RESIDUARY POWER AND WEALTH TAX ON AGRICULTURAL
PROPERTY—A NOTE ON UNION OF INDIA v. H.S. DHILLON
THE MAJORITY judgment of the Supreme Court in Union of India
v. H.S. Dhillon1 is of major importance for Indian federalism as it determines the controversy about the legislative relationship between the union
and the states in the all-important area of taxation of capital value
of agricultural assets. The significance of the case lies in the fact that the
constitutional scheme gives a dominant role to the states in matters of taxation
of agricultural income and property, 2 but in this case a taxation law of the
union on agricultural property was upheld.
The facts were : the Wealth Tax Act was originally enacted in 1957
by Parliament and it imposed a tax on the capital value of net wealth on
the relevant valuation date of every individual, Hindu undivided family
and company. The Act defined 'net wealth' to mean the amount by which
the aggregate value of all the assets of the assessee is in excess of the aggregate
value of all the debts of the assessee on the valuation date. Though the
Act brought within its purview all movable and immovable assets, yet it
excluded agricultural land. However, the Act was amended by the Finance
Act of 1969 to include agricultural land for purposes of wealth tax.
The validity of the amendment was challenged by Shri Dhillon, a
landlord, in the High Court of Punjab and Haryana mainly on two grounds :
(/) that wealth tax on agricultural land could be imposed under entry 49,
list II by the states and not by the union; and (//') that even if that was not
so Parliament had no competence to enact an Act imposing wealth tax on
agricultural land either under entry 86 of list I and/or under its residuary
powers. By a majority of four to one the High Court declared that the
Act, in so far as it included the capital value of agricultural land for the
purpose of computing net wealth, was beyond Parliament's legislative
competence and ultra vires.3
On appeal the Supreme Court, by a majority of four to three, 4 upheld
1. (1971) 2 S.C.C..779.
2. See the following entries in list II :
Entry 18 : Land, that is to say, rights in or over land, land tenures including
the relation of landlord and tenant, and the collection of rents;
transfer and alienation of agricultural land; land improvement and
agricultural loans; colonization.
Entry 46 : Taxes on agricultural income.
Entry 47 : Duties in respect of succession to agricultural land.
Entry 48 : Estate duty in respect of agricultural land.
Entry 49 : Taxes on lands and buildings.
3. State v. Union of India (FB), A.I.R. 1971 Punj. and Har. 155.
4. Mr. Chief Justice Sikri delivered the majority judgement on behalf of himself,
Mr. Justice S.C. Roy and Mr. Justice Palekar. Mr. Justice Mitter delivered the
concurring opinion. The dissenting opinion was written by Mr. Justice Shelat on behalf
Of himself, Mr. Justice A.N. Ray and Mr. Justice Dua.
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RESIDUARY POWER AND WEALTH TAX ON AGRICUL. PROPERTY
81
the constitutionality of the Act. The main issues before the court were :
(/) whether the instant legislation fell under entry 49 of the state list or entry
86 of the union list5, namely, the identification of the subject matter of the
Act in order to specify the legislative entries of the lists under which it would
fall. If it did not fall under any of these entries, then clearly Parliament
had the residuary power to impose the tax in question; (//) assuming that
the Act fell under entry 86, whether the words "exclusive of agricultural
land" in the entry constituted a positive prohibition on Parliament's legislative competence to levy wealth tax on agricultural land so as to take it
beyond the residuary jurisdiction of Parliament.
Analysis of the subject matter of legislation in order to identify the sphere
of legislative jurisdiction it would fall under
The constitutionality of the Wealth Tax Act as originally enacted was
challenged in several cases before the High Courts and the Supreme Court.
