STATE OF KARNATAKA & ANR. ETC. versus STATE OF MEGHALAYA & ANR. ETC. on 23 March 2022

SUPREME COURT REPORTS

[2022] 18 S.C.R.

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STATE OF KARNATAKA & ANR. ETC.

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STATE OF MEGHALAYA & ANR. ETC.

(Civil Appeal Nos.10466-10476 of 2011)

BMARCH 23, 2022

[M. R. SHAH AND B. V. NAGARATHNA, JJ.]

Constitution of India, 1950 – Article 246 – Seventh Schedule– Entry 40 of List 1 – Entry 34 of List II – Entry 62 of List II –Karnataka Tax on Lotteries Act, 2004 – Kerala Tax on PaperCLotteries Act, 2005 - Division Bench of the High Court of Karnatakavide impugned judgments dated 27th December, 2010 and 7th March,2011 held that the Karnataka Legislature had no legislativecompetence to pass the Karnataka Tax on Lotteries Act, 2004 - TheDivision Bench of the High Court of Kerala by the impugnedDjudgments dated 30th April, 2020, 9th August, 2021 and 10thAugust, 2021, held that the Kerala legislature had no legislativecompetence to enact the Kerala Tax on Paper Lotteries, Act, 2005and declared it as unconstitutional and invalid – The respondentsherein are the States of Nagaland, Arunachal Pradesh, Meghalaya,Sikkim, and others who are the organisers of the lotteries as well asEpromoters, inter alia, in the States of Karnataka and Kerala – As perthe decision of the High Courts, the States of Karnataka and Keralawere directed to refund the amounts deposited by the RespondentsStates who had organised the lottery schemes - The present set ofappeals have been preferred by the States of Karnataka, KeralaFand others being aggrieved by the judgments passed by the DivisionBenches of the High Courts of the respective States – Held:Thesubject ‘betting and gambling’ in Entry 34 of List II is a State subject–From the judgments of the Supreme Court, it is clear that ‘lotteries’is a species of gambling activity and hence lotteries is within theambit of ‘betting and gambling’ as appearing in Entry 34 List II –GThe expression ‘betting and gambling’ is thus a genus it includesseveral types or species of activities such as horse racing, wheelingand other local variations/forms of ‘betting and gambling’ activity– The subject ‘lotteries organised by the Government of India orthe Government of a State’ in Entry 40 of List I is a Union subject –HIt is only lotteries organised by the Government of India or the

Conclusion

Government of State in terms of Entry 40 of List I which are excludedfrom Entry 34 of List II –‘betting and gambling’ is a State subjectexcept to the extent of it being denuded of its powers insofar asEntry 40 of List I is concerned –Entry 62 of List II is a specifictaxation Entry on ‘luxuries, including taxes on entertainments,amusements, betting and gambling’ – The power to tax is on allactivities which are in the nature of ‘betting and gambling,’ includinglotteries – Since, there is no dispute that lotteries, irrespective ofwhether it is conducted or it is organised by the Government ofIndia or the Government of State or is authorized by the State or isconducted by an agency or instrumentality of State Government ora Central Government or any private player, is ‘betting andgambling’, the State Legislatures have the power to tax lotteriesunder Entry 62 of List II – This is because the taxation contemplatedunder the said Entry is on ‘betting and gambling’ activities whichalso includes lotteries, irrespective of the entity conducting the same– Hence, the legislations impugned are valid as the Karnataka andKerala State Legislatures possessed legislative competence to enactsuch Acts –The scope and ambit of lotteries organised by Governmentof India or Government of State under Entry 40 of List I is only inthe realm of regulation of such lotteries – The said Entry does nottake within its contours the power to impose taxation on lotteriesconducted by the Government of India or the Government of State– lottery schemes by the Government of other States are organised/conducted in the State of Karnataka or Kerala and there are expressprovisions under the impugned Acts for registration of the agentsor promoters of the Governments of respective States for conductingthe lottery schemes in the State of Karnataka and the State of Kerala– This itself indicates sufficient territorial nexus between therespondents- States who are organising the lottery and the States ofKarnataka and Kerala – Division Benches of the High Courts ofKerala and Karnataka were not right in holding that the respectiveState Legislatures had no legislative competence to impose tax onthe lotteries conducted by other States in their State (in the State ofKarnataka and Kerala respectively).

Allowing the appeals, the Court

HELD: 1. Whether, while interpreting Entry 40 of List Ialongside Entries 34 and 62 of List II, the power to tax lotteries AB

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Aorganised by the Government of India or the Government of aState is also taken away from Entry 62 of List II and is to be readwithin the ambit of Entry 40 of List I and therefore, the States ofKarnataka and Kerala in the instant cases had no legislativecompetence to enact the impugned Acts. Only lotteries organisedby the Government of India or the Government of a State is carvedBout of the subject, ‘betting and gambling’ in Entry 34 of List IIand is placed in Entry 40 of List I and Entry 62 of List II, interalia, speaks of tax on ‘betting and gambling’. By that, this Courtdoes not think by that the State Legislatures have been denudedof their power to levy tax under Entry 62 of List II on lotteriesCorganised by Government of India or Government of a State. Thecourt say so for the following reasons: (a) Entry 62 of List II is aspecific taxation entry on luxuries, including taxes onentertainments, amusements, betting and gambling. Theexpression ‘betting and gambling’ would have to be read ejusdemgeneris with entertainments and amusements. The tax is thus onDthe activity of ‘betting and gambling’ as it is on an activity. (b)The expression ‘betting and gambling’ is also found in Entry 34of List II. The activity of ‘betting and gambling’ includes, interalia, lotteries. Lotteries can be conducted by the Government ofIndia or the Government of States or authorised by a State or beEconducted by private entities in a State. Thus, a lottery conductedby any of the above entities, Government or private is an activityfalling within the nomenclature of ‘betting and gambling’ which isthe subject in Entry 34 List II. But what has been carved out ofEntry 34 of List II is only lotteries conducted by the Governmentof India or the Government of any State. Therefore, all other typesFof 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 anactivity which is ‘betting and gambling’ is reserved with the Statelegislature and cannot be read within the scope and ambit of EntryG40 of List I which is inherently restricted in its scope. This Courtsays so for the following reasons:

(i) First, when a specific entry regarding taxation is providedin List II empowering the State Legislature to levy tax on asubject, namely, ‘betting and gambling’ amongst other similarHactivities, the same cannot be read by implication in an entry of

List I namely Entry 40 of List I. This is because a taxation entryis separate and distinct from an entry dealing on a particularsubject. This principle has been adequately explained by this Courtin several judgments such as M.P.V. Sundararamier and followedin 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 splitbetween the Parliament and the State Legislature when the saidpower is expressly enumerated in Entry 62 of List II. This is theconstitutional scheme under the three Lists. This is as per theconstitutional scheme. This is also evident on a perusal of theEntries of List III (Concurrent List) which empowers both theUnion as well as State Legislature to enact laws on subjectsmentioned therein and the powers to levy a tax is conspicuousby its absence. (iii) Third, the object and purpose of Entry 62 ofList II is to tax the activity of ‘betting and gambling’, whether itis conducted by a private entity or a State authorised entity or aninstrumentality or agency or for that matter by the Governmentof India or the Government of any State. This is becauseirrespective of who organises a lottery scheme, it is ultimately aspecies of gambling. It is nobody’s case that participation in alottery scheme is not gambling. The said activity i.e. lotteryscheme can be conducted throughout the territory of Indiaprovided a particular State grants permission to organise andconduct the said activity in that State. Thus, organisation andconducting of lottery can be a pan India activity of gambling andwhen a particular State permits a lottery scheme conducted bythe Government of India or the Government of any State in thatState, a tax is leviable on the same, which is a tax on gambling.Thus Entry 62 of List II empowers the State Legislatures toimpose tax on ‘gambling’ irrespective of who or which entity isconducting it including the Government of India or Governmentof any State. (iv) Fourth, ‘betting and gambling’ is a subjectenumerated in Entry 34 of List II and is a State subject. Therefore,the permission for conducting any betting and gambling activitieswithin a State, including conduct of a lottery scheme under thesaid Entry, gives competence to the State Legislatures to alsotax the said activity irrespective of who conducts it. This isbecause what is being taxed is a gambling activity which issquarely covered under Entry 34 of List II and not on lottery per AB

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Ase conducted by Government of India or Government of a State.Therefore, the State Legislature has the competence to tax lotteryscheme which is gambling being conducted not only by theGovernment of India or the Government of any State or by anyother agency or instrumentality of a particular State but also by aprivate entity within the State as gambling. (v) Fifth, the contentionBof respondents-States that the subject, ‘lotteries organised bythe Government of India or the Government of a State’ beingplaced in Entry 40 of List I would also empower only theParliament to impose a tax on the same by way of implicationunder the said Entry itself is not a correct interpretation of theCEntries in the Lists. (vi) Sixth, Entry 97 of List I can be invokedonly when any matter is not enumerated in List II or List IIIincluding any tax not mentioned in the said Lists. There is nospecific Entry for levy of tax on betting and gambling in List I. Itis only in Entry 62 of List II. Thus, Entry 62 of List II giveslegislative competence to a State Legislature to levy a tax onD‘betting and gambling’. This would also include a tax onorganisation and conduct of lotteries, whether by the CentralGovernment or Government of any State or authorised by a Stateor by any private entity within the State when permission hasbeen given by a State Government to conduct such an activity ofEgambling. Thus, Entries 34 and 62 of List II which deal with‘betting and gambling’ have been interpreted identically and thesaid expression is given an identical meaning. Thus, lotteriesorganised by the Government of India or the Government of aState is only excluded from Entry 34 of List II which deals with‘betting and gambling’ only, for the purpose of regulation by theFParliament and not for levy of tax. (vii) Seventh, when the StateGovernment has the legislative competence to levy tax on ‘bettingand gambling’ as a specific taxation entry is provided to levy taxon the said activity under Entry 62 of List II the said entry mustbe interpreted comprehensively and not in a restricted or narrowGmanner by excluding taxation on gambling on lottery conductedby Government of India or any Government of a State from thepurview of the said Entry and read into Entry 40 of List I byimplication. (viii)Eighth, such a power to levy taxes cannot beread into Entry 40 of List I by implication or into Entry 97 of ListI as a residuary power. Such interpretation, if endorsed, it wouldHdo violence to the manner of interpretation of Entries in the Lists

and prove to be contrary to the Articles of the Constitution andjudgments of this Court cited above. (ix) Ninth, if the StateGovernment does not permit a particular species of betting andgambling activity in the State including the organisation andconduct of lotteries by the Government of India or theGovernment of any State then obviously it cannot tax such anactivity. But if it permits any species of betting and gamblingactivity within the State in terms of Entry 34 of List II then theState has legislative competence to tax such an activity of bettingand gambling including lotteries irrespective of who conducts itas per Entry 64 of List II. (x) Tenth, Entry 40 of List I is meantonly for the regulation of lotteries organised by the Governmentof India or the Government of a State. The said Entry cannot beexpanded to cover the power to levy taxes on lotteries by theParliament when as such a power is envisaged in Entry 62 of ListII. The Parliament, therefore, cannot tax a gambling activity,namely, organisation of lotteries conducted by the Governmentof India or for Government of a State on the strength of Entry 40of List I. It may however regulate the said activity. Any impoststrictly for the purpose of regulation of lotteries is permissibleso long as it is not a tax on gambling which is only within theambit of only Entry 62 of List II. In other words, in order to haveuniformity in the regulation of lotteries organised by theGovernment of India or the Government of a State throughoutthe territory of India, Entry 40 is found in List I and the Parliamentis vested with the power to regulate the same. (xi) Eleventh, anybetting and gambling activity conducted by a private entity in aState or is authorized by a State Government can be regulatedonly by the State Legislature. This is because of Entry 34 in ofList II which deals with betting and gambling which also includeslotteries and the same does not fall within Entry 40 of List I. (xii)Twelfth, when a Government of a State permits organisation orconduct of lotteries either by the Government of India or theGovernment of any State thereby enabling participation in thescheme of lottery by those persons who have purchased the lotterytickets in the State, the territorial nexus is established as lottery,being species of betting and gambling, is permitted to beconducted within the State which has sought to impose taxationon the conduct of lotteries. Such nexus persists even when the AB

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Alotteries promoted within the taxing State are conducted by theGovernment of India or the Government of any other State.Therefore, the court we do not find any merit in the contentionregarding the impugned laws being invalid on account of extraterritorial operation. [Para 118][595-G-H; 596-A-H; 597-A-H;598-A-H; 599-A-H; 600-A-H; 601-A]B

2. In conclusion this Court holds that the tax sought to beimposed by the State Legislatures of Karnataka and Kerala byway of the impugned Acts, is traceable to the power conferred onthe State Legislatures under Entry 62 of List II. The said entrycontemplates imposition of taxes, inter alia, on the entire genusCof ‘betting and gambling’. having concluded that ‘lottery’ of everykind, whether organized by the Government of India or theGovernment of a State or by a private entity is included withinthe genus of ‘gambling’, we find no reason to hold that Stateorganized lotteries are excluded from the ambit of ‘betting andDgambling’ as appearing in Entry 62 of List II. We are not inclinedto accept the view that ‘lotteries organized by the Governmentof India or the Government of a State’ are to be excluded fromthe expression ‘betting and gambling’ as appearing in Entry 62of List II which deals with taxes on gambling activities, simplybecause such category of lotteries is excluded from the regulatoryEfield relatable to betting and gambling under Entry 34 of List IIand included in Entry 40 of List I. Exclusion of a legislative fieldfrom a term appearing in a general Entry, does not necessarilymean that such field ought to be excluded from the taxation Entry.This means that the term ‘betting and gambling’ in Entry 62 ofFList II is being construed in the same way as in Entry 34 of ListII. The expression is accorded the same meaning andinterpretation in both the Entries, i.e., that gambling includeslotteries. However, ‘lotteries organized by the Government ofIndia or the Government of a State’ have been carved out of Entry34 of List II and been placed with the Union. Entry 34 of List II isGdenuded to this limited extent. Such transposition of power doesnot mean that the term ‘betting and gambling’ has a differentmeaning in each of the aforesaid Entries. It only implies that forregulatory purposes, having regard to the need for uniformlegislation throughout the territory of India, the Parliament hasH

been conferred with exclusive jurisdiction to regulate the conductof lotteries, throughout the territory of India. [Para 119][601-B-G]

3. In the instant case, the tax imposed is on the ‘gambling’nature of lotteries, which field is covered in its entirety underEntry 62 of List II and the power to impose tax under this Entryextends in relation to lottery of every kind, with no distinction asto the entity organizing the same. [Para 120][601-G-H; 602-A]

4. Thus, in the context of lotteries, the organisation andconduct of a lottery scheme being a pan India activity, when anyState Government permits the Government of India or any otherState Government to organise the lottery scheme in that State,Entry 62 of List II would enable the Legislature of that State tolevy taxes on the same. [Para 121][602-B]

5. Hence, in our view, the Legislatures of the State ofKarnataka and Kerala were fully competent to enact the impugnedActs and levy taxes on the activity of ‘betting and gambling’ beingorganised and conducted in the said respective States, includinglotteries conducted by the Government of India or theGovernment of any State. [Para 122][602-C]

6. The Division Benches of the High Courts was not rightin holding that the State Legislatures had no power to levy tax onlotteries conducted by the Government of India or theGovernment of any State or Union territory in the State ofKarnataka as such a power could be read in Entry 40 or Entry 97of List I and only the Parliament could levy such a tax. Since wehave held that the States of Karnataka and Kerala had thelegislative competence to enact the impugned Acts, the questionof refund of tax collected under the same does not arise. [Para123][602-D-E]

7. In view of the aforesaid discussion, this Court comes tothe 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’

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Ais a species of gambling activity and hence lotteries is within theambit of ‘betting and gambling’ as appearing in Entry 34 List II.(iii) The expression ‘betting and gambling’ is relatable to anactivity which is in the nature of ‘betting and gambling’. Thus, allkinds and types of ‘betting and gambling’ fall within the subjectof Entry 34 of List II. The expression ‘betting and gambling’ isBthus a genus it includes several types or species of activitiessuch as horse racing, wheeling and other local variations/formsof ‘betting and gambling’ activity. The subject ‘lotteries organisedby the Government of India or the Government of a State’ inEntry 40 of List I is a Union subject. It is only lotteries organisedCby the Government of India or the Government of State in termsof Entry 40 of List I which are excluded from Entry 34 of List II.In other words, if lotteries are conducted by private parties or byinstrumentalities or agencies authorized, by Government of Indiaor the Government of State, it would come within the scope andambit of Entry 34 of List II. (iv) Thus, the State legislatures areDdenuded of their powers under Entry 34 of List II only to theextent of lotteries organised by the Government of India or theGovernment of a State, in terms of Entry 40 of List I. In otherwords, except what is excluded in terms of Entry 40 of List I, allother activities which are in the nature of ‘betting and gambling’Ewould come within the scope and ambit of Entry 34 of List II.Thus, ‘betting and gambling’ is a State subject except to the extentof it being denuded of its powers insofar as Entry 40 of List I isconcerned. (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 whichFare in the nature of ‘betting and gambling,’ including lotteries.Since, there is no dispute that lotteries, irrespective of whetherit is conducted or it is organised by the Government of India orthe Government of State or is authorized by the State or isconducted by an agency or instrumentality of State GovernmentGor a Central Government or any private player, is ‘betting andgambling’, the State Legislatures have the power to tax lotteriesunder Entry 62 of List II. This is because the taxationcontemplated under the said Entry is on ‘betting and gambling’activities which also includes lotteries, irrespective of the entityconducting the same. Hence, the legislations impugned are validHas the Karnataka and Kerala State Legislatures possessed

legislative competence to enact such Acts. (vi) Thus, the scopeand ambit of lotteries organised by Government of India orGovernment of State under Entry 40 of List I is only in the realmof regulation of such lotteries. The said Entry does not take withinits contours the power to impose taxation on lotteries conductedby the Government of India or the Government of State. (vii) Wealso hold that lottery schemes by the Government of other Statesare organised/conducted in the State of Karnataka or Kerala andthere are express provisions under the impugned Acts forregistration of the agents or promoters of the Governments ofrespective States for conducting the lottery schemes in the Stateof Karnataka and the State of Kerala. This itself indicatessufficient territorial nexus between the respondents– States whoare organising the lottery and the States of Karnataka and Kerala.(viii) In view of the aforesaid conclusions, the court find thatDivision Benches of the High Courts of Kerala and Karnatakawere not right in holding that the respective State Legislatureshad no legislative competence to impose tax on the lotteriesconducted by other States in their State (in the State of Karnatakaand Kerala respectively). [Para 124][602-E-H; 603-A-H; 604-A-E]

Skill Lotto Solutions Pvt. Ltd. vs. Union of India (2020)SCC Online SC 990; Govind Saran Ganga Saran vs.Commissioner of Sales Tax AIR 1958 SC 1041 : [1985]SCR 985; M.P.V Sundararamier and Co. vs. State ofAndhra Pradesh AIR 1958 SC 468 : [1958] SCR 1422;State of West Bengal vs. Kesoram Industries Limited(2004) 10 SCC 201 : [2004] 1 SCR 564; Syntheticsand Chemicals Ltd. vs. State of Uttar Pradesh (1990) 1SCC 109 : [1989] 1 Suppl. SCR 623; JalkalVibhagNagar Nigam vs. Pradeshiya Industrial and InvestmentCorporation (2021) SCC Online SC 960; MafatlalIndustries Ltd. vs. Union of India (1997) 5 SCC 536,[1996] 10 Suppl. SCR 585; Somaiya Organics (India)Ltd. vs. State of Uttar Pradesh (2001) 5 SCC 519 :[2001] 3 SCR 33; I.C. Golaknath vs. State of PunjabAIR 1967 SC 1643 : [1967] SCR 762; India CementLtd. vs. State of Tamil Nadu (1990) 1 SCC 12 : [1989] 1Suppl. SCR 692; Jindal Stainless Ltd. vs. State of AB

