present Entry gives to the Union the power to levy terminal
taxes on goods or passengers carried by railway, sea or air, Entry 52 of List II
gives to the State the power to levy taxes on the entry of goods into a local area
for consumption, use or sale therein. Entry 56 of List II, on the other hand,
empowers the State to impose taxes on goods and passengers carried by road, on
inland waterways, or national highways.47 In Central India Spg. Co. v.
Empress Mills, the Supreme Court said that ‘Terminus’ means the end of the
journey, by railways, sea or air. It follows that a terminal tax can be imposed
only on goods on their journey ending within the municipal limits or
commencing there from and not where the goods were merely in transit through
the municipal limits and had their terminus elsewhere. Of course, the incidence
is the same whether the tax is imposed on goods which are imported or exported.
A terminal tax can therefore be levied only by the Corporation or the

State which is the final destination of the goods sent from some other area.49
‘Final destination’ in this context refers to the transaction which is the subject-
matter of taxation. Thus, where A consigns goods from Patna to Delhi in the
name of X and X, after having received the goods at Delhi rebooks the same on
a transport for Chandigarh in the name of Y, terminal tax would be leviable by
the Corporation at Delhi because the destination of the goods at the first instance
was Delhi and that by itself would attract the imposition of terminal tax. The fact
that X rebooks them to Chandigarh would not make any difference because the
ct of rebooking by X at Delhi would constitute a fresh transaction by which the
47 International Tourist Corpn. v. State of Haryana . AIR 1981 S.C. 774.

48 AIR 1958 S.C. 341.
49 Man Mohan v. Delhi Municipality, AIR 1981 S.C. 991.
112
goods, having been carried to Delhi, are further exported to Chandigarh. In
short, where the goods enter into a local area which is also the destination of the
goods either temporarily or otherwise, the terminal tax would be leviable.50
90. Taxes other than stamp duties on transactions in stock exchanges and
futures markets:
Entry 48, List I, relates to stock exchanges and futures markets. Thus, the
whole area of stock exchanges falls to the centre. This has been done in view of
the far reaching effects on public credit and finance of stock exchange
transactions.51
91. Rates of stamp duty in respect of bills of exchange, cheques, promissory

notes, bills of lading, letters of credit, policies of insurance, transfer of
shares, debentures, proxies and receipts.
Under Entry 44 of List III, the power to levy stamp duty on all
documents, is concurrent. But the power to prescribe the rate of such levy is
excluded from Entry 44 of List III and is divided between parliament and the
State Legislatures as follows: if the instrument falls under the categories
mentioned in Entry 91 of List I, the power to prescribe the rate will belong to
Parliament; for all other instruments or documents, the power to prescribe the
rate belongs to the State Legislature, under Entry 63 of List II. The meaning of
Entry 44 of List III, therefore, is that excluding the power to prescribe the rate,
the charging provisions of a law relation to stamp duty can be made both by the
Union and the State Legislature, in the concurrent sphere, subject to Art. 254, in
case repugnancy.52
92. Taxes on the sale or purchase of newspapers and on advertisements

published therein:
Taxes on sale of goods and on advertisements are included in Entries 54-

55 of List II, but taxes on sale of newspapers and on newspaper advertisements
are excluded from those entries and included in the present entry and has been
50 Ibid.
51 M.P. Jain, “Indian Constitutional Law” p.665, 5th Edn.2003 Vol. 1.
52 Bar Council v. State of U.P., AIR 1973 S.C. 231.
113
made a central subject. This has been done so as to protect newspapers, which
have an intimate connection with the fundamental right of speech and
expression, from indiscriminate taxation.53
92-A. Taxes on the sale or purchase of goods other than newspapers where
such sale or purchase takes place in the course of inter-state trade or
commerce
This Entry has been inserted by the Constitution (Sixth Amendment) Act,
1956.
92-B Taxes on the consignment of goods (whether the consignment is to the

person making it or to any other person) where such consignment takes
place in the course of inter-state trade or commerce.
This entry has been added to the constitution by the constitution (Forty-
Sixth Amendment) Act, 1982. The taxable event is dispatch/consignment of
goods. The effect of the various amendments made by the 46th Amendment is to
expressly bring within the legislative competence of Parliament the field of
taxation on the consignment/dispatch of goods in the course of interstate trade or
commerce. Under Art. 269 (3), Parliament may by law formulate principles for
determining when a consignment of goods takes place in the course of inter-state
trade and commerce. A state law imposing such a tax was declared to be
invalid.54
92-C. Taxes on services
This Entry has been inserted by the Constitution (Eighty-eighth

Amendment) Act, 2003.
96. Fees in respect of any of the matters in the Union List, but not including
fees taken in any court, except the Supreme Court,
According to entry 77, List I, Fees taken in the Supreme Court is a

central subject. Fees taken in all Courts other than the Supreme Court is included
in Entry 3 of List II. But if the tribunal or authority in relation to which the fee is

54 Goodyear India Ltd. v. State of Haryana, AIR 1990 S.C. 781.
114
taken is not a ‘court’ and the matter is included in any Entry of List I, it is within
the competence of Parliament to levy a fee. Thus, Parliament may impose a fee
for appeal to the Appellate Tribunal under the Income-tax Act, for the Appellate
Tribunal is not a ‘Court’ and taxation of non-agricultural income is enumerated
in Entry 82 of List I.55
97. Any other tax not enumerated in Lists II and III
This is known as ‘residuary taxes’. This topic is discussed later.
State Taxes
State taxes are those taxes levied exclusively by the State Government under
List II (State List, Entries 45 to .63 and 66) of the 7th Scheduled of the
Constitution of India. Within the jurisdiction of States are more taxes concerned
with land, such as land revenue, agriculture income and land succession taxes,
estate duties in respect of agricultural land, and also the excise duties on
alcoholic liquors and narcotics. Also among state tax heads are sales taxes, taxes
on professions and callings and taxes on vehicles, on passengers travelling by
roads or inland waterways, and on luxuries and amusements56
45. Land revenue including its assessment and collection of revenue, the
maintenance of land records, survey for revenue purposes and records of
rights, and alienation of revenue.
The State Legislature is competent, under this Entry, to assess land

revenue in derogation of revenue-free grants previously made by the State. Land
revenue is a tax and not a rent for land.57 In R.S. Rekchand Mohote Spg. and
Wvg. v. State of Maharashtra, 58 the Supreme Court has held that a state can
levy cess on the use of following water in a river under this entry. A factory
owner was drawing water for industrial purpose from a river by installing water
pumps at its bank. The state government levied a cess on the use of the river
water for industrial purpose under the state land revenue code. The court came to
this conclusion by giving a very broad interpretation to the term ‘land’ in this

56 See Constitution of India, Seventh Schedule, State List, Items 45-63,
57 Sesha Sarma v. State of A.P. AIR 1960 A.P. 461.
58 AIR 1997 S.C. 2590.
115
entry. The court pointed out that the code in question clearly included “flowing
water, as investing title thereof in the state as integral part of land. The definition
of ‘land’ includes the right to tire water flowing there from as in the definition in
the Transfer of Property Act”.
46. Taxes on Agricultural Income
Taxes on non-agricultural income fall in the central sphere, entry 82, List
I. ‘Agricultural income’ means agricultural income as defined for the purposes
of the enactments relating to the Indian income-tax59 and this meaning is
intended to have some permanence because “No bill to the effect of changing the
meaning of agricultural income can be introduced in either House of Parliament
except on the recommendation of the President.”60 The jurisdiction of the State
Legislature to legislate under the present Entry is limited by the definition of
‘agriculture income’ in Art. 366(1) and the State Legislature cannot extend its
own jurisdiction by adopting a wider definition of‘agricultural income.’61
In Commissioner of Income-tax, West Bengal v. Raja Benoy Kumar

Sahas Roy,62 the Court made it clear that distinct and separate entry for
agriculture and forestry for legislative purposes but the term ‘agriculture
income’ may include, for purposes of taxation, income from forestry. In the
words of Bhagwati, J., “the result of this determination would be that the
assessee would not be liable to assessment under the Indian Income-tax Act, but
he would have to pay the agricultural income-tax which would be levied upon
him under the respective Agricultural Income-tax Acts.”
47. Duties in respect of Succession to Agricultural Land.
There are real and substantial differences between Succession Duty and
Estate Duty. There is one feature common to both taxes, viz, that the occasion
for the levy is the death of a person, but while Succession Duty (Entry 88 of List
I) has reference to the acquisition of the property by the successor and generally
takes into account the extent of the benefit derived by him and other
59 Art. 366 (1).

60 Article 274(1).
61 Karimtharuvi Tea Estates v. State of Kerala AIR 1963 S.C. 760.
62 AIR 1957 S.C. 768.
116
considerations relevant from that point of view,—the Estate Duty has reference
to the value of the property constituting the estate of the deceased and is
independent of the question as to who takes it.63 While a succession duty falls
upon the person who takes the property of the deceased, an estate duty falls upon
the property whoever may be the successor to the property on the death of the
previous owner. Since the word ‘succession’ implies the passing of property on
the death of a person to another, a tax on a gift inter vivos would not come under
the present Entry.64
48. Estate duty in respect of agricultural land.
“Estate duty” means a duty to be assessed on or by reference to the

principal value, ascertained in accordance with such rules as may be prescribed
by or under laws mads by Parliament or the Legislature of a State relating to the
duty, of all property passing upon death or deemed, under the provisions of the
said laws, so to pass.65
49. Taxes on lands and buildings.
The State Legislature has the power to impose tax on land and buildings
under Entry 49 of the State List. Tax under this entry may be imposed either on
the owner or on occupier. It may be imposed on land on which forest stands, on
land which is used as market and on land used for extraction of minerals.66
The present Entry confers power upon the State Legislature to levy taxes
on ‘lands and buildings’ without any terms of limitation as to the manner in
which the tax is to be levied. It is; therefore, open to Municipality under the
present Entry, to correlate its tax to the real value of the open lands for the
purpose of determining the rat or amount of the tax that should be levied upon
them. Hence, a municipal legislation which provides that the basis of valuation
for the purpose of levying a tax on lands may be either capital or annual letting
value is not ultra vires 67 The word ‘land’ in the entry is board enough to include
63 In the matter of Duty on Non-agricultural Property, AIR 1944 F.C. 73.

