STATE OF KARNATAKA VS STATE OF MEGHALAYA

STATE OF KARNATAKA VS STATE OF MEGHALAYA - Supreme Court Case

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.10466-10476 OF 2011

STATE OF KARNATAKA & ANR. ETC. APPELLANT(S)

VERSUS

STATE OF MEGHALAYA & ANR. ETC. RESPONDENT(S)

WITH

CIVIL APPEAL NOS.101-102 OF 2012

CIVIL APPEAL NO.911 OF 2021

CIVIL APPEAL NOS.869-870 OF 2022

CIVIL APPEAL NO.871 OF 2022

J U D G M E N T

NAGARATHNA J.

INDEX

1. Bird’s Eye View of Controversy …………………………….……..4

2. Submissions …………………………………………………………….5

2.1. Submissions on behalf of Appellants:

2.1.1. Submissions on behalf of State of Karnataka….5

2.1.2. Submissions on behalf of State of Kerala……….9

2.2. Submissions on behalf of Respondents :

2.2.1. Submissions on behalf of State of Nagaland ……11

2.2.2. Submissions on behalf of State of Sikkim ………22

2.2.3. Submissions on behalf of State of Meghalaya…26

3. Reply Arguments…………………………………………………….29

4. Points for Consideration…………………………………..……...34

5. Constitutional Scheme………………………………………….…35

6. Acts under consideration :

6.1. The Lotteries (Regulation) Act, 1998…….………..62

6.2. The Karnataka Tax on Lotteries Act, 2004……….64

6.3. Kerala Tax on Paper Lotteries Act, 2005…………..67

7. Parameters of Taxation……………………………………………..69

8. Meaning of ‘betting and gambling’ and ‘lotteries’ …………73

9. Discussion……………………………………………………………..100

10. Summary of Conclusions………………………………………….119

These appeals have been preferred by the States of

Karnataka, Kerala and others being aggrieved by the judgments

passed by the Division Benches of the High Courts of the

respective States. The Division Bench of the High Court of

Karnataka vide impugned judgments dated 27th December, 2010

and 7th March, 2011 held that the Karnataka Legislature had no

legislative competence to pass the Karnataka Tax on Lotteries Act,

2004 (hereinafter referred to as, “Karnataka Act, 2004”) and,

consequently, directed the amounts deposited by the

respondents-States who had organised the lottery schemes to be

refunded to them within four months from the date of receipt of

the copy of the impugned judgment.

2. Similarly, the Division Bench of the High Court of Kerala by the

impugned judgments dated 30th April, 2020, 9th August, 2021 and

10th August, 2021, held that the Kerala legislature had no

legislative competence to enact the Kerala Tax on Paper Lotteries,

Act, 2005 (hereinafter referred to as, “Kerala Act, 2005”) and

declared it as unconstitutional and invalid. Liberty was reserved

to the respondents-States to seek refund of the tax already

collected by the State of the Kerala under the said Act on

producing proper account and proof and a direction was issued to

the State of Kerala to pass appropriate orders making refund of

the amounts due based on evaluation of such proof, without any

delay.

3. Being aggrieved, the States of Karnataka, Kerala and others are

in appeal before this Court. The respondents herein are the States

of Nagaland, Arunachal Pradesh, Meghalaya, Sikkim, and others

who are the organisers of the lotteries as well as promoters, inter

alia, in the States of Karnataka and Kerala.

Bird’s eye view of the controversy:

4. The controversy in these cases is regarding the interpretation

to be given to the expression ‘betting and gambling’ in Entries 34

and 62 of List II of the Seventh Schedule of the Constitution of

India. Further, whether the ‘lotteries organised by the Government

of India or Government of a State’, which is a subject in Entry 40

of List I also encompasses the power to levy tax on the said

lotteries? Consequently, whether under Entry 62 of List II the

State Legislature is denuded of the power to levy tax on the said

subject? In other words, whether the subject covered in Entry 40

of List I restricts the scope and ambit of Entries 34 and 62 of List

II? If the answer is in the affirmative, whether the State

Legislatures have no legislative competence to levy tax on lotteries

organised by the Government of India or Government of a State.

Consequently, the question in these cases is, whether, the

legislature of States of Karnataka and Kerala had the legislative

competence to enact Karnataka Act, 2004 and Kerala Act, 2005

respectively. Further, whether these Acts are unconstitutional as

being extra territorial in operation?

Submissions on behalf of Appellants:

Submissions on behalf of State of Karnataka:

5. Sri N. Venkataraman, learned Senior Counsel and Additional

Solicitor General appearing on behalf of the appellant-State of

Karnataka contended that the impugned legislation passed by the

Karnataka State Legislature does not seek to impose a tax on the

sale of lottery tickets. He referred to the following two cases in

support of his contention: (i) Sunrise Associates vs. Govt. of

NCT of Delhi – [(2006) 5 SCC 603] wherein it was held that

lottery tickets are only actionable claims and not goods or services

and cannot be taxed invoking Entry 54 of List II and; (ii) Skill

Lotto Solutions Pvt. Ltd. vs. Union of India – [2020 SCC

Online SC 990] wherein it was held that under the new Central

Goods and Services Tax (CGST) regime, post 1st July, 2017,

actionable claims are brought under the tax network of Goods and

Services Tax (GST).

6. Learned Senior Counsel submitted that the tax under question,

is neither a tax on sale of lottery tickets nor on lotteries as

actionable claims and any reference to Entry 54 of List II will be

of no avail as tax on lotteries is not a sales tax or Value Added Tax

(VAT) or GST. He contended that the tax under question is a tax

on gambling traceable to Entry 62 of List II which, inter alia, deals

with tax on betting and gambling. It was contended that the

Karnataka Tax on Lotteries Act, 2004 was passed in pursuance of

the power under the aforesaid entry and the Karnataka State

Legislature had the legislative competence to pass such a

legislation.

7. Elaborating further, it was pointed out that Entry 40 of List I is

only a ‘regulatory entry’ and the Lotteries (Regulation) Act, 1998

(hereinafter referred to as “Lotteries Act, 1998”) was enacted by

the Parliament in light of the same. That said Act deals with only

‘regulation’ and not with ‘taxation’ owing to the jurisdictional

incompetence of the Parliament in the area of taxation of State

lotteries. Entry 34 of List II is also a ‘regulatory entry’. The said

entry deals with betting and gambling, including lotteries that do

not fall under the ambit of Entry 40 of List I. To the contrary,

Entry 62 of List II is a specific taxing entry inter alia on gambling

and betting. Learned Senior Counsel submitted that the source of

taxation is Entry 62 of List II and not Entry 54 of List II and the

tax is not on sale or purchase of lottery tickets.

8. It was further contended that on a conjoint reading of Section

2(4) and Section 6 of the Karnataka Act, 2004 it would indicate

that the ‘charge’ or ‘tax’ is a tax on lotteries i.e., on the chance of

those persons participating in a lottery and the chance to win a

prize in a lottery, which comes within the nomenclature of

gambling. The measure of taxation, in case of a bumper draw is

Rs.1,50,000/- and in case of any other draw is Rs.1,00,000/-.

9. Learned Senior Counsel further referred to Paragraph 6 of

Govind Saran Ganga Saran vs. Commissioner of Sales Tax –

[AIR 1958 SC 1041] to state that when the source of taxation and

occurrence of taxable event, along with the measure are available

to tax a person, such a levy cannot be questioned.

10. Sri Venkataraman next urged that where a regulatory power

and taxing power are traceable to different sources and are kept

distinct under the Constitutional scheme, in such a case, the

regulatory entry cannot subsume a taxing entry as was held in

M.P.V Sundararamier and Co. vs. State of Andhra Pradesh –

[AIR 1958 SC 468] and State of West Bengal vs. Kesoram

Industries Limited – [(2004) 10 SCC 201]. He further relied

upon a Seven Judge Bench decision in Synthetics and

Chemicals Ltd. vs. State of Uttar Pradesh – [(1990) 1 SCC 109]

wherein it was held that the power to regulate, develop or control

would not include within its ken a power to levy tax or fee except

when the said impost is only for a regulatory purpose. That it is

permissible for the power to levy tax or fee for augmenting revenue

to continue to vest with the State Legislature despite the

regulatory power being with the Union. That ratio in synthetics

and chemicals (supra) was reiterated recently in Jalkal Vibhag

Nagar Nigam vs. Pradeshiya Industrial and Investment

Corporation – [2021 SCC Online SC 960] and had first been laid

down in RMDC vs. State of Mysore – [AIR 1962 SC 594].

11. Sri Venkatraman further contended that the tax imposed in

the instant case is not extra-territorial in its operation since the

tax is on the act of gambling in the State of Karnataka and when

more than one State is involved, the nexus theory test has to be

applied. Reliance was placed on State of Bombay vs. R.M.D.

Chamarbaugwala – [AIR 1957 SC 699], wherein the

requirement of fulfilling three principles, namely, real and not

illusory connection; liability sought to be imposed be pertinent to

that connection and the connection affecting merely the policy

and not validity of legislation, were stipulated. In such a case,

when there are participants from State of Karnataka in the act of

gambling, there is a real connection to the taxable event and the

levy under the impugned legislation is pertinent to that

connection although the lottery is organised by any other State in

the State of Karnataka.

12. It was further contended that lotteries are res extra

commercium i.e., outside the ambit of trade and commerce and

therefore, it will neither get protection under Art. 19(1)(g) relating

to trade, occupation, business or commerce nor the protection

under Article 301 dealing with inter-state trade, commerce and

business, even if the State happens to be the operator, as was

held in the cases of R.M.D. Chamarbaugwala (supra) and B.R.

Enterprises vs. State of Uttar Pradesh – [(1999) 9 SCC 700].

Submissions on behalf of State of Kerala:

13. Sri Pallav Shishodia, learned Senior Counsel appearing for the

appellant-State of Kerala, adopted the submissions made by

learned Senior Counsel for the State of Karnataka. He made the

following additional submissions:

He submitted that under the Kerala Act, 2005 and the Rules

made thereunder, the respondents were liable to pay the tax in

advance before any draw, under Section 10 thereof. The

respondents herein in fact filed a writ petition seeking a writ of

mandamus against the appellant-State of Kerala directing them

to accept advance tax. In addition, a companion petition was filed

challenging Section 10 of the aforesaid Act which was decided by

the learned Single Judge of the High Court of Kerala on 10th

January, 2007 and thereafter affirmed by the Division Bench on

30th March, 2007. The matter came up to this Court and vide

Order dated 16th July, 2014 the High Court’s finding was affirmed

in respect of accepting advance tax; however, it did not accept the

challenge to the aforesaid section.

14. Sri Shishodia, learned Senior Counsel, contended that

opportunity was granted to the respondents to prove that the

burden of tax paid during the period 2006-2010 was not passed

on to consumers/purchasers of lottery tickets. That the same is

contrary to law and was completely unwarranted in the present

case. In support of his argument, he fervently relied on Mafatlal

Industries Ltd. vs. Union of India - [(1997) 5 SCC 536] where

it was held that there is a rebuttable presumption that an indirect

tax borne by an assessee is passed on to consumers. Even when

challenge to constitutionality of a tax succeeds, the relief of refund

can be granted only when the assessee makes a claim to allege

and establish that as a fact, the burden of tax collected in the

interregnum was not passed on to consumers.

15. Lastly, Sri Shishodia, learned Senior Counsel, contended that

the tax period in the instant case is limited to the years 2006-

2010 whereafter lotteries of the State of Sikkim were discontinued

in the State of Kerala because large scale frauds were reported.

The said ban was made by the Central Government in exercise of

power under Section 6 of the Lotteries Act, 1998 which was

confirmed on 12th June, 2015 after an investigation by the CBI

and further enquiry. He urged that if the submission that the

State cannot tax lotteries at all is to be accepted by this Court,

then the same should be held prospectively to validate non-refund

of recoveries made of far. He drew our attention to Somaiya

Organics (India) Ltd. vs. State of Uttar Pradesh – [(2001) 5

SCC 519] wherein I.C. Golaknath vs. State of Punjab – [AIR

1967 SC 1643] and India Cement Ltd. vs. State of Tamil Nadu

– [(1990) 1 SCC 12] have been relied upon.

Submissions on behalf of Respondents:

Submissions on behalf of Nagaland:

16. Sri C. Aryama Sundaram, learned Senior Counsel appearing

on behalf of the State of Nagaland in Civil Appeal No.10467 of

2011 raised the following main contentions:

(i) Contentions pertaining to the legislative

competence, or the lack thereof, of the State of

Karnataka.

(ii) That the impugned Act, in effect seeks to impose

tax on the sale of lotteries.

(iii) That the impugned Act seeks to operate extraterritorially.

(iv) Contentions pertaining to the exigencies faced by

North-Eastern States in generating revenue.

17. Sri. C. Aryama Sundaram, learned Senior Counsel, supported

the judgment of the High Court of Karnataka and contended that

the State of Karnataka had no legislative competence to impose

tax on the lotteries organised by the Governments of the

Respondents-States. It was submitted that lotteries organised by

the Government of India or by the Government of any State, fall

within the ambit of Entry 40 of List I and therefore any legislation

pertaining to such lotteries may only be enacted by the

Parliament.

18. It was next contended that lotteries organised by the

Government of India or by the Government of any State, were not

within the legislative fields covered under Entries 34 or 62 of List

II which pertain to the power of the State Legislature to make laws

to regulate ‘betting and gambling’ and to impose ‘taxes on

luxuries, including taxes on entertainment, amusements, betting

and gambling,’ respectively. That although the expression ‘betting

and gambling’ may be construed as the genus, within which

‘lotteries’ is a species, the specific field of lotteries organised by

the Government of India or by the Government of any State, has

been carved out of the genus of ‘betting and gambling’ and been

placed under Entry 40 of List I, meaning thereby, that the same

may be regulated or subjected to tax, only by the Parliament. In

other words, it was contended that taxes on betting and gambling

as envisaged under Entry 62 of List II, would be limited to those

lotteries which are neither organised by the Government of India

nor by the Government of any State. It was submitted that since

the Act in question, enacted by the Legislature of the State of

Karnataka, seeks to impose tax on the lotteries organised by the

Central Government or by the Government of a State, it is beyond

the legislative competence of State of Karnataka. That the State of

Karnataka by enacting the impugned Act has attempted to

legislate on an aspect which lies within the exclusive legislative

domain of the Parliament and therefore the said Act is ultra vires

the Constitution and is liable to be declared so.

19. In order to buttress the above contentions, learned Senior

Counsel placed reliance on the following judgments of this Court:

(i) H. Anraj vs. State of Maharashtra – [1984 (2) SCC 292]

wherein this Court considered whether the State of

Maharashtra could impose a ban on the sale of lottery tickets

of other States, by relying on an executive order of the President

under Article 258 (1) of the Constitution which entrusted the

State Government with the executive power of the Union as

regards the conduct of lottery. This Court held that the

Parliament has exclusive power to make laws in respect of

lotteries organised by the Government of India or the

Government of a State. It was further observed that State

organised lotteries were specifically taken out of the ambit of

the legislative field of States from the expression ‘betting and

gambling’ under entry 34 of the State list.

(ii) State of Haryana vs. M/s Suman Enterprises – [(1994) 4 SCC

217] is a case where this Court, in deciding whether the State

of Haryana could issue a Notification imposing a ban on the

lotteries of other states, held that regulation of lotteries

organised by other states is not a State subject but is within the

exclusive regulatory power of the Parliament under Entry 40 of

List I.

20. It was submitted that although the afore-cited decisions make

no specific reference to Entry 62 of List II and only observe that

State organised lotteries were specifically taken out of the ambit

of Entry 34 of List II, ‘betting and gambling’ as appearing in both

these entries must be construed in a similar manner; i.e. that they

are inclusive only of those lotteries which are organised other than

by the Government of India or by the Government of any State. In

this regard, Jindal Stainless Ltd. vs. State of Haryana – [2017

(12) SCC 1] was pressed into service to contend that the same

expression, if used in different entries in the same List, would

have the same meaning. Therefore, although State organised

lotteries have specifically been carved out of the expression

‘betting and gambling’ as appearing in Entry 34 of List II, it may

be deemed that ‘betting and gambling’ as appearing in Entry 62

of List II is also not inclusive of State organised lotteries.

21. It was further urged in this regard that if Entry 34 of List II is

a general entry which deals with the regulatory power of the State

Legislature in the area of ‘betting and gambling’, Entry 62 of List

II vests a more specific power of taxation over ‘betting and

gambling’ with the State Legislature. Once it has been held that a

given expression, as appearing in a general entry would be

construed to exclude a certain item, then it would naturally follow

that such item would also be excluded from a specific entry which

employs the said expression. In the instant case, lotteries

organised by the Government of India or the Government of any

State have been specifically excluded from the ambit of ‘betting

and gambling’ as appearing in Entry 34 of List II, therefore, it

would follow that it would also be excluded from Entry 62 of List

II which is a narrower power, only dealing with taxation. Reference

was made to Prof. Yashpal vs. State of Chhattisgarh – [2005

(5) SCC 420] wherein it was held that a narrow or restrictive

interpretation would generally not be accorded to a legislative

heading which is general in nature. In this regard it was

contended that although a general entry is not usually given a

restrictive meaning, when in exceptional cases a restrictive

interpretation is given, such interpretation should be given effect

to not only in connection with the general entry, but should also

be extended to specific entries which employ the same term as

was interpreted.

