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LLM (Constitutional Law and Administrative Law) :: I SEMESTER

PAPER III: centre and state relations


1. Prerequisites, evolution and leading features of federal ConstitutionPosition
of the UnitsAmendment of federal constitution.
2. Division of powers and residuary power. Resolution of conflicts in exclusive and concurrent
spherespith and substance Repugnancy Ancillary power.
3. Commerce powerTaxing the doctrine of immunity of instrumentalities, Financial Relations.
4. Administrative Relations: Cooperative federalism.
5. Judicial powers and the role of the Federal Courts Federalism and civil rights.
6. Breakdown of Constitutional machinery in states.
7. Services under the union and states.
8. Parliamentary and presidential forms of Government
9. Parliamentary Privileges.
Reference Books:
A.V. Dicey : Law of the Constitution
K.C. Wheare : Federal Government
Edward McWhinny : Comparative Federalism
Bowie and Friendrish (Ed.): Studies in Federalism
Indian Administrative Reforms Commission, Report on CentreState
Relations.
(Vols. I & II, 1967).
H.M. Seervai: Constitutional Law of India.
D.B. Basu : Commentaries on the Constitution of India.
Alexander Smith: Commerce power in Canada and US.
M. Ramaswami : The Commerce clause in the U.S. Constitution.
Victor Mackinnon: Comparative Federalism.
Cushman : Leading Constitution Decisions.
Mayson & Beaney : Introduction to American Constitutional Law.
Sabastian V.D. : The Indian Federalism The
Legislative Conflicts.
Krishna Shetty K.P. : Legislative Conflicts, the Law of UnionState
Relations and Indian Federalism.
Setalvad: UnionState
Relations in India.
*******

LESSON No.1
EVOLUTION OF A FEDERAL CONSTITUTION
Objectives:
After going through this lesson, you should be able to:
Know about the relations between the centre and States
Know about the features of federal Constitution
Bring out the nature and characteristics of federalism
Structure:
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9

Introduction
Meaning of federal Constitution
Concept of Union and State Relationship
Nature and scope of federal Constitution
Historical Perspective of Federal Government in India
Comparative perspectives of Federal Constitutions
Summary
Model Questions
Reference books

1.1 Introduction :
For any country to have a systematic government constitutional law is inevitable
whether in the shape of unwritten conventions or a written document. The essential function of
the constitutional law is to determine the constitution, powers and functions of the various
organs of the government i.e. legislature, executive and judiciary. Generally, the Constitutions
may be of Unitary, Confederal or federal depending on the relations between the Union
Government and the governments of Constituent States.
Unitary Constitution : In this , the Centre has all powers and the Constituent parts are totally
subordinate to the Centre and enjoy the powers delegated by the Centre, example of this are
South Africa, Britain, Italy, France etc.,
Confederation : In this, Constituent Parts are sovereign and the Central Government is
subordinate to them.
Example of this is United States of America, etc., here the Union
government had to depend upon States for finances and army and all important decisions of
the Union required concurrence of the States.

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Federation:
A federal type of government is a syntheses of unitary constitution and
confederation. Here both the central government and Constituent Parts are coordinate with
each other and none of them is subordinate to the other. The Constitution demarcates their
fields of operation and within that field they are sovereign. Example of this Canada, Australia,
Switzerland, etc.,
Federalism has gained popularity because of certain inherent benefits such as i) In a
federal organization, independence and identity of regional governments is ensured. At the
same time, they can strengthen themselves to face external aggression and internal centrifugal
forces ii) Regional governments can protect their regional interests and at the same time, they
can enjoy benefits of a bigger organization in matters of defense, trade, commerce and
industrial development, iii) In a country where different regions have separate languages,
culture and peculiar circumstances federal government is more suitable iv) federalism protects
democracy, because of the powers of decentralized whereas in a country with unitary
constitution, powers tend to concentrate with the centre.
1.2. Meaning of Federal Constitution:
Etymologically, the term Federation derived from the Latin word
Foedus which
means treaty. The concept of federation was understood as a State made up of States. The
traditional meaning ascribed to federation is that it is a union of several States brought about
through treaty or agreement.
According to Albert Venn Dicey, the well known British Jurist, a federal State is a political
contrivance intended to reconcile national unity and power with the maintenance of State
rights. Whatever concerns the nation as a whole should be placed under the control of the
national Government. All matters which are not primarily of common interest should remain in
the hands the several States. The essence of federalism is the distribution of the force of the
State among a number of co-ordinate bodies each originating in and controlled by the
Constitution. It is to pertinent to note that Dicean theory of sovereignty in a federation. In his
theses, he mentioned that every legislature under a federal constitution is a subordinate lawmaking body. It is true that neither the federal nor the State legislature in a federation has that
legal sovereignty which the British Parliament enjoys in much as both legislatures derive their
powers from and are limited by the Written Constitution, which constitutes the supreme law of
the land. As a result, if either the Union or a State legislature transgresses the powers which
are assigned to it by the Constitution, or violates any of the other limitations which are imposed
by that Constitution upon wither or both legislatures, the offending law shall be unconstitutional.
It is to be noted that the natural and literal interpretation of the word federal confines its
application to cases in which self-contained States. According to Salmond in his book
Jurisprudence brings out the difference between the Unitary type of government and Federal
type of government. The former State means is one which is not made up of territorial divisions
which are States themselves, whereas in latter or in Composite State is one which is itself an
aggregate or group of constituent States. It is obvious to note that the Constitution of India
contemplates federalism of composite States.
1.3.. Concept of Union and State Relationship:
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In a federation, Union and State relationship is a sensitive subject. In a federal system


which is complicated and cumbrous arrangement, there is a possibility of conflict of jurisdiction
and clash of wills between the Centre and States. The problems that arise are complex and
they have been acute after the second world war. The basic controversy revolves round the
question of distribution of powers between the Centre and the States and over-centralization
versus decentralization. Always the federal government should be strong, equally vehement
are the State rights protagonists who feel that greater autonomy should be given to the States.
There is a tendency all over the world has been to create a strong Centre. The relationship
between the Union and the States covers a wide range and embraces not only the entire field of
administration and socio-economic planning but oversteps into the field of politics. It is to be
noted that in the field of administrative action entrusted by the Constitution to the Centre and so
inter-dependent are the functioning of the Union and the States that almost every activity will
involved Centre-State relationship. It should be borne in mind that it does not cover actions and
interactions of the parties in power at the Centre and in the States. IT is has been rightly
pointed out by the Study Team of the Administrative Reforms Commission that there is a welldefined distinction between party and government and strictly speaking, the term denominates
relationships between governments and not between parties. Federation is both a process
and a constitutional form. It is pertinent to note that the Constitution outlines the form of
federation which has certain legal characteristics that allow a wide variety of application. In
determining Centre and State relationship, it is not enough to examine merely the constitutional
provision but it is essential to examine the manner in which the constitutional provisions have
been worked and how politics has played a part in it.
1.4.. Nature and Scope of Federal Constitution:
There has been considerable controversy among jurists and political scientists as to
whether the Constitution of India is federal, quasi-federal, or unitary with subsidiary federal
features. According to Prof. K.C. Wheare, the true test of federalism is the division of powers
between the Union and the units is made in such a way that whoever has the residue neither
general or regional government is subordinate to the other. The test applied by him for federal
government is Does a system of government embody predominantly a division of powers
between general and regional authorities, each of which, in its own sphere, is coordinate with
the others and independent of them? If so, the government is federal. In the opinion of him,
the Constitution of India is quasi-federal i.e. Constitutions or Governments in which the federal
principle though not predominant is none the less importance are named as quasi-federal
constitutions and quasi-governments. According to Prof. Alexandrowicz, which he opposed to
the concept of quasi-federation, and he viewed that India is undoubtedly a federation in which
the attributes of sovereignty are shared between the Centre and local Sates. Instead of defining
her by the vague term of quasi-federation, it seems more accurate consider her a federation
with vertically divided sovereignty, and he described that India is a case of sui generis. It is to
be noted that Sir Ivor Jennings, in his book Some Characteristics of the Indian Constitution had
described that a federation with strong centralizing tendency. While the Paul Appleby, in his
book Public Administration in India had described that India is an extremely federal.
It is significant to note that the expression Federation has nowhere been used in the
Constitution of India. The Study Team of the Administrative Reforms Commission has also
considered the question and has taken the view that the Indian polity is federal in form but lack
such of the substance of classical federation. The said Commission analyses the concepts of
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legal and political sovereignty and holds that political sovereignty vests in the people of the
country as a whole and not, in any measure, in the people of the individual units. It further holds
that legal sovereignty also does not vest in the States and the division of powers between the
Centre and States can be seen as a functional devolution rather than as conferment of
sovereign rights. But, nonetheless, it reminds us that the polity is federal and not unitary in
structure.
The basic characteristics of federation as is reflected from the Constitutional provision
which governing the country are as follows:
a) Distribution of Legislative Powers :
Article 245 to 255 of the Constitution of India dealing the relations between Union and
States read with Schedule VII, comprises three lists, which project the picture of a well marked
distribution of legislative powers between Union and States. It is pertinent to note that the
residuary legislative powers rest with the Parliament of India as contra-distinguished with other
federal Constitutions like United State of America, and Canada.
b) Distribution of Executive Powers :
The executive powers of the Union and the States are parallel to their legislative powers.
Article 73 (1) and Article 162 of the Constitution which govern ordinary situations. However,
during emergency Articles 352 to Article 356 whenever there is a failure of the constitutional
machinery in a given state shall govern. In such contingencies, the executive powers of the
concerned Sates get divested resulting into concentration of executive powers even concerning
territories of the concerned States in the Union.
1.5.. Historical Perspective of Federal Government in India:
No doubt the federation is both a process and a constitutional reform. India has
evolved a novel kind of federalism which is unusual and unique, and the Union-State
relationship has become extremely complex. The demand for a federal government in India
has a historical background. According to Granville Austin, in his book Indian Constitution :
Cornerstone of a Nation, he mentioned as federation was an imperial as well as administrative
necessity. In a country like India, there is a large in size, and diverse in languages, religions
and cultural groups, there was a growing realization that some form of federation was needed.
During the year 1904, the President of Indian National Congress, visualized a United States of
India as the dim and distant goal of every Indian freedom fighter. In the year 1916, Lucknow
Pact between the Indian National Congress and the Muslim League incorporated the principles
of federalism for the future Indian State. The Montford Report referred to sisterhood of
autonomous States, comprising both British India and Indian States. It is to be noted that the
Nehru Report recommended a federal structure for India, though they differed about the powers
of the federal government. The Government of India Act, 1935, was the first legal document
which proposed to unite the Provinces of British India and the Indian States into a federation
under the Crown, but the complete plan was never implemented. Political developments
between the 1935 and 1947, led to proposals for looser forms of federalism envisaging greater
autonomy for the units. The Cripps Mission as also the Cabinet Mission made such proposal.
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The cabinet Mission plan envisaged a weak Centre where the power of the Central Government
would be confined to the three subjects by name Foreign Affairs, Defense and Communication.
When the Constituent Assembly met, it was faced with the problem of unity in diversity.
In India with diverse religions, races and languages, if infinite variety and the innate unity of
India had to be preserved, a federal form of government was the inevitable choice. The Union
Powers Committee, which was formed by the Constituent Assembly under the Chairmanship of
Pandit Nehru, had to function under the limitations of the Cabinet Mission Plan. Though Nehru
had always advocated a great deal of unitary control in federal India, its first report provided for
a weak Centre. All the proposals of Cripps Mission, the Cabinet Mission Plan and the first
Report of Union Powers Committee were made mainly to accommodate the Muslim League and
the Princely States and also to prevent the partition of the country.
1.6.. Comparative Perspectives of Federal Constitutions:
The term Federalism has become a hot topic in few Constitutions around the world,
because as the term itself seeks Union and not Unity in view of Dicey. It seeks uniformity,
but wants to avoid a monopoly of political power in one central government. It allows the State
Governments to solve and saves the federal government from being involved in, purely local
issued which have no direct impact on national affairs. It is to be noted that both the Union
and State governments have separate powers conferred by the constitution which operate
direction upon the people within the spheres respectively assigned to each government by the
Constitution.
Supremacy Clause:
In a federal State, the Constitution is supreme. Without the distribution of powers, will have
no meaning. In case of a conflict between the federal constitution and a State Constitution, the
federal constitution must prevail, if the federation is to survive. According to the division of
powers, in case of conflict between laws made by the two competing legislatures, the law
made by the federal legislature shall prevail over the State law, to the extent of inconsistency.
However, a federal state derives its existence from the Constitution, just as a corporation
derives its existence from the grant or Statute by which it is created. Every power whether
executive, legislative or judicial, whether it belongs to the federation, or to the component
States, is subordinate to and controlled by the Constitution. Therefore, any act done by the
federal or State government, which is inconsistent with the Constitution, must be invalid.
In
case of United States of America, as per Article VI, Sec. 2 provides that the Constitution and
laws of United States which shall be made in pursuance thereof .. shall be the supreme law of
the land .. anything in the Constitution or laws of any State to the contrary notwithstanding. It is
to be noted that even though there is no direct provision in the Swiss Constitution, the
supremacy of federal laws is secured as Article 113 empowers the Federal Tribunal to decide
disputes between the federal authorities and the Cantonal authorities . Whereas under Sec.
109 of Australian Constitution Act, the Supremacy of the Constitution secured as when a law of
a State is inconsistent with a law of Commonwealth, the latter shall prevail, and the former shall
be invalid to the extent of inconsistency.

