Article 301 of the Constitution states that subject to the other provisions
of Part-XIII, trade, commerce and intercourse throughout India shall be free. It
is not freedom from all laws but freedom from such laws which restrict or affect
activities of trade and commerce amongst the States. Although Article 301 is
positively worded, in effect, it is negative as freedom correspondingly creates
general limitation on all legislative power to ensure that trade, commerce and
intercourse throughout India shall be free.
Article 301, therefore, refers to freedom from laws which go beyond regulations
which burdens, restricts or prevents the trade movement between States and also
within the State. Since freedom correspondingly imposes limitation, we have the
doctrine of direct and
immediate effect of the operation of the impugned law on the freedom of trade
and commerce in Article 301(a)
enunciated in Atiabari Tea Co. case.[1]
Broadly, the above analysis of the scheme of Articles 301 to 304 shows that
Article 304 relates to the State Legislature while Article 302 relates to the
Parliament in the matter of lifting of limitation, which, as stated above, flows
from the freedom of trade and commerce guaranteed under Article 301.[2] Article
304 also confers upon the State Legislature power to lift the limitations
imposed on it by Article 301 and Clause (1) of Article 303.
This aspect is important because the doctrine of direct and immediate effect
which is mentioned in Atiabari Tea Co.s case emerges from the concept of limitation
embodied in Article 301. It is this doctrine of direct and immediate effect
which constitutes the basis of the working test propounded vide para 19 in
Automobile Transports case.[3]
Therefore, whenever the law is impugned as violative of Article 301, the Courts will have to examine the effect of the
operation of the impugned law on the inter-State and the intra-State movement of
goods, which movement constitutes an integral part of trade.[4]
Whenever a law is challenged on the ground of violation of Article 301, the
Court has not only to examine the pith and substance of the law but in addition
thereto, the Court has to see the effect and the operation of the impugned law
on inter-State trade and commerce as well as intra-State trade and commerce. The
concept of compensatory taxes was propounded in the case of Automobile
Transports case 1962 SC 1406 in which compensatory taxes were equated with
regulatory taxes.
In that case, a working test for deciding whether a tax is
compensatory or not was laid down. In that judgment, it was observed that one
has to enquire whether the trade as a class is having the use of certain
facilities for the better conduct of the trade/business. This working test
remains unaltered even today. Accordingly, the constitutional validity of
various local enactments which are the subject-matters of pending appeals,
special leave petitions and writ petitions will now be listed for being disposed
of in the light of this judgment.[5]
Tax imposed on contract carriages, held, compensatory in character, hence not a
restriction of trade and commerce under Article 301 and need not comply with
Article 304 (b).[6]
Strictly speaking, a compensatory tax is based on the nature and the extent of
the use made of the roads, as for example, a mileage or ton-mileage charge and
if the proceeds are devoted to the repair, upkeep and maintenance and
depreciation of relevant roads and the collection of the exaction involves no
substantial interference with the movement.[7] What is essential for the purpose
of securing freedom of movement by road is that no pecuniary burden should be
placed upon it which goes beyond a proper recompense to the State for the actual
use made of the physical facilities provided in the shape of a road.[8]
The word regulation cannot have any rigid or inflexible meaning as to exclude prohibition.
The word regulate is difficult to define as having any precise meaning. It
is a word of broad import, having a broad meaning and is very comprehensive in
scope.[9] One of the ways in which regulation or control over production, supply
and distribution of, and trade and commerce in an essential commodity like
foodstuffs may be exercised is by placing a ban on inter-State or intra-State
movement of foodstuffs held by a wholesale dealer, commission agent or
retailer.[10] Restrictions obstruct the freedom whereas regulations promote it.
Police regulations, though they may superficially appear to restrict the freedom
of movement, in fact provide the necessary conditions for free movement.
Regulation such as provision for lighting, speed, good conditions of vehicles,
timings, rule of the road and similar others, really facilitate the freedom of
movement rather than retard it. So too, licensing system with compensatory fees
would not be restrictions but regulatory provisions for without it, the
necessary lines of communication, such as roads, waterways and airways cannot
effectively be maintained and the freedom declared may in practice turn out to
be an empty one. So too, regulations providing for necessary services to enable
the free movement of traffic, whether charged or not, cannot also be described
as restrictions impeding the freedom.5
A regulatory measure imposing compensatory taxes for facilitating trade,
commerce and intercourse is not Violative of article 301.[11] A rule regulating
transport in its essence permits transport, subject to certain conditions
devised to promote transport; such a rule aims at making transport orderly, so
that it does not harm or endanger other persons following a similar vocation or
the public, and enables transport to function for the public good.[12]
G.K. Krishnan & Ors. V. State Of Tamil Nadu & Ors. (Air 1975 Sc 583) Facts-
Under the Madras Motor Vehicles Taxation Act. 1931, levy of tax on motor
vehicles by local bodies in the Presidency of Madras came to be imposed. The
rate of tax was increased Rs 30 per seat per quarter when the system of issuing
permits for omnibuses by the Regional Transport Authority came into vogue.
The
State Government by a notification dated April 19, 1969 again increased the rate
of tax to Rs 50 per seat per quarter with effect from July 1, 1969 with the
express object of avoiding unhealthy competition between omnibuses and regular
stage carriage buses and to put down the misuse of omnibuses.
Section 4 of Madras Motor Vehicles Taxation Act, 1931 stated that-
- The State Government may, by notification in the official gazette, from
time to time direct that a tax shall be levied on every motor vehicle using
any public road in the Presidency of Madras.
- The notification issued under Sub-section (1) shall specify the rates at
which, and the quarter from which, the tax shall be levied:
Provided that the rates shall not exceed the maxima specified in Schedule II.
- A notification under Sub-section (1) may be issued so as to have
retrospective effect from a date not earlier than the 1st day of July, 1962.
Provided that a notification under Sub-section (1) in respect of the rates
as amended by the Madras Motor Vehicles Taxation (Amendment) Act, 1967 shall
not have retrospective effect from a date earlier than the 1st day of July,
1967.
Section 2(3) of Motor Vehicles Act, 1939 states that
'contract carriage' means a motor vehicle which carries a passenger or
passengers for hire or reward under a contract expressed or implied for the use
of the vehicle as a whole at or for a fixed or agreed rate or sum-
- on a time basis whether or not with reference to any route or distance,
or
- from one point to another, and in either case without stopping to pick
up, or set down along the line of route passengers not included in the
contract; and includes a motor cab notwithstanding that the passengers may
pay separate fares.
Section 2(29) states that-
Stage carriage means a motor vehicle carrying or adapted to carry more than six
persons excluding the driver which carries passengers for hire or reward at
separate fares paid by or for individual passengers, either for the whole
journey or for stages of the journey.
During the pendency of the writ petitions challenging the aforesaid
notification, the Government further increased the rate of tax to Rs 100 per
seat per quarter by a notification dated February 27, 1970. The latter
notification too was challenged in the High Court of Madras which allowed the
writ petitions and quashed the aforesaid notifications.
Appeals were preferred from the High Courts decision to the Supreme Court.
Thereafter, the Government issued another notification dated September 20, 1971
enhancing the rate of tax with effect from July 1, 1971. That notification was
challenged by means of writ petitions under Article 32 in the Supreme Court and
the matter was decided by a 3-judges bench comprising of CJ. A. Alagiriswami, J.
A.N. Ray and J. K.K. Matthew.
Contentions of Petitioner
- The notification was not a measure of taxation but a device to eliminate
the competition of omnibuses with stage carriages run by Government. In
other words, the motive of the legislature was to eliminate competition and
not to impose tax and hence, it would be bad in law.
- The tax is neither compensatory nor regulatory in character and,
therefore, the tax is a restriction on the freedom of trade, commerce and
intercourse guaranteed under Article 301 and as the notification is not a
law passed with the previous sanction of the President, it would not be
saved by Article 304(b).
- The tax imposed is excessive and therefore, it operates as unreasonable
restriction upon the fundamental right of the appellants to carry on the
business.
- The imposition of different rates of tax on contract and stage carriages
is discriminatory and is, therefore, hit by Article 14.
Judgment
- Regarding the first contention, the Supreme Court held that as the state
legislature was competent to pass the Act and as the Government is authorised under Section 4 to levy the tax, the question of the motive with
which the tax was imposed is immaterial.
To put it differently, there can be no plea of a colourable exercise of power to
tax if the Government had power to impose the tax and the fact that the
imposition of the tax was for the purpose of eliminating competition would not
detract from its validity.
If an authority has power to impose a tax, the fact that it gave a wrong reason
for exercising the power would not derogate from the validity of the tax.
Therefore, there is no substance in the first contention.
- The second contention raised the question before the Supreme Court that
whether tax in question is a restriction on the freedom of trade, commerce
and intercourse guaranteed by Article 301 of the Constitution. To answer
this question, the honourable Court looked into the jurisprudence of the rule of law
in this regard.
They referred to Atiabari Tea Co. v. State of Assam,[13] wherein the majority
held that it would be reasonable and proper to hold that restrictions, freedom
from which is guaranteed by Article 301, would be such restrictions as directly
and immediately restrict or impede the free flow or movement of trade and that
taxes may and do amount to restrictions, but it is only such taxes as directly
and immediately restrict trade that would fall with in the purview of Article
301. Sinha, Shah, J. who delivered a separate judgment said that Article 301
guaranteed freedom, in its widest amplitude-freedom from prohibition, control,
burden or impediment in commercial intercourse.
The direct and immediate restriction test had great adverse effect upon the
financial autonomy of states, for instance, a law passed by a state legislature
under Entry 56 in List II, namely "taxes on goods and passengers carried by road
or on inland waterways" would be a restriction which is immediate and direct on
the movement part of trade and commerce and would be bad. This means that Entry
56 in List II is rendered otiose.
In view of the grave impact of this judgment, when appeals from Rajasthan High
Court came up for consideration in Automobile Transport (Rajasthan) Ltd. v.
State of Rajasthan,[14] a larger Bench was constituted and that Bench considered
the question once again. It practically overruled the decision in Atiabari Case,
insofar as it held that if a State legislature wanted to impose tax to raise
money necessary in order to maintain roads, that could only be done after
obtaining the sanction of the President as provided in Article 304(b).
In Khverbari Tea co. Ltd. v. The State of Assam,[15] it was said that the
decision in Atiabari case was affirmed in Automobile Case with a clarification
that regulatory measures or measures imposing compensatory tax do not come
within the purview of restrictions contemplated in Article 301 and that such
measures need not comply with the requirement of the provisions of Article
304(b). In whatever way one may choose to put it, the effect of the majority
decision in the Automobile Case is that a compensatory tax is not a restriction
upon the movement part of trade and commerce.
Article 301 imposes a general limitation on all legislative power in order to
secure that trade, commerce and intercourse throughout the territory of India
shall be free. Article 302 gave power to Parliament to impose general
restrictions upon that freedom. But a restriction is put on this relaxation by
Article 303(1) which prohibits Parliament from giving preference to one State
over another or discriminating between one State and another by virtue of the
entries relating to trade and commerce in Lists I and III of Seventh Schedule
and a similar restriction is placed on the states, though the reference to the
states is inappropriate.
Each of the clauses of Article 304 operates as a proviso to Articles 301 and
303. Article 304(a) places goods imported from sister-states on a par with
similar goods manufactured or produced inside the state in regard to state
taxation within the allocated filed. Article 304(b) is the State analogues to
Article 302, for it makes the state's power contained in Article 304(b)
expressly free from the prohibition contained in Article 303(1) by reason of the
opening words of Article 304. Whereas in Article 302 the restrictions are not
subject to the requirement of reasonableness, the restrictions under Article
304(b) are so subject. The word 'free' in Article 301 does not mean freedom from
regulation.
Distinguishing between laws interfering with freedom to carry out the
activities constituting trade and laws imposing on those engaged therein rules
of proper conduct or other restraints directed to the due and orderly manner of
carrying out the activities, the Court defined the latter as regulation.
Regulation would refer to rules which do not necessarily have the character of
trade and commerce, and which contrastingly to restrictions, facilitate freedom
of tax and commerce. The Supreme Court observed that collection of toll tax do
not operate as barriers or hindrance to trade. The Supreme Court laid down a
test to decide if a tax is compensatory or regulatory in nature wherein the test
was that the pecuniary burden on the freedom of movement must not go beyond a
proper recompense to the state for the use of the road.
Regulatory and Compensatory Tax have been distinguished as the former meaning a
tax which seeks to regulate trade or commerce for the purpose of ensuring some
public interest such as public safety, health, and the latter as a tax which may
or may not have such regulation in view, but merely that the tax-payer is
compensated or benefited by the return offered by the utilization of the tax
proceeds.[16]
Referring to Freight lines & Construction Holding Ltd. v. State of New South
Wales[17], the Court observed that imposing tax on users of motors vehicles, and
especially public motor vehicles over and above their general contribution as
taxpayers unless the charge is imposed for the purpose of adversely affecting
trade or commerce.
The Supreme Court observed that the Government in its counter affidavit
clarified that while the cost of road construction and maintenance for 1970-71
was Rs. 19.51 Crores (excluding grants made to local bodies for repair and
maintenance of roads within their jurisdiction), the receipts of vehicle tax was
only Rs. 16.38 Crores. On these lines, the Court once again referred to the
Automobiles Transport case, where it was held that a tax will not cease to
be compensatory because the precise amount collected is not actually used for
providing any facilities. This is the law in USA as well.[18] The Court then
referred to judgments that have upheld the validity of tax on using roads[19].
The Judgment of the Court in State of Madras v. N.K. Nataraja Mudaliar[20] was
discussed wherein between the opinions of Justice Shah who observed that tax
on inter-state sale, is in its essence a tax which encumbers movement of trade
and commerce and Justice Bachawat who in turn observed that tax is on the
sale, the movement being incidental and consequential, the Supreme Court
preferred the second one.
In light of all of the above, the Court concluded that the tax was compensatory
in nature, and therefore did not restrict freedom of trade and commerce.
- Regarding the third issue, the Supreme Court held that since tax is
compensatory in character, it cannot operate as an unreasonable restriction
upon the fundamental right of the appellants to carry on their business,
for, the very idea of a compensatory tax is service more or less
commensurate with the tax levied. No citizen has a right to engage in trade
or business without paying for the special services he receives from the
state. That is part of the cost of carrying on the business.
- In light of the fourth issue, the Supreme Court held that the Government
was able to justify the differential rate of taxation, when in their
counter-affidavit they stated that because of higher flexibility of space
and time and no restrictions because of a fixed schedule, the contract
carriages cause more wear and tear. The Supreme Court concluded that this
meant the rate of taxation was not discriminatory or unreasonable.
The Supreme Court followed the proposition in law that there is a presumption
that a statute is valid[21], especially in a taxing statute and that the onus of
proving unconstitutionality lies on the petitioner[22] by referring to various
cases of the Apex Court.
This principle can be seen in:
In the context of economic interests, we find that discriminatory state action
is almost always sustained, for such interests are generally far removed from
Constitutional guarantees. Moreover, "the extremes to which the Court has gone
in dreaming up rational bases for state regulation in that area may in many
instances be ascribed to a healthy revulsion from the Court's earlier excesses
in using the Constitution to protect interests that have more than enough power
to protect themselves in the legislative halls."[23]
The Court observed that tax laws respond closely to local needs and court's
familiarity with these needs is likely to be limited on the basis of:
The legislature, after all, has the affirmative responsibility. The Courts
have only the power to destroy, not to reconstruct. When these are added to the
complexity of economic regulation, the uncertainty, the liability to error, the
bewildering conflict of the experts, and the number of times the judges have
been overruled by events-self-limitation can be seen to be the path of judicial
wisdom and institutional prestige and stability.[24]
Thus, we stand on familiar ground when we continue to acknowledge that the
Justices of this Court lack both the expertise and the familiarity with local
problems so necessary to the making of wise decisions with respect to the
raising and disposition of public revenues. Yet, we are urged to direct the
States either to alter drastically the present system or to throw out the
property tax altogether in favour of some other form of taxation. No scheme of
taxation, whether the tax is imposed on property, income, or purchases of goods
and services, has yet been devised which is free of all discriminatory
impact[25]
Therefore, the Court held that in such a situation must presume that the
classification was reasonable.
Current Position of Law
In Jindal Stainless Ltd. v. State of Haryana,[26] the Supreme Court of India
held that-
- Only such taxes which are non-discriminatory in nature are valid and
those taxes which are discriminatory in nature are unconstitutional.
- The factum as to whether an entry tax is discriminatory or not has to
examined by the respective benches hearing the same.
- The concept of compensatory tax is flawed and has no legal basis.
End-Notes:
- Atiabari Tea Co. v. State of Assam, [1961] 1 SCR 809.
- 3 CK Thakker, COMMENTARY ON CONSTITUTION OF INDIA 3021 (Whytes & Co. 2016).
- Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR 1962 SC
1406.
- Jindal Stainless Ltd. v. State of Haryana, AIR 2006 SC 2550.
- Ibid.
- G.K. Krishnan v. State of Tamil Nadu, AIR 1975 SC 583.
- 2 Dr Subhash C. Kashyap, CONSTITUTIONAL LAW OF INDIA, 1764 (Universal Law
Publishing 2015).
- Ibid.
- Ibid.
- K. Ramanathan v. State of Tamil Nadu, AIR 1985 SC 660.
- State of Assam v. Labanya Probha Devi, AIR 1967 SC 1575.
- State of Mysore v. H. Sanjeeviah, AIR 1967 SC 1189.
- Atiabari Tea Co. v. State of Assam, [1961] 1 SCR 809.
- Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR 1962 SC
1406.
- Khverbari Tea co. Ltd. v. The State of Assam, [1964] 5 SCR 975.
- 8, D.D. Basu, Commentary on the Constitution of India, (8th ed. 2012), 9765
- Freight lines & Construction Holding Ltd. v. State of New South Wales,
[1968] A.C. 625.
- Morf. v. Bingaman, 298 U.S. 407; Aero Mayflower transit Co. v. Board of
R.R. Commrs., 332 U.S. 497
- Interstate Transit, Inc. v. Lindscy 283 U.S. 183
- State of Madras v. N.K. Nataraja Mudaliar, [1968] 3 SCR 829.
- State of Gujarat v. Ambica Mills Ltd, 1974 AIR 1300.
- Amalgamated Tea Estates v. State of Kerala [1974]94 ITR 479(SC).
- Dandridge v. Williams, 397 US 520.
- State of Gujarat v. Ambica Mills Ltd, 1974 AIR 1300.
- San Antonio School District v. Bodrigues, 411 U.S.I 1 (1973)
- Jindal Stainless Ltd. v. State of Haryana, AIR 2006 SC 2550.
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