'Income' tax on transfers of Immovable Property: Part III - The Scope of the Residuary Entry

(Part I of this series is available here; Part II is available here)

The next question arises as to whether the tax can be justified under Entry 97, i.e. the residuary entry. It is an arguable proposition that a tax purportedly on income can only be justified under the entry pertaining to income. The contention can be taken, that if Parliament seeks to tax ‘income’ – and in the present case, this is manifestly the intention of Parliament – then the only relevant entry is the entry pertaining to income. What is sought to be justified as an income tax – if it is not actually a tax on income under Entry 82 – cannot be justified under the residuary entry. There is faint obiter in Kesavananda (Kesavananda Bharti v. State of Kerala, AIR 1973 SC 1461) supporting this proposition. The logic behind this is that the residuary entry was intended by the framers to be used in cases where the proposed law was on a subject-matter which could not be contemplated by the framers. Hence, the residuary entry must be given a narrow meaning. Further, as taxes on income was clearly a matter which was in the contemplation of the framers, what purports to be a tax on income must be assessed only vis-à-vis the income entry and not the residuary entry.

This line of argument can be strongly countered by other cases of the Supreme Court which allow for so-called ‘rag-bag’ legislations. For instance, the levy of excise duty on processing, bleaching etc. was challenged on the ground that this did not constitute ‘manufacture’ and that the law was therefore ultra vires Entry 84 on List I (which gives the competence to Parliament to levy excise duty). The Court held that the law would in any event be valid under Entry 97 since a piece of legislation can be defended with reference to more than one legislative Entry (Empire Industries, (1985) 3 SCC 314).

More recent decisions of the Supreme Court however seem to provide ground for arguing that if a tax is purported to be enacted under a specific entry, it must be tested on the touchstone of the essential elements of that entry itself. Thus, it has been held that the existence of ‘service’ is essential to the levy of service tax as a matter of legislative competence. This proposition draws some support from the decision in of the Supreme Court (Kalyana Mandapam (2004) 5 SCC 632). In that case, the question was whether the application of the Finance Act, 1994 to “mandap-keepers” was valid. The Court upheld the provision, but only because it found on facts that there was in fact the provision of service by mandap-keepers, such as lighting arrangements, furniture.

It therefore appears possible to argue that once a tax is purportedly of a specific nature under an Entry, then the competence of the legislature to enact that particular tax is to be assessed by reference to whether the elements of the directly relevant Entry are satisfied.

In the present case, the amendment proposes to widen the ambit of ‘income’ chargeable to tax – the amended provision specifically states that it seeks to charge income-tax. The directly relevant entry is therefore the one related to levy of income tax itself. The principles governing that Entry therefore cannot be deviated from. Accordingly, as what is sought to be taxed is not income, the legislation which purports to tax that as income must fall.

In any event, even assuming that Entry 97 can be relied upon counter to the arguments proposed thus far, it still needs to be noted that a law under Entry 97 will be constitutionally valid only if it is not one dealing with subject-matter under an Entry in another List. Hence in assessing whether the proposed levy falls under the residuary Entry 97, it must be seen whether the legislation can be justified under any entry either in the State List – List II – or the Concurrent List – List III. If it can be so justified, then recourse to Entry 97 would not be permissible. The next couple of posts will discuss this aspect.