64 Ibid.
65 Art. 366(9).
66 Ajoykumar Mukhejea v. Local Board, Barpeta A.I.R 1965 S.C. 1561
67 Municipal Corporation v. Gordhandas Hargovandas I.L.R. (1954) Bom. 41 (52).
117
all lands whether agricultural or not.68 Though entry 49 refers to 'lands and
buildings', it may not mean that a tax merely on “land” could not be imposed.
The Supreme Court has said that the amplitude of the entry should not be
curtailed; it should be construed as taxes on land and taxes on buildings and
therefore taxes on land alone can be levied. Thus a tax on a percentage basis of
the market value of urban land falls under this entry and not under entry 86 list I.
There is a clear distinction between tax directly on land and tax on

income arising from land. Wealth tax has been held to fall under entry 86, List I,
and not under this entry.69 In the case of a tax on ‘lands and buildings’, the
value, capital or annual value would be determined by taking the land or
buildings as a unit and subjecting the value to a percentage of tax. in the case of
‘wealth tax’, on the other hand, the charge is on the valuation of the total assets
(inclusive of lands and buildings) less the value of debts and other obligations
which the assessee has to discharge merely because in determining the taxable
quantum under taxing statutes made in exercise of powers under Entries 86, List
I and 49 of List II, the same basis of valuation of assets is adopted trespass on
the field of one legislative power over another may not be assumed. In
Bhagwan Das Jain v. Union of India,71 while assessing the annual income of
the assessee for purposes of income tax on annual income of the assessee’s
house, which was in his own use, was also taken into consideration. It was
contended that it amounted to a tax on property under Entry 49 of List II. But the
Court rejected the contention. The Court held that the meaning of income was
not limited to what one gets from others or what one earns by exploiting his
property: it would also include that which one saved by using one’s property.
The Supreme Court has explained the scope of entry 49 in Union of

India v. H.S. Dhillon.72 The court has laid down the following incidents of a tax
under entry 49, List II:
(1) It must be a tax on units that is lands and buildings separately as

units.
68
Raja Jagnnath Baksh Singh v. State of Uttar Pradesh, AIR 1962 SC 1563.
69
Ibid.
70
Sudhir Chandra Jain v. W.T.O. AIR 1969 S.C. 59.
71
AIR 1981 S.C. 907.
72
AIR 1972 SC 1061.
118
(2) The tax cannot be a tax on totality, i.e. it is not a composite tax on the
value of all lands and buildings.
(3) The tax is not concerned with the division of interest in the buildings
or land. In other words, the tax is not concerned with the division of interest in
the building or land; in other words, the tax is not concerned whether one person
owns or occupies it or two or more persons own or occupy it.
50. Taxes on mineral rights subject to any limitations imposed by

Parliament by law relating to mineral development.
A tax on mineral rights would ordinarily refer to tax on the extraction of

minerals or on the right to do so. The competence of the state legislature under
this entry is circumscribed by “any limitations imposed by Parliament by law
relating to mineral development.”74 As parliament had enacted the Mines and
Minerals (Dev. & Reg.) Act under entry 54, List I, making exhaustive provisions
covering all kinds of taxation on minerals and mineral rights - tax, royalty, fee,
dead rent etc., the state legislature was deprived or denuded of the power to
enact any law imposing any tax or levy under entry 50, List II. Accordingly, the
tax in: question was held to be beyond the competence of and ultra vires the
legislature. By virtue of the Mines and Minerals Regulation and Development
Act, enacted by Parliament under entry 54, List I, the State Legislatures are
denuded of their power to levy any tax on minerals. Entry 50 has now practically
become a dead letter.75
According to Supreme Court in Murthy H.R.S. v. Collector of

Chittoor76, it would not include a cess payable according to the annual rent
value of the mining land, which is a land tax, even though such rent, in the case
of a mining land, exceeds the rent which would have been payable if the lease
related to the use of the surface only.
73 Murthy H.R.S. v. Collector of Chittoor AIR 1965 S.C. 177; Orissa Cement v. State of Orissa
AIR 1991 S.C. 1676.
75 P. Kannadasan v. State of Tamil Nadu AIR 1996 S.C. 2560.
76 AIR 1965 S.C. 177.
119
51. Duties of excise on the following goods manufactured or produced in the
state and countervailing duties at the same or lower rates on similar goods
manufactured or produced elsewhere in India: (a) alcoholic liquors for
human consumption; (b) opium, Indian hemp, and other narcotic drugs and
narcotics, but not including medicinal and toilet preparations containing
alcohol or any substance included in sub-paragraph (b) of this entry.
The constitution distributes the power to levy excise duties on alcoholic

liquors between the centre and the states. Entry 81, List I, and entry 51, List II,
complement each other. Both provide for levy of excise duties. States have no
power to levy excise on alcohol which is not for human consumption. Such a tax
can be levied only by the centre. The states cannot levy a tax or charge or impost
on industrial alcohol, i.e. alcohol used and usable for industrial purpose as the
states have no authority to levy duty or tax on alcohol which is not fit for human
consumption. Such an impost can only be levied by the centre under entry 84,
List I. Entry 51 has been held to be limited to potable liquors. Thus, duties of
excise on rectified spirit cleared/removed for the purposes of obtaining or
manufacturing potable liquors is leviable by the state governments.77
7S
The term ‘goods’ includes all materials, commodities and articles. The
term ‘goods’ in this entry refers to such goods which are capable of being sold to
consumers.79 A duty of excise is primarily levied upon a manufacturer or
producer in respect of the commodity manufactured or produced, even though it
may be levied at a stage subsequent to the manufacture. It is a tax upon goods,
not upon sales or the proceeds of sale of goods.
This Entry gives power to the State Legislature—
(a) To impose duties of excise on alcoholic liquors where the goods are
manufactured in the State;
(b) To levy countervailing duties at the same or lower rates on similar
OA
goods manufactured elsewhere in India.
77 Synthetics & Chemicals Ltd. v. State of U.P. AIR 1990 S.C. 1927; Bihar Distillery v. Union of
India AIR 1997 S.C. 109.
78 Art. 366(12).
79 Union Carbide India Ltd. v. Union of India, AIR 1986. S.C. 1097.
120
In Kalyani Stores v. State of Orissa,81 the Supreme Court observed that
the countervailing duties are meant to equalize the burden on alcoholic liquors
imported from outside the State and the burden placed by excise duties on
alcoholic liquors produced in the State. Countervailing duties can, therefore, be
imposed on imported liquors only if goods similar to those which are imported
are actually manufactured or produced in the taxing State. The State Legislature
has exclusive power under this Entry to impose excise duty upon a drug if it is a
‘narcotic drug’, e.g. chloral hydrate. ‘Narcotic’ is a substance which relieves
pain, produces sleep and in large doses brings on stupor, coma, and even death,
as opium does. Chloral hydrate being hypnotic and sedative would be a narcotic
and so an excise duty may be levied on it under the present entry.
52. Taxes on the entry of goods into a local area for consumption, use or sale
therein
The essential features of the present tax are—■
(a) The entry of goods into a definite local area;

(b) The goods must enter for the purpose of consumption, use or sale
therein.83
Hence, the tax cannot be imposed under the present entry on goods
merely passing through that local area and having terminus elsewhere. But there
is no limitation on the manner by which the goods to be subjected to the tax may
enter into that local area.84 The tax referred to by the present Entry is (when
levied by a local authority) commonly known as ‘octroi’, i.e. a tax on goods
brought into a place for sale, consumption or use.85 Since the competence of the
State Legislature to impose a tax on the entry of goods into a local area is limited
to such entry having been made only for the purposes of consumption, use or
sale therein, in the case the State Legislature uses wide terms in the taxing
statute, e.g. ‘brought into the city’, without limiting it to the purpose authorized
81 Kalyani Stores v. State of Orissa, AIR 1966 S.C. 1686.

82 Indian C & P Works v. State of A.P. AIR 1966 S.C. 713.
83 Burmah-Shell v. Belgaum Borough Municipality AIR 1963 S.C. 906.
84 Cenreal India Spinning and Weaving and Manufacturing Co. v. Municipal Committee AIR
1958 S.C. 341.
85 Ram Krishna v. Municipal Committee AIR 1959 S.C. 11.
121
by the Constitution, the Court should read these wide and general words so as to
authorize the tax subject to the limit imposed by the Constitution, so as to levy
the tax only in respect of such goods as are brought into that local area for
purposes of consumption, use or sale, but not for any other purpose. 86
In the context of the State legislative power under the present Entry, this
expression means an area administered by a local body like a municipality, a
district board, a local board, a panehayat or the like. It does not mean any area
notified by the Government to be a local area and would not, therefore, include
the premises of a factory. Hence, the U.P. Sugarcane Cess Act, 1956 which
empowered the imposition of a cess on the entry of sugarcane into the premises
07
of a factory, is ultra vires the present Entry.
This entry authorizes the taxation of goods brought into a local area
where the importer brings it—
(a) To be consumed by himself or for sale to consumers direct; or

(b) For sale to dealers who in their turn sell the goods to consumers
within such area, irrespective of the fact whether the consumers buy the goods
00
for use in the area or outside it.
In case of terminal tax, the goods reach their final destination and their
entry into the area of destination immediately attracts payment of terminal tax
irrespective of their user. Octroi is levied on goods for their use and
consumption. Terminal tax, on the other hand, signifies that there must be
terminus for the journey of the goods. Thus, where goods enter into a local area
which is also the destination of the goods either temporarily or otherwise, the
terminal tax would be leviable. Octroi refers to goods and not to passengers; it
can be imposed only at the point of entry of goods; there is no limitation on the
manner by which the goods enter whether by rail, air, road or waterway. Octroi
cannot be collected at the point of exit of goods. The terminal tax may be
OQ
imposed both on entry or exit, and may refer to both passengers and goods.
Under entry 52, List II, a state legislature can levy a tax on the entry of goods for
86 Jothi Timber Mart v. Corporation of Calicut AIR 1970 S.C. 264.

87 Diamond Sugar Mills v. State of U.P. AIR 1961 S.C. 652; Bhopal Sugar industries v. State of
M.P. AIR 1979 S.C. 537; Shaktikumar M. Sancheti v. State of Maharashtra (1995) 1 SCC 351.
88 Burmah-Shell v. Belgaum Borough Municipality AIR 1963 S.C. 906.
89 Punjab Flour Mills v. Lahore Corp., AIR 1947 FC 14.
122
‘consumption, use or sale’ into a local area.63 Under entry 52, List II, not only a
municipality or a local body can impose an octroi duty but even the state can
impose a tax on goods entering a local area. Both octroi and entry tax can be
levied simultaneously as there is no constitutional bar against double taxation.
Upon the same object and person separate taxes can be levied for different
purposes by the same authority or different authorities.90
53. Taxes on the consumption or sale of electricity.
Under this entry, a state legislature is competent to tax ‘consumption’ of

electricity, whether produced by the consumer, himself, or purchased from
somebody else.91 A levy of duty upon consumption of electrical energy is not a
duty of excise falling in entry 84, List I, because excise is a duty on ‘production’
and not ‘consumption’. The word ‘consumption’ not being limited in any way,
authorizes the imposition of a duty on the consumption of electricity by the
producer himself. Such a duty cannot be regarded as a duty of excise within the
meaning of Entry 84 of List I. Electricity is goods which can be sold. As
electricity cannot be stored, it can only be sold for consumption. Therefore, the
word ‘sale’ in entry 53, List II must be read as ‘sale for consumption’ of
electricity. Taxes on the consumption or sale for consumption of electricity
within the meaning of entry 53 must be consumption within the state and not
beyond its territory.92
Restrictions have been placed on the levy of this tax by Arts. 287 and
288 Art 287 lays down that except in so far as Parliament may by law otherwise
provide, a state cannot impose a tax on the consumption by, or sale of electricity
(whether produced by a government or other persons) to, the government of
India; or electricity consumed in the construction, maintenance or operation of a
railway by, or electricity sold for the purpose to, the Government of India or a
railway company. The tenor of Art 288 is that a state may by law impose a tax in
respect of any water or electricity stored, generated, consumed, distributed or
sold by any authority established by a law of parliament for regulating or
developing any inter-state river or river valley. Such a law to be effective should
90 Jaika Automobiles Pvt. Ltd. Nagpur v. State of Maharashtra AIR 1993 Bom. 124.
91 Jiyajeerao Cotton Mills v. State of M.P. AIR 1963 S.C. 414.
92 State of A.P. v. NTPC Ltd. (2002) 5 SCC 203, 222.
123
be reserved for the president’s consideration and receive his assent. If the state
law provides for the fixation of the rates and other incidents of such tax by
means of rules or orders to be made under the law by any authority, the law must
make provision for the previous consent of the president being obtained to the
making of any such rule or order.
The purpose of the provision evidently is to protect the public utility

services like railways and river valley projects from indiscriminate state taxation
as these services have a national importance. Art. 288 does not stipulate
presidential assent for imposition of a fee for supply or use of water. Art. 288 is
a corollary of the doctrine of “intergovernmental tax immunities.” The subject of
taxation under this clause is a matter of interstate utility and hence of national
concern. The presidential assent ensures that the state legislation does not injure
interstate interests by imposing unduly high taxation on generation, storage etc.
of electricity. The Presidential assent is a condition precedent for the validity of
the state legislation imposing tax under Art. 288. It serves a very beneficial
interest by way of protection of intergovernmental interests.93
54. Taxes on the sale or purchase of goods other than newspapers, subject to
the provisions of entry 92A of List I.
This Entry confers power upon the State Legislature to tax sale of every
kind, including the first sale by a manufacturer. Such tax would be a sales tax
and not an excise duty. The power of the states to levy sales tax under entry 54 is
subject to two limitations. One arises out of the entry itself, viz., the entry itself
is subject to entry 92A of List I. Under entry 92-A, taxation of inter-state sales
are subject to Central Laws. The other limitation flows from the restrictions
embodied in Article 286.94 The term ‘goods’ for the purposes of this entry has
been given a very wide connotation. According to Art. 366 (12), “goods”
includes “all materials, commodities, and articles.” A lottery ticket has been held
to be “goods.”95 Where the taxing event is the sale or purchase of goods, it is a