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In Canada, there is no general supremacy clause in the British North America Act,
1867. There are some federal laws in relation to social benefits, and old age benefits, and
uniformity laws relating to civil and property rights in the Provinces of Ontario, and New
Brunswick. In Tennant v. Union Bank (1894) A.C.31, in this case, the general principle of
supremacy of a valid federal law over a Provincial law has been accepted.
Dual Judiciary:
Some of the federations have double judicial system i.e. federal courts and state courts
such as United States of America, Austalia etc., But whereas in India, the Constitution provides
for unified judicial system like that of Canada. For instance in USA, there is a Supreme Court at
the apex of both Federal and State Courts to maintain uniformity of interpretation, and it is to
act as the guardian of the Federal Constitution which provides the division of powers. In
Switzerland, though the legal system is basically divided, the Canton Courts administer both
Federal and State laws, and there are no separate federal courts except the Federal Tribunal
which stands at the head of the unified judiciary as a final court of appeal.
It should be noted that even the duality of the legal system does not obtain in Switzerland to the
same extent as in the USA, because Switzerland has adopted a single national code of civil,
criminal and commercial law. It should be noted that the West German Constitution, 1949
provides for both federal and State court. Apart from Special and Administrative Courts, there
are Federal and State courts to administer civil and criminal law. The Special feature of the
German judicial system is that the federal Civil and Criminal Codes are applicable in all the
States, so that the State Courts administer these federal laws, apart from their own Statutes
relating to the concurrent legislative field.
Though the legal systems of Canada are bifurcated because the power of law making
is divided between the federal and State Legislatures and the Constitution Act empowers the
Federal Legislature to create additional federal Courts for the better administration of federal
laws and though the dominion Parliament has create a federal court to deal with specified
matters. It is to be noted that the Dominion Legislature has, while exercising its jurisdiction to
make federal laws such as crimes, bankruptcy, empowered the Provincial Courts to administer
these laws. The Supreme Court of Canada has final appellate jurisdiction.
1.7.. Summary:
A federation is a compromise between the regional autonomy and national integration. For
a federation, the distribution of powers between the Central Government and the Regional units
is essential and this type of distribution should be such as to ensure substantial independence
to central as well as regional government. A federation is stated to as an association of States
in which the units and the Union are independent and supreme within their own spheres. The
ideal of federalism was complete interdependence between centre and States. But recently, in
all federations, powers of central government have been increased either by constitutional
amendments or by way of judicial interpretations. Currently, the world consists of different types
federal constitutions, but none being an exact replica of the other. A federation must possess
the characteristics such as existence of dual government, distribution of powers between the
centre and states, written constitution, supremacy of the constitution, and the rigid process of
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amendment, etc., It should be noted that the coordinate character of the central government
and Units is the touchstone of a federal system.
1.8.. Model Questions :
1. Explain the nature and scope of federation of a Government?
2. Examine the chief characteristics of a Federal Government ?
3. Is Constitution of India Federal? Explain
1.9.. Suggested Readings:
Pande G.S., Constituional Law of India, Allahabad Law Agency, Faridabad, Haryana.
Jain M.P., Indian Constitutional Law Wadhwa Publications, New Delhi.
R.C.S. Sarkar, Union State Relations in India National Publishing House, New Delhi.
Basu Durga Das, Comparative Federalism, Prentice-Hall of India Private Ltd. New Delhi.

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LESSON-2
LEGISLATIVE RELATIONS BETWEEN UNION
AND STATES
Objectives:
After going through this lesson, you should be able to:
Know about the legislative relations between the Union and States
Know about the features of delegated legislation
Bring out the division of powers under various sectors
Structure:
1.1
1.2
1.3
1.4
1.5
1.6
1.7

Introduction
Delegated Legislation
Residuary Power
Interpretation of powers
Summary
Model Questions
Reference books

1.1 Introduction :
The distribution of powers is an essential feature of federalism. Though we have a
strong centre, federal equation in India is a variable and fluctuating phenomenon which takes its
colour from a multitude of factors and situations. It is to be noted that Union and state relations
have passed through several distinct phases of development since the coming into force of the
constitution in the year 1950. The distribution of legislative powers between Centre and Units
is an essential condition of federal type of government. It is to be noted that the scheme of
division powers under the federal system of embodied in the Constitution of India. The
outstanding characteristic of modern federalism is that it helps to preserve unity while allowing
diversity, oneness while providing the division. The distribution of legislative powers between
the Centre and the regions is the most important characteristics of a federal Constitution.
1.2..Delegation Legislation :
It is means legislation by authorities other than a legislature acting under powers
delegated by the legislature. It is very difficult to give the precise definition of the word
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Delegated Legislation. It is an expression which covers a multitude of confusion. It is said to


