It is a universally common known fact that taxation meaning levy of tax which is a compulsory exaction of money by sovereign state under a public law for public good. In other words, no subject comes forward to part with any amount of hard earned money voluntarily with no volition, but is forced to pay the amount in a specified quantum at a specified rate. How the levy and collection of tax is to be processed is interdicted by article, 265 of the Constitution of India, where embargo is placed on levy and collections of tax only with the authority of law. It is from this embargo very much discernable that without authority of law, the tax shall neither be levied nor is collected. We all know what is meant by law and what is source of law. Law is nothing but a set of code of rules, regulations, procedures and such law can be traced to many a source. Whatever on a subject is legislated in a democratic country by a competent legislature for conduct of the affairs of the country, on administrative side in terms of the fields of legislation as are enumerated in schedules in lists 1 to 3 in the VII Schedule to the Constitution of India is law. Therefore, the law enacted by a competent legislature within the contours of power of legislation is the primary source of law. Simultaneously, the rules and regulations, notifications, circular instructions, guidelines issued in exercise of the powers conferred on the delegated legislature is also another source of law. The third source of law is decisions of the constitutional courts from which a particular ratio decidendi can be deduced. In terms of the article 141 of the Constitution of India, the judgment of the Apex Court of the country is the law that binds every authority, Court, Tribunal, Sub-Ordinate to it. However, an exception to article 141 is carved out by way of rendition of complete justice in a particular case by the Apex Court in exercise of its’ plenary powers under article 142 of the Constitution of India. To put it otherwise, the decision rendered by the Apex Court in a given case in the process of doing complete justice under given circumstances would not be law in contrast to the enshrinement grafted in article 141. Thus, the various categories of sources of law have been found to be notice.

Let us examine how the tax laws are legislated. IN federal poly the central legislature as well as the State legislature are empowered to legislative laws in respect of the fields of legislation as demarcated in articles 245 & 246 of the Constitution of India and in respect of fields of legislation specified in List-I, the Parliament alone is competent, while in respect of entries in List-II of the state legislature only is competent and in respect of entries in List-III, which is called Concurrent List, the Parliament alone will be competent to legislate law which will also extend to every part of the country.

Now let me confine the discussion only to fields of legislation concerning taxation. Broadly, the tax administration is of two types viz., direct tax and indirect tax. The expression “direct” itself is a mirror of indication that the tax sought to be levied is personam whereas the expression “indirect” simultaneously itself indicates that the tax is not a personam, but on others concerned with use, consumption of goods or enjoyment of services. Indian Income Tax Act, 1961 that replaced the old Income Tax Law, 1922 is a tax on personal or persons’ income earned through any source. In this connection, it is also essential to state the expression person is an inclusive definition to mean and include individual, association of persons, body of persons, society, company etc., Therefore, the basic tenet of income tax law is to impose tax on personal income. The other facet of the taxation is indirect taxation, which means the tax either on sale, purchase, supply of goods or services as the case may be is not on the person, but qua sale or supply or provisions of service. The tax so levied on sale or supply of goods or provision of service, ultimately percolates down the line to fall upon the consumer or recipient of services. Therefore, now the difference between direct tax and indirect tax is very clear even to a naked eye that the direct tax is personam, while the indirect tax is on sale or supply of goods or services which otherwise is destination based one.

The legislature, whether central or provincial shall be competent to enact a law within its’ spheres of territorial limits to mean Parliament can enact a law in terms of List-I and also List- III to apply in all parts of the country, viz., the territorial jurisdiction of the country, which has a state or provincial legislature is empowered to make a legislature in terms of List-II to be applied limited to its’ territorial jurisdiction. Therefore, a state legislature cannot make any law even in terms of the earmarked fields of legislation to transgress or encroach upon the jurisdiction of another province. In this confine, to name some of the taxation laws are Sales Tax/VAT in terms of entry 54, Entry Tax in terms of entry 52, Luxury Tax in terms of entry 62, Land Tax in terms of entry 44, Motor Vehicle Tax in term of entry 51, Entertainment Ax, Professional Tax are all designed to apply within the territorial frontiers of the state as formed with given boundaries in terms of article 3 of the Constitution of India. Therefore, various legislations made by a competent state legislature will have to spin its’ application and adopt within the limits of territorial jurisdiction and to illustrate Tamilnadu State VAT or Sales Tax or Entry Tax law will not extend to nearby states viz., Andhra Pradesh, Karnataka or Kerala, but will have to confine within the limits of Tamilnadu State. The same is the case with all the state enactments.

Now time has come to loiter around and pay attention on the concept of the article viz., scope for Nexus Theory or Theory of Nexus in administration of tax laws.

Let me initiate the elaboration on the concept by explaining the meaning of “Nexus”. It means connection with. In other words, if there is no connection, Nexus Theory will not apply. Whether Nexus Theory and its application is confined to direct taxation, or for that matter can it be extended to indirect tax as also. To proceed with further, I feel it also my duty to state here about the origin of Nexus Theory, where was it explored and how it had travelled to our country to bear the roots in Indian Tax Laws and how its’ theory can be applied.

Since, the concept for erudiate explanation is voluminous for the time being, due to paucity of space, let me deal with how the theory was considered for application first in direct tax laws.

The Nexus Theory does not impose tax. It only indicates the circumstances as well as the connections in which the tax is imposed by an Act of legislature may be enforced in a particular case and unless eventually there is a concluded sale in the sense of passing of the property in the goods, no tax liability attaches under the Act. The Theory of Nexus had been applied in support of tax legislation in more cases than one, not only in our country, but in Australia and England also. In the case of Wanganui Rangitikei Electric Power Board Vs. Australian Mutual Fund Society, His Lord Dixon observed so long as the statute selected some fact or circumstance which provided some connection or relation with New South Whales and adapted this ground of its’ interference, the validity of an enactment would not be open to challenge. Once again, the same learned judge in case of Broken Hill South Limited v. Commissioner of Taxation observed if a connection exists, it is for the legislature to decide how far it should go in the exercises of its’ powers. No doubt that there must be some relevance to the circumstances in the exercise of the power. It is also necessary to state that even dissenting Judge Rich, J; accepted the Theory of Nexus.

The Nexus Theory was applied in full force in the case of Governor General v. Raleigh Investment Company, Wallace Brothers & Company Limited v. Commissioner of Income Tax, Bombay City & AH Wadia v. Commissioner of Income Tax, Bombay all being cases arising under direct tax laws. In Raleigh Investment Company case, the assesse was an English Company with registered office in England. It purchased shares in Nine Sterling Companies incorporated in England, which companies carried on the business in British India and in the process of such business in British India, earned income, profits or gains to declare and pay dividends on the shares in England to its’ share holders including Raleigh Investment Company. The said company was charged to Income Tax and in that connection it should be noted that Raleigh Investment Company, the assesse, therein was not a resident of British India, carried on no business there in India and made no income, profits or gains out of business in India. It had invested its’ money and acquired shares in England in the Nine Sterling Companies, which were all English Companies. It was only when those nine companies declared and paid dividends in England, the assesse company really earned it’s income, profits or gains out of its’ shares carried on out of its’ Nine Sterling Companies. Because the Nine Sterling Companies derived their income out of business then in British India out of which dividends were paid to.Raleigh Investment Company was regarded as sufficient Nexus so as to fasten the tax liability on the assesse company in relation to the income or profits, it derived from the Nine Sterling Companies. Such a distantly derivative connection with a source of income was held as sufficient Nexus to enable British Indian Tax Authorities to charge the company with Income Tax. The Chief Justice His Lord Spens concluded that if some connection exists, the legislature is not compelled to measure the taxation by the degree of benefit received in particular cases by the tax payer. This affects the policy and not the validity of legislation. Again in the case of Wallace Brothers, the connection of the assesse company with British India was not so remote as in Raleigh Investment Company as in Wallace Brothers’ case, the assesse company was a partner in a firm that carried on business in British India and such connection was held to be sufficient Nexus to bring the British India Tax not only the income, profits or gains by the assesse as a partner in the firm, but also its’ income, profits or gains accrued without British India in the previous year. In Wadia’s case, which is also. In Income Tax case that a law imposing tax cannot be impugned on the ground that it is extra territorial, if there is some connection (Nexus) between a person, who is subject to tax and the country, which imposes the tax. Thus, the Nexus Theory was expounded in direct taxes regime. The Nexus Theory was enunciated to extend to indirect tax laws also, in the case of sales tax legislation, it is the sale or purchase of goods, which is the subject matter of taxation and it cannot be predicted that the sale or purchase takes places in one or more places, where the necessary ingredients of sale happened to be located. The Theory of territorial connection or Nexus was not put to the test at any time prior to the enactment of the constitution. The Theory of Nexus cannot be contended to have no application to Sales Tax Legislation at all. Indeed examination of the decisions of the Hon’ble Supreme Court would clearly show that the Theory of Nexus to Salas Tax legislation has been clearly recognized particularly in cases that required interpretation of the true meaning of explanation to article 286(1)(a) of the constitution that created fiction locating the situs of sale or purchase in the state in which the goods had actually been delivered as a result of such sale. In the case of state of Bombay Vs. United Motors (India Limited), Bengal Immunity Company and later in the case of Poppatlal Shah Vs. State of Madras and later in the case of Boddu Paidanna where in it was contended that the Nexus Theory shall be real as it only indicates the circumstance in which a tax imposed by an Act of legislature was being enforced in a particular case. The Nexus Theory was considered in a Sales Tax case by a constitution Bench of Supreme Court in the case of TATA Iron & Steel Company Limited. Vs. State of Bihar. Again another Constitution Bench of Supreme Court explained the theory in the case of Collector of Commercial Taxes, Cuttack Vs. Bharat Sabai Grass Limited in which it was once again reiterated that the Nexus Doctrine is applicable to Sales Tax Law.

Therefore, as already indicated the concept involved in this article is thus dealt with in shortening the deliberations herein. In my humble view as already mentioned, the Nexus does not impose any tax. On the contrary, it will have a potential impact of exploring Nexus or the connection as the case may be in relation to the tax sought to be imposed having regard to the territorial jurisdiction. The judgment in Raleigh Investment Company considered the circumstances that provided a relative connection to impose Income Tax on the income or profits or gains in the form of payment of dividend on the shares held by the England company in Nine Sterling Companies that carried on business in British India that provided the real Nexus to subject the income out of dividends paid by Sterling Company out of income earned in British India despite the fact Raleigh Investment Company was an English Company that never carried on business in British India. Therefore, in application of Theory of Nexus, the income out of dividends was held to be amenable to tax at the hands of British Indian Tax authorities.

It is therefore with all emphasis, once again echoed that Nexus Theory or Theory of Nexus would have its’ own significance for application in taxation laws be whether direct or indirect tax laws, of course, subject to the limits of jurisdiction, sometimes exceeding such jurisdiction depending upon certain specific given circumstances.

I hope that this little article out of my professional knowledge coupled with experience for the past four and half decades in constitutional law as well as revenue laws would be beneficial to my fellow brethren in the fraternity in practice.


All the people who fought for freedom were my heroes. I mean, that was the sort of story I liked reading… freedom struggles and so on.

— Indira Gandhi