Problem Set -1

1) Arguments on behalf of Mukil:

a) Entry 86 of List-I specifically excludes the capital value of agricultural lands from
being taxed and therefore, the centre does not possess legislative competence to
tax the same.
b) In any event, Entry 86 of List-I also specifically excludes a Hindu Undivided
Family (HUF) from within its purview and subjects capital value of all assets
excluding agricultural land of individuals and companies only to taxation by the
centre.

a) To prove that the centre does not possess legislative competence to tax assets
including agricultural land worth more than Rs.10 lakhs by 1%, Mukil should argue
that Entry 86 of List-I excludes agricultural land, whose capital value cannot be taxed
by the centre. Since, taxing on agricultural land is not subject to any of the entries
under List-I, Mukil can point to corresponding Entry-49 of List- I which permits
states to tax land and buildings. Only states can tax land and buildings including
agricultural land.

- Notwithstanding centre’s argument that the ‘Pith and Substance’ of the tax
measure falls within Entry 86, List-I and not Entry-49, List-II as the tax is on the
capital value of the assets and not on the asset itself, the explicit exclusion of
agricultural land under Entry-86 indicates that the intention of the framers was to
not let the centre tax agricultural land.

b) In any event, HUF’s are not possible assesses in Entry-86 of List-I and the term
‘individuals’ did not refer to HUF’s. In income tax legislations, there has always been
a distinction maintained between individuals and HUF and that, entry-86 must be
construed narrowly. Therefore, the centre cannot tax agricultural lands of HUF’s.
Arguments on behalf of the state:
a) Entry 49 of List-II allows states to tax agricultural lands and buildings, while entry-
86, List-I allows centre to tax the capital value of all assets. There is a difference
between them and in the present case, the centre is taxing only the capital value of
agricultural lands and not the agricultural lands.

- Notwithstanding the above argument, the centre can also submit that, in cases
where, both, lists-I and II do not refer explicitly to a particular entry, the centre
can exercise jurisdiction over such an item by virtue of entry 97 which vests in
parliament the power to legislate on any matter not enumerated under lists I and
II.
- Further, parliament can exercise residuary powers vested under Art.248(2) r/w
entry 97 to legislate on any matter not enumerated in list II or III.
 - The state can use the precedent established by a 7-judge bench in the case of
Dhillon v. Union of India1, wherein the Supreme Court held that parliament has
residuary powers u/Art.248(2) r/w entry 97 of List – I to tax any income not
explicitly falling under list – I or II.
b) The centre can rely on the decision of a 5-judge bench of the SC in the case of Seth
Banarsi Das Etc vs Wealth Tax Officer2 wherein the court held that the term
“individuals” mentioned in entry-86 of list-I includes HUF’s. Thus, HUF’s are subject
to payment of taxes.

2)

3) MMP’s contentions

- The mobile phone app primarily provides a service and can only be taxed u/entry
97 of the Union list. The state does not possess the legislative competence to tax
the application.
- Even though the app has 2 aspects : a service and an entertainment component, the
Pith and Substance of the transaction is within entry 97 of list-I, i.e. service
component. MMP can refer to decided cases on the Doctrine of Pith and
Substance like F.N.Balsara v. Union of India3.
However, MMP will not succeed in his claims as the two aspects of the transaction can be
taxed by the centre and the state respectively. The entertainment component of the transaction
can be taxed by the state u/entry 62 of List-II and the service aspect of the transaction can be
taxed by the centre u/entry 97 of List-I. The state can refer to the case of Tata sky v. State of
Tamil Nadu, wherein the Madras High Court upheld the ‘aspect theory’ and the right of the
state of Tamil Nadu to tax the entertainment element of DTH services.

1
1972 AIR 1061, 1972 SCR (2) 33
2
1965 AIR 1387, 1965 SCR (2) 355
3
[2013] 62 VST 69