22. It was next contended that the sole and exclusive power of

imposition of taxes which are beyond the legislative fields covered

under entries specified in List I and List II, would vest only with

the Parliament by virtue of Entry 97 of List I read with Article 248

(3) and Article 265 of the Constitution of India. In support of the

above contention, learned Senior Counsel for the State of

Nagaland relied on the decision in Union of India vs. Harbhajan

Singh Dhillon – [1971 (2) SCC 779], wherein this Court while

dealing with the question as to the legislative competence to enact

a Legislation pertaining to wealth tax, held that while the subject

matter of wealth tax is not specifically covered under any of the

entries of the three Lists of the Constitution, the Constitution has

not denied the Union Government power to levy wealth tax and

such power would be traceable to Entry 97 of List I.

That the impugned Act, in effect seeks to impose tax on the

sale of lottery tickets:

23. It was submitted on behalf of the State of Nagaland that the

impugned Act in fact, seeks to impose a tax on lotteries organized

by the Government of India or by the Government of any State

and that legislative competence to enact such statute could not

be traced to Entry 62 of List II. The said Entry deals with the

power to impose ‘taxes on luxuries, including taxes on

entertainment, amusements, betting and gambling.’ The event or

incidence for imposition of such tax would be either the conduct

of lotteries or the sale and purchase of lottery tickets. That by

enacting the impugned Act, what the State Legislature sought to

tax was the sale of lottery tickets, which was not permissible in

light of the decision of this Court in Sunrise Associates vs.

Government of Delhi – [(2006) 5 SCC 603]. In the said case, it

was held that lottery tickets were not goods within the meaning of

the Sales Tax Act and therefore they cannot be subject to sales

tax.

That the impugned Act, in a clandestine manner, sought to

impose sales tax on the sale of lottery tickets which is not

permissible.

24. In support of the said contention, the statement of objects and

reasons of the impugned Act was referred to, which provides that

it has been enacted with an intention “to regulate the actual

number of draws held by any lottery promoter.” It was submitted

that while the statement of objects and reasons has been worded

in a manner as if the legislation would seek to regulate the

quantum of betting and gambling activities or the number of

draws held by a lottery promoter, in effect, the tax sought to be

imposed by the impugned legislation is in the nature of sales tax.

That tax was being levied on the proceeds from the sale of lottery

tickets and this would point to the tax being in the nature of sales

tax. It was submitted that the impugned Act does not expressly

employ the term ‘sale of lottery tickets’ but seeks to tax the same

under the guise of regulating the number of draws held by a

promoter.

25. Alternatively, it was contended that even if it is assumed for

the sake of argument that the tax was being imposed, not on the

sale of lottery tickets but on the conduct of lottery activities,

including formulation and notification of scheme of lotteries,

printing of lottery tickets, transportation of lottery tickets,

conducting of the draw, declaration of winners, no taxable event

relatable to activities listed hereinabove had occurred within the

State of Karnataka. That in order for a tax to be imposed by a

State, the taxable event would have to occur within the State.

That, the only event that has occurred within the State of

Karnataka, was the sale of lottery tickets and the same is not

taxable. Hence, it was submitted that the Appellants herein were

seeking to do indirectly, that which could not have been done

directly.

That the impugned Act seeks to operate extra-territorially:

26. Sri Aryama Sundaram next contended that for a State to

impose tax on any activity, there ought to be a territorial nexus

between the activity sought to be taxed and the levy of the tax. In

the instant case, even if the submission made by on behalf of the

State of Karnataka that the activity sought to be taxed is the

propensity to participate in lotteries, no part of such activity has

arisen or taken place within the State of Karnataka. All activities

which are to be undertaken for the conduct of lotteries, such as

formulation and notification of the scheme of lotteries, printing of

lottery tickets, transportation of lottery tickets, conducting of the

draw, declaration of winners, were undertaken outside the

territorial limits of Karnataka and therefore, the conduct of

lotteries cannot be subject to tax by the State of Karnataka. In

this regard, reference was made to Article 246 (3) of the

Constitution of India to contend that a State Government has the

power to enact laws for the State or any part thereof. A State

Government does not have the power to extend its laws beyond

its territorial limits. If a State law is allowed to operate in relation

to activities which are conducted beyond its territorial limits, it

would have the effect of encroaching upon the legislative power of

other States.

27. Learned Senior Counsel appearing for the State of Nagaland

next submitted that the decision of this Court in R.M.D.

Chamarbaugwala (supra) relied upon by the appellants would

not come to their aid in the instant case. That in the said case,

several activities, such as the sale and distribution of forms for

the lottery and prize competitions, the collection of entry fees,

publication of advertisements pertaining to the lottery and prize

competitions, were all conducted within the State of Bombay and

it was in that context that this Court held that the State of

Bombay possessed legislative competence to enact the Bombay

Lotteries and Prize Competitions Control and Tax Act, 1948 which

sought to control and levy tax on lotteries and prize competitions

in the State of Bombay. In the said case, two conditions were laid

down by this Court in order to establish territorial control: (a) real

and not illusory connection; (b) the liability sought to be imposed

must necessarily pertain to the said connection. In this context,

it was urged that the State Acts impugned in these cases would

satisfy the aforestated conditions only qua the sale and

distribution of lottery tickets, which activity is in any case not

taxable. Therefore, reliance placed by the appellants on the said

case was misplaced.

Contentions pertaining to the exigencies faced by NorthEastern States in generating revenue:

28. It was submitted that Section 10 of the impugned legislation

requires the State which organises the lottery sought to be taxed,

to deposit taxes in advance. This has resulted in a situation which

is detrimental to the economic necessities of the State of

Nagaland. Learned Senior Counsel explained the difficulty that

may arise if the said scheme is permitted to continue: The State

of Karnataka collects the tax amount in advance. The amount of

tax to be paid is calculated having no regard to the number of

tickets sold but is based on the entire scheme or draw. Such a

requirement may result in an absurd situation where despite

there being negligible or no sale of lottery tickets, as may be the

case sometimes, the State of Karnataka would be entitled to enjoy

the tax on the entire scheme.

29. It was also urged that if the impugned Act is held to be valid

then it would be open to the Legislatures of each of the States in

the Country to enact a similar legislation and this would result in

a situation of multiple taxation of the same event. Further, if the

organising State is required to pre-deposit the tax pertaining to

the scheme floated, in each State where a similar enactment may

be made, it would result in a situation where lottery schemes

would no longer be a source of revenue to the organising State.

Reference was made to the decision of this Court in B.R.

Enterprises (supra) wherein the importance of lotteries, as a

source of revenue to North-Eastern States was recognised. It was

urged that the State of Karnataka must not be permitted to curtail

the rights of North- Eastern States to conduct lotteries.

30. On the aforesaid submissions, learned Senior Counsel

appearing for the State of Nagaland sought dismissal of the

appeals.

Submissions on behalf of State of Sikkim:

31. Sri S.K. Bagaria, learned Senior Counsel appearing for the

State of Sikkim, First Respondent in Civil Appeal No. 911 of 2021,

adopted the contentions advanced by Sri Aryama Sundaram,

learned Senior Counsel appearing on behalf of the State of

Nagaland in Civil Appeal No. 10467 of 2011. He further elaborated

on the submissions as regards the exclusion of the species of

‘lotteries’ from the genus of ‘betting and gambling’ as appearing in

Entries 34 and 62 of List II vide H. Anraj (supra) and M/s Suman

Enterprises (supra). He contended that although the decision of

this Court in H. Anraj (supra) excluded ‘lotteries’ from the

legislative field of the State Legislature while examining Entry 34

of List II and no reference was made in the said judgment to Entry

62 of List II, it may be construed that ‘lotteries’ organised by the

Government of India or the Government of a State are not

included within the expression ‘betting and gambling’ appearing

in Entry 34 as well as Entry 62 of List II. In support of this

contention, reference was made to a decision of this Court in

R.M.D. Chamarbaugwala (supra) wherein a co-relation was

established by the Court between the expression ‘betting and

gambling’ as appearing under Entry 34 of List II and Entry 62 of

List II, by holding that once it is held that a legislation falls under

the topic of ‘betting and gambling’ under Entry 34 of List II, it

would follow that the tax imposed by the same legislation would

fall under Entry 62 of List II. In this context, it was contended that

since it has been unequivocally declared that the tax imposed on

‘betting and gambling’ under Entry 62 of List II seeks to tax the

same activity which is regulated under Entry 34 of List II, it

logically follows that the expression ‘betting and gambling’ must

be given the same meaning and interpretation in both these

entries. In other words, an interpretation which suggests that

‘lotteries’ has been carved out of ‘betting and gambling,’ should be

made equally applicable to Entry 62, as is applicable to Entry 34

of List II.

32. It was next contended that the impugned Act, namely, the

Kerala Lotteries Act, makes no distinction between the taxing

event and the measure of tax, i.e., a distinction between the

subject matter of tax and the standard by which the amount of

tax is to be measured. Reference was made to Federation of

Hotel and Restaurant Association of India vs. Union of India

- [(1989) 3 SCC 634] to contend that the subject of a tax is

different from the measure of the levy of tax. That the measure of

tax is not determinative of its essential character or the

competence of the legislature. In this regard, it was submitted that

‘draw’ of lotteries, as appearing in Section 6 of the impugned Act,

is only a measure and not the taxable event. That the impugned

Act is ambiguous and uncertain and in the guise of tax on

lotteries, seeks to levy tax on sale of lotteries.

33. Reference was made to specific provisions of the impugned Act

of State of Kerala to contend that the tax sought to be imposed

was in effect a tax on sale of lottery tickets. Section 6 of the said

Act is the charging provision. It merely states that the tax sought

to be levied under the Act is ‘tax on paper lotteries’. Therefore, it

is unclear as to what aspect of the conduct of lotteries is sought

to be subjected to taxation. That while section 2 (i) of the said Act

has defined ‘lottery’ to mean a lottery organised by the

Government of India or the Government of any State, nothing can

be imputed from such definition as to the chargeability or the

taxing event. It was further urged that Section 7(1) and 8(1) of the

Act mandatorily require that any promoter involved in the sale of

lottery tickets be registered under the Act and file returns. Section

8(2) imposes the liability of tax on a promoter who has registered

and filed returns under Section 7(1) and 8(1) of the Act. In this

regard it was submitted that it is the promoter, who is involved in

the sale of the tickets, who is required to bear the burden of tax

and therefore, what the State Government has done is to levy

sales tax on the sale of paper lotteries in Kerala, which is

impermissible in light of the decision of this Court in Sunrise

Associates (supra). That in the absence of any clarity in the

charging provision as to what would be the taxable event and on

a conjoint reading of Section 7 and 8 of the impugned Act, the

only deduction that could be made would be that the event taxed

was the sale of lotteries.

34. In reply to the contention advanced on behalf of the State of

Kerala, to the effect that the burden of tax imposed on the State

of Sikkim was being passed on to the consumer and therefore, the

State of Sikkim was not entitled to claim refund of tax imposed

even in the event that the impugned Act was struck down, as

receiving a refund would amount to unjust enrichment, it was

urged that the doctrine of unjust enrichment was not applicable

to a State vide Mafatlal Industries Ltd. (supra). Therefore, the

amount of tax collected by the State of Kerala without jurisdiction

is liable to be refunded.

Submissions on behalf of the State of Meghalaya:

35. Sri Arvind P. Datar, learned Senior Counsel appearing for the

State of Meghalaya and Sri Amit Kumar, learned Advocate

General for the State of Meghalaya adopted the contentions of Sri

C. Aryama Sundaram, learned Senior Counsel appearing for the

State of Nagaland. He made an additional argument as regards

the exclusive Parliamentary power to impose taxation on lotteries

organised by the Government of a State. It was submitted that in

determining the legislative competence pertaining to the

legislative field of ‘State Lotteries’ reference must be made to the

Government of India Act, 1935. The said Act provided in Entry 47

of List I for the regulation of ‘State Lotteries.’ The said Act provided

for regulation of ‘betting and gambling’ in Entry 36 of List II and

the power to impose ‘taxes on luxuries, including taxes on

entertainments, amusements, betting and gambling’ under Entry

50 of List II. In that context, it was urged that State lotteries have

always been within the exclusive legislative domain of the

Parliament and have been carved out of the expression ‘betting

and gambling’ as appearing in List II.

36. It was further contended that the power to impose taxation on

lotteries is inherent in the general legislative power under Entry

40 of List I. Learned Senior Counsel referred to certain Entries of

List I and II to contend that wherever the legislative competence

relatable to the general legislative field or regulatory field is

different from the taxation field, such separation has been

expressly stated in the Constitution. Since such distinction has

not been made in the context of lotteries covered under Entry 40

of List I, the scope of this entry is unrestricted and every type of

legislation qua Central and State organised lotteries is within its

ambit.

37. Sri Datar next contended that to uphold the validity of the

impugned legislations and allow them to operate, would be against

the principles of federalism and inter-governmental immunity. In

this regard, reliance was placed on New Delhi Municipal Council

vs. State of Punjab – [(1997) 7 SCC 339] wherein this Court,

after discussing the principle of inter-governmental immunity as

it operates in the United States of America, held that the said

principle would operate in India as well, although to a limited

extent. In the Indian context, the immunity conferred on the

Union, from any action of the State, is absolute; while immunity

to States from the actions of the Union is as per Article 289 of the

Constitution. It was submitted in this regard that the impugned

Legislations seek to impose interest and penalties on the Union

for non-payment of taxes levied on it and also prescribes

withholding monies due to the Union in order to recover the tax

due. That such provisions of the statute pose a threat to the

principle of inter-governmental immunity, which is well

recognised and currently operating in India.

38. Learned Senior Counsel appearing for the State of Meghalaya

urged that the doctrine of pith and substance and the aspects

theory have no relevance to the instant matter. That the doctrine

of pith and substance is employed by a Court to save a statute

from being declared ultra-vires, when the main purpose of the

statute is to legislate on an aspect which is within the legislative

competence of the legislature that has enacted it, while an

incidental or ancillary purpose sought to be achieved by the

statute has the effect of branching into another list. However, in

the instant case, the impugned Statutes have only one purpose

viz. taxing Central and State organised lotteries. Therefore, they

are in their entirety encroaching on the exclusive legislative

domain of the Parliament. In a similar vein, it was contended that

the aspects doctrine cannot be pressed into service in order to

uphold the vires of the impugned Legislations as the said doctrine

may be employed only when two aspects are found in the statute

and each of such aspects is traceable to a legislative field in a

different List. However, in the instant case, the impugned

legislations only have one aspect, traceable to the legislative field

covered by a single Entry, viz. Entry 40 of List I.

Reply Arguments:

39. Learned Senior Counsel, Sri Venkataraman, appearing for the

State of Karnataka, in response to the submissions made on

behalf of State of Nagaland, stated that if the submission is that

by virtue of Entry 40 of List I, the Union gains taxing power under

Entry 97 of List I, it would be a self-defeating submission. It was

also contended that recourse to Entry 97 of List I can only be

taken after exhausting specific Entries under List I and List II. It

cannot be contented that the power is secured under Entry 97 of

List I as Entry 62 of List II has never undergone any change,

mutilation or any denudation till date.

40. In this regard it was explained that Entry 42 of List I refers to

inter-state trade and commerce. That originally the tax on interstate trade and commerce along with local sales tax was levied

only by the State under Entry 54 of List II. Only after the 6th

Constitutional Amendment Act in 1956, the powers of the State

were denuded and the Union was vested with the exclusive power

by insertion of Entry 92A in List I. When Entry 62 of List II has

not been denuded, it cannot be construed that Entry 40 of List I

can subsume within itself, the taxation power as would be

available under Entry 97 of List I, overlooking the Dhillon Test.

41. In response to the submissions of the State of Meghalaya in

respect of Article 246(1) that under the said provision, Parliament

has exclusive power to make laws with respect to any of the

matters enumerated in List I and therefore, Entry 40 of List I is

good enough to include power of taxation on lotteries organised

by Central or State Governments, it was urged that the said

provision cannot be read in insolation. He submitted that List I

and II vest exclusive powers in Union and States respectively and

therefore one cannot be read in insolation to the other.

42. It was further submitted that the Constitution Bench in RMDC

vs. State of Mysore (supra) had clearly stated that the surrender

of a regulatory or any other power to the Union cannot mean a

surrender of the taxation power. Taxing powers are always

identified independently and unless such power is transposed,

denuded or mutilated, it cannot be read by implication as held in

M.P.V. Sundararamier (supra).

43. In respect of the submission relating to Article 289, Sri

Venkataraman pointed out that there is a ‘Constitutional bar’

against the Union taxing the Income of a State, and the same

cannot be taxed by virtue of Article 289. He stated that any

activity conducted per se by the State, in this case conducting

State Lotteries, cannot be taxed under Article 289.

44. Learned Senior Counsel then addressed the submission

raised by the State of Nagaland that since the Union is imposing

tax on lotteries under the GST regime, the power of taxation would

vest with the Union even under the pre-GST era. He stated that

the aforesaid submission was not right as it was incorrect to say

that the Union is taxing under the GST regime. It was urged that

GST is a unique tax traceable to Article 246A both in terms of

power and field of legislation, under which the taxable event is

one, namely supply and the taxing power vests both with the

Union and the States. However, in the present case at hand,

Article 246 is the source of power and Entries in List I and II are

fields of legislation which have to be interpreted.

45. In response to the argument that lottery is the main source of

income for the North - Eastern States and grave prejudice would

be caused to State revenue if the appellant-States are permitted

to tax, learned Senior Counsel urged that there is no equity is

taxation laws. It was submitted that the respective North -

Eastern States have earned their lottery revenues using the

territory of other States. In such a case, it is not open to plead

that such States should not use their taxing powers only because

that would be detrimental to North - Eastern States.

