STATE OF KARNATAKA VS STATE OF MEGHALAYA - Supreme Court Case

STATE OF KARNATAKA VS STATE OF MEGHALAYA - Supreme Court Case 

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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.
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(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
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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
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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
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‘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
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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
17
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
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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.
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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.
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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.
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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.
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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
23
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
24
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
25
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.
26
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
27
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
28
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.
29
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.
30
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.
31
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
32
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
33
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
34
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
35
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
36
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
37
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
38
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).
(c) Clause (3) thereof, states that the Legislature of any State
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.
39
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
40
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
41
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).
42
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
43
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
44
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
45
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
46
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
47
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 :
48
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
49
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-
50
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
51
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 :
52
“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
53
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
54
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
55
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
56
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
57
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
58
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
59
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
60
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
61
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
62
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;
(c) the State Government shall sell the tickets either
itself or through distributors or selling agents;
63
(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
64
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
65
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
66
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.
67
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
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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
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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
70
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.
71
(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
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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.
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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
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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
75
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:
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(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
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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.
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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-
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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
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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.
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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
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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.”
(c) In H. Anraj (supra), the petitioner therein questioned the ban
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
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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
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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
85
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
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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
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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
88
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
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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
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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
91
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
92
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
93
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
94
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
95
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
96
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
97
‘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
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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.
99
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,
103
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
104
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
106
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
107
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
108
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
109
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.
(c) Hence under Entry 62 of List II, the specific power to tax an
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
110
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
111
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
112
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
113
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.
114
(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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