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G.K. Krishnan and ors. v. State of Tamil Nadu and ors

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-
  1. 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.
  2. 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.
  3. 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-
  1. on a time basis whether or not with reference to any route or distance, or
  2. 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
  1. 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.
  2. 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).
  3. The tax imposed is excessive and therefore, it operates as unreasonable restriction upon the fundamental right of the appellants to carry on the business.
  4. The imposition of different rates of tax on contract and stage carriages is discriminatory and is, therefore, hit by Article 14.

  1. 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.
  2. 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.
  3. 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.
  4. 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.

  1. Atiabari Tea Co. v. State of Assam, [1961] 1 SCR 809.
  2. 3 CK Thakker, COMMENTARY ON CONSTITUTION OF INDIA 3021 (Whytes & Co. 2016).
  3. Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR 1962 SC 1406.
  4. Jindal Stainless Ltd. v. State of Haryana, AIR 2006 SC 2550.
  5. Ibid.
  6. G.K. Krishnan v. State of Tamil Nadu, AIR 1975 SC 583.
  7. 2 Dr Subhash C. Kashyap, CONSTITUTIONAL LAW OF INDIA, 1764 (Universal Law Publishing 2015).
  8. Ibid.
  9. Ibid.
  10. K. Ramanathan v. State of Tamil Nadu, AIR 1985 SC 660.
  11. State of Assam v. Labanya Probha Devi, AIR 1967 SC 1575.
  12. State of Mysore v. H. Sanjeeviah, AIR 1967 SC 1189.
  13. Atiabari Tea Co. v. State of Assam, [1961] 1 SCR 809.
  14. Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR 1962 SC 1406.
  15. Khverbari Tea co. Ltd. v. The State of Assam, [1964] 5 SCR 975.
  16. 8, D.D. Basu, Commentary on the Constitution of India, (8th ed. 2012), 9765
  17. Freight lines & Construction Holding Ltd. v. State of New South Wales, [1968] A.C. 625.
  18. Morf. v. Bingaman, 298 U.S. 407; Aero Mayflower transit Co. v. Board of R.R. Commrs., 332 U.S. 497
  19. Interstate Transit, Inc. v. Lindscy 283 U.S. 183
  20. State of Madras v. N.K. Nataraja Mudaliar, [1968] 3 SCR 829.
  21. State of Gujarat v. Ambica Mills Ltd, 1974 AIR 1300.
  22. Amalgamated Tea Estates v. State of Kerala [1974]94 ITR 479(SC).
  23. Dandridge v. Williams, 397 US 520.
  24. State of Gujarat v. Ambica Mills Ltd, 1974 AIR 1300.
  25. San Antonio School District v. Bodrigues, 411 U.S.I 1 (1973)
  26. Jindal Stainless Ltd. v. State of Haryana, AIR 2006 SC 2550.

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