46. Learned Senior Counsel Sri Pallav Shishodia for the State of

Kerala, in furtherance of the contentions of the learned Senior

Counsel appearing for the State of Karnataka, placed reliance on

the decision of the Constitution Bench of this Court in Kesoram

Industries Limited (supra) wherein it was held that the ‘power of

regulation and control’ is separate and distinct from the ‘power of

taxation’ and so are the fields for the purpose of legislation. It was

submitted that the States can legislate to regulate ‘betting and

gambling’ in their respective states except with respect to lotteries

organised by other States which shall remain governed by the

Lotteries Act, 1998 enacted by the Parliament having legislative

competence under Entry 40 of List I. However, levy of tax on

‘betting and gambling’ is a different field of legislation under Entry

62 of List II.

47. It was further contended that the regulation of gambling and

taxing of gambling activity being two separate and distinct fields

of legislation, the width of legislative power of States to tax State

organised lotteries under Entry 62 of List II cannot be curtailed

by regulatory powers of Centre under Entry 40 of List I even

though only regulatory powers of states to regulate State

organised lotteries are taken out from Entry 34 of List II.

48. To buttress his contention, learned Senior Counsel for the

State of Kerala referred to Chapter 5, Subsidiary Rules in

Principles of Statutory Interpretation authored by Justice GP

Singh under the heading ‘Same Word Same Meaning’. He

contended that it is a settled principle of interpretation that the

same expression can have different meanings in the same statute

or even the same provision, if the context so required. Learned

Senior Counsel cited the case of Maharaj Singh vs. State of UP

– [1977 (1) SCC 155] in this behalf.

49. It was further urged that the respective contexts of the

expression ‘betting and gambling’ under Entry 34 and Entry 62

both in List II are very different. Entry 34 of List II describes the

legislative field of regulatory powers of the State over ‘betting and

gambling’ while Entry 62 of List II describes the legislative field of

taxation on ‘betting and gambling’ by States. Learned Senior

Counsel for the State of Kerala emphasized upon the judgment of

this Court in Kesoram Industries Limited (supra) and stated

that the principles in the aforesaid case have also been approved

in the case of Jindal Stainless Limited (supra).

50. Learned Senior Counsel submitted that there were several

examples where regulatory powers are with the Centre and the

taxing power is with the States. To fortify his argument, he relied

upon State of Uttar Pradesh vs. Vam Organic Chemicals

Limited and Ors. – [2004 (1) SCC 225] wherein it was held that

the tax or fee imposed for regulatory purposes must not be

mistaken as tax under taxing entry. The regulatory power cannot

be used for plenary taxation. However, the levy of some regulatory

charges under the Lotteries Act, 1998 is not a tax and does not in

any manner whittle down the scope of Entry 62 of List II. To

conclude, learned Senior Counsel for the State of Kerala

submitted that one transaction can have several aspects to attract

both central and state taxes as was held in Federation of Hotel

and Restaurant Association of India (supra).

51. Further, learned Senior Counsel brought to the attention of

this Court, the principle, that ‘specific’ excludes ‘general’ and that

the taxing entry would limit the scope of general regulatory entry,

as was explained in the Commentary on Constitution of India (2nd

Edition, Volume 2, Pg.2145) authored by Sri Arvind P. Datar,

Senior Advocate.

52. Learned Senior Counsel for the State of Kerala stated that

Entry 62 of List II is now whittled down in view of the now firmly

established GST regime. He stated that the interpretation of Entry

62 of List II in the present set of appeals concerns taxes paid in

the past.

Points for consideration

53. Having heard learned Senior Counsel and learned counsel

appearing for the respective parties and upon perusal of the

record, the following points would arise for our consideration:

(i) Whether the subject ‘lotteries organised by the Central

Government and the State Governments’ being carved out

of ‘betting and gambling’ which is dealt with under Entry

34 of List II and being placed in Entry 40 of List I would

also exclude the power of taxation on the same in Entry 62

of List II?

(ii) Whether the power of taxation on ‘betting and gambling’ is

within the ambit of Entry 62 of List II?

(iii) Whether the impugned Acts passed by the Karnataka and

Kerala State Legislatures are within the legislative

competence of Entry 62 of List II, and are therefore valid

pieces of legislation?

(iv) What order?

Constitutional Scheme

54. For easy and immediate reference, the following provisions of

the Constitution of India are extracted as under :

“245. Extent of laws made by Parliament and by the

Legislatures of States –

(1) Subject to the provisions of this Constitution,

Parliament may make laws for the whole or any part of the

territory of India, and the Legislature of a State may make

laws for the whole or any part of the State.

(2) No law made by Parliament shall be deemed to be

invalid on the ground that it would have extra territorial

operation.

246. Subject matter of laws made by Parliament and by

the Legislatures of States - (1) Notwithstanding anything

in clauses (2) and (3), Parliament has exclusive power to

make laws with respect to any of the matters enumerated

in List I in the Seventh Schedule (in this Constitution

referred to as the ‘Union List’).

(2) Notwithstanding anything in clause (3), Parliament,

and, subject to clause (1), the Legislature of any State also,

have power to make laws with respect to any of the matters

enumerated in List III in the Seventh Schedule (in this

Constitution referred to as the ‘Concurrent List’).

(3) Subject to clauses (1) and (2), the Legislature of any

State has exclusive power to make laws for such State or

any part thereof with respect to any of the matters

enumerated in List II in the Seventh Schedule (in this

Constitution referred to as the ‘State List’).

(4) Parliament has power to make laws with respect to any

matter for any part of the territory of India not included (in

a State) notwithstanding that such matter is a matter

enumerated in the State List.

246A. Special provision with respect to goods and

services tax -

1) Notwithstanding anything contained in articles 246 and

254, Parliament, and, subject to clause (2), the Legislature

of every State, have power to make laws with respect to

goods and services tax imposed by the Union or by such

State.

(2) Parliament has exclusive power to make laws with

respect to goods and services tax where the supply of

goods, or of services, or both takes place in the course of

inter-State trade or commerce.

Explanation. - The provisions of this article, shall, in

respect of goods and services tax referred to in clause (5) of

article 279A, take effect from the date recommended by the

Goods and Services Tax Council.]

X X X

248. Residuary powers of legislation –

(1) Subject to Article 246A, Parliament has exclusive power

to make any law with respect to any matter not enumerated

in the Concurrent List or State List

(2) Such power shall include the power of making any law

imposing a tax not mentioned in either of those Lists

X X X

265. Taxes not to be imposed save by authority of law

No tax shall be levied or collected except by authority of

law.

X X X

Entries 40 and 97 of List I

40. Lotteries organised by the Government of India or the

Government of a State.

97. Any other matter not enumerated in List II or List III

including any tax not mentioned in either of those Lists.

Entries 34 and 62 of List II

34. Betting and gambling.

62*. Taxes on luxuries, including taxes on entertainments,

amusements, betting and gambling.

[*As it stood prior to its substitution with effect from

16.09.2016 which is relevant for the purpose of these

cases].”

Some of the salient aspects concerning the distribution of

the legislative powers between the Parliament and State

Legislature as per the three Lists of Seventh Schedule of the

Constitution in the backdrop of provisions could be alluded to.

Article 246 of the Constitution deals with the distribution of

legislative powers between the Union and the States. The said

Article has to be read along with the three Lists namely the Union

List, the State List and the Concurrent List. The taxing powers of

the Union as well as the States are also demarcated as separate

Entries in the Union List as well as the State List i.e. List I and

List II respectively. The Entries in the Lists are the fields of

legislative powers conferred under Article 246 of the Constitution.

In other words, the Entries define the areas of legislative

competence of the Union and State Legislature.

55. Article 246 deals with subject matter of laws made by

Parliament and by the Legislatures of States as follows :

(a) Clause (1) of Article 246 states that notwithstanding

anything in clauses (2) and (3) Parliament has exclusive

power to make laws with respect to any of the matters

enumerated in List I (Union List). In this case, we are

concerned with Entry 40 of List I, which deals with Lotteries

organised by the Government of India or the Government of

a State.

(b) Clause (2) of Article 246 of the Constitution, states that

notwithstanding anything in clause (3), the Parliament and

the Legislature of any State also have the power to make

laws with respect to any matters enumerated in List-III

(Concurrent List).

has exclusive power to make laws for the State with respect

to any matters enumerated in List-II (State List). However,

clause (3) of Article 246, is subject to clauses (1) and (2)

which begin with a non-obstante clause.

56. The power to legislate which is dealt with under Article 246

has to be read in conjunction with the Entries in the three Lists

which define the respective areas of legislative competence of the

Union and State Legislatures. While interpreting these entries,

they should not be viewed in a narrow or myopic manner but by

giving the widest scope to their meaning, particularly, when the

vires of a provision of a statue is assailed. In such circumstances,

a liberal construction must be given to the Entry by looking at the

substance of the legislation and not its mere form. However, while

interpreting the Entries in the case of an apparent conflict, every

attempt must be made by the Court to harmonise or reconcile

them. Where there is an apparent overlapping between two

Entries, the doctrine of pith and substance is applied to find out

the true character of the enactment and the entry within which it

would fall. The doctrine of pith and substance, in short, means, if

an enactment substantially falls within the powers expressly

conferred by the Constitution upon the legislature which enacted

it, it cannot be held to be invalid merely because it incidentally

encroaches on matters assigned to another legislature. Also, in a

situation where there is overlapping, the doctrine has to be

applied to determine to which Entry, a piece of legislation could

be related. If there is any trenching on the field reserved to another

legislature, the same would be of no consequence. In order to

examine the true character of enactment or a provision thereof,

due regard must be had to the enactment as a whole and to its

scope and objects. It is said that the question of invasion into

another legislative territory has to be determined by substance

and not by degree.

57. In case of any conflict between Entries in List I and List II, the

power of Parliament to legislate under List I will supersede when,

on an interpretation, the two powers cannot be reconciled. But if

a legislation in pith and substance falls within any of the Entries

of List II, the State Legislature's competence cannot be questioned

on the ground that the field is covered by Union list or the

Concurrent list vide Prafulla Kumar Mukherjee vs. Bank of

Commerce, Khulna - [AIR 1947 P.C. 60]. According to the pith

and substance rule, if a law is in its pith and substance within

the competence of the Legislature which has made it, it will not

be invalid because it incidentally touches upon the subject lying

within the competence of another Legislature vide State of

Bombay vs. FN Balsara – [AIR 1951 SC 318].

58. In Atiabari Tea Company Ltd. vs. State of Assam – [AIR

1961 SC 232], it has been observed by this Court that the test of

pith and substance is generally and more appropriately applied

when a dispute arises as to the legislative competence of the

Legislature and it has to be resolved by reference to the Entries to

which the impugned legislation is relatable. When a question of

legislative competence is raised, the test is to look at the

legislation as a whole and if it has a substantial and not merely a

remote connection with the Entry, the same may well be taken to

be a legislation on the topic vide Ujagar Prints vs. Union of India

– [AIR 1989 SC 516].

59. The expression used in Article 246 is ‘with respect to’ any of

the matters enumerated in the respective Lists. The said

expression indicates the ambit of the power of the respective

Legislature to legislate as regards the subject matters comprised

in the various Entries included in the legislative Lists. Hence,

where the Entry describes an object of tax, all taxable events

pertaining to the object are within that field of legislation unless

the event is specifically provided for elsewhere under a different

legislative head. Thus, the Court has to discover the true

character and nature of the Legislation while deciding the validity

of the Legislation. Applying the doctrine of pith and substance

while interpreting the legislative Lists what needs to be seen is

whether an enactment substantially falls within the powers

expressly conferred by the Constitution upon the Legislature

which enacted it. If it does, it cannot be held to be invalid merely

because it incidentally encroaches on matters assigned to another

Legislature vide FN Balsara (supra).

60. In Ujagar Prints (supra), it was observed that the Entries in

the legislative Lists must receive a liberal construction inspired by

a broad and generous spirit and not in a narrow and pedantic

manner. This is because the Entries are not sources of legislative

power but are merely topics or fields of Legislation. The expression

‘with respect to’ in Article 246 brings in the doctrine of pith and

substance in the understanding of the exertion of the legislative

power and wherever the question of legislative competence is

raised, the test is whether the Legislation, looked at as a whole, is

substantially ‘with respect to’ the particular topic of Legislation.

For applying the principle of pith and substance, regard must be

had (i) to the enactment as a whole, (ii) to its main object, and (iii)

to the scope and effect of the provision.

61. Once the Legislation is found to be ‘with respect to’ the

legislative Entry in question unless there are other constitutional

prohibitions, the power would be unfettered. It would also extend

to all ancillary and subsidiary matters which can fairly and

reasonably be said to be comprehended in that topic or category

of Legislation vide United Provinces vs. Atiqa Begum – [AIR

1941 FC 16].

62. Another important aspect while construing the Entries in the

respective Lists is that every attempt should be made to

harmonise the contents of the Entries so that interpretation of one

Entry should not render the entire content of another Entry

nugatory vide Calcutta Gas Company vs. State of West Bengal

– [AIR 1962 SC 1044]. This is especially so when some of the

Entries in a different List or in the same List may overlap or may

appear to be in direct conflict with each other, in such a situation,

a duty is cast on the Court to reconcile the Entries and bring

about a harmonious construction. Thus, an effort must be made

to give effect to both Entries and thereby arrive at a reconciliation

or harmonious construction of the same. In other words, a

construction which would reduce one of the Entries nugatory or

dead letter, is not to be followed.

63. The sequitur to the aforesaid discussion is that if the

Legislature passes a law which is beyond its legislative

competence, it is a nullity ab-initio. The Legislation is rendered

null and void for want of jurisdiction or legislative competence

vide RMDC vs Union of India – [AIR 1957 SC 628].

64. Since these appeals concern interpretation, inter alia, of

Entry 62 of List II, which is a taxation entry, it would be useful to

refer to certain other articles of the Constitution. Article 265 of

the Constitution of India states that no tax shall be levied or

collected except by authority of law. That means not only the levy

but also the collection of a tax must be authorized by law. The tax

to be levied must be within the competence of the Legislature

imposing the tax and the validity of the tax has to be adjudged

with reference to the competence of the Legislature at the time the

statute authorizing the tax was enacted. Further, the law

imposing the tax must have been validly enacted. Thus, power to

tax cannot be inferred by implication. The source of power which

does not specifically speak of taxation cannot be interpreted by

expanding its width as to include therein the power to tax by

implication or by necessary inference. There must be a charging

section specifically empowering the State to levy the tax vide

Kesoram Industries Limited. (supra).

65. Bearing in mind the issues raised in this batch of cases, it is

unnecessary to consider the other aspects touching upon the

validity of the taxation laws made by a Legislature viz., that they

ought not to violate any fundamental right etc., as what is of more

significance to the present appeals is the question, whether, the

impugned Acts contravene the specific provisions of the

Constitution which impose limitation on legislative power relating

to particular matters.

66. Further, under Article 289, the Union cannot tax the property

and income of a State vide Re. Sea Customs Act – [AIR 1963 SC

1760]. This is based on the principles of federalism and intergovernmental immunity as adverted to by learned Senior Counsel

Sri Datar. However, under clause (2) of Article 289, the Union can

impose or authorize the imposition of, any tax to such extent, if

any, as Parliament may by law provide in respect of a trade or

business of any kind carried on by, or on behalf of, the

Government of a State, or any operations connected therewith, or

any property used or occupied for the purposes of such trade or

business, or any income accruing or arising in connection

therewith. Clause (2) of Article 289 states that Parliament may by

law declare any trade or business or any class of trade or business

to be incidental to the ordinary functions of government in which

event, clause (2) of Article 289 would not apply.

67. Further, when a power is conferred on the Legislature to levy

a tax, the power itself must be widely construed. It must include

the power to impose a tax and select the articles or commodities

for the exercise of such power. It must also include the power to

fix the rate and prescribe the machinery for the recovery of tax. In

imposing taxes, the Legislature can also appoint authorities for

collecting taxes and may prescribe the procedure for determining

the amount of tax payable by any individual and also ensure that

there is no evasion of tax. All these provisions are subsidiary to

the main power to levy a tax vide Khyerbari Tea Co. Ltd. vs.

State of Assam – [AIR 1964 SC 925].

68. If a tax is ultra vires or unconstitutional then the party is

entitled to have a refund of it from the government whether it has

been paid under protest or not. This Court has held that the

payment of tax which is without authority of law is payment made

under a mistake within the meaning of Section 72 of the Indian

Contract Act. Then, in such a case, question would arise, whether,

the government to whom the payment had been made by mistake

must repay it. Thus, the principle of restitution or repayment of

the tax simpliciter has been considered in light of the doctrine of

unlawful enrichment. The doctrine envisages that when the State

collects a tax from the tax payer without authority of law, but if

the taxpayer has already passed on the burden of the tax money

paid by him to the State to someone else and has recouped the

money then the taxpayer is not entitled to ask for the restitution

from the State the money paid by him as unauthorised tax. In

such circumstances, the State cannot be asked to refund the tax

money to the taxpayer on the principle of unlawful enrichment.

The Court may refuse the relief to the concerned taxpayer who

had ultimately paid the above but not to the intermediary to

collect the amount from them and paid the same to the

government. It would all depend upon the facts and

circumstances of each case. With the passage of time, it has been

held that no refund can be granted so as to cause a windfall gain

to any person when he has not suffered the burden of tax. That

the right of restitution is neither automatic nor unconditional vide

Mafatlal Industries (supra). In the said case it was held that

refund claim can be allowed only when a person establishes that

he has not passed on the burden to others.

69. With the above preface, we shall consider the relevant case

law cited at the Bar on interpretation of an Entry in respect of

taxation.

70. Under the Seventh Schedule of the Constitution, Lists I & II

are divided essentially into two groups: One, relating to the power

to legislate on specified subjects and the other, relating to the

power to tax. In Hoechst Pharmaceuticals Ltd. vs. State of

Bihar – [AIR 1983 SC 1019], it has been categorically held that

taxation is considered as a distinct matter for purposes of

legislative competence.

