Exp) Option a is the correct answer answer.

Statement 1 is correct: Any property/ income/ asset which is used by the state governments to carry out their sovereign functions (carry out the roles and duties of governance entrusted to them by the constitution) are exempt from taxation by the Central government.

Statement 2 is correct: The government, both at Centre and in the states, makes investments in various assets like equities and debt funds. Such assets, although normally taxed, are exempt from central taxation (such as securities transaction tax, dividend distribution tax, capital gains tax, etc), as it is in the service of providing public services (a sovereign function) by the state governments.

Statement 3 is incorrect: The Constitution mentions that property or income of corporations or companies owned by the state government are not exempt from Central taxation, even if they are in the service of the public.

Statement 4 is incorrect: The Supreme Court, in an advisory opinion in 1963, held that the immunity granted to a state in respect of Central taxation does not extend to Excise or Custom duties. This means that if a state imports anything, even if it is for a public purpose, like machines for digging tunnels or laying roads, from abroad, it will have to pay custom duty (which is a central tax).