A perusal of the High Court decisions6 reveals that the main question raised
therein was whether it was competent for Parliament to enact a law which
would levy a tax on Hindu undivided families when entry 86 referred to the
imposition of tax on 'individuals' and 'companies' only. In other words,
the issue had been whether the word 'individuals' comprehended Hindu
undivided families within its compass. The matter came to the Supreme
Court for the first time in Banarasi Dassv. Wealth Tax Officer1 in which
the Supreme Court agreeing with the High Court decisions held that
'individuals' in entry 86 included Hindu undivided families. It may be
pointed out that in this case the question whether a tax on net wealth could
be levied under entry 86 was not in issue. It was assumed that Parliament
enacted the Wealth Tax Act, 1957, in terms of entry 86, and this assumption
found specific mention by Mr. Justice Shah (as he then was )in the subsequent case of Sudhir Chandra Nawn v. Wealth Tax Officer.8 In this
case the petitioner did not contend that the tax on net wealth was not leviable
under entry 86. The argument, inter alia, was that in so far as the expression
'net wealth' included non-agricultural lands and buildings of an assessee,
it invaded the field allotted to states under entry 49. This contention led
the court to examine the ambit of taxes under entry 86 of list I and entry
5. The Constitution of India, seventh schedule, entry 49 of list II : Taxes on lands
and buildings : entry 86 of list I: Taxes on the capital value of the assets, exclusive of
agricultural land, of individuals and companies; taxes on the capital of companies.
6. See Mahavirprasad Badridas v. Yagnik, Second Wealth Tax Officer, 31 I.T.R.
191; N.V. Subramanian v. Wealth Tax Officer, 40 I.T.R. 567; P. Ramabhadra Raju v.
Union of India, 45 I.T.R. 118; C. K. Mammad Keyiw. Wealth Tax Officer, 44 I.T.R.
277; Jugal Kishore \. Wealth Tax Officer, 44 I.T.R. 94; Sarjerao Appasaheb Shitole v.
Wealth Tax Officer, 52 I.T.R. 372; Raja Sir M.A. Muthiah Chettiar v. -Wealth TOY
Officer, 53 I.T.R. 504.
7. A.LR. 1965 S.C. 1387.
8. A,LR. 1969 S.C. 59-.
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49 of list II.
stated that :
In analyzing the nature of a tax under entry 86 the court
[IJtis not imposed on the components of the assets of the assessee:
it is imposed on the total assets which the assessee owns, and
in determining the net wealth not only the encumbrances
specifically charged against any item of asset, but the general
liability of the assessee to pay his debts and to discharge his
lawful obligations have to be taken into account.9
The court added that the tax under entry 49 of list II
contemplates the levy of tax on lands and buildings or both
as units. It is normally not concerned with the division of
interest or ownership in the units of lands or buildings which
are brought to tax. Tax on lands and buildings is directly
imposed on lands and buildings, and bears a definite relation
to it.10
Thus the concept of a tax under entry 86 and one under entry 49 was defined
and it was held that both cover different fields and there was no conflict
between them. In the subsequent decisions of Assistant Commissioner
v Buckingham and Carnatic Co. Ltd.,11 and Sri Prithvi Cotton Mills Ltd.
v. Broach Municipality12 which involved the validity of state statutes, the
above view was reiterated by the court. Therefore, in none of the previous
cases the issue squarely arose whether a tax on net wealth of individuals
(as distinguished from capital value of assets) could be levied under entry
86 and whether it could include agricultural assets.
Mr. Chief Justice Sikri in the instant case examined the question
whether the Wealth Tax Act fell within entry 86, list I and concluded that
there was a difference between net wealth tax and a tax that could be levied
under entry 86. The difference in his view was that in ascertaining the capital
value of assets under entry 86, it was not obligatory for Parliament to provide
for deduction of debits, though he agreed that aggregation of assets was
necessary. Referring to authorities on the concept of taxation on net
wealth, he observed that the essential element in a true wealth tax was to
provide for reduction of general liabilities from the total assets of
an individual. Consequently, in pith and substance, the impugned law did
not fall under entry 86 but under entry 97 of list I (residuary entry). Further,
the Chief Justice pertinently observed that assuming that the Wealth Tax
Act, as originally enacted, came within the purview of entry 86, the residuary
clause could still be invoked to justify the wealth tax on agricultural land :
[TJhere is nothing in the Constitution to prevent Parliament from
combiningits powers under Entry 86, List I with its powers under
9
10.