71. It would be relevant to discuss the following judgments of this

Court in detail so as to bring out the pertinent principles of

interpretation of taxation Entries in List II even when regulation

of an activity is provided under an Entry in List I. They are (i)

M.P.V. Sundararamier (supra) and (ii) Kesoram Industries Ltd.

(supra) while delving on these judgments reference would also be

made to other cases cited at the Bar, particularly Synthetics and

Chemicals Ltd. (supra) and Harbhajan Singh Dhillon (supra).

M.P.V. Sundararamier :

72. In M.P.V. Sundararamier (supra), the petitioners were

dealers carrying on business in the city of Madras (now Chennai)

for the sale and purchase of yarn, and they had filed petitions

under Article 32 of the Constitution before this Court for the

issuance of a writ of prohibition or any other appropriate writ

restraining the erstwhile State of Andhra Pradesh from taking

proceedings for imposing tax on certain sales effected by them in

favour of merchants who were residing or carrying on business in

what was the erstwhile State of Andhra Pradesh, on the ground,

inter alia, that the said sales were made in the course of interState trade, and that no tax could be levied on them by reason of

the prohibition contained in Article 286(2) of the Constitution.

One of the questions considered in the said case was, whether,

tax on inter-State sales was within the exclusive competence of

Parliament, and whether the Act impugned in the said case

(Madras General Sales Tax Act, 1939; ‘Madras Act’, for short) and

the amendment made thereof by the Madras General Sales Tax

(Amendment) Act No.25 of 1947, was in consequence bad, as it

authorized the State to levy the sales tax.

73. The contention was that Entry 42 of List I dealt with interState trade and commerce and under that Entry, the Parliament

had the exclusive power to enact laws in respect of inter-State

trade and commerce which also included the power to impose a

tax on inter-State sales and the State Legislature had therefore no

competence under the Constitution to enact a law imposing tax

on such sales and the laws passed by the States after the

enactment of the Constitution, imposing such a tax were ultra

vires and void and therefore, the Act impugned in the said case

was also ultra vires. It was contended that the content of Entry 42

in List I was the same as that of the Commerce Clause of the

American Constitution and it must therefore be construed as

having the same effect. It was also argued that the power to

impose tax on inter-State sales did not vest with the State. That

after the enforcement of the Constitution, no law of a State could

impose a tax on inter-State sales and hence section 22 of the

Madras Act impugned in the said case which came into force after

the Constitution was enforced and sought to impose such a tax,

was bad in law.

74. The aforesaid contentions were considered in light of the

Government of India Act, 1935 under which there was no entry

corresponding to Entry 42 of List I of the Constitution but there

was Entry 48 in List II which corresponded to Entry 54 of List II

of the Constitution. That under Entry 48 of List II of the

Government of India Act, 1935 the State had power to pass a law

imposing a tax on inter-State sales because the term of the Entry

was wide enough to include both inter-State sales as well as intra-

State sales. However, after the Constitution came into force for

the first time a new Entry 42 of List I was added and consequently,

the States were deprived of the power to tax inter-State sales

which had earlier been within their legislative competence under

Entry 48 of List II, under the Government of India Act, 1935.

75. It was observed by this Court that while enacting Entry 42 of

List I the Constitution makers could have included the power to

tax on inter-State sales instead of leaving that to be inferred by

construction of Entry 42 of List I in light of the Commerce Clause

under the American Constitution. While saying so in paragraph

51, it was observed as follows :

“51. In List I, Entries 1 to 81 mention the several

matters over which Parliament has authority to

legislate. Entries 82 to 92 enumerate the taxes which

could be imposed by a law of Parliament. An

examination of these two groups of Entries shows that

while the main subject of legislation figures in the first

group, a tax in relation thereto is separately mentioned

in the second. Thus, Entry 22 in List I is “Railways”, and

Entry 89 is “Terminal taxes on goods or passengers,

carried by railway, sea or air; taxes on railway fares and

freights”. If Entry 22 is to be construed as involving

taxes to be imposed, then Entry 89 would be

superfluous. Entry 41 mentions “Trade and commerce

with foreign countries; import and export across

customs frontiers”. If these expressions are to be

interpreted as including duties to be levied in respect of

that trade and commerce, then Entry 83 which is

“Duties of customs including export duties” would be

wholly redundant. Entries 43 and 44 relate to

incorporation, regulation and winding up of

corporations. Entry 85 provides separately for

corporation tax. Turning to List II, Entries 1 to 44 form

one group mentioning the subjects on which the States

could legislate. Entries 45 to 63 in that List form

another group, and they deal with taxes. Entry 18, for

example, is “Land” and Entry 45 is “Land revenue”.

Entry 23 is “Regulation of mines” and Entry 50 is “Taxes

on mineral rights”. The above analysis — and it is not

exhaustive of the Entries in the Lists — leads to the

inference that taxation is not intended to be comprised

in the main subject in which it might on an extended

construction be regarded as included, but is treated as

a distinct matter for purposes of legislative competence.

And this distinction is also manifest in the language of

Article 248, clauses (1) and (2) and of Entry 97 in List I

of the Constitution. Construing Entry 42 in the light of

the above scheme, it is difficult to resist the conclusion

that the power of Parliament to legislate on inter-State

trade and commerce under Entry 42 does not include a

power to impose a tax on sales in the course of such

trade and commerce.”

On the above analysis, it was categorically inferred that

taxation was not intended to be comprised in the main subject in

which it might, on extended construction, be regarded as included

but is to be treated as a distinct matter for the purpose of

legislative competence. But while saying so, in the said case,

reliance was placed on Article 286 of the Constitution and on the

point, as to, whether, tax on inter-State sales was included within

Entry 42 in List I, it was held in the negative, particularly, having

regard to Article 286 of the Constitution. Consequently, it was

opined that the State had power under Entry 54 of List II to

impose a tax on inter-State sales but it would be subject to

restrictions included under Article 286(2) of the Constitution. The

aforesaid conclusion was summed up in paragraph 55 in the

following words :

“55. To sum up: (1) Entry 54 is successor to Entry 48

in the Government of India Act, and it would be

legitimate to construe it as including tax on inter State

sales, unless there is anything repugnant to it in the

Constitution, and there is none such. (2) Under the

scheme of the entries in the Lists, taxation is regarded

as a distinct matter and is separately set out. (3) Article

286(2) proceeds on the basis that it is the States that

have the power to enact laws imposing tax on interState sales. It is a fair inference to draw from these

considerations that under Entry 54 in List II the States

are competent to enact laws imposing tax on inter-State

sales.”

76. It was also observed that the said conclusion was a

construction of the statutory provisions having a bearing in the

said case, without reference to the Sixth Amendment to the

Constitution which had proceeded on the view that the States had

the power to tax inter-State sales under Entry 54 of List II.

Therefore, the Constitution was amended to vest the power to tax

inter-State sales with the Centre.

Kesoram Industries Ltd.

77. In this case, the controversy centered around Entries 52, 54

and 97 of List I and Entries 23, 49, 50 and 66 of List II and also

the extended purport of the residuary power of legislation vested

in the Union of India. The judgment dealt with the imposition of

levies on coal, tea, brick-earth and minor minerals. While dealing

with the aforesaid Entries of List I and List II, reliance was placed

on Hoechst Pharmaceuticals Ltd. (supra) on the interpretation

of various Entries in the three Lists. The amplitude of legislative

power under a general Entry vis-à-vis taxation Entry was

discussed in paragraph 31 which is reproduced as under:

“31. Article 245 of the Constitution is the fountain

source of legislative power. It provides — subject to the

provisions of this Constitution, Parliament may make

laws for the whole or any part of the territory of India,

and the legislature of a State may make laws for the

whole or any part of the State. The legislative field

between Parliament and the legislature of any State is

divided by Article 246 of the Constitution. Parliament

has exclusive power to make laws with respect to any of

the matters enumerated in List I in the Seventh

Schedule, called the “Union List”. Subject to the said

power of Parliament, the legislature of any State has

power to make laws with respect to any of the matters

enumerated in List III, called the “Concurrent List”.

Subject to the abovesaid two, the legislature of any

State has exclusive power to make laws with respect to

any of the matters enumerated in List II, called the

“State List”. Under Article 248 the exclusive power of

Parliament to make laws extends to any matter not

enumerated in the Concurrent List or State List. The

power of making any law imposing a tax not mentioned

in the Concurrent List or State List vests in Parliament.

This is what is called the residuary power vesting in

Parliament. The principles have been succinctly

summarised and restated by a Bench of three learned

Judges of this Court on a review of the available

decision in Hoechst Pharmaceuticals Ltd. v. State of

Bihar [(1983) 4 SCC 45 : 1983 SCC (Tax) 248] . They

are:

(1) The various entries in the three lists are not “powers”

of legislation but “fields” of legislation. The Constitution

effects a complete separation of the taxing power of the

Union and of the States under Article 246. There is no

overlapping anywhere in the taxing power and the

Constitution gives independent sources of taxation to the

Union and the States.

(2) In spite of the fields of legislation having been

demarcated, the question of repugnancy between law

made by Parliament and a law made by the State

Legislature may arise only in cases when both the

legislations occupy the same field with respect to one of

the matters enumerated in the Concurrent List and a

direct conflict is seen. If there is a repugnancy due to

overlapping found between List II on the one hand and

List I and List III on the other, the State law will be ultra

vires and shall have to give way to the Union law.

(3) Taxation is considered to be a distinct matter for

purposes of legislative competence. There is a distinction

made between general subjects of legislation and

taxation. The general subjects of legislation are dealt

with in one group of entries and power of taxation in a

separate group. The power to tax cannot be deduced

from a general legislative entry as an ancillary power.

(4) The entries in the lists being merely topics or fields

of legislation, they must receive a liberal construction

inspired by a broad and generous spirit and not in a

narrow pedantic sense. The words and expressions

employed in drafting the entries must be given the

widest-possible interpretation. This is because, to quote

V. Ramaswami, J., the allocation of the subjects to the

lists is not by way of scientific or logical definition but

by way of a mere simplex enumeratio of broad

categories. A power to legislate as to the principal matter

specifically mentioned in the entry shall also include

within its expanse the legislations touching incidental

and ancillary matters.

(5) Where the legislative competence of the legislature of

any State is questioned on the ground that it

encroaches upon the legislative competence of

Parliament to enact a law, the question one has to ask

is whether the legislation relates to any of the entries in

List I or III. If it does, no further question need be asked

and Parliament's legislative competence must be

upheld. Where there are three lists containing a large

number of entries, there is bound to be some

overlapping among them. In such a situation the

doctrine of pith and substance has to be applied to

determine as to which entry does a given piece of

legislation relate. Once it is so determined, any

incidental trenching on the field reserved to the other

legislature is of no consequence. The court has to look

at the substance of the matter. The doctrine of pith and

substance is sometimes expressed in terms of

ascertaining the true character of legislation. The name

given by the legislature to the legislation is immaterial.

Regard must be had to the enactment as a whole, to its

main objects and to the scope and effect of its

provisions. Incidental and superficial encroachments

are to be disregarded.

(6) The doctrine of occupied field applies only when

there is a clash between the Union and the State Lists

within an area common to both. There the doctrine of

pith and substance is to be applied and if the impugned

legislation substantially falls within the power expressly

conferred upon the legislature which enacted it, an

incidental encroaching in the field assigned to another

legislature is to be ignored. While reading the three lists,

List I has priority over Lists III and II and List III has

priority over List II. However, still, the predominance of

the Union List would not prevent the State Legislature

from dealing with any matter within List II though it may

incidentally affect any item in List I.

(emphasis supplied)

After restating the above principle, it was observed by this

Court that legislation in the field of tax and economic activities

need special consideration and are to be viewed with larger

flexibility rather than measuring the propositions by an abstract

symmetry. It was further observed that where a power is with the

Union to regulate and control, such power of the Union cannot

result in depriving the States of their power to levy tax or fee

within its legislative competence without trenching upon the field

of regulation and control. Thus, there is a distinction between

power to regulate and control and power to tax, the two being

distinct.

78. While examining the scheme underlying the Seventh Schedule

of the Constitution, reliance was placed on M.P.V.

Sundararamier (supra) and it was observed as under:-

“74(3). Taxation is not intended to be comprised in the

main subject in which it might on an extended

construction be regarded as included, but is treated as

a distinct matter for purposes of legislative competence.

And this distinction is also manifest in the language of

Article 248 clauses (1) and (2) and of Entry 97 in List I

of the Constitution. Under the scheme of the entries in

the lists, taxation is regarded as a distinct matter and

is separately set out.”

79. Further, the entries in List I and List II must be construed if

possible, so as to avoid conflict. If there appears to be a conflict

between Entries of List I and List II, what has to be decided is

whether there is any real conflict. If there is none, the question of

application of the non - obstante clause ‘subject to’ does not arise.

If there is a conflict, the correct approach to the question is to see,

whether, it is possible to effect a reconciliation between the two

entries so as to avoid a conflict and overlapping. It was reiterated

that in the event of a dispute arising it should be determined by

applying the doctrine of pith and substance in order to find out

whether between two Entries or legislative fields assigned to two

different legislatures, the particular subject of the legislation falls

within the ambit of the one or the other. Where there is a clear

and irreconcilable conflict of jurisdiction between the Union and

a State Legislature, it is the law of the Union that must prevail.

80. Reliance was placed on the words of Sabyasachi Mukharji, J.

(as His Lordship then was), speaking for six out of the seven

Judges constituting the Bench in Synthetics and Chemicals

Ltd. (supra). It was held that under the constitutional scheme of

division of powers in the Seventh Schedule, there are separate

entries pertaining to taxation and other laws. A tax cannot be

levied under a general entry. It was observed that the above

principles continued to hold the field and have been followed in

cases after cases.

81. Delving further on the subject, it was observed by this Court

that the power of regulation and control is separate and distinct

from the power of taxation. This was illustrated with reference to

several judgments of this Court, particularly, Hingir - Rampur

Coal Co. Ltd. vs. State of Orissa – [AIR 1961 SC 459] wherein

this Court dealt with Entry 54 of List I and Entry 23 of List II.

Reference was also made to the State of Orissa vs. M.A. Tulloch

– [AIR 1964 SC 1284].

82. It was further observed with reference to Harbhajan Singh

Dhillon (supra), that Entry 97 of List I conferred the residuary

powers on the Parliament. Article 248 of the Constitution which

speaks of residuary powers of legislation confers exclusive power

on Parliament to make any law with reference to any matter not

enumerated in the Concurrent List or the State List. But at

the same time, it provides that such a residuary power shall

include a power of making any law imposing a tax not mentioned

in either of those Lists. It is thus clear that if any power to tax

is clearly mentioned in List II, the same would not be available to

be exercised by the Parliament based on the assumption of

residuary power.

83. In fact, the judgment in Harbhajan Singh Dhillon (supra)

was by a majority of 4 : 3 to the effect, that the power to legislate

in respect of a matter does not carry with it a power to impose a

tax under our constitutional scheme. Thus, there is nothing like

an implied power to tax. The source of power which does not

specifically speak of taxation cannot be so interpretated by

expanding its width as to include therein the power to tax, by

implication or by necessary inference. Reliance was also placed

on Cooley on Taxation to the following effect :

“There is no such thing as taxation by implication. The

burden is always upon the taxing authority to point to

the act of assembly which authorizes the imposition of

the tax claimed.”

Thus, the power to tax is not an incidental power. Although

legislative power includes incidental and subsidiary power under

a particular Entry dealing with a particular subject, the power to

impose a tax is not such a power which could be implied under

our Constitution. Therefore, it was held that the power to legislate

in respect of inter-State trade and commerce (Entry 42 List I) did

not carry with it, the power to tax the sale of goods which are

subject of inter-State trade and commerce, before the insertion of

Entry 92A in List I and such power belonged to the States under

Entry 54 in List II subject to Article 286 of the Constitution.

84. Delving further on the distinction between the power to

regulate and control and the power to tax, it was observed by this

Court that there is a significant distinction between the two

primary purposes of legislation. The primary purpose of taxation

is to collect revenue. Power to tax may be exercised for the

purpose of regulating an industry, commerce or any other activity.

The purpose of levying such tax is the exercise of sovereign power

for the purpose of effectuating regulation although incidentally,

the levy may contribute to the revenue. Taking a leaf from Cooley

on his work on taxation, it was observed that the distinction

between a demand of money under the police power and one made

under the power to tax, is not so much one of form as of

substance.

85. The aforesaid principle was alluded to in Synthetics and

Chemicals Ltd. (supra) by holding that regulation is a necessary

concomitant of the police power of the State which is actually an

American principle but in India it means the ‘sovereign’ power.

However, it was categorically observed that the power to regulate,

develop or control would not include within its ken a power to levy

tax or fee except when it is only regulatory. Power to tax or levy

for augmenting revenue shall continue to be exercised by

Legislature with whom it vests, for instance, the State Legislature,

in spite of regulation or control having been assumed by another

Legislature i.e. the Union. In this case, the question before the

seven-Judge Bench was the power of the State to legislate on

industrial alcohol as a subject. Entry 8 in List II and Entry 33 in

List III came up for consideration.

86. The aforesaid discussion could be summed up in a nutshell

by culling out the following principles stated in Kesoram

Industries Ltd. (supra):

(1) In the scheme of the lists in the Seventh

Schedule, there exists a clear distinction between the

general subjects of legislation and heads of taxation.

They are separately enumerated.

(2) Power of “regulation and control” is separate and

distinct from the power of taxation and so are the two

fields for purposes of legislation. Taxation may be

capable of being comprised in the main subject of

general legislative head by placing an extended

construction, but that is not the rule for deciding the

appropriate legislative field for taxation between List I

and List II. As the fields of taxation are to be found

clearly enumerated in Lists I and II, there can be no

overlapping. There may be overlapping in fact but there

would be no overlapping in law. The subject-matter of

two taxes by reference to the two lists is different.