be as an excuse for the legislators, a shield for administrators, a provocation to the
Constitutional jurists. All legislation cannot possibly be made by the legislature itself and
delegation becomes essential for the following reasons such as lack of time, local needs,
secrecy, future contingencies, to strengthen administration, etc., Delegated legislation is a
legislation made by a body or person other than the Sovereign in Parliament by virtue of
powers conferred by such sovereign under the Statute.
There are number of reasons have contributed for the development of development of
the delegated legislation. Even the role of the State have undergone a change over time. The
Laissez-faire State of the Nineteenth Century has given a place to the welfare State, and the
vast technological developments have taken, and it has enormously increased the work of
government necessitating a mass of legislation. Consequently, legislatures are faced with a
great load of work as they have on the anvil many more bills than what they can conveniently
dispose of.
In India, the Constitution permits subordinate legislation by delegation. The
Parliament and also the Legislature of a State can delegate both administrative as well as
legislative powers to any subordinate body or individual. The power to make law has been
conferred by the people of India through the constitution under Articles 245 and 246 upon
Parliament and the State Legislatures.
There is a distinction between the delegated legislation and conditional legislation. By
delegated legislation, the delegate completes the legislation by supplying the details within the
limits prescribed by statute, whereas in the case of conditional legislation, the power of
legislation is exercised by the legislature conditionally levying to the discretion of external
authority, the time and manner of carrying its legislation into effect, as also the determination of
the area to which it is to extend.
The famous case held in this regard is Hamdard
Dawakhana v. Union of India AIR 1960 SC 554, the Supreme Court of India observed that in
case of conditional legislation, the delegates power is that of determining when a legislative
declared rule of conduct shall become effective, and whereas in the delegated legislation
involves the delegation of rule making power which constitutionally may be exercised by the
administrative agent. This means that the legislature having laid down broad principles of its
policy in the legislation can then leave the details to be supplied by the administrative authority.
It should be noted that in United States of America, there are two theories to justify the
delegation of legislative power. One is that the Congress may be by a general provisions
delegate power to a department which is to act under such general provision to fill up the
details, whereas the other theory is that the Legislature lays down policy and standard leaving
the details to be filled by selected instrumentalities, which is otherwise known as Standards
Theory.
1.3.. Residuary Power :
Article 248 of the Constitution of India vests the residuary powers in the Parliament.
Whereas the Federations of USA and Australia vested residuary powers in the States. Under
the above article, the Parliament has exclusive power to make any law with respect to any
mater not enumerated in the Concurrent List or State list. It is to be noted that the Article 248 is
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to be read with Item No.97 of the List I i.e. the Union List of the Seventh schedule, which
empowers Parliament to legislate with respect to any matter not enumerated in List II or III
including any tax not mentioned in either of those Lists. The residuary powers have been
vested in the Centre so as to make the Centre strong.
It is well versed to note that in
Constituent Assembly, the Chairman of the Union Powers Committee Jawahar Lal Nehru stated
that we think that residuary powers should remain with the Centre. In view however of the
exhaustive nature of the three lists drawn up by us, the residuary subjects could only relate to
matters which, while they claim recognition in the future, are not at present identifiable and
cannot therefore be included now in the lists. In the Constituent Assembly, an intriguing
question was raised that where the residuary power is vested by the Constitution in the federal
Legislature, what was the justification in again enumerating the powers of federal legislature by
a separate list, apart from the residue ?
Dr. B.R. Ambedkar repelled this question by referring to the Constitution of Canada,
where though the residuary power was vested in Dominion Parliament, yet that very Section
91specifically enumerates a number of powers in the Dominion Parliament, without prejudice to
the residuary power. The object was to impart certainty to the division of powers between the
federal and Provincial Legislatures, and this precedent was followed by the Government of India
Act, 1935. The famous case held by the Supreme Court of India in relation to residuary power
is Union of India v. Dhillon AIR 1972 S.C. at page 1061, in relation to liability of agricultural
land liable to Wealth Tax. The important challenge came before the Court was as to the vires
of Parliament to enact the Finance Act, 1969, by which the Wealth Tax Act, 1957, was
amended so as to make the agricultural land liable to Wealth Tax. The questions that were
raised before the Court that i) Was the power relatable to Entry 49 of List II i.e. Tax on lands
and buildings ii) Was the power relatable to Entry 86 of List I i.e. Taxes on the capital value of
the assets, exclusive of agricultural land, of individuals and companies, and iii) Was it covered
by the residuary power of Parliament under Entry 97 of List I read with Article 248. Justice
Mitter holds that acceptance of the last question and said that the wealth tax was not covered
by Entry 86 of List I, but fell under the residuary power under Entry 97 of List I and at the same
time, he adhered that Article 248(1) of the Constitution of India makes it clear beyond doubt
that such matters are those which have not covered by Entries in List II or List III.
At the time of the making of the Constitution, the residuary power is intended to take
care of such matters as could not be identified. The framers of the Constitution were designedly
devising for a strong Centre. It is to be noted that no one can visualize future developments and
exigencies of government and more so we observe as an era of technological developments,
something unforeseen may happen and some new matter may arise calling for governmental
action. Then a question may arise as to which government, the constitution provides that the
residue will belong exclusively to the Centre.
If the law does not fall in the state list, the
parliament has legislative competence to enact the law by virtue of its residuary power and it
would not be necessary to go into the question whether it falls under any entry in the Union List
or Concurrent List.
It is relevant to note that the scope of the residuary power is very wide in nature. For
instance, Entry 3 in List III, Parliament can legislate with respect to preventive detention.
Further, Parliament can legislate with respect to preventive detention under Entry9 List I on the
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grounds mentioned therein. It is to be noted that these two entries do not exhaust the entire
field of preventive detention. Parliament can legislate under its residuary power with respect to
preventive detention on any ground not mentioned in these two entries. On certain grounds, the
preventive detention is covered by these entries, but on the other grounds, Parliament can act
under its residuary power. Therefore, Parliament has enacted the Conservation of Foreign
Exchange and Prevention of Smuggling Act (COFEPOSA) providing for preventive detention in
connection with smuggling and foreign exchange racketeering. This Act can find support from
entry 36 List I (foreign exchange) and Parliaments residuary power.
It is impossible to enumerate all powers exhaustively because no human foresight can
conceive of all matters on which legislation might be necessary in future. For example during
18th century, nobody could conceive of aero planes, atomic energy or outer space. The
residuary provision is intended for such unforeseen subject-maters. Whenever a law is to be
made on a matter not included in any of the three Lists or a new tax is to be levied which is not
included in those lists such law can be made and such tax can be imposed by Parliament under
Article 248 read with entry 97 of the Union List. In the case of Surya Narain v. Union of India
AIR 1982 Rajasthan at page 1, the Rajasthan High Court held that Parliament has power to
make rules and regulations for appointment and removal of Governors under Entry 97 of the List
I of the Seventh schedule read with Article 248 because it is not enumerated in any list.
Another important case held in the elucidation of residuary powers held by the Supreme Court
of India that in Naga Peoples Movement of Human Rights v. Union of India AIR 199 SC 431,
Armed Forces (Special Powers) Act, 1958, as originally enacted by Parliament was held to be
within the powers of Parliament under Entry 2 of List I and Article 248 read with Entry 97 of List
I. After the enactment of Entry 2-A of List I by the Constitution (Forty Second Amendment) Act,
1976, power of Parliament to enact such Act flows from Entry 2-A.
It may be noted that in Vishwabharathi House Building Co-operative Society Limited v.
Union of India AIR 1999 Knt. 210., held that the Consumer Protection Act, 1986, creates quasijudicial bodies to render inexpensive and speedy remedies to consumers. The Act provides an
additional forum providing inexpensive and speedy resolute of disputes arising between
consumers and suppliers of goods and services. These bodies are not supposed to supplant
but supplement the existing judicial system. The agencies created by the Act are in no way
parallel hierarchy to the judicial courts. The Act would fall under the Parliaments residuary
power and not under Entry 11A of List III. Whereas in another case in Attorney General for
India v. Amratlal Prajivandas AIR 1994 SC 2179, the Supreme Court has observed that the
test to determine the legislative competence of Parliament , that whoever the competence of
Parliament to enact a specific statue is questioned one must look to the entries in List II. If the
said statute is not relatable to any of the entries in List II, no further inquiry is necessary
Parliament will be competent to enact the said statute either by virtue of the entries in List I and
List III, or by virtue of the residuary power contained in Article 248 read with entry 97 List I.
As far as validation of invalid State laws are concerned, when States lack legislative
competence with respect to a subject-matter, Parliament will have such competence. At times,
when a state law is declared invalid because of the States legislative incompetence, Parliament
may come to the rescue of the State by way of validating the law in question. It is to be noted
that the Parliament cannot merely pass an Act saying that such and such State Act is hereby
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declared as valid, which amounts to delegation of legislative power on the State Legislature on
a topic which the Constitution has kept outside the Sate jurisdiction and this Parliament is not
competent to do . It is for the Constitution and not Parliament to confer competence on State
Legislatures. Parliament cannot arrogate to itself any omnipotence to redraw legislative lists so
as to confer competence on the state to legislate on a topic which is outside its purview.
Instead, since Parliament can legislate on a topic within its power, it can re-enact the invalid
State law. As a convenient legislative device, Parliament can, instead of repeating the whole of
the State Act, legislate referentially. For instance, When a State Act is held invalid, Parliament
may enact a law putting the State Act in a schedule and saying that the Act shall be deemed
always to have been as valid as if the provisions contained therein had been enacted by
parliament.
1.4.. Interpretation of Powers :
In relation to Centre and State Distribution of powers that the constitutionality of the
law becomes essentially a question of power. The Supreme Court in the case of federation of
Hotel and Restaurant v. Union of India AIR 1990 SC 1637, has categorically observed that the
ultimate responsibility to interpret the entries lies with the Supreme Court in the scheme of the
Indian federal system. Further the court has reiterated the proposition that these subjects which
in one aspect and for one purpose fall within the power of a particular legislature ay in another
aspect and for another purpose fall within another legislative power. It may be noted that since
the inauguration of the Constitution of India, a large number of cases involving interpretation of
the various entries in the three Lists have come before the courts. Keeping in view the fact that
the Constitution has elaborate Lists enumerating more than 200 entries, questions regarding
interpretation of these entries, and their mutual relationship, are bound to arise from time to
time. There have been quite a few significant controversies in this area. A point which
deserved to be noted is that most of the disputes regarding division of powers have been raised
by private parties. The matter arises when a person raises a plea in a court that a particular
legislation affecting his rights falls outside the legislative ambit of the Legislature which has
enacted it, and therefore, it is unconstitutional.
It should be noted that each entry to be interpreted broadly. The entries in the three lists
are not always set out with scientific precision or logical definition. It is relevant to note that it is
practically impossible to define each item in a List in such a way as to make it exclusive of every
other item in that list. The framers of the Constitution wished to take a number of
comprehensive categories and describe each of them by a word of broad and general import.
For instance, in matters like Local Government, education, Water, Agriculture, Land, in these
the respective entry opens with a word of general import, followed by a number of examples or
illustrations or words having reference to specific sub-heads or aspects of the subject matter.
The effect of the general word is not curtailed, but rather amplified and explained, by what
follows thereafter. An important principle to interpret the entries is that none of them should be
read in a narrow, that the widest possible and most liberal construction be put on each entry,
and that each general word in an entry should be held to extend to all ancillary or subsidiary
matters which can fairly and reasonably be said to be comprehended in it.

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In the case of State of Rajasthan v. Chawla AIR 1959 SC 544 the court held that the
entries are to be regarded as enumeration simplex of broad categories, and that the power to
legislate on a topic of legislation carried within the power to legislate on an ancillary matter
which can be said to be reasonably included in the power given. In relation to ancillary powers
we would discuss in the next chapter in detail. Therefore, it is to be noted that the main topic in
an entry is to be interpreted as comprehensive all matters which are necessary, incidental or
ancillary to the exercise of power under it. The Supreme Court has often emphasized that the
various entries in the three Lists are not powers but are fields of legislation. The power to
legislate is given by Article 246. The entries demarcate the area over the which the concerned
legislature can operate, and that the widest import and significance must be given to the
language used in these entries. Each general word in an entry should be held to extend to all
ancillary or subsidiary maters which can fairly and reasonably be comprehended therein.
1.5.. Summary :
Obviously the distribution of powers in all Constitutions relates to the Three branches of
the Government, and they are legislative, executive and judicial, which are most necessary and
essential in a federal system. But this pattern of distribution is not the same under the different
federal Constitutions. When we look at broader perspective, the matters of national concern
must be handed over to the Union and whereas the Units should have jurisdiction over matters
of regional concern. The Constitution of India contains an elaborate scheme of distribution of
powers and functions between the Centre and States. The obvious tendency of the
Constitution of India is towards centralization within a federal pattern and frame work. There is
a classification of entries in various lists enumerated in a schematic manner. It would appear
that the central government has been vested with vast powers contained in the Union and
Concurrent lists. The power of the Centre has been extended by several devices adopted in the
entries. Primarily some of the entries in the Union List are so phrased that their scope can be
expanded by the Centre itself. secondarily, some of the entries in the State list are subject
some of the entries in the Union List or the Concurrent list, or a law made by Parliament. And
thirdly, some entries in the Concurrent List are subject to the entries in the Union list or laws
made by Parliament. Therefore, the dimensions of several entries in the Union List or the
Concurrent List are expansive. Moreover, the residuary power has been left with the Centre.
1.6.. Model Questions :
1. Explain the nature and scope of residuary power of a Government?
2. Examine the chief characteristics of a delegated legislation.
3. Analyze the various principles of interpretation of lists of the Constitution of India.
1.7.. Suggested Readings:
Pande G.S., Constituional Law of India, Allahabad Law Agency, Faridabad, Haryana.
Jain M.P., Indian Constitutional Law Wadhwa Publications, New Delhi.
R.C.S. Sarkar, Union State Relations in India National Publishing House, New Delhi.
Basu Durga Das, Comparative Federalism, Prentice-Hall of India Private Ltd. New Delhi.
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LESSON-3
RESOLUTION OF CONFLICTS IN CONCURRENT
SPHERE
Objectives:
After going through this lesson, you should be able to:
Know about the state of repugnancy
Know about the features of Pith And Substance
Bring out the division of ancillary powers
Structure:
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9

Introduction
Conflicts between the exclusive jurisdiction
Doctrine of Pith and Substance
Doctrine of Ancillary powers
Conflicts between the concurrent jurisdiction
Theory of repugnancy
Summary
Model Questions
Reference books

1.1 Introduction :
The distribution of powers is an essential feature of federalism.
The federalism
connotes a legalistic government. There being a division of powers between the Centre and
States and none of the governments can step out of its assigned field, if it does so, the law
passed by it becomes unconstitutional. The questions that constantly arise whether a particular
matter falls within the ambit of one or the other government. It is for the courts to decide such
matters for it is their function to see that no government exceeds its powers. It is to be noted
that the makers of the Constitution have made an attempt to make entries in one list exclusive
of those in other lists. But, as no drafting can be perfect, at times come conflict or overlapping
between an entry in one list and an entry in the other list comes to surface, which rise to
question of determining inter-relationship between the such entries.