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Haryana (2017) 12 SCC 1 : [2016] 10 SCR 1;Prof.Yashpal vs. State of Chhattisgarh (2005) 5 SCC420 : [2005] 2 SCR 23; Union of India vs. HarbhajanSingh Dhillon (1971) 2 SCC 779 : [1972] 2 SCR 33;Sunrise Associates vs. Government of Delhi (2006) 5SCC 603 : [2006] 1 Suppl. SCR 421; Federation ofHotel and Restaurant Association of India vs. Union ofIndia (1989) 3 SCC 634 : [1989] 2 SCR 918; New DelhiMunicipal Council vs. State of Punjab (1997) 7 SCC339 : [1996] 10 Suppl. SCR 472; Maharaj Singh vs.State of UP 1977 (1) SCC 155 : [1977] 1 SCR 1072;State of Uttar Pradesh vs. Vam Organic ChemicalsLimited and Ors. (2004) 1 SCC 225 : [2003] 4 Suppl.SCR 957; State of Orissa vs. M.A. Tulloch AIR 1964SC 1284 : [1964] SCR 461– referred to

Prafulla Kumar Mukherjee vs. Bank of Commerce,Khulna AIR 1947 P.C. 60; State of Bombay vs. FNBalsara AIR 1951 SC 318 : [1951] SCR 682; AtiabariTea Company Ltd. vs. State of Assam AIR 1961 SC 232: [1961] SCR 809; Ujagar Prints vs. Union of IndiaAIR 1989 SC 516 : [1988] 3 Suppl. SCR 770; UnitedProvinces vs. Atiqa Begum AIR 1941 FC 16; CalcuttaGas Company vs. State of West Bengal AIR 1962 SC1044 : [1962] Suppl. SCR 1; RMDC vs Union of IndiaAIR 1957 SC 628; [1957] SCR 930; Re. Sea CustomsAct AIR 1963 SC 1760 : [1964] SCR 787; KhyerbariTea Co. Ltd. vs. State of Assam AIR 1964 SC 925 :[1964] SCR 975; Hoechst Pharmaceuticals Ltd. vs. Stateof Bihar AIR 1983 SC 1019 : [1983] 3 SCR 130; Hingir- Rampur Coal Co. Ltd. vs. State of Orissa AIR 1961SC 459 : [1961] SCR 537; State of Bombay vs. R.M.D.Chamarbaugwala AIR 1957 SC 699 : [1957] SCR 874;H. Anraj vs. State of Maharashtra, (1984) 2 SCC 292 :[1984] 2 SCR 440; H. Anraj vs. Government of TamilNadu (1986) 1 SCC 414 : [1985] 3 Suppl. SCR 342;State of Haryana vs. M/s Suman Enterprises (1994) 4SCC 217; B.R. Enterprises vs. State of Uttar Pradesh(1999) 9 SCC 700 : [1999] 2 SCR 1111; RMDC vs.State of Mysore AIR 1962 SC 594 : [1962] SCR 230; STATE OF KARNATAKA & ANR. ETC. v. STATE OFMEGHALAYA & ANR. ETC.

Sunrise Associates vs. Govt. of NCT of Delhi (2006) 5SCC 603 : [2006] 1 Suppl. SCR 421; – relied on.

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Reader’s Digest Association ltd. v. Williams, (1976) 1W.L.R. 1109 – referred to.

Black’s Law Dictionary, 104; Advanced Law Lexicon, P.RamanathaAiyar (6th Edition), 104; Words and Phrases[Permanent Edition] Vol. 25-A at page 439, 104;Advanced Law Lexicon, P. RamanathaAiyar (1997Edition), 104; Concise Oxford English Dictionary[Oxford University Press, 11 Edn., 2004], 104; Webster’sNew American College Dictionary (1981), 105 – Reliedon.

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Case Law Reference

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[2022] 18 S.C.R.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 10466-10476 of 2011.

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From the Judgment and Order dated 27.12.2010 of the High Courtof Karnataka at Bangalore in Writ Appeal Nos. 2251, 2131, 2132, 2220,2246, 2221, 2225, 2248 of 2007 and 749, 750, 895 of 2008 (GM-LOTT).

With

FCivil Appeal Nos. 101-102 of 2012, Civil Appeal No. 911 of 2021,Civil Appeal Nos. 869-870 and 871 of 2022.

N. Venkataraman, ASG, Nikhil Goel, AAG, Pallav Shishodia, Sr.Adv., Shubhranshu Padhi, Ashish Yadav, Rakshit Jain, Vishal Banshal,C. K. Sasi, Abdullah Naseeh, Ms. Meena K. P., Advs. for the Appellants.

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Amit Kumar, Vivek Kohli, Advocate Generals, Arvind Datar, S.K. Bagaria, C. A. Sundaram, Sr. Advs., Avijit Mani Tripathi, AdityaShankar Pandey, Ms. Vishakha Kumar, Rahul Unnikrishnan, ShauryaSahay, Shaffi Mather, Siddhartha Chowdhury, Sameer Abhyankar, Ms.Yeshi Rinchhen, Kumar Ajit Singh, Abhinav Mishra, Ms. Nishi Sangatani,Ms. Rohini Musa, Abhishek Gupta, Zaffar Inayat, Bhargava V. Desai,H

STATE OF KARNATAKA & ANR. ETC. v. STATE OFMEGHALAYA & ANR. ETC.

Ajit Kumar, Shivam Jasra, M/s Arputham Aruna and Co., Mrs. GurkamalHora Arora, Amit Bhatnagar, Subodh Pandey, Abhishek Sharma, Ms.Tatini Basu, Gautam Narayan, Kartik Seth, Ms. Shriya Gilhotra, Ms.Garima Saxena for M/s Chambers of Kartik Seth, Advs. for theRespondents.

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The Judgment of the Court was delivered by B

NAGARATHNA J.

INDEX*

1. Bird’s Eye View of Controversy ……………………………42.Submissions …………………………………………………5C2.1.Submissions on behalf of Appellants:

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

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

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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

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3. Reply Arguments………………………………………….29

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

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

6. Acts under consideration :

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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

G8. Meaning of ‘betting and gambling’ and ‘lotteries’ …………739. Discussion……………………………………………………..100

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

* Ed. Note: Pagination in the Index is as per the original judgment.

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AThese appeals have been preferred by the States of Karnataka,Kerala and others being aggrieved by the judgments passed by theDivision Benches of the High Courts of the respective States. The DivisionBench of the High Court of Karnataka vide impugned judgments dated27[th] December, 2010 and 7[th] March, 2011 held that the KarnatakaLegislature had no legislative competence to pass the Karnataka Tax onBLotteries 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 themwithin four months from the date of receipt of the copy of the impugnedjudgment.C

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2. Similarly, the Division Bench of the High Court of Kerala bythe impugned judgments dated 30[th] April, 2020, 9[th] August, 2021 and 10[th]August, 2021, held that the Kerala legislature had no legislativecompetence to enact the Kerala Tax on Paper Lotteries, Act, 2005(hereinafter referred to as, “Kerala Act, 2005”) and declared it asDunconstitutional and invalid. Liberty was reserved to the respondents-States to seek refund of the tax already collected by the State of theKerala under the said Act on producing proper account and proof and adirection was issued to the State of Kerala to pass appropriate ordersmaking refund of the amounts due based on evaluation of such proof,without any delay.E

3. Being aggrieved, the States of Karnataka, Kerala and othersare in appeal before this Court. The respondents herein are the States ofNagaland, Arunachal Pradesh, Meghalaya, Sikkim, and others who arethe organisers of the lotteries as well as promoters, inter alia, in theStates of Karnataka and Kerala.F

Bird’s eye view of the controversy:

4. The controversy in these cases is regarding the interpretationto be given to the expression ‘betting and gambling’ in Entries 34 and 62of List II of the Seventh Schedule of the Constitution of India. Further,Gwhether the ‘lotteries organised by the Government of India orGovernment of a State’, which is a subject in Entry 40 of List I alsoencompasses the power to levy tax on the said lotteries? Consequently,whether under Entry 62 of List II the State Legislature is denuded of thepower to levy tax on the said subject? In other words, whether the subjectcovered in Entry 40 of List I restricts the scope and ambit of Entries 34Hand 62 of List II?If the answer is in the affirmative, whether the State Legislatures have no legislative competence to levy tax on lotteriesorganised by the Government of India or Government of a State.Consequently, the question in these cases is, whether, the legislature ofStates of Karnataka and Kerala had the legislative competence to enactKarnataka Act, 2004 and Kerala Act, 2005 respectively. Further, whetherthese 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 AdditionalSolicitor General appearing on behalf of the appellant-State of Karnatakacontended that the impugned legislation passed by the Karnataka StateLegislature 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 andnot goods or services and cannot be taxed invoking Entry 54 of List IIand; (ii) Skill Lotto Solutions Pvt. Ltd. vs. Union of India –[2020SCC Online SC 990] wherein it was held that under the new CentralGoods and Services Tax (CGST) regime, post 1[st] July, 2017, actionableclaims 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 actionableclaims and any reference to Entry 54 of List II will be of no avail as taxon lotteries is not a sales tax or Value Added Tax (VAT) or GST. Hecontended that the tax under question is a tax on gambling traceable toEntry 62 of List II which,inter alia, deals with tax on betting andgambling. It was contended that the Karnataka Tax on Lotteries Act,2004 was passed in pursuance of the power under the aforesaid entryand the Karnataka State Legislature had the legislative competence topass such a legislation.

7. Elaborating further, it was pointed out that Entry 40 of List I isonly a ‘regulatory entry’ and the Lotteries (Regulation) Act, 1998(hereinafter referred to as “Lotteries Act, 1998”) was enacted by theParliament in light of the same. That said Act deals with only ‘regulation’and not with ‘taxation’ owing to the jurisdictional incompetence of theParliament in the area of taxation of State lotteries. Entry 34 of List II is AB

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Aalso 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 ongambling and betting. Learned Senior Counsel submitted that the sourceof taxation is Entry 62 of List II and not Entry 54 of List II and the tax isnot on sale or purchase of lottery tickets.B

8. It was further contended that on a conjoint reading of Section2(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 personsparticipating in a lottery and the chance to win a prize in a lottery, whichcomes within the nomenclature of gambling. The measure of taxation, inCcase of a bumper draw is Rs.1,50,000/- and in case of any other draw isRs.1,00,000/-.

9. Learned Senior Counsel further referred to Paragraph 6 ofGovind Saran Ganga Saran vs. Commissioner of Sales Tax –[AIR1958 SC 1041] to state that when the source of taxation and occurrenceDof 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 powerand taxing power are traceable to different sources and are kept distinctunder the Constitutional scheme, in such a case, the regulatory entryEcannot subsume a taxing entry as was held in M.P.V Sundararamierand Co. vs. State of Andhra Pradesh–[AIR 1958 SC 468] and Stateof West Bengal vs. Kesoram Industries Limited–[(2004) 10 SCC201]. He further relied upon a Seven Judge Bench decision in Syntheticsand Chemicals Ltd. vs. State of Uttar Pradesh – [(1990)1 SCC 109]Fwherein it was held that the power to regulate, develop or control wouldnot include within its ken a power to levy tax or fee except when thesaid impost is only for a regulatory purpose. That it is permissible for thepower to levy tax or fee for augmenting revenue to continue to vest withthe State Legislature despite the regulatory power being with the Union.That ratio in synthetics and chemicals (supra) was reiterated recentlyGin Jalkal Vibhag Nagar Nigam vs. Pradeshiya Industrial andInvestment Corporation – [2021 SCC Online SC 960] and had firstbeen laid down in RMDC vs. State of Mysore – [AIR 1962 SC 594].

11. Sri Venkatraman further contended that the tax imposed inthe instant case is not extra-territorial in its operation since the tax is onHthe 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 wasplaced on State of Bombay vs. R.M.D. Chamarbaugwala – [AIR1957 SC 699], wherein the requirement of fulfilling three principles,namely, real and not illusory connection; liability sought to be imposed bepertinent to that connection and the connection affecting merely thepolicy and not validity of legislation, were stipulated. In such a case,when there are participants from State of Karnataka in the act ofgambling, there is a real connection to the taxable event and the levyunder the impugned legislation is pertinent to that connection althoughthe lottery is organised by any other State in the State of Karnataka.

12. It was further contended that lotteries are res extracommercium 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 301dealing with inter-state trade, commerce and business, even if the Statehappens to be the operator, as was held in the cases of R.M.D.Chamarbaugwala (supra) and B.R. Enterprises vs. State of UttarPradesh – [(1999) 9 SCC 700].

Submissions on behalf of State of Kerala:

13. Sri Pallav Shishodia, learned Senior Counsel appearing for theappellant-State of Kerala, adopted the submissions made by learned SeniorCounsel for the State of Karnataka. He made the following additionalsubmissions:

He submitted that under the Kerala Act, 2005 and the Rules madethereunder, the respondents were liable to pay the tax in advance beforeany draw, under Section10 thereof. The respondents herein in fact fileda writ petition seeking a writ of mandamus against the appellant-State ofKerala directing them to accept advance tax. In addition, a companionpetition was filed challenging Section10 of the aforesaid Act which wasdecided by the learned Single Judge of the High Court of Kerala on 10[th]January, 2007 and thereafter affirmed by the Division Bench on 30[th]March, 2007. The matter came up to this Court and vide Order dated16[th] July, 2014 the High Court’s finding was affirmed in respect ofaccepting advance tax; however, it did not accept the challenge to theaforesaid section.

14. Sri Shishodia, learned Senior Counsel, contended thatopportunity was granted to the respondents to prove that the burden oftax paid during the period 2006-2010 was not passed on to consumers/

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Apurchasers of lottery tickets. That the same is contrary to law and wascompletely unwarranted in the present case. In support of his argument,he fervently relied on Mafatlal Industries Ltd. vs. Union of India -[(1997) 5 SCC536] where it was held that there is a rebuttablepresumption that an indirect tax borne by an assessee is passed on toconsumers. Even when challenge to constitutionality of a tax succeeds,Bthe relief of refund can be granted only when the assessee makes aclaim to allege and establish that as a fact,the burden of tax collected inthe interregnum was not passed on to consumers.

15. Lastly, Sri Shishodia, learned Senior Counsel, contended thatthe tax period in the instant case is limited to the years 2006-2010Cwhereafter lotteries of the State of Sikkim were discontinued in the Stateof Kerala because large scale frauds were reported. The said ban wasmade by the Central Government in exercise of power under Section 6of the Lotteries Act, 1998 which was confirmed on 12[th] June, 2015 afteran investigation by the CBI and further enquiry. He urged that if theDsubmission that the State cannot tax lotteries at all is to be accepted bythis Court, then the same should be held prospectively to validate non-refund of recoveries made of far. He drew our attention to SomaiyaOrganics (India) Ltd. vs. State of Uttar Pradesh – [(2001) 5 SCC519] wherein I.C. Golaknath vs. State of Punjab – [AIR 1967 SC1643] and India Cement Ltd. vs. State of Tamil Nadu –E[(1990)1SCC12] have been relied upon.

Submissions on behalf of Respondents:

Submissions on behalf of Nagaland:

16. Sri C. Aryama Sundaram, learned Senior Counsel appearingFon behalf of the State of Nagaland in Civil Appeal No.10467 of 2011raisedthe 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 onGthe sale of lotteries.

(iii) That the impugned Act seeks to operate extra-territorially.

(iv) Contentions pertaining to the exigencies faced by North-HEastern States in generating revenue.

17. Sri. C. Aryama Sundaram, learned Senior Counsel, supportedthe judgment of the High Court of Karnataka and contended that theState of Karnataka had no legislative competence to impose tax on thelotteries organised by the Governments of the Respondents-States. Itwas submitted that lotteries organised by the Government of India or bythe Government of any State, fall within the ambit of Entry 40 of List Iand therefore any legislation pertaining to such lotteries may only beenacted by the Parliament.

18. It was next contended that lotteries organised by theGovernment of India or by the Government of any State, were not withinthe legislative fields covered under Entries 34 or 62 of List II whichpertain to the power of the State Legislature to make laws to regulate‘betting and gambling’ and to impose ‘taxes on luxuries, including taxeson entertainment, amusements, betting and gambling,’ respectively. Thatalthough the expression ‘betting and gambling’ may be construed as thegenus, within which ‘lotteries’ is a species, the specific field of lotteriesorganised by the Government of India or by the Government of anyState, has been carved out of the genus of ‘betting and gambling’ andbeen placed under Entry 40 of List I, meaning thereby, that the samemay be regulated or subjected to tax, only by the Parliament. In otherwords, it was contended that taxes on betting and gambling as envisagedunder Entry 62 of List II, would be limited to those lotteries which areneither organised by the Government of India nor by the Government ofany State. It was submitted that since the Act in question, enacted bythe Legislature of the State of Karnataka, seeks to impose tax on thelotteries organised by the Central Government or by the Government ofa State, it is beyond the legislative competence of State of Karnataka.That the State of Karnataka by enacting the impugned Act has attemptedto legislate on an aspect which lies within the exclusive legislative domainof the Parliament and therefore the said Act is ultra vires the Constitutionand is liable to be declared so.

19. In order to buttress the above contentions, learned SeniorCounsel 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 ofMaharashtra could impose a ban on the sale of lottery ticketsof other States, by relying on an executive order of thePresident under Article 258 (1) of the Constitution which AB

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Aentrusted the State Government with the executive powerof the Union as regards the conduct of lottery. This Courtheld that the Parliament has exclusive power to make lawsin respect of lotteries organised by the Government of Indiaor the Government of a State. It was further observed thatState organised lotteries were specifically taken out of theBambit of the legislative field of States from the expression‘betting and gambling’ under entry 34 of the State list.

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(ii) State of Haryana vs. M/s Suman Enterprises – [(1994)4 SCC 217] is a case where this Court, in deciding whetherthe State of Haryana could issue a Notification imposing aCban on the lotteries of other states, held that regulation oflotteries organised by other states is not a State subject butis within the exclusive regulatory power of the Parliamentunder Entry 40 of List I.

20. It was submitted that although the afore-cited decisions makeDno specific reference to Entry 62 of List II and only observe that Stateorganised lotteries were specifically taken out of the ambit of Entry 34of List II, ‘betting and gambling’ as appearing in both these entries mustbe construed in a similar manner; i.e. that they are inclusive only ofthose lotteries which are organised other than by the Government ofEIndia or by the Government of any State. In this regard, Jindal StainlessLtd. vs. State of Haryana – [2017 (12) SCC 1] was pressed intoservice to contend that the same expression, if used in different entriesin the same List, would have the same meaning. Therefore, althoughState organised lotteries have specifically been carved out of theexpression ‘betting and gambling’ as appearing in Entry 34 of List II, itFmay be deemed that ‘betting and gambling’ as appearing in Entry 62 ofList II is also not inclusive of State organised lotteries.