Simply because the methodology or mechanism

adopted for assessment and quantification is similar,

the two taxes cannot be said to be overlapping. This is

the distinction between the subject of a tax and

the measure of a tax.

(3) The nature of tax levied is different from the

measure of tax. While the subject of tax is clear and well

defined, the amount of tax is capable of being measured

in many ways for the purpose of quantification. Defining

the subject of tax is a simple task; devising the measure

of taxation is a far more complex exercise and therefore

the legislature has to be given much more flexibility in

the latter field. The mechanism and method chosen by

the legislature for quantification of tax is not decisive of

the nature of tax though it may constitute one relevant

factor out of many for throwing light on determining the

general character of the tax.

(4) The entries in List I and List II must be so

construed as to avoid any conflict. If there is no conflict,

an occasion for deriving assistance from non obstante

clause “subject to” does not arise. If there is conflict, the

correct approach is to find an answer to three questions

step by step as under:

One — Is it still possible to effect reconciliation between

two entries so as to avoid conflict and overlapping?

Two — In which entry the impugned legislation falls by

finding out the pith and substance of the legislation?

and

Three — Having determined the field of legislation

wherein the impugned legislation falls by applying the

doctrine of pith and substance, can an incidental

trenching upon another field of legislation be ignored?

(5) The primary object and the essential purpose of

legislation must be distinguished from its ultimate or

incidental results or consequences, for determining the

character of the levy. A levy essentially in the nature of

a tax and within the power of the State Legislature

cannot be annulled as unconstitutional merely because

it may have an effect on the price of the commodity.

(6) The heads of taxation are clearly enumerated in

Entries 83 to 92-B in List I and Entries 45 to 63 in List

II. List III, the Concurrent List, does not provide for any

head of taxation. Entry 96 in List I, Entry 66 in List II

and Entry 47 in List III deal with fees. The residuary

power of legislation in the field of taxation spelled out

by Article 248(2) and Entry 97 in List I can be applied

only to such subjects as are not included in Entries 45

to 63 of List II.

We shall now briefly discuss the Central Act of 1998 and the

impugned Acts of the States of Karnataka and Kerala which have

been made under Entry 40 of List I and Entry 62 of List II

respectively.

Acts under consideration :

The Lotteries (Regulation) Act, 1998:

87. In view of Entry 40 of List I, the Parliament has enacted the

Lotteries Act, 1998. The said Act is intended to regulate lotteries

and to provide for matters connected therewith and incidental

thereto. Section 3 of the said Act prohibits a State Government

from organising, conducting or promoting any lottery except

subject to the conditions provided under Section 4 of the Act.

Section 4 prescribes the conditions under which a State

Government may organise, conduct or promote a lottery. There

are ten conditions prescribed under Section 4 of the Act. Section

4 is extracted as under for felicity of reference:

“4. Conditions subject to which lotteries may be

organised, etc.—A State Government may organise,

conduct or promote a lottery, subject to the following

conditions, namely:—

(a) prizes shall not be offered on any pre-announced

number or on the basis of a single digit;

(b) the State Government shall print the lottery tickets

bearing the imprint and logo of the State in such

manner that the authenticity of the lottery ticket is

ensured;

itself or through distributors or selling agents;

(d) the proceeds of the sale of lottery tickets shall be

credited into the public account of the State;

(e) the State Government itself shall conduct the draws

of all the lotteries;

(f) the prize money unclaimed within such time as may

be prescribed by the State Government or not

otherwise distributed, shall become the property of

that Government;

(g) the place of draw shall be located within the State

concerned;

(h) no lottery shall have more than one draw in a week;

(i) the draws of all kinds of lotteries shall be conducted

between such period of the day as may be prescribed

by the State Government;

(j) the number of bumper draws of a lottery shall not

be more than six in a calendar year;

(k) such other conditions as may be prescribed by the

Central Government.”

88. The Central Government may also prescribe any other

condition. Section 5 deals with prohibition of sale of ticket in a

State which means that a State Government may, within the

State, prohibit the sale of tickets of a lottery organised, conducted

or promoted by every other State. The Central Government can

also by an order published in the Official Gazette, prohibit lottery

organised, conducted or promoted in contravention of the

provisions of Section 4 of the said Act or where tickets are sold in

a contravention of the provisions of Section 5 thereof. Penalty

clause is in Section 7. Section 10 of the said Act enables the

Central Government to give directions to State Governments as to

carrying into execution in the State, of any of the provisions of the

said Act or of any rule or order made thereunder. The Central

Government has the power to make rules under the said Act in

terms of Section 11. Section 12 of the said Act enables the State

Government to make rules to carry out the provisions of the said

Act.

89. A schematic reading of the said Lotteries Regulation Act

clearly indicates that the Parliament has enacted the same having

regard to Entry 40 of List I of the Seventh Schedule of the

Constitution. The 1998 Act deals exclusively with conduct of

lotteries by a State Government subject to terms and conditions

prescribed in Section 4 of the 1998 Act. The said Act does not deal

with conduct of lotteries by entities other than Government of

India or Government of State. Hence, regulation of the

organisation, conduct and promotion of any lottery by the

Government of India or State Government is made by the

Parliament under the provisions of the 1998 Act. The said Act has

no provision regarding taxation.

The Karnataka Tax on Lotteries Act, 2004

90. The Karnataka Tax on Lotteries Act, 2004 is an enactment to

levy tax on lottery scheme as per Section 6 of the said Act. The tax

is levied at the following rates namely: (a) Rupees one lakh and

fifty thousand for every bumper draw; and (b) Rupees one lakh in

respect of any other draw.

91. The said tax is to be paid by every promoter. The Karnataka

Act, 2004 defines the expression ‘lottery’ in Sub-Section 4 of

Section 2 to mean a scheme, in whatever form and whatever name

called for distribution of prizes by lot or chance to those persons

participating in the chance of a prize by purchasing tickets

organised by the Government of India or the Government of a

State or a Union Territory or any other country having bilateral

agreement or treaty with the Government of India. The definition

of the expression ‘lottery’ would indicate that the object and

purpose is of levying the tax on a lottery scheme is only when the

lottery scheme is organised by the Government of India or the

Government of a State or a Union Territory or any other country

having bilateral agreement or treaty with the Government of India.

Thus, this Act does not levy any tax on lotteries conducted by any

private entities. Sub-Section 5 of Section 2 defines a ‘promoter’ to

be the Government of India or a Government of a State or a Union

Territory or any country organising, conducting or promoting a

lottery and includes any person appointed for selling lottery

tickets in the State on its behalf by such Government or country,

where such Government or country is not directly selling lottery

tickets in the country or a State. The Karnataka Act, 2004 enables

payment of tax in advance by the registered promoter. Section 8

of the Act deals with registration of promoters and sellers.

92. The Karnataka Act, 2004 is a comprehensive legislation on

levy and collection of tax on lotteries (gambling). In fact, the

preamble of the Act itself states that the Act is to provide for levy

and collection of tax on lottery (gambling). Thus, in the Karnataka

Act, 2004, the Legislature has clearly indicated that the

expression lottery means gambling.

93. The Act seeks to provide for all matters incidental and

ancillary to the levy of taxation, including provisions for filing

return, assessment thereof and schedule for payment of tax in

advance. Additionally, the said Act also provides for a machinery

to effect recoveries of tax and/or penalties from the assessee.

Chapter VI of the Act provides for the right of an assessee to prefer

an appeal; and the powers of the Commissioner and Joint

Commissioner to initiate revisional proceedings in relation to any

assessment made or pending under the Act.

94. Section 20 of the Act authorizes certain officers of the State

Government to conduct inspection of documents and searches,

and effect seizure of accounts or documents pertinent to the

assessment under the Act.

95. Chapter VII of the Karnataka Act, 2004 prescribes specific

penalties for contravention of various conditions of the Act such

as penalty for failure on the part of a promoter to register, keep

records, file statement of returns etc.

96. The Karnataka Tax on Lotteries Rules, 2003 (hereinafter

referred to as ‘Karnataka Lottery Rules, 2003’) were made

pursuant to Section 37 of the Karnataka Tax on Lotteries,

Ordinance, 2003, which preceded the Karnataka Act, 2004.

Kerala Tax on Paper Lotteries Act, 2005

97. The Kerala Act, 2005 is an enactment which provides for the

levy and collection of tax on the conduct of paper lotteries within

the State of Kerala, at such rates as specified in Section 6 of the

Act. The Act provides for the following two rates, applicable based

on the nature of the draw: (a) Ten lakh rupees for every bumper

draw; (b) Two lakh fifty thousand rupees in respect of any other

draw.

98. The said tax is to be paid by every ‘promoter.’ The terms

‘promoter’ and ‘lottery’ have been defined in identical terms as

provided under the Karnataka Act of 2004. The Kerala Tax on

Paper Lotteries Act, 2005 does not seek to tax the conduct of

online lotteries, but only paper lotteries conducted within the

State of Kerala. The preamble of the said Act states that it is an

Act to provide for the levy and collection of tax on the conduct of

paper lotteries in the State of Kerala.

99. Section 7 of the said Act requires promoters to get registered

under the Act on payment of a fee and deposit of security.

However, the Act does not require registration of persons who

ordinarily sell lottery tickets in retail. ‘Promoter’ has been defined

to include the Government of India or a Government of a State or

a Union Territory or any country organising, conducting or

promoting a lottery, within the State of Kerala, or any person or

entity appointed by the said Government or Country in this behalf.

Therefore, the Act only provides for taxation of lotteries conducted

within the State of Kerala, by or on behalf of the Government of

India, the Government of any State or of a foreign Country and

not for taxation on lotteries organised by private entities.

Section 11 of the Kerala Act, 2005 provides for payment of tax on

every draw, in advance.

100. The Kerala Act, 2005 is a comprehensive legislation and also

provides for all matters incidental to the levy and collection of tax

on paper lotteries such as, the procedures for assessment of tax

due, the right of the assessee to prefer appeals, powers of the tax

authorities to conduct search and make seizure, penal provisions

to be resorted to for default in payment of tax prescribed under

the said Act. The legislation also empowers the State Government

to enact Rules to give effect to any of the provisions of the Act.

Parameters of Taxation :

101. A legislative enactment which provides for the imposition of

a tax must specify the following parameters of taxation:

i) The taxable event which forms the basis of levy,

also referred to as ‘subject’ of a tax;

ii) The measure of the tax;

iii) The rate/s of taxation;

iv) The incidence of the tax,

102. The said parameters are each distinct and must not be

conflated with the others. The components of tax, as stated above

have been characterized in Govind Saran Ganga Saran (Supra).

In the said case, it was also laid down that a legislative scheme

which seeks to impose a tax, ought to define each of the

aforestated components with certainty and precision. The

observations of Chief Justice Pathak may be extracted as under:

“6. The components which enter into the concept of a tax are

well known. The first is the character of the imposition

known by its nature which prescribes the taxable event

attracting the levy, the second is a clear indication of the

person on whom the levy is imposed and who is obliged to

pay the tax, the third is the rate at which the tax is imposed,

and the fourth is the measure or value to which the rate will

be applied for computing the tax liability. If those

components are not clearly and definitely ascertainable, it is

difficult to say that the levy exists in point of law . Any

uncertainty or vagueness in the legislative scheme defining

any of those components of the levy will be fatal to its

validity.”

103. The above parameters may be identified in the impugned Acts

under consideration, as follows:

(i) In the context of the tax sought to be imposed by the

impugned Acts, the basis of levy is the conduct of lotteries

within the State of Karnataka or Kerala. In other words, the

subject of taxation is the conduct of lottery schemes, by

the Government of India or the Government of other States,

within the State of Kerala or Karnataka. While it has rightly

been stated by the learned counsel appearing on behalf of

the Respondents that the conduct of lotteries involves a host

of events such as formulation and notification of scheme of

lotteries, printing, transportation and sale of lottery tickets

etc., all these events constituting the conduct of the lotteries

are ultimately for the participation of persons, within the

State of Karnataka or Kerala. Therefore, the subject of tax is

the conduct of lottery schemes, within the State of

Karnataka or Kerala, which is enabled by the propensity of

persons to participate in the lottery schemes.

(ii) The measure of taxation in the instant case is the ‘draw.’

The impugned legislations contemplate two kinds of draws,

namely bumper draw and draw other than a bumper draw.

(iii) The rate of tax, is a dependent variable and is to be

determined based on the measure. In the instant case, the

rate of tax under the Karnataka Act, 2005 is Rupees One

Lakh and fifty thousand in respect of a bumper draw and

Rupees one lakh in respect of any other draw. Similarly, in

the Kerala Act, 2005, the rate of tax is Rupees ten lakhs in

respect of a bumper draw and Rupees two lakhs and fifty

thousand in respect of any other draw.

(iv) The incidence of the tax is on the promoters of the

lotteries, i.e. on the Government of India or a Government

of a State or a Union Territory or any Country organizing,

conducting or promoting a lottery, within the State of

Karnataka or Kerala, or any person or entity appointed by

the said Government or Country in this behalf. The

impugned Acts require registration of promoters and all

provisions requiring filing of the returns of draws and

payment of tax, are to operate in relation to promoters.

Therefore, the incidence of the tax, falls on the promoters of

the lotteries.

104. The expression ‘betting and gambling’ finds a mention in

Entry 34 of List II of the Seventh Schedule of the Constitution and

taxes on, inter alia, betting and gambling are leviable having

regard to Entry 62 of List II of the Seventh Schedule. Thus, the

activity of betting and gambling and taxes on betting and gambling

are subjects falling within List II of the Seventh Schedule i.e. they

are State subjects. If conduct of lotteries is held to come within

the scope of the expression ‘betting and gambling’ then the

regulation and control of the said activity as well as the taxation

on lotteries are squarely within the contours of the legislative

powers of the State. However, only lotteries organised by the

Government of India or the Government of a State, even though,

they come within the scope of the expression ‘betting and

gambling’ have been carved out of the Entry 34 of List II dealing

with betting and gambling inasmuch as Entry 40 of List I (Union

List) deals with lotteries organised by the Government of India or

the Government of a State. This implies that conduct of lotteries

by the Government of India or the Government of a State, even

though, is betting and gambling within the meaning of Entry 34

and Entry 62 of List II, nevertheless, those Entries are denuded

inasmuch as the State Legislature has no legislative powers to

pass any law on the subject lotteries organised by the Government

of India or the Government of a State. If such is the simplistic

interpretation to be given, the matter would rest. However, that is

not so.

Meaning of ‘betting and gambling’ and ‘lotteries’ :

105. Having perused the impugned Acts and identified the

parameters of taxation in the context of the said Acts, we shall

now discuss the meanings of betting and gambling and, in

particular, lottery as found in Entries 34 and 62 of List II and

Entry 40 of List I.

A. Dictionary meaning :

(i) Black’s Law Dictionary defines ‘gambling’ to mean:

“The act of risking something valuable, especially

money for a chance to win a prize.”

(ii) Similarly, in Advanced Law Lexicon, P. Ramanatha Aiyar

(6th Edition) at page 612 ‘betting and gambling’ has been

described as follows:

“Putting a stake on something of value,

particularly money with consciousness of risk

and hope of gain on the outcome of a game or a

contest, whose result may be determined by

chance or accident, or on the likelihood of

anything occurring or not occurring.”

(iii) In Words and Phrases (Permanent Edition) Vol. 25-A at page

439 a ‘lottery’ has been defined to mean ‘a species of gambling.’

At page 444, it has been stated as follows:

“The term ‘lottery’ as popularly and generally

used referring to a gambling scheme in which

chances are sold or disposed of for value and the

sums thus paid are hazarded in the hope of

winning a much larger sum, a scheme for the

distribution for the distribution of prizes by

chance.”

(iv) In Advanced Law Lexicon, P. Ramanatha Aiyar (1997

Edition) ‘Lottery’ has been defined as follows:

“Scheme for disposal or distribution of property

by chance. The term ‘lottery’ has no technical

meaning in the law distinct from its popular

signification.”

(v) Similarly, in Black’s Law Dictionary (6th Edn.) at p. 947 the

meaning of ‘lottery’ has been pithily given as under:

“A chance for a prize for a price.”

(vi) The Concise Oxford English Dictionary [Oxford University

Press, 11 Edn., 2004] at p. 844, defines the term “lottery”

as follows:

“Lottery a means of raising money by

selling numbered tickets and giving

prizes to the holders of numbers

drawn at random – something whose

success is governed by chance.”

(vii) The Webster’s New American College Dictionary (1981)

defines as:

“A method of selling numbered

tickets and awarding prizes to the

holders of certain numbers drawn

by lot.”

106. From the above Dictionary meanings what emerges is that

‘lottery’ is one of the many gambling schemes. That ‘gambling’ is

the genus of which a species is ‘lottery’. It is evident that ‘lotteries’

and ‘gambling’ activities, to be termed as such, must inherently

have an element of ‘chance’ in the manner in which the result

thereof is determined. That the species of ‘lottery’ may be placed

in the genus of ‘betting and gambling’ and more specifically under

the ambit of ‘gambling’ because of the ‘gambling spirit’ which is a

necessary element of ‘lottery’. The expression ‘to take a chance’ is

itself synonymous to a gamble. Therefore, it may be concluded

that lottery is one such activity which requires a participant to

take a chance or to gamble. Any form of contest for a prize that

does not fall within the definition of either betting, gaming or a

lottery is defined as a ‘prize competition’ which is also subject to

legal control.

B. Some Recent Writings :

(i) According to the House of Lords Select Committee Report on

‘the Social and Economic Impact of the Gambling Industry’

(Report of Session 2019-21), gambling is a general expression

which can include different types of gambling viz., betting, gaming

and lotteries.