11.
12.
Id. at 61.
Ibid.
(1969) 2 S.C.C. 55.
(1969) 2 S.C.C. 283.
~~"
1972] RESIDUARY POWER AND WEALTH TAX ON AGRICUL. PROPERTY 83
Entry 97, List I. There is no principle that we know of which
debars Parliament from relying on the powers under specified
Entries 1 to 96, List I and supplement them with the powers
under Entry 97, List I and Article 2 4 8 . . . . 1 3
Mr. Justice Mitter decided the appeal on the point that the subject
matter of Wealth Tax Act including or excluding agricultural land was not
covered by entry 86 of list I but by entry 97. He was of the view that capital
value of assets did not mean the same thing as net wealth as defined in the
Wealth Tax Act. While examining the concept of 'capital value of assets',
he pointed out that this expression was used in the English Law of Rating
and found its way in the Government of India Act, 1935, (entry 55, list I)
and in the Constitution (entry 86, list I). Agreeing with the meaning of
the expression under the Law of Rating, he concluded that it meant
the aggregate value of the assets whichawilling purchaser would
offer a willing seller for the property in its condition at the time
of the transaction.
In other words, it would mean the market value of the assets minus encumbrances charged thereon but not any other liability. Similar were the
judicial observations on the meaning of the expression by the Bombay
High Court in Sir Byramjee Jeejeebhoy v. Province of Bombayu
and in
Municipal Corporation v. Gordhandas15 while examining the constitutional
validity of state statutes under the Government of India Act, 1935.
Consequently it may be stated that there is difference in the concept of tax
on the capital value of assets and tax on the net wealth. The 'net wealth*
is arrived at after deducting a person's general liabilities from the totality
of his assets; whereas capital value of one's assets is the market value of
assets less the charges the assets are subject to. Therefore, the Wealth
Tax Act would not, in Mr. Justice Mitter's opinion, come under entry 86
of list I. Further, he made a graphic analysis of the judicial decisions on
the subject to show that the courts had merely assumed that the impugned
legislation fell under entry 86 of list I and that no analysis of the nature of
the subject matter of legislation was made.
However, Mr. Justice Shelat on behalf of the minority maintained
that the Supreme Court had held in the previous cases that the Wealth Tax
Act came within the purview of entry 86 of list I and since the entry prohibited
Parliament from legislating with reference to agricultural land, Parliament
had no competence to enact the impugned legislation. Further he was of
the view that the states could under entry 49 levy a tax on the capital value
of agricultural land. This view, it may be submitted, runs counter to the
established judicial opinion that any tax under entry 49 should consider land
13. Supra note 1 at 808.
14. A.I.R. 1940 Bom. 65 (F.B.)
15. A.I.R. 1954 Bom. 188.
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and buildings as units of taxation and that no aggregation is possible.
Further, the states could levy tax only in respect of lands and buildings
situate within their territorial jurisdiction. Since a tax under entry 49 is
directly upon lands and buildings, it is difficult to conceive of states being
competent to levy wealth tax on an individual's totality of assets including
those lying outside the states.
Extent of union's residuary powers
The second issue considered by the court was the extent of union's
residuary powers. The division of legislative powers between the union
and state legislatures is enshrined in article 246 of the Constitution. It
distributes the subject matter of legislation in three lists enumerated in the
seventh schedule to the Constitution and specifies the legislative body
competent to deal with any such subject matter. The three lists are elaborately worded and the framers of the Constitution have attempted to make
the entries in one list exclusive of those in the other lists. However, due
to "the imperfections of human expression and the fallibility of legal
draftsmanship" 16 some conflict or overlapping between entries in the different
lists is inevitable. To deal with such contingencies, the Constitution in
article 246 has provided a scheme of priority of the union list (list I) over
the state and concurrent lists (lists II and III). 17 Further, the Constitution
makers in article 248 provided for residuary powers of legislation to Parliament. This article reads :
(1) Parliament has exclusive power to make any law with respect
to any matter not enumerated in the Concurrent List or State
List.
