Holding

The explanation to Section 65(19) is a substantive amendment, not a clarificatory one, and therefore has no retrospective effect; service tax, if any, is payable only from May 2008.

Summary

The case concerned whether the sale, promotion and marketing of state‑run lottery tickets by M/s Martin Lottery Agencies Ltd. attracted service tax under Section 65(19) of the Finance Act, 1994. The High Court had held that lottery tickets are not "goods" and that the distributor’s activities were merely promotion, not a taxable service. On appeal, the Supreme Court examined the explanation added by the Finance Act, 2008 to Section 65(19) and held that the explanation introduced a substantive change rather than a mere clarification, and therefore could not have retrospective effect. Consequently, any service tax liability, if at all, would arise only from May 2008 and not for the period before that. The appeal was dismissed and the High Court’s order upheld.

Issues considered

Whether sale, promotion and marketing of lottery tickets constitute a "business auxiliary service" taxable under Section 65(19) of the Finance Act, 1994.
Whether lottery tickets qualify as "goods" within the meaning of the Sale of Goods Act, 1930.
Whether the explanation inserted by the Finance Act, 2008 to Section 65(19) is a clarificatory/declaratory amendment and whether it has retrospective effect.
Whether the State’s organization of lotteries can be characterised as a service for tax purposes.

Legislation cited

Constitution of Indias. Article 19(6), s. Article 245, s. Article 246, s. Article 268A, s. Article 298
Finance Act, 1994s. 65(105), s. 65(19), s. 65(50), s. 65A, s. 66, s. 68
Sale of Goods Act, 1930s. 2(7)

Subjects

service taxlotterybusiness auxiliary serviceexplanationretrospective effectstatutory interpretationres extra commerciumSale of Goods ActConstitution of Indiataxation

Judgment

(2009] 7 S.C.R. 946

A UNION OF INDIA & ORS.
V.
M/S MARTIN LOTTERY AGENCIES LTD.
Civil Appeal No. 3239 of 2009

B
MAY 5, 2009
(S.B. SINHA AND CYRIAC JOSEPH, JJ.)
Finance Act, 1994:
-
Section 65( 105) - Service Tax - Whether sale, promotion
c and marketing of lottery tickets would be exigible to Service
Tax - On a writ petition, High Court held in the negative - On
appeal, Held: By reason of explanation a substantive law may
be introduced - But it will have no retrospective effect - Thus,
Service Tax, if any, would be payable with effect from May,
2008 and not with retrospective effect.
D
Interpretation of Statutes:
Speech of Finance Minister in Parliament - Could be
taken to be a valid tool for interpretation of a statute.
E Words and Phrases:
'Service' - Meaning of.
In this appeal against the judgment of the Sikkim
High Court, the question involved was as to whether sale,
F promotion and marketing of lottery tickets would be
exigible to Service Tax within the meaning of the
provisions of Section 65(105) of the Finance Act, 1994. ...
Dismissing the appeal, the Court

G HELD: 1.1 Organizing lottery by the State is tolerated
being an economic activity on its part so as to enable it to
raise revenue. Raising of revenue by the State, by itself .'
cannot amount to rendition of any service. It may be true
that for the purpose of invoking the provisions of taxing
•
H 946
UNION OF INDIA & ORS. V. 947
M/S MARTIN LOTTERY AGENCIES LTD.

statute, the morality aspect may not be of much A
consequence but such a question assumes significance
for the purpose of ascertaining as to whether the same
.··amounts to rendition of service within the meaning of
clause (19) of Section 65 of the Finance Act, 1994. [Pata
16] [962-C-E] B
1.2 Service provided in respect of the matters
envisaged under clause (19) of Section 65 of the Act must
be construed strictly. Before a tax is found to be leviable,
it must come within the domain of legitimate business and/
or trade. The doctrine of res extra Cominercium was c
invoked in the United States of America where keeping in
view the nature of right conferred on its citizens and the
concept of imposition of reasonable restrictions thereon
being absent, it was held that gambling should be frowned ,
upon being opposed to constitutional jurisprudence.
0
... While borrowing the said principle in the Indian context,
however, it must be borne in mind that Constitution of India
envisages reasonable restrictions in respect of almost all
the fundamental rights of the citizens. No citizen has an
absolute fundamental right. Whereas the same principle
may apply in Australia but it may not apply to the European E
Countries where gambling and even sale of narcotic drugs
subject to licensing provisions, if any, is permissible. [Para
18] [963-B-E]
1.3 Conceptually business may be carried out in
respect of a property which is capable of being owned as F
contrasted to those which cannot be. Having regard to
the changing concept of the right of property, which
includes all types of properties capable of being owned
including intellectual property, it is possible to hold that
the restrictions which can be imposed in carrying on G
business in relation thereto must only be reasonable on~ ~ __
within the meaning of Clause (6) of Article 19 of the
Constitution of India. Right of property although no longer
a fundamental right, but, indisputably is a human right.
(Para 18] (963-F-G] H
948 SUPREME COURT REPORTS [2009] 7 S.C.R.

A Gujarat Ambuja Cements Ltd. v. Union of India (2005) 4
SCC 241; H. Anraj v. Government of Tamil Nadu (1986) 1
SCC 414; Yasha Oversees v. Commr. of Sales Tax & Ors.
(2008) 8 SCC 681; The State of Bombay v. R.M.D.
Chamarbaugwala 1957 SCR 874; B.R. Enterprises v. State of
B U.P & Ors. (1999) 9 sec 700; Vimlaben Ajitbhai Patel v.
Vatslaben Ashokbhai Patel and Others (2008) 4 SCC 649;
Karnataka State Financial Corporation v. N. Narasimahaiah
(2008) 5 sec 176; e.S.S Motor Service Tenkari and Ors v
The State of Madras represented by the Secretary to the
c Government of Madras, Home Department and Anr. Al R 1953
Mad 279 - relied on.

Sunrise Associates vs. Govt. of NCT of Delhi & Ors. (2006)
5 SCC 603 and Federation and Association of Hotels and
Restaurants Association of India v. Union of India (1989) 3
D SCC 634 - referred to.
California v. Central Pacific R. Co. (1888) 32 Law Ed 150 ti
- referred to.
2.,The speech of the Hon'ble the Finance Minister
E would have been relevant for the purpose of opining as
to whether the court independently would have arrived
at a conclusion that organizing lottery would amount to
rendition of service but not otherwise. As it is not possible
for this Court to arrive at the said conclusion, there is no
F other option but to hold that by inser.ting the explanation
appended to clause (19) of Section 65 of the Act, a new
concept of imposition of tax has been brought in. The
Parliament may be entitled to do so. It would be entitled
to raise a legal fiction, but when a new type of tax is
G introduced or a new concept of tax is introduced so as to
widen the net, it should not be construed to have a retro-
spective operation on the premise that it is clarificatory · '
or declaratory in nature. [Para 27] [969-D-F]
K.P. Varghese v. Commissioner of Income-tax,
H Ernakulam & Anr. (1981) 4 SCC 173 and Commissioner of
UNION OF INDIA & ORS. V. 949
M/S MARTIN LOTTERY AGENCIES LTD.
i
Wealth Tax, Punjab, J & K, Chandigarh, Patiala v. Yuvraj A
Amrinder Singh and Ors. (1985) 4 SCC 608 - relied on.
,<

'"' 3. It is well settled that the statute must be interpreted
keeping in view the words used in it. [Para 29) [970-D]
Virtual Soft Systems Ltd. v. Commissioner of Income Tax, B
Delhi-I (2007) 9 SCC 665 - referred to.