Betting is defined as making or accepting a bet on:

(i) the outcome of a race, competition or other

event or process;

(ii) the likelihood of anything occurring or not

occurring; or

(iii) whether anything is or is not true.

Gaming is defined as ‘playing a game of chance for a prize’.

A game of chance includes:

(i) A game that involves both an element of

chance and an element of skill;

(ii) A game that involves an element of chance

that can be eliminated by superlative skill;

and

(iii) A game that is presented as involving an

element of chance, but

(iv) Does not include a sport.

The Report however states that the expression ‘gaming’ may

not include video gaming and social gaming as such but is used

in a statutory sense viz., section 6 of Gambling Act, 2005.

Lotteries is defined as a type of gambling that has three

essential elements :

(i) Payment is required to participate;

(ii) One or more prizes are awarded; and

(iii) Those prizes are awarded by chance.

In England, the Gambling Act, 2005 has been enforced as a

comprehensive legislation with effect from 1st September, 2007 to

include betting, gaming and lotteries. While the Gambling Act,

2005 defines each of the forms of gambling, the underlying

concept ‘game’ and ‘bet’ are not defined.

(ii) Kent R. Grote and Victor A. Matheson (Department of

Economics and Business, Lake Forest College and Department of

Economics, College of the Holy Cross, Worcester respectively) in

their Article ‘The Economics of Lotteries: A Survey of the

Literature’, published in August, 2011, have stated that lotteries

represent one of the oldest and most common forms of gambling

around the world. That lotteries involve the sale by an organising

body, typically the government but also occasionally private

businesses or charities, of a ticket, giving the possessor, a

potential monetary reward. Lotteries differ from casinos in that

lottery ticket sales generally do not take place at a location

specifically set aside for gambling, and modern lotteries are

usually operated by governments instead of private firms. It is

further observed that lotteries are of particular interest to

scholars for a variety of reasons. First, they represent an

important source of government revenue in many States and

countries, so they are of interest to public finance economists.

Second, lotteries provide researchers interested in microeconomic theory and consumer behavior with a type of

experimental lab that allows economists to explore these topics.

107. According to these learned authors, lotteries have a revenue

potential and the revenue mechanism, is explicitly stated, the goal

of lottery organisers and there are ways in which variations in

product variety, lottery structure and payout rates could be

adjusted to increase revenue. If a State finds that its residents are

purchasing lottery tickets from other States that have adopted

lotteries, this may increase the likelihood of that State to

introduce its own lotteries.

108. The relevant judgments cited at the Bar on lottery scheme

and its essential features shall be considered as under:

(a) In RMD Chamarbaugwala (supra), this Court examined the

validity of the Bombay Lotteries and Prize Competitions

Control Act, 1948, which sought to tax the promoters of prize

competitions. In that context, this Court discussed whether

prize competitions as defined in the legislation impugned

therein were in the nature of gambling activities. This Court

examined the nature of the prize competitions and made

observations as to which of them ought to be included under

the category of ‘activities of gambling nature’. It was held that

prize competitions which require participants to guess the

solution prepared beforehand or which determine the solution

by lot were of gambling nature. In a more general vein, it was

highlighted that gambling activities, in their very nature

include any competition wherein success does not depend to a

substantial extent on skill of the participant, but on an element

of chance. As regards those competitions in which prizes are

offered for forecasts of the results either of a future event or an

event that has occurred in the past for which the result is

unknown, this Court held that the said category of

competitions were also of ‘gambling’ nature. This Court

concluded that the activity being conducted by the respondent-

promoter therein was a lottery and such activity could be

regarded as gambling inasmuch as it was not a competition in

which skill, knowledge and judgment were in real and effective

play.

(b) In RMDC vs. State of Mysore (supra), the challenge was to the

constitutionality of the Mysore Lotteries and Prize

Competitions Control and Tax Act, 1951 (‘Mysore Act’ for

short) passed by the Mysore Legislature which came into force

from 21st June, 1951 and the Rules made thereunder, which

came into force on 1st February, 1952. Earlier to that, the

Bombay High Court had observed that the amendment made

to the Bombay Lotteries and Prize Competition Control and

Tax Act, 1948 (‘Bombay Act’ for short) was unconstitutional

and that the taxes imposed under the provisions of the

Bombay Act were hit by Article 301 of the Constitution. The

result of that judgment was that though the prize competitions

could be controlled by the State within their respective

borders, their ramifications beyond those borders could only

be dealt with by any action under Article 252(1) of the

Constitution. It was for that reason that the States of Andhra

Pradesh, Bombay, Madras, Uttar Pradesh, Hyderabad,

Madhya Bharat, Pepsu and Saurashtra passed resolutions

under Article 252(1) of the Constitution authorizing

Parliament to legislate for the control and regulation of prize

competitions and in pursuance thereof, the Parliament passed

the Prize Competitions Act, 1955 (Act 42 of 1955) (Central Act)

which came into force on 1st April, 1956. On 24th February,

1956, the Mysore Legislature passed a resolution adopting the

said Central Act. Petitions were filed under Article 32 of the

Constitution before this Court challenging the validity of the

Central Act but the same were dismissed vide R.M.D.C. vs.

Union of India (supra).

Thereafter, certain amendments were made to the

Mysore Act, as originally passed in 1951. The Mysore

Amending Act was challenged in the High Court of Mysore by

a petition filed under Article 226 which was dismissed and

against that judgment and order, the appeal was brought

before this Court pursuant to a certificate issued by the High

Court under Article 132(1) of the Constitution. The challenge

to the constitutionality of the Mysore Amending Act was, inter

alia, on the ground that the Mysore Legislature, by adopting

the Central Act, was no longer competent to pass any law in

regard to prize competitions because the whole matter

including the power of taxation was surrendered in favour of

the Parliament.

While considering the resolutions passed by various States,

the question that arose for consideration of this Court was

whether the resolutions as passed and particularly the words

“control and regulation of prize puzzle competitions and all other

matters ancillary thereto” had the effect of surrendering the

whole subject of prize competitions to the Parliament i.e., every

matter and power connected therewith including the power to

tax. This Court held that the resolutions passed by the States

vis-à-vis Entry 34 of List II as per Article 252 of the

Constitution, did not take away the power of the State to

impose tax under Entry 62 of List II and the said power could

not have been said to have been surrendered. That by passing

the resolutions, the States did not surrender their power of

taxation and neither was Clause (2) of Article 252 of the

Constitution violated by the amendment of the Mysore Act.

That the tax imposed under the Mysore Act was in exercise of

the powers which the legislature possessed of imposing tax

under Entry 62 of List II.

In RMDC vs. State of Mysore (supra), after referring to

R.M.D. Chamarbaugwala (supra), it was categorically

observed as follows:-

“The fact that regulatory provisions have been

enacted to control gambling by issuing licences

and by imposing taxes does not in any way alter

the nature of gambling which is inherently vicious

and pernicious.”

Considering Entries 34 and 62 of List II, it was observed

that the subject of ‘betting gambling’ given in Entry 34 of List

II and the taxes on ‘betting gambling’ as given in Entry 62 of

List II have to be read separately as separate powers and

therefore when control and regulation of prize competitions

was surrendered to Parliament by the resolutions passed by

the States, the power to tax under Entry 62 of List II, which is

a separate head, cannot be said to have been surrendered. The

observations of Das, C.J. in R.M.D. Chamarbaugwala (supra)

were reiterated as under:-

“For the reasons stated above, we have come to

the conclusion that the impugned law is a law

with respect to betting and gambling under Entry

34 and the impugned taxing section is a law with

respect to tax on betting and gambling under

Entry 62 and that it was within the legislative

competence of the State legislature to have

enacted it. There is sufficient territorial nexus to

entitle the State legislature to collect the tax from

the petitioners who carry on the prize

competitions through the medium of a newspaper

printed and published outside the State of

Bombay.”

sought to be imposed by the Government of Maharashtra on

sale within the State of Maharashtra of tickets of lotteries

conducted by the Government of other States. While

considering the said question, it was observed that Entry 40 of

List I deals with lotteries organised by the Government of India

or the Government of State while Entry 34 of List II deals with

‘betting and gambling’. That the expression ‘betting and

gambling’ includes and has always been understood to have

included conduct of lotteries. But, the subject, ‘Lotteries

organised by the Government of India or the Government of

State’ has been taken out from the legislative field comprised

in the expression ‘betting and gambling’ and is reserved to be

dealt with by the Parliament. Since the subject was within the

exclusive legislative competence of Parliament in view of Article

246(1) and (3), no legislature of a State can make laws

touching lotteries organised by the Government of India or the

Government of a State. In our view, in the aforesaid case, the

scope of Entry 62 of List II in the context of Entry 34 of List II

and Entry 40 of List I did not come up for consideration.

(d) In H. Anraj vs. Government of Tamil Nadu- [(1986) 1 SCC

414] (For short, “Anraj II”), the amendment introduced to the

Tamil Nadu General Sales Tax Act, 1959, with effect from 28th

January, 1984, whereby lottery tickets were subjected to sales

tax, was assailed before this Court primarily on the ground

that the Tamil Nadu State Legislature lacked legislative

competence to enact such amendment. This Court considered

the question as to whether sales tax could be levied by a State

Legislature on the sale of lottery tickets within its territory,

based on the power vested with it under Entry 54 of List II

which at the time pertained to ‘taxes on the sale or purchase

of goods other than newspapers.’

In that background, this Court undertook an analysis of

the nature of lottery tickets, with a view to determine whether

they may be construed to be ‘goods’ as defined under the Sale

of Goods Act, the sale of which ‘goods’ may be subjected to

sales tax. This Court concluded that lottery tickets were ‘goods’

inasmuch as they carried with them the entitlement to

participate in a draw. That when lottery tickets were sold, a

beneficial interest in movable property of incorporeal or

intangible character, was being transferred. It was held that

when a lottery ticket is purchased, it carried with it a right to

participate in a draw, and therefore, sales tax may be imposed

on the same, in a similar manner as is imposed when any other

‘dealer’s merchandise’ which is bought and sold in the market,

is transferred.

(e) In M/s Suman Enterprises and Others (supra) an executive

order dated 6th October, 1989, was issued by the State of Tamil

Nadu prohibiting the sale of lottery tickets of other States. The

said Government order categorized lotteries as (a) Lotteries

organized by the Government of India; (b) Lotteries organized

by the Government of Tamil Nadu; (c) Lotteries organized by

the other State Governments; (d) Private lotteries authorized by

Government of Tamil Nadu; and (e) Private lotteries authorized

by other Governments but not authorized by this Government.

The Government order stated that sale of lottery tickets of

Government of Tamil Nadu and lotteries organized by the

Government of India or other State Governments alone would

be permitted within the said State. This Court observed that a

lottery ‘organised’ by a State would require certain basic and

essential concomitants to be satisfied as members of the public

when investing their money in such a lottery proceed on a trust

and on certain assumptions as to the genuineness, bona fides,

safety, security, the rectitude of administration etc. associated

with governmental functioning. As to the meaning of the said

organized lottery and the requirements thereof are concerned,

it was observed as under:-

“The first of those requirements is that the tickets

which bear the imprint and logo of the State must

be printed by or directly at the instance of the

State Government so as to ensure their

authenticity and genuineness and further to

ensure that any possibility of duplication of the

tickets and sale of fake tickets is provided against

and rendered impossible. Secondly, the State

itself must sell the tickets though, if it thinks

necessary or proper so to do, through a sole

distributor or selling agent or several agents or

distributors under terms and conditions

regulated by the agreement reached between the

parties. The sale proceeds of the tickets either

sold in retail or wholesale shall be credited to the

funds of the Government. Thirdly, the draws for

selecting the prize-winning tickets must be

conducted by the State itself, irrespective of the

size of the prize money. Fourthly, if any prize

money is unclaimed or is otherwise not

distributed by way of prize, it must revert to and

become the property of the State Government.

These, prima facie, appear to us to be the minimal

characteristics of a lottery which can claim to be

‘organised’ by the State.”

The aforesaid were said to be a minimal criteria which

rendered a lottery to be eligible to be called ‘organised’ by a

State. Thus, a distinction was made by this Court between the

said organized lottery and a lottery which is authorised by the

State. Further it was observed that the Government order of

Tamil Nadu impugned therein was construed to apply to

lotteries organized by the States in terms of the Entry 40 of List

I, while Entry 34 of List II dealt with ‘betting and gambling’.

(f) The nature and character of the lotteries was again deliberated

upon in B.R. Enterprises (supra) wherein it was held that

lotteries are a form of gambling. However, it was contended

that State lottery, if it is gambling, would lose its character as

such. While considering the said issue, reliance was placed by

this Court on R.M.D. Chamarbaugwala (supra), to hold that

gambling activities are in their very nature and essence, res

extra commercium. That, even if lotteries were permitted under

the regulating power of the State, it could not be given status

of ‘Trade and Commerce’ as understood in common parlance.

The ingredients of a contract of lottery tickets were considered

and reference was made to Anraj II (supra), wherein it had

been held that sale of lottery tickets was transfer of ‘Goods’

and hence liable for sales tax, by observing thus:-

“49. ….“A sale of a lottery ticket confers on the

purchaser thereof two rights (a) a right to

participate in the draw and (b) a right to claim a

prize contingent upon his being successful in the

draw. Both would be beneficial interests in

moveable property. Lottery tickets, not as physical

articles, but as slips of paper or memoranda

evidence not one but both these beneficial

interests in moveable property which are capable

of being transferred, assigned or sold and on their

transfer, assignment or sale both these beneficial

interests are made over to the purchaser for a

price.

***

The right to participate in the draw under a lottery

ticket remains a valuable right till the draw takes

place and it is for this reason that licensed agents

or wholesalers or dealers of such tickets are

enabled to effect sales thereof till the draw actually

takes place and as such till then the lottery tickets

constitute their stock-in-trade and therefore a

merchandise and goods, capable of being bought

or sold in the market.”

However, it was also noted that in Anraj II (supra) neither

was there any issue nor any contest as to whether the sale of

such lottery tickets would be ‘Trade and Commerce’. The said

decision proceeded as if it was ‘Trade and Commerce’ within

the meaning of Articles 301 to 304 of the Constitution in

Chapter XIII thereof. Hence, the nature of the transaction

involved in the sale of lottery tickets was examined and after

referring to various dictionaries and other authorities, it was

observed that there are three ingredients in the sale of lottery

tickets, namely, (i) prize, (ii) chance, and (iii) consideration. So,

when a person purchases a lottery ticket, he purchases it for

receiving a prize, which is by chance and the consideration is

the price of the ticket. The holder of such a ticket knows that

the consideration which he has paid may be for receiving

nothing. However, there may be a few who are lucky to receive

the prize which is just by chance.

While noting that Entry 62 of List II refers to taxes on

‘betting and gambling’ which inherently includes gambling, the

question whether State lotteries (gambling) could still qualify

to be ‘Trade and Commerce’ within the meaning of Chapter XIII

of the Constitution was considered. Noting that, there had

been a distinction made under the Government of India Act,

1935 between State lotteries and other forms of lotteries which

have been placed in different Lists and the same pattern had

been followed under the Constitution, this Court made a

distinction between ‘gambling’ and ‘trade’ and observed that

gambling inherently involved an element of chance, with no

skill, while trade involved skills, with no chance. That even

though the State may conduct lotteries, the element of chance

remains, with no skill involved and even the organisation and

conduct of the lotteries by the State Government are within the

boundaries of gambling. That the only purpose of having

stringent measures vis-à-vis lotteries being conducted by the

State was to inculcate faith in the participants of such lottery

being conducted fairly with no possibility of fraud or

misappropriation and deceit and assure the hopeful recipients

of high prizes that all is fair and safe. That the object was to

assure the participants that the proceeds from the sale of

lottery tickets are credited to the public accounts of the State

and would not be in the hands of any individual group or

association and thus to bring about a transparency in the

organisation of the lottery by the State, subject to the

regulation. Even then, the activity of conduct of the lottery

would remain in the realm of gambling. With respect to the

nature of lotteries conducted by a State vis-à-vis lotteries

conducted by any individual group or association, this Court

further observed as follows:-

“In this regard, there is no difference between

lotteries under Entry 34 List II and a lottery

organised by the State under Entry 40 List I. When

character of both the State organised lotteries and

other lotteries remains the same, by merely

placing the apparel of the State with authority of

law, would not make any difference; it remains

gambling as element of chance persists with no

element of skill. Even other lotteries under Entry

34 List II could only be run under the authority of

the State or the law of the State. The only

difference is in one case, authority is that of State

and in the other, Parliament.”

This Court further held that even a lottery, though not

organised by the State, but authorized by the State, has a

sanction in law. That gambling may be taxed and may be

authorized for specified purpose, but it would not attain the

status of trade like other trades and become res commercium.

As regards the applicability of the R.M.D. Chamarbaugwala

(supra) case to State lotteries this Court observed as follows:-

“……..no gambling could be commercium, hence

in our considered opinion the principle of RMDC

case would equally be applicable even to the State

organised lottery. In no uncertain terms the said

decision recorded that the Constitution makers

could never have conceived to give protection to

gambling either under Article 19(1)(g) or it as a

trade under Article 301 of the Constitution.”

Ultimately, in paragraph 73 of the said judgment, it was

observed that sale of lottery tickets organised by the State

could not be construed to be ‘trade and commerce’ and even if

it could be so construed, it cannot be raised to the status of

‘trade and commerce’ as understood in common parlance or

‘trade and commerce’ as used in Article 301. Thus, it was

concluded that lotteries organised by the State are also in the

nature of gambling as per the principles laid down in RMDC

vs. State of Mysore (supra). Therefore, the said principles

would be equally applicable to State lotteries.