21. It was further urged in this regard that if Entry 34 of List II isa general entry which deals with the regulatory power of the StateLegislature in the area of ‘betting and gambling’, Entry 62 of List IIGvests a more specific power of taxation over ‘betting and gambling’ withthe State Legislature. Once it has been held that a given expression, asappearing in a general entry would be construed to exclude a certainitem, then it would naturally follow that such item would also be excludedfrom a specific entry which employs the said expression. In the instantHcase, lotteries organised by the Government of India or the Government of any State have been specifically excluded from the ambit of ‘bettingand gambling’ as appearing in Entry 34 of List II, therefore, it wouldfollow that it would also be excluded from Entry 62 of List II which is anarrower power, only dealing with taxation. Reference was made toProf. Yashpal vs. State of Chhattisgarh – [2005 (5) SCC 420] whereinit was held that a narrow or restrictive interpretation would generally notbe accorded to a legislative heading which is general in nature. In thisregard it was contended that although a general entry is not usuallygiven a restrictive meaning, when in exceptional cases a restrictiveinterpretation is given, such interpretation should be given effect to notonly in connection with the general entry, but should also be extended tospecific entries which employ the same term as was interpreted.

22. It was next contended that the sole and exclusive power ofimposition of taxes which are beyond the legislative fields covered underentries specified in List I and List II, would vest only with the Parliamentby virtue of Entry 97 of List I read with Article 248 (3) and Article 265of the Constitution of India. In support of the above contention, learnedSenior Counsel for the State of Nagaland relied on the decision in Unionof India vs. Harbhajan Singh Dhillon – [1971 (2) SCC 779], whereinthis Court while dealing with the question as to the legislative competenceto enact a Legislation pertaining to wealth tax, held that while the subjectmatter of wealth tax is not specifically covered under any of the entriesof the three Lists of the Constitution, the Constitution has not denied theUnion Government power to levy wealth tax and such power would betraceable to Entry 97 of List I.

That the impugned Act, in effect seeks to impose tax on thesale of lottery tickets:

23. It was submitted on behalf of the State of Nagaland that theimpugned Act in fact, seeks to impose a tax on lotteries organized by theGovernment of India or by the Government of any Stateand that legislativecompetence to enact such statute could not be traced to Entry 62 of ListII. 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 theconduct of lotteries or the sale and purchase of lottery tickets. That byenacting the impugned Act, what the State Legislature sought to taxwas the sale of lottery tickets, which was not permissible in light of thedecision of this Court in Sunrise Associates vs. Government of Delhi AB

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A– [(2006) 5 SCC 603]. In the said case, it was held that lottery ticketswere not goods within the meaning of the Sales Tax Act and thereforethey cannot be subject to sales tax.

That the impugned Act, in a clandestine manner, sought to imposesales tax on the sale of lottery tickets which is not permissible.

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24. In support of the said contention, the statement of objects andreasons of the impugned Act was referred to, which provides that it hasbeen enacted with an intention “to regulate the actual number of drawsheld by any lottery promoter.” It was submitted that while the statementof objects and reasons has been worded in a manner as if the legislationCwould seek to regulate the quantum of betting and gambling activities orthe number of draws held by a lottery promoter, in effect, the tax soughtto 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 ticketsand this would point to the tax being in the nature of sales tax. It wassubmitted that the impugned Act does not expressly employ the termD‘sale of lottery tickets’ but seeks to tax the same under the guise ofregulating the number of draws held by a promoter.

25. Alternatively, it was contended that even if it is assumed forthe sake of argument that the tax was being imposed, not on the sale oflottery tickets but on the conduct of lottery activities, including formulationEand notification of scheme of lotteries, printing of lottery tickets,transportation of lottery tickets, conducting of the draw, declaration ofwinners, no taxable event relatable to activities listed hereinabove hadoccurred within the State of Karnataka. That in order for a tax to beimposed by a State, the taxable event would have to occur within theFState. That, the only event that has occurred within the State ofKarnataka, was the sale of lottery tickets and the same is not taxable.Hence, it was submitted that the Appellants herein were seeking to doindirectly, that which could not have been done directly.

That the impugned Act seeks to operate extra-territorially:

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G26. Sri Aryama Sundaram next contended that for a State to imposetax on any activity, there ought to be a territorial nexus between theactivity 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 thatthe 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 ofH

Karnataka. All activities which are to be undertaken for the conduct oflotteries, such as formulation and notification of the scheme of lotteries,printing of lottery tickets, transportation of lottery tickets, conducting ofthe draw, declaration of winners, were undertaken outside the territoriallimits of Karnataka and therefore, the conduct of lotteries cannot besubject to tax by the State of Karnataka. In this regard, reference wasmade to Article 246 (3) of the Constitution of India to contend that aState Government has the power to enact laws for the State or any partthereof. A State Government does not have the power to extend its lawsbeyond its territorial limits. If a State law is allowed to operate in relationto activities which are conducted beyond its territorial limits, it wouldhave the effect of encroaching upon the legislative power of other States.

27. Learned Senior Counsel appearing for the State of Nagalandnext submitted that the decision of this Court in R.M.D.Chamarbaugwala (supra) relied upon by the appellants would not cometo 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 prizecompetitions, the collection of entry fees, publication of advertisementspertaining to the lottery and prize competitions, were all conducted withinthe State of Bombay and it was in that context that this Court held thatthe State of Bombay possessed legislative competence to enact theBombay Lotteries and Prize Competitions Control and Tax Act, 1948which sought to control and levy tax on lotteries and prize competitionsin the State of Bombay. In the said case, two conditions were laid downby this Court in order to establish territorial control: (a) real and notillusory connection; (b) the liability sought to be imposed must necessarilypertain to the said connection. In this context, it was urged that the StateActs impugned in these cases would satisfy the aforestated conditionsonly qua the sale and distribution of lottery tickets, which activity is inany case not taxable. Therefore, reliance placed by the appellants onthe said case was misplaced.

Contentions pertaining to the exigencies faced by North-Eastern States in generating revenue:

28. It was submitted that Section 10 of the impugned legislationrequires the State which organises the lottery sought to be taxed, todeposit taxes in advance. This has resulted in a situation which isdetrimental to the economic necessities of the State of Nagaland. LearnedSenior Counsel explained the difficulty that may arise if the said scheme AB

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Ais permitted to continue: The State of Karnataka collects the tax amountin advance. The amount of tax to be paid is calculated having no regardto 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 therebeing negligible or no sale of lottery tickets, as may be the casesometimes, the State of Karnataka would be entitled to enjoy the tax onBthe entire scheme.

29. It was also urged that if the impugned Act is held to be validthen it would be open to the Legislatures of each of the States in theCountry to enact a similar legislation and this would result in a situationof multiple taxation of the same event. Further, if the organising State isCrequired to pre-deposit the tax pertaining to the scheme floated, in eachState where a similar enactment may be made, it would result in a situationwhere lottery schemes would no longer be a source of revenue to theorganising State. Reference was made to the decision of this Court inB.R. Enterprises(supra)wherein the importance of lotteries, as a sourceDof revenue to North-Eastern States was recognised. It was urged thatthe State of Karnataka must not be permitted to curtail the rights ofNorth- Eastern States to conduct lotteries.

30. On the aforesaid submissions, learned Senior Counsel appearingfor the State of Nagaland sought dismissal of the appeals.ESubmissions on behalf of State of Sikkim:

31. Sri S.K. Bagaria, learned Senior Counsel appearing for theState of Sikkim, First Respondent in Civil Appeal No. 911 of 2021, adoptedthe contentions advanced by Sri Aryama Sundaram, learned SeniorCounsel appearing on behalf of the State of Nagaland in Civil AppealFNo. 10467 of 2011. He further elaborated on the submissions as regardsthe exclusion of the species of ‘lotteries’ from the genus of ‘betting andgambling’ as appearing in Entries 34 and 62 of List II vide H. Anraj(supra) and M/s Suman Enterprises (supra).He contended that althoughthe decision of this Court in H. Anraj (supra) excluded ‘lotteries’ fromGthe legislative field of the State Legislature while examining Entry 34 ofList II and no reference was made in the said judgment to Entry 62 ofList II, it may be construed that ‘lotteries’ organised by the Governmentof India or the Government of a State are not included within theexpression ‘betting and gambling’ appearing in Entry 34 as well as Entry62 of List II. In support of this contention, reference was made to aHdecision of this Court in R.M.D. Chamarbaugwala (supra) wherein a co-relation was established by the Court between the expression ‘bettingand gambling’ as appearing under Entry 34 of List II and Entry 62 ofList II, by holding that once it is held that a legislation falls under thetopic of ‘betting and gambling’ under Entry 34 of List II, it would followthat the tax imposed by the same legislation would fall under Entry 62 ofList II. In this context, it was contended that since it has beenunequivocally declared that the tax imposed on ‘betting and gambling’under Entry 62 of List II seeks to tax the same activity which is regulatedunder Entry 34 of List II, it logically follows that the expression ‘bettingand gambling’ must be given the same meaning and interpretation inboth these entries. In other words, an interpretation which suggests that‘lotteries’ has been carved out of ‘betting and gambling,’ should be madeequally applicable to Entry 62, as is applicable to Entry 34 of List II.

32. It was next contended that the impugned Act, namely, theKerala Lotteries Act, makes no distinction between the taxing event andthe measure of tax, i.e., a distinction between the subject matter of taxand the standard by which the amount of tax is to be measured. Referencewas made to Federation of Hotel and Restaurant Association of Indiavs. Union of India - [(1989) 3 SCC 634] to contend that the subject ofa tax is different from the measure of the levy of tax. That the measureof tax is not determinative of its essential character or the competenceof 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 notthe taxable event. That the impugned Act is ambiguous and uncertainand in the guise of tax on lotteries, seeks to levy tax on sale of lotteries.

33. Reference was made to specific provisions of the impugnedAct of State of Kerala to contend that the tax sought to be imposed wasin effect a tax on sale of lottery tickets. Section 6 of the said Act is thecharging provision. It merely states that the tax sought to be levied underthe Act is ‘tax on paper lotteries’. Therefore, it is unclear as to whataspect 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 alottery organised by the Government of India or the Government of anyState, nothing can be imputed from such definition as to the chargeabilityor the taxing event. It was further urged that Section 7(1) and 8(1) ofthe Act mandatorily require that any promoter involved in the sale oflottery tickets be registered under the Act and file returns. Section 8(2)imposes the liability of tax on a promoter who has registered and filedreturns under Section 7(1) and 8(1) of the Act. In this regard it was AB

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Asubmitted 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 StateGovernment has done is to levy sales tax on the sale of paper lotteries inKerala, which is impermissible in light of the decision of this Court inSunrise Associates (supra). That in the absence of any clarity in thecharging provision as to what would be the taxable event and on a conjointBreading of Section 7 and 8 of the impugned Act, the only deduction thatcould 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 ofKerala, to the effect that the burden of tax imposed on the State ofSikkim was being passed on to the consumer and therefore, the State ofCSikkim was not entitled to claim refund of tax imposed even in the eventthat the impugned Act was struck down, as receiving a refund wouldamount to unjust enrichment, it was urged that the doctrine of unjustenrichment was not applicable to a State vide Mafatlal Industries Ltd.(supra). Therefore, the amount of tax collected by the State of KeralaDwithout jurisdiction is liable to be refunded.

Submissions on behalf of the State of Meghalaya:

Submissions on behalf of the State of Meghalaya:

35. Sri Arvind P. Datar, learned Senior Counsel appearing for theState of Meghalaya and Sri Amit Kumar, learned Advocate General forthe State of Meghalaya adopted the contentions of Sri C. AryamaESundaram, learned Senior Counsel appearing for the State of Nagaland.He made an additional argument as regards the exclusive Parliamentarypower to impose taxation on lotteries organised by the Government of aState. It was submitted that in determining the legislative competencepertaining to the legislative field of ‘State Lotteries’ reference must beFmade to the Government of India Act, 1935. The said Act provided inEntry 47 of List I for the regulation of ‘State Lotteries.’ The said Actprovided for regulation of ‘betting and gambling’ in Entry 36 of List IIand the power to impose ‘taxes on luxuries, including taxes onentertainments, amusements, betting and gambling’ under Entry 50 ofList II. In that context, it was urged that State lotteries have alwaysGbeen within the exclusive legislative domain of the Parliament and havebeen carved out of the expression ‘betting and gambling’ as appearing inList II.

36. It was further contended that the power to impose taxation onlotteries is inherent in the general legislative power under Entry 40 ofHList I. Learned Senior Counsel referred to certain Entries of List I and II to contend that wherever the legislative competence relatable to thegeneral legislative field or regulatory field is different from the taxationfield, such separation has been expressly stated in the Constitution. Sincesuch distinction has not been made in the context of lotteries coveredunder Entry 40 of List I, the scope of this entry is unrestricted and everytype of legislation qua Central and State organised lotteries is within itsambit.

37. Sri Datar next contended that to uphold the validity of theimpugned legislations and allow them to operate, would be against theprinciples of federalism and inter-governmental immunity. In this regard,reliance was placed on New Delhi Municipal Council vs. State ofPunjab –[(1997) 7 SCC 339] wherein this Court, after discussing theprinciple of inter-governmental immunity as it operates in the UnitedStates of America, held that the said principle would operate in India aswell, although to a limited extent. In the Indian context, the immunityconferred on the Union, from any action of the State, is absolute; whileimmunity to States from the actions of the Union is as per Article 289 ofthe Constitution. It was submitted in this regard that the impugnedLegislations seek to impose interest and penalties on the Union for non-payment of taxes levied on it and also prescribes with holding moniesdue to the Union in order to recover the tax due. That such provisions ofthe statute pose a threat to the principle of inter-governmental immunity,which is well recognised and currently operating in India.

38. Learned Senior Counsel appearing for the State of Meghalayaurged that the doctrine of pith and substance and the aspects theoryhave no relevance to the instant matter. That the doctrine of pith andsubstance is employed by a Court to save a statute from being declaredultra-vires, when the main purpose of the statute is to legislate on anaspect which is within the legislative competence of the legislature thathas enacted it, while an incidental or ancillary purpose sought to beachieved by the statute has the effect of branching into another list.However, in the instant case, the impugned Statutes have only one purposeviz. taxing Central and State organised lotteries. Therefore, they are intheir entirety encroaching on the exclusive legislative domain of theParliament. In a similar vein, it was contended that the aspects doctrinecannot be pressed into service in order to uphold the vires of the impugnedLegislations as the said doctrine may be employed only when two aspectsare found in the statute and each of such aspects is traceable to a ABC

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Alegislative field in a different List. However, in the instant case, theimpugned legislations only have one aspect, traceable to the legislativefield covered by a single Entry, viz. Entry 40 of List I.

Reply Arguments:

39. Learned Senior Counsel, Sri Venkataraman, appearing for theBState of Karnataka, in response to the submissions made on behalf ofState of Nagaland, stated that if the submission is that by virtue of Entry40 of List I, the Union gains taxing power under Entry 97 of List I, itwould be a self-defeating submission. It was also contended that recourseto Entry 97 of List I can only be taken after exhausting specific EntriesCunder List I and List II. It cannot be contented that the power is securedunder Entry 97 of List I as Entry 62 of List II has never undergone anychange, mutilation or any denudation till date.

40. In this regard it was explained that Entry 42 of List I referstointer-state trade and commerce. That originally the tax on inter-statetrade and commerce along with local sales tax was levied only by theDState under Entry 54 of List II. Only after the 6[th]ConstitutionalAmendment Act in 1956, the powers of the State were denuded and theUnion was vested with the exclusive power by insertion of Entry 92A inList I. When Entry 62 of List II has not been denuded, it cannot beconstrued that Entry 40 of List I can subsume within itself, the taxationEpower as would be available under Entry 97 of List I, overlooking theDhillon Test.

41. In response to the submissions of the State of Meghalaya inrespect of Article 246(1) that under the said provision, Parliament hasexclusive power to make laws with respect to any of the mattersFenumerated in List I and therefore, Entry 40 of List I is good enough toinclude power of taxation on lotteries organised by Central or StateGovernments, it was urged that the said provision cannot be read ininsolation. He submitted that List I and II vest exclusive powers in Unionand States respectively and therefore one cannot be read in insolation tothe other.G

42. It was further submitted that the Constitution Bench in RMDCvs. State of Mysore (supra) had clearly stated that the surrender of aregulatory or any other power to the Union cannot mean a surrender ofthe taxation power. Taxing powers are always identified independentlyand unless such power is transposed, denuded or mutilated, it cannot beHread by implication as held in M.P.V. Sundararamier (supra).

43. In respect of the submission relating to Article 289, SriVenkataraman pointed out that there is a ‘Constitutional bar’ against theUnion taxing the Income of a State, and the same cannot be taxed byvirtue of Article 289. He stated that any activity conducted per se by theState, in this case conducting State Lotteries, cannot be taxed underArticle 289.

44. Learned Senior Counsel then addressed the submission raisedby the State of Nagaland that since the Union is imposing tax on lotteriesunder the GST regime, the power of taxation would vest with the Unioneven under the pre-GST era. He stated that the aforesaid submissionwas not rightas it was incorrect to say that the Union is taxing under theGST regime. It was urged that GST is a unique tax traceable to Article246A both in terms of power and field of legislation, under which thetaxable event is one,namely supply and the taxing power vests both withthe Union and the States. However, in the present case at hand, Article246 is the source of power and Entries in List I and II are fields oflegislation which have to be interpreted.

45. In response to the argument that lottery is the main source ofincome for the North - Eastern States and grave prejudice would becaused to State revenue if the appellant-States are permitted to tax,learned Senior Counsel urged that there is no equity is taxation laws. Itwas submitted that the respective North - Eastern States have earnedtheir 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 powersonly because that would be detrimental to North - Eastern States.

46. Learned Senior Counsel Sri Pallav Shishodia for the State ofKerala, in furtherance of the contentions of the learned Senior Counselappearing for the State of Karnataka, placed reliance on the decisionof 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 thefields for the purpose of legislation. It was submitted that the Statescan legislate to regulate ‘betting and gambling’ in their respective statesexcept with respect to lotteries organised by other States which shallremain governed by the Lotteries Act, 1998 enacted by the Parliamenthaving legislative competence under Entry 40 of List I. However, levyof tax on ‘betting and gambling’ is a different field of legislation underEntry 62 of List II.

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A47. It was further contended that the regulation of gambling andtaxing of gambling activity being two separate and distinct fields oflegislation, the width of legislative power of States to tax State organisedlotteries under Entry 62 of List II cannot be curtailed by regulatory powersof Centre under Entry 40 of List I even though only regulatory powersof states to regulate State organised lotteries are taken out from EntryB34 of List II.

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48. To buttress his contention, learned Senior Counsel for the Stateof Kerala referred to Chapter 5, Subsidiary Rules in Principles of StatutoryInterpretation authored by Justice GP Singh under the heading ‘SameWord Same Meaning’. He contended that it is a settled principle ofCinterpretation that the same expression can have different meanings inthe same statute or even the same provision, if the context so required.Learned Senior Counsel cited the case of Maharaj Singh vs. State ofUP – [1977 (1) SCC 155] in this behalf.

49. It was further urged that the respective contexts of theDexpression ‘betting and gambling’ under Entry 34 and Entry 62 both inList II are very different. Entry 34 of List II describes the legislativefield 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 StateEof Kerala emphasized upon the judgment of this Court in KesoramIndustries Limited (supra) and stated that the principles in the aforesaidcase have also been approved in the case of Jindal Stainless Limited(supra).