(2) Such power shall include the power of making any law imposing
a tax not mentioned in either of those Lists.
The union list also contains a residuary entry, entry 97 on the following
lines :
Any other matter not enumerated in List II or List III including any
tax not mentioned in either of those Lists.
Article 248 read with entry 97 of list I confers residuary powers of
legislation and taxation on Parliament. The scope of Parliament's residuary
powers had been the subject of judicial interpretation in earlier cases. In
Jaora Sugar Mills v. State ofM.P.18 Hari Krishna v. Union of India19 and in
Second G. T. O. Mangalore v. D. H. Nazareth,20 the Supreme Court
16. In re C.P. Motor Spirit Act, A.L.R. 1939 F.C.I, at 8, Governor General in
Council v. Madras Province, A.I.R. 1943 F.C. 11; State of Bombay v. F.N. Balsara,
A.I.R. 1951 S.C. 318.
17. The Constitution of India, art. 246 (1), (2) and (3),
18. A.LR. 1966 S.C. 416.
19. A.I.R. 1966 S.C. 619.
20. (1970) 1 S.C.C. 749.
1972]
RESIDUARY POWUR AND WEALTH TAX ON AGRtCUL. PROPERTY 85
had unequivocally held that where the subject matter of legislation did not
fall within the state list, concurrent list and the enumerated entries in the
union list, it was covered by the residuary jurisdiction of Parliament.
Thus in all these decisions residuary power was availed of when the
subject matters of legislation were not enumerated in the three lists. However, in the Dhillon case the question was whether a topic of legislation
mentioned by way of exclusion in an entry in the union list would fall within
the compass of residuary powers of Parliament. The Wealth Tax Act,
1957, as amended in 1969, was seemingly enacted under entry 86 of list I.
The respondents had argued that the words 'exclusive of agricultural land'
were words of prohibition and prohibited Parliament from including capital
value of agricultural land in any law levying tax on capital value of assets.
A matter specifically excluded in the union list could not fall within the
words 'any other matter' in entry 97 of the same list.
Mr. Chief Justice Sikri and Mr. Justice Mitter refused to give such
a resticted interpretation to the scope of the residuary power. Mr. Chief
Justice Sikri opined that the Constitution makers had not withheld certain
legislative powers from the legislative competence of the legislatures in
India either legislating singly or concurrently. He held that the words
'any other matter' in entry 97 of list I referred to matters contained in each
of entries I to 96 and thus gave additional powers. The test to determine
the scope of residuary powers was to examine whether the matter sought
to be legislated on was included in list II or in list III. No question had
to be asked in respect of list I. If it did not fall within list II or list III,
then it followed that Parliament had requisite legislative competence.
In the words of the Chief Justice :
If the argument of the respondent is accepted, Article 248 would have
to be redrafted as follows : 'Parliament has exclusive power to make
any law with respect to any matter not mentioned in the Concurrent
List or State List, provided it has not been mentioned by way of
exclusion in any entry in List I.21
Similar were the observations of Mr. Justice Mitter :
Under the express words of clause (1) of Article 248, one has only
to consider whether the subject matter of legislation is comprised in
List II or List III; it if is not, Parliament is competent to legislate on it
irrespective of the inclusion of akindred subject in ListI orthe specified
limits of such subject in this Li St.... Although read by itself Entry 97 may
seem to suggest that the expression 'any other matter' has reference
to the other entries in List I, Article 248(1) makes it clear beyond doubt
that such matters are those which are not covered by entries in List II
or List III.22
21. Supra nole 1 at 792.
22. Id. at 844 and 859.
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Mr. Justice Shelat, however, on behalf of the minority disagreed
with the view that Parliament's power to make law with regard to the
capital value of agricultural land was to be found in the residuary powers.