(g) In Sunrise Associates vs. Government of NCT of Delhi -

[(2000) 10 SCC 420], a decision rendered by the High Court

of Delhi, following the ratio laid down in Anraj II, was

challenged before this Court on the principal ground that the

judgment in Anraj II required reconsideration. This Court

noted that Anraj II proceeded on the view that purchase of a

lottery ticket carried with it the right to participate in a draw.

It however, had not taken into account that the transaction of

sale of lottery tickets involved two elements which were

inextricably linked to each other, namely, (i) the right to

participate in a draw; and (ii) the right to win the prize,

dependent on chance. It was held in light of the second of the

two elements, that the sale of a lottery ticket may, in fact, be a

transfer of a chose in action and not transfer of a good. Having

regard to the said ambiguity as to the nature of right being

transferred when a lottery ticket is sold, the matter was

referred to a Bench of five Judges, who clarified the law on the

point in Sunrise Associates vs. Government of NCT of Delhi

- [(2006) 5 SCC 603]

(h) In Sunrise Associates vs. Government of NCT of Delhi -

[(2006) 5 SCC 603], which is a judgment of a Constitution

Bench of this Court authored by Ruma Pal, J., the question,

whether, sales tax could be levied by a State on the sale of

lottery tickets as considered in H. Anraj II (supra) was

reconsidered. This Court came to the conclusion about the

transfer of lottery tickets in the following manner:-

“14. The Court in H. Anraj [(1986) 1 SCC 414 :

1986 SCC (Tax) 190] came to the conclusion that

the transfer of a lottery ticket upon consideration

paid by the purchaser was not a mere contract

creating an obligation or right

in personam between the parties, but was in the

nature of a grant. The Court noted the various

definitions of the word “lottery” in dictionaries

and authoritative text books and decisions of the

courts and held that a lottery was composed of

three essential elements, namely, (1) chance, (2)

consideration; and (3) prize. As we have

mentioned earlier, according to the learned

Judges a sale of a lottery ticket conferred on the

purchaser two rights viz. (a) the right to

participate in the draw, and (b) the right to claim

a prize contingent upon the purchaser being

successful in the draw. Both were held to be

beneficial interests in movable property, the

former in praesenti, the latter in futuro depending

on the contingency.”

Ultimately, in paragraphs 41 and 44, the Constitution

Bench observed as under :-

“41. A lottery ticket has no value in itself. It is a

mere piece of paper. Its value lies in the fact that

it represents a chance or a right to a conditional

benefit of winning a prize of a greater value than

the consideration paid for the transfer of that

chance. It is nothing more than a token or

evidence of this right. The Court in H.

Anraj [(1986) 1 SCC 414 : 1986 SCC (Tax) 190] ,

as we have seen, held that a lottery ticket is a slip

of paper or memoranda evidencing the transfer of

certain rights. We agree.

42. …..

43 …..

44. The question is, what is this right which the

ticket represents? There can be no doubt that on

purchasing a lottery ticket, the purchaser would

have a claim to a conditional interest in the prize

money which is not in the purchaser's

possession. The right would fall squarely within

the definition of an actionable claim and would

therefore be excluded from the definition of

“goods” under the Sale of Goods Act and the sales

tax statutes. This was also accepted in H.

Anraj [(1986) 1 SCC 414 : 1986 SCC (Tax) 190]

when the Court said that to the extent that the

sale of a lottery ticket involved a transfer of the

right to claim a prize depending on chance, it was

an assignment of an actionable claim.

Significantly in B.R. Enterprises v. State of

U.P. [(1999) 9 SCC 700] construing H.

Anraj [(1986) 1 SCC 414 : 1986 SCC (Tax) 190]

the Court said: (SCC p. 746, para 52)

“52. So, we find three ingredients in

the sale of lottery tickets, namely, (i)

prize, (ii) chance, and (iii)

consideration. So, when one

purchases a lottery ticket, he

purchases for a prize, which is by

chance and the consideration is the

price of the ticket.”

Thus, the Constitution Bench held that the lottery ticket

would represent an actionable claim and hence is excluded

from the definition of ‘Goods’ under the Sale of Goods Act and

the sales tax statutes.

It was further observed that the distinction drawn in H.

Anraj II (supra) between the chance to win and the right to

participate in the draw was unwarranted because the right to

participate in the draw is a part of the composite right of the

chance to win and it does not feature separately in the

definition of the word ‘lottery’. It is an inseparable part of the

chance to win and not a different right, and therefore, the

separation between the two was not right. In other words, a

draw without a chance to win is meaningless; and one cannot

claim a prize without participating in a draw. In fact, the

transfer of the chance to win assumes participation in the

draw. The consideration is paid for the chance to win after

participating in the draw and not merely for the right to

participate. The right to participate being an inseparable part

of the chance to win, is therefore part of an actionable claim.

It was also observed that the right to participate and the

chance to win are both rights in futuro. It was thus emphasized

that there is no sale of goods within the meaning of sales tax

statutes when the right to participate in a draw is transferred

by sale of a lottery ticket and that the object of right to

participate would be to win a prize. Hence, the right to

participate in a lottery is an actionable claim or what is called

as chose in action. In view of the above discussion, it was held

that H. Anraj II (supra) was incorrectly decided by holding that

a sale of lottery ticket involved a sale of goods. It was

emphasised that there was no sale of goods within the

meaning of Sales Tax Acts of the different States but at the

highest a transfer of actionable claim. Consequently, all the

decisions which held otherwise were overruled, though

prospectively, with effect from the date of the judgment in

Sunrise Associates vs. Government of NCT of Delhi –

[(2006) 5 SCC 603].

(i) Skill Loto Solutions Pvt. Ltd (supra) is a recent judgment of

a three–Judge Bench of this Court in which the petition filed

by an authorized agent for sale and distribution of lotteries

organised by the State of Punjab, had impugned the definition

of ‘goods’ under Section 2(52) of Central Goods and Service Tax

Act, 2017 (for short, ‘CGST Act’) to the extent that actionable

claims were included under ‘goods’. Consequently,

notifications issued pertaining to levy of tax on lotteries were

also challenged. The petitioner therein had sought a

declaration that the levy of tax on lottery was discretionary and

violative of Article 14, 19(1)(g), 301 and 304 of the Constitution

of India. The following questions of law were taken up for

consideration in the said Writ Petition:-

“12. …

(I) Whether the writ petition is not maintainable

under Article 32 of the Constitution of India since

the writ petition relates to lottery, which is res

extra commercium and the petitioner cannot

claim protection under Article 19(1)(g)?

(II) Whether the inclusion of actionable claim in

the definition of goods as given in Section 2(52) of

Central Goods and Services Tax Act, 2017 is

contrary to the legal meaning of goods and

unconstitutional?

(III) Whether the Constitution Bench judgment of

this Court in Sunrise Associates (supra) in

paragraphs 33, 40, 43 and 48 of the judgment

has laid down as the proposition of law that

lottery is an actionable claim or the observations

made in the judgment were only an obiter

dicta and not declaration of law?

(IV) Whether exclusion of lottery, betting and

gambling from Item No. 6 Schedule III of Central

Goods and Services Tax Act, 2017 is hostile

discrimination and violative of Article 14 of the

Constitution of India?

(V) Whether while determining the face value of

the lottery tickets for levy of GST, prize money is

to be excluded for purposes of levy of GST?”

After noting that the CGST Act, 2017, being an Act of

Parliament in exercise of power of Parliament as conferred

under Article 246A of the Constitution, this Court considered

a catena of judgments of this Court touching upon the activity

of organising and conducting lotteries, levy of taxes on

lotteries, etc. and answered Question I by holding that the Writ

Petition filed under Article 32 of the Constitution was

maintainable. Question II and III were also answered by

holding that the inclusion of actionable claim in the definition

‘Goods’ as given in Section 2(52) of the CGST Act, 2017 is not

contrary to the legal meaning of ‘goods’ and is neither illegal

nor unconstitutional. It was further held that in Sunrise

Associates, the Constitution Bench had laid down that lottery

is an actionable claim and the same was not an obiter dicta.

With regard to question IV as to whether there was any hostile

discrimination in the exclusion of lottery, betting and gambling

from Item No. 6 Schedule III of CGST Act, 2017, it was held

that there was no violation of the equality clause. The relevant

observations of this Court are extracted as under:

“69. In a later decision, Union of India v. Martin

Lottery Agencies Limited, (2009) 12 SCC 209, this

Court had occasion to consider levy of service tax on

the lottery tickets. This Court had held that law as it

stands today recognises lottery to be gambling, which

is res extra commercium. In paragraph 17, following

has been laid down:—

“17. We fail to persuade ourselves to agree

with the aforementioned submission. The

law, as it stands today (although it is

possible that this Court in future may take

a different view), recognises lottery to be

gambling. Gambling is res extra

commercium as has been held by this Court

in State of Bombay v. R.M.D.

Chamarbaugwala [AIR 1957 SC 699] and

B.R. Enterprises v. State of U.P. [(1999) 9

SCC 700]”

70. Lottery, betting and gambling are well known

concepts and have been in practice in this country

since before independence and were regulated and

taxed by different legislations. When Act, 2017

defines the goods to include actionable claims and

included only three categories of actionable claims,

i.e., lottery, betting and gambling for purposes of levy

of GST, it cannot be said that there was no rationale

for including these three actionable claims for tax

purposes. Regulation including taxation in one or

other form on the activities namely lottery, betting

and gambling has been in existence since last several

decades. When the parliament has included above

three for purpose of imposing GST and not taxed

other actionable claims, it cannot be said that there

is no rationale or reason for taxing above three and

leaving others.

71. It is a duty of the State to strive to promote the

welfare of the people by securing and protecting, as

effectively as it may, a social order in which justice,

social, economic and political, shall inform all the

institutions of the national life. The Constitution

Bench in State of Bombay v. R.M.D. Chamarbaugwala

(supra) has clearly stated that Constitution makers

who set up an ideal welfare State have never intended

to elevate betting and gambling on the level of

country’s trade or business or commerce. In this

country, the aforesaid were never accorded

recognition of trade, business or commerce and were

always regulated and taxing the lottery, gambling

and betting was with the objective as noted by the

Constitution Bench in the case of State of Bombay v.

R.M.D. Chamarbaugwala (supra), we, thus, do not

accept the submission of the petitioner that there is

any hostile discrimination in taxing the lottery,

betting and gambling and not taxing other actionable

claims. The rationale to tax the aforesaid is easily

comprehensible as noted above. Hence, we do not

find any violation of Article 14 in Item No. 6 of

Schedule III of the Act, 2017. ”

It is clear from the paragraphs extracted above that this

Court has held that for the purpose of levy of taxation, the

actionable claims arising out of participation in a lottery or on

placing a bet or via gambling in any other form, may be placed

in a class distinct from the rest of the actionable claims and be

subjected to taxation accordingly. Such acknowledgment by

this Court establishes a corelation between ‘lotteries’ and

‘betting and gambling’ and places them in the same

category/class.

In answering Question V, it was held that having regard to

the statutory provisions of the CGST Act, 2017, the value of

taxable supply is a matter of statutory regulation and when

the value is to be the transaction value which is to be

determined as per Section 15, it is not permissible to compute

the value of taxable supply by excluding the prize money which

has been contemplated in the statutory scheme. When prize

paid by the distributor/agent is not to be excluded from the

value of taxable supply, the prize money should be included

for computing the taxable value of supply. Thus, while

determining the taxable value of supply, the prize money is not

to be excluded for the purpose of levy of goods and service tax.

In view of the above answers, the writ petition was dismissed.

(j) In Reader’s Digest Association ltd. v. Williams – [(1976) 1

W.L.R. 1109], it was said:

“A lottery is the distribution of prizes by

chance where the person taking part in the

operation, or a substantial number of them,

make a payment or consideration in return for

obtaining their chance of a prize. There are

really three points one must look for in

deciding whether a lottery has been

established: first of all, the distribution of

prizes, secondly, the fact this was to be done

by means of a chance and thirdly, that there

must be some actual contribution made by the

participants in return for their obtaining a

chance to take part in the lottery. The above

laid down principle shows that there should be

three elements to establish a lottery such as;

prize, chance and consideration.”

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It may be noted that in the aforesaid case too, the passage

reproduced below is included.

“A lottery is the distribution of prizes by chance

where the person taking part in the operation,

or a substantial number of them, make a

payment or consideration in return for

obtaining their chance of a prize.”

109. What emerges from the discussion of the decisions of this

Court referred to above is that ‘lotteries’ are a species within the

genus of ‘gambling.’ That one of the essential features of a lottery

is its inherent gambling nature, which persists irrespective of

whether the lottery scheme is conducted by the Government of

India, Government of a State or by a private entity. ‘Gambling’

activities include a whole gamut of activities, including, but not

limited to ‘lotteries.’

110. It is also settled that the sale of a lottery ticket involves two

elements, namely, (i) the right to participate in a draw; and (ii) the

right to win the prize, dependent on chance. Therefore, sale of a

lottery ticket is in the nature of a transfer of an actionable claim

or a chose in action.

Discussion :

111. Having regard to the aforesaid discussion, we now answer

the points for consideration. While doing so, the following

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approach is being adopted with regard to the interpretation of the

Entries of the Lists of the Seventh Schedule of the Constitution:

1. The Entries in the different Lists should be read

together without giving a narrow meaning to any of

them. The powers of the Union and the State

Legislatures are expressed in precise and definite

terms. Hence, there can be no broader interpretation

given to one Entry than to the other.

Even where an Entry is worded in wide terms, it

cannot be so interpreted as to negate or override

another Entry or make another Entry meaningless.

In case of an apparent conflict between different

Entries, it is the duty of the Court to reconcile them

in the first instance.

2. In case of an apparent overlapping between two

Entries, the doctrine of pith and substance has to be

applied to find out the true nature of a legislation

and the Entry within which it would fall.

3. Where one Entry is made ‘subject to’ another Entry,

all that it means is that out of the scope of the former

Entry, a field of legislation covered by the latter

Entry has been reserved to be specially dealt with by

the appropriate Legislature.

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4. When one item is general and another specific, the

latter will exclude the former on a subject of

legislation. If, however, they cannot be fairly

reconciled, the power enumerated in List II must

give way to List I.

5. 5. On a close perusal of the Entries in the three Lists

of the Seventh Schedule of the Constitution, it is

discerned that the Constitution has divided the

topics of legislation into the following three broad

categories: (i) Entries enabling laws to be made; (ii)

Entries enabling taxes to be imposed; and (iii)

Entries enabling fees and stamp duties to be

collected. Thus, the entries on levy of taxes are

specifically mentioned. Therefore, per se, there

cannot be a conflict of taxation power of Union and

the State. Thus, in substance the taxing power can

be derived only from a specific taxing Entry in an

appropriate List in the Seventh Schedule. Such a

power has to be determined by the nature of the tax

and not the measure or machinery set up by the

statute.

112. At the same time, Article 265 of the Constitution which states

that no tax shall be levied or collected except by authority of law,

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ought to be borne in mind. In the instant cases, authority of law

would imply the competence of the State Legislatures of

Karnataka and Kerala in enacting the impugned laws.

113. In view of the detailed discussion made above, we find that

the dictum of this Court in M.P.V. Sundararamier analysing the

entries in Lists I and II dealing with various subjects of legislation

and entries concerning taxation being separate and distinct must

be borne in mind while interpreting the impugned Acts. That is

the constitutional scheme. In this regard, we reiterate what has

been observed in Hoechst Pharmaceuticals Ltd., to the effect

that taxation is considered to be a distinct matter for purposes of

legislative competence and the power to tax cannot be deduced

from the general legislative Entry as an ancillary power. This is

because, as already stated, the general subjects of legislation are

dealt with in one group of Entries and the power of taxation in a

separate group. Also, a power to legislate as to the principal matter

specifically mentioned in the Entry shall also include within its

expanse legislation touching only upon incidental and ancillary

matters. The power to levy tax cannot be considered to be an

incidental and ancillary matter while interpreting an entry in the

Lists concerning legislative competence of the Parliament or

Legislature of any State to enact laws on the subjects mentioned

in the Entry. It is reiterated that taxation is not intended to be

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comprised in the main subject of an entry in the Lists but being a

distinct matter for the purpose of legislative competence must be

relatable to the specific entry dealing with taxation.

114. As a sequitur, it is observed that Entry 97 in List I which is

the residuary entry relatable to Article 248 of the Constitution

cannot be invoked or pressed into service when a specific entry

empowering the Parliament or the Legislature of a State to pass

laws regarding the taxation on any subject is specifically

enumerated either in List I or List II.

115. It would also be useful to mention that since the legislative

competence to pass a law relating to taxation being specific and

distinct in List I or List II, such an entry is not found in List III. In

other words, both the Parliament as well as the Legislature of a

State cannot have the competence to levy tax on a particular

subject and hence, there is no specific entry regarding taxation in

List III or the Concurrent List. In fact, Entry 47 of List III refers

only to power to impose ‘fees in respect of any of the matters in

the List but not including fees taken in any court’. The distinction

between the power to levy fees and the power to levy a tax is well

known and it would not be necessary to go into that aspect of the

matter in the present cases except to highlight that there is no

Entry for taxation in the Concurrent List. Therefore, while

interpreting a taxation Entry in List I or List II, all efforts must be

105

made to interpret it in such a way as to give content and meaning

to the same having regard to the Constitutional scheme under

which the distribution of legislative powers have been envisaged

in the Seventh Schedule and bearing in mind and the object and

intent behind it.

116. Therefore, before approaching Entry 97 of List I which is a

residuary Entry in the Union List (List I), it would be necessary to

interpret the relevant taxation Entry in the State List and it is only

in the absence of there being legislative competence in the relevant

taxation Entry in the State List could such a power be traced to

Entry 97 of List I in the residuary list provided such a power is

not also traceable to any Entry in the Union List. This is because

in List I itself the entries concerning taxation are separate and

distinct. Such Entries are from Entries 82 to 92B and Entry 96 of

List I deals with fees in respect of any of the matters in the List

but not including fees taken in any court. Therefore, even in

respect of any subject in any Entry in List I, the power to tax

cannot be implied or read under Entry 97 of the said List which is

only a residuary entry, if the same is enumerated in List II in

which case it would come within the legislative competence of the

State Legislature.