1.2 Conflicts between Exclusive Jurisdiction :


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Article 249 to Article 253 of the Constitution of India invokes the overriding provisions.
Whereas in Canada is concerned, the general principles evolved by the courts in interpreting
the conflict between Sections 91 and 92 of the British North America Act, 1867. It should be
noted that the question of conflict between the Union and State jurisdictions primarily arises
where the Constitution provides two exclusive lists, as in Canada and in India. Since the
question is a legal question, its solution must also in legal, and calls for legal interpretation of
the constitutional instrument by the courts. Generally, a State legislature shall have exclusive
jurisdiction to make laws for its State with respect to any subject enumerated in List II of the 7th
Schedule as enshrined under Article 246(1). Since a Union law operates over the entire
territory of India, laws made by both the Union and State Legislatures operate within the
territory of each State. Tehrefore, there arises the possibility of a clash between a Union and
a state law within a particular State in case they profess to relate to the same subject of
legislation. Few problems in this regard mentioned as follows:
1.3..Doctrine of Pith and Substance:
It may be noted that within their respective spheres, the Union and State legislatures are
made supreme and they should not encroach into the sphere reserved to the other. For
example, if a law passed by one encroaches upon the field assigned to the other, the court will
apply the doctrine of pith and substance to determine whether the legislature concerned was
competent to make it. If the pith and substance of law it means the true object of the
legislation or a State, relates to a matter with the competence of legislature which enacted it, it
should be held to be intra vires even through it might incidentally trench on matters not within
the competence of Legislature. In order to ascertain the true character of legislation one must
have regard to the enactment as a whole, to its object and to the scope and effect of its
provisions.
The Supreme Court of India has enunciated this principle in Premchand Jain v.
R.K.Chhabra AIR 1984 SC 981, that as long as the legislation is within the permissible field in
pith and substance, objection would not be entertained merely on the ground that while
enacting legislation, provision has been made for a matter which though germane for the
purpose for which competent legislation is made, it covers an aspect beyond it. In a series of
decisions, this court has opined that if an enactment substantially falls within the powers
expressly conferred by the constitution upon the Legislature enacting it, it cannot be help to be
invalid merely because it incidentally encroaches on matters assigned to another legislature. It
should be noted that to ascertain the true character of a law, it must be looked into as an
organic whole. It would be a wrong approach to view the statute as a mere collation of
sections, to disintegrate it into parts and then to examine under which entry each part would fall
and then to determine which part of it is valid and which invalid. Instead, the Act should be
taken in one piece and then its true character determined.
In Prafulla Kumar v. Bank of Khulna 74 I.A 23, in this case, The Bengal Money Lenders
Act was challenged on the ground that being the provincial law, it affected promissory notes, a
Central subject as of (Entry 46 List I). The Privy Council found that in its true nature and
character, the legislation dealt with money-lenders and money lending as of (Entry 30 List II),
and not with promissory notes. The money lenders commonly take a promissory note as
security for a loan. In any real sense , a legislature would not be able to deal with moneylending if it cannot limit the liability of a borrower in respect of a promissory note given by him.
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The Act was held valid even though as an ancillary effect


instruments, a central subject.

it affected the negotiable

The Apex Court of India has enunciated the rule of pith and substance in State of Bombay
v. F.N.Balsara AIR 1951 SC 318, it is well settled that the validity of an Act is not affected if it
incidentally trenches on matters outside the authorized field and, therefore, it is necessary to
enquire in each case what is the pith and substance of the Act impugned. If the Act, when so
viewed, substantially, falls within the powers expressly conferred upon the legislature which
enacted it then it cannot be held to be invalid merely because it incidentally encroaches on
matters which have been assigned to another legislature. Applying the rule of pith and
substance, it has been held that a) A State law enforcing prohibition is valid because it
prohibits purchase, use, possession, transport, and sale of liquor (Entry 8 of List III), and it only
incidentally encroaches on the Central power on imports, (Entry 41 of List I). b) A State
prohibition law is valid even though it also deals with some aspects of evidence and criminal
procedure which fall in the Current list, for the law deals, in substance, with intoxicating liquors
and only incidentally with evidence and criminal procedure. C) The Industrial Disputes Act
enacted by Parliament, even though it applies to employees of municipalities, is valid as, in
substance, it deals with industrial and labour disputes (Entry 22 of List III) and not with local
government which deals with Entry5 list of II).
Despite the above, the object of the Advocates Act, 1961, is to constitute one common
Bar for the whole country and to provide machinery for its regulated functioning. Though, the
Act relates to legal practitioners, in its pith and substance it concerns itself with the
qualifications, enrolment and discipline of the persons entitled to practice as advocate before
the Supreme Court of the High Courts. The Act thus falls under items 77 and 78 of List I. The
power to legislate in regard to such persons is excluded from Entry 26 of List III.
In the case of Krishna v. State of Madras AIR 1957 SCR 399, applying the role of the
pith and substance, the Supreme Court upheld the Madras Prohibition Act, even though it laid
down procedure and principles of evidence for trail of offences under the law in question very
different from those contained in the Criminal Procedure Code and the Indian Evidence Act,
both Central Acts in the Concurrent field. In this case, the court appears to have gone rather
too far in upholding the State law. It should be noted that in Ukha Kothe v. Stte of
Maharashtra AIR 1963 SC 1531 the Apex Court had held that the provisions in the State law in
question concerning criminal procedure and evidence fell under Entries 2 and 12 of List III.
The only difference in the situations in the two cases appears to be that, while in Ukha the
State law had received the Presidential assent, the law involved in Krishna had not been so
reserved, and this perhaps explains the dichotomy in the judicial attitudes, for to take the
same view in Krishna, as was done in Ukha, would have been to hold the law bad on the
ground of repugnancy with a Central law.
The doctrine of Pith and substance introduces a degree of flexibility into the rigid
scheme of distribution of powers. It gives an additional dimension to the powers of the Centre
as well as the States. The reason behind the rule is that if every legislation were to be
declared invalid, howsoever, slight or incidental the encroachment by it of the other field, then
the power of each legislature will be drastically circumscribed to deal effectively with the
subjects entrusted to it for legislation. Though, the rule applies to both, the Centre and the
States, and helps both to some extent, yet since Parliament is the more dominant legislature
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and its powers are more generally and broadly worded, the state Legislatures benefit much
more by the rule than Parliament, for the rule enables them to incidentally trespass into the
much larger, and comparatively more important, Central Area.

1.4.. Doctrine of Ancillary Powers:


The principle of ancillary powers is available both to the Union and State Legislatures.
It should be noted that the doctrine of pith and substance only identifies the List, Union or
State, to which the impugned law is to be ascribed and also the Entry with reference to which
its validity has to be tested. Before entering into the question of conflict between the powers of
the enacting legislature and competing legislature, the impugned law must itself be held to be
intra vires i.e. made in exercise of a power conferred by the Constitution upon the legislature
which made the law; if the alleged Entry does not cover the impugned legislation, no further
question of conflict with the power of a competing Legislature can possible arise. It may be
noted that though the impugned law, in its pith and substance, is found to relate to an Entry in
a particular list, the law may cover some provisions which are not directly covered by that
Entry, but are yet necessary to make the law effective, for example to provide for evasion of a
taxing law. In such a situation, the Court would enlarge the ambit of the particular Entry,
provided it can be said that the additional provisions are ancillary or incidental to the exercise
of the power conferred by the Entry which has been identified. It is founded on the wider
doctrine of liberal interpretation. At this junction, the ambit of the power granted by a particular
Entry in a legislative list is enlarged or extended, to include other powers which the Court
draws as implied powers. Despite the above, a taxing power includes all ancillary powers
necessary for prevention of evasion of tax. But, incidental or ancillary powers can be
exercised only in aid of expressly granted powers. In the case of Check Post Officer v. K.P.
Abdulla and Brothers AIR 1971SC 792, the court held that the power conferred by SubSection (3) of the Sec. 42 of Madras General Sales Tax Act to seize and confiscate and to levy
penalty in respect of all goods which are carried from one State to another in a vehicle, whether
the goods are sold or not, was not incidental or ancillary to power to levy sales tax.
It should be noted that the doctrine of ancillary powers cannot be resorted to where the
power claimed has been specifically included in a different Entry. In the case of Sundaramier
v. State of Andhra Pradesh AIR 1958 SC at page 468 under the Constitution of India the
power of tax is included in specific Entries i.e. Entry 93 of List I and Entry 94 of List II.
Therefore, the power to tax cannot be claimed as ancillary to the general power to legislate
with respect to a matter enumerated in any other Entry in any list. The doctrine of ancillary
powers cannot utilized for re-writing the Constitution or to subvert the federal scheme of the
Constitution which distributes the legislative powers between the Union and State legislatures.
It is to be noted that in Hans Muller v. Superintendent (1955) 1 SCR 1285, the proposition
formulated by the Court is that it has to start with giving the widest possible interpretation to
the words in each of the Entries in the Legislation lists having regard to their natural meaning.
Before invoking this doctrine, it is first to be seen whether the power claimed as ancillary is
necessary for the effective exercise of the power expressly granted by the Entry in the
legislative list which is relief upon.
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1.5.. Conflicts between Concurrent Jurisdiction :


The rationale underlying the Concurrent List is that there may be certain matters
which are neither of exclusively national interest, nor of purely state or local concern. These
matters are such that both the Centre and the States may have common interest therein. On
the one hand, the problems and conditions may vary from State to state requiring diverse
remedies suited to their local peculiarities. Where diversity is needed, the states know what is
best for them. Then, some subject-matters of legislation may be multi-faceted and so they
cannot be assigned exclusively either to the Centre or the states. On the other hand, there
may be circumstances when a Central law may be needed on a subject in this area. It may be
noted that when Parliament makes a law on a matter in the Concurrent list , there is a
corresponding attenuation in the legislature power of the States because a State law
repugnant to a Central Law is invalid. However, subject to any law made by Parliament with
respect to any matter in List III, the State legislature can also make a law in relation to the
matter.
According to Sarkaria Commission, the need for Central legislation may arise for the
following reasons such as i) need to secure uniformity in regard to main principles of law
throughout the country in the larger interests of the nation. ii) it may be important to safeguard
a fundamental right, or secure implementation of a constitution directive iii) the subject matter
of legislation may have interstate, national and even international, aspects, and the mischief
emanating in a state may have impact beyond its territorial limits. Prof. Wheare opposes the
creation of Concurrent List on the ground that the more the number of words to be interpreted
by the courts, the greater arises the scope for litigation and consequent uncertainty. The
question is whether this uncertainty is greater than that which results from the American
system which uses the minimum number of words in one list and leaves the rest to judicial
decisions. It is precisely to avoid such uncharted wide sea for judicial speculation that the
framers of the Government of India Act, 1935, thought it advisable to engraft a Concurrent List
and the framers of the Constitution of India have adopted that scheme, obviously because the
experience of the working of the third list was not discouraging.
1.6.. Theory of Repugnancy:
Article 254(1) of the Constitution of India says that if any provision of law made by
the Legislature of the State is repugnant to any provision of a law made by Parliament which is
competent to enact or to any provision of the existing law with respect tone of the matters
enumerated in the Concurrent List, then the law made by Parliament, whether passed before
or after the law made by the legislature of such stage or, as the case may be, the existing law
shall prevail, a and the law made by the legislature of the state shall, to the extent of the
repugnancy be void.
In the case of Vijay Kumar Sharma v. State of Karnataka AIR 1990
SC2072, the court held that Article 254(1) only applies where there is inconsistency between
a Central Law and a State Law relating to a subject mentioned in the Concurrent List.
It is relevant to note that there is distinction between ultra vires and repugnancy where as
the former refers to incompetency and latter refers to inconsistency. Ultra vires is more
fundamental than repugnancy. When a legislature professes to legislate with respect to a
subject which does not belong to its legislative power, the law becomes ultra vires for
example when a State legislature, in India, makes a law with respect to a subject included in
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List I.. similarly a union law may be ultra vires, if it deals directly with a subject included in List
II (State List), without any constitutional provisions sanctioning such encroachment. In ultra
vires, there is no competition between two legislatures having different jurisdictions. It
operates to invalidate a law made by any legislature if the legislation goes beyond the powers
assigned to that legislature by the Constitution. The question of repugnancy can arise only
when both the legislatures are competent to legislate with respect to the same subject viz a
subject included in the Concurrent List of List III.