50. Learned Senior Counsel submitted that there were severalFexamples where regulatory powers are with the Centre and the taxingpower is with the States. To fortify his argument, he relied upon State ofUttar Pradesh vs. Vam Organic Chemicals Limited and Ors. – [2004(1) SCC 225] wherein it was held that the tax or fee imposed forregulatory purposes must not be mistaken as tax under taxing entry. Theregulatory power cannot be used for plenary taxation. However, theGlevy of some regulatory charges under the Lotteries Act, 1998 is not atax and does not in any manner whittle down the scope of Entry 62ofList II.To conclude, learned Senior Counsel for the State of Keralasubmitted that one transaction can have several aspects to attract bothcentral and state taxes as was held in Federation of Hotel andHRestaurant Association of India (supra).

51. Further, learned Senior Counsel brought to the attention ofthis Court, the principle, that ‘specific’ excludes ‘general’ and that thetaxing entry would limit the scope of general regulatory entry, as wasexplained in the Commentary on Constitution of India (2[nd] Edition, Volume2, Pg.2145) authored by Sri Arvind P. Datar, Senior Advocate.

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52. Learned Senior Counsel for the State of Kerala stated thatEntry 62 of List II is now whittled down in view of the now firmlyestablished GST regime. He stated that the interpretation of Entry 62 ofList II in the present set of appeals concerns taxes paid in the past.

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Points for consideration

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53. Having heard learned Senior Counsel and learned counselappearing for the respective parties and upon perusal of the record, thefollowing points would arise for our consideration:

(i) Whether the subject ‘lotteries organised by the CentralGovernment and the State Governments’ being carved outof ‘betting and gambling’ which is dealt withunder Entry 34Dof List II and being placed in Entry 40 of List I would alsoexclude the power of taxation on the same in Entry 62 ofList II?

(ii) Whether the power of taxation on ‘betting and gambling’ iswithin the ambit of Entry 62 of List II?

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(iii) Whether the impugned Acts passed by the Karnataka andKerala State Legislatures are within the legislativecompetence of Entry 62 of List II, and are therefore validpieces of legislation?

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(iv) What order?

Constitutional Scheme

54. For easy and immediate reference, the following provisions ofthe Constitution of India are extracted as under :

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“245. Extent of laws made by Parliament and by theLegislatures of States –

(1) Subject to the provisions of this Constitution, Parliament maymake laws for the whole or any part of the territory of India, andthe Legislature of a State may make laws for the whole or anypart of the State.

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A(2) No law made by Parliament shall be deemed to be invalid onthe ground that it would have extra territorial operation.

246. Subject matter of laws made by Parliament and by theLegislatures of States - (1) Notwithstanding anything in clauses(2) and (3), Parliament has exclusive power to make laws withBrespect to any of the matters enumerated in List I in the SeventhSchedule (in this Constitution referred to as the ‘Union List’).

(2) Notwithstanding anything in clause (3), Parliament, and, subjectto clause (1), the Legislature of any State also, have power tomake laws with respect to any of the matters enumerated in ListCIII 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 hasexclusive power to make laws for such State or any part thereofwith respect to any of the matters enumerated in List II in theDSeventh Schedule (in this Constitution referred to as the ‘StateList’).

(4) Parliament has power to make laws with respect to any matterfor any part of the territory of India not included (in a State)notwithstanding that such matter is a matter enumerated in theState List.E

246A. Special provision with respect to goods and servicestax -

1) Notwithstanding anything contained in articles 246 and 254,Parliament, and, subject to clause (2), the Legislature of everyFState, have power to make laws with respect to goods and servicestax imposed by the Union or by such State.

(2) Parliament has exclusive power to make laws with respect togoods and services tax where the supply of goods, or of services,or both takes place in the course of inter-State trade or commerce.

GExplanation. - The provisions of this article, shall, in respect ofgoods and services tax referred to in clause (5) of article 279A,take effect from the date recommended by the Goods and ServicesTax Council.]

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248. Residuary powers of legislation –

(1) Subject to Article 246A, Parliament has exclusive power tomake any law with respect to any matter not enumerated in theConcurrent List or State List

(2) Such power shall include the power of making any law imposinga tax not mentioned in either of those Lists

265. Taxes not to be imposed save by authority of law- No tax shall be levied or collected except by authority of law.

40. Lotteries organised by the Government of India or theGovernment of a State.

97. Any other matter not enumerated in List II or List III includingany tax not mentioned in either of those Lists.

Entries 34 and 62ofList 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 16.09.2016which is relevant for the purpose of these cases].”

Some of the salient aspects concerning the distribution of thelegislative powers between the Parliament and State Legislature as perthe three Lists of Seventh Schedule of the Constitution in the backdropof provisions could be alluded to.Article 246 of the Constitution dealswith the distribution of legislative powers between the Union and theStates. The said Article has to be read along with the three Lists namelythe Union List, the State List and the Concurrent List. The taxing powersof the Union as well as the States are also demarcated as separateEntries in the Union List as well as the State List i.e. List I and List IIrespectively. The Entries in the Lists are the fields of legislative powersconferred under Article 246 of the Constitution. In other words, the Entriesdefine the areas of legislative competence of the Union and StateLegislature.

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A55. Article 246 deals with subject matter of laws made byParliament and by the Legislatures of States as follows :

(a) Clause (1) of Article 246 states that notwithstanding anythingin clauses (2) and (3) Parliament has exclusive power tomake laws with respect to any of the matters enumeratedBin List I (Union List). In this case, we are concerned withEntry 40 of List I, which deals with Lotteries organised bythe Government of India or the Government of a State.

(b) Clause (2) of Article 246 of the Constitution, states thatnotwithstanding anything in clause (3), the Parliament andCthe Legislature of any State also have the power to makelaws with respect to any matters enumerated in List-III(Concurrent List).

(c) Clause (3) thereof, states that the Legislature of any Statehas exclusive power to make laws for the State with respectDto any matters enumerated in List-II (State List). However,clause (3) of Article 246, is subject to clauses (1) and (2)which begin with a non-obstante clause.

56. The power to legislate which is dealt with under Article 246has to be read in conjunction with the Entries in the three Lists whichEdefine the respective areas of legislative competence of the Union andState Legislatures. While interpreting these entries, they should not beviewed in a narrow or myopic manner but by giving the widest scope totheir meaning, particularly, when the vires of a provision of a statue isassailed. In such circumstances, a liberal construction must be given tothe Entry by looking at the substance of the legislation and not its mereFform. However, while interpreting the Entries in the case of an apparentconflict, every attempt must be made by the Court to harmonise orreconcile them. Where there is an apparent overlapping between twoEntries, the doctrine of pith and substance is applied to find out the truecharacter of the enactment and the entry within which it would fall. TheGdoctrine of pith and substance, in short, means, if an enactmentsubstantially falls within the powers expressly conferred by theConstitution upon the legislature which enacted it, it cannot be held to beinvalid merely because it incidentally encroaches on matters assigned toanother legislature. Also, in a situation where there is overlapping, thedoctrine has to be applied to determine to which Entry, a piece of legislationHcould be related. If there is any trenching on the field reserved to another legislature, the same would be of no consequence. In order to examinethe true character of enactment or a provision thereof, due regard mustbe had to the enactment as a whole and to its scope and objects. It issaid that the question of invasion into another legislative territory has tobe determined by substance and not by degree.

57. In case of any conflict between Entries in ListI and ListII, thepower of Parliament to legislate under ListI will supersede when, on aninterpretation, the two powers cannot be reconciled. But if a legislationin pith and substance falls within any of the Entries of ListII, the StateLegislature’s competence cannot be questioned on the ground that thefield is covered by Union list or the Concurrent list vide Prafulla KumarMukherjee vs. Bank of Commerce, Khulna - [AIR 1947 P.C. 60].According to the pith and substance rule, if a law is in its pith andsubstance within the competence of the Legislature which has made it,it will not be invalid because it incidentally touches upon the subject lyingwithin 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 – [AIR1961 SC 232], it has been observed by this Court that the test of pithand substance is generally and more appropriately applied when a disputearises as to the legislative competence of the Legislature and it has to beresolved by reference to the Entries to which the impugned legislation isrelatable. When a question of legislative competence is raised, the test isto look at the legislation as a whole and if it has a substantial and notmerely a remote connection with the Entry, the same may well be takento be alegislation 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 ofthe matters enumerated in the respective Lists. The said expressionindicates the ambit of the power of the respective Legislature to legislateas regards the subject matters comprised in the various Entries includedin the legislative Lists. Hence, where the Entry describes an object oftax, all taxable events pertaining to the object are within that field oflegislation unless the event is specifically provided for elsewhere undera different legislative head. Thus, the Court has to discover the truecharacter and nature of the Legislation while deciding the validity of theLegislation. Applying the doctrine of pith and substance while interpretingthe legislative Lists what needs to be seen is whether an enactment A

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Asubstantially falls within the powers expressly conferred by theConstitution upon the Legislature which enacted it. If it does, it cannotbe held to be invalid merely because it incidentally encroaches on mattersassigned to another Legislature vide FN Balsara (supra).

60. In Ujagar Prints (supra), it was observed that the Entries inBthe legislative Lists must receive a liberal construction inspired by abroad and generous spirit and not in a narrow and pedantic manner. Thisis because the Entries are not sources of legislative power but are merelytopics or fields of Legislation. The expression ‘with respect to’ in Article246 brings in the doctrine of pith and substance in the understanding ofthe exertion of the legislative power and wherever the question ofClegislative competence is raised, the test is whether the Legislation, lookedat as a whole, is substantially ‘with respect to’ the particular topic ofLegislation. For applying the principle of pith and substance, regard mustbe had (i) to the enactment as a whole, (ii) to its main object, and (iii) tothe scope and effect of the provision.D61. Once the Legislation is found to be ‘with respect to’ thelegislative Entry in question unless there are other constitutionalprohibitions, the power would be unfettered. It would also extend to allancillary and subsidiary matters which can fairly and reasonably be saidto be comprehended in that topic or category of Legislation vide UnitedEProvinces vs. Atiqa Begum – [AIR 1941 FC 16].

62. Another important aspect while construing the Entries in therespective Lists is that every attempt should be made to harmonise thecontents of the Entries so that interpretation of one Entry should notrender the entire content of another Entry nugatory vide Calcutta GasFCompany vs. State of West Bengal – [AIR 1962 SC 1044]. This isespecially so when some of the Entries in a different List or in the sameList 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 Entriesand bring about a harmonious construction. Thus, an effort must be madeto give effect to both Entries and thereby arrive at a reconciliation orGharmonious construction of the same. In other words, a constructionwhich would reduce one of the Entries nugatory or dead letter, is not tobe followed.

63. The sequitur to the aforesaid discussion is that if the Legislaturepasses a law which is beyond its legislative competence, it is a nullityHab-initio. The Legislation is rendered null and void for want of jurisdiction or legislative competence vide RMDC vs Union of India – [AIR 1957SC 628].

64. Since these appeals concern interpretation, inter alia, of Entry62 of List II, which is a taxation entry, it would be useful to refer tocertain other articles of the Constitution. Article 265 of the Constitutionof India states that no tax shall be levied or collected except by authorityof law. That means not only the levy but also the collection of a tax mustbe authorized by law. The tax to be levied must be within the competenceof the Legislature imposing the tax and the validity of the tax has to beadjudged with reference to the competence of the Legislature at thetime the statute authorizing the tax was enacted. Further, the law imposingthe tax must have been validly enacted. Thus, power to tax cannot beinferred by implication. The source of power which does not specificallyspeak of taxation cannot be interpreted by expanding its width as toinclude therein the power to tax by implication or by necessary inference.There must be a charging section specifically empowering the State tolevy the tax vide Kesoram Industries Limited. (supra).

65. Bearing in mind the issues raised in this batch of cases, it isunnecessary to consider the other aspects touching upon the validity ofthe taxation laws made by a Legislature viz., that they ought not toviolate any fundamental right etc., as what is of more significance to thepresent appeals is the question, whether, the impugned Acts contravenethe specific provisions of the Constitution which impose limitation onlegislative power relating to particular matters.

66. Further, under Article 289, the Union cannot tax the propertyand income of a State vide Re. Sea Customs Act – [AIR 1963 SC1760]. This is based on the principles of federalism and inter-governmental immunity as adverted to by learned Senior Counsel SriDatar. However, under clause (2) of Article 289, the Union can imposeor authorize the imposition of, any tax to such extent, if any, as Parliamentmay by law provide in respect of a trade or business of any kind carriedon by, or on behalf of, the Government of a State, or any operationsconnected therewith, or any property used or occupied for the purposesof such trade or business, or any income accruing or arising in connectiontherewith. Clause (2) of Article 289 states that Parliament may by lawdeclare any trade or business or any class of trade or business to beincidental to the ordinary functions of government in which event, clause(2) of Article 289 would not apply.

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A67. Further, when a power is conferred on the Legislature to levya tax, the power itself must be widely construed. It must include thepower to impose a tax and select the articles or commodities for theexercise of such power. It must also include the power to fix the rateand prescribe the machinery for the recovery of tax. In imposing taxes,the Legislature can also appoint authorities for collecting taxes and mayBprescribe the procedure for determining the amount of tax payable byany individual and also ensure that there is no evasion of tax. All theseprovisions are subsidiary to the main power to levy a tax vide KhyerbariTea Co. Ltd. vs. State of Assam – [AIR 1964 SC 925].

68. If a tax is ultra vires or unconstitutional then the party isCentitled to have a refund of it from the government whether it has beenpaid under protest or not. This Court has held that the payment of taxwhich is without authority of law is payment made under a mistakewithin the meaning of Section 72 of the Indian Contract Act. Then, insuch a case, question would arise, whether, the government to whomDthe payment had been made by mistake must repay it. Thus, the principleof restitution or repayment of the tax simpliciter has been considered inlight of the doctrine of unlawful enrichment. The doctrine envisages thatwhen the State collects a tax from the tax payer without authority oflaw, but if the taxpayer has already passed on the burden of the taxmoney paid by him to the State to someone else and has recouped theEmoney then the taxpayer is not entitled to ask for the restitution from theState the money paid by him as unauthorised tax. In such circumstances,the State cannot be asked to refund the tax money to the taxpayer onthe principle of unlawful enrichment. The Court may refuse the relief tothe concerned taxpayer who had ultimately paid the above but not to theFintermediary to collect the amount from them and paid the same to thegovernment. It would all depend upon the facts and circumstances ofeach case. With the passage of time, it has been held that no refund canbe granted so as to cause a windfall gain to any person when he has notsuffered the burden of tax. That the right of restitution is neither automatic nor unconditional vide Mafatlal Industries (supra). In the said case itGwas held that refund claim can be allowed only when a person establishesthat he has not passed on the burden to others.

69. With the above preface, we shall consider the relevant caselaw cited at the Bar on interpretation of an Entry in respect of taxation.

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70. Under the Seventh Schedule of the Constitution, Lists I & IIare divided essentially into two groups: One, relating to the power tolegislate on specified subjects and the other, relating to the power to tax.In Hoechst Pharmaceuticals Ltd. vs. State of Bihar – [AIR 1983 SC1019], it has been categorically held that taxation is considered as adistinct matter for purposes of legislative competence.

71. It would be relevant to discuss the following judgments of thisCourt in detail so as to bring out the pertinent principles of interpretationof taxation Entries in List II even when regulation of an activity is providedunder an Entry in List I. They are (i) M.P.V. Sundararamier (supra)and (ii) Kesoram Industries Ltd. (supra) while delving on these judgmentsreference would also be made to other cases cited at the Bar, particularlySynthetics and Chemicals Ltd. (supra) and Harbhajan Singh Dhillon(supra).

M.P.V. Sundararamier :

72. In M.P.V. Sundararamier (supra), the petitioners were dealerscarrying on business in the city of Madras (now Chennai) for the saleand purchase of yarn, and they had filed petitions under Article 32 of theConstitution before this Court for the issuance of a writ of prohibition orany other appropriate writ restraining the erstwhile State of AndhraPradesh from taking proceedings for imposing tax on certain saleseffected by them in favour of merchants who were residing or carryingon business in what was the erstwhile State of Andhra Pradesh, on theground, inter alia, that the said sales were made in the course of inter-State trade, and that no tax could be levied on them by reason of theprohibition contained in Article 286(2) of the Constitution. One of thequestions considered in the said case was, whether, tax on inter-Statesales was within the exclusive competence of Parliament, and whetherthe Act impugned in the said case (Madras General Sales Tax Act, 1939;‘Madras Act’, for short) and the amendment made thereof by the MadrasGeneral Sales Tax (Amendment) Act No.25 of 1947, was in consequencebad, as it authorized the State to levy the sales tax.

73. The contention was that Entry 42 of List I dealt with inter-State trade and commerce and under that Entry, the Parliament had theexclusive power to enact laws in respect of inter-State trade andcommerce which also included the power to impose a tax on inter-Statesales and the State Legislature had therefore no competence under theConstitution to enact a law imposing tax on such sales and the laws AB

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Apassed by the States after the enactment of the Constitution, imposingsuch a tax were ultra vires and void and therefore, the Act impugned inthe said case was also ultra vires. It was contended that the content ofEntry 42 in List I was the same as that of the Commerce Clause of theAmerican Constitution and it must therefore be construed as having thesame effect. It was also argued that the power to impose tax on inter-BState sales did not vest with the State. That after the enforcement of theConstitution, no law of a State could impose a tax on inter-State salesand hence section 22 of the Madras Act impugned in the said casewhich came into force after the Constitution was enforced and soughtto impose such a tax, was bad in law.

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74. The aforesaid contentions were considered in light of theGovernment of India Act, 1935 under which there was no entrycorresponding to Entry 42 of List I of the Constitution but there wasEntry 48 in List II which corresponded to Entry 54 of List II of theConstitution. That under Entry 48 of List II of the Government of IndiaDAct, 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 includeboth inter-State sales as well as intra-State sales. However, after theConstitution came into force for the first time a new Entry 42 of List Iwas added and consequently, the States were deprived of the power totax inter-State sales which had earlier been within their legislativeEcompetence under Entry 48 of List II, under the Government of IndiaAct, 1935.

75. It was observed by this Court that while enacting Entry 42of List I the Constitution makers could have included the power totax on inter-State sales instead of leaving that to be inferred byFconstruction of Entry 42 of List I in light of the Commerce Clauseunder the American Constitution. While saying so in paragraph 51, itwas observed as follows :

“51. In List I, Entries 1 to 81 mention the several matters overwhich Parliament has authority to legislate. Entries 82 to 92Genumerate the taxes which could be imposed by a law ofParliament. An examination of these two groups of Entries showsthat 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 “TerminalHtaxes on goods or passengers, carried by railway, sea or air; taxes

on railway fares and freights”. If Entry 22 is to be construed asinvolving 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 expressionsare to be interpreted as including duties to be levied in respect ofthat trade and commerce, then Entry 83 which is “Duties ofcustoms including export duties” would be wholly redundant.Entries 43 and 44 relate to incorporation, regulation and windingup of corporations. Entry 85 provides separately for corporationtax. Turning to List II, Entries 1 to 44 form one group mentioningthe subjects on which the States could legislate. Entries 45 to 63in that List form another group, and they deal with taxes. Entry18, for example, is “Land” and Entry 45 is “Land revenue”. Entry23 is “Regulation of mines” and Entry 50 is “Taxes on mineralrights”. The above analysis — and it is not exhaustive of theEntries in the Lists — leads to the inference that taxation is notintended to be comprised in the main subject in which it might onan extended construction be regarded as included, but is treatedas a distinct matter for purposes of legislative competence. Andthis 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 difficultto resist the conclusion that the power of Parliament to legislateon inter-State trade and commerce under Entry 42 does not includea power to impose a tax on sales in the course of such trade andcommerce.”

