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An analysis of State of Madras v. N. Mudaliar

Whether Imposition of unequal tax rates among states ultra vires to the Art 301 of the Constitution.
Article 301 provides for the freedom of inter-state as well as intra-state trade, commerce and intercourse. The object of the freedom declared by this Article is to ensure that the unity f India may not be broken up by any internal barriers,[1] or restrictions which directly or immediately affect the free flow of trade, commerce and intercourse.

SC held that Art 301 is not a declaration of a mere platitude, or the expression of the pious wish of a declaratory character; it is not also a mere state of a DPSP, but embodies and enshrines a principle of paramount importance that the economic unity of the country will provide the main sustaining force for the stability and progress of the political and cultural unity of the country.[2]

Art 301 is couched in terms of the widest amplitude: trade, commerce and intercourse are thereby declared free and unhampered throughout the territory of India.

The freedom of trade so declared is against the imposition of barriers or obstruction within the state as well as the inter-state, all restrictions which directly or immediately affect the movement of trade are declared by Art 301 to be ineffective.

No power is vested with the executive authority to act in any manner which affects or hinders the very essence and thesis contained in the scheme of Part XIII of the constitution. The declaration contained in Part XIII is against the creation of economic barriers which would stand against the free flow.

Taxation is a deterrent against the free-flow. As a result of favorable or unfavorable treatment by way of taxation, the course of low of trade gets regulated either adversely or favorably.
The Freedom guaranteed by Art 301 is not an absolute freedom. It will be infringed only if,

  1. A restriction is imposed as distinguished from a regulation which in reality facilitates trade, commerce or intercourse.[3]
  2. Such restrictions must directly and immediately affect the free flow of trade, commerce or intercourse.[4]
  3. Such restriction must not be covered by any of the provision in Art 302-305.[5]


The object of Part XIII is not to make inter-state trade, commerce or intercourse absolutely free. Reasonable restrictions in public interest can be placed.

In Jindal Stainless Ltd. v. State of Haryana, the SC held that Art 301 although positively worded, it is negative as freedom correspondingly creates general limitation on all legislative power to ensure that trade and commerce and intercourse throughout India shall be free.

It was further held that Art 301 is not only an authorization to enact laws for the protection and encouragement of trade and commerce amongst states but by its own force creates an area free from interference by the state and therefore, Art 301 per se constitutes limitation on the power of the state.[6]

Art 301-305, taken together, present a complicated array of provisions which has raised various issues of interpretation. According to DAS J. in Automobile Transport v. State of Rajasthan,[7] the provisions contained in this group of Articles have been framed with a view to three considerations, first, in the larger interests of India there must be free flow of trade, commerce and intercourse, both inter and intra state, second, the regional interests must not be ignored altogether and the third, there must be a power of intervention by the Union in any case of crisis to deal with particular problems that may arise in any part of India.

Article 302 relaxes the limitation in favour of parliament by providing that it may impose restrictions on freedom guaranteed by Art 301 as may be required in the public interest except that it cannot give any preference to any state over another or discriminate between one state and the other by virtue of any entry relating to any trade and commerce in Lists I and III in the seventh schedule,[8] unless such preference or discrimination is necessitated by any situation arising from scarcity of goods in any part of India.[9]

Thus, a relaxation is made in the application of Art 301 to a Union law provided, it satisfies the requirements of Art 302. The word “Public Interest” is subject to judicial review and may be questioned in the court.[10]

Art 304(a)[11] authorizes a state legislature to impose a non-discriminatory tax on goods imported from other states even though it interferes with the freedom of trade and commerce guaranteed by Art 301. However, Article 304(b) provides exceptions whereby the discriminatory restrictions can be considered valid only if-

  1. Such restrictions shall be in public interest.
  2. They shall be reasonable.
  3. That they shall be subject to the procurement of prior sanction of the president before introducing the bill.[12]


POSITION OF LAW PRIOR TO STATE OFMADRAS v. N MUDALIAR
State of Madras v. N. Mudaliar was decided in the year 1969. Prior to this case, the SC in Atiabari Tea Co. Ltd. v. State of Assam[13] and Automobile Transport Ltd. case[14] held that Taxes may and do amount to restrictions but it is of an extreme approach to consider that all taxes should be governed by Art 301 whether or not their impact on trade is immediate or mediate, direct or remote.

In Andhra Sugars Ltd. and Another v. The State of A.P and Others[15], the Court held that a tax on sale of goods does not impede the free movement or transport of goods and is not violative of Art. 301. The court therefore considered it to be a settled law that a tax may in certain cases hamper the flow of trade directly or immediately but every imposition of tax does not do so.

Factual Analysis of The Case
The Respondent in the present case was an assessee under the CST Act, 1956. A dispute arose with respect to whether the assessee is liable to pay CST. In the proceedings the Deputy Commercial tax officer rejected the contention of the assessee that a part of the turnover of his business in matches arose out of intra-State sale transactions at the assessee's depot at Ongole (in the State of Andhra Pradesh) to which depot the goods were dispatched by him from his place of business in the State of Madras.

The Deputy Commercial Tax Officer held that the goods were moved from "the godown stock" of the assessee in execution of contracts of sale with merchants outside the State of Madras, and on that account the turnover from sales was liable to tax under the Central Sales Tax Act.

The assessee moved the High Court of Madras under Art. 226 of the Constitution seeking a writ of certiorari quashing the order of assessment, on the grounds that the provisions of the Central Sales Tax Act which permitted levy of tax at varying rates in different States were invalid, and that the transactions brought to tax were not in truth inter-State transactions.

The High Court did not determine the nature of the transactions but held that sub-s. (2), (2A) and (5) of s. 8 of the Central Sales Tax Act, 1956[16], in operation at the relevant time imposed or authorised the imposition of varying rates of tax in different States on similar inter-State transactions and the resultant inequality in the burden of tax affected and impeded inter-State trade, commerce and intercourse, and thereby offended Arts. 301 and 303(1) of the Constitution.

The High Court rejected the plea of the assessee that s. 9(3)[17] of the Act was ultra vires. The State has appealed to this Court with certificate granted by the High Court against the order declaring sub-ss. (2), (2A) and (5) of s. 8[18] of the Central Sales Tax Act, 1956, invalid.

Issues raised before the Supreme Court

  1. Whether entries relating to trade and commerce in the Lists in the Seventh Schedule are restricted to entries 41 & 42 of List I, entries 26 & 27 of List II and entry 33 of List III, or relate to all general entries which affect trade and commerce.
  2. Whether Imposition of unequal tax rates among states ultra vires to the Art 301 of the Constitution.

The State contended that under Art. 303 could only be exercised so as to restrict the authority of the Parliament which arises by virtue of an entry relating to trade and commerce in the legislative lists and it was urged that an entry with respect to the levy of tax on trade and commerce and is not an entry relating to trade and commerce and therefore there is no prohibition against the Parliament exercising power or authorising the giving of any preference to one State over another. Reliance in support of that contention was placed upon the judgment in Sundararamier and Company v. State of Andhra Pradesh[19] in which Venkatarama Aiyar, J., pointed out that under the scheme of entries in List I & II of the Seventh Schedule the power of taxation exercisable in respect of any matter is a power distinct from the power to legislate in respect of that matter.

It was also urged that the expression "an entry relating to trade and commerce in any of the Lists in the Seventh Schedule" was restricted to the entries which expressly deal with the power to legislate in respect of trade and commerce i.e. entries 41 & 42 of List I, entries 26 & 27 of List II and entry 33 of List III in the Seventh Schedule, and extended to no others. On the other hand it was contended that all legislative entries which directly affect trade and commerce are also within the expression "entry relating to trade and commerce"

Contentions of the Respondent
The Respondents contended that unequal rates of tax on the same commodity is discriminatory and adds burden on inter-state trade since the higher rate of tax acts as a barrier to the free movement of trade and commerce. Reliance was placed upon Firm A.T.B. Mehtab Majid & Co.'s case[20] and A. Hajee Abdul Shakoor and Co. v. State of Madras[21] in which the court held that unequal taxes on imported skins contravened Art. 304(a) of the constitution.

Decision of the Supreme Court
The SC allowed the appeal and set aside the order passed by the High Court declaring the provisions of section 8(2), 8(2A) and 8(5) ultra vires. With regard to the question whether entries relating to trade and commerce in the Lists in the Seventh Schedule are restricted to entries 41 & 42 of List I, entries 26 & 27 of List II and entry 33 of List III, or relate to all general entries which affect trade and commerce, the SC opined that it is merely an academic question and found that it is not necessary to decide whether for the purpose of Art 303, entries relating to tax on sale or purchase of goods i.e. entry 92A of List I, entry 54 of List II are entries relate to trade, commerce.

Reasoning of the Supreme Court behind its decision
J.C. Shah in deciding this case referred to various case laws and in particular, the development of taxation that is prevalent at that time. The GOI Act of 1935 was referred to through which the provinces have gained the power to tax multiple times.[22] State of Bombay v. United motors[23], Bengal Immunity Company Ltd. v. State of Bihar[24], Sales Tax Laws Validation Act VII of 1956[25] was referred to decide upon who is eligible to tax over a transaction.

The Court has referred to the scheme of the CST Act and found that the provisions were intended to restricted the imposition of multiple taxation on a single inter-state transaction by different states. Later, the Court referred to Atiabari Tea Co. Ltd. case[26]in which Gajendragadkar J. held that imposing tax on sales doesn’t restrict the trade, commerce and intercourse directly, immediately or remotely.

The Andhra Sugars Ltd. and Another v. The State of Andhra Pradesh and others
[27] was referred to in which Bachawat J. held that tax on sale on goods does not directly impede free movement of transport of the goods and section 21 of the CST act[28] isn’t an exception.

With regard to the first issue before the court, the Court opined the an act which is merely enacted for the purpose of imposing tax which is to be collected and not to be retained by the state does not amount to law giving, or authorizing the giving of any preference to one state over another, or making, or authorizing the making of, any discrimination between one state and another, merely because of varying rates of tax prevail in different states.

With regard to the second question i.e. whether the imposition of unequal rates of tax in various states is ultra vires, the SC looked into whether imposition of unequal rates tax restrict the trade. The SC in this regard opined that flow of trade doesn’t necessarily depend upon the rates of tax but on variety of factors such as the source of supply, place of consumption, existence of trade channels, the rates of freight, trading facilities, availability of efficient transport and other facilities for carrying on trade.

The court in this regard referred to The King v. Barger[29], in which the Australian HC observed that the flow of trade depend upon the natural or business circumstances and there is nothing preventing the Govt. from imposing taxation for the welfare of the people. This observation was approved by the privy council in W. R. Moran Proprietary Ltd. v. The Deputy Federal Commissioner of Taxation (N.S.W.) and others [1940] 63 C.L.R. 338[30]

The court opined that prevalence of differential rates of tax on the same commodity cannot be regarded as the sole determinative of the object to discriminate between states. The Central Sales Tax Act is enacted under the authority of the Union Parliament, but the tax is collected through the agency of the State and is levied ultimately for the benefit of the States and is statutorily assigned to the States.

That is clear from the amendments made by the Constitution (Sixth Amendment) Act, 1956, in Art. 269, and the enactment of cls. (1) & (4) of s. 9 of the Central Sales Tax Act. The Central sales-tax though levied for and collected in the name of the Central Government is a part of the sales-tax levy imposed for the benefit of the States. By leaving it to the States to levy sales-tax in respect of a commodity on intra-State transactions no discrimination is practiced : and by authorizing the State from which the movement of goods commences to levy on transactions of sale Central sales-tax, at rates prevailing in the State, subject to the limitation already set out, no discrimination can be deemed to be practiced.

R.S.Bachawat, J. referred to Atiabari Case in which the test to determine the limits of the amplitude of the freedom guaranteed under Art 301 was laid down. It is whether the impugned restriction would operate directly or immediately on the movement of the trade.

The Court found that there is no distinction between intra-state and inter-state taxes and thus wouldn’t offend Art 301 and thus concluded that tax doesn’t act directly or immediately on the free flow of trade or the movement of the goods from one part of the country to another since tax is not sale and the movement is incidental to and a consequence of the sale. Reliance was placed upon The Bengal Immunity Company Ltd. v. State of Bihar[31].

Thereby the SC allowed and remanded the Appeal.

Position of Law Post Sadanandan v/s State of Kerala

Jindal Stainless Ltd. v. State of Haryana[32] and was referred to the larger bench for reconsideration. The Court held that Levy of sales tax on goods which are held to have been sold inside the state could not be considered as contravening Art 301.

The restrictions were imposed were introduced to check tax evasion. They do unduly hamper trade. On the other hand, they are imposed in the public interest. They do not violate Art 19(1)(g) or 301.[33] An increase in the rate of tax cannot per se be said to impede free trade and commerce.[34]

In State of Bihar v. Harihar Prasad[35], the court upheld the validity of a notification of the state of Bihar requiring filling of certain forms from the carriers of goods in inter-state commerce passing through the state on the ground that the notification is incidental to the power of levying sales tax.

With respect to the question whether for the purpose of Art. 303, entries relating to tax on the sale of goods are entries relating to trade and commerce, the question was left open in the present case. However, it doesn’t appear that the liberal interpretation given in Automobile Case[36] has been dissented from in any later case.

The question whether Unequal taxation restricts trade and commerce came up again in State of T.N v. Sitalakshmi Mills[37] in which the constitution bench followed the majority decision of State of Madras v. N. Mudaliar.

Conclusion
The judgement laid down in State of Madras v. N. Mudaliar is an addition to the already settled law laid down in Atiabari Tea Co. Ltd v. State of Assam which was reconsidered by the SC in Automobile Transport Ltd. v. State of Rajasthan that taxation doesn’t restrict the flow of trade, commerce and intercourse. However, in the present case, the SC has provided the reasoning and the test to be used to determine whether a taxation policy is restricting flow of trade, commerce and intercourse.

The Court emphasized upon, the public interest to be the defence for levying unequal rates of taxes. This gives rise to the question whether public interest is justiciable. In Atiabari case, the SC didn’t give a conclusive opinion about the same.

In Kyyerbari Tea Co. Ltd. v. State of Assam[38], the court held that the public interest is not an expression of a definitive opinion that the requirement of Public interest does not become the subject matter of adjudication in court proceedings when the validity of law passed under Art 304(b) is questioned. Thus, the element of public interest appears to be justiciable.

But there is little to doubt the jurisdiction of the court to examine whether a particular law made by the parliament, curtailing the freedom of trade and commerce, is in public interest. It is not apparent to say that the court shall be powerless even though the invasion of the parliament is patent and flagrant and contravening public interest.

Thus it can be concluded that taxation doesn’t impede the flow of trade, commerce and intercourse however subject to the condition that public interest is to be proved.

End-Notes
[1] State of Bombay v. Chamarbaugwala, AIR 1957 SC 699.
[2] Atiabari Tea Co. Ltd. v. State of Assam, AIR 1961 SC 232.
[3] Automobile Transport v. State of Rajasthan, (1963) 1 SCR 491.
[4] Jindal Stainless Ltd. v. State of Haryana, AIR 2006 SC 2550.
[5] Supra note 4.
[6] Supra note 4.
[7] Automobile Transport v. State of Rajasthan, AIR 1962 SC 1406 (1418).
[8] Article 303(1) of Indian Constitution.
[9] Article 303(2) of Indian Constitution.
[10] State of Bombay v. Ali Gulshan, AIR 1955 SC 810.
[11] Article 304(a) of the India Constitution.
[12] Supra Note 4.
[13] Supra Note 2.
[14] Supra note 7.
[15] The Andhra Sugars Ltd. and Another v. The State of Andhra Pradesh and others, MANU/SC/0245/1967.
[16] Section 8 of CST Act, 1956.
[17] Section 9(3) of CST Act, 1956.
[18] Section 8 of CST Act, 1956.
[19] Sundararamier and Company v. State of Andhra Pradesh, MANU/SC/0151/1958.
[20] Firm A.T.B. Mehtab Majid & Co., MANU/SC/0352/1962.
[21] A. Hajee Abdul Shakoor and Co. v. State of Madras, MANU/SC/0262/1964.
[22] List II of GOI Act, 1935.
[23] State of Bombay v. United motors, MANU/SC/0095/1953.
[24] Bengal Immunity Company Ltd. v. State of Bihar, MANU/SC/0083/1955.
[25] Sales Tax Laws Validation Act VII of 1956.
[26] Supra Note 2.
[27] Supra Note 14.
[28] Section 21 of the Central Sales Tax act, 1956.
[29] The King v. Barger, [1908] 6 C.L.R. 41.
[30] W. R. Moran Proprietary Ltd. v. The Deputy Federal Commissioner of Taxation (N.S.W.) and others, [1940] 63 C.L.R. 338.
[31] The Bengal Immunity Company Ltd. v. State of Bihar MANU/SC/0083/1955
[32] Jindal Stainless Ltd. v. State of Haryana.
[33] Sodhi Transport Co. v. State of U.P, AIR 1986 Sc 1099.
[34] State of Kerala v. Abdul Kadir, AIR 1970 SC 1912.
[35] State of Bihar v. Harihar Prasad, AIR 1989 Sc 1119.
[36] Supra note 3.
[37] State of T.N v. Sitalakshmi Mills, AIR 1974 SC 1505.
[38] Kyyerbari Tea Co. Ltd. v. State of Assam

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