4.1 The question as to whether a Subordinate
Legislation or a Parliamentary Statute would be held to
be clarificatory or declaratory or not would indisputably
depend upon the nature thereof as also the object it seeks
c
to achieve. If two views are not possible, resort to
clarification and/or declaration may not be permissible.
[Para 31) [971-E-F]
4.2 By reason of an explanation, a substantive law D
may also be introduced. If a substantive law is introduced,
it will have no retrospective effect. [Para 36) [975-F]
4.3 The notice issued to the assessee by the appellant
has, thus, rightly been held to be liable to be set aside.
,,
Subject to the constitutionality of the Act, service tax, if E
any, would be payable only with effect from May, 2008 and
not with retrospective effect. [Para 36) [975-G-H]
4.4 In a case of this nature, the Court must be satisfied
that the Parliament did not intend to introduce a F
substantive change in the law. For that purpose, the
expressions like 'for the removal of doubts' are not
conclusive. The said expressions appear to have been
used under assumption that organizing games of chance
would be rendition of service. This Court in this case is G
; ., not concerned as to whether it was constitutiolially
permissible for the Parliament to do so as it is not called
upo·n to determine the said question but for the present,
purpose, it would be. suffice to hold that the expl!'lnation
is not clarificatory or declaratory in nature. Thus, the High H
_.·
950 SUPREME COURT REPORTS [2009] 7 S.C.R.

A Court judgment albeit for different reasons warrants no
interference. [Paras 37, 38] [976-A-C]

Commissioner of Income Tax, l?iombey & Ors. v. Podar
Cement Pvt. Ltd. & Ors. (1997) 5 SCC 482; Keshav/a/ Jethalal
Shah v. Mohan/a/ Bhagwandas and Anr. (1968) 3 SCR 623;
B WPl.L. Ltd., Ghaziabad v. Commissioner of Central Excise,
-
Meerut, UP. (2005) 3 SCC 73; Virtual Soft Systems Ltd. v.
Commissioner of Income Tax, Delhi-I (2007) 9 SCC 665;
Commissioner of Income Tax-I, Ahmedabad v. Gold Coin
Health Foods Pvt. Ltd. (2008) 11 SCALE 497; SEDCO Forex
c International Drill. Ina. & Ors. v. Commissioner of Income, Tax,
Dehradun & Anr. (2005) 12 SCC 717; CIT v. S. G Pgnatal (1980) )----

124 /TR 392 (Guj) and CIT v. S.R. Patton (1992) 193 ITR 49
(Ker) - referred to.
'
"Benion's Statutory Interpretation" and "G.P. Singh's
D
Principles of Statutory Interpretation" - referred to. .
Case Law Reference
c2006) 5 sec 603 referred to Para 6

E (1989) 3 ·sec 634 referred to Para 6

c2005) 4 sec 241 relied on Para 6
(1986) 1 sec 414 relied on Para 12

c2008) 8 sec 681 relied on Para 12
F
1957 SCR 874 relied on Para 14
(1999) 9 sec 100 relied on Para 14
c2008) 4 sec 649 relied on Para 18
G c2008) 5 sec 176 relied on Para 18
AIR 1953 Mad 279
(1888) 32 Law Ed 150
(1981) 4 sec 113
relied on
referred to
relied on
Para 18
Para 18
Para 28
-
H
UNION OF INDIA & ORS. V. 951
M/S MARTIN LOTTERY AGENCIES LTD.

(1985) 4 sec 608 relied on Para 28 A
(2001) 9 sec 665 referred to Para 29
(1997) 5 sec 482 referred to Para 30--
(1968) 3 SCR 623 referred to Para 30
B
(2005) 3 sec 73 referred to Para 30
(2008) 11 SCALE 497 referred to Para 32
(2005) 12 sec 111 referred to _Para 33
(1980) 124 ITR 392 (Guj) referred to Para 34 c
(1992) 193 ITR 49 (Ker) referred to Para 35
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 3239
Of 2009 ''
D
~ From the Judgment and Or~er dated 18.09.20070f the
High Court of Sikkim at Gangtok in Writ Petition (C) No. 19 of·
2007
Mohan Parasaran, ASG, Naveen Prakash, D.L.
C,hidananda, Gaurav Dhingra, S. N. Terdal (for B. V. Balaram E
Das), with him for the Appellant(s).
Harish N. Salve, A. R. Madhav Rao, Vivek Sharma, Sujata,
Kamaldeep, M.P. Devanath, with him for the Respondent(s).
The Judgment of the Court was delivered by F
S.B. SINHA, J.
1. Leave granted.
2. Whether sale, promotion and marketing of lottery tickets
would be exigible tq 'Service Tax' within the meaning of the G
; ., provisions of Section '65(105) of the Finance Act, 199.4
(hereinafter called and referred to for the sake of brevity as 'the
Act') is the question involved in this appeal which arises from a
judgment and order dated 18.9.2007 passed by the High Court
of Sikkim in Writ Petition (C) No. 19 of 2007. H
952 SUPREME COURT REPORTS (2009] 7 S.C.R.

'
A 3. Respondents are agents of the State of Sikkim. The
State Governm·ent floated "schemes" whereby the total number
~
of tickets therefor was prescribed. In terms of the said schemes,
the respondent purchases all lottery tickets in bulk form on "all
sold basis". It pays Rs. 70 per ticket for the face value of Rs.100/
B -. In turn, it sells the ticket to its principal stockists on "outright"
and "all sold basis": It makes a profit out of the margin out of the
difference between the amounts received from the principal
stockists and the amounts paid to the State Government. The
principal stockists in turn sell the tickets to the sub-stockist and
c who in turn sell to the agents. The retailers purchase tickets from
the agents and in turn sell the same to the ultimate participants
of the draw.
4. Indisputably, the entire transaction is governed by the
Lottery (Regulation) Act, 1998. It is neither in doubt nor in dispute
D that having regard to the circular letter issued by Commissioner
~
(Service Tax), Ministry of Finance, CBEC dated 14.01.2007,
the nature of transactions between the distributor and the State
,Government do not constitute a sale.
However, it was concluded that the activities of the
E distributor are that of promotion or marketing of lottery tickets
for their client (i.e. the State Governments) and, thus, would be
exigible to service tax under the heading 'business auxiliary
service'.