On the above analysis, it was categorically inferred that taxationwas 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 asa distinct matter for the purpose of legislative competence. But whilesaying so, in the said case, reliance was placed on Article 286 of theConstitution and on the point, as to, whether, tax on inter-State sales wasincluded within Entry 42 in List I, it was held in the negative, particularly,having regard to Article 286 of the Constitution. Consequently, it wasopined that the State had power under Entry 54 of List II to impose a taxon inter-State sales but it would be subject to restrictions included underArticle 286(2) of the Constitution. The aforesaid conclusion was summedup in paragraph 55 in the following words :

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A“55. To sum up: (1) Entry 54 is successor to Entry 48 in theGovernment of India Act, and it would be legitimate to construe itas including tax on inter State sales, unless there is anythingrepugnant to it in the Constitution, and there is none such. (2)Under the scheme of the entries in the Lists, taxation is regardedas a distinct matter and is separately set out. (3) Article 286(2)Bproceeds on the basis that it is the States that have the power toenact laws imposing tax on inter-State sales. It is a fair inferenceto draw from these considerations that under Entry 54 in List IIthe States are competent to enact laws imposing tax on inter-State sales.”

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76. It was also observed that the said conclusion was a constructionof the statutory provisions having a bearing in the said case, withoutreference to the Sixth Amendment to the Constitution which hadproceeded on the view that the States had the power to tax inter-Statesales under Entry 54 of List II. Therefore, the Constitution was amendedDto vest the power to tax inter-State sales with the Centre.

Kesoram Industries Ltd.

77. In this case, the controversy centered around Entries 52, 54and 97 of List I and Entries 23, 49, 50 and 66 of List II and also theextended purport of the residuary power of legislation vested in the UnionEof India. The judgment dealt with the imposition of levies on coal, tea,brick-earth and minor minerals. While dealing with the aforesaid Entriesof List I and List II, reliance was placed on Hoechst PharmaceuticalsLtd. (supra) on the interpretation of various Entries in the three Lists.The amplitude of legislative power under a general Entry vis-à-vis taxationFEntry was discussed in paragraph 31 which is reproduced as under:

“31. Article 245 of the Constitution is the fountain source oflegislative power. It provides — subject to the provisions of thisConstitution, Parliament may make laws for the whole or anypart of the territory of India, and the legislature of a State mayGmake laws for the whole or any part of the State. The legislativefield between Parliament and the legislature of any State is dividedby Article 246 of the Constitution. Parliament has exclusive powerto make laws with respect to any of the matters enumerated inList I in the Seventh Schedule, called the “Union List”. Subject tothe said power of Parliament, the legislature of any State hasHpower to make laws with respect to any of the matters enumerated in List III, called the “Concurrent List”. Subject to the abovesaidtwo, the legislature of any State has exclusive power to makelaws with respect to any of the matters enumerated in List II,called the “State List”. Under Article 248 the exclusive power ofParliament to make laws extends to any matter not enumeratedin the Concurrent List or State List. The power of making anylaw imposing a tax not mentioned in the Concurrent List or StateList vests in Parliament. This is what is called the residuary powervesting in Parliament. The principles have been succinctlysummarised and restated by a Bench of three learned Judges ofthis Court on a review of the available decision in HoechstPharmaceuticals Ltd. v. State of Bihar [(1983) 4 SCC 45 : 1983SCC (Tax) 248] . They are:

(1) The various entries in the three lists are not “powers” oflegislation but “fields” of legislation. The Constitution effects acomplete separation of the taxing power of the Union and of theStates under Article 246. There is no overlapping anywhere inthe taxing power and the Constitution gives independentsources 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 anda law made by the State Legislature may arise only in cases whenboth the legislations occupy the same field with respect to one ofthe matters enumerated in the Concurrent List and a direct conflictis seen. If there is a repugnancy due to overlapping found betweenList II on the one hand and List I and List III on the other, theState law will be ultra vires and shall have to give way to theUnion law.

(3) Taxation is considered to be a distinct matter for purposesof legislative competence. There is a distinction made betweengeneral subjects of legislation and taxation. The general subjectsof legislation are dealt with in one group of entries and power oftaxation in a separate group. The power to tax cannot be deducedfrom 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 andgenerous spirit and not in a narrow pedantic sense. The words AB

C

D

E

F

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A

B

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and expressions employed in drafting the entries must be giventhe widest-possible interpretation. This is because, to quote V.Ramaswami, J., the allocation of the subjects to the lists is not byway of scientific or logical definition but by way of a mere simplexenumeratio of broad categories. A power to legislate as to theprincipal matter specifically mentioned in the entry shall alsoinclude within its expanse the legislations touching incidentaland ancillary matters.

(5) Where the legislative competence of the legislature of anyState is questioned on the ground that it encroaches upon thelegislative competence of Parliament to enact a law, the questionone has to ask is whether the legislation relates to any of theentries in List I or III. If it does, no further question need be askedand Parliament’s legislative competence must be upheld. Wherethere are three lists containing a large number of entries, there isbound to be some overlapping among them. In such a situationthe doctrine of pith and substance has to be applied to determine as to which entry does a given piece of legislation relate. Once itis so determined, any incidental trenching on the field reserved tothe other legislature is of no consequence. The court has to lookat the substance of the matter. The doctrine of pith and substanceis sometimes expressed in terms of ascertaining the true character of legislation. The name given by the legislature to the legislationis 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 aclash between the Union and the State Lists within an area commonto both. There the doctrine of pith and substance is to be appliedand if the impugned legislation substantially falls within the powerexpressly conferred upon the legislature which enacted it, anincidental encroaching in the field assigned to another legislatureis to be ignored. While reading the three lists, List I has priorityover Lists III and II and List III has priority over List II. However,still, the predominance of the Union List would not preventthe State Legislature from dealing with any matter within ListII though it may incidentally affect any item in List I.

(emphasis supplied)

After restating the above principle, it was observed by this Courtthat legislation in the field of tax and economic activities need specialconsideration and are to be viewed with larger flexibility rather thanmeasuring the propositions by an abstract symmetry. It was furtherobserved that where a power is with the Union to regulate and control,such power of the Union cannot result in depriving the States of theirpower to levy tax or fee within its legislative competence without trenchingupon the field of regulation and control. Thus, there is a distinction betweenpower to regulate and control and power to tax, the two being distinct.

78. While examining the scheme underlying the Seventh Scheduleof 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 subjectin which it might on an extended construction be regarded asincluded, but is treated as a distinct matter for purposes of legislativecompetence. And this distinction is also manifest in the languageof Article 248 clauses (1) and (2) and of Entry 97 in List I of theConstitution. Under the scheme of the entries in the lists, taxationis regarded as a distinct matter and is separately set out.”

79. Further, the entries in List I and List II must be construed ifpossible, so as to avoid conflict. If there appears to be a conflict betweenEntries of List I and List II, what has to be decided is whether there isany 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, thecorrect approach to the question is to see, whether, it is possible to effecta reconciliation between the two entries so as to avoid a conflict andoverlapping. It was reiterated that in the event of a dispute arising itshould be determined by applying the doctrine of pith and substance inorder to find out whether between two Entries or legislative fields assignedto two different legislatures, the particular subject of the legislation fallswithin the ambit of the one or the other. Where there is a clear andirreconcilable conflict of jurisdiction between the Union and a StateLegislature, 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 Judgesconstituting the Bench in Synthetics and Chemicals Ltd. (supra).It washeld that under the constitutional scheme of division of powers in the A

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ASeventh Schedule, there are separate entries pertaining to taxation andother laws. A tax cannot be levied under a general entry. It was observedthat the above principles continued to hold the field and have been followedin cases after cases.

81. Delving further on the subject, it was observed by this CourtBthat the power of regulation and control is separate and distinct from thepower of taxation. This was illustrated with reference to several judgmentsof this Court, particularly, Hingir - Rampur Coal Co. Ltd. vs. State ofOrissa – [AIR 1961 SC 459] wherein this Court dealt with Entry 54 ofList I and Entry 23 of List II. Reference was also made to the State ofOrissa vs. M.A. Tulloch – [AIR 1964 SC 1284].C

82. It was further observed with reference to Harbhajan SinghDhillon (supra), that Entry 97 of List I conferred the residuary powerson the Parliament. Article 248 of the Constitution which speaks ofresiduary powers of legislation confers exclusive power on Parliamentto make any law with reference to any matter not enumerated in theDConcurrent List or the State List. But at the same time, it providesthat such a residuary power shall include a power of making any lawimposing a tax not mentioned in either of those Lists. It is thusclear that if any power to tax is clearly mentioned in List II, the samewould not be available to be exercised by the Parliament based on theEassumption 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 inrespect of a matter does not carry with it a power to impose a tax underour constitutional scheme. Thus, there is nothing like an implied powerFto tax. The source of power which does not specifically speak of taxationcannot be so interpretated by expanding its width as to include thereinthe power to tax, by implication or by necessary inference. Reliancewas also placed on Cooley on Taxation to the following effect :

“There is no such thing as taxation by implication. The burden isGalways upon the taxing authority to point to the act of assemblywhich authorizes the imposition of the tax claimed.”

Thus, the power to tax is not an incidental power. Althoughlegislative power includes incidental and subsidiary power under aparticular Entry dealing with a particular subject, the power to impose atax is not such a power which could be implied under our Constitution.H

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, thepower to tax the sale of goods which are subject of inter-State trade andcommerce, before the insertion of Entry 92A in List I and such powerbelonged to the States under Entry 54 in List II subject to Article 286 ofthe Constitution.

84. Delving further on the distinction between the power toregulate and control and the power to tax, it was observed by thisCourt that there is a significant distinction between the two primarypurposes of legislation. The primary purpose of taxation is to collectrevenue. Power to tax may be exercised for the purpose of regulatingan industry, commerce or any other activity. The purpose of levyingsuch tax is the exercise of sovereign power for the purpose ofeffectuating regulation although incidentally, the levy may contributeto the revenue. Taking a leaf from Cooley on his work on taxation, itwas observed that the distinction between a demand of money underthe police power and one made under the power to tax, is not so muchone of form as of substance.

85. The aforesaid principle was alluded to in Synthetics andChemicals Ltd. (supra) by holding that regulation is a necessaryconcomitant of the police power of the State which is actually an Americanprinciple but in India it means the ‘sovereign’ power. However, it wascategorically observed that the power to regulate, develop or controlwould not include within its ken a power to levy tax or fee except whenit is only regulatory. Power to tax or levy for augmenting revenue shallcontinue to be exercised by Legislature with whom it vests, for instance,the State Legislature, in spite of regulation or control having been assumedby another Legislature i.e. the Union. In this case, the question beforethe seven-Judge Bench was the power of the State to legislate on industrialalcohol as a subject. Entry 8 in List II and Entry 33 in List III came upfor consideration.

86. The aforesaid discussion could be summed up in a nutshell byculling out the following principles stated in Kesoram Industries Ltd.(supra):

(1) In the scheme of the lists in the Seventh Schedule, there existsa clear distinction between the general subjects of legislation andheads of taxation. They are separately enumerated.

A

B

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D

E

F

G

H

A(2) Power of “regulation and control” is separate and distinctfrom the power of taxation and so are the two fields for purposesof legislation. Taxation may be capable of being comprised in themain subject of general legislative head by placing an extendedconstruction, but that is not the rule for deciding the appropriatelegislative field for taxation between List I and List II. As theBfields of taxation are to be found clearly enumerated in Lists I andII, there can be no overlapping. There may be overlapping infact but there would be no overlapping in law. The subject-matterof two taxes by reference to the two lists is different. Simplybecause the methodology or mechanism adopted for assessmentCand quantification is similar, the two taxes cannot be said to beoverlapping. This is the distinction between the subject of a taxand the measure of a tax.

A

A

(3) The nature of tax levied is different from the measure oftax. While the subject of tax is clear and well defined, the amountDof tax is capable of being measured in many ways for the purposeof quantification. Defining the subject of tax is a simple task;devising the measure of taxation is a far more complex exerciseand therefore the legislature has to be given much more flexibilityin the latter field. The mechanism and method chosen by thelegislature for quantification of tax is not decisive of the natureEof tax though it may constitute one relevant factor out of manyfor throwing light on determining the general character of thetax.

D

(4) The entries in List I and List II must be so construed as toavoid any conflict. If there is no conflict, an occasion for derivingFassistance from non obstante clause “subject to” does not arise.If there is conflict, the correct approach is to find an answer tothree questions step by step as under:

One — Is it still possible to effect reconciliation between twoentries so as to avoid conflict and overlapping?

G

Two — In which entry the impugned legislation falls by findingout the pith and substance of the legislation?

and

Three — Having determined the field of legislation wherein theHimpugned legislation falls by applying the doctrine of pith and substance, can an incidental trenching upon another field oflegislation be ignored?

(5) The primary object and the essential purpose of legislationmust be distinguished from its ultimate or incidental results orconsequences, for determining the character of the levy. A levyessentially in the nature of a tax and within the power of the StateLegislature cannot be annulled as unconstitutional merely becauseit may have an effect on the price of the commodity.

(6) The heads of taxation are clearly enumerated in Entries 83to 92-B in List I and Entries 45 to 63 in List II. List III, theConcurrent List, does not provide for any head of taxation. Entry96 in List I, Entry 66 in List II and Entry 47 in List III deal withfees. The residuary power of legislation in the field of taxationspelled out by Article 248(2) and Entry 97 in List I can be appliedonly to such subjects as are not included in Entries 45 to 63 ofList II.

We shall now briefly discuss the Central Act of 1998 and theimpugned Acts of the States of Karnataka and Kerala which have beenmade 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 theLotteries Act, 1998. The said Act is intended to regulate lotteries and toprovide for matters connected therewith and incidental thereto. Section3 of the said Act prohibits a State Government from organising, conductingor promoting any lottery except subject to the conditions provided underSection 4 of the Act. Section 4 prescribes the conditions under which aState Government may organise, conduct or promote a lottery. Thereare ten conditions prescribed under Section 4 of the Act. Section 4 isextracted 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 numberor on the basis of a single digit; ABC

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A(b)the State Government shall print the lottery tickets bearingthe imprint and logo of the State in such manner that theauthenticity of the lottery ticket is ensured;

(c) the State Government shall sell the tickets either itself orthrough distributors or selling agents; B

(d) the proceeds of the sale of lottery tickets shall be creditedinto the public account of the State; (e)the State Government itself shall conduct the draws of allthe lotteries; (f)the prize money unclaimed within such time as may beprescribed by the State Government or not otherwisedistributed, shall become the property of that Government; C

(g) the place of draw shall be located within the Stateconcerned; D

(h) no lottery shall have more than one draw in a week;

(i) the draws of all kinds of lotteries shall be conducted betweensuch period of the day as may be prescribed by the StateGovernment; (j)the number of bumper draws of a lottery shall not be moreEthan six in a calendar year; (k)such other conditions as may be prescribed by the CentralGovernment.”

88. The Central Government may also prescribe any otherFcondition. Section 5 deals with prohibition of sale of ticket in a Statewhich means that a State Government may, within the State, prohibit thesale of tickets of a lottery organised, conducted or promoted by everyother State. The Central Government can also by an order published inthe Official Gazette, prohibit lottery organised, conducted or promotedin contravention of the provisions of Section 4 of the said Act or whereGtickets 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 theCentral Government to give directions to State Governments as to carryinginto execution in the State, of any of the provisions of the said Act or ofany rule or order made thereunder.The Central Government has theHpower to make rules under the saidAct in terms of Section 11. Section 12 of the said Act enables the State Government to make rules to carryout the provisions of the said Act.

89. A schematic reading of the said Lotteries Regulation Act clearlyindicates that the Parliament has enacted the same having regard toEntry 40 of List I of the Seventh Schedule of the Constitution. The 1998Act deals exclusively with conduct of lotteries by a State Governmentsubject to terms and conditions prescribed in Section 4 of the 1998 Act.The said Act does not deal with conduct of lotteries by entities otherthan Government of India or Government of State. Hence, regulation ofthe organisation, conduct and promotion of any lottery by the Governmentof India or State Government is made by the Parliament under theprovisions of the 1998 Act. The said Act has no provision regardingtaxation.

The Karnataka Tax on Lotteries Act, 2004

90. The Karnataka Tax on Lotteries Act, 2004is an enactment tolevy tax on lottery scheme as per Section 6 of the said Act. The tax islevied at the following rates namely: (a) Rupees one lakh and fiftythousand for every bumper draw; and (b) Rupees one lakh in respect ofany other draw.

91. The said tax is to be paid by every promoter. The KarnatakaAct, 2004 defines the expression ‘lottery’ in Sub-Section 4 of Section 2to mean a scheme, in whatever form and whatever name called fordistribution of prizes by lot or chance to those persons participating inthe chance of a prize by purchasing tickets organised by the Governmentof India or the Government of a State or a Union Territory or any othercountry having bilateral agreement or treaty with the Government ofIndia. The definition of the expression ‘lottery’ would indicate that theobject and purpose is of levying the tax on a lottery scheme is only whenthe lottery scheme is organised by the Government of India or theGovernment of a State or a Union Territory or any other country havingbilateral agreement or treaty with the Government of India. Thus, thisAct does not levy any tax on lotteries conducted by any private entities.Sub-Section 5 of Section 2 defines a ‘promoter’ to be the Governmentof India or a Government of a State or a Union Territory or any countryorganising, conducting or promoting a lottery and includes any personappointed for selling lottery tickets in the State on its behalf by suchGovernment or country, where such Government or country is not directly AB

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Aselling lottery tickets in the country or a State. The Karnataka Act, 2004enables payment of tax in advance by the registered promoter. Section 8of the Act deals with registration of promoters and sellers.

92. The Karnataka Act, 2004 is a comprehensive legislation onlevy and collection of tax on lotteries (gambling). In fact, the preambleBof the Act itself states that the Act is to provide for levy and collection oftax on lottery (gambling). Thus, in the Karnataka Act, 2004, theLegislature has clearly indicated that the expression lottery meansgambling.

93. The Act seeks to provide for all matters incidental and ancillaryCto the levy of taxation, including provisions for filing return, assessmentthereof and schedule for payment of tax in advance. Additionally, thesaid Act also provides for a machinery to effect recoveries of tax and/orpenalties from the assessee. Chapter VI of the Act provides for theright of an assessee to prefer an appeal; and the powers of theCommissioner and Joint Commissioner to initiate revisional proceedingsDin relation to any assessment made or pending under the Act.

94. Section 20 of the Act authorizes certain officers of the StateGovernment to conduct inspection of documents and searches, and effectseizure of accounts or documents pertinent to the assessment under theAct.E

95. Chapter VII of the Karnataka Act, 2004 prescribes specificpenalties for contravention of various conditions of the Act such as penaltyfor failure on the part of a promoter to register, keep records, file statementof returns etc.F96. The Karnataka Tax on Lotteries Rules, 2003 (hereinafterreferred to as ‘Karnataka Lottery Rules, 2003’) were made pursuant toSection 37 of the Karnataka Tax on Lotteries, Ordinance, 2003, whichpreceded the Karnataka Act, 2004.