The question how the repugnancy is to be determined. Justice Fazal Ali in the case of
M.Karunanidhi v. Union of India AIR 1979 SC 898 reviewed all earlier decisions and
summarized the test of repugnancy. A repugnancy would arise between the two statutes in the
following situations. They are i) It must be shown that there is clear and direct inconsistency
between the two enactments i.e. Central Act and Sate Act, which is irreconcilable, so that they
cannot stand together or operate in the same field. ii) There can be no repeal by implication
unless the inconsistency appears on the face of the two statutes. iii) where the two statutes
occupy a particular field, but there is room or possibility of both statutes operating in the same
filed without coming into collusion with each other, no repugnancy results. Iv) Where there is no
inconsistency but a statue occupying the same filed seeks to create distinct and separate
offences, no question of repugnancy arises and both the statues continue to operate in the
same field.
It may be noted that the above rule of repugnancy is subject to the exception which is
mentioned in Article 254(2), which says that if a State law with respect to any of the matters
enumerated in the Concurrent List contains any provisions repugnant to the provisions of
earlier law made by Parliament, or an existing law with respect of that matter, then the State
law if it has been reserved for the assent of the President and has received his assent , shall
prevail notwithstanding such repugnancy. But it would still be possible for the Parliament
under clause 2 to override such a law, the state law would be void to the extent of the
repugnancy with Union Law. The famous case laws in relation to repugnancy are Deep Chand
v. State of Uttar Pradesh AIR 1959 SC 648, the validity of Uttar Pradesh Transport Service
(Development) Act was involved. By this Act, the State Government was authorized to make
the scheme for nationalization of Motor Transport in the State. The law was necessitated
because the Motor Vehicles Act, 1939, did not contain any provision for the nationalization of
Motor Transport Services. Later on, in the year 1956, the Parliament with a view to introduce a
uniform law amended the Motor Vehicles Act, 1939, and added a new provision enabling the
state Government to frame rules of nationalization of Motor Transport. The court held that
since both Union law and the State law occupied the same field, the state law was void to the
extent of repugnancy to the union of law.
Another famous case law in this regard is Zaverbhai v. State of Bombay AIR 1954 SC
752, Parliament enacted the Essential supplies Act, 1946, for regulating production, supply and
distribution of essential commodities. A contravention of any provision of the above Act was
punishable with imprisonment up to three years or fine or both. In the year 1947, considering
the punishment inadequate, the Bombay Legislature passed an Act enhancing the punishment
provided under the Central law. The Bombay Act received the assent of the President and
thus prevailed over the Central Law and become operative in Bombay. However, in 1950
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Parliament amended its Act of 1946, and enhanced the punishment . It was held that as both
occupied the same field (as far as enhancing punishment), the State law became void as
being repugnant to the Central law.
It may be noted that as far as Australian Constitution is concerned, the powers though
conferred by the Constitution under Sec. 51, upon the Federal Parliament, shall be regarded as
concurrent, subject to the prevalence of the federal legislation in case the State law is
inconsistent with it. Whereas under the Canadian Constitution Act, there is a division of
legislative powers by the two exclusive lists in Sec. 91 and 92, the courts have drawn out a
concurrent sphere by application of the doctrine of aspect of legislation which means that a law
passed by the Federal or Provincial Legislature may have a double aspect, it means that it
covered by the Provincial list such as Property and Civil Rights, while other it covered by an
item in the Dominion List such as trade and commerce. Therefore, it would be decided in a
case of Deere Plow Company v. Wharton A 1914 Privy Council, that a Provincial law for
liquor-licensing may be regarded as a local regulation relating to civil rights in the Province
and it may also relate to the trade and commerce in so far as seeks to regulate the trade in
liquor.
1.7.. Summary :
The distribution of powers in all Constitutions relates to the Three branches of the
Government, and they are legislative, executive and judicial, which are most necessary and
essential in a federal system. For the interpretation of powers allocated to the Union and State
in any federal constitution, the courts have evolved certain principles such as ancillary powers,
etc.,. Legislative powers carries with it all ancillary and subsidiary powers. Despite of the
various lists such Union and State lists, it is remarkable that many of the postwar Constitutions
have adopted concurrent list. Where is there is a concurrent list of legislative subjects, the
federal and state legislatures are both competent to legislate with respect to the same subject. It
is to be noted that repugnancy does not arise only from conflict of provisions of Statutes. It may
also exist where Parliament intends to make its enactment a complete and exhaustive code and
intends to cover filed so that State law on the same matter should not operate. Despite that the
doctrine of pith and substance or incidental encroachment is the product of
Canadian
Jurisprudence which has been held applicable to the Government of India Act, 1935, and also to
the present Constitution. Besides the traditional area of its application in interpreting the powers
of State and Central Legislatures, the Supreme Court of India also applied the doctrine of pith
and substance to the cases of Constitutional Amendment also.
1.8.. Model Questions :
1. Explain the nature and scope of doctrine of ancillary powers.
2. Examine the scope of doctrine of pith and substance.
3. Analyze the concurrent jurisdiction in relation to interpretation of powers between lists.
1.9.. Suggested Readings:
Pande G.S., Constituional Law of India, Allahabad Law Agency, Faridabad, Haryana.
Jain M.P., Indian Constitutional Law Wadhwa Publications, New Delhi.
R.C.S. Sarkar, Union State Relations in India National Publishing House, New Delhi.
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Basu Durga Das, Comparative Federalism, Prentice-Hall of India Private Ltd. New Delhi.