94 Century Finance Corp. Ltd. v. State of Maharashtra, AIR 2000 S.C. 2436.
95 H. Anraj v. Govt, of Tamil Nadu, AIR 1986 S.C. 63.
124
tax under Entry 54 of List II. It is, on the other hand, an excise tax, if the taxing
event is the manufacture or production of the goods.96
In popular parlance, ‘sale’, means transfer of property from one person to

another in consideration of price paid or promised or other valuable
consideration. But the word ‘sale’ in Entry 54 of List II and the connected
Articles has been used in the sense in which it is used in S. 4 of the Sale of
Goods Act.97 A sales-tax is a tax on the occasion of sale.98 These words,
however, have reference to the character of the transaction and not to the point
of time at which the duty becomes leviable, and it has no bearing on the question
as to when such a tax could be imposed. There is, therefore, nothing to bar the
enactment of a retrospective law to tax sales or of a validating Act to give
retrospective validity to an invalid law of sales tax.99 The Court held that Entry
54 uses two terms ‘sale’ and ‘purchase’. Both are two sides of the same coin.
Sale and purchase are sides of the same transaction. From the point of view of
the seller, the transaction is a ‘sale’; looked at from the point of view of the
buyer, the same transaction is a purchase. Under entry 54, the state legislature
may levy both - ‘sales tax’ as well as ‘purchase tax’. A tax on the purchase of
bamboo is valid under this entry.100
Sales tax constitutes a major source of revenue for the states. With a
view to enhance their taxing capacity under this entry, the constitution (Forty-
Sixth Amendment) Act, 1982, has been enacted. C1.29A has been added to Art.
366 so as to clarify the position in certain respects, to remove certain judicially
imposed restrictions and to include the following transactions within the
expression “a tax on the sale or purchase of goods”:
(a) A tax on the transfer, otherwise than in pursuance of a contract of

property in any goods for cash, deferred payment or other valuable
consideration.
96 Ganga Sagar Corpn. v. State of U.P. AIR 1980 S.C. 286.

97 New India Sugar Mills v. Commr. of Sales Tax, AIR 1963 S.C. 1207; J.C. Tax Officer v.
Y.M.A. Madras AIR 1970 S.C. 1212; State of Madras v. Dunkerley (1959) SCR 379.
98 Prov. of Madras v. Boddu Puddanna, AIR 1942 FC 33.
99 Sundraramier and Co., M.P.V. v. State of A.P. AIR 1958 S.C. 468.
100 State of Orissa v. Titaghur Paper Mills Co.Ltd. AIR 1985 S.C. 1394.
125
(b) A tax on the transfer of property in goods (whether as goods or in
some other form) involved in the execution of a works contract;
(c) A tax on the delivery of goods on hire-purchase or any system of
payment by instalments;
(d) A tax on the transfer of the right to use any goods for any purpose
(whether or not for a specified period) for cash, deferred payment or other
valuable consideration;
(e) A tax on the supply of goods by any unincorporated association or
body of persons to a member thereof for cash, deferred payment or other
valuable consideration;
(f) A tax on the supply, by way of or as part of any service or in any
other manner whatsoever, of goods, being food or any other article for human
consumption or any drink (whether or not intoxicating), where such supply or
service, is for cash, deferred payment or other valuable consideration.101
Any of the above-mentioned supply, transfer or delivery of any goods is
to be deemed to a sale of those goods by the person making the transfer, delivery
or supply and a purchase of those goods by the person to whom such transfer,
delivery or supply is made.102
Cl. 29A of Art. 366 defines expansively the expression “tax on the sale
or purchase” so as to include inter alia non-contractual transfer of property in
goods in execution of a works contract; delivery of goods on hire-purchase; and
transfer of the right to use any goods for consideration. The purpose of these
amendments is to augment the State revenue through sales taxation. The State
Legislatures have thus become competent to levy sales tax on ‘deemed sales’ as
envisaged in the above clauses from (a) to (f) even though such transactions
were not sales within the meaning of ‘sale’ as contained in the Sale of Goods
Act. Provision to check sales tax evasion is within the legislative competence
of the states under entry 54, List II. This being so, the provisions to make
101 O.N.G.C. v. State of Bihar AIR 1976 S.C. 2478; Vishnu Agencies v. C.T.O. AIR 1978 S.C.
449.
103 Ibid., p. 689.
126
imposition of tax efficacious, or to prevent of tax, are within the legislative
competence of the State Legislative.104
55. Taxes on advertisements other than those published in the newspapers.
A tax on advertisements published in the newspapers falls under entry

92, List I. of 7th schedule.A tax on advertisement, which is specifically
authorized by the present Entry, does not constitute a tax on ‘professions’ or
‘callings’ under Entry 60 of List II. Hence, it is not subject to the monetary limit
imposed by Art. 276(2), though a film which has been advertised would be
taxable even where it is not exhibited after being advertised.105
56. Taxes on goods and passengers carried by road or on inland waterways:
Since the taxing power under Entry 56, List II is of a regulatory nature, it
would not violate Art. 301, even though the tax so imposed is levied on
passengers and goods carried from a place outside the taxing Sate to a place
outside that State.106 The present Entry does not exclude national highways or
waterways. Hence, tax on goods and passengers carried on national highways or
waterways falls within State power under the present Entry. Under entry 56,
List II, a state can levy a tax on passengers and goods carried on national
highways. This entry does not exclude national highways and national
waterways. Entry 56 uses the terms ‘road’ and ‘inland waterways’. So
“national highways and “national waterways” (so declared under entries 23 and
27, List I) are not exempted from the scope of entry 56. Thus, taxes on
passengers and goods carried on national highways fall directly and squarely
within entry 56.109
However, under this entry, a state could only impose a tax of a

‘compensatory’ and ‘regulatory’ nature.110 A state incurs considerable
expenditure in connection with national highways (though the primary
104
State of Rajasthan v. D.P. Metals, AIR 2001 S.C. 3076.
105
Ismail & Co. v. State of Kerala. AIR 1965 Ker. 237.
106
International Tourist Corpn. v. State of Haryana. AIR 1981 S.C. 774.
Ibid.
108 Under the National Highways Act, 1956, certain highways have been declared as national
except such parts thereof as lie within any municipal area.
109 op. cit. n. 101.
127
responsibility for them rests on the centre) not directly by constructing or
maintaining them but by facilitating the transport of goods and passengers along
them in various ways such as lighting, traffic control, amenities for passengers,
halting places for buses and trucks, etc.111 This constitutes sufficient nexus
between the tax and the passengers and goods carried on the national highways
to justify the state imposition of tax thereon.
This Entry authorizes a tax the incidence of which is on goods and

passengers (by road or inland waterways), even though the amount of the tax is
measured by the fares; or by the distance travelled. It is open to the
Legislature to recover this tax from the owners or operators of the carriers. The
present Entry does not specify who should be the assessee. Hence, where a tax is
payable at a certain rate on all passengers and goods carried by stage carriages, it
is a tax under this Entry, even though it is levied on the operator. It is not a tax
on income, for, had it been a tax on income, the operator would not have been
liable to pay in a year in which he did not make any profit or gain.114 Further, the
operator is entitled to pass on the tax to the passenger or consignor of the goods,
even though the statute does not confer that right expressly. In short, the method
or machinery of collection does not affect the nature of the tax, where there is a
nexus between the tax and the machinery.115
For the same reason, the Legislature may make the producer liable for
this tax even where he sells the goods to a purchaser before the goods are carried
away from the place of production, provided only the liability of the producer
arises only when the goods are carried from his place, by road or inland
waterways. It is open to the Legislature to tax goods and passengers either
individually or collectively. The tax imposed under the present Entry is of a
regulatory and compensatory character.116 But this does not mean that the
111 Manmohan Vig v. State of Haryana AIR 1981 S.C. 1035.

112 Sainik Motors v. State of Rajasthan AIR 1961 S.C. 1480.
113 Karthikeya v. State of Kerala AIR 1974 S.C. 436.
114 Ramkrishna v. State of Bihar AIR 1963 S.C. 1667.
115 Khyerbari Tea Co. v. State of Assam. AIR 1964 S.C. 925.
116 P. Barua v. State of Assam, AIR 1955 Assam 249.
128
measure of the tax should be proportionate to the expenditure incurred on the
regulation provided and the services rendered.117
57. Taxes on Vehicles, whether mechanically propelled or not, suitable for

use on roads, including tramcars subject to the provisions of entry 35, List
III
The power to tax vehicles, whether mechanically propelled or not,

belongs exclusively to the State Legislature under Entry 57 of List II. This
power of the State legislature being subject to Entry 35 of List III, if there is an
existing law made by Parliament laying down the principles on which taxes on
mechanically propelled vehicles should be levied, then any State legislation
enacted under the present Entry must conform to those principles as laid down in
the existing law or the earlier law made by Parliament. If the provisions of the
State law are repugnant to those principles, the law made by the State
Legislature must fail to the extent of the repugnancy, unless reserved for the
consideration of and assented to by the President.
But no assent of the President is necessary to validate the State law, in

the absence of any such repugnancy, or any such existing Central law. The
tax, under the present Entry is leviable by the State Legislature on all vehicles
‘suitable for use on roads’, which are kept in the State.119 But such tax must have
some nexus with the vehicles using the public roads of the State because it is of
a compensatory nature. Hence, any vehicle which does not actually use the roads
is not taxable, even though registered under the State Motor Vehicles Act. On
the question of interpretation of the words “suitable for use on roads” in the
entry, the Supreme Court has observed in the Automobile Transport case: 121
“The words “suitable for use on roads” describe the kinds of vehicle and not
their condition. They exclude from the Entry, farm machinery, aeroplanes,
railways etc. which though mechanically propelled are not suitable for use on
roads”. A state tax was levied on all motor vehicles ‘used or kept for use in the
state’. The Supreme Court interpreting this as ‘used or kept for use on the public
117 Bolani v. State of Orissa. AIR 1975 S.C. 17.

118 Phoolchand v. State of M.P., AIR 1966 M.P. 131.
119 Travancore Tea Co. v. State of Kerala, AIR 1980 S.C. 1547.
120 Bolani Ores v. State of Kerala, AIR 1975 S.C. 17.
121 The Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR 1962 S.C. 1406.
129
roads of the state’ held it valid under this entry as it authorizes levy on vehicles
suitable for use on roads.
58. Taxes on animals and boats
A state tax on mechanically propelled barges has been upheld as falling

under this entry. The state can tax all kinds of boats. Under this entry, barges
belong to the family of boats and not ships. There is no reason to confine the
199
term “boats” in this entry to boats which are exclusively propelled by oars.
Entries 24, 25 and 27 in List I, 77 and entries 31 and 32 in List III78, operate in
their own fields and do not entrench upon the subject covered by entry 58, List
II.
59. Tolls
This Entry authorizes the State Legislature to levy a ‘toll’ which means a
payment realized for some benefit, e.g. for the use of a market, or a bridge; the
temporary use of land. It is not essential that the toll should be collected prior
to the rendering of the benefit. Thus, provided that it is not collected twice in
respect of the same benefit, a toll may be collected from a trader either when he
enters the market place or when he leaves it; or from a vehicle when it either into
or leaves the limits of the Municipality which levies a toll for the use of its
roads.124 Tolls are of various kinds and Entry 59 is not confined to ‘toll thorough
and toll traverse’. A state government is authorized to levy toll under S. 2 of the
Indian Tolls Act, 1851. Toll may be levied upon any road or bridge made or
repaired at the expense of the central or the state government. “For advantage
obtained by the public by the construction of the roads or bridges, the state
government is entitled to reimburse itself for providing the service.” The rate of
19c
toll must bear a reasonable relationship to the providing of the benefit.
60. Taxes on professions, trades, callings and employment
The power conferred by this Entry is subject to the limitation imposed by

Art. 276(2) that a levy does not exceed a maximum amount of Rs. 2500 in
122 Panduronga Timblo Industries v. Union of India, AIR 1992 S.C. 1194.
123 Automobile Transport v. State of Rajasthan, AIR 1958 Raj. 114.
124 Atiabari Tea Co. v. State of Assam, AIR 1961 S.C. 232.
125 State of U.P. v. Devi Dayal Singh, (2000) 3 SCC 5.
130
toto.126 The limit imposed by Art. 276(2) will not, however, be attracted to z
‘composite tax’, which draws power not only from the present Entry but alsc
from some other Entry, e.g. 49 of List II, to which Art 276(2) does not extend;-
such as a ‘tax on circumstances and property’ which is preferable to both Entries
49 and 60 of List II. This does not mean, however, that by combining the two
sources of power, a local authority acquires an unlimited charter to impose
disproportionately excessive levies on the ‘circumstances’ of a man which
includes his income from profession, trade or calling. If it is excessive, ‘income’
will then cease to be the yardstick or measure of the tax, and the tax will be a tax
on ‘income’ falling under Entry 82 of List I.127
The idea underlying Arts. 276(1) and (2) is that the state power to levy
tax on professions etc. is not valid on the ground that it is a tax on income
leviable by Parliament; nor is parliament’s power to levy income tax limited by
state’s power to levy a profession tax. However, to mitigate the evils arising
from an overlapping of central state taxes on income, Art. 276(2) lays down that
the total amount payable by one person to the state or to any one municipality in
the state by way of taxes on professions, etc. “shall not exceed two thousand and
five hundred rupees per annum”. The words trades, callings seem to have been
used in the widest sense in which they are usually used in fiscal statutes, as
connoting “any activity for gaining livelihood”.128
61. Capitation tax:

19Q
It is a tax levied on each head or person.
62. Taxes on luxuries including taxes on entertainments, amusements,

betting and gambling
A tax under the present Entry, may be imposed not only on the person
spending on luxuries, entertainment or amusements but also on the act of
entertaining or the subject of entertainment, e.g. on a cinema show.130 The use of
126 Sitaram v. Jamapada Sabha, AIR 1952 Nag. 401.

127 Engineering Co. v. Zila Parishad, AIR 1980 S.C. 1088.
128 Mazagaon Dock v. I.T. Commr., AIR 1958 S.C. 861; Kisan Supdu Ingale v. Bhusawal
Municipality, AIR 1966 Bom. 15.
lj0 Western India Theatres v. Cantonment Board, AIR 1959 S.C. 582.
131
the plural suggests that the tax that is contemplated is not a tax on an activity
which may be considered as ‘unnecessary’ an in that sense a ‘luxury’ but a tax
on goods or articles which constitute luxuries, e.g. tobacco, as distinguished
from a tax on its production, in which case it becomes an excise duty. A ‘luxury
is something which conduce enjoyment over and above the necessaries of life,
even though the article may be popular among a large number of people,
1T 1
including the poorer sections, such as tobacco, beer.
The words ‘entertainments’ and ‘amusements’ are wide enough to

include theatres, dramatic performances, cinemas, sports and the like.132 The
question whether a particular tax is a tax on entertainment under the present
Entry or a tax on callings under Entry 60 becomes material because of the
i
limitations imposed by Art. 276(2) upon a tax under Entry 60 of List II. The
tax authorized by this Entry is a tax imposed in respect of the show, exhibition,
performance or the like. It may be levied either upon the person who offers the
entertainment or upon the person who enjoys it or on both.134 Where the
incidence of the tax falls on the person who offers the entertainment, it does not
become a tax on ‘calling’ or ‘profession’ within the meaning of Entry 60 of List
II, if the tax is to be paid in respect of an entertainment (say, a cinema show),
irrespective of whether it is given by a professional exhibitor or by one
following a different calling, e.g. by a charitable society to raise funds for a
charity, and the tax is levied on each of the exhibitions, separately. In such case,
what is taxed is not the calling of the person providing the entertainment but the
entertainment itself; and the question of applying Art. 276(2) do not,
consequently, arise in such cases.
On the other hand, if the incidence of the tax is upon the person because
he is engaged in the business of providing the entertainment irrespective of the
number of occasions when he provides the entertainment, it is a tax on calling. It
would be an entertainment tax if the tax is imposed on every act of
entertainment, e.g. on a cinema show, so that there would be no such tax if no
cinema show is held. A tax on the promoters of a gambling prize competition,
131 Abdul Kadin v. State of Kerala, AIR 1966 S.C. 182.

132 Corporation of Calcutta v. Liberty Cinema, AIR 1965 S.C. 1107.
133 Srinivasamurthy v. State of Mysore, AIR 1959 S.C. 895.
134 Western India Theatres v. Cantonment Board, AIR 1959 S.C. 582.
132
being a percentage of the entry fees received, is a tax on betting and gambling
and not a tax on ‘trade’ under Entry 60 of List II. The tax is levied on the
promoter for the convenience of collection with the expectation that he will
indemnify himself at the expense of the gamblers. A ‘wagering contract’ is
‘gambling’, its essence being an intention of the parties that though it purports to
be a contract for sale, no actual transfer of the goods should take place under it
but the parties should only pay or receive (as the case may be) the difference
according as the market price should vary from the contract price on a future
date. Such a transaction is not a commercial transaction but a ‘wager’ on the rise
or fall of the market.135
63. Rates of stamp duty in respect of documents other than those specified
in the provisions of List I with regard to rates of stamp duty:
The occasion for levy of the stamp duty is the document which is
executed as distinguished from the transaction which is embodied in the
document.136 Since the following documents are not mentioned in Entry 91 of
List I, the State Legislature is competent to alter the rate of stamp duty in regard
to them within its own jurisdiction—
(a) Acknowledgment
(b) Application or certificate of enrolment of an Advocate.
66. Fees in respect of any of the matters in this List, but not including fees
taken in any court.
This Entry gives power to the State Legislature to levy fees in most
general terms in ali matters which are within its legislative field. If the
conditions of a ‘fee’ are satisfied under Art. 277, the nomenclature given by the
Legislature is immaterial. Thus, a cess imposed by a State Legislature for the
purpose of controlling sugar or a cess levied upon owners of mines in a notified
area to render specific services to such owners by developing the notified
area,137 can be treated as a fee under this Entry; or a fee for keeping stalls in a
market (Entry 28), or a water tax to be imposed by a municipality (Entry 5). But
135 Bullion & Grain Exchange v. State of Punjab, AIR 1961 S.C. 268.
136 Sesharatnam v. Gift Tax Officer, AIR 1960 A.P. 115.
137 Hingir-Rampur Coal Co. v. State of Orissa, AIR 1961 S.C. 459.
133
in order to come under this Entry, the imposition must be a fee for services
rendered by the State relating to any of the subjects included in this List. Thus, if
a Municipality maintains a burial ground, (Entry 10, List II), it can levy a fees
for every person buried in that burial ground, if a State Government maintains an
establishment for the inspection of factories, it may levy a fee on factories by
way of realizing the expenses involved. But a ‘fee’ cannot be justified with
reference to the general purposes of‘local’ government.
In State of Orissa v. Tullock M,A. and Co.,138 the court pointed out
that the power to levy a fee under the present Entry is dependent upon the State
Legislature’s power to legislate with respect to independent subject matter in the
State List. If, for any reason, e.g. a declaration by Parliament under Entry 54 of
List I, the State Legislature loses its power over that subject matter, it loses the
power to impose a cess in relation to that subject matter. An imposition
purported to be made under the present Entry cannot be valid, if it lacks any of
the two characteristics of a ‘fee’ viz—
(a) The authority levying the fee must render some service for the fee
levied, however remote that service may be. An imposition cannot be justified
under this Entry when the authority fails to show that any services are being
rendered which have a proximate relationship with the imposition.139
(b) The fees realized must be spent for the purposes of the imposition and
should not form part of the general revenues of the State.140
Concurrent Taxes
Concurrent taxes are those taxes levied by both the Centre as well as
State government under List III (Concurrent List, Entries 35, 44 and 47) of the
7 Scheduled of the Constitution of India. In the Concurrent List there are only a
taxes, these are, the taxes on mechanically propelled vehicles which can be
levied by the States under entry 57, List II. In the interest of the uniformity of
taxation throughout the country, the Centre can lay down principles, under the
entry 35, List III. The two entries deal with two different, though allied, matters
-one deals with taxes on vehicles and the other with the principles on which
138 AIR 1964 S.C. 1284.

139 Umaid Mills v. State of Rajasthan, AIR 1954 Raj. 135.
140 Chief Comr.v. D.C.M.. AIR 1978 S.C. 1181.
134
such taxes are to levied.141 Recently, the Committee on Coordination of
Transport has suggested that to achieve uniformity in the area of taxation of
motor vehicles throughout the country, the subject may be transferred from the
State to the Concurrent List.142 Also among concurrent taxes are stamp duties
other than duties or fees collected by means of judicial stamps, but not including
rates of stamp duty.143
35. Principles on which taxes on mechanically propelled vehicles are to be

levied
Under this entry, Parliament as well as the state legislatures can legislate
to lay down principles of taxation in respect of only the mechanically propelled
vehicles Legislation under this entry cannot be made in respect of vehicles
which are not mechanically propelled. On the other hand, under entry 57, List II,
the States can impose tax on all kinds of vehicles-mechanically propelled or
not.144 The two entries, viz., 57 in list II and 35 in List III, deal with two
different matters though allied ones- one with taxes on vehicles and the other
with the principles subject to which such taxes are to be levied. “Taxes on
vehicles in their ordinary meaning connote the liability to pay taxes at the rates
at which the taxes are to be levied”. On the other hand, the expression
‘principles of taxation’ denotes the rules of guidance in the matter of taxation.
Thus, under this entry, only ‘principles’ for taxation can be laid down; no tax, as
such, can be levied. Entry 35, List III, does not confer power to tax but only
connotes rules of guidance in the matter of taxation.145 It is open to Parliament to
lay down the principles on which taxes may be levied on mechanically propelled
vehicles. So far Parliament has not enacted any law regulating the principles of
taxation, or the rules for the guidance of taxation on motor vehicles. The Motor
Vehicles Act is only a regulatory measure and does not in any way affect or
control the power of the states under entry 57, List II.146 There are 28 states and
7 Union Territories. As each of them has a right to levy tax on motor vehicles,
141 Assam v. Labanya Probha, AIR 1967 S.C. 1975.

142 M.P. Jain, Indian Constitutional Law, (1970), p. 345
143 See, entry 63 of List II and entry 91 of List 1.
145 Ibid., p. 700.
146 Indian Telephone Industries Ltd. v. State of Karnataka, AIR 1985 Kant 186; Sharma
Transport v. Govt, of Andhra Pradesh, AIR 2002 S.C. 322.
135
there may be great difficulties in the way of evolving All-India permits. If a bus
has to pay a tax to each state through which it passes, it will impose a heavy
burden on inter-state tourist traffic. To overcome such difficulties, and to
introduce uniformity of taxation throughout the country, the centre has been
authorised, under entry 35, List III, to lay down principles on which taxes on
mechanically propelled vehicles may be levied by the states under entry 57, List
II. 147
44. Stamp duties other than duties or fees collected by means of judicial
stamps, but not including rates of stamp duty:
Rates of stamp duties are fixed by Parliament under entry 91, List 124 on
such documents as bills of exchange cheques and debentures etc. Stamp duties in
respect of documents not specified in entry 91; List I, are to be fixed by the State
Legislatures under entry 63, List II. A state legislature can levy stamp duty on
the certificate of enrolment of an advocate under this entry read with entry 63 of
List II.149 The power to levy stamp duty is concurrent, under Entry 44 of the List
III. But that Entry does not include the power to prescribe the rate of such duty.
The power to prescribe the rate of stamp duty is divided between the exclusive
jurisdiction of the Union and a State;
(a) As regards the instruments specified in Entry 91 of List I, the power

belongs exclusively to Parliament;
(b) As regards other instruments, the power belongs to the State, under
Entry 63 of List II.
taken in any court.
According to Supreme Court, this Entry would authorize the imposition
of the following fees,
(a) A fee for licensing of factories Entry 36.
147 M.P. Jain, “Indian Constitutional Law” p.700, 5lh edn.2003 Vol. 1.
148 Ibid., p. 700.
149 Bar Council, U.P. v. State of Uttar Pradesh, AIR 1973 S.C. 231.
136
(b) A fee or contribution150 for regulation religious and charitable
institutions Entry 28.
A levy which was in the nature of a tax may be converted retrospectively
into a fee, under the present Entry, by denuding the levy of those characteristics
which went to make it a tax e.g. by creation a separate fund.151 But the present
Entry would not authorize a State Legislature to levy a ‘tax’ on a factory, as
distinguished from a tax on a land or building occupied by a factory Entry 49
List II.152
Residuary Taxes
The expression ‘residuary powers’ refers to those powers which are not
allocated either to the federal Legislature or to the Units. It carries the idea of
non-descript i.e. powers which were not in contemplation of the framers of the
Constitution. Any scheme of the distribution of powers has to leave room for
unforeseen eventualities. The Constitution of a country has to endure for ages
and all the future eventualities cannot be contemplated by its framers. Therefore,
it becomes necessary to provide in advance as to which of the two sets of
government will have the power to deal with those matters which are not
covered by any the specifically enumerated powers.153 If we look at the different
federal constitutions from which the framers of our Constitution freely
borrowed, we find that no common pattern emerges from them with regard to
the allocation of the residuary powers. Thus, while in the United States of
America and in Commonwealth of Australia residuary powers remain with the
States, in Canada they have been allocated to the Dominion government. Under
the government of India Act, 1935 residuary power was allocated neither to the
Centre nor to the Provinces: it was given to the Governor-General who, in the
exercise of his discretion, was to allocate the same to the Centre or to the
Provinces, as the circumstances might require from time to time.154 This
extraordinary provision was enacted because a compromise could not be reached
150 Ratilal Panachand Gandhi v. State of Bombay AIR 1954 S.C. 388.
151 Sudhindra Thiratha Swamiar, H.H. v. H.R.E.Commr., AIR 1963 S.C. 966.
152 Govt of A.P. v. H.M.T., AIR 1975 S.C. 2037.
153 Anirudha Parsad, Centre-State Relations in India 428-29 (1985).
154 Section 104, Government of India Act, 1935.
137
amongst the different parties and interest groups on the question of allocation of
this power to the Centre or the Provinces.155
Article 248 provides:
(a) Parliament has exclusive power to make any law with respect to any
matter not enumerated in the Concurrent List or State List,
(b) State power shall include the power of making any law imposing a
tax not mentioned in either of these Lists.
Article 248 thus, confers residuary powers of legislation exclusively on

Union Parliament.156 Entry 97 of List I give effect to Art. 248. Article 248 is to
be read with Entry 97 of Union List which reads as “Any other matter not
enumerated in List II or List III including any tax not mentioned in either of
those Lists.” Notwithstanding great care with which the various Entries in the
three Lists of our Constitution have been framed, there may be some legislative
or taxing power which does not come under any of these Entries. In such a case,
it is the Union Parliament which shall have power to legislate with regard to
such matter of taxation, by virtue of the present Article. Resort to this residual
power should, however, be a matter of ‘last refuge’, only when all the Entries in
the three Lists are absolutely exhausted,157 that is to say, only if the subject
■l co
matter cannot be comprehended in any Entry in the three Lists.
There is nothing wrong for Parliament to claim taxing power under the
present Entry. But before that can be admitted, it must be shown that the tax is
not mentioned in List II or III. The reason is that the Constitution of India being
federal in nature, the residuary power cannot be so expensively interpreted as to
whittle down the power of the State Legislature. In International Tourist
Corpn. v. State of Haryana,159 the Supreme Court held that once it is
established that the taxing power claimed is not covered by any Entry in List II
or III, it is competent for Parliament to combine its power under Entry 97 with
some other power which legitimately belongs to Parliament exclusively under
155 Anirudha Parsad, op. cit. n.

156 Prof. Narender Kumar, Constitutional Law of India, 4lh Ed. 2004.
157 Subramaniyam Chettiar v. Muthuswami Goundan, AIR 1979 FC 47.
158 Second Gift Tax Officer v. D.H. Nazareth.AIR 1970 S.C. 1999
159 AIR 1981 S.C. 774.
138
some other Entry of List I. In Stainislaus v. State of M.P.,160 the Supreme Court
observed that a law cannot be brought under the present Entry where it clearly
falls under some Entry of List II or III e.g. matters relating to ‘public order’.
Again, in Karnataka State v. Union of India,161 the Supreme Court made it
clear that if the law does not relate to nay of the matters enumerated in List II or
III, it will come under Entry 97 of List I.
The most significant judicial pronouncement on the scope of residuary

power of Parliament is Union of India v. Harbhajan Singh Dhillon.162 In this
case, a Bench of seven Judges decided questions of far reaching significance as
to the taxing powers of Parliament and the State Legislatures. The main question
in this case was whether the wealth tax could be levied under the Centre’s
residuary power. The nature of wealth tax imposed under the Wealth-tax Act, as
originally stood, was different from that of a tax under Entry 49, List II, and it
did not fall under this entry. However assuming that the Wealth-tax Act, an
originally enacted, is held to be legislation under Entry 86, List I, there is
nothing in the Constitution to prevent Parliament from combining its powers
under Entry 86, List I with its powers under Entry 97, List I. The Parliament has
enacted several taxes under residuary entry. Gift tax falls under the residuary
entry. Expenditure tax also fall in the residuary entry as there is not entry in
any List under which it can fall.164
Supreme Court held that levy of cess on sugarcane by the state was
invalid. In order to protect the State from refunding the amount collected
through the cess. Parliament enacted an Act levying the cess retrospectively and
authorising the State to collect the same on its behalf. A cess on cement or other
minerals fall under residuary entry.166 A cess on water consumed by any local
authority and every person carrying on any specified industry levied by
AIR 1977 S.C. 908.

161 AIR 1978 S.C. 68.
162 AIR 1972 S.C. 1061.
163 Op. cit. n.
164 Azam Jah v. I.T. Officer, Hyderabad, AIR 1972 S.C. 2319; Federation of Hotel & Restaurant
v. Union of India. AIR 1990 S.C. 1637.
165 Diamond Sugar Mills v. State of U.P. AIR 1961 S.C. 652; Jaora Sugar Mills v. State of M.P.
AIR 1972 S.C. 1061.
166 India Cement Ltd v. State of Tamil Nadu, AIR 1990 S.C. 85; P. Kannadasan v. State of Tamil
Nadu. AIR 1996 S.C. 2560.
139
Parliament through the Water (Prevention and Control of Pollution) Cess Act,
1977, has been held to be valid as a residuary tax.167
No Taxation Except by Authority of Law
Article 265 declares that “no tax shall be levied or collected except by
authority of law.” This Article embodies the English principle of ‘no taxation
without representation.’ There was no provision in the Government of India
Acts, corresponding to this Article. The protection offered by the Article
involves the propositions that not only the levy but also the collection of a tax
must be under the authority of some Taw’, the procedure for making which is
provided by Arts 110, 117, 123, 199, 207 and 213. This cannot be done by mere
resolutions of the Houses of the Legislature or any executive action169 or
instruction or by subordinate legislation in the absence of express statutory
authority for the charge.171 Where an executive authority has been empowered to
collect a tax by an invalid law or rules or notification made there under, the
Court is entitled to interfere.
In England, the principle that the Crown has no power to tax save by
grant of Parliament has its origin in the demand of the Magna Carta (1215)172,
which was affirmed and finally established by the Bill of Rights, 1689. It was
this principle which established Parliamentary government in England, for the
King was obliged to summon Parliament annually in order to obtain supplies, as
Parliament would not grant more than what was sufficient to meet the
requirements of one year. In modem times, of course, many taxes are imposed
by permanent Acts (subject to modifications from year to year according to
needs of the administration), but the income-tax is levied only by the annual
Finance Act, which also embodies the annual modifications of the permanent
taxation laws. The authority for taxation is an Act of Parliament and a resolution
167 Municipal Corp. Jullundhar City v. Union of India. AIR 1981 P&H 287.
168 D.D. Basu, Commentary on the Constitution of India, “L”, 1986, 206.
169 Kunnathat v. State of Kerala, A. 1961 S.C. 552.
170 Mehra v. State of Maharashtra, A. 1971 S.C. (1131).
171 Ghulam v. Rajasthan, A. 1963 S.C. 479 (484).
172 In England Magna Carta provides that “No scutage of aid is to be levied without the consent
of the commune concilium excepting the three customary feudal aids”.
173 According to Bill of Rights 1689, “Levying money for the use of the Crown by pretence of
prerogative without grant of Parliament is illegal”.
140
of the House of Commons is not sufficient,174 except for a limited purpose under
the Provisional Collection of Taxes Act, 1913. The above principle of ‘no
taxation without the authority of law’ is so jealously guarded by the Courts that
they would not infer the grant of a power to tax from any legislation in the
absence of a clear expression.175
Similarly, The Constitution of U.S.A.176 provides the power that the

power of taxation belongs exclusive to the Legislature and the Courts can
interfere only if the taxing power is colourably used for the exercise of a
forbidden power, e.g. confiscation. ‘Authority of law’ refers to a valid law,
which means that the tax proposed to be levied must be within the legislative
competence of the Legislature imposing the tax. The validity of the tax is to
be determined with reference to the competence of the Legislature at the time
when the taxing law was enacted and not by any subsequent changes. The law
must be validity enacted, i.e. by the proper body which has the legislative
authority and in the manner required to give its Acts the force of law. Of
course, there is a presumption that the prescribed procedure has been
followed.179 The law must not be a colourable use of or a fraud upon the
legislative power to tax.180
The tax must not violate the conditions laid down in Art. 13; in other
words, it must not violate a fundamental right, such as that in Art. 19(1) (a); 181
and Art. 19(1) (g). It must not also contravene the specific provisions of the
Constitution which impose limitation on legislative power in relation to
particular matters, e.g. Art. 27; 276(2); 286; 301.185 The tax in question must be
174 Bowles v. Bank of England, (1913) 1 Ch. 57; 82 I.J., Ch. 124.
175 Att. General v. Wilt’s United Dairy Co., (1922) 91 L.J. (K.B.) 897 (H.L.) 37 T.L.R. 884; 127
L.T. 822.
176 According to Art.l, Section 8(1) of The Constitution of U.S.A., “The Congress shall have
power to lay and collect taxes, duties, imposts and excises....”.
177 Balaji v. I.T.O., A.l.R. 1962 S.C. 123 (128); Kunnathat v. State of Kerala, A.l.R. 1961 S.C.
552; Poona Municipality v. Dattaraya, A.l.R. 1965 S.C. 555.
178 Ghulam v. Rajasthan, A.l.R. 1963 S.C. 479 (484); Bharat Kala Bhandar v. Dhamangoan
Municipality, A.l.R. 1966 S.C. 249 (262).
179 Gopal v. State of U.P., A.l.R. 1964 S.C. 370.
180 Amalgamated Coalfields v. Janapada Savha, A.l.R. 1961 S.C. 964 (965); Jagannath v. State
of U.P., A.l.R. 1962 S.C. 1563 (1570-72).
181 Express Newspapers v. Union of India, A.l.R. 1958 S.C. 578 (614).
182 Yasin v. Town Area Committee, 1952 S.C.R. 572.
183 Sainik Motors v. State of Rajasthan, A.l.R. 1961 S.C. 1480 (1485); Atiabari Tea Co. v. State
of Assam, A.l.R. 1961 S.C. 232 (248-49; 256).
141
authorised by such valid law.184 'Law’ in this context means an Act of the
Legislature and cannot comprise an executive order, or a rule without express
statutory authority. Art. 265 embodies the principle of ‘no taxation without
representation’. An executive order, or executive instruction or custom,
thus, cannot justify an imposition. But it would include an order of the ex-Ruler
of an Indian State which had the force of law.
Tax
This word, as used in the present article, includes any ‘impost’-general or

special or local [Art. 376(28)]. In Muhammadbhai Khudabux Chhipa v. State
of Gujarat it held that it would, thus, include not only ‘taxes’ but also duties,
cesses or fees.188 It is clear, therefore, that even a duty, cess or fee cannot be
levied without specific statutory authority. A tax is a charge levied upon a
person or property for the support of Government, or for a public purpose,
namely, to raise the general revenue. It is a demand of sovereignty and is thus
distinguished from a toll which is found on proprietorship. From this standpoint,
taxation is the taking of private property for public use under conditions
determined by law. In R. v. Barger,190 the Australian High Court explained as,
“The primary meaning of taxation is raising money for the purposes of
government by means of contributions from individual persons.”
According to Cooley,191 “Taxes are burdens or charges imposed by

legislative power upon persons or property to raise money for public purposes.”
According to Supreme Court of India in Commissioner, H.R.E. v.
Lakshmindra,192 “A tax is a compulsory exaction of money by public authority
for public purposes enforceable by law and is not payment for services
rendered.” A tax is compulsory levy,193 which is enforceable by law, leaving no
84 State of Mysore v. Cowasji, (1970) 3 S.C.C. 710 (715).

185 Ghulam v. Rajasthan, A.I.R. 1963 S.C. 479 (484).
186 Mehra v. State of Maharashtra, A.I.R. 1971 S.C. 1130 (1131).
187 State of Kerala v. Joseph, A.I.R. 1958 S.C. 296.
188 AIR 1962, S.C. 1517.
189 Sakti Ousadhalaya v. Union of India, AIR 1953 S.C. 622; H.C. & P. Works v. State of A.P.,
AIR 1964 S.C. 1870.
190 (1908) 6 C.L.R. 38(48).
191 Constitutional Limitations, 7th Ed., p. 678.
192 AIR 1954 S.C. 282.
193 D.D. Basu, Commentary on the Constitution of India, “L”, 1986, 224.
142
option to the person but to pay.i94 Once the test of a compulsory exaction is
satisfied, Government cannot imposed it without legislative authority by
resorting to some device, e.g. an agreement with the person who is obliged to
pay the compulsive demand, or by means of inducement or threat, without
providing some services which the State was not bound under the law to provide
without extra payment, e.g. special police protection.195 The special
characteristics of a tax have already been explained. An imposition is a tax only
if it has all of the following attributes;
(a) It is a compulsory exaction of money by a public authority and

enforceable by law.
(b) It is an imposition made for a public purpose, without reference to

any services rendered by the State or any specific benefit to be conferred upon
the tax-payer.
(c) The object of the levy is to raise the general revenue and, hence, when
the tax is collected, it forms part of the general revenues of the State.
If any of the above characteristics is absent, it is not a tax though it may

be a cess or a fee. On the other hand, if the characteristics are present, the
imposition is a ‘tax’ no matter by what nomenclature the Legislature seeks to
label it. Thus, ‘Assessment’ or ‘land revenue’ is taxation, being a compulsory
exaction of a share of the produce of the land by the Sate in exercise of its
sovereign powers, for purposes of the general revenue.196
Duties:
Duties, broadly speaking, are levies other that direct taxes.197 A direct tax
is on which is demanded from the very person who it is intended or desired
should pay it. Indirect taxes are those which are demanded from one person in
the expectation and intention that he shall indemnify himself at the expense of
another.198 A duty, in short, is a tax levied on a commodity. “Taxes on
194 A.G.N.S.W. v. Homebush Mills, (1937) 56 C.L.R. 390 (413).

195 D.D. Basu, op. cit. n. 185.
196 Commissioner, H.R.E. v. Lakshmindra, AIR 1954 S.C. 282.
197 D.D. Basu, op. cit. n. 185.
198 Indian Express v. Union of India, (1985) 1 S.C.C. 94.
143
commodities are either on production within the country or on importation into
it, or on conveyance or sale within it; and are classed respectively as excise,
customs or tolls and transit duties.”199
Cesses:
This word was used in item 49 of List II of the Government of India Act,
1935. But the word has been replaced by the word ‘taxes’ in the corresponding
Entry 52 of List II of the 7th Schedule of the Constitution. Generally speaking, a
cess is a tax imposed for some specific purpose, with reference to some goods.
Thus, in item 49 of List II of the Government of India Act, 1935, a tax on the
entry of goods into a local area for the purposes of sale or consumption was
referred to as a ‘cess’.200 A cess is a tax confined to a local area for a specific
object or a particular purpose. It is a form of taxation and the word ‘tax’, used in
its generic sense in Arts. 265- 66, includes a cess. Since draftsman often use the
terms ‘tax’ and ‘cess’ rather indiscriminately, the validity of an imposition is to
be determined with reference, to its nature and not whether it is labelled as a
‘tax’ or a ‘cess’. A cess being a tax and not a fee, no quid pro quo between a
service rendered and the levy is necessary to maintain its validity. Even though
the proceeds of a cess go to a local fund, if the levy is not in respect of any
particular service rendered it is a tax. In Jarao Sugar Mills v. State of
M.P. the Supreme Court held that, Parliament is competent to levy a cess m
exercise of its residuary power under Entry 97 of List I.
Fees:
A fee is a payment levied by the State in respect of services performed

by it for the benefit of the individual.204 It is levied on a principle just opposite to
that of a tax. While a tax is paid for the common benefits conferred by the
Government on all tax-payers, a fee is a payment made for some special benefit
199 Ibid., p. 102.

200 D.D. Basu, op. cit. n. 185.
201 Ibid.
202 IU, ,
2Uj AIR 1966 S.C. 416.
204 D.D. Basu, op. cit. n. 185.
144
enjoyed by the payer and the payment is usually proportional to the special
benefit.205
Fines:
Fines, like taxes, are compulsory contributions levied by public

authorities; but unlike taxes their object is not to obtain revenue, but mainly to
deter people from doing certain acts. In fact, the revenue from fines should fall,
if they succeed in their object.206 In some cases, it is for the default in payment
of an existing tax that a fine or penalty is imposed by the statute 207
Legislative power to tax
In India, the Constitution distinguished taxing power from the general

legislative power relating to a subject. The entries in the Legislative List in the
7th Schedule are divided into two groups: one relating to the power to1 tax and the
other relating to the power of general legislation relating to specified subjects.

Taxation is considered as a distinct matter for purposes of legislative
competence . Hence the power to tax cannot be deduced from a general
legislative Entry as an ancillary power.209 Thus, the power to legislate on inter
state trade and commerce under Entry 42 of List I does not include a power to
impose tax on sales in the course of such trade and commerce, nor can the power
to tax intoxicating liquors be derived from the general legislative power relating
to ‘intoxicating liquors’ in Entry 8 of List II. There is no Entry as to tax, in the
Concurrent List it only contains an Entry relating to levy of fees in respect of
matters specified in List III other than court-fees. It follows therefore that it is
not competent for Parliament to intrude upon the exclusive power of a State
Legislature to levy a tax on the sale or purchase of goods, by making a law under
91 1
Entry 33 of List III. In short, taxing power can be derived only from a specific
taxing Entry in the appropriate List in the 7th Schedule. Such power is
203 Commissioner, H.R.E. v. Lakshmindra, AIR 1954 S.C. 282; Jagannath v. State of Orissa
(1954) S.C.R. 1046.
206 D.D. Basil, Commentary on the Constitution of India, “L”, 1986,224.
207 Moore v. Commonwealth, (1951) 82 C.L.R. 547 (578).
208 Hoechst v. State of Bihar, AIR 1983 S.C. 1019.
209 Sundraramier v. State of A.P. AIR 1958 S.C. 468.
210 State of Mysore v. Cawasji, AIR 1971 S.C. 152.
211 Ibid., para. 81.
145
determined by the nature of the tax and not the measure or machinery set up by
the statute.212
Constitutional limitations upon the taxing power
Apart from the limitation imposed by the division of the taxing power
between the Union and State Legislatures by the relevant Entries in the
legislative Lists, the taxing power of either Legislature is particularly subject to
the following limitations imposed by particular provisions of our Constitution.213
(a) It must not contravene Art. 13.
(b) It must not deny equal protection of the laws Art. 14
(c) It must not constitute an unreasonable restriction upon the right of

business Art. 19 (1) (g).
(d) No tax shall be levied the proceeds of which are specially

appropriated in payment of expenses for the promotion or maintenance of any
particular religion or religious denomination Art. 27.
(e) A State Legislature or any authority within the State cannot tax the
property of the Union Art. 285.
(f) The Union cannot tax the property and income of the State Art. 289.
(g) The power of a State to levy tax on sale or purchase of goods is

subject to Art. 286.
(h) Save in so far as Parliament may, by law, otherwise provide, a State

shall not tax the consumption or sale of electricity in the cases specified in Art.
287 214
212 Union of India v. Bombay Tyre, (1984) 1 S.C.C. 1467.

213 D.D. Basu, Shorter Constitution of India, 2006, 1203.
214 Kunnathat Thathunni Moopil Nair v. State of Kerala, AIR 1961 S.C. 552; State of Kerala v.
Kutty Naha, Haji K. Haji K., AIR 1969 S.C. 378; Ayurveda Pharmacy v. State of T.N., AIR
1989 S.C. 1230; Regional Transport Officer-Cum-Taxing Authority, Rourkela v. Steel Authority
of India, AIR 1996 S.C. 536; Chandrakant Krishnarao Pradhan v. Jasjit Singh, AIR 1962 S.C.
204.
146
Levied
The words ‘levy and collection’ are used in this article in a

comprehensive sense and are intended to include the entire process of taxation
commencing from taxing statute to the taking away of the money from the
pocket of the citizen.215 What the article enjoins is that every stage in this entire
process must be authorised by the law.216 The increase of an existing duty
constitutes the ‘levy’ of an impost and must equally be made under the authority
of law in the manner prescribed by it. But no enhancement of a tax is involved
where the substitution of one coinage is made by another coinage of equivalent
value. After a rule has been declared ultra vires, it can no longer be invoked as
91 7
authority for the levy or collection of a tax.
No bar against double taxation.
In Avinder v. State of Punjab, the Supreme Court held that where more
than one legislative authority, such as the State Legislature and a local or
municipal body, possess the power to levy a tax, there is nothing in the
Constitution to prevent the same person or object being subjected to both the
State and municipal taxation; or the same legislature exercising its power twice,
91R
subject to constitutional limitations, if any.
No bar against being retrospective
Under our Constitution, the legislatures can legislate retrospectively

except in the matter of criminal laws; [Article 20(1)] and taxing laws are no
exception to this power. Where a Legislature has the power to levy a tax, it
may, with retrospective effect, validate an illegal assessment of such tax made
by the executive, without proper legislative sanction, even though such law
might have another object too.220 But it cannot give retrospective operation to a
5 D.D. Basu, op. cit. n. 205.

216 Subba Rao A. Venkata v. State of A.P. AIR 1965 S.C. 1773.
217 Rajamony Amma, M v. C.I.T., (1993) Supp. (1) S.C.C. 604; State of Haryana v. Santlal
(1993) 4 S.C.C. 380; State of Kerala v. Joseph, P.J., AIR 1958 S.C. 296; Manglore Ganesh Beedi
Works v. State of Mysore, AIR 1963 S.C. 588.
218 AIR 1979 S.C. 321; Radhakishan Rathi v. Additional Collector, Drug AIR 1995 S.C. 1540.
219 Muhammadbhai Khudabux Chhipa v. State of Gujarat, AIR 1962 S.C. 1517; P. Kannadasan
v. State of T.N., AIR 1996 S.C. 2560.
220 Sat Pal & Co. v. Lt. Governor Delhi, AIR 1979 S.C. 1550.
147
tax in respect of an area over which it had no territorial jurisdiction during the
period of the retrospective operation. Mere retroactivity does not render a taxing
law an unreasonable restriction upon a right guaranteed by Art. 19 (1) (g),
though, of course, it is a relevant consideration in determining the
reasonableness of such law.221 It was upheld by the Court that it would not be an
encroachment by the Legislature on the powers of the Judiciary if, after making
a tax retrospective, it is made to cover taxes already levied, providing that the
levy of such taxes would be valid as if law, as amended, was in force at the time
of levy of the tax. But if, without changing the basis of the decisions of the
Court, the Legislature directly commands the Executive or other taxing authority
to assess or refuse a refund despite the orders of the Court to the contrary, such
law would be unconstitutional, being a direct inroad upon judicial powers.
Imposition of Fees
Entry 96 of List I, Entry 66 of List II and Entry 47 of List III provides for
fees.
96. Fees in respect of any of the matters in the Union List, but not including
fees taken in any court, except the Supreme Court.
Fees taken in the Supreme Court is a central subject under entry 77, List
I. fees taken in all Courts other than the Supreme Court is included in Entry 3 of
List II. But if the tribunal or authority in relation to which the fee is taken be not
a ‘court’ and the matter is included in any Entry of List I, it is within the
competence of Parliament to levy a fee. Thus, Parliament may impose a fee for
appeal to the Appellate Tribunal under the Income-tax Act, for the Appellate
Tribunal is not a ‘Court’ and taxation of non-agricultural income is enumerated
in Entry 82 of List I.223
221 Asst. Commr. v. B. & C. Co., AIR 1970 S.C. 169; Ram Chandra Kailash Kumar & Co. v.
State of U.P. AIR 1980 S.C. 1124; B.K. Industries v. Union of India, AIR 1993 S.C 2123.
222 Govt of A.P. v. H.M.T., AIR 1975 S.C. 2037; Tirath Ram Rajindra Nath v. State of U.P., AIR
1973 S.C. 405; Municipal Corpl. of the City of Ahmadabad v. New Shrock S. & W. Co. Ltd.,
AIR 1970 S.C. 1292; State ofT.N. v. Rayappa Gaunder, M., AIR 1971 S.C. 231.
148
taken in any court.
This Entry gives power to the State Legislature to levy fees in most
general terms in all matters which are within its legislative field. If the
conditions of a ‘fee’ are satisfied under Art. 277, the nomenclature given by the
Legislature is immaterial. Thus, a cess imposed by a State Legislature for the
purpose of controlling sugar or a cess levied upon owners of mines in a notified
area to render specific services to such owners by developing the notified area,
can be treated as a fee under this Entry; or a fee for keeping stalls in a market
(Entry 28), or a water tax to be imposed by a municipality (Entry 5).224
But in order to come under this Entry, the imposition must be a fee for
services rendered by the State relating to any of the subjects included in this List.
Thus, if a Municipality maintains a burial ground, (Entry 10, List II), it can levy
a fees for every person buried in that burial ground, if a State Government
maintains an establishment for the inspection of factories, it may levy a fee on
factories by way of realizing the expenses involved. But a ‘fee’ cannot be
justified with reference to the general purposes of ‘local’ government. ■ The
power to levy a fee under the present Entry is dependent upon the State
Legislature’s power to legislate with respect to independent subject matter in the
State List. If, for any reason, e.g. a declaration by Parliament under Entry 54 of
List I, the State Legislature loses its power over that subject matter, it loses the
power to impose a cess in relation to that subject matter. An imposition
purported to be made under the present Entry cannot be valid, if it lacks any of
the two characteristics of a ‘fee’ viz-—
(a) The authority levying the fee must render some service for the fee
levied, however remote that service may be. An imposition cannot be justified
under this Entry when the authority fails to show that any services are being
rendered which have a proximate relationship with the imposition.
(b) The fees realized must be spent for the purposes of the imposition and
should not form part of the general revenues of the State.
224 Hingir-Rampur Coal Co. v. State of Orissa, AIR 1961 S.C. 459.
149
taken in any court.
According to Supreme Court, this Entry would authorize the imposition

of the following fees,
(a) A fee for licensing of factories Entry 36.

(b) A fee or contribution for regulation religious and charitable
institutions Entry 28.
A levy which was in the nature of a tax may be converted retrospectively
into a fee, under the present Entry, by denuding the levy of those characteristics
which went to make it a tax e.g. by creation a separate fund. But the present
Entry would not authorize a State Legislature to levy a ‘tax’ on a factory, as
distinguished from a tax on a land or building occupied by a factory Entry 49
List II.225
Difference between ‘tax’ and ‘fee’
There is no generic difference between tax and fee. Both are compulsory
exactions of money by public authorities. The Constitution recognises a clear
distinction between a tax and a fee in the three Lists in the Seventh Schedule.
While there are several entries in the Union and State Lists with regard to
various forms of taxes, there is an entry at the end of each List as regards fees
which may be levied in respect of or as incidental to the matter that is included
in that List. The implication seems to be that fees have special reference to
governmental action undertaken in respect of any of these matters. Thus, though
a fee may be levied as incidental to legislation with respect to any entry, no taxes
can be imposed by virtue of the general legislative power.
Article 265 applies to taxes and not to be fee. The distinction between tax
and fee lies primarily in the fact that tax is levied as part of a common burden,
while fee is a payment for a special benefit or privilege. If the element of
revenue for the general purposes of the State predominates, the levy becomes a
tax. In regard to fee there is a correlation between the fee collected and the
225 Ratilal Panachand Gandhi v. State of Bombay AIR 1954 S.C. 388; Sudhindra Thiratha
Swamiar, H.H. v. H.R.E.Commr., AIR 1963 S.C. 966; Govt of A.P. v. H.M.T., AIR 1975 S.C.
2037.
150
service. intended to be rendered. In the case of a fee it is the special benefit or
privilege accruing to an individual which is the reason for payment, whereas in
the case of a tax the particular advantage, if it exists at all, is an incidental result
of State action. Cases may arise where under the guise of levying a fee, an
attempt may be made to impose a tax. In the case of such a colourable exercise
of power, courts would have to scrutinise the scheme of the levy very carefully,
an determine whether in fact there is correlation between the service and the levy
or whether the levy is excessive to such an extent as to be a pretence of a fee and
not a fee in reality. Whether or not a particular cess levied by a statute amounts
to a fee or tax would always be a question of fact to be determined in
circumstances of each case.
Though both a tax and a fee are compulsory exactions, enforceable by

law, there is an important distinction between the two; while a tax is levied as
part of a common burden, a fee is for payment of a specific benefit or privilege.
If the element of revenue predominates, the levy becomes a tax. On the other
hand, if the primary and essential purpose is to render specific services to a
specified area or class, it is a fee even though the State may ultimately or
indirectly be benefited by it. The distinction between a ‘tax’ and a ‘fee’ is of
particular importance under our Constitution in connection with the question of
vires inasmuch as the power to levy different kinds of impositions has been
distributed by the various Entries in three Legislative Lists, specifically, so that
the validity of the imposition made by a particular Legislature has to be
determined with reference to those Entries. Now, taxes are specifically divided
between Lists I and II and the residuary power to levy a tax other that those
enumerated in any of the Lists is given to Parliament, by Entry 97 of List I. Fees
are, however, not mentioned specifically. There is a general Entry towards the
end of each List which empowers the Legislature to levy a ‘fee’ in respect of any
mater over which it has legislative power according to the relevant List.
The result is that each Legislature has the power to levy a fee which is
co-extensive with its power to legislate with respect to substantive matters and
that either Legislature may, while making a law relating to a subject-matter
within its competence, levy a fee with reference to the services that would be
rendered by the State under such law. It follows, accordingly, that whenever the
151
question of the legislative competence or validity of an imposition is raised, the
Court has to enquire into its real nature, according to the tests discussed above.
Thus, even though an imposition is labelled as a fee, if it appears to the Court
that it is not a ‘fee’ but a ‘tax’, the next question to be determined is whether the
power to levy such specific tax has been assigned to that Legislature by the
Entries in the Lists over which its power extends; if not, the Court must declare
the imposition as ultra vires. It would appear from the above that the scope for
levying fees is much broader than that for levy of taxes. Whereas a tax is to be
confined to the few specific tax entries in each list, a fee can be levied in respect
of all the entries - tax or non tax in the three lists by the concerned legislature.
The first important incident of the difference between ‘tax’ and ‘fee’ is that
whereas no tax can be levied outside the tax entries, fees can be levied in respect
of a non-tax entry as well. As for example, a state levy on public trusts is invalid
as a ‘tax’ as there is no such tax entry, but it is valid as a ‘fee’ under entry 47 of
List III. A fee may be levied even under a law relating to the imposition of a tax,
e.g., licence fee charged from dealers under the Sales Tax Acts.
Another significant difference between “fee” and “tax” is that Arts. 110
(2) and 199 (2) which deal with ‘Money Bills’ lay down expressly that a Bill
will not be deemed to be a ‘Money Bill’ by reason only that it provides for the
imposition of fines, or the demand or ‘payment of fees’ for licences, or ‘fees for
services rendered’, whereas a Bill dealing with imposition or regulation of a tax
will always be regarded as a Money Bill. These provisions should, however, be
read as excluding from the category of Money Bills not every ‘licence fee’ but
only such as does not amount to a ‘tax’. In some situations, a tax can be
collected in the form of a licence fee and this could not be exempted from the
definition of a Money Bill. The use of the term ‘licence fee’ in a statute is not
decisive of the nature of the levy in question. A payment would be a fee if it
fulfils the following two elements:
1. It must be levied in consideration of certain services rendered to the

individuals by some governmental agency; and
152
2. Payments demanded for rendering such services should be kept apart, or
specifically appropriated for that purpose, and not merged in the general revenue
to be spent for general purposes.
The distinction between ‘fee’ and ‘tax’ has been elaborated by the
Supreme Court in many cases. Describing the nature of fee, the Supreme Court
said in P.M. Ashathanarayaana Setty v. State of Maharashtra:226
“A fee is ... a charge for the special service rendered to a class of citizens
by government or governmental agencies and is generally based on the expenses
incurred in rendering the services”.
The characteristics of the imposition of taxation are: firstly, the essence

of taxation is compulsion, that is to say, it is imposed under statutory power
without the taxpayers consent and the payment is enforced by law. Secondly,
taxation is an imposition made for a public purpose without reference to any
special benefit to be conferred on the payer of the tax. The tax once collected
forms part of the public revenues of the State, and there is no element of quid
pro quo between the taxpayer and the public authority. Taxation is for a public
purpose even if particular persons receive more benefit from the use of tax
proceeds than others, such as tariff duties for encouragement of manufacturers or
licence fee with a view to regulate a particular trade or industry. Thirdly,
taxation is a part of the common burden, the quantum of imposition upon the
taxpayer depends generally upon his capacity to pay. A fee is generally regarded
to be a charge for a special service rendered to individuals by some government
agency. Thus, in determining whether a levy is a fee the true test must be
whether it’s primary and essential purpose is to render specific services to a
specified area or class, it may be of no consequence that the State may ultimately
and indirectly be benefitted by it. The power of any legislature to levy a fee is
conditioned by the fact that it must be by and large a quid pro quo for the
services rendered. However, correlationship between the levy and the services
rendered is one of general character and not as of arithmetical exactitude. The
quid pro quo need not be simultaneous, it may be deferred also. The words
‘licence fee’ do not necessarily mean a fee in return for the services rendered. In
226 A.I.R. 1989 S.C. 111.
153
the Constitution, fee for licence and fee for services rendered are contemplated
as different kinds of levy. In City Corporation of Calicut v. Thachambalath
Sadasivam the Court observed:
“The traditional concept of quid pro quo in a fee is undergoing

transformation. Though the fee must have relation to the services rendered, or
the advantages conferred, it is not necessary to establish that those who pay the
fee must receive direct or special benefit or advantage of the services rendered
for which the fee is being paid. If one who is liable to pay receives general
benefit from the authority levying the fee the element of service required for
collecting fee is satisfied.”
Thus a licence fee can also be regulatory when the activity for which a
licence is given requires to be regulated or controlled. In Jagannath Ramanuj
Das v. State of Orissa, one of the essential elements of fee as made out was its
being set apart or specifically appropriated for the rendering of services, and not
merged in the general revenue of the State to be spent for general public
purposes. But later, in Secretary, Government of Madras, Home deptt v.
Zenith Lamp & Electrical Ltd, the Supreme Court ruled that the Constitution
did not contemplate it to be an essential element of fee that it be credited to a
separate fund and not to the Consolidated Fund.
Review
Indian Constitution is the longest written Constitution in the world. It

establishes a dual polity, a system of double government with the Union
Government at the Centre and the State Governments at the state level. There is
a division of powers between the Union Government and the State
Governments. Each level of Government is supreme in its own sphere.
In Indian Constitution, the scheme of allocation of taxing power framed

in such a way as the Centre has been given adequate resources so as to make it
able to meet its high functions of defence etc. The taxing agency i.e. Centre or
State may levy and collect what tax from the point of view of administrative
convenience, efficiency and effectiveness. In other words an attempt has been
made for the convenience of tax collection. Therefore taxes having a national
154
base have been entrusted to the Centre and taxes having a localised base have
been entrusted to the State. Taxes which are uniform in nature throughout the
country have been allotted to the Centre e.g. stamp duties on negotiable
instruments, taxes on transactions in stock exchanges. Taxes of the same tax
base or which are not localised but extends beyond the confines of one State or
where aggregation may be necessary for purposes of levy of tax on a progressive
basis, have been given to the Centre, for example income-tax can be collected
easily on an all-India basis because a person may carry on business in several
States and derive income there from. Similarly, customs duties may be collected
most effectively by the Centre at the ports; the estate duty may be levied
effectively by the Centre as a person may die leaving behind property in several
States.
In order to keep the economic development in the country the taxes

which have a close relationship with national economy and which, if allotted to
the State may hinder economic development or may interfere with the movement
of inter-State trade or commerce or development of a common market in India,
have been allotted to the Centre e.g. excise duties or tax on inter-State sales.
Thus, only taxes of a local nature have given to the States. An attempt has been
made who avoid the complexities of overlapping and multiple taxation such as
have arisen in other federations. Most of these problems arise because the Centre
and the States have a large concurrent taxing area and simultaneously levy many
taxes of the same kind on the same tax-base. It is the unique feature of the Indian
Constitution that it provides for complete separation of taxing power between
the Centre and State. The result of this separation is that a tax leviable by the
Centre is not leviable by the States. Similarly the Centre and the States cannot
simultaneously levy a similar tax on the same base. This has avoided the
conflicts between the Centre and the States resulting in overlapping taxation.
Also, taxes having as their tax-base, transactions or interests which are not
localised in one State but have nexus with more than one State, like income-tax
on non-agricultural income or corporation tax or succession duty on non-
agricultural property, have been given to the Centre and this has avoided
multiple taxation of the same base by several governments.
155
The scheme of allocation of taxing powers between the Centre and the
States is successful in India in avoiding the inter-State and Centre-State
competition for taxation and conflicts of jurisdiction which other federal
countries are faced with. It was a noble step on the part of the Constitution-
Framers, because the underdeveloped economy of the country could ill-afford
the luxury of inter-governmental conflicts for taxation as the taxing capacity of
the people is very limited and they form the least potential tax paying
community in the world. Multiple taxation places unduly high burdens on
private enterprise and creates a lack of uniformity and efficiency in the tax
burdens from State to State. Inter-State competition for revenue leads to
litigation and administrative difficulties, raising costs of tax compliance and tax
collection. The possibility of inter-State migration of wealth and industry comes
into existence. The makers of the Indian Constitution have avoided most of these
problems by fairly and reasonably distributing the taxing powers between the
Centre and the States.
156

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CHAPTER-4

Allocation of Taxing Powers

Just as the legislative and executive powers have to be divided as

“It is...a necessary that the State governments should be able to

In practice, however, the above two principles of an ideal distribution

1 Wheare, Federal Government, 1953, p.96.

The entries in the three lists cannot be claimed to be scientifically perfect

“The cardinal rule of interpretation is that the entries in the legislation

Thus, power to legislative includes power to legislative retrospectively as

Central taxes are those taxes levied exclusively by Central Government

82. Taxes on income other than agricultural income

In Navinchandra Mafatlal v. Commissioner of Income Tax,20

83. Duties of customs including Export Duties

A duty of customs being a tax on the act of importation or exportation.

0 Sakti Ousadhalaya v. Union of India. AIR 1963 S.C. 622 (623).

An ayurvedic medicine “Mritsanjibini”, is a medicinal preparation

85. Corporation Tax

A ‘corporation tax’ is a tax on income payable by companies, in case of

(1) it is not chargeable in respect of agricultural income;

or refundable to, such individuals.

87. Estate duty in respect of property other than agricultural land

“Estate duty” means a duty to be assessed on or by reference to the

88. Duties in respect of succession of property other than agricultural land

89. Terminal taxes on goods or passengers carried by railway, sea or air;

A terminal tax can therefore be levied only by the Corporation or the

47 International Tourist Corpn. v. State of Haryana . AIR 1981 S.C. 774.

91. Rates of stamp duty in respect of bills of exchange, cheques, promissory

92. Taxes on the sale or purchase of newspapers and on advertisements

Taxes on sale of goods and on advertisements are included in Entries 54-

92-B Taxes on the consignment of goods (whether the consignment is to the

92-C. Taxes on services

This Entry has been inserted by the Constitution (Eighty-eighth

According to entry 77, List I, Fees taken in the Supreme Court is a

53 M.P. Jain, op. cit. n.

97. Any other tax not enumerated in Lists II and III

This is known as ‘residuary taxes’. This topic is discussed later.

The State Legislature is competent, under this Entry, to assess land

55 D.D. Basu, Shorter Constitution of India. 2006.

46. Taxes on Agricultural Income

In Commissioner of Income-tax, West Bengal v. Raja Benoy Kumar

47. Duties in respect of Succession to Agricultural Land.

59 Art. 366 (1).

48. Estate duty in respect of agricultural land.

“Estate duty” means a duty to be assessed on or by reference to the

49. Taxes on lands and buildings.

63 In the matter of Duty on Non-agricultural Property, AIR 1944 F.C. 73.

There is a clear distinction between tax directly on land and tax on

The Supreme Court has explained the scope of entry 49 in Union of

(1) It must be a tax on units that is lands and buildings separately as

50. Taxes on mineral rights subject to any limitations imposed by

A tax on mineral rights would ordinarily refer to tax on the extraction of

According to Supreme Court in Murthy H.R.S. v. Collector of

The constitution distributes the power to levy excise duties on alcoholic

This Entry gives power to the State Legislature—

goods manufactured elsewhere in India.

The essential features of the present tax are—■

(a) The entry of goods into a definite local area;

81 Kalyani Stores v. State of Orissa, AIR 1966 S.C. 1686.