Kerala Tax on Paper Lotteries Act, 2005

G97. The Kerala Act, 2005 is an enactment which provides for thelevy and collection of tax on the conduct of paper lotteries within theState of Kerala, at such rates as specified in Section 6 of the Act. TheAct provides for the following two rates, applicable based on the natureof the draw: (a) Ten lakh rupees for every bumper draw; (b) Two lakhfifty thousand rupees in respect of any other draw.H

98. The said tax is to be paid by every ‘promoter.’ The terms‘promoter’ and ‘lottery’ have been defined in identical terms as providedunder the Karnataka Act of 2004. The Kerala Tax on Paper LotteriesAct, 2005 does not seek to tax the conduct of online lotteries, but onlypaper lotteries conducted within the State of Kerala. The preamble ofthe said Act states that it is an Act to provide for the levy and collectionof tax on the conduct of paper lotteries in the State of Kerala.

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B

99. Section 7 of the said Act requires promoters to get registeredunder the Act on payment of a fee and deposit of security. However, theAct does not require registration of persons who ordinarily sell lotterytickets in retail. ‘Promoter’ has been defined to include the Governmentof India or a Government of a State or a Union Territory or any countryorganising, conducting or promoting a lottery, within the State of Kerala,or any person or entity appointed by the said Government or Country inthis behalf. Therefore, the Act only provides for taxation of lotteriesconducted within the State of Kerala, by or on behalf of the Governmentof India, the Government of any State or of a foreign Country and notfor taxation on lotteries organised by private entities. Section 11 of theKerala Act, 2005 provides for payment of tax on every draw, in advance.

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D

100. The Kerala Act, 2005 is a comprehensive legislation andalso provides for all matters incidental to the levy and collection of taxon paper lotteries such as, the procedures for assessment of tax due, theright of the assessee to prefer appeals, powers of the tax authorities toconduct search and make seizure, penal provisions to be resorted to fordefault in payment of tax prescribed under the said Act. The legislationalso empowers the State Government to enact Rules to give effect toany of the provisions of the Act.

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F

Parameters of Taxation :

101. A legislative enactment which provides for the imposition ofa tax must specify the following parameters of taxation:

i)The taxable event which forms the basis of levy,a l s oreferred to as ‘subject’ of a tax;G

ii)The measure of the tax;

iii)The rate/s of taxation;

iv)The incidence of the tax,

H

A102. The said parameters are each distinct and must not beconflated with the others. The components of tax, as stated above havebeen characterized in Govind Saran Ganga Saran (Supra). In the saidcase, it was also laid down that a legislative scheme which seeks toimpose a tax, ought to define each of the aforestated components withcertainty and precision. The observations of Chief Justice Pathak mayBbe extracted as under:

“6. The components which enter into the concept of a tax arewell known. The first is the character of the imposition known byits nature which prescribes the taxable event attracting the levy,the second is a clear indication of the person on whom the levy isCimposed and who is obliged to pay the tax, the third is the rate atwhich the tax is imposed, and the fourth is the measure or valueto which the rate will be applied for computing the tax liability. Ifthose components are not clearly and definitely ascertainable, it isdifficult to say that the levy exists in point of law . Any uncertaintyDor vagueness in the legislative scheme defining any of thosecomponents of the levy will be fatal to its validity.”

103. The above parameters may be identified in the impugnedActs under consideration, as follows:

(i) In the context of the tax sought to be imposed by theEimpugned Acts, the basis of levy is the conduct of lotterieswithin 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 otherStates, within the State of Kerala or Karnataka. While itFhas rightly been stated by the learned counsel appearing onbehalf of the Respondents that the conduct of lotteriesinvolves a host of events such as formulation and notificationof scheme of lotteries, printing, transportation and sale oflottery tickets etc., all these events constituting the conductof the lotteries are ultimately for the participation of persons,Gwithin the State of Karnataka or Kerala. Therefore, thesubject of tax is the conduct of lottery schemes, within theState of Karnataka or Kerala, which is enabled by thepropensity of persons to participate in the lottery schemes.

(ii) The measure of taxation in the instant case is theH‘draw.’ The impugned legislations contemplate two kinds of draws, namely bumper draw and draw other than abumper draw.

A

(iii) The rate of tax, is a dependent variable and is to bedetermined based on the measure. In the instant case, therate of tax under the Karnataka Act, 2005 is Rupees OneLakh and fifty thousand in respect of a bumper draw andBRupees one lakh in respect of any other draw. Similarly, inthe Kerala Act, 2005, the rate of tax is Rupees ten lakhs inrespect of a bumper draw and Rupees two lakhs and fiftythousand in respect of any other draw.

(iv) The incidence of the tax is on the promoters of thelotteries, i.e. on the Government of India or a Governmentof a State or a Union Territory or any Country organizing,conducting or promoting a lottery, within the State ofKarnataka or Kerala, or any person or entity appointed bythe said Government or Country in this behalf. The impugnedActs require registration of promoters and all provisionsrequiring filing of the returns of draws and payment of tax,are to operate in relation to promoters. Therefore, theincidence of the tax, falls on the promoters of the lotteries.

CD

104. The expression ‘betting and gambling’ finds a mention inEntry 34 of List II of the Seventh Schedule of the Constitution and taxeson, interalia, betting and gambling are leviable having regard to Entry62 of List II of the Seventh Schedule. Thus, the activity of betting andgambling and taxes on betting and gambling are subjects falling withinList II of the Seventh Schedule i.e. they are State subjects. If conduct oflotteries is held to come within the scope of the expression ‘betting andgambling’ then the regulation and control of the said activity as well asthe taxation on lotteries are squarely within the contours of the legislativepowers of the State. However, only lotteries organised by the Governmentof India or the Government of a State, even though, they come withinthe scope of the expression ‘betting and gambling’ have been carved outof the Entry 34 of List II dealing with betting and gambling inasmuch asEntry 40 of List I (Union List) deals with lotteries organised by theGovernment of India or the Government of a State. This implies thatconduct of lotteries by the Government of India or the Government of aState, even though, is betting and gambling within the meaning of Entry34 and Entry 62 of List II, nevertheless, those Entries are denuded E

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Ainasmuch as the State Legislature has no legislative powers to pass anylaw on the subject lotteries organised by the Government of India or theGovernment of a State. If such is the simplistic interpretation to be given,the matter would rest. However, that is not so.

Meaning of ‘betting and gambling’ and ‘lotteries’ :B

105. Having perused the impugned Acts and identified theparameters of taxation in the context of the said Acts, we shall nowdiscuss the meanings of betting and gambling and,in particular, lottery asfound in Entries 34 and 62 of List II and Entry 40 of List I.

A. Dictionary meaning :C

(i) Black’s Law Dictionary defines ‘gambling’ to mean:

“The act of risking something valuable, especially moneyfor a chance to win a prize.”

(ii) Similarly, in Advanced Law Lexicon, P. Ramanatha AiyarD(6[th] Edition) at page 612‘betting and gambling’ has been described asfollows:

“Putting a stake on something of value, particularly moneywith consciousness of risk and hope of gain on the outcomeof a game or a contest, whose result may be determined byEchance or accident, or on the likelihood of anything occurringor not occurring.”

(iii) In Words and Phrases (Permanent Edition) Vol. 25-A atpage 439 a ‘lottery’ has been defined to mean ‘a species of gambling.’

At page 444, it has been stated as follows:F

“The term ‘lottery’ as popularly and generally used referringto a gambling scheme in which chances are sold or disposedof for value and the sums thus paid are hazarded in thehope of winning a much larger sum, a scheme for thedistribution for the distribution of prizes by chance.”

G

(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 distinctfrom its popular signification.”

H

(v) Similarly, in Black’s Law Dictionary (6[th] Edn.) at p. 947 themeaning 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 numberedtickets and giving prizes to the holders of numbers drawnat random – something whose success is governed bychance.”

(vii) The Webster’s New American College Dictionary (1981)defines as:

“A method of selling numbered tickets and awarding prizesto 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 thegenus of which a species is ‘lottery’. It is evident that ‘lotteries’ and‘gambling’ activities, to be termed as such, must inherently have anelement of ‘chance’ in the manner in which the result thereof isdetermined. 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 whichrequires a participant to take a chance or to gamble. Any form of contestfor a prize that does not fall within the definition of either betting, gamingor a lottery is defined as a ‘prize competition’ which is also subject tolegal 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 ofSession 2019-21), gambling is a general expression which can includedifferent 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 orprocess; A

B

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A(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’. Agame of chance includes:

(i) A game that involves both an element of chance and anelement of skill; B

(ii) A game that involves an element of chance that can beeliminated by superlative skill; and

(iii) A game that is presented as involving an element ofCchance, but

(iv) Does not include a sport.

The Report however states that the expression ‘gaming’ maynot include video gaming and social gaming as such but is used in astatutory sense viz., section 6 of Gambling Act, 2005.D

Lotteries is defined as a type of gambling that has three essentialelements :

(i) Payment is required to participate;

(ii) One or more prizes are awarded; and E

(iii) Those prizes are awarded by chance.

In England, the Gambling Act, 2005 has been enforced as acomprehensive legislation with effect from 1[st] September, 2007 to includebetting, gaming and lotteries. While the Gambling Act, 2005 defines eachFof the forms of gambling, the underlying concept ‘game’ and ‘bet’ arenot defined.

(ii) Kent R. Grote and Victor A. Matheson (Department ofEconomics and Business, Lake Forest College and Department ofEconomics, College of the Holy Cross, Worcester respectively) in theirArticle ‘The Economics of Lotteries: A Survey of the Literature’,Gpublished in August, 2011, have stated that lotteries represent one of theoldest and most common forms of gambling around the world. Thatlotteries involve the sale by an organising body, typically the governmentbut also occasionally private businesses or charities, of a ticket, givingthe possessor, a potential monetary reward. Lotteries differ from casinosHin that lottery ticket sales generally do not take place at a location specifically set aside for gambling, and modern lotteries are usuallyoperated by governments instead of private firms. It is further observedthat lotteries are of particular interest to scholars for a variety of reasons.First, they represent an important source of government revenue in manyStates and countries, so they are of interest to public finance economists.Second, lotteries provide researchers interested in micro-economictheory and consumer behavior with a type of experimental lab that allowseconomists to explore these topics.

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107. According to these learned authors, lotteries have a revenuepotential and the revenue mechanism, is explicitly stated, the goal oflottery organisers and there are ways in which variations in productvariety, lottery structure and payout rates could be adjusted to increaserevenue. If a State finds that its residents are purchasing lottery ticketsfrom other States that have adopted lotteries, this may increase thelikelihood of that State to introduce its own lotteries.

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108. The relevant judgments cited at the Bar on lottery schemeand its essential features shall be considered as under:

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(a) In RMD Chamarbaugwala (supra), this Court examinedthe validity of the Bombay Lotteries and Prize CompetitionsControl Act, 1948, which sought to tax the promoters ofprize competitions. In that context, this Court discussedwhether prize competitions as defined in the legislationEimpugned therein were in the nature of gambling activities.This Court examined the nature of the prize competitionsand made observations as to which of them ought to beincluded under the category of ‘activities of gamblingnature’. It was held that prize competitions which requireFparticipants to guess the solution prepared beforehand orwhich determine the solution by lot were of gambling nature.In a more general vein, it was highlighted that gamblingactivities, in their very nature include any competitionwherein success does not depend to a substantial extent onskill of the participant, but on an element of chance. AsGregards those competitions in which prizes are offered forforecasts of the results either of a future event or an eventthat has occurred in the past for which the result is unknown,this Court held that the said category of competitions werealso of ‘gambling’ nature. This Court concluded that the G

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activity being conducted by the respondent-promoter thereinwas a lottery and such activity could be regarded asgambling inasmuch as it was not a competition in whichskill, knowledge and judgment were in real and effectiveplay.

(b) In RMDC vs. State of Mysore (supra), the challenge wasto the constitutionality of the Mysore Lotteries and PrizeCompetitions Control and Tax Act, 1951 (‘Mysore Act’ forshort) passed by the Mysore Legislature which came intoforce from 21[st] June, 1951 and the Rules made thereunder,which came into force on 1[st] February, 1952. Earlier to that,the Bombay High Court had observed that the amendmentmade to the Bombay Lotteries and Prize Competition Controland Tax Act, 1948 (‘Bombay Act’ for short) wasunconstitutional and that the taxes imposed under theprovisions of the Bombay Act were hit by Article 301 ofthe Constitution. The result of that judgment was that thoughthe prize competitions could be controlled by the State withintheir respective borders, their ramifications beyond thoseborders could only be dealt with by any action under Article252(1) of the Constitution. It was for that reason that theStates of Andhra Pradesh, Bombay, Madras, Uttar Pradesh,Hyderabad, Madhya Bharat, Pepsu and Saurashtra passedresolutions under Article 252(1) of the Constitutionauthorizing Parliament to legislate for the control andregulation 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 on1[st] April, 1956. On 24[th] February, 1956, the MysoreLegislature passed a resolution adopting the said CentralAct. Petitions were filed under Article 32 of the Constitutionbefore this Court challenging the validity of the Central Actbut the same were dismissed vide R.M.D.C. vs. Union ofIndia (supra).

Thereafter, certain amendments were made to theMysore Act, as originally passed in 1951. The MysoreAmending Act was challenged in the High Court of Mysoreby a petition filed under Article 226 which was dismissedand against that judgment and order, the appeal was brought before this Court pursuant to a certificate issued by theHigh Court under Article 132(1) of the Constitution. Thechallenge to the constitutionality of the Mysore AmendingAct was, inter alia, on the ground that the MysoreLegislature, by adopting the Central Act, was no longercompetent to pass any law in regard to prize competitionsbecause the whole matter including the power of taxationwas surrendered in favour of the Parliament.

While considering the resolutions passed by variousStates, the question that arose for consideration of this Courtwas whether the resolutions as passed and particularly thewords “control and regulation of prize puzzlecompetitions and all other matters ancillary thereto” hadthe effect of surrendering the whole subject of prizecompetitions to the Parliament i.e., every matter and powerconnected therewith including the power to tax. This Courtheld that the resolutions passed by the States vis-à-vis Entry34 of List II as per Article 252 of the Constitution, did nottake away the power of the State to impose tax under Entry62 of List II and the said power could not have been said tohave been surrendered. That by passing the resolutions,the States did not surrender their power of taxation andneither was Clause (2) of Article 252 of the Constitutionviolated by the amendment of the Mysore Act. That thetax imposed under the Mysore Act was in exercise of thepowers which the legislature possessed of imposing taxunder Entry 62 of List II.

In RMDC vs. State of Mysore (supra), after referringto R.M.D. Chamarbaugwala (supra), it was categoricallyobserved as follows:- “The fact that regulatory provisions have beenenacted to control gambling by issuing licences andby imposing taxes does not in any way alter the natureof gambling which is inherently vicious andpernicious.”

Considering Entries 34 and 62 of List II, it was observedthat the subject of ‘betting gambling’ given in Entry 34 ofList II and the taxes on ‘betting gambling’ as given in Entry A

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A62 of List II have to be read separately as separate powersand therefore when control and regulation of prizecompetitions was surrendered to Parliament by theresolutions passed by the States, the power to tax underEntry 62 of List II, which is a separate head, cannot be saidto have been surrendered. The observations of Das, C.J. inBR.M.D. Chamarbaugwala (supra) were reiterated asunder:- “For the reasons stated above, we have come to theconclusion that the impugned law is a law with respectto betting and gambling under Entry 34 and theimpugned taxing section is a law with respect to taxon betting and gambling under Entry 62 and that itwas within the legislative competence of the Statelegislature to have enacted it. There is sufficientterritorial nexus to entitle the State legislature tocollect the tax from the petitioners who carry on theprize competitions through the medium of anewspaper printed and published outside the Stateof Bombay.”

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(c) In H. Anraj (supra), the petitioner therein questioned theEban sought to be imposed by the Government ofMaharashtra on sale within the State of Maharashtra oftickets of lotteries conducted by the Government of otherStates. While considering the said question, it was observedthat Entry 40 of List I deals with lotteries organised by theGovernment of India or the Government of State while EntryF34 of List II deals with ‘betting and gambling’. That theexpression ‘betting and gambling’ includes and has alwaysbeen understood to have included conduct of lotteries. But,the subject, ‘Lotteries organised by the Government of Indiaor the Government of State’ has been taken out from theGlegislative field comprised in the expression ‘betting andgambling’ and is reserved to be dealt with by the Parliament.Since the subject was within the exclusive legislativecompetence of Parliament in view of Article 246(1) and(3), no legislature of a State can make laws touching lotteriesorganised by the Government of India or the Government G

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of a State. In our view, in the aforesaid case, the scope ofEntry 62 of List II in the context of Entry 34 of List II andEntry 40 of List I did not come up for consideration.

(d) In H. Anraj vs. Government of Tamil Nadu - [(1986) 1SCC 414] (For short, “Anraj II”), the amendmentintroduced to the Tamil Nadu General Sales Tax Act, 1959,with effect from 28[th] January, 1984, whereby lottery ticketswere subjected to sales tax, was assailed before this Courtprimarily on the ground that the Tamil Nadu State Legislaturelacked legislative competence to enact such amendment.This Court considered the question as to whether sales taxcould be levied by a State Legislature on the sale of lotterytickets within its territory, based on the power vested withit under Entry 54 of List II which at the time pertained to‘taxes on the sale or purchase of goods other thannewspapers.’

In that background, this Court undertook an analysis ofthe nature of lottery tickets, with a view to determinewhether they may be construed to be ‘goods’ as definedunder the Sale of Goods Act, the sale of which ‘goods’may be subjected to sales tax. This Court concluded thatlottery tickets were ‘goods’ inasmuch as they carried withthem the entitlement to participate in a draw. That whenlottery tickets were sold, a beneficial interest in movableproperty of incorporeal or intangible character, was beingtransferred. It was held that when a lottery ticket ispurchased, it carried with it a right to participate in a draw,and therefore, sales tax may be imposed on the same, in asimilar manner as is imposed when any other ‘dealer’smerchandise’ which is bought and sold in the market, istransferred.

(e) In M/s Suman Enterprises and Others (supra) anexecutive order dated 6[th] October, 1989, was issued by theState of Tamil Nadu prohibiting the sale of lottery tickets ofother States. The said Government order categorizedlotteries as (a) Lotteries organized by the Government ofIndia; (b) Lotteries organized by the Government of TamilNadu; (c) Lotteries organized by the other State A

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Governments; (d) Private lotteries authorized byGovernment of Tamil Nadu; and (e) Private lotteriesauthorized by other Governments but not authorized by thisGovernment. The Government order stated that sale oflottery tickets of Government of Tamil Nadu and lotteriesorganized by the Government of India or other StateGovernments alone would be permitted within the said State.This Court observed that a lottery ‘organised’ by a Statewould require certain basic and essential concomitants tobe satisfied as members of the public when investing theirmoney in such a lottery proceed on a trust and on certainassumptions as to the genuineness, bona fides, safety,security, the rectitude of administration etc. associated withgovernmental functioning. As to the meaning of the saidorganized lottery and the requirements thereof areconcerned, it was observed as under:- “The first of those requirements is that the ticketswhich bear the imprint and logo of the State must beprinted by or directly at the instance of the StateGovernment so as to ensure their authenticity andgenuineness and further to ensure that any possibilityof duplication of the tickets and sale of fake ticketsis provided against and rendered impossible. Secondly,the State itself must sell the tickets though, if it thinksnecessary or proper so to do, through a soledistributor or selling agent or several agents ordistributors under terms and conditions regulated by

the agreement reached between the parties. The saleproceeds of the tickets either sold in retail or wholesaleshall be credited to the funds of the Government.Thirdly, the draws for selecting the prize-winningtickets 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 notdistributed by way of prize, it must revert to andbecome the property of the State Government.These, prima facie, appear to us to be the minimalcharacteristics of a lottery which can claim to be‘organised’ by the State.”

