Legal Notes by Arvind Datar: Doctrine of Inter-Governmental Immunity

The doctrine of inter-governmental immunity originated in the observations of  Chief Justice Marshall in McCullough v. Maryland 4 L Ed 579 (1819) which levied stamp tax on bank loans issued by the Baltimore branch of the Bank of United States, a federal bank. It was held that States could not tax or control a federal instrumentality. Such federal instrumentality covered the interest of all citizens and was intended for the benefit of everyone. It was further held that if the power of the States to impose a tax was recognized in principle, it would be difficult for the federal courts to take a decision on the reasonableness of such tax.

The question then arose is whether the immunity which was granted in the context of taxation to Federal bodies  would apply to other branches of law as well? Conversely, were the States also entitled to immunity from Federal regulation?

This doctrine was sought to be invoked in State of West Bengal v. Union of India AIR 1963 SC 1241. This was a suit filed by the State of West Bengal against the Union of India under Article 131. As a plaintiff, the State of West Bengal contended that Parliament did not have the legislative competence to compulsorily acquire land and mineral rights which belonged to the State of West Bengal. It was contended that the power of Parliament to acquire property had an implied limitation and could not extend to acquire lands or rights within another State on the ground that the States were sovereign. Interestingly, it was argued that if Parliament could acquire coal mines, it could acquire other Government buildings in the State, including the Secretariat, i.e. the Writer’s Building. The Supreme Court held that if this was done, it would not amount to using the power of acquisition but abusing the power of acquisition. However, the fact that an enactment may be abused was not a ground to decide its validity.   

The majority rejected the plea of sovereignty and held that the doctrine of inter-governmental immunity had been practically given up in the United States. Further, the court  referred to two decisions of the Privy Council which had  held that this doctrine was not applicable to the Canadian and Australian Constitutions. The extent of the power  of Parliament or the Dominion legislature depended on the express provisions that distributed legislative power under a particular Constitution. [See Toronto v. Lambe  (1887) 12 A.C. 575 and Webb v. Outrim  (1907) A.C. 81].

This doctrine was once again referred to before a nine-judge bench in New Delhi Municipal Council v. State of Punjab (1997) 7 SCC 339. The ruling in this case -the NDMC case- was by a narrow margin of 5:4. In the minority decision, Ahmadi C.J. once again reiterated that the doctrine of inter-governmental immunity had been substantially diluted even in the United States. It noted that after McCullogh v. Maryland  4 L Ed 579 (1819), the theory of inter-governmental immunity was made reciprocal and the Federal government was also bound by the immunity of State instrumentalities. [See Collector v. Day 78 US 122 (1871)]. The US Supreme Court then made a distinction between strictly governmental functions and those which were commercial in nature; the former were immune from taxation  but business activities of the States did not enjoy any immunity.   Ahmadi C.J. noted that this had created fresh problems and there was a call for a complete re-examination of this doctrine in the United States. 

In the Constituent Assembly, it was decided not to rely on this doctrine but to specifically provide the limits of  inter-governmental immunity under Articles 285 and 289. Thus, under  Article 285,  the property of the Union is exempt from all taxes imposed by any State Government, unless Parliament so permits by law.  But, conversely, the States do not enjoy complete exemption from Union taxation. Under Article 289, there is a three-tier exemption. While clause (1) exempts the property and income of a State from Union taxation, clause (2) permits taxation of  trade or business activities carried on either by the State itself or on behalf of the State. Parliament can also tax property which is used or occupied for trade or business. Clause (3) enables Parliament to create an exemption for trade or business which is incidental to the ordinary functions of  Government.

In the NDMC case, various State Governments had properties in New Delhi which was then a Union Territory. It was held that property tax levied  in Delhi amounted to Union taxation under Article 289(1). Several State Governments had lands or buildings in Delhi which had been  let out. The  majority held that if any building was used for trade or business, it would be subject to property tax i.e. Union taxation. In cases where the property was used for the purposes of the State Government, it would not be taxed.  

In the end, States enjoy limited immunity from Union taxation as set out in Article 289 but the Union enjoys complete immunity. The doctrine of  inter-governmental immunity has no application under our constitution.

Arvind P Datar is a Senior Advocate of the Supreme Court.