TMI Blog2007 (8) TMI 667X X X X Extracts X X X X X X X X Extracts X X X X ..... Areas Act, 1999 is held to be ultra vires article 301. The demand raised against petitioner shall not be enforceable in case not already paid by the petitioner. However, if any amount is collected by the petitioner from its customer as entry tax, the same shall be allowed to be retained by it on proof that the burden thereof has not been passed on to buyers, consumers or users. If the burden has been so passed on to such other persons, the same shall be paid by the petitioner to the State Treasury within a month failing which such amount shall be recoverable from him. Likewise, any amount already paid by the petitioner as entry tax shall be refunded to him on proof of the fact that burden thereof has not been passed on to the users, consumers or buyers of such goods, as the case may be, as aforesaid. The petitioner may lay his claim for refund with required proof before the concerned assessing authority under the Commercial Taxes Department. - D.B. Civil Writ Petition No. 21 of 2002 - - - Dated:- 21-8-2007 - RAJESH BALIA AND MANAK MOHTA , JJ. The case The judgment of the court was delivered by RAJESH BALIA J. The petitioner is a manufacturer of sada pan masala , mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to refer to the procedure provided under article 304 of the Constitution for the purpose of saving it from the restriction imposed under article 301 of the Constitution to be a reasonable restriction. (ii) The contention was also that the entry tax is not merely on the entry of goods within the local area but it requires something more than that, i.e., to say entry of goods into local area must be for its use, consumption or sale therein. (iii) It was also argued that octroi being a compensatory tax, it does not fall within the province of article 301 of the Constitution at all, which also obviate necessity to follow procedure for making a law by State Legislature to overcome the prohibition imposed under article 301 of the Constitution. In this regard, the specific case of the respondents is that prior to introducing entry tax under the Act of 1999, the octroi duty on entry of goods within local limits of municipality or panchayat for use, sale or consumption at such rates as may be notified by the State Government in each local area under municipality or panchayat, as the case may be, was being levied and collected by the concerned local self-Government institution. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Corporation established under the Haryana Municipal Corporation Act, 1994, or a municipality established under the Haryana Municipal Act, 1973, or a Town Board or a Cantonment Board established under the Cantonment Act, 1924, or a zila parishad established under the Haryana Panchayati Raj Act, 1994, or any other local authority constituted or continued under any law for the time being in force . Both the provisions under the Haryana Act are in pari materia with the provisions of the Rajasthan Tax on Entry of Goods into Local Areas Act, 1999. Local area has been defined under section 2 in the Rajasthan Act of 1999 as under: (j) Local area means the area within the limits of, (i) a panchayat established under the Rajasthan Panchayati Raj Act, 1994 (Act No. 13 of 1994), or (ii) a municipality established under the Rajasthan Municipalities Act, 1959 (Act No. 38 of 1959), or (iii) a notified area committee or a cantonment board constituted or established under any law for the time being in force; Charging section 3 of the Act reads as under: Levy of tax. (1) There shall be levied, collected and paid to the State Government a tax on entry of any goods bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of article 304(b). The court further noticed that in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan AIR 1962 SC 1406 the exception to article 301 and its operation in relation to compensatory taxes was a judicially crafted concept by the apex court while examining the validity of the Rajasthan Motor Vehicles Taxation Act, 1951. The challenge to the Rajasthan Motor Vehicles Taxation Act, 1951 was rejected on the ground that the tax on motor vehicles was a compensatory tax which, instead of hindering trade, commerce and intercourse, facilitates them by providing and maintaining the roads. In Automobile Transport's case AIR 1962 SC 1406, the court has observed that: . . . If a statute fixes a charge for a convenience or service provided by the State or an agency of the State, and imposes it upon those who choose to avail themselves of the service or convenience, the freedom of trade and commerce may well be considered unimpaired . . . The court further noticed in Automobile Transport's case AIR 1962 SC 1406 that: . . . a working test for deciding whether a tax is compensatory or not is to enquire whether the trades people are having t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the provisions of article 301 and as the parameters of this judicial concept are blurred particularly by reason of the decisions in Bhagatram's case [1995] 96 STC 654 (SC) and Bihar Chamber of Commerce's case [1996] 103 STC 1 (SC); [1996] 9 SCC 136, we are of the view that the interpretation of article 301 vis-a-vis compensatory tax should be authoritatively laid down with certitude by the Constitution Bench under article 145(3). The reference came to be decided by the Constitution Bench of the Supreme Court vide Jindal Stainless Ltd. v. State of Haryana [2006] 145 STC 544. The five-judge Bench of the Supreme Court did not approve the test laid in Bhagatram Rajeev Kumar's case [1995] 96 STC 654 (SC); [1995] Suppl. 