The aforesaid were said to be a minimal criteria whichrendered a lottery to be eligible to be called ‘organised’ bya State. Thus, a distinction was made by this Court betweenthe said organized lottery and a lottery which is authorisedby the State. Further it was observed that the Governmentorder of Tamil Nadu impugned therein was construed toapply to lotteries organized by the States in terms of theEntry 40 of List I, while Entry 34 of List II dealt with ‘bettingand gambling’.

(f) The nature and character of the lotteries was againdeliberated upon in B.R. Enterprises (supra) wherein itwas held that lotteries are a form of gambling. However,it was contended that State lottery, if it is gambling, wouldlose 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 activitiesare in their very nature and essence, res extracommercium. That, even if lotteries were permitted underthe regulating power of the State, it could not be givenstatus of ‘Trade and Commerce’ as understood in commonparlance. The ingredients of a contract of lottery ticketswere considered and reference was made to Anraj II(supra), wherein it had been held that sale of lottery ticketswas transfer of ‘Goods’ and hence liable for sales tax, byobserving thus:- “49. ….”A sale of a lottery ticket confers on thepurchaser thereof two rights (a) a right to participatein the draw and (b) a right to claim a prize contingentupon his being successful in the draw. Both wouldbe beneficial interests in moveable property. Lotterytickets, not as physical articles, but as slips of paperor memoranda evidence not one but both thesebeneficial interests in moveable property which arecapable of being transferred, assigned or sold and ontheir transfer, assignment or sale both these beneficialinterests are made over to the purchaser for a price.

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The right to participate in the draw under a lotteryticket remains a valuable right till the draw takes placeand it is for this reason that licensed agents orwholesalers or dealers of such tickets are enabled toeffect sales thereof till the draw actually takes placeand as such till then the lottery tickets constitute theirstock-in-trade and therefore a merchandise andgoods, 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 whetherthe sale of such lottery tickets would be ‘Trade andCommerce’. The said decision proceeded as if it was ‘Tradeand Commerce’ within the meaning of Articles 301 to 304of the Constitution in Chapter XIII thereof. Hence, thenature of the transaction involved in the sale of lottery ticketswas examined and after referring to various dictionariesand other authorities, it was observed that there are threeingredients in the sale of lottery tickets, namely, (i) prize,(ii) chance, and (iii) consideration. So, when a personpurchases a lottery ticket, he purchases it for receiving aprize, which is by chance and the consideration is the priceof the ticket. The holder of such a ticket knows that theconsideration which he has paid may be for receivingnothing. However, there may be a few who are lucky toreceive 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 stillqualify to be ‘Trade and Commerce’ within the meaning ofChapter XIII of the Constitution was considered. Notingthat, there had been a distinction made under theGovernment of India Act, 1935 between State lotteries andother forms of lotteries which have been placed in differentLists and the same pattern had been followed under theConstitution, this Court made a distinction between‘gambling’ and ‘trade’ and observed that gambling inherentlyinvolved an element of chance, with no skill, while tradeinvolved skills, with no chance. That even though the State may conduct lotteries, the element of chance remains, withno skill involved and even the organisation and conduct ofthe lotteries by the State Government are within theboundaries of gambling. That the only purpose of havingstringent measures vis-à-vis lotteries being conducted bythe State was to inculcate faith in the participants of suchlottery being conducted fairly with no possibility of fraud ormisappropriation and deceit and assure the hopefulrecipients of high prizes that all is fair and safe. That theobjectwas to assure the participants that the proceeds fromthe sale of lottery tickets are credited to the public accountsof the State and would not be in the hands of any individualgroup or association and thus to bring about a transparencyin the organisation of the lottery by the State, subject to theregulation. Even then, the activity of conduct of the lotterywould remain in the realm of gambling. With respect to thenature of lotteries conducted by a State vis-à-vis lotteriesconducted by any individual group or association, this Courtfurther observed as follows:- “In this regard, there is no difference betweenlotteries under Entry 34 List II and a lottery organisedby the State under Entry 40 List I. When characterof both the State organised lotteries and otherlotteries remains the same, by merely placing theapparelof the State with authority of law, would notmake any difference; it remains gambling as elementof chance persists with no element of skill. Even otherlotteries under Entry 34 List II could only be run underthe authority of the State or the law of the State. Theonly difference is in one case, authority is that ofState and in the other, Parliament.”

This Court further held that even a lottery, though notorganised by the State, but authorized by the State, has asanction in law. That gambling may be taxed and may beauthorized for specified purpose, but it would not attain thestatus of trade like other trades and become rescommercium. As regards the applicability of the R.M.D.Chamarbaugwala (supra) case to State lotteries this Courtobserved as follows:- ABC

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“……..no gambling could be commercium, hence inour considered opinion the principle of RMDC casewould equally be applicable even to the Stateorganised lottery. In no uncertain terms the saiddecision recorded that the Constitution makers couldnever have conceived to give protection to gamblingeither under Article 19(1)(g) or it as a trade underArticle 301 of the Constitution.”

Ultimately, in paragraph 73 of the said judgment, it wasobserved that sale of lottery tickets organised by the Statecould not be construed to be ‘trade and commerce’ andeven if it could be so construed, it cannot be raised to thestatus of ‘trade and commerce’ as understood in commonparlance or ‘trade and commerce’ as used in Article 301.Thus, it was concluded that lotteries organised by the Stateare also in the nature of gambling as per the principles laiddown in RMDC vs. State of Mysore (supra). Therefore,the said principles would be equally applicable to Statelotteries.

(g) In Sunrise Associates vs. Government of NCT of Delhi -[(2000) 10 SCC 420], a decision rendered by the HighCourt of Delhi, following the ratio laid down in Anraj II,was challenged before this Court on the principal groundthat the judgment in Anraj II required reconsideration. ThisCourt noted that Anraj II proceeded on the view thatpurchase of a lottery ticket carried with it the right toparticipate in a draw. It however, had not taken into accountthat the transaction of sale of lottery tickets involved twoelements which were inextricably linked to each other,namely, (i) the right to participate in a draw; and (ii) theright to win the prize, dependent on chance. It was held inlight of the second of the two elements, that the sale of alottery ticket may, in fact, be a transfer of a chose in actionand not transfer of a good. Having regard to the saidambiguity as to the nature of right being transferred whena lottery ticket is sold, the matter was referred to a Benchof five Judges, who clarified the law on the point in SunriseAssociates vs. Government of NCT of Delhi - [(2006) 5SCC 603]

(h) In Sunrise Associates vs. Government of NCT of Delhi -[(2006) 5 SCC 603], which is a judgment of a ConstitutionBench of this Court authored by Ruma Pal, J., the question,whether, sales tax could be levied by a State on the sale oflottery tickets as considered in H. Anraj II (supra) wasreconsidered. This Court came to the conclusion about thetransfer 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 thatthe transfer of a lottery ticket upon consideration paidby the purchaser was not a mere contract creatingan obligation or right in personam between theparties, but was in the nature of a grant. The Courtnoted the various definitions of the word “lottery” indictionaries and authoritative text books and decisionsof the courts and held that a lottery was composedof three essential elements, namely, (1) chance, (2)consideration; and (3) prize. As we have mentionedearlier, according to the learned Judges a sale of alottery ticket conferred on the purchaser two rightsviz. (a) the right to participate in the draw, and (b)the right to claim a prize contingent upon thepurchaser being successful in the draw. Both wereheld to be beneficial interests in movable property,the former in praesenti, the latter in futurodepending on the contingency.”

Ultimately, in paragraphs 41 and 44, the ConstitutionBench observed as under :- “41. A lottery ticket has no value in itself. It is amere piece of paper. Its value lies in the fact that itrepresents a chance or a right to a conditional benefitof winning a prize of a greater value than theconsideration paid for the transfer of that chance. Itis nothing more than a token or evidence of this right.The Court in H. Anraj [(1986) 1 SCC 414 : 1986SCC (Tax) 190] , as we have seen, held that a lotteryticket is a slip of paper or memoranda evidencing thetransfer of certain rights. We agree.

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44. The question is, what is this right which the ticketrepresents? There can be no doubt that on purchasinga lottery ticket, the purchaser would have a claim toa conditional interest in the prize money which is notin the purchaser’s possession. The right would fallsquarely within the definition of an actionable claimand would therefore be excluded from the definitionof “goods” under the Sale of Goods Act and the salestax 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 saleof a lottery ticket involved a transfer of the right toclaim a prize depending on chance, it was anassignment of an actionable claim. Significantlyin B.R. Enterprises v. State of U.P. [(1999) 9 SCC700] construing H. Anraj [(1986) 1 SCC 414 : 1986SCC (Tax) 190] the Court said: (SCC p. 746, para52)

“52. So, we find three ingredients in the sale oflottery tickets, namely, (i) prize, (ii) chance, and(iii) consideration. So, when one purchases alottery ticket, he purchases for a prize, which isby chance and the consideration is the price ofthe ticket.”

Thus, the Constitution Bench held that the lottery ticketwould represent an actionable claim and hence is excludedfrom the definition of ‘Goods’ under the Sale of Goods Actand the sales tax statutes.

It was further observed that the distinction drawn in H.Anraj II (supra) between the chance to win and the rightto participate in the draw was unwarranted because theright to participate in the draw is a part of the compositeright of the chance to win and it does not feature separatelyin the definition of the word ‘lottery’. It is an inseparablepart of the chance to win and not a different right, and therefore, the separation between the two was not right. Inother 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 assumesparticipation in the draw. The consideration is paid for thechance to win after participating in the draw and not merelyfor the right to participate. The right to participate being aninseparable part of the chance to win, is therefore part ofan actionable claim. It was also observed that the right toparticipate and the chance to win are both rightsin futuro.It was thus emphasized that there is no sale of goods withinthe meaning of sales tax statutes when the right to participatein a draw is transferred by sale of a lottery ticket and thatthe object of right to participate would be to win a prize.Hence, the right to participate in a lottery is an actionableclaim or what is called as chose in action. In view of theabove discussion, it was held that H. Anraj II (supra) wasincorrectly decided by holding that a sale of lottery ticketinvolved a sale of goods. It was emphasised that there wasno sale of goods within the meaning of Sales Tax Acts ofthe different States but at the highest a transfer of actionableclaim. Consequently, all the decisions which held otherwisewere overruled, though prospectively, with effect from thedate of the judgment in Sunrise Associates vs. Governmentof NCT of Delhi – [(2006) 5 SCC 603].

(i) Skill Loto Solutions Pvt. Ltd (supra) is a recent judgmentof a three–Judge Bench of this Court in which the petitionfiled by an authorized agent for sale and distribution oflotteries organised by the State of Punjab, had impugnedthe definition of ‘goods’ under Section 2(52) of CentralGoods and Service Tax Act, 2017 (for short, ‘CGST Act’)to the extent that actionable claims were included under‘goods’. Consequently, notifications issued pertaining to levyof tax on lotteries were also challenged. The petitionertherein had sought a declaration that the levy of tax on lotterywas discretionary and violative of Article 14, 19(1)(g), 301and 304 of the Constitution of India. The following questionsof law were taken up for consideration in the said WritPetition:- ABC

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(I) Whether the writ petition is not maintainable underArticle 32 of the Constitution of India since the writpetition relates to lottery, which is res extracommercium and the petitioner cannot claim protectionunder Article 19(1)(g)?

(II) Whether the inclusion of actionable claim in thedefinition of goods as given in Section 2(52) of CentralGoods and Services Tax Act, 2017 is contrary to thelegal meaning of goods and unconstitutional?

(III) Whether the Constitution Bench judgment of thisCourt in Sunrise Associates (supra) in paragraphs 33,40, 43 and 48 of the judgment has laid down as theproposition of law that lottery is an actionable claim orthe observations made in the judgment were onlyan obiter dicta and not declaration of law?

Obiter dicta

(IV) Whether exclusion of lottery, betting and gamblingfrom Item No. 6 Schedule III of Central Goods andServices Tax Act, 2017 is hostile discrimination andviolative of Article 14 of the Constitution of India?

(V) Whether while determining the face value of thelottery tickets for levy of GST, prize money is to beexcluded for purposes of levy of GST?”

After noting that the CGST Act, 2017, being an Act ofParliament in exercise of power of Parliament as conferredunder Article 246A of the Constitution, this Court considereda catena of judgments of this Court touching upon the activityof organising and conducting lotteries, levy of taxes onlotteries, etc. and answered Question I by holding that theWrit Petition filed under Article 32 of the Constitution wasmaintainable. Question II and III were also answered byholding that the inclusion of actionable claim in the definition‘Goods’ as given in Section 2(52) of the CGST Act, 2017 isnot contrary to the legal meaning of ‘goods’ and is neitherillegal nor unconstitutional. It was further held that inSunrise Associates, the Constitution Bench had laid down that lottery is an actionable claim and the same was not anobiter dicta. With regard to question IV as to whetherthere was any hostile discrimination in the exclusion of lottery,betting and gambling from Item No. 6 Schedule III of CGSTAct, 2017, it was held that there was no violation of theequality clause. The relevant observations of this Court areextracted as under:

“69. In a later decision, Union of India v. MartinLottery Agencies Limited, (2009) 12 SCC 209, this Courthad occasion to consider levy of service tax on the lotterytickets. This Court had held that law as it stands todayrecognises lottery to be gambling, which is res extracommercium. In paragraph 17, following has been laiddown:—

“17. We fail to persuade ourselves to agree with theaforementioned submission. The law, as it stands today(although it is possible that this Court in future may takea different view), recognises lottery to be gambling.Gambling is res extra commercium as has been held bythis 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 conceptsand have been in practice in this country since beforeindependence and were regulated and taxed by differentlegislations. When Act, 2017 defines the goods to includeactionable claims and included only three categories ofactionable claims, i.e., lottery, betting and gambling forpurposes of levy of GST, it cannot be said that therewas no rationale for including these three actionableclaims for tax purposes. Regulation including taxation inone or other form on the activities namely lottery, bettingand gambling has been in existence since last severaldecades. When the parliament has included above threefor purpose of imposing GST and not taxed otheractionable claims, it cannot be said that there is norationale or reason for taxing above three and leavingothers.

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71. It is a duty of the State to strive to promote thewelfare of the people by securing and protecting, aseffectively as it may, a social order in which justice,social, economic and political, shall inform all theinstitutions of the national life. The Constitution Benchin State of Bombay v. R.M.D. Chamarbaugwala(supra) has clearly stated that Constitution makers whoset up an ideal welfare State have never intended toelevate betting and gambling on the level of country’strade or business or commerce. In this country, theaforesaid were never accorded recognition of trade,business or commerce and were always regulated andtaxing the lottery, gambling and betting was with theobjective as noted by the Constitution Bench in the caseof State of Bombay v. R.M.D. Chamarbaugwala(supra), we, thus, do not accept the submission of thepetitioner that there is any hostile discrimination in taxingthe lottery, betting and gambling and not taxing otheractionable claims. The rationale to tax the aforesaid iseasily comprehensible as noted above. Hence, we donot find any violation of Article 14 in Item No. 6 ofSchedule III of the Act, 2017. “

It is clear from the paragraphs extracted above thatthis Court has held that for the purpose of levy of taxation,the actionable claims arising out of participation in a lotteryor on placing a bet or via gambling in any other form, maybe placed in a class distinct from the rest of the actionableclaims and be subjected to taxation accordingly. Suchacknowledgment by this Court establishes a corelationbetween ‘lotteries’ and ‘betting and gambling’ and placesthem in the same category/class.

In answering Question V, it was held that having regardto the statutory provisions of the CGST Act, 2017, the valueof taxable supply is a matter of statutory regulation andwhen the value is to be the transaction value which is to bedetermined as per Section 15, it is not permissible to computethe value of taxable supply by excluding the prize moneywhich has been contemplated in the statutory scheme.

When prize paid by the distributor/agent is not to be excludedfrom the value of taxable supply, the prize money should beincluded for computing the taxable value of supply. Thus,while determining the taxable value of supply, the prizemoney is not to be excluded for the purpose of levy of goodsand service tax. In view of the above answers, the writpetition 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 wherethe person taking part in the operation, or a substantialnumber of them, make a payment or consideration inreturn for obtaining their chance of a prize. There arereally three points one must look for in deciding whethera lottery has been established: first of all, the distributionof prizes, secondly, the fact this was to be done by meansof a chance and thirdly, that there must be some actualcontribution made by the participants in return for theirobtaining a chance to take part in the lottery. The abovelaid down principle shows that there should be threeelements to establish a lottery such as; prize, chanceand consideration.”

It may be noted that in the aforesaid case too, thepassage reproduced below is included.

“A lottery is the distribution of prizes by chance wherethe person taking part in the operation, or a substantialnumber of them, make a payment or consideration inreturn for obtaining their chance of a prize.”

109. What emerges from the discussion of the decisions of thisCourt referred to above is that ‘lotteries’ are a species within the genusof ‘gambling.’ That one of the essential features of a lottery is its inherentgambling nature, which persists irrespective of whether the lotteryscheme is conducted by the Government of India, Government of aState or by a private entity. ‘Gambling’ activities include a whole gamutof activities, including, but not limited to ‘lotteries.’

110. It is also settled that the sale of a lottery ticket involves twoelements, namely, (i) the right to participate in a draw; and (ii) the right A

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Ato win the prize, dependent on chance. Therefore, sale of a lotteryticket is in the nature of a transfer of an actionable claim or a chose inaction.

Discussion :

111. Having regard to the aforesaid discussion, we now answerBthe points for consideration. While doing so, the following approach isbeing adopted with regard to the interpretation of the Entries of the Listsof the Seventh Schedule of the Constitution:

1. The Entries in the different Lists should be read togetherwithout giving a narrow meaning to any of them. The powersCof the Union and the State Legislatures are expressed inprecise and definite terms. Hence, there can be no broaderinterpretation given to one Entry than to the other.

Even where an Entry is worded in wide terms, it cannotbe so interpreted as to negate or override another Entry orDmake another Entry meaningless. In case of an apparentconflict between different Entries, it is the duty of the Courtto 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 findEout the true nature of a legislation and the Entry withinwhich it would fall.

3. Where one Entry is made ‘subject to’ another Entry, allthat it means is that out of the scope of the former Entry, afield of legislation covered by the latter Entry has beenFreserved to be specially dealt with by the appropriateLegislature.

4. When one item is general and another specific, the latterwill exclude the former on a subject of legislation. If,however, they cannot be fairly reconciled, the powerGenumerated in List II must give way to List I.

5. On a close perusal of the Entries in the three Lists of theSeventh Schedule of the Constitution, it is discerned thatthe Constitution has divided the topics of legislation into thefollowing three broad categories: (i) Entries enabling lawsHto 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 taxationpower of Union and the State. Thus, in substance the taxingpower can be derived only from a specific taxing Entry inan appropriate List in the Seventh Schedule. Such a powerhas to be determined by the nature of the tax and not themeasure or machinery set up by the statute.

112. At the same time, Article 265 of the Constitution which statesthat no tax shall be levied or collected except by authority of law, oughtto be borne in mind. In the instant cases, authority of law would implythe competence of the State Legislatures of Karnataka and Kerala inenacting the impugned laws.