F Pursuant to and/or in furtherance of the said opinion of the
Board, the Superintendent of Central Excise, Gangtok Range;
Gangtok by a letter dated 30.04.2007 directed the respondent
to obtain registration and pay service tax under the heading
'business auxiliary service' in terms of the provisions of the said
Act.
G
5. The legality and/or validity of the said notice was r ..
questioned before the High Court of Sikkim by the respondent
byway of a Writ Petition. By an order dated 13.8.2007, the Chief
Justice of the said High Court while declining to grant an interim
H order made certain observations to the effect that the activities
UNION OF INDIA & ORS. V. MIS MARTIN LOTIERY 953
AGENCIES LTD. [S.B. SINHA, J.]
1
undertaken by respondent cannot but be promotion or marketing, A
in the following terms:
"(sic) can be sold in the market for that face value, is itself
a promotional or marketing service. The contract between
a principal producer and its large distributor or promotional
distributor can have a lot of flexibility. It will all depend on B
the business negotiations b.y the two parties, as to whether
the goods are being taken by the distributor as an agent,
and retained as such, or whether the goods will be purchased
outright by the distributor from the manufacturer, at a reduced
price, the distributor thereafter taking all responsibility for the c
goods purchased, in return for, or inconsideration of, the
reducing in the wholesale price of goods.

If, we repeat if, the writ petitioner is a distributor or a selling
agent, then there is no problem, notwithstanding section
D
4(c) of the 1998 Act, of the writ petitioner reselling the
lottery tickets in the open market even upto the full face
value of Rs. 100/-, or for a lesser price but above Rs.70/
'.,
-, even though it bought the tickets itself for Rs.70/-. Is this
a promotion of the lottery marketing of lottery tickets
produced or provided by the State? If it is not, then what E
is the difference between a person buying lottery tickets
of face value of Rs.100/- at Rs.100/- from the State
Government directly, and a person who is buying it at a
1 "
reduced price? Is the reduced price of Rs.30/- in relation
to goods, originally belonging to the State Government, a F
reduction for the purpose of marketing and further sale,
and is it for the purpose of marketing, which the true and
core business activity of the writ petitioner? Is the business
violability of the writ petitioner dependent only on the
middleman succeeding in getting a market for the original G
> ..,; goods, and is the margin of 30% sufficient to cover this
type of business venture?
These questions might merely be asked today but need
not be answered today without hearing parties fully.
H
954 SUPREME COURT REPORTS [2009] 7 S.C.R.

A I am of the opinion that on a balance of circumstances it
appears that the essence of activity, properly so called,
cannot but be promotion or marketing.
Order and observations, however worded, are without
prejudice to the rights and contentions of the parties. There
B will be no interim order. Appearance of parties before the
Department will take place and decisions might be given
and even levy might be made. However, decisions given
will ultimately abide by the result of the writ. Since both the
parties are also solver, no interim order is called for.
c
Returnable on 17.8.2007 when further orders might be
prayed for by either party."
The said writ petition was posted for hearing on 18.9.2007
and by reason of an order of the said date, the writ petition was
D allowed, directing:
"Affidavits have not been called for although the leaned
Advocate General asked for time. Here the learned
,.
Advocate General is appearing as Assistant Solicitor
General. Time to file affidavit was refused by me since the
E issue is one of pure law. This order is to be read as a
sequel to the order already passed by this Court on
13.8.2007. The basic facts are set out there. The
arguments this time centered round whether lottery tickets
are goods or not. The statutory provisions which are
F material in this regard are extracted in my earlier order.
On the authority of the Constitution Bench of the Supreme
Court which delivered its judgment in the Sunrise
Associates Case (2006) 5 SCC 603 lottery tickets have
to be held to be actionable claims. As such those would
G not be goods within the meaning of the definition clause
in the Sale of Goods Act. If the lottery tickets are not goods,
the writ petitioners cannot be said to be rendering any
service in relation to the promotion of their client's goods,
or marketing of their client's goods, or sale of their client's
H goods.
UNION OF INDIA & ORS. V MIS MARTIN LOTTERY 955
AGENCIES LTD. [S.B. SINHA, J]

The writ petition succeeds on this simple point. The A
impugned notice dated 30.4.2007 (Annexure P-3 of the
writ petition) is accordingly quashed. There will be no order
as to costs."
6. Mr. Mohan Parasaran, learned Additional Solicitor
General of India appearing for the appellant, would submit: B

(i) The High Court committed a serious error in passing
the impugned judgment insofar as it failed to take
into consideration that the notice had been issued in
terms of sub-clause (ii) of Section 65(19) of the Act c
and not sub-clause (i) thereof.

(ii) As United Nations-Central Product Classification
(UN-CPC) Heading 96920 contains 'gambling and
betting' seryices and covers 'organization of lotteries'
and, thus, the activities of organizing lotteries being . D
internationally recognized, should be considered as
a service and, thus, the High Court committed a
serious illegality in relying upon the decision of this
Court in Sunrise Associates vs. Govt. of NCT of
Delhi & Ors. reported in (2006) 5 SCC 603. E
(iii) Explanation appended to Section 65 (19) being
clarificatory and/or declaratory in nature must be held
to have a retrospective operation.
~·
(iv) Entries 34 and 62 of List II of the Seventh Schedule F
of the Constitution of India does not create any kind
of fetter on the powers of the Parli~ment to impose
service tax on the assessee who provide the service
of promotion and marketing of lotteries. The
aforementioned two entries empower the State
G
Legislature to impose tax on betting and. gambling
> .., and other luxuries. In the instant case, however, what
is sought to be taxed under sub-clause (ii) of clause
(19) of Section 65 of the Finance Act, 1994 is the
services rendered by an assessee to its client in
H
956 SUPREME COURT REPORTS [2009] 7 S.C.R.

A promoting and marketing of lotteries organized by
the State Government and not anything else.
(v) A transaction may involve two taxable events in its
different aspects, as has been held by the Constitution
Bench of this Court in Federation and Association of
B Hotels and Restaurants Association of India v. Union
of lndia_reported in [(1989) 3 sec 634], in terms
whereof whereas, on the one hand, service tax can
be levied on the services provided by the respondent 1

to the Government of Sikkim in promoting and
c marketing of lotteries; the State Government is also
empowered to impose tax on the organization and
conduct of lotteries in the State in exercise of its
powers under Entries 34 and 62 of the List II of the
Seventh Schedule read with Articles 245 and 246 of
D the Constitution of India, despite the fact that the
same transaction creates two taxable events, namely,
the organization of the lotteries itself and secondly
the services rendered in the promotion and marketing
of lotteries.
E (vi) In view of a recent decision of this Court in Gujarat
Ambuja Cements Ltd. v. Union of India reported in
(2005) 4 sec 241, tax was not sought to be imposed
on 'betting' or 'gambling' or 'entertainments' or
·~
'amusements' as provided in the Entries 34 and 62
F of List 11 of the Seventh Schedule to the Constitution
of India, but on the services rendered in respect
thereof.
7. Mr. Harish N. Salve, learned Senior Counsel appearing
G on behalf of the respondent, on the other hand, urged :
(i) Even UN-CPC or the classification provided for
therein has no bearing to an Act enacted by the
Parliament of India. Whereas UN-CPC regards lottery
tickets as goods; the Indian laws do not. In any event,
H lottery has been. brought within the concept of 'service'
UNION OF INDIA & ORS. V MIS MARTIN LOTTERY 957
AGENCIES LTD. [S.S. SINHA, J]
1
treating it to be goods, which is against the purport A
of the said term; having been held by this Court in
-.. Sunrise Associates (Supra) as merely an 'actionable
claim'.