He was of the view that the purpose of residuary power was to enable
legislation only on matters unforeseen or not contemplated at the time of
framing of the legislative lists. The scheme of division of legislative powers
between the union and the states revealed a calculated policy on the part
of Constitution makers to confer powers on the states in respect of agricultural
properties and the power conferred on Parliament under entry 86 was
restricted in scope by the words 'exclusive of agricultural land'. Consequently the power that was restricted under one entry in the union list
could not be granted to Parliament under the residuary entry. Otherwise
it would amount to nullifying the exclusion which could not legitimately
be attributed to the framers. The minority judges were clearly of the opinion
that residuary power could be resorted to only in respect of a field of legislation not found in any one of the three lists. In the words of Mr. Justice
Shelat :
Once a topic or a field of legislation is enumerated and dealt with
in any one of the entries in one of the Lists, whether the topic is in
its entirety or restricted, there is no question of the residuary provision being resorted to on the ground that it operates on the remainder.
Such a construction would either nullify the intention to confer
power only on the partial field of the topic of legislation in question
or set at naught the delicate system of distribution of power effected
through the three elaborately worded Lists.23
Since this was a case involving the determination of limits of the union
and state legislative powers under the Constitution of India, Mr. Chief
Justice Sikri as well as Mr. Justice Shelat expressed views on the applicability
of the rules of interpretation of the Canadian Constitution (the British
North America Act, 1867) to the distribution of legislative powers under the
Indian Constitution. The Chief Justice pointed out that the scheme of
distribution of legislative power between the dominion and the provinces
in Canada was essentially the same as under Indian Constitution and the
tests evolved in Canada could appropriately be applied in India also. The
test was that if the central law was challenged as being beyond the jurisdiction
of Parliament, it was sufficient to inquire if it was a law with respect to matters
or taxes enumerated in list II or list III. If it was not, no further question
arose, which meant that in that case Parliament would have full power to
legislate on such subjects. By this method of enquiry, he was not depriving
the states of their legitimate sphere of jurisdiction. The states had full
competence in respect of entries in list II, and subject to legislation by Parliament on matters in list III. On the other hand Mr. Justice Shelat felt that
there was no similarity either in the content or the scheme of distribution of
23. Id. at 823.
1972
RESIDUARY POWER AND WEALTH TAX ON AGRICUL. PROPERTY 87
the Canadian Constitution and the Constitution of India. Mr. Justice Mitter,
though was of the view that the scheme of distribution of legislative powers
in the Constitution of India had a 'close parallel' to that in the Canadian
Constitution, did not discuss the points of similarity to arrive at the decision
in the instant case.
Both the Chief Justice as well as Mr. Justice Shelat relied on the
Constituent Assembly Debates to prove their point as regards the scope
of Parliament's residuary powers. Reference was also made to the reports
of the Union Powers Committee and the Expert Committee on Financial
Provisions.
General observations
The majority view on the scope of residuary powers of Parliament,
it may be submitted, is in consonance with the plain language of the provisions of the Constitution and the intent of the framers of the Constitution,
and typifies the broad and liberal interpretation of provisions concerning
distribution of legislative powers in favour of the centre. The Constitution
of India has established a highly specialized kind of federalism that both
in its executive and legislative terms, it is deliberately weighted in favour of
Parliament and central government and in particular it reveals a scheme of
legislative jurisdiction in which Parliament is to play the dominant part.
Apart from this fact, there is a greater logical consistency in the opinions of
the Chief Justice and Mr. Justice Mitter than in the opinion of Mr. Justice
Shelat. The text of article 248 is explicit in language in that 'any matter
not enumerated in the Concurrent List or State List' will come under the
residuary jurisdiction of Parliament indicating thereby that even if a matter
is excluded by enumeration in list I, it will come under the residuary power.
On the other hand, the minority emphaiszed the word 'other' in the words
'any other matter' to mean that the residuary power could be invoked
only in any matter other than those specified (whether by exclusion or inclusion) in list I, and matters not enumerated in the concurrent list or state
list. Moreover, the words 'any other matter' in entry 97 of list I
cannot but have the same meaning as attributed to similar words in article
248. It has been repeatedly held that legislative entries do not confer
powers, they merely demarcate the fields of competence.24 The substantive
powers of legislation are to be found in the article itself. The plain meaning
of article 248 gets added support in the intent of the framers of the Constitu24. See Mr. Justice Ramaswamy's observations in Harakchand v. Union of India,
A.I.R. 1970 S.C. 1453 at 1458 :
Before constring these entries it is useful to notice some of the well settled
rules of interpretation laid down by the Federal Court and by this Court
in the matter of construing the entries. The power to legislate is given to the
appropriate legislatures by Article 246 of the Constitution. The entries
in the three Lists are only legislative heads or fields of legislation; they demarcate the area over which the appropriate legislatures can operate.
See also Baldeo Singh v. Commr. of Income Tax, A.I.R. 1961. S.C. 736 ; Balaji
v. I.T.O., A.I.R. 1962 S.C. 123.
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tion. The debates in the Constituent Assembly on the scope of residuary
powers reinforce the majority's construction of article 248. Replying to
members on the necessity of having an entry on the pattern of entry 97 of
list I, Dr. B.R. Ambedkar said that the purpose of entry 91 of the Draft
Constitution (which corresponds to entry 97) was to define the scope of
list I which would have been served either by the present entry or by adding
an entry such as 'anything not included in List II or III shall be deemed to
fall in List I\ The elaborate enumeration of entries in the union list,
he added, was only with a view to particularise the residuary powers in
order to allay the fears of the provinces about the scope of union powers.26
Further, it cannot be the intention of the Constitution makers to
create a vacuum in the Constitution of a sovereign democratic republic
in certain matters as those in which neither the union nor the states will
have power to legislate. The majority having held that the Wealth Tax
Act could not legally come within the jurisdiction of the states under entry
49 of state list, reasoned to avoid the possible occurrence of a 'power
vacuum' for the union and state legislatures over the subject matter of wealth
tax on agricultural assets. Every field of legislation is to be found either with
Parliament or state legislatures.
Apart from the matter of dialectics, the majority judgments reflect
the court's awareness of the political, economic and social connotations
of the issues involved. The majority judges rightly felt that the legislative
issues which called for the exercise of Parliament's legislative powers
were not based on mere artificial presuppositions but on the existence of
facts and circumstances which gave rise to pressure for legislation. The
main objective of wealth tax legislation is to gradually eliminate large fortunes
and the current degree of inequality of wealth distribution. The reluctance
of the states to tax the agriculture sector due to political reasons induced
Parliament to embark upon the programme of levying wealth tax on
agricultural assets and this bold experiment needed judicial reinforcement
which the majority gave by this decision. The immediate effect of the
decision is to provide a fruitful source of revenue to the union exchequer
and the ultimate one is to reduce inequality of wealth to some extent in the
rural areas.
The very nature of judicial review of legislation as applied to the
general terms of a constitution tends to confer a wide discretion on the
courts and it is to be exercised to expand the connotation of words to make
them encompass developments unforeseen by its authors. This is the
inherent problem in all constitutional interpretation, that of ascribing
new application to old words to fit the constitution to the changing conditions
of social life. A court interpreting the constitution establishes community
policies in the broader sense. Often the problems faced by the judges in a
constitutional case are questions of policy relating to political, economic
and social issues. Consequently they must necessarily step on political,
25. 9 C.A.D. 856-57.
1972] RESIDUARY POWER AND WEALTH TAX ON AGRICUL. PROPERTY 80
economic and social issues of the day. The solution of such problems
requires an attitude on the part of judges not just to rely on the text of the
constitution but also on other extra-legal materials to give meaning to the
text. This should be the approach in matters of constitutional litigation
because constitution should be kept fluid through constitutional interpretation. After all, constitutions which are the yardstick or grundnorm for
other legislation should not be interpreted "in vacuo but as living instruments of government".26
Alice Jacob*
26. Vincent C. MacDonald, The Privy Council and the Canadian Constitution,
29 Can. Bar. Rev. 1021 at 1030 (1951); See generally McWhinney, Edward, Judicial
Review (4th ed. 1969).
* LL.M., J.S.D. (Yale) Research Professor, Indian Law Institute.