113. In view of the detailed discussion made above, we find thatthe dictum of this Court in M.P.V. Sundararamier analysing the entriesin Lists I and II dealing with various subjects of legislation and entriesconcerning taxation being separate and distinct must be borne in mindwhile interpreting the impugned Acts. That is the constitutional scheme.In this regard, we reiterate what has been observed in HoechstPharmaceuticals Ltd., to the effect that taxation is considered to be adistinct matter for purposes of legislative competence and the power totax cannot be deduced from the general legislative Entry as an ancillarypower. This is because, as already stated, the general subjects of legislationare dealt with in one group of Entries and the power of taxation in aseparate group. Also, a power to legislate as to the principal matterspecifically mentioned in the Entry shall also include within its expanselegislation touching only upon incidental and ancillary matters. The powerto levy tax cannot be considered to be an incidental and ancillary matterwhile interpreting an entry in the Lists concerning legislative competenceof the Parliament or Legislature of any State to enact laws on the subjectsmentioned in the Entry. It is reiterated that taxation is not intended to becomprised in the main subject of an entry in the Lists but being a distinctmatter for the purpose of legislative competence must be relatable tothe specific entry dealing with taxation.

114. As a sequitur, it is observed that Entry 97 in List I which isthe residuary entry relatable to Article 248 of the Constitution cannot beinvoked or pressed into service when a specific entry empowering the AB

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AParliament or the Legislature of a State to pass laws regarding the taxationon any subject is specifically enumerated either in List I or List II.

115. It would also be useful to mention that since the legislativecompetence to pass a law relating to taxation being specific and distinctin List I or List II, such an entry is not found in List III. In other words,Bboth the Parliament as well as the Legislature of a State cannot have thecompetence to levy tax on a particular subject and hence, there is nospecific entry regarding taxation in List III or the Concurrent List. Infact, Entry 47 of List III refers only to power to impose ‘fees in respectof any of the matters in the List but not including fees taken in anycourt’. The distinction between the power to levy fees and the power toClevy a tax is well known and it would not be necessary to go into thataspect of the matter in the present cases except to highlight that there isno Entry for taxation in the Concurrent List. Therefore, while interpretinga taxation Entry in List I or List II, all efforts must be made to interpretit in such a way as to give content and meaning to the same havingDregard to the Constitutional scheme under which the distribution oflegislative powers have been envisaged in the Seventh Schedule andbearing in mind and the object and intent behind it.

116. Therefore, before approaching Entry 97 of List I which is aresiduary Entry in the Union List (List I), it would be necessary to interpretEthe relevant taxation Entry in the State List and it is only in the absenceof there being legislative competence in the relevant taxation Entry inthe State List could such a power be traced to Entry 97 of List I in theresiduary list provided such a power is not also traceable to any Entry inthe Union List. This is because in List I itself the entries concerningtaxation are separate and distinct. Such Entries are from Entries 82 toF92B and Entry 96 of List I deals with fees in respect of any of thematters 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 taxcannot be implied or read under Entry 97 of the said List which is only aresiduary entry, if the same is enumerated in List II in which case itGwould come within the legislative competence of the State Legislature.

117. In the above backdrop, we shall now consider Entry 40 ofList I and Entries 34 and 62 of List II to assess whether there is anyapparent conflict/overlapping between the same. We have alreadydiscussed in detail the concept of ‘betting and gambling’ as well asH‘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 SeniorCounsel appearing for the State of Nagaland, the expression ‘bettingand gambling’ is a genus while the expression ‘lottery’ is a species ofbetting and gambling. We have also alluded to the same in detail aboveand 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 andgambling’ is carved out of Entry 34 of List II and placed in Entry 40 ofList I only to the extent of lotteries organised by the Government ofIndia or the Government of a State. That means lotteries organised byprivate parties or entities in a State or lotteries authorised by governmentof a State continue to remain within the scope and ambit of Entry 34 ofList II dealing with ‘betting and gambling’. The inference is that in so faras lotteries organised by the Government of India or the Government ofany State is concerned, in order to have uniformity of laws throughoutthe country governing such lotteries the framers of the Constitution haveintentionally included the said activity in Entry 40 of List I. Consequently,the Parliament has legislative competence to pass laws on lotteriesorganised by the Government of India or the Government of any State.This means the Parliament can pass laws to regulate organisation oflotteries by the Government of India or the Government of a Stateuniformly throughout the country, as indubitably the conduct of suchlotteries by the sovereign State is a source of revenue for the Governmentof India. Therefore, in order to enhance the faith of the people in theorganisation and conduct of such lotteries throughout the territories ofIndia by the Government of India or the Government of any State, saidregulation by the Parliament is enabled by placing the subject in Entry 40of List I. Consequently, the 1998 Act has been passed by the Parliamentwhich is regulatory in nature, as has been discussed above. If, for thepurpose and object of regulation of lotteries organised by the Governmentof India or the Government of any State, any fee is to be levied it is asper Entry 96 of List I.

118. But the question is, whether, while interpreting Entry 40 ofList I alongside Entries 34 and 62 of List II, the power to tax lotteriesorganised by the Government of India or the Government of a State isalso taken away from Entry 62 of List II and is to be read within theambit of Entry 40 of List I and therefore, the States of Karnataka andKerala in the instant cases had no legislative competence to enact theimpugned Acts. We have already stated that only lotteries organised bythe Government of India or the Government of a State is carved out of AB

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Athe subject, ‘betting and gambling’ in Entry 34 of List II and is placed inEntry 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 StateLegislatures have been denuded of their power to levy tax under Entry62 of List II on lotteries organised by Government of India or Governmentof a State. We say so for the following reasons:B

(a) Entry 62 of List II is a specific taxation entry on luxuries,including taxes on entertainments, amusements, betting andgambling. The expression ‘betting and gambling’ would haveto be read ejusdem generis with entertainments andamusements. The tax is thus on the activity of ‘betting andCgambling’ as it is on an activity.

(b) The expression ‘betting and gambling’ is also found in Entry34 of List II. We have discussed at length above the contentof the said expression and as to what it encompasses. Theactivity of ‘betting and gambling’ includes, inter alia,Dlotteries. Lotteries can be conducted by the Government ofIndia or the Government of States or authorised by a Stateor be conducted by private entities in a State. Thus, a lotteryconducted by any of the above entities, Government orprivate is an activity falling within the nomenclature ofE‘betting and gambling’ which is the subject in Entry 34 ListII. But what has been carved out of Entry 34 of List II isonly lotteries conducted by the Government of India or theGovernment of any State. Therefore, all other types oflotteries continue to remain within the scope and ambit of‘betting and gambling’ as an activity in Entry 34 of List II.F

(c) Hence under Entry 62 of List II, the specific power to taxan activity which is ‘betting and gambling’ is reserved withthe State legislature and cannot be read within the scopeand ambit of Entry 40 of List I which is inherently restrictedin its scope. We say so for the following reasons:

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(i) First, when a specific entry regarding taxation isprovided in List II empowering the State Legislatureto levy tax on a subject, namely, ‘betting andgambling’ amongst other similar activities, the samecannot be read by implication in an entry of List IHnamely Entry 40 of List I. This is because a taxation entry is separate and distinct from an entry dealingon a particular subject. This principle has beenadequately explained by this Court in severaljudgments such as M.P.V. Sundararamier andfollowed in Hoechst Pharmaceuticals, Kesoramdiscussed above.

(ii) Second, a taxation entry or legislative power to levya tax on ‘betting and gambling’ in the instant case,cannot be split between the Parliament and the StateLegislature when the said power is expresslyenumerated in Entry 62 of List II. This is theconstitutional scheme under the three Lists. This isas per the constitutional scheme. This is also evidenton a perusal of the Entries of List III (ConcurrentList) which empowers both the Union as well as StateLegislature to enact laws on subjects mentionedtherein and the powers to levy a tax is conspicuousby its absence.

(iii) Third, the object and purpose of Entry 62 of List II isto tax the activity of ‘betting and gambling’, whetherit is conducted by a private entity or a State authorisedentity or an instrumentality or agency or for thatmatter by the Government of India or the Governmentof any State. This is because irrespective of whoorganises a lottery scheme, it is ultimately a speciesof gambling. It is nobody’s case that participation ina lottery scheme is not gambling. The said activityi.e. lottery scheme can be conducted throughout theterritory of India provided a particular State grantspermission to organise and conduct the said activityin that State. Thus, organisation and conducting oflottery can be a pan India activity of gambling andwhen a particular State permits a lottery schemeconducted by the Government of India or theGovernment of any State in that State, a tax is leviableon the same, which is a tax on gambling. Thus Entry62 of List II empowers the State Legislatures toimpose tax on ‘gambling’ irrespective of who or which A

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entity is conducting it including the Government ofIndia or Government of any State.

(iv) Fourth, ‘betting and gambling’ is a subjectenumerated in Entry 34 of List II and is a Statesubject. Therefore, the permission for conducting anybetting and gambling activities within a State,including conduct of a lottery scheme under the saidEntry, gives competence to the State Legislatures toalso tax the said activity irrespective of who conductsit. This is because what is being taxed is a gamblingactivity which is squarely covered under Entry 34 ofList II and not on lottery per se conducted byGovernment of India or Government of a State.

Therefore, the State Legislature has thecompetence to tax lottery scheme which is gamblingbeing conducted not only by the Government of Indiaor the Government of any State or by any otheragency or instrumentality of a particular State butalso by a private entity within the State as gambling.

(v) Fifth, the contention of respondents-States that thesubject, ‘lotteries organised by the Government ofIndia or the Government of a State’ being placed inEntry 40 of List I would also empower only theParliament to impose a tax on the same by way ofimplication under the said Entry itself is not a correctinterpretation of the Entries in the Lists.

(vi) Sixth, Entry 97 of List I can be invoked only whenany matter is not enumerated in List II or List IIIincluding any tax not mentioned in the said Lists. Thereis no specific Entry for levy of tax on betting andgambling in List I. It is only in Entry 62 of List II.Thus, Entry 62 of List II gives legislative competenceto a State Legislature to levy a tax on ‘betting andgambling’. This would also include a tax onorganisation and conduct of lotteries, whether by theCentral Government or Government of any State orauthorised by a State or by any private entity withinthe 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 interpretedidentically and the said expression is given an identicalmeaning. Thus, lotteries organised by the Governmentof India or the Government of a State is only excludedfrom Entry 34 of List II which deals with ‘bettingand gambling’ only, for the purpose of regulation bythe Parliament and not for levy of tax.

(vii) Seventh, when the State Government has thelegislative competence to levy tax on ‘betting andgambling’ as a specific taxation entry is provided tolevy tax on the said activity under Entry 62 of List IIthe said entry must be interpreted comprehensivelyand not in a restricted or narrow manner by excludingtaxation on gambling on lottery conducted byGovernment of India or any Government of a Statefrom the purview of the said Entry and read into Entry40 of List I by implication.

(viii) Eighth, such a power to levy taxes cannot be readinto Entry 40 of List I by implication or into Entry 97of List I as a residuary power. Such interpretation, ifendorsed, it would do violence to the manner ofinterpretation of Entries in the Lists and prove to becontrary to the Articles of the Constitution andjudgments of this Court cited above.

(ix) Ninth, if the State Government does not permit aparticular species of betting and gambling activity inthe State including the organisation and conduct oflotteries by the Government of India or theGovernment of any State then obviously it cannottax such an activity. But if it permits any species ofbetting and gambling activity within the State in termsof Entry 34 of List II then the State has legislativecompetence to tax such an activity of betting andgambling including lotteries irrespective of whoconducts it as per Entry 64 of List II.

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(x) Tenth, Entry 40 of List I is meant only for theregulation of lotteries organised by the Governmentof India or the Government of a State. The said Entrycannot be expanded to cover the power to levy taxeson lotteries by the Parliament when as such a poweris envisaged in Entry 62 of List II. The Parliament,therefore, cannot tax a gambling activity, namely,organisation of lotteries conducted by the Governmentof India or for Government of a State on the strengthof Entry 40 of List I. It may however regulate thesaid activity. Any impost strictly for the purpose ofregulation of lotteries is permissible so long as it isnot a tax on gambling which is only within the ambitof only Entry 62 of List II.

In other words, in order to have uniformity inthe regulation of lotteries organised by theGovernment of India or the Government of a Statethroughout the territory of India, Entry 40 is found inList I and the Parliament is vested with the power toregulate the same.

(xi) Eleventh, any betting and gambling activity conductedby a private entity in a State or is authorized by aState Government can be regulated only by the StateLegislature. This is because of Entry 34 in of List IIwhich deals with betting and gambling which alsoincludes lotteries and the same does not fall withinEntry 40 of List I.

(xii) Twelfth, when a Government of a State permitsorganisation or conduct of lotteries either by theGovernment of India or the Government of any Statethereby enabling participation in the scheme of lotteryby those persons who have purchased the lotterytickets in the State, the territorial nexus is establishedas lottery, being species of betting and gambling, ispermitted to be conducted within the State which hassought to impose taxation on the conduct of lotteries.Such nexus persists even when the lotteries promotedwithin the taxing State are conducted by the Government of India or the Government of any otherState. Therefore, we do not find any merit in thecontention regarding the impugned laws being invalidon account of extra territorial operation.

119. In conclusion we hold that the tax sought to be imposed bythe State Legislatures of Karnataka and Kerala by way of the impugnedActs, is traceable to the power conferred on the State Legislatures underEntry 62 of List II. The said entry contemplates imposition of taxes,inter alia, on the entire genus of ‘betting and gambling’. having concludedthat ‘lottery’ of every kind, whether organized by the Government ofIndia or the Government of a State or by a private entity is includedwithin the genus of ‘gambling’, we find no reason to hold that Stateorganized lotteries are excluded from the ambit of ‘betting and gambling’as appearing in Entry 62 of List II. We are not inclined to accept theview that ‘lotteries organized by the Government of India or theGovernment of a State’ are to be excluded from the expression ‘bettingand gambling’ as appearing in Entry 62 of List II which deals with taxeson gambling activities, simply because such category of lotteries isexcluded from the regulatory field relatable to betting and gambling underEntry 34 of List II and included in Entry 40 of List I. Exclusion of alegislative field from a term appearing in a general Entry, does notnecessarily mean that such field ought to be excluded from the taxationEntry. This means that the term ‘betting and gambling’ in Entry 62 ofList II is being construed in the same way as in Entry 34 of List II. Theexpression is accorded the same meaning and interpretation in both theEntries, i.e., that gambling includes lotteries. However, ‘lotteries organizedby the Government of India or the Government of a State’ have beencarved out of Entry 34 of List II and been placed with the Union. Entry34 of List II is denuded to this limited extent. Such transposition of powerdoes not mean that the term ‘betting and gambling’ has a different meaningin each of the aforesaid Entries. It only implies that for regulatorypurposes, having regard to the need for uniform legislation throughoutthe territory of India, the Parliament has been conferred with exclusivejurisdiction to regulate the conduct of lotteries, throughout the territoryof 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 ofList II and the power to impose tax under this Entry extends in relation A

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Ato lottery of every kind, with no distinction as to the entity organizing thesame.

121. Thus, in the context of lotteries, the organisation and conductof a lottery scheme being a pan India activity, when any StateGovernment permits the Government of India or any other StateBGovernment to organise the lottery scheme in that State, Entry 62 ofList II would enable the Legislature of that State to levy taxes on thesame.

122. Hence, in our view, the Legislatures of the State of Karnatakaand Kerala were fully competent to enact the impugned Acts and levyCtaxes on the activity of ‘betting and gambling’ being organised andconducted in the said respective States, including lotteries conducted bythe Government of India or the Government of any State.

123. The Division Benches of the High Courts was not right inholding that the State Legislatures had no power to levy tax on lotteriesDconducted by the Government of India or the Government of any Stateor Union territory in the State of Karnataka as such a power could beread in Entry 40 or Entry 97 of List I and only the Parliament could levysuch a tax. Since we have held that the States of Karnataka and Keralahad the legislative competence to enact the impugned Acts, the questionof refund of tax collected under the same does not arise.

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Summary of Conclusions :

124. In view of the aforesaid discussion, we come to the followingsummary of conclusions: -

(i) That the subject ‘betting and gambling’ in Entry 34 of ListFII 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 lotteriesis within the ambit of ‘betting and gambling’ as appearing inEntry 34 List II.

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(iii) The expression ‘betting and gambling’ is relatable to anactivity which is in the nature of ‘betting and gambling’.Thus, all kinds and types of ‘betting and gambling’ fall withinthe subject of Entry 34 of List II. The expression ‘bettingand gambling’ is thus a genus it includes several types orHspecies of activities such as horse racing, wheeling and other local variations/forms of ‘betting and gambling’ activity. Thesubject ‘lotteries organised by the Government of India orthe Government of a State’ in Entry 40 of List I is a Unionsubject. It is only lotteries organised by the Government ofIndia or the Government of State in terms of Entry 40 ofList I which are excluded from Entry 34 of List II. In otherwords, if lotteries are conducted by private parties or byinstrumentalities or agencies authorized, by Government ofIndia or the Government of State, it would come within thescope and ambit of Entry 34 of List II.

(iv) Thus, the State legislatures are denuded of their powersunder Entry 34 of List II only to the extent of lotteriesorganised by the Government of India or the Governmentof 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, allother activities which are in the nature of ‘betting andgambling’ would come within the scope and ambit of Entry34 of List II. Thus, ‘betting and gambling’ is a State subjectexcept to the extent of it being denuded of its powers insofaras 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 andgambling’. The power to tax is on all activities which are inthe nature of ‘betting and gambling,’ including lotteries.Since, there is no dispute that lotteries, irrespective ofwhether it is conducted or it is organised by the Governmentof India or the Government of State or is authorized by theState or is conducted by an agency or instrumentality ofState Government or a Central Government or any privateplayer, is ‘betting and gambling’, the State Legislatures havethe power to tax lotteries under Entry 62 of List II. This isbecause the taxation contemplated under the said Entry ison ‘betting and gambling’ activities which also includeslotteries, irrespective of the entity conducting the same.Hence, the legislations impugned are valid as the Karnatakaand Kerala State Legislatures possessed legislativecompetence to enact such Acts.

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A(vi)Thus, the scope and ambit of lotteries organised byGovernment of India or Government of State under Entry40 of List I is only in the realm of regulation of such lotteries.The said Entry does not take within its contours the powerto impose taxation on lotteries conducted by the Governmentof India or the Government of State.

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(vii) We also hold that lottery schemes by the Government ofother States are organised/conducted in the State ofKarnataka or Kerala and there are express provisions underthe impugned Acts for registration of the agents orpromoters of the Governments of respective States forCconducting the lottery schemes in the State of Karnatakaand the State of Kerala. This itself indicates sufficientterritorial nexus between the respondents–States who areorganising the lottery and the States of Karnataka andKerala.

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(viii) In view of the aforesaid conclusions, we find that DivisionBenches of the High Courts of Kerala and Karnataka werenot right in holding that the respective State Legislatureshad no legislative competence to impose tax on the lotteriesconducted by other States in their State (in the State ofEKarnataka and Kerala respectively).

125. In the result, the appeals filed by the State of Karnataka andState of Kerala and others are allowed by setting aside the impugnedjudgments passed by the Division Benches of the High Courts ofKarnataka and Kerala.FParties to bear their respective costs.

Ankit Gyan and Amarendra Kumar(Assisted by : Ajay, LCRA)

Appeals allowed.

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