1 SCC 673 and Bihar Chamber of Commerce's case [1996] 103 STC 1 (SC); [1996] 9 SCC 136 and overruled the same. It approved the doctrine of direct and immediate effect of the impugned law on trade and commerce under article 301 as propounded in Atiabari Tea's case AIR 1961 SC 232 and working test devised in Automobile Transport's case AIR 1962 SC 1406 for deciding whether a tax is compensatory or not for attracting article 301 was approve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommon burden based on the principle of ability or capacity to pay. In the case of a 'fee', the basis is the special benefit to the payer (individual as such) based on the principle of equivalence. When the tax is imposed as a part of regulation or as a part of regulatory measure, its basis shifts from the concept of 'burden' to the concept of measurable/quantifiable benefit and then it becomes 'a compensatory tax' and its payment is then not for revenue but as reimbursement/recompense to the service/facility provider. It is then a tax on recompense. Compensatory tax is by nature hybrid but it is more closer to fees than to tax as both fees and compensatory taxes are based on the principle of equivalence and on the basis of reimbursement/recompense. If the impugned law chooses an activity like trade and commerce as the criterion of its operation and if the effect of the operation of the enactment is to impede trade and commerce then article 301 is violated. Burden on the State: 43.. Applying the above tests/parameters, whenever a law is impugned as violative of article 301 of the Constitution, the court has to see whether the impugned enactment facially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and if it is to impede or burden the activity, then the law is a restraint. After finding the law to be restraint/restriction one has to see whether the impugned law is enacted by the Parliament or the State Legislature. Clause (b) of article 304 confers a power upon the State Legislature similar to that conferred upon Parliament by article 302 subject to the following differences: (a) While the power of Parliament under article 302 is subject to the prohibition of preference and discrimination decreed by article 303(1) unless Parliament makes the declaration under article 303(2), the State power contained in article 304(b) is made expressly free from the prohibition contained in article 303(1) because the opening words of article 304 contains a non obstante clause both to article 301 and article 303. (b) While the Parliament's power to impose restrictions under article 302 is not subject to the requirement of reasonableness, the power of the State to impose restrictions under article 304 is subject to the condition that they are reasonable. (c) An additional requisite for the exercise of the power under article 304(b) by the State Legislature is that previous P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf-Government by authorising levy of tax to be part of general revenue of the institution of local self-governance, by whatever name called, of any local area. The fact that the activity on which tax under entry 52 is to be levied is confined to entry of goods into a local area and such entry of goods being for the purpose of use, consumption or sale in the said local area is the first indication that this tax is levied for the purpose of authority administering or governing the local area. The entry itself suggests that levy can only be on class of goods moving from outside the local limits of a territory defined as local area to within such local area and the persons on whom the incidence is to fall will be those, who bring in or receive such goods within that local area. Hence, the levy under entry 52 of List II is designed for generating revenue for the purpose of particular local area, by imposing tax on movement of goods within local area from outside for consumption, use or sale therein. Almost all the statutes in existence before the commencement of the Constitution or which came into existence after the commencement of the Constitution constituting municipalities or oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipalities as bodies of local self-governance as a part of the smallest unit of sovereign power of the free people of India as institutions of self-governance. Part IX deals with Panchayats and Part IXA deals with municipalities. Under article 243G of Part IX, it is envisaged that subject to the provisions of this Constitution the Legislature of a State may, by law, endow the panchayats with such powers and authority and may be necessary to enable them to function as institution of self-Government. The panchayats can be entrusted with such powers as may be provided by law constituting such