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LESSON-4
FINANCIAL RELATIONS BETWEEN CENTRE
AND STATES
Objectives:
After going through this lesson, you should be able to:
Know about the power of taxation in sovereign Government
Know about the sources of revenue between the Union and States
To know about the Immunity of instrumentalities
Structure:
1.1
Introduction
1.2
Distribution of revenues between the Union and States
1.2.1.. Taxes levied by the Union but collected and appropriated by the States
1.2.2.. Taxes levied and collected by the Union and assigned to the States
1.3
Distinction between tax and fee
1.4
Inter-governmental tax immunities i.e. Doctrine of Immunity of Instrumentalities
1.4.1.. United States of America
1.4.2.. Canada
1.4.3.. Australia
1.4.4.. India
1.5
Summary
1.6
Model Questions
1.7
Reference books
1.1 Introduction :
The distribution of powers is an essential feature of federalism.
The federalism
connotes a legalistic government. There being a division of powers between the Centre and
States and none of the governments can step out of its assigned field, if it does so, the law
passed by it becomes unconstitutional. It should be noted that in a federation, besides the
distribution of various powers, the distribution of sources of revenue also plays a very
important role. No other federal Constitution makes such elaborate provisions as the
Constitution of India with respect to the relationship between the Union and the States in the
financial field. Nowhere else is the founder-fathers emphasis on the integrity and unity of the
country is more pronounced than in the financial relations of the constitution. They stipulated a
financially strong centre so much so that the States were almost made subservient to the Union
and during the last thirty years, the financial provisions of the Constitution have worked in such
a manner that the States dependence on the Union has become almost total.
It should be
noted that no system of federation can be successful unless both the Union and the States
have at their disposal adequate financial resources to enable them to discharge their
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respective responsibilities under the Constitution of India. To achieve the object, the
Constitution of India has made elaborate provisions mainly following the lines of the
Government of India Act, 1935, relating to the distribution of the taxes as well as non-tax
revenues and the power of borrowing, supplemented by provisions for grants-in-aid by the
Union to the States.
Before the entering into the elaborate provision which set up a complicated
arrangement for the distribution of the financial resources of the country. It has to be noted
that the object of this complicated machinery is an equitable distribution of the financial
resources between the two unites of the federation, instead of dividing the resources into the
two watertight compartments, as under the usual federal system.
1.2.. Distribution of Revenues between the Union and States:
Finance is an essential pre-requisite of any good government.
The scheme of
distribution the taxes envisaged under the Constitution of India. A balance ought to exist
between the financial resources of the government and its allotted responsibilities and functions.
It is pertinent to mention that a viable scheme of centre-state financial relationship is the sinequa-non for the proper functioning of a federal polity a whole. Article 268 of the Constitution of
India provides the scheme of the distribution of revenue between the Union and the States. The
Union is entitled to the proceeds of the taxes in the Union List. The taxes enumerated in the
Union List i.e. List I are leviable by the Centre exclusively whereas the taxes enumerated in the
State list i.e. List II are leviably by the State exclusively. It is to be noted that not many tax
entries are contained in the Concurrent list, and this has been done to avoid problems of
overlapping and multiple taxation between the Centre and the States. The scheme of allocation
of taxing powers between the Centre and the States is based on the broad principle that the
taxes of a local nature have been allotted to the Sates while the taxes which having a tax base
extending over more than one State, or which should be levied on a uniform basis throughout
the country and not vary State from State, or which can be collected more conveniently by the
Centre rather than the States.
1.2.1.. Taxes levied by the Union but collected and appropriated by the States:
Article 268 of the Constitution of India provides that such stamp duties and duties of
excise on medicinal and toiled preparations as are mentioned in the Union List shall be levied
by the Government of India, but they are to be collected by the States with which such duties
are leviable. The proceeds of such duties are assigned to the States.
1.2.2.. Taxes levied and collected by the Union and assigned to the States:
Article 269(1) of the Constitution of India provides that taxes on sale or purchase of
goods and taxes on the assignment of goods shall be levied and collected by the Government
of India bur shall be assigned an shall be deemed to have been assigned to States on or after
the 1-4-1996 in the manner as may be prescribed by Parliament by law. It is to be noted that
the Constitution 80th Amendment Act, 2000, has amended Article 269 and substituted new
clauses in place of (1) and (2) of Article 269. The above amendment has been enacted on the
basis of the recommendations of the Tenth Finance Commission, and it has recommended that
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total income obtained from certain central taxes and duties, 29% shall be given to the States.
The expression taxes on the sale or purchases of goods shall mean taxes on sale or purchase
of goods other than newspapers, where such sale or purchase takes place in the course of
inter-state trade or commerce. While the expression taxes on the consignment of goods shall
mean taxes on the consignment of goods i.e where the consignment is to the person making it
or to any other person, where such consignment takes place in the course of inter-state
commerce.
1.3.. Distinction between Tax and Fee:
There is no generic difference between a tax and fee, but the Constitution of India
distinguishes between the two concepts for legislative purposes. The prohibition that no tax can
be levied or collected without authority of law, which applies only in respect of taxes, and this
prohibition does not apply in respect of a fee. It should be noted that a tax is a common burden
and the only return the tax-payer gets is the participation in the common benefit of the state. A
tax is compulsory exaction of money by public authority for public purposes enforceable by law
and is not payment of services rendered. While a fee is a payment of services rendered, benefit
provided or privileges conferred. It is submitted that each lest has a number of tax entries, but
at the end, there has an entry authorizing levy of fees in respect of any of the matters included
For example List-I of Entry-96 of the Constitution of India read as Fees taken in respect of any
of the matters within this list, but not including the fees taken in any court. While List II of Entry66 read as fees in respect of any of the matters in this List, but not including fees taken in any
court. The expression any of the matter in the list necessarily includes also the entries relating
to taxation. This means that a fee may be levied even under an enactment relating to the
imposition of a tax. For example under entry 54 of List II, it states a tax can believed on the sale
or purchase of goods. But licenses are issued to dealers for permitting them to carry on
business of buying and selling goods, and a license-fee may be charged for the purpose.
It would appear from the above that scope for levying fees is much broader than the for
levy of taxes. Whereas a tax is to be confined to the few specific tax entries in each List, a fee
can be levied in respect of all the entries tax or non-tax in the three Lists by the concerned
Legislature. The first important incident of the difference between tax and fee is that whereas
no tax can be levied outside the tax entries, fees can be levied in respect of a non-tax entry as
well. As for example, a State levy on public trusts is invalid as a tax; as there is no such tax
entry, but it is valid as a fee under entry 47 of List III. A fee may be levied even under a law
relating to the imposition of a tax, e.g., license fee charged from dealers under the Sales Tax
Acts.
It is relevant to mention that in Secunderabad Hyderabad Hotel Owners Association v.
Hyderabad Municipal Corporation AIR 1999 SC 635 it has been held that though the element of
quid pro quo is necessary in order to determine whether license fee is tax or fee, but it is not
essential in cases where the license fee is merely regulatory or compensatory. A license fee
may be either regulatory or compensatory. When a fee is charged for rending specific services a
certain element of quid pro quo must be there between the services rendered and the fee
charged so that the license fee is commensurate with the cost of rendering the service although
exact arithmetical equivalence is not expected. However this is not the only kind of fee which
can be charged. License fee can be regulatory when the activities for which a license is given
require to be regulated or controlled. The fee which is charged for regulation for such activity
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would be validly classifiable as a fee and not a tax, although no service is rendered. In this
instant case, the petitioners has challenged the increase of in the license fee for trade license
for running a lodging and heating house on the ground that the increased license fee was not in
the nature of fees since there is no quid pro quo between the fee charged by the respondent
Municipal Corporation and the services rendered by them to the traders. The court held that the
license fee charged for regulating the activities for which the license is gven is a fee and not a
tax although no services is rendered. An element of quid pro quo for the levy such a fee is not
required although such fee cannot be excessive. In the present case the fees are not charged of
just for services rendered but they also have the large element of regulatory fee levied for the
purpose of monitoring the activity of the licenses to ensure that they comply with the terms and
conditions of the license.
Another significant difference between the fee and tax is that Art. 110(2) and 199(2)
which deals with the money bills lay down expressly that a bill will not be deemed to be a more
bill by reason only that it provides for the imposition of fines, or the demand or payment of fees
for licenses, or fees for services rendered, whereas a bill a dealing with imposition or regulation
of a tax will always be regarded as a money bill. These provisions should be read as excluding
from the category of money bills not every license fee but only such as doesnt amount to a tax.
In some situations a tax can be collected in the form a license fee and this couldnt be exempted
from the definition of a money bill. The use of the term license fee in statute is not decisive of
the nature of the levy in question it raises the question as to how to distinguish between a tax
and fee. Over the period of time, there has occurred a sea change in the approach of the
Supreme Court towards the identifying a levy as fee.
In the case of State of Maharastra v. Salvation Army AIR 1975 SC 846, the court again
emphasized upon the co relation between fee charged and services rendered. The court has
observed that as a fee is regarded as a sort of return or consideration for services rendered, it is
necessary that the levy of fees should be co related to the expenses incurred by the agency in
regarding the services. The court insisted that two elements were essential for a levy to be
regarded as a fee. (I) it is levied in consideration of certain services which the individuals accept
either willingly or unwillingly (ii) it must not go to the general revenue of the State but be ear
marked to meet the expenses on the service rendered. The court insisted that the fee must, as
far practically as possible, be commensurate with the service rendered. In this case 2% charge
being levied on charities to meet the expenses of the charity commissioner was held to be ultra
vires since 1970 as there was surplus of 54 lakh rupees. The court ruled that infixing the fee
regard must be had to the surplus.
The concept of quid pro quo was very strictly applied by the Supreme Court in State of
Andhra Pradesh v. Hindustan Machine Tools Ltd.: The Court observed:
One cannot take into account the sum total of the activities of a public body like a gram
panchayat to seek justification for the fees imposed by it. The expenses incurred by a Gram
Panchayat or a municipality in discharging its obligatory functions are usually met by the
imposition of a variety of taxes. For justifying the imposition of fees the public authority has to
show what services are rendered or intended to be rendered individually to the particular person
on whom the fee is imposed.
1.4 Inter-governmental tax immunities
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As the two tiers of governments having autonomous functions and taxing powers
operate side by side in a federation, their operation are bound to cross and intersect at several
points. A government at one level may exercise it powers in such a manner as to interfere with
the working of the government at the other level. The doctrine of immunity of instrumentalities or
inter governmental immunity seeks to ensure that government at one level in a Federation
operates without unduly restricting the operations and instrumentalities of the government at
other level. Though the doctrine as general application, yet its most significant application is in
the area of taxation. Therefore the doctrine of immunity restricts the taxing powers of
governments in a federation.
1.4.1.. In United States of America:
The doctrine of inter-government immunities was for the first time recognized by the
American Supreme Court in the leading case of Mechulloch v. Maryland 4 Wheaton 316(1819).
The Congress had established a bank in the State of Maryland. The State of Maryland levied a
tax which Mechulloch, the cashier, refused to pay on the ground that a State couldnt tax an
instrumentality of the Central Government. The Supreme Court of America held that the State
had no power to levy a tax on Centres Property. One of the question to be decided by the
Supreme Court was whether Marryland could tax the bank incorporated by the United States.
The Supreme Court answered it in the negative. In his historical judgment Chief Justice
Marshall denied the power on the following rationale:1. That the Constitution and laws made by the Congress in pursuance thereof are
supreme;
2. That the Congress has power to create banks;
3. That power to create implies power to preserve;
4. That the power to destroy, if wielded by a different hand, is hostile to and
incompatible with power to create and preserve;
5. That where this repugnancy exists that authority which is supreme must control it;
6. That the power to tax involves power to destroy; that power to destroy repugnance in
conferring on one government power to control the constitutional measures of
another, which other, with respect to those very measures, is declared to be
supreme over that which exerts the control;
7. That if the States may tax one instrument, they may tax any and every instrument.
They may tax the mail, they may tax the mint, they may tax patent rights, they may
tax the papers of the customs house, they may tax the judicial process, they may tax
all the means employed by the government to an extent which would defeat all the
ends of government.
The above case, however, decided that a State cannot tax the instrumentalities of the
federal government but not vice versa. Later on the rule was applied to give immunity to State
properties from Central taxation in case of Collector v. Day 11 Wall 173(1870). It is to be noted
that by approving Dobbins v. The Commissioners of Erie Country 16 Pet. 435in which the court
held that both the States and the United States are restrained in the power of taxation by
express prohibitions in the Constitution, and the States by such as are necessarily implied when
the exercise of the right by a State conflicts with the perfect execution of another sovereign
power delegated to the United States. In the above case of Collector v. Day, various statues
passed by Congress in 1864 were challenged. These statutes imposed as 5% personal income
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tax on all incomes over $1000. Day, who was a County judge, paid the tax under protest and
then brought a suit in the Circuit Court to recover the amount paid. The court decided in favour
of Day and the United States sought review by writ of certiorari. The Supreme Court affirmed
the judgment and held that Congress cannot tax the salaries of a judicial officer of a State.
Thus, reciprocal application of the doctrine was established.
The doctrine of immunity was evolved to protect the autonomy of National and State
governments within their respective spheres from being encroached upon each other. The
judicial tendency was to carry the doctrine of exemption to rather extreme lengths So much so
that not only the governmental instrumentalities as such, but even private persons in their
dealings with a government in various capacities such as suppliers, contractors or creditors
were held immune from being taxed by the other government. For example in the Indian Motor
Cycle Company v. US 283 US 570(1931).in this case a manufacturer of motor cycles was held
not subject to the federal excise tax on sales thereof with respect to sales to a Municipality.
In case of Carson v. Roan Anderson Company 342 U.S. 232, the immunity to the States
has come to be confined to functions of a governmental character. As regards the Central
instrumentalities, the immunity granted n their favour from State taxation is somewhat broader.
The Congress can always confer immunity on any of its instrumentalities from State taxation
under the necessary and proper clause.
1.4.2.. Canada :
In this State the courts have refused to apply the doctrine of immunity of United States. It
is to be noted that Sec. 125 of the British North America Act expressly incorporates the
principle of inter-governmental immunity in so far as it prohibits taxation of lands or property, of
one government by the other. This provision, it has been held, does not immunize provincial
imports of goods from central customs duties. A tax also may be levied on an owner of land
leased to the Crown, or a tenant of government land. No tax can, however, be levied on a
corporate body for occupying land when it is a servant or an agent to the Crown. In this State,
the Judicial Committee of Privy Council refused to apply this doctrine in Bank of Toranto
v.Lambe (1887) 12 AC. 575, Their Lordships held as construe the express words of an Act of
Parliament which makes an elaborate distribution of the whole field of legislative authority
between the two legislative bodies, and at the same time, provides for the federative provinces
a carefully balanced constitution, under which no one of the parts can pass laws for itself under
the control of the whole acting through the Governor General. And the question they have to
answer is whether the one body or the other has power to make a given law. If they find that on
the due construction of the Act, a legislative power falls within the Sec. 92, it would be quite
wrong of them, to deny its existence because by some possibility it may be abused or limit the
range which otherwise opened to the Dominion Parliament.
1.4.3.. Australia :
The doctrine of Immunity of Instrumentalities is followed on similar lines as in United
States. To start with the American doctrine of immunity of instrumentalities was held applicable
in full vigour in Australia. Thus, a central government servant was held immune from State tax
in respect of his salary. State instrumentalities like State Railways were held immune from
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federal taxation.
This phase, however, came to an end with the Engineers case i.e. The
Amalgamated Society of Engineers v. the Adelaide Steamship Company Limited 28 C.L.R 129,
in 1920. The State of Western Australia claim immunity from the central law in respect of trading
concerns owned and controlled by it. The High Court rejected the doctrine as it thought that
otherwise the states could without limit encroached on the Commonwealth power simply by
creating a governmental instrumentality. A pay roll tax on all wages payable by an employer
(including the States) held valid in Victoria v. Common wealth (1971) 122 C.L.R. 353. However,
appears to the Common wealth enjoys immunity from State legislation. Discriminatory laws
cannot, however, be made by one government against the other

1.4.4.. India:
It is to be mentioned that the rule of immunity from State taxation applies only to the
instrumentalities of the union of India and not to private bodies.
The scope of intergovernmental tax immunities in India is very respected, and such immunities are dealt with
mainly in Articles of 285, 287, 288, and 289, of the Constitution of India. The Indian
Constitution does not import the broad and general doctrine of immunity of instrumentalities as
understood in the United States, beyond what can be derived from these constitutional
provisions. Articles 285 and 289 are discussed below.
Article 285 (1) of the Constitution of India says that the property of the union shall, save
in far as Parliament may by law otherwise provide, be exempt from all taxes which may be
imposed by a state or by any authority within a state.
Article 285(2) of the Constitution of India nothing in Clause 1 shall until parliament by law
otherwise provide prevent any authority within a state from levy of any tax on any property of the
union to which such property immediately before the commencement of this Constitution was
liable or liable as treated, so long as the tax continues to be levied in the State.
Article 287 of the Constitution of India prohibits a state from imposing tax on consumption
of sale or electricity supplied to the Government of India, or utilized for construction.
Maintenance, or operation of any Railway unless parliament by law otherwise provides.
Article 288 (1) of the Constitution of India, save in so far as the President may by order
otherwise provides, no law of a state in force immediately before the commencement of this
constitution shall impose, or authorize the imposition of a tax in respect of any water or
electricity stored, generated, consumed, distributed, or sold by any authority established by any
existing law or any law made by parliament for regulating or developing any inter-state river, or
river valley. However, the clause (2) permits states to make such law now with a condition that
it will have any affect unless it has been reserved for consideration of the president and
received his assent.
Article 289 ( 1) of the Constitution of India says that the property of income of a state shall
be exempt from union taxation; Whereas Article 289 (2) says that nothing in clause 1 shall
prevent the union from imposing or authorizing the imposition of any tax to such as extent, if
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any, as parliament may by law provide in respect of a trade or business of any kind carried on
by or on behalf of the government of a State, or any operations connected therewith, or any
property used or occupied for the purposes of such trade or business, or any income accruing
or arising in connection therewith. Nothing in clause 2 shall apply to any trade or business, or
to any class of trade or business which parliament may by law declare to be incidental to
ordinary functions of the government.
It is relevant to mention that in Municipal Corporation of Dumdum municipality v. Indian
Tourism Corporation (1995)5 SCC 251, it has been held that properties vested in international
airport authority are not the properties of the Union. Whereas in Western Coalfields Limited v.
Special Area Development authority (1982) 1 SCC 125, it was held that the fact that the entire
share capital was owned by the government, it does not mean that the companies themselves
were owned by the government. They have corporate personality of their own distinct from that
of the government. Similarly, in Food Corporation of India v. Municipal Corporation Jalalabad,
AIR 1999 SC 2575, it has been held that Food Corporation of India is a distinct company from
the Government of India , therefore it cannot claim immunity from taxation and Article 285 of the
Constitution of India. Another case dealt with Board of Trustees, Visakhapatnam Port Trust v.
Andhra Pradesh, AIR 1999 SC 2552, also held that the Board is not the department of the
Government and therefore, not exempt from tax under Article 285 of the constitution of India.
Similarly, Hotel Corporation of India held not entitled to tax immunity under this Article AIR 2001
Jammu And Kashmir at page 36.
1.5.. Summary:
A federation is a compromise between the regional autonomy and national
integration. in a federation, besides the distribution of various powers, the distribution of sources
of revenue also plays a very important role. No other federal Constitution makes such
elaborate provisions as the Constitution of India with respect to the relationship between the
Union and the States in the financial field. Nowhere else is the founder-fathers emphasis on the
integrity and unity of the country is more pronounced than in the financial relations of the
constitution. The Constitution of India lays down a broad scheme for the distribution of revenue
resources between the Union and the States. The states possess exclusive jurisdiction over
taxes enumerated in the a State list, whereas the Union is entitled to the proceeds of the taxes
in the Union list. It is to be noted that in Canada and Australia, the sources of revenue allotted to
the units are so meagre that they have to be substantially assisted by the central grants. It is to
be noted that the framer of the Constitution of India desired that the scheme of financial relation
be flexible and adaptable to varying needs and reviewable periodically in the light of experience
of central resources, of States needs and available date. The doctrine of immunity of
instrumentalities or inter governmental immunity seeks to ensure that government at one level in
a Federation operates without unduly restricting the operations and instrumentalities of the
government at other level. Though the doctrine as general application, yet its most significant
application is in the area of taxation. Therefore the doctrine of immunity restricts the taxing
powers of governments in a federation.
1.6.. Model Questions :
1. Narrate the distinction between the tax and fee with the help of decided cases?
2. critically examine the distribution of revenue between the Centre and States. ?
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3. Explain the scope of the doctrine of immunity of instrumentalities in India?


1.7.. Suggested Readings:
Pande G.S., Constituional Law of India, Allahabad Law Agency, Faridabad, Haryana.
Jain M.P., Indian Constitutional Law Wadhwa Publications, New Delhi.
R.C.S. Sarkar, Union State Relations in India National Publishing House, New Delhi.
Basu Durga Das, Comparative Federalism, Prentice-Hall of India Private Ltd. New Delhi.

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LESSON-5
FINANANCE COMMISSION, GRANTS-IN-AID
Objectives:
After going through this lesson, you should be able to:
Know about the financial equilibrium at the State level
Know about the functioning of the finance commission
Know about the power to make conditional grants
Structure:
1.1 Introduction
1.2 Financial Equilibrium at the State level
1.2.1.. Tax Sharing
1.3 Finance Commission
1.4 Grants-in-Aid
1.5 Borrowing Power
1.6 Summary
1.7 Model Questions
1.8 Reference books
1.1 Introduction :
The distribution of powers is an essential feature of federalism.
The federalism
connotes a legalistic government. There being a division of powers between the Centre and
States and none of the governments can step out of its assigned field, if it does so, the law
passed by it becomes unconstitutional. It should be noted that in a federation, besides the
distribution of various powers, the distribution of sources of revenue also plays a very important
role. It is also important to know that under the Indian Constitution, the Centre shares some of
the taxes levied and collected by it with the States. The powers of taxation assigned to the
Union are based mostly on considerations of convenience of imposition and collecting and not
with a view to allocate them solely to the union. Despite the above, there is a need to establish
a finance commission. When we look at the importance of finance commission as a
constitutional instrument capable of settling many complicated financial problems that affect the
relationship of the Union and States may be seen from the recommendations of the last few
commissions. The present system of allocation of finance between the Union and the States is
almost entire the result of the recommendations of the finance commission. Therefore, we
would like to elucidate few issues relate to few expedients to create financial equilibrium, and
functioning the finance commission and grants-in-aid.
1.2. Financial Equilibrium at State level:

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It is to be noted that the scheme of allocation of centre state taxing powers, though
designed with many considerations in view of convenience, simplicity, economy and uniformity,
yet fails to create equilibrium between the responsibilities and resources at the State level. most
of the expansive and lucrative sources of taxation lie with the Centre such as income-tax,
corporation tax, customs and excises. Moreover, the centre has the whole country to tap and
can tax the taxing capacity existing anywhere in India. On the other hand, while the fiscal needs
of the States are huge, because of their responsibility to provide for development, welfare and
social service activities like education, housing, health, agriculture etc., for which there is an
insatiable demand in the country, their revenue raising capacities cabined due to many reasons
such as the economic conditions prevailing within their boundaries; and the fact that they have
to share their taxing powers with the local governments, and by their taxing powers being
somewhat elastic. Before the discussing the Indian position in this regard, it may be worthwhile
to have some idea of the developments in other federations in area of fiscal relationship
between the Centre and the regional governments. In the United States of America, the
Constitution makes no provision for transfer of revenue from the centre to the States.
Nevertheless, under the force of circumstances, a pervasive system of conditional grants has
arisen under which the centre financially supports many State activities. In Canada, the system
of grants to the Provinces is in vogue and with the centralization of income-tax during the war, a
kind of tax-sharing has also come to be adopted. The above constitutions were drafted in the
laissez faire era. Gradually, it gave way to the concept of social welfare which generated public
demand for social services and this led to the emergence of the stem of the Central grants to
the states to enable them to meet the demands.
1.2.1.. Tax Sharing:
The Indian Constitution provides a for a scheme of centre and state tax sharing on a big
scale. It envisages that the centre shares some of the taxes levied and collected by it with the
States. Al revenue accruing to the States from their taxes is sued by them, but all taxes leviable
by the centre are not meant for its exclusive use. The centre is required to share some of its
taxes with the States. The powers of taxation assigned to the Union are based mostly on
considerations of convenience of imposition and collecting and not with a view to allocate them
solely to the union. It is relevant to mention that the framers of the Constitution did not intend
that all taxes assigned to the centre should be solely spent by the Centre for its own purposes.
They desired that a part of the Central revenue arising from taxation be used for subsidizing the
State activities. From this point of view of tax-sharing all central taxes were arranged in the
following such as taxes levied and collected by the Centre and used by it as a whole i.e.
custom taxes, corporation tax, capital gains tax, surcharges on taxes etc., and also the taxes
levied and collected by the centre, but the net proceeds of which had to be compulsorily shared
by this with the States. It is to be noted that the tax on non-agricultural income fell in this
category. The centre had to hand over a part of the revenue accruing to it from the levy of
income tax to the States. Such percentage as may be prescribed of the net proceeds of this tax
in a financial year, except the proceeds attributable to the Union Territories, or to taxes payable
in respect of union emoluments, was to be distributed among the States in such manner as was
to be prescribed. This divisible pool of the income-tax did not even for part of the Consolidated
Fund of India. The word prescribed here meant prescribed by the President by order after
considering the recommendations of the finance Commission. Parliament need not pass a law
for the purpose. This technique had been adopted as it was feared that there might be a good
deal of wrangling in Parliament if the matter were to be discussed there and there might be
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undue political pressures for favoring one state at the cost of another State, and the big States
having a large number of representatives in Parliament might combine to do injustice to the
smaller states.
Under Article 271 of the Constitution of India, the Centre could levy a surcharge on
income-tax on non-agricultural income for its exclusive use without sharing it with the States.
Taxes levied and collected by the Centre but a portion of the net proceeds of which may be
assigned by it to the States by its own law as per under Article 272 of Constitution of India. The
Central Excises other than medicinal and toilet preparations fall in this category. Unlike the
income tax which must be shared, Centre State tax sharing in this area was not compulsory but
optional for the Centre. The revenue accruing from the Central Excises formed part of the
Consolidate Fund of India out of which payments were to be made to the states when
parliament passed a law for this purpose.
As per Article 269(1) of the Indian Constitution taxes levied and collected by the Centre,
but the whole proceeds of which belonged to the State. The taxes falling in this category were
such as:
a) Duties of succession on property other than agricultural land.
b) a state duty in respect of non agricultural property;
c) Terminal taxes on goods or passengers carried by rail, sea or air;
d) Taxes on railway fares and freights;
e) Taxes other than stamp duties on transactions in stock exchanges and futures markets;
f) Taxes on the sale or purchase of newspapers and on advertisements published therein;
g) Taxes on the sale or purchase of goods other than newspapers in the course of inter-State
trade or commerce [see entry 92A List I]
it is relevant to note that in case of Good year India Ltd v. State of Haryana AIR 1990 SC
781 court held that a State possessed no competent to impose a tax on mere dispatch of goods
by a manufacturer to its own branch outside the State and also it was held that this could not be
regarded as a sale or disposal of goods and therefore it would not fall with in the ambit of entry
54 of List II. Such a tax would fall within the parliamentary field of legislation. In the residuary
field by virtue of Article 248 and the residuary entry No 97 of List I. under Article 269(1)(h) along
with entry 92 B, such tax fell exclusively within parliamentary field and a State legislature
couldnt intrude into the parliamentary field
1.3.. Finance Commission:
The framers of the Constitution realized that a permanent or immutable formula would
hardly meet the situation for all time to come as changes in socio-economic conditions in the
country would demand constant adjustment in the basis of transfer of revenue from the centre to
the states. They devised a flexible scheme for transfer of central revenue to the States, a
scheme adjustable in the light of experience, contemporary economic situation, and financial
position of the centre and the States. Article 280 of the Constitution of India specifies about the
powers and functions of the Finance Commission, which provides that President shall by order
constitute a Finance Commission within 2 years from the commencement of the Constitution
and thereafter at the expiration of every fifth year or at such earlier time as he may think
necessary. The constitutional requirement of setting up a Finance Commission is an original
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idea. According to this, the Commission shall consist of a Chairman and four other members
appointed by the President. Parliament may by law prescribe qualifications which shall be
requisite for appointment as members of the Commission and the manner in which they shall be
selected. In exercise of the power under Article 80(1) , Parliament has passed the Finance
(Miscellaneous Provision) Act, 1951. It provides that the Chairman of the commission shall be
selected from among persons who have had experience in public affairs. The other four
members shall be selected from among persons who (i) are or have been or are qualified to be
appointed as Judges of High Court or (ii) have special knowledge of the Finance and Accounts
of Government or iii) have had wide experience in financial matter and in administration or iv)
have special knowledge of economics.
The members of the Commission shall hold office for such period as may be specified in
the Presidential Order and shall be eligible for appointment. The Commission is empowered to
determine its procedure and shall have all the powers of a civil court in respect of summoning
an enforcing the attendance of witnesses, production of any document and requisitioning any
public record from any court or office.
Article 280(3) of the Constitution provides some duties of the Finance Commission such as
i) the distribution between the Union and the States of the net proceeds of taxes which are to
be, or may be, divided between them under the chapter and the allocation between the States
of the respective shares of such proceeds; ii) the principle which should govern the grant-in-aid
of the revenues of the State out of the Consolidated Fund of India; iii) the measures needed to
augment the Consolidated Fund of State to supplement the resources of the panchayats in the
State on the basis of the recommendations made by the Finance Commission of the State; iv)
the measure needed to augment the Consolidate Fund of a State to supplement the resources
of the municipalities in a state on the basis of the recommendations made by the Finance
Commission of the State. v) any other matter referred to the Commission by the President in the
interest of sound finance. It is pertinent to mention that the Commission shall determine their
procedure and shall have powers in the performance of their functions as Parliament may by
law confer on them.
The scheme of distribution of revenues indicates like distribution of
legislative and administrative powers, a clear tendency towards centralization. The resources of
the centre are many and vast but the State resources are very meager while the responsibilities
of the States are manifold. The states has to implement all the welfare schemes.
Consequently, the States are dependent upon Centre for funds. These funds are given to the
State by the Centre on the recommendation of the Finance Commission in the form of grants.
The States are primarily responsible for the well being of the citizens.
Article 280(4) provides that the Commission shall determine its procedure and shall have
such powers as Parliament may by law confer on it. Under the Finance Commission Act,
Commission has all powers of a civil court. Whereas, the Article 291 provides that the President
shall cause every recommendation of the Finance Commission to be laid before each House of
parliament together with an explanatory memorandum as to action taken thereon. It is pertinent
to note that the idea of Finance Commission under the Indian constitution has been adopted
from Australian grant Commission but the two commissions differ in the following respects such
as i) Australian commission is continuous body but Indian finance commission sits only once
in five years, ii) Members of Australian commission are appointed for three years. The
members of the Indian commission are appointed for nearly a year and after they discharge
their assigned work they become functus officio. Iii) The Australian commission only
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recommends grants to deficit States every year but Finance Commission in India has wider
functions. Besides making recommendations as to principles which should govern grants-inaid, it also makes recommendations as to distribution of net proceeds of taxes between the
Union and States or any other mater referred to it by the President.
The importance of finance commission as a constitutional instrument capable of settling
many complicated financial problems that affect the relationship of the Union and States may be
seen from the recommendations of the last few commissions. The present system of allocation
of finance between the Union and the States is almost entire the result of the recommendations
of the finance commission. Viewing the Union and State relationship in the financial field as a
whole, one finds that it is in harmony with the general nature of the Indian Federalism, namely,
the tendency for centralization. The Union Government is financially stable and stronger than
the State Governments. This was necessary to facilitate the planner development of the
country as a whole and to check parochial and even separatist tendencies in the economic
activities within individual states. As it is, the states are bound to look up to the Union for
financial aid for most if not, all developmental projects.
It is important to note that the finance commission plays a significant and pivotal role in
adjusting inter-governmental financial relationship. As finance is the sine qua non of good
government, it will not be an exaggeration to say that the makers of the Constitution envisaged
the commission as the balance-wheel of the Indian federalism. By endeavoring to create an
equilibrium between the resources and demands at each governmental level, the commission
designed to ensure that the federal structure in India continues to function without avoidable
stress and strains. The framers of the Constitution envisaged an expert body functioning on a
non-political basis and the task of devolution of resources from the centre to the states has been
removed from the arena of political bargaining. The commission during the course of its work
holds discussion, received memoranda and hears evidence not only from the central
government and the various State Governments, but even from the private individuals and
bodies who might be interested in placing their views before it on the questions under its review.
It visits all State capitals to hold discussions with the representatives of the State Governments
before finalizing the report.
1.4.. Grants-in-Aid:
The constitution of India provides for 3 kinds of grants-in-aid.
1. Under Article 273 Grants-in-aid will be given to the State of Assam, Bihar, Orissa and West
Bengal in lieu of export duty on Jute products. Sums of such grants are prescribed by the
President with the consultation of the Finance commission. These sums shall be given to the
states for a period of ten years from the commencement of the constitution.
2. Article 275 of the Constitution of India provides for grants-in-aid of revenues of States
Assam, Bihar, Orissa, and West Bengal in lieu of assignment of any share of net proceeds of
export duty of jute or jute products. This article provides that such sums as Parliament may by
law provide shall be charted on the Consolidated Fund of India in each year as grants-in-aid of
revenue of such States as Parliament may determine to be in need of assistance. Different
sums may be fixed for different states.
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3. Under Article 282 both union and state make a grant for any public purpose, even if it relates
to a subject over which it cannot make laws. The Central Government can under this Article
make grants to hospitals or to Schools. Under Article 271 Parliament is empowered to increase
any of the duties or the taxes mentioned in Article 269 and 270 by a surcharge for the purposes
of the Union and the entire proceeds of any such surcharge shall go to the Union and form part
of the Consolidated Fund of India. According to Article 274 no bill which imposes or varies any
tax or duty in which States are interest or which varies the meaning of agricultural income or
which affects the principle of the distribution of the money to the States, or which imposes a
surcharge for the purposes of the Union, shall be introduced or moved in either House of
Parliament except on the recommendations of the President. These Grants are given not to
each State but only to such States as may be in need of assistance. The amount of money
payable to the States by way of fiscal need grants is also unconditional and the recipient states
can use this money as they like.
Whereas the American Constitution grants only enumerated taxing powers to the
Union(Art. I, s. 8(1)] while the residuary power is left to the States, the Union assumes some
control over the financial administration of the States through the system of grants-in-aid. The
question of financial help or grants from the Union to the States arises when it is felt that though
a particular subject belongs to the exclusive State Jurisdiction but has yet a nation-wide
importance but the State resources are inadequate to deal with the subject properly, so that the
Union should intervene or encourage the State activity, by granting financial aid to the
States(with or without conditions attached). Obviously, the grants are made from the Union
revenues, in the interests of national welfare.
In the United States of America, federal financial aid to the States commenced soon
after the birth of the federation, and it gathered momentum after 1913, when, as a result of the
16th Amendment, the Union(Congress) acquired plenary power to lay and collect taxes on
incomes derived in the States, freed from any obligation of any appointment among the several
States. The Union thus acquired enough funds to encourage States activities over subjects like
education, housing, relief of unemployment and the like, which belong to the reserved State
Jurisdiction.
When it comes to Australian Constitution assigns exclusive power to the Union to lay
certain taxes e.g., excise and customs duties (s.90), the rest of the field of taxation has become
concurrent by the operation of s.51(ii) read with s.109. nevertheless, a system of federal grants
to the States was envisaged by s.96 of the Constitution Act which expressly empowers the
Commonwealth Parliament to grant financial assistance to any State on such terms and
conditions as the Parliament thinks fit.
1.5 Borrowing Power:
The Central Government can borrow within such limits, if any, as may be fixed by
Parliament by Law. Under Article 292 of the Indian Constitution, the executive power of the
Union extends to borrowing upon the security of the Consolidated Fund of India within such
limits, if any as may from time to time be fixed by Parliament by Law and to the giving of the
guarantees within such limits, if any as may be so fixed. Similarly under Article 293(1) the
executive power of a State extends to borrowing with in India upon the Security of its
Consolidated Fund within its limits, if any as may from time to time be fixed by the State
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Legislation by Law and to the giving of guarantees, within such limits, if any State Legislation
may fix by law.
Since the inauguration of the era of planning, central loans to the States have been increasing
by leaps and bounce. The States complain that much of their annual taxation is consumed by
payments made to the Centre towards loan and interest thereon. The question of State
indebtedness to the Centre has become a complicated matter because of several factors such
as the number of loans are large, terms of repayment, rates of interest, vary from loan to loan,
while the bulk of the loans have been given for developmental and productive purposes, some
part of the same has also been spent on unproductive purposes.

1.6. Summary:
A federation is a compromise between the regional autonomy and national
integration. in a federation, besides the distribution of various powers, the distribution of sources
of revenue also plays a very important role. Financial relations between the Union and the
States especially in a developing economy cannot remain static for long. Adjustments will have
to be made in the light of changing pattern of the economy. The scheme of distribution of
revenues indicates, like distribution of legislative and administrative powers clearly tendency
towards centralization. It is to be noted that the tendency towards centralization is seen in the
modern times in all the federations. The problem of centre-state relations is more serious in the
sphere of distribution of finances. The Article 275 provides that such sums as Parliament may
by law provide shall be charted on the Consolidated Fund of India in each year as grants-in-aid
of revenue of such States as Parliament may determine to be in need of assistance. Different
sums may be fixed for different states.
Although the constitution devises an elaborate and flexible scheme of central state
relationship and that larger and larger central funds have been devolving on the States over
time. The fact remains that the present day financial health of the State is none too happy,
several factors have been contributed to the situation such as the States do not make adequate
tax effort, their tax collection machinery is weak, the demands of planning have cast a shadow
over their resources. The states indulge in populist but economically unsound.
1.7. Model Questions :
1. Explain the role and function of the finance commission under the Constitution of India?
2. Explain in detail about the tax sharing in between the Centre and States?
3. Explain different kinds of Grants-in-aid under the Constitution of India?
1.8. Suggested Readings:
Pande G.S., Constituional Law of India, Allahabad Law Agency, Faridabad, Haryana.
Jain M.P., Indian Constitutional Law Wadhwa Publications, New Delhi.
R.C.S. Sarkar, Union State Relations in India National Publishing House, New Delhi.
Basu Durga Das, Comparative Federalism, Prentice-Hall of India Private Ltd. New Delhi.
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