(ii) As conduct of lotteries has been held by this Court
to be res-extra commercium, no service can be said B
to be rendered by the State to the society at large
and, thus, the provisions of the Act will have no
application in the instant case.

(iii) In view of the decision of this Court in Sunrise c
Associates (supra), lottery tickets being actionable
claims and not goods, the relevant clause attracted
in this case would be sub-clause (i) of clause (19) of
Section 65 and not sub-clause (ii) as gambling cannot
be equated with 'service'.
D
... (iv) Respondent has merely been purchasing lottery
tickets in bulk and re-selling the same to the principal
stockists; earning a margin of profit from such
transactions and, in that view of the matter, rendition
of any kind of service by the State to it does not arise. E
(v) In any event, explanation appended to Section 65(19)
having only a prospective operation, service tax, if
any, can be levied only with effect from 16.5.2008
~.
and not for a period prior thereto.
F
8. Before adverting to the rival contentions raised before
us by the learned counsel for the parties, we may notice the
relevant provisions of the Finance Act, 1994 (The Act).
Chapter V of the Act provides for levy of service tax. It is
levied on "taxable services" as defined in Section 65(105) G
> --i thereof. Section 66 is the charging section and Section 68
provides for payment of service tax.
Sub-clauses (i} and (ii) of Section 65(19) which are
relevant for our purpose, read as under:-
H
958 SUPREME COURT REPORTS [2009] 7 S.C.R.

A "Section 65(19) "business auxiliary service" means any
service in relation to,-

(i) promotion or marketing or sale of goods produced or
provided by or belonging to the client; or

B (ii) promotion or marketing of service provided by the
client; or''

The term "business auxiliary service" was inserted in the
Act by Finance Act, 2003 which came into force on 01.07.2003.
The term "business auxiliary service" includes services as a
C commission agent, but does not include any information
technology service or any activity that amounts to "manufacture"
within the meaning of clause (f) of Section 2 of the Central Excise
~.1~. ~

Clause (zzb) of Section 65( 105) of the Act defines "taxable
D
service" to mean any service provided to a client, by a ,..
commercial concern in relation to business auxiliary service.
"Goods" has been defined in Section 65(50), in the
following terms:
E
"Section 65(50) "goods" has the meaning assigned to it
in clause (7) of section 2 of the Sale of Goods Act, 1930."

Section 2(7) of the Sale of Goods Act, 1930 defines
"goods" to mean : ,. ~

F "Goods" means every kind of movable property other than
actionable claims and money; and includes stock and
shares, growing crops, grass, and things attached to or
forming part of the land which are agreed to be severed
before sale or under the contract of sale."
G
9. After the Special Leave Petition was filed in this Court,
the Parliament by Finance Act, 2008 inserted an explanation in
r '
sub-clause (ii) of Section 65(19), which came into force on or
about 16.5.2008 and reads as under :
H "Explanation-For the removal of doubts, it is hereby
-f

...;' UNION OF INDIA & ORS. V. M/S MARTIN LOTIERY 959
AGENCIES LTD. [S.S. SINHA, J.]
-(
I .. declared that for the purposes of this sub-clause, "service A
1.. in relation to promotion or marketing of service provided
by the client" includes any service provided in relation to
; promotion or marketing of games of chance, organized,
\ conducted or promoted by the client, in whatever form or
\
"" by whatever name called, whether or not conducted online, B
including lottery, lotto, bingo;"

Section 65A which was inserted by Finance Act, 2003
provides for classification of taxable services. Section 66
• provides for the charge of service tax.
c
10. The core question which arises for our consideration
is as to whether the explanation appended to sub-clause (ii) of
Section 65(19) is clarificatory or declaratory in nature so as to
be construed having retrospective effect and retroactive
operation.
D
... Sub-clause (i) of clause (19) of Section 65 of the Act refers
·''
to 'goods~. What would come within the purview of the definition
of 'goods' must be consJrued having regard to the provisions of
the Sale of Goods Act, 1930 in view of its definition contained
in Section 65(50) of the Act. E
11. This takes us to another question as regards the source
of power of the State to conduct a business. Conduct of business

- ,.
by a State is permissible, inter alia, in terms of Article 298 of the
Constitution of India. If it is not otherwise prohibited, the State in
exercise of its executive power contained in Article 162 of the F
Constitution of India may also have the power to conduct a trade
or business.
12. For invoking the provisions of Chapter V of the 1994
Act, the basic question which is required to be posed and
G
answered is as to whether the lottery tickets are 'goods' within
.I
the meaning of Sale of Goods Act. It is evidently not.
'
A Constitution Bench of this Court in Sunrise Associates
(supra) held to be so. H. Anraj v. Government of Tamil Nadu
reported in [(1986) 1sec414] was overruled opining that sale H
960 SUPREME COURT REPORTS [2009] 7 S.C.R.

A of lottery tickets does not involve sale of goods and that at the t
highest stage, transfer of it would amount to transfer of an
actionable claim.
In Yasha Oversees v. Commr. of Sales Tax & Ors. [(2008)
8 SCC 681], Sunrise Associates (supra) was distinguished,
B stating:

"37. The decision in Sunrise makes two very significant
points and to us it appears that the decision mainly turns
on those two points. The first is with regard to the two
c different meanings of 'property', as highlighted in paragraph
35 of the judgment and the second is with regard to the
distinction between interests in goods and a contract as
highlighted in paragraph 43 of the judgment. In paragraph
35 of the decision the court explained that the word
'property' occurring both in the definitions of 'goods' and
D
'sale' carries different meanings. In the definition of 'goods' ,
the word 'property' is used to mean the subject matter of
ownership, that is to say, the thing itself. In the definition of
-
'

'sale' the same word is used to mean the nature of interests
in goods, that is, title or ownership.
E
38. In paragraphs 42 and 43 of the decision, the court
examined the nature of a ticket and by giving illustrations
of a railway ticket, a ticket to see a cinema or a

F
pawnbroker's ticket pointed out that the tickets were
normally evidence of and in some cases the contract
between the buyer of the ticket and its seller.· Being a
'· -
contract or evidence of a contract, naturally a ticket can
not be property either as a thing (of value) in itself or title
or ownership to anything. It, therefore, followed that the
sale of lottery ticket did not involve transfer of 'property'
G
either in the sense of the thing itself (goods) or in the
'l
sense of title or ownership (sale).
39. On purchasing a lottery ticket one merely gets a claim
to a conditional interest in the prize money that is not in the
H purchaser's possession and the right would, therefore,
UNION OF INDIA & ORS. V. M/S MARTIN LOTIERY 961
AGENCIES LTD. [S.B. SINHA, J.]

' squarely fall within the definition of actionable claim. The A
Constitution Bench decision in Sunrise further held that
Anraj wrongly split up the right accruing to the purchaser
of a lottery ticket. The right was one and indivisible. But
even assuming the right to participate in the draw Page
2519 to be a separate right there would still be no sale of B
goods within the meaning of sales tax laws because the
...
-~

draw itself could not be any movable property and the
~
participation in the draw was only with the obj~ct to win the
.. prize. The transfer of the right would thus be of a conditional
beneficial interest in movable property that is not in c
possession, in other words, once again an actionable
claim."

13. In the aforementioned, backdrop, it is necessary to
consider the submissions of th~ learned Additional Solicitor
General that clauses (1), (2), (8), (10), (16), (18), (25), (29), (36), D
(39) and (40) of the agreement entered into by and between the
State and respondent shows that it is not a case involving
simpliciter sale of goods but in effect and substance respondent
was rendering service in relation to promotion or marketing of
service provided by the State. E
14. This gives rise to a question, i.e., Does the State in
organizing lottery render any service and, if so, to whom.

~ f The learned Additional Solicitor General submits that
service is being rendered to the general public as revenue is F
generated therefrom. We fail to persuade ourselves to agree
with the aforementioned submission. The law, as it stands today
(although it is possible that this Court in future may take a

. different view), recognizes lottery to be gambling. Gambling is
res extra commercium as has been held by this Court in The
..... 1.., State of Bombay v. R.M.D. Chamarbaugwala [1957 SCR 874]
and B.R. Enterprises v. State of UP & Ors. [(1999) 9 SCC
G

700].
15. Contention of Mr. Salve is that where the State involves
itself in an illegal activity, it cannot render a service as dealing H
962 SUPREME COURT REPORTS [2009] 7 S.C.R.

A in lottery is illegal being res extra commercium, no services
can be rendered. We, as at present advised, do not intend to
t
go into the said issue which is a complex one, in view of the fact
that in this case we are primarily required to consider the effect
of the explanation appended to clause (19) of Section 65 of the
B Act. It is also not otherwise necessary to be determined.

We must, however, proceed to determine the said question
keeping in view the aforementioned decisions of this.Court that
.
~

holding of lottery being gambling comes within the purview of
the doctrine of res extra commercium.
c
16. Organizing lottery by the State is tolerated being an
economic activity on its part so as to enable it to raise revenue.
Raising of revenue by the State, in our opinion, by itself cannot
amount to rendition of any service. It may be true that for the
purpose of invoking the provisions of taxing statute, the morality
D
aspect may not be of much consequence but such a question
assumes significance for the purpose of ascertaining as to
whether the same amounts to rendition of service within the
meaning of the aforementioned sub-clause. The word 'service'
has not been defined in the Act. Its dictionary or etymological
E meaning may or may not be appropriate. We would, however,
notice its dictionary meaning :

"Work done or duty performed for another or others; a

F
serving; as, professional services, repair service, a life
devoted to public service. ' ~
An activity carried on to provide people with the use of
something, as electric power, water, transportation, mail

G
delivery, telephones, etc.
Anything useful, as maintenance, supplies, installation,
repairs, etc., provided by a dealer or manufacturer for
people who have bought things from him." .... "'..
..
t.

17. While the State raises its revenue by controlling dealing
in liquor and/or by transferring its privilege to manufacture,
H distribute, sale etc., as envisaged under Entry 8 of List 11 of the
UNION OF INDIA & ORS. V. MIS MARTIN LOTTERY 963
AGENCIES LTD. [S.B. SINHA, J]
... I Seventh Schedule of the Constitution of India, thereby it does A
not render any service to the society. Service tax purports to
impose tax on services on two grounds (1) service provided to
-{
' a consumer and (2) service provided to a service provider.
18. Service provided in respect of the matters envisaged
under clause (19) of Section 65 of the Act must be construed B
strictly. Before a tax is found to be leviable, it must come within
the domain of legitimate business and/or trade. The doctrine of
,.• res extra Commercium was invoked in the United States of
America where keeping in view the nature of right conferred on
its citizens and the concept of imposition of reasonable c
restrictions thereon being absent, it was held that gambling
should be frowned upon being opposed to constitutional
jurisprudence. While borrowing the said principle in the Indian
context, however, it must be borne in mind that Constitution of
India envisages reasonable restrictions in respect of almost all D
the fundamental rights of the citizens. No citizen has an absolute
fundamental right. Whereas the same principle may apply in
Australia but it may not apply to the European Countries where
gambling and even sale of narcotic drugs subject to licensing
provisions, if any, is permissible. E
The concept of res extra commercium may in future be
required to be considered afresh having regard to its origin to
Roman Law as also the concept thereof. Conceptually bus,iness
·•
" may be carried out in respect of a property which is capable of
being owned as contrasted to those which cannot be. Having F
regard to the changing concept of the right of property, which
includes .all types of properties capable of being owned including
intellectual property, it is possible to hold that the restrictions
which can be imposed in carrying on business in relation thereto
must only be reasonable one within the meaning of Clause (6) G
..... 4 of Article 19 of the Constitution of India. Right of property although
no longer a fundamental right, but, indisputably is a human right.
[See Vimlaben Ajitbhai Patel v. Vatslaben Ashokbhai Patel
and Others (2008) 4 SCC 649 and Karnataka State Financial
Corporation v. N. Narasimahaiah (2008) 5 SCC 176]. H
964 SUPREME COURT REPORTS [2009] 7 S.C.R.

A We may notice that the doctrine of 'franchise' or 'exclusive \
privilege' has been mentioned in C. S. S Motor Service Tenkari
and Ors v The State of Madras represented by the Secretary
· to the Government of Madras, Home Department and Anr. [AIR -
1953 Mad 279]. Therein the connotation of the word "franchise"
B was noticed from California v. Central Pacific R. Co. [(1888)
32 Law Ed 150] in the following terms:

"What is a franchise? Under the English Law, Blackstone
defines it as 'a royal privilege, or branch of the King's
prerogative subsisting in the hands of a subject.' A
c franchise is a right, privilege or power, of public concern,
which ought not to be exercised by private individuals at
their mere will and pleasure but should be reserved for
public control and administration either by the Government
directly or by public agents acting under such conditions
D and regulations as the Government may impose as the
public interest and for the public security."

The doctrine of franchise, thus, would require a thorough
relook in view of the change in its concept, as we are governed
by the Constitution of India. But this is n.ot the case where we
E have an occasion to do so.

19. Lottery has been brought within the purview of National
Industrial Classification to which we may now advert to. A
foreword to the Industrial Classification, relevant for our purpose, •
F reads as under :
"A standardized system of classification of economic
activities is essential for meaningful collection of data relating
to such activities. This not only ensures comparability ofthe data
collected within the country from various sources by different
G agencies but also with the rest of the world. In India, the National
Industrial Classification (NIC) is the standard classification \.- .. '
followed for classifying economic activities. The NIC is prepared
to suit the Indian conditions and follows the principles and
procedures laid down in the United Nations' International
H Standard Industrial Classification (ISIC). It is a constant
UNION OF INDIA & ORS. V M/S MARTIN LOTIERY 965
AGENCIES LTD. [S.B. SINHA, J.]

J endeavour of the Ministry of Statistics and Programme A
Implementation, charged as it is with the responsibility for setting
standards for collection, compilation and dissemination of
statistical data in India, to establish classification systems as
well as updating existing ones. This is necessary to keep pace
with the changes in the organization and structure of industries B
besides accounting foremerging economic activities. The NIC-
2004 is the revised version of the earlier classification standard
f
issued in 1998 called the NIC-1998, which was based on !SIC-
~ 1990 Rev.3."

20. Lotteries come within the purview of Group 924 class c
924(9) and sub-class 924(9)(0) which is in the following terms :

."Other recreational activities includes fairs and shows of
a recreational nature; management and operation of
lotteries (bulk and retail sale of lottery tickets are included
D
under wholesale and retail sale respectively); gambling
.. and betting activities; activities of casinos; booking agency
activities in connection with theatrical productions or other
entertainment attractions, recreational fishing and other
recreational activities n.e.c."
E
It also comes within the purview of Section 4 classifying
other community, social and personal service activities.

21. If it is brought within the purview of the terms
'entertainment' or 'amusement' as provided for in Entries 34
and 62 of List II of the Seventh Schedule of the Constitution of F
India, it may come within the purview of service. It is, however,
contended that what is being taxed is the services rendered in
respect thereof. Services can be rendered in respeCt of
activities of the State if they are permissible in terms of sub-
clause (ii) of Clause (19) of Section 65 of the Act and the State G
J4 itself has been rendering services and not otherwise. While we
say so, we are not unmindful of the. fact that in terms of the
agreement, the respondent not only distributes the lottery tickets
printed by the State but also distributes prizes worth less than
Rs.5,000/-. It issues an advertisement. It has a right to be H
966 SUPREME COURT REPORTS [2009] 7 S.C.R.

A consulted in respect of design of a lottery ticket. It may also \.-
have a say in the matter of arranging for the lottery. But we are
not sure as to how service element of the entire transaction is to • •
be ascertained.
22. Keeping in view the aforementioned backdrop, it has
B to be determined as to whether the 'explanation' is declaratory
or clarificatory in nature.
23. Clause 19 was inserted in Section 65 of the Act in the
year 2003. The notice dated 30.4.2007 shows that according
to the authorities clause (i) was attracted and not clause (ii) of "'
c
the said provision. The Board issued a clarification on 17 .1.2007
which is in the following terms:
"Decision : Commissioner (ST) explained the issue of
service tax liability on promotion, marketing, distribution
D of paper lottery. Under the contractual arrangement, the
State Government print lottery tickets and deliver them to
distributor. The distributor is free to publicize for promotion, •
marketing of the lottery tickets received and distribute the
same through sub-distributors. The State Governments
E do not receive back the unsold lottery tickets and the prizes,
if any, on such unsold tickets could be collected by the
distributor. The draws are held by the State Governments.
Board noted that the Lotteries (Regulation) Act, 1998,
governs the activity of organizing, conducting or promoting ~ •
F a lottery. As per sub-section (c) of Section 4, 'the State
Government shall sell the tickets either itself or through
distributors or selling agent'. This provision thus forbids
resale of tickets that have been sold by the State
Government. Accordingly, the nature of transaction between
G the State Government and distributor is not in the nature
of sales. The activities of the distributor are that of " .·,.
promotion or marketing of lottery tickets for their clients
i.e. the State Governments. Hence, Board decided that
the services of distributor fall under the 'business auxiliary
H service' and, therefore, be chargeable to service tax. The
UNION OF !NOIA & ORS. V M/S MARTIN LOTIERY 967
AGENCIES LTD. [S.B. SINHA, J.]

1 value of taxable service shall be taken into account as the A
total face value of the tickets sold minus (a) the total cost
of the tickets paid by the distributor to the State
Government and (b) the prize money paid by the distributor.
In other words, the value is the mark up between the buying
and selling of lottery tickets." B
24. A bare perusal of the said circular letter would clearly
show that lottery tickets were considered to be goods. It is with
r that mindset, the circular was issued. However, it must have
_,,
been realised that resale of lottery tickets by the distributor or
by others is not permissible. Whether sub-clause (ii) of clause c
(19) of Sect[on 65 had been applied in case of any other
distributor or agent of such lottery tickets is not known. If the
=3" assertion of Mr. Salve that nobody had demanded tax under the
~

second clause is correct, we do not know why the principle of
'small repairs' by inserting an explanation was taken recourse D
to. The explanation, in our opinion, cannot be said to be a simple
>- clarification as it introduces a new concept stating that
organizing of the lottery is a form of entertainment. lntrodu'ction
of such new concept itself would have a constitutional
implication. In the year 2003, while amending the provisions of
E
1994 Act, the Constitution was also amended and Article 268A
and Entry 92C in List I were inserted. The courts are in future

-
required to determinewhether a service tax within the meaning
of Entry 92C would cover sale of lottery or it would come within
" the purview of residuary entry containing Entry 97 List I. If it is ·
held to be a taxing provision within the purview of Entry 97, the F
same will have a bearing on the States. The Explanation so
read appears to be a charging provision. It states about taxing
need. It can be termed to be a suigeneris tax. If it is a different
kind of tax, the same may be held to be running contrary to the
ordinary concept of service tax. It may, thus; be held to be a G
, j, .J. stand alone clause. A constitutional question may have to be
raised and answered as to whether the taxing power can be
segregated. If by reason of the said explanation, the taxing net
___,
has been widened, it cannot be held to be retrospective in
operation. H
968 SUPREME COURT REPORTS [2009] 7 S.C.R.

A No doubt, the explanation begins with the words 'for \,...
removal of doubts'. Does it mean that it is conclusive in nature?
In law, it is not. It is not a case where by reason of a judgment of ,,
a court, the law was found to be vague or ambiguous. There is
also nothing to show that it was found to be vague or ambiguous
B by the executive. In fact, the Board circular shows that invocation
of clause (ii) had never been in contemplation of the taxing
authorities.
25. In fact, rendition of service for the purpose of imposition
of service tax is imperative in character. It must be a part of
C economic activity. Whereas the economic activity has three
characteristics - tax on production; tax on sales and tax on
service. The concept of the Value Added Tax comes from the
generic expression so as to include not only taxes on sales but
also taxes on service as service has become segment of the
D economic activity.
26. We are informed at the Bar that, in fact, States of Tamil
Nadu and Karnataka have barred lottery.
We have been taken through the budget speech of the
E Hon'ble Minister of Finance for 2008-2009, the relevant portion
whereof is as under :
"5.4 Business Auxiliary Service :
5.4.1 Services provided in relation to promotion or
F marketing of service provided by the client is leviable to
service tax under business auxiliary service. Organization
and selling of lotteries are globally treated as supply of
service. Lotteries (Regulation) Act, 1998 enables State
Governments to organize, conduct or promote lotteries.
Lottery tickets are printed by the State Governments and
G
are sold through agents or distributors. Tickets are
delivered by the State Government to the distributors at a
discounted price as compared to the face value of the
tickets. Services provided by the distributors or agents in
relation to promotion or marketing of lottery tickets are
H
UNION OF INDIA & ORS. V M/S MARTIN LOTTERY 969
AGENCIES LTD. [S.B. SINHA, J.]

leviable to service tax under the existing business auxiliary A
service.
5.4.2 Lotteries fall under the category of games of
chance. Games of chance are known under various names
like lottery, lotto, bingo etc. and are also conducted through
internet or other electronic networks. B
5.4.3 To clarify as removal of doubts, an explanation is
added under business auxiliary service stating that
services provided in relation to promotion or marketing of
games of chance organized, conducted or promoted by c
the client are covered under the existing definition of
business auxiliary service. Amendment is only for removal
of doubts and field formations are, therefQre, requested to
ensure that service tax is collected on such services."
27. The speech of the Hon'ble the Finance Minister would D
have been relevant for the purpose of opining as to whether the
court independently would have arrived at a conclusion that
organizing lottery would amount to rendition of service but not
otherwise. As it is not possible for us to arrive at the said
conclusion, we have no other option but to hold that by inserting E
the explanation appended to clause (19) of Section 65 of the
Act, a new concept of imposition of tax has been brought in.
The Parliament may be entitled to do so. It would be entitled to
• l:'
raise a legal fiction, but when a new type of tax is introduced or
a new concept of tax is introduced so as to widen the net, it, in F
our opinion, should not be construed to have a retrospective
operation on the premise that it is clarificatory or declaratory in
nature.
28. There cannot be any doubt whatsoever that speech of
the Hon'ble Finance Minister in the House of the Parliament G
may be taken to be a valid tool for interpretation of a statute. It
was so held in K.P. Varghese v. Commissioner of Income-tax,
Ernakulam & Anr. [(1981) 4 SCC 173 at 184], in the following
terms:
H
970 SUPREME COURT REPORTS [2009] 7 S.C.R.

A "Now it is true that the speeches made by the Members \.
of the Legislature on the floor of the House when a Bill for
enacting a statutory provision is being debated are
inadmissible for the purpose of interpreting the statutory
provision but the speech made by the Mover of the Bill
B explaining the reason for the introduction of the Bill can
certainly be referred to for the purpose of ascertaining the
mischief sought to be remedied by the legislation and the
object and purpose for which the legislation is e!lacted.
>
This is in accord with the recent trend in juristic thought not -;.

c only in western countries but also in India that interpretation
of a statute being an exercise in the ascertainment of
meaning, everything which is logically relevant should be
admissible."
{See also Commissioner of Wealth Tax, Punjab, J & K,
D Chandigarh, Patiala v. Yuvraj Amrinder Singh and Ors. [(1985}
-
4 sec 608]} "
.J.
29. It is, however, also well settled that the statute must be
interpreted keeping in view the words used in it. We must notice
that in Virtual Soft Systems Ltd. v. Commissioner of Income
E Tax, Delhi-1[(2007)9 SCC 665], a Bench of this Court has held:

"24. Section 271 of the Act is a penal provision and there
are well-established principles for the interpretation of such
a penal provision. Such a provision has to be construed ~
.
F strictly and narrowly and not widely or with the object and
intention of the legislature."
30. Mr. Parasaran has referred to Commissioner of
Income Tax, Bombay & Ors. v. Podar Cement Pvt. Ltd. & Ors.
[(1997) 5 sec 482] to contend that clarificatory statute would
G be retrospective in nature. On legal principle, there may not be
any quarrel with the said proposition. Therein, however, this court
was considering a case where two interpretations of Section
.--~ ...

22 of the Income-tax Act were possible. It was opined that if one
interpretation is possible and the same is clear, the next thing
H to be considered would be what would be the effect of the
UNION OF INDIA & ORS. V M/S MARTIN LOTTERY 971
AGENCIES LTD. [S.B. SINHA, J.]

1' amendment. Referring to Benion's Statutory Interpretation and A
G.P. Singh's Principles of Statutory Interpretation, it was held :

- "An amending Act may be purely clarificatory to clear a
meaning of a provision of the principal Act which was
already implicit. A clarificatory amendment of this nature
will have retrospective effect and, therefore, if the principal B
Act was existing law when the Constitution came into force,
the amending Act also will be part of the existing law."
r

- ~
It furthermore noticed the decision of the Constitution
Bench in Keshavlal Jethalal Shah v. Mohan/a/ Bhagwandas c
and Anr. [(1968) 3 SCR 623], wherein it was opined that an
Explanatory Act is generally made to supply an obvious omission

- ~
or to clear up doubts as to the meaning of previous Act. We are
herein not concerned with such a situation.
In WP"f.L. Ltd., Ghaziabad v. Commissioner of Central D
Excise, Meerut, UP [(2005) 3 SCC 73], whereupon again Mr.
Jr Parasaran placed strong reliance, this Court, while dealing with
an exemption notification which is a piece of subordinate
legislation, held:
"Such a notification merely clarified the position and E
makes explicit what was implicit. Clarificatory notifications
have been issued to end the dispute between the parties."

. 31. The question as to whether a Subordinate Legislation
" or a Parliamentary Statute would be held to be clarificatory or F
declaratory or not would indisputably depend upon the nature
thereof as also the object it seeks to achieve. What we intend
to say is that if two views are not possible, resort to clarification
and/or declaration may not be permissible. This aspect of the
matter has been considered by this Court in Virtual Soft
G
,_._, ... Systems Ltd. v. Commissioner of Income Tax, Delhi-/ [(2007)
9 sec 665], holding :
"It may be noted that the amendment made to Section
271 by the Finance Act, 2002 only stated that the amended
provision would come into force with effect from 1.4.2003. H
972 SUPREME COURT REPORTS [2009] 7 S.C.R.

I
A The statute nowhere stated that the said amendment was
either clarificatory or declaratory. On the contrary, the statue
stated that the said amendment would come into effect on
"
1.4.2003 and therefore, would apply to only to future periods
and not to any period prior to 1.4.2003 or to any assess-
B ment year prior to assessment year 2004-2005. It is the
well settled legal position that an amendment can be
considered to be declaratory and clarificatory only if the
statue itself expressly and unequivocally states that it is a
declaratory and clarificatory provision. If there is no such ~

c clear statement in the statute itself, the amendment will
not be considered to be merely declaratory or clarificatory.

D
Even if the statute does contain a statement to the effect
that the amendment is declaratory or clarificatory, that is
not the end of the matter. The Court will not regard itself as
being bound by the said statement made iri the statute but
~
-
will proceed to analyse the nature of the amendment and
-4.
then conclude whether it is in reality a clarificatory or
declaratory provision or whether it is an amendment which
is intended to change the law and which applies to future
E periods."
32. We are also not unmindful of the fact that the said
decision has been overruled in Commissioner of Income Tax-
I, Ahmedabad v. Gold Coin Health Foods Pvt. Ltd. [(2008) 11
'I
SCALE 497). A bare perusal of the said decision would, however,
F show that a Three Judge Bench of this Court noticed that the
Act intended to make the position explicit which otherwise was
implicit. The Bench went back to the provisions of the Original
Act to hold that the clarification issued by the Parliament was in
tune with the actual interpretation of the original provision. In
G that view of the matter, it was held :
~ ,A <
"As noted by this Court in Commissioner of Income Tax,
Bombay & Ors. v. Podar Cement Pvt. Ltd. & Ors. [(1997)
5 SCC 482 = 2002-TIOL-445-SC-IT] the circumstances
under which the amendment was brought in existence and
H
•
UNION OF INDIA & ORS. V M/S MARTIN LOTIERY 973
AGENCIES LTD. [S.B. SINHA, J.]

1 • the consequences of the amendment will have to be taken A
care of while deciding the issue as to whether the
amendment was clarificatory or substantive in nature and,
whether it will have retrospective effect or it was not so.

~ 33. We may also notice that in that judgment itself a
distinction has been made with a clarificatory provision and a
B
substantive provision to opine that Explanation 4 was
clarificatory in nature and not a substantive provision.
1
To the sar:ne effect is the decision of this Court in SEOCO
• " Forex International Drill. Inc. & Ors. v. Commissioner of c
Income, Tax, Dehradun & Anr. [(2005) 12 SCC 717]. The
explanation which was in question was added by Finance Act,
1983 with effect from 1979 was to the following effect:
"Explanation.-For the removal of doubts, it is hereby
declared that income of the nature referred to in this clause D
• payable for service rendered in India shall be regarded as
j...
income earned in India."
Similar expression is to be found in the instant case.
However, in SEDCO the question which arose for consideration
was interpretation of the words 'off period'. While considering E
the question as to whether salary for the off period was taxable
as arising out of services rendered in India, this Court noticed
that there was a reasonable nexus between salary earned for
- .,, the off period and the services rendered in India .
F
34. The Gujarat High Court in CIT v. S. G Pgnatal [(1980)
124 ITR 392 (Guj)] held that words 'earned in India' occurring in
clause (ii) must be interpreted as "arising or accruing in India"
and not"from service rendered in India". Opining that the High

. ..
)..
Court proceeded on an incorrect hypothesis, it was held :
"The High Court did not refer to the 1999 Explanation in
upholding the inclusion of salary for the field break periods
G

in the assessable income of the employees of the
appellant. However the respondents have urged the point
before us. H
974 SUPREME COURT REPORTS [2009] 7 S.C.R.

A In our view the 1999 Explanation could not apply to •'t
assessment years for the simple reason that it had not
come into effect then. Prior to introducing the 1999 +--
Explanation, the decision in CIT v. S. G Pgnatale (supra)
was followed in 1989 by a Division Bench of the Gauhati
B High Court in Commissioner of Income Tax v. Goslino
Mario reported in [(2002) 10 SCC 165]. It found that the
1983 Explanation had been given effect from 1.4.1979
whereas the year in question in that case was 1976-77
and said: ~

c "... it is settled law that assessment has to be made with ·-·
reference to the law which is in existence at the relevant
time. The mere fact that the assessments in question
has(sic) somehow remained pending on April 1, 1979,
cannot be cogent reason to make the Explanation
D applicable to the cases of the present assessees. This
fortuitous circumstance cannot take away the vested rights •
-I
of the assessees at hand"."
35. Reverting to the decision of a Kerala High Court in
CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker)] wherein Gujarat
E High Court's judgment was followed, this Court noticed that
explanation was not held to be a declaratory one but thereby
the scope of Section 9(1 )(ii) of the Act was widened. The law in
the aforementioned premise was laid down as under :
y -
F "17. As was affirmed by this Court in Goslino Mario (supra),
a cardinal principle of the tax law is that the law to be
applied is that which is in force in the relevant assessment
year unless otherwise provided expressly or by necessary
implication. [See also: Reliance Jute and Industries. v.
CIT [(1980) 1 SCC 139]. An Explanation to a statutory
G
provision may fulfil the purpose of clearing up an ambiguity -. ..A.. <I
in the main provision or an Explanation can add to and
widen the scope of the main section (See: Sonia Bhatia
v. State of U.P. [(1981) 2 SCC 585 at 598]. If it is in its
nature clarificatorythen the Explanation must be read into
H
UNION OF !NOIA & ORS. V MIS MARTIN LOTIERY 975
AGENCIES LTD. [S.B. SINHA, J]

the n:iain provision with effect from the time that the main A
provision came into force (See: Shyam Sunder v. Ram
Kumar [(2001) 8 SCC 24 (para 44)]; Brij Mohan Laxman
Das v. CIT[(1997) 1 SCC 352 at 354], CIT v. Podar Cement
((1997) 5 SCC 482 at 506]. But if it changes the law it is
not gresumed to be retrosgective irresgective of the fact B
that the ghrase used are 'it is declared' or 'for the removal
of doubts'.

18. There was and is no ambiguity in the main provision
..' of Section 9(1 )(ii). It includes salaries in the total income
of an assessee if the assessee has earned it in India. The c
word "earned" had been judicially defined in S. G Pgnatale
(supra) by the High Court of Gujarat, in our view, correctly,
to mean as income "arising or accruing in India". The
amendment to the section by way of an Explanation in
1983 effected a change in the scope of that judicial D
•
j..
definition so as to include with effect from 1979, "income
payable for service rendered in India".
19. When the Explanation seeks to give an artificial
meaning 'earned in India' and bring about a change
effectively in the existing law and in addition is stated to E
come into force with effect from a future date, there is no
principle of interpretation which would justify reading the
Explanation as operating retrospectively."
(Emphasis supplied) F
36. It is, therefore, evident that by reason of an explanation,
a substantive law may also be introduced. If a substantive law
is introduced, it will have no retrospective effect.
The notice issued to the assessee by the appellant has,
G
thus, rightly been held to be liable to be set aside. Subject to the
A. ..
constitutionality of the Act, in view of the explanation appended
to this, we are of the opinion that the service tax, if any, would be
payable only with effect from May, 2008 and not with
retrospective effect
H
976 SUPREME COURT REPORTS [2009] 7 S.C.R.

A 37. In a case of this nature, the Court must be satisfied
that the Parliament did not intend to introduce a substantive
change in the law. As stated hereinbefore, for the aforementioned
purpose, the expressions like 'for the removal of doubts' are
not conclusive. The said expressions appear to have been used
s under assumption that organizing games of chance would be
rendition of service. We are herein not concerned as to whether
it was constitutionally permissible for the Parliament to do so
as we are not called upon to determine the said question but for
our purpose, it would be suffice to hold that the explanation is
C not clarificatory or declaratory in nature.
38. For the views we have taken, we have no other option
but to hold that the High Court judgment albeit for different
reasons warrants no interference. This appeal is dismissed with
costs. Counsel fee assessed at Rs.1,00,000/-.

G.N. Appeal dismissed.