panchayats as have been detailed in Schedule XI. Like provision has been made under article 243W read with Schedule XII in respect of municipalities under Part IXA. For the purpose of discharging their functions as bodies of self-governance, provisions have also been made for funds for panchayat under article 243H and for municipalities under article 243X, respectively. Relevant provisions of the same read as under: Article 243H. Powers to impose taxes by, and funds of, the panchayats. The Legislature of a State may, by law, (a) authorise a panchayat to levy, collect and appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected by the authority of local area concerned or to be levied and collected by the State Government itself and assign the same to the institution of self-governance of such local area. We are, therefore, of the opinion that authorisation of levy under entry 52 whether to be levied and collected by local authority or by the State Government, it remains for the purpose of local area. If that is not the essential condition, there would remain hardly any distinction about the terminal tax authorised to be levied under entry 58 of Federal List of Government of India Act, 1935 or entry 89 of Union List under the Seventh Schedule of the Constitution and the taxes to be levied under entry 49 of List II of the Government of India Act, 1935 or entry 52 of List II of the Seventh Schedule of the Constitution, and that is the reason behind the ratio that octroi or the tax on the entry of goods into local area for consumption, use or sale therein is neither regulatory nor compensatory but is a part of fund of local authority to be utilised by the authority governing the local area for its expenditure in general, in order to discharge its functions. As we have seen, either law can authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cesses on entry of goods into local areas for consumption, use or sale therein, but was considered to be part of power of local authority to raise revenue for its purpose. The court rejected the contention by drawing distinction between terminal taxes imposable by the Federal Government under entry No. 58 of List I of the Seventh Schedule (corresponding to entry 89 of List I of the Seventh Schedule to the Constitution) and the taxes imposable by provincial Government referred to as cesses on entry of goods into local area in entry 49, List II of the Act, 1935 , (which corresponds to entry 52 under the Constitution in List II of the Seventh Schedule). Adverting to levy under entry 49 of the Act of 1935, the court said: . . . In our judgment no conclusions can possibly be based on the forms of taxes or the nomenclature applied to the taxes imposed prior to April 1, 1937. The Government of India Act made a great alteration in the powers of Provinces and local authorities to impose local taxation, and our enquiry must be limited to an examination of the taxes imposed in 1938 and 1940 to ascertain whether or not the taxes claimed on the grain imported by the appellant did or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to the other provisions of Part XIII of the Constitution. The argument, therefore, on behalf of the applicant that octroi duties can, in no circumstances, be imposed, is also incorrect. Article 304 envisages imposition of such reasonable restrictions on the freedom of trade, commerce or intercourse with or within the State as may be required in the public interest. Item 52 of List II of the Seventh Schedule gives power to the State to impose taxes on the entry of goods into a local area for consumption, use or sale therein. The Constitution, therefore, envisages imposition of octroi duty on entry of goods in municipal area in the public interest, and octroi duty can be imposed under article 304 if the State passes law as provided in that article. Surajmal Baj v. State of Rajasthan AIR 1954 Raj 260: The matter had earlier been considered in another Bench decision in Surajmal Baj v. State of Rajasthan AIR 1954 Raj 260 and a like argument, as in the case of Rajasthan Town Municipalities Act, was raised in connection with levy of octroi duty on entry of goods within Jaipur Municipal limits for use, sale or consumption therein in 1953 by the Jaipur Municipality under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, and to local bodies, and big private concerns. Borough municipality was governed by the Bombay Municipal Boroughs Act, 1925, which was an enactment brought into force even before the commencement of Government of India Act, 1935, replacing the Borough Act of 1911. Under the Bombay Municipal Boroughs Act, 1925, before its amendment from May 5, 1954, under section 73(1)(iv), it was provided that subject to any general or special orders, which the State Government may, in this behalf and to the provisions of sections 75 and 76, a municipality may impose for the purposes of this Act any of the following taxes, namely: (iv) an octroi on animals or goods or both, brought within the octroi limits for consumption or use therein. With effect from May 5, 1954, the words or sale were also inserted. The company was paying octroi on its products brought within the municipal limits of Belgaum even for the