117. In the above backdrop, we shall now consider Entry 40 of

List I and Entries 34 and 62 of List II to assess whether there is

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any apparent conflict/overlapping between the same. We have

already discussed in detail the concept of ‘betting and gambling’

as well as ‘lotteries’. It is not in dispute that a scheme of lottery is

a form of gambling. As rightly contended by Sri C. Aryama

Sundaram, learned Senior Counsel appearing for the State of

Nagaland, the expression ‘betting and gambling’ is a genus while

the expression ‘lottery’ is a species of betting and gambling. We

have also alluded to the same in detail above and we have referred

to the judgments of this Court in the said context. Thus, the term

‘lotteries’ being a species of the activity of ‘betting and gambling’

is carved out of Entry 34 of List II and placed in Entry 40 of List I

only to the extent of lotteries organised by the Government of India

or the Government of a State. That means lotteries organised by

private parties or entities in a State or lotteries authorised by

government of a State continue to remain within the scope and

ambit of Entry 34 of List II dealing with ‘betting and gambling’.

The inference is that in so far as lotteries organised by the

Government of India or the Government of any State is concerned,

in order to have uniformity of laws throughout the country

governing such lotteries the framers of the Constitution have

intentionally included the said activity in Entry 40 of List I.

Consequently, the Parliament has legislative competence to pass

laws on lotteries organised by the Government of India or the

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Government of any State. This means the Parliament can pass

laws to regulate organisation of lotteries by the Government of

India or the Government of a State uniformly throughout the

country, as indubitably the conduct of such lotteries by the

sovereign State is a source of revenue for the Government of India.

Therefore, in order to enhance the faith of the people in the

organisation and conduct of such lotteries throughout the

territories of India by the Government of India or the Government

of any State, said regulation by the Parliament is enabled by

placing the subject in Entry 40 of List I. Consequently, the 1998

Act has been passed by the Parliament which is regulatory in

nature, as has been discussed above. If, for the purpose and object

of regulation of lotteries organised by the Government of India or

the Government of any State, any fee is to be levied it is as per

Entry 96 of List I.

118. But the question is, whether, while interpreting Entry 40 of

List I alongside Entries 34 and 62 of List II, the power to tax

lotteries organised by the Government of India or the Government

of a State is also taken away from Entry 62 of List II and is to be

read within the ambit of Entry 40 of List I and therefore, the States

of Karnataka and Kerala in the instant cases had no legislative

competence to enact the impugned Acts. We have already stated

that only lotteries organised by the Government of India or the

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Government of a State is carved out of the subject, ‘betting and

gambling’ in Entry 34 of List II and is placed in Entry 40 of List I

and Entry 62 of List II, inter alia, speaks of tax on ‘betting and

gambling’. By that, we do not think by that the State Legislatures

have been denuded of their power to levy tax under Entry 62 of

List II on lotteries organised by Government of India or

Government of a State. We say so for the following reasons:

(a) Entry 62 of List II is a specific taxation entry on luxuries,

including taxes on entertainments, amusements, betting

and gambling. The expression ‘betting and gambling’ would

have to be read ejusdem generis with entertainments and

amusements. The tax is thus on the activity of ‘betting and

gambling’ as it is on an activity.

(b) The expression ‘betting and gambling’ is also found in Entry

34 of List II. We have discussed at length above the content

of the said expression and as to what it encompasses. The

activity of ‘betting and gambling’ includes, inter alia,

lotteries. Lotteries can be conducted by the Government of

India or the Government of States or authorised by a State

or be conducted by private entities in a State. Thus, a lottery

conducted by any of the above entities, Government or

private is an activity falling within the nomenclature of

‘betting and gambling’ which is the subject in Entry 34

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List II. But what has been carved out of Entry 34 of List II is

only lotteries conducted by the Government of India or the

Government of any State. Therefore, all other types of

lotteries continue to remain within the scope and ambit of

‘betting and gambling’ as an activity in Entry 34 of List II.

activity which is ‘betting and gambling’ is reserved with the

State legislature and cannot be read within the scope and

ambit of Entry 40 of List I which is inherently restricted in

its scope. We say so for the following reasons:

(i) First, when a specific entry regarding taxation is

provided in List II empowering the State Legislature to

levy tax on a subject, namely, ‘betting and gambling’

amongst other similar activities, the same cannot be

read by implication in an entry of List I namely Entry 40

of List I. This is because a taxation entry is separate and

distinct from an entry dealing on a particular subject.

This principle has been adequately explained by this

Court in several judgments such as M.P.V.

Sundararamier and followed in Hoechst

Pharmaceuticals, Kesoram discussed above.

(ii) Second, a taxation entry or legislative power to levy a tax

on ‘betting and gambling’ in the instant case, cannot be

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split between the Parliament and the State Legislature

when the said power is expressly enumerated in Entry

62 of List II. This is the constitutional scheme under the

three Lists. This is as per the constitutional scheme.

This is also evident on a perusal of the Entries of List III

(Concurrent List) which empowers both the Union as

well as State Legislature to enact laws on subjects

mentioned therein and the powers to levy a tax is

conspicuous by its absence.

(iii) Third, the object and purpose of Entry 62 of List II is to

tax the activity of ‘betting and gambling’, whether it is

conducted by a private entity or a State authorised

entity or an instrumentality or agency or for that matter

by the Government of India or the Government of any

State. This is because irrespective of who organises a

lottery scheme, it is ultimately a species of gambling. It

is nobody’s case that participation in a lottery scheme

is not gambling. The said activity i.e. lottery scheme can

be conducted throughout the territory of India provided

a particular State grants permission to organise and

conduct the said activity in that State. Thus,

organisation and conducting of lottery can be a pan

India activity of gambling and when a particular State

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permits a lottery scheme conducted by the Government

of India or the Government of any State in that State, a

tax is leviable on the same, which is a tax on gambling.

Thus Entry 62 of List II empowers the State Legislatures

to impose tax on ‘gambling’ irrespective of who or which

entity is conducting it including the Government of

India or Government of any State.

(iv) Fourth, ‘betting and gambling’ is a subject enumerated

in Entry 34 of List II and is a State subject. Therefore,

the permission for conducting any betting and gambling

activities within a State, including conduct of a lottery

scheme under the said Entry, gives competence to the

State Legislatures to also tax the said activity

irrespective of who conducts it. This is because what is

being taxed is a gambling activity which is squarely

covered under Entry 34 of List II and not on lottery per

se conducted by Government of India or Government of

a State.

Therefore, the State Legislature has the competence

to tax lottery scheme which is gambling being

conducted not only by the Government of India or the

Government of any State or by any other agency or

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instrumentality of a particular State but also by a

private entity within the State as gambling.

(v) Fifth, the contention of respondents-States that the

subject, ‘lotteries organised by the Government of India

or the Government of a State’ being placed in Entry 40

of List I would also empower only the Parliament to

impose a tax on the same by way of implication under

the said Entry itself is not a correct interpretation of the

Entries in the Lists.

(vi) Sixth, Entry 97 of List I can be invoked only when any

matter is not enumerated in List II or List III including

any tax not mentioned in the said Lists. There is no

specific Entry for levy of tax on betting and gambling in

List I. It is only in Entry 62 of List II. Thus, Entry 62 of

List II gives legislative competence to a State Legislature

to levy a tax on ‘betting and gambling’. This would also

include a tax on organisation and conduct of lotteries,

whether by the Central Government or Government of

any State or authorised by a State or by any private

entity within the State when permission has been given

by a State Government to conduct such an activity of

gambling. Thus, Entries 34 and 62 of List II which deal

with ‘betting and gambling’ have been interpreted

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identically and the said expression is given an identical

meaning. Thus, lotteries organised by the Government

of India or the Government of a State is only excluded

from Entry 34 of List II which deals with ‘betting and

gambling’ only, for the purpose of regulation by the

Parliament and not for levy of tax.

(vii) Seventh, when the State Government has the legislative

competence to levy tax on ‘betting and gambling’ as a

specific taxation entry is provided to levy tax on the said

activity under Entry 62 of List II the said entry must be

interpreted comprehensively and not in a restricted or

narrow manner by excluding taxation on gambling on

lottery conducted by Government of India or any

Government of a State from the purview of the said

Entry and read into Entry 40 of List I by implication.

(viii)Eighth, such a power to levy taxes cannot be read into

Entry 40 of List I by implication or into Entry 97 of List

I as a residuary power. Such interpretation, if endorsed,

it would do violence to the manner of interpretation of

Entries in the Lists and prove to be contrary to the

Articles of the Constitution and judgments of this Court

cited above.

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(ix) Ninth, if the State Government does not permit a

particular species of betting and gambling activity in the

State including the organisation and conduct of lotteries

by the Government of India or the Government of any

State then obviously it cannot tax such an activity. But

if it permits any species of betting and gambling activity

within the State in terms of Entry 34 of List II then the

State has legislative competence to tax such an activity

of betting and gambling including lotteries irrespective

of who conducts it as per Entry 64 of List II.

(x) Tenth, Entry 40 of List I is meant only for the regulation

of lotteries organised by the Government of India or the

Government of a State. The said Entry cannot be

expanded to cover the power to levy taxes on lotteries by

the Parliament when as such a power is envisaged in

Entry 62 of List II. The Parliament, therefore, cannot tax

a gambling activity, namely, organisation of lotteries

conducted by the Government of India or for

Government of a State on the strength of Entry 40 of

List I. It may however regulate the said activity. Any

impost strictly for the purpose of regulation of lotteries

is permissible so long as it is not a tax on gambling

115

which is only within the ambit of only Entry 62 of List

II.

In other words, in order to have uniformity in the

regulation of lotteries organised by the Government of

India or the Government of a State throughout the

territory of India, Entry 40 is found in List I and the

Parliament is vested with the power to regulate the

same.

(xi) Eleventh, any betting and gambling activity conducted

by a private entity in a State or is authorized by a State

Government can be regulated only by the State

Legislature. This is because of Entry 34 in of List II

which deals with betting and gambling which also

includes lotteries and the same does not fall within

Entry 40 of List I.

(xii) Twelfth, when a Government of a State permits

organisation or conduct of lotteries either by the

Government of India or the Government of any State

thereby enabling participation in the scheme of lottery

by those persons who have purchased the lottery tickets

in the State, the territorial nexus is established as

lottery, being species of betting and gambling, is

permitted to be conducted within the State which has

116

sought to impose taxation on the conduct of lotteries.

Such nexus persists even when the lotteries promoted

within the taxing State are conducted by the

Government of India or the Government of any other

State. Therefore, we do not find any merit in the

contention regarding the impugned laws being invalid

on account of extra territorial operation.

119. In conclusion we hold that the tax sought to be imposed by

the State Legislatures of Karnataka and Kerala by way of the

impugned Acts, is traceable to the power conferred on the State

Legislatures under Entry 62 of List II. The said entry contemplates

imposition of taxes, inter alia, on the entire genus of ‘betting and

gambling’. having concluded that ‘lottery’ of every kind, whether

organized by the Government of India or the Government of a

State or by a private entity is included within the genus of

‘gambling’, we find no reason to hold that State organized lotteries

are excluded from the ambit of ‘betting and gambling’ as

appearing in Entry 62 of List II. We are not inclined to accept the

view that ‘lotteries organized by the Government of India or the

Government of a State’ are to be excluded from the expression

‘betting and gambling’ as appearing in Entry 62 of List II which

deals with taxes on gambling activities, simply because such

category of lotteries is excluded from the regulatory field relatable

117

to betting and gambling under Entry 34 of List II and included in

Entry 40 of List I. Exclusion of a legislative field from a term

appearing in a general Entry, does not necessarily mean that such

field ought to be excluded from the taxation Entry. This means

that the term ‘betting and gambling’ in Entry 62 of List II is being

construed in the same way as in Entry 34 of List II. The expression

is accorded the same meaning and interpretation in both the

Entries, i.e., that gambling includes lotteries. However, ‘lotteries

organized by the Government of India or the Government of a

State’ have been carved out of Entry 34 of List II and been placed

with the Union. Entry 34 of List II is denuded to this limited

extent. Such transposition of power does not mean that the term

‘betting and gambling’ has a different meaning in each of the

aforesaid Entries. It only implies that for regulatory purposes,

having regard to the need for uniform legislation throughout the

territory of India, the Parliament has been conferred with

exclusive jurisdiction to regulate the conduct of lotteries,

throughout the territory of India.

120. In the instant case, the tax imposed is on the ‘gambling’

nature of lotteries, which field is covered in its entirety under

Entry 62 of List II and the power to impose tax under this Entry

extends in relation to lottery of every kind, with no distinction as

to the entity organizing the same.

118

121. Thus, in the context of lotteries, the organisation and

conduct of a lottery scheme being a pan India activity, when any

State Government permits the Government of India or any other

State Government to organise the lottery scheme in that State,

Entry 62 of List II would enable the Legislature of that State to

levy taxes on the same.

122. Hence, in our view, the Legislatures of the State of Karnataka

and Kerala were fully competent to enact the impugned Acts and

levy taxes on the activity of ‘betting and gambling’ being organised

and conducted in the said respective States, including lotteries

conducted by the Government of India or the Government of any

State.

123. The Division Benches of the High Courts was not right in

holding that the State Legislatures had no power to levy tax on

lotteries conducted by the Government of India or the Government

of any State or Union territory in the State of Karnataka as such

a power could be read in Entry 40 or Entry 97 of List I and only

the Parliament could levy such a tax. Since we have held that the

States of Karnataka and Kerala had the legislative competence to

enact the impugned Acts, the question of refund of tax collected

under the same does not arise.

119

Summary of Conclusions :

124. In view of the aforesaid discussion, we come to the

following summary of conclusions: -

(i) That the subject ‘betting and gambling’ in Entry 34 of

List II is a State subject.

(ii) From the judgments of this Court, it is now clear that

‘lotteries’ is a species of gambling activity and hence

lotteries is within the ambit of ‘betting and gambling’

as appearing in Entry 34 List II.

(iii) The expression ‘betting and gambling’ is relatable to an

activity which is in the nature of ‘betting and gambling’.

Thus, all kinds and types of ‘betting and gambling’ fall

within the subject of Entry 34 of List II. The expression

‘betting and gambling’ is thus a genus it includes

several types or species of activities such as horse

racing, wheeling and other local variations/forms of

‘betting and gambling’ activity. The subject ‘lotteries

organised by the Government of India or the

Government of a State’ in Entry 40 of List I is a Union

subject. It is only lotteries organised by the

Government of India or the Government of State in

terms of Entry 40 of List I which are excluded from

Entry 34 of List II. In other words, if lotteries are

120

conducted by private parties or by instrumentalities or

agencies authorized, by Government of India or the

Government of State, it would come within the scope

and ambit of Entry 34 of List II.

(iv) Thus, the State legislatures are denuded of their

powers under Entry 34 of List II only to the extent of

lotteries organised by the Government of India or the

Government of a State, in terms of Entry 40 of List I. In

other words, except what is excluded in terms of Entry

40 of List I, all other activities which are in the nature

of ‘betting and gambling’ would come within the scope

and ambit of Entry 34 of List II. Thus, ‘betting and

gambling’ is a State subject except to the extent of it

being denuded of its powers insofar as Entry 40 of

List I is concerned.

(v) Entry 62 of List II is a specific taxation Entry on

‘luxuries, including taxes on entertainments,

amusements, betting and gambling’. The power to tax

is on all activities which are in the nature of ‘betting

and gambling,’ including lotteries. Since, there is no

dispute that lotteries, irrespective of whether it is

conducted or it is organised by the Government of India

or the Government of State or is authorized by the State

121

or is conducted by an agency or instrumentality of

State Government or a Central Government or any

private player, is ‘betting and gambling’, the State

Legislatures have the power to tax lotteries under Entry

62 of List II. This is because the taxation contemplated

under the said Entry is on ‘betting and gambling’

activities which also includes lotteries, irrespective of

the entity conducting the same. Hence, the legislations

impugned are valid as the Karnataka and Kerala State

Legislatures possessed legislative competence to enact

such Acts.

(vi) Thus, the scope and ambit of lotteries organised by

Government of India or Government of State under

Entry 40 of List I is only in the realm of regulation of

such lotteries. The said Entry does not take within its

contours the power to impose taxation on lotteries

conducted by the Government of India or the

Government of State.

(vii) We also hold that lottery schemes by the Government

of other States are organised/conducted in the State of

Karnataka or Kerala and there are express provisions

under the impugned Acts for registration of the agents

or promoters of the Governments of respective States

122

for conducting the lottery schemes in the State of

Karnataka and the State of Kerala. This itself indicates

sufficient territorial nexus between the respondents–

States who are organising the lottery and the States of

Karnataka and Kerala.

(viii) In view of the aforesaid conclusions, we find that

Division Benches of the High Courts of Kerala and

Karnataka were not right in holding that the respective

State Legislatures had no legislative competence to

impose tax on the lotteries conducted by other States

in their State (in the State of Karnataka and Kerala

respectively).

125. In the result, the appeals filed by the State of Karnataka

and State of Kerala and others are allowed by setting aside

the impugned judgments passed by the Division Benches of

the High Courts of Karnataka and Kerala.

Parties to bear their respective costs.

…..……………………..J.

[M.R. SHAH]

……………………………J.

[B.V. NAGARATHNA]

NEW DELHI;

23rd MARCH, 2022.

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STATE OF KARNATAKA VS STATE OF MEGHALAYA - Supreme Court Case

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