purpose of sale within the municipal limits of Belgaum even prior to this amendment. After the amendment, it has paid octroi in respect of its products brought within the municipal limits for sale also but raised a dispute that tax could not be collected prior to May 5, 1954 on goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. On July 6, 1917, the Government of India by a Resolution reversed their former policy and agreed that the conversion was not a change from indirect to direct taxation. Terminal taxes were of the nature of octrois, but were not quite the same. The main differences were: that there was no system of refunds under the Terminal Tax Rules (Terminal Taxes as Findlay Shirras tells us were sometimes known as 'octrois without refunds') and for octroi to be levied the goods must be brought in for sale, use or consumption. Similar view was expressed in Taxation Enquiry Commission, in which it was said: . . . . the most important difference lies in the requirement peculiar to octroi that, for this tax to become leviable, the goods must not only enter the area, but must be for the purpose of 'consumption, use or sale therein'. Usually, this requirement is sought to be satisfied by (a) the ab initio exemption of the goods which merely pass through the area, whether the exit is immediate or after an interval, or (b) by the subsequent refund of the tax collected on such goods. Exemptions and refunds, therefore, are the distinguishing features of the octroi system. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r view in Atiabari's case AIR 1961 SC 232, Automobile Transport's case AIR 1962 SC 1406, and other cases in Shaik Madar Saheb v. State of Andhra Pradesh [1972] 4 SCC 635, Bolani Ores Ltd. v. State of Orissa [1974] 2 SCC 777, G.K. Krishnan v. State of Tamil Nadu [1975] 1 SCC 375, International Tourist Corporation v. State of Haryana [1981] 2 SCC 318, Malwa Bus Service (Pvt.) Ltd. v. State of Punjab [1983] 3 SCC 237, Mrs. Meennakshi Alias Rama Bai v. State of Karnataka AIR 1983 SC 1283; [1984] Supp. SCC 326, B.A. Jayaram v. Union of India [1984] 1 SCC 168, State of Maharashtra v. Madhukar Balkrishna Badiya [1988] 4 SCC 290. The relevant conclusions for the present purposes are: The following propositions are deducible from these cases: (1) The essence of article 301 is a right of free movement of trade without any obstructions by way of barriers inter-State or intraState or impediments operating as such barriers. Taxes which have a direct impact on the flow of trade and commerce constitute a violation of article 301 unless the legislation is brought within the scope of article 304(b). (2) The tax levied upon the entry of goods into a local area for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax collected. The tax levied for augmenting general revenue is not compensatory, though due to activity of State or its agencies in discharge of its general obligation as Welfare State. Some benefits of its spending reaches trade and commerce also as incidental outcome. With aforesaid premise, the court opined with reference to section 22 of the Haryana Act that it envisaged giving of tax to local bodies for utilisation for the development of local area by itself did not indicate that tax was levied for providing facilities to trade and commerce specifically. The aforesaid decision fortifies us in our conclusion that tax on entry of goods within the local area for use, consumption or sale therein is primarily a revenue of general nature collected for the general purpose of the institution of self-governance administering the local area under it, in the absence of any indication that it has been levied with specific object of providing identifiable facilities to the trade and commerce. Whether the tax is authorised to be levied and collected by such institution or is levied and collected by the State Government itself and disbursed amongst the various local areas from where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instead of empowering each local authority to levy and collect the tax on such goods on their entry into the local area for its general fund, the power to levy and collect the same tax has been vested in State Government to be assigned to municipalities and panchayats in its obligation under articles 243H and 243X, respectively but without specifying the purpose for which the funds are assigned. They remain collection by way of augmenting general revenue to be utilised by State for its obligation as governing body or by institution of local self-Government for discharging their functions in general, but the nature of levy remains the same, namely, the levy of tax on entry (moving of) of goods within each local area within the State for consumption, use or sale therein. Under the statute in question, the State has been divided into various local areas, namely, Panchayats, municipalities and cantonments and the like and on entry of goods in each local area for the purpose of consumption, use or sale therein levy is attracted. Therefore, on every entry of goo s into the local area, an inquiry has to be made by stopping the goods regarding the purpose for which goods are entering i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and is a universally acknowledged evil calling for its abolition and that being so, the impugned levy falls within the purview of article 301 of the Constitution of India, whether ordained to be levied and collected by local authority in-charge/local area or by the State Government for their purpose. Kunwar Ram Nath v. Municipal Board, Pilibhit [1983] 3 SCC 357 No element of quid pro quo: The levy of tax on entry of goods into local area has no element of quid pro quo qua the person who pays the octroi to the municipality or for that matter to any other institution of local self-governance. Considering the levy of octroi under the U.P. Municipalities Act about the liability to pay octroi in respect of sugarcane brought within the municipal limits of Pilibhit through railway siding and claim of exemption thereto, the following observations were made in Kunwar Ram Nath v. Municipal Board, Pilibhit [1983] 3 SCC 357: It is also significant that the word 'octroi' in section 128(1)(viii) of the Act is found in the group of taxes referred to in section 128. All sums received by a municipal Board on account of the various levies made under section 128 have to be cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act and tax demand was in respect of tea carried by them through roads and waterways within Assam State. The principal ground on which constitutional validity of the aforesaid levy was questioned was that the Act had violated the provisions of article 301 of the Constitution and since it was not enacted as per procedure laid in the provisions of article 304(b), it was ultra vires. In defence, the State had contended that the levy of tax was within the legislative competence of Assam Legislature under entry 56 of List II of the Seventh Schedule and since the levy has been made by the competent Legislature suggesting that levy and collection was authorised by law in terms of article 265, Part XIII had no application. This spacious proposition was not accepted by the majority view of the Constitution Bench. The court held that restriction under article 301 was not confined only to laws made in relation to regulating the trade and commerce but tax laws as well may fall within the ambit of article 301 of the Constitution, the gateway to Part XIII of the Constitution. The court held: The provision contained in article 301 guaranteeing the freedom of trade, commerce and int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed restriction operate directly or immediately on trade or its movement? . . . Applying the aforesaid test, the court found that since the tax under the Act of 1954 is collected on goods solely on the ground that they are carried by road or by inland waterways within the area of State resulting in putting a direct restriction on the freedom of trade. Having come to this conclusion, the court further found that in doing so the State Legislature has not complied with the provisions of article 304(b), namely, that the Bill for enacting a law for levy and collection of tax in question had not been presented to the President for its approval before it was introduced in the House and Act has not been validated by the assent of the President under article 255(c). The Act was held to be void for want of compliance with article 304(b) in framing the law. From the aforesaid decision, the principles which can be culled out are that (i) the law which imposes a tax directly on the activity involving movement of goods, whether inter-State or intra-State, falls within the ambit of article 301 of the Constitution, as it results in directly impairing the free movement of goods and consequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the constitutional validity of the Rajasthan Motor Vehicles Taxation Act, 1951 in Automobile Transport's case AIR 1962 SC 1406, while reiterating the principles laid in earlier decision in Atiabari Tea Co.'s case AIR 1961 SC 232 that all tax laws are not immune from the provisions of article 301, the apex court disapproved the proposition noted by learned Chief Justice in his minority opinion in Atiabari's case AIR 1961 SC 232. Simultaneously, it also disapproved the concurring opinion of the honourable Justice Shah in Atiabari's case AIR 1961 SC 232 that all taxes impair freedom of trade and commerce. The two opinions were founded on two different principles. Minority opinion was based on general presumption that all taxes by the sovereign are in public interest and authorised by respective legislative fields distributed amongst different legislative authorities under the Constitution. The other view enunciated by the honourable Justice Shah was founded on the premise that all taxes burden the trade and commerce and restriction on free movement of trade and commerce. Both these extreme propositions were not approved by majority judgment in Automobile Transport&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that: . . . The collection of a toll or a tax for the use of a road or for the use of a bridge or for the use of an aerodrome is no barrier or burden or deterrent to traders who, in their absence, may have to take a longer or less convenient or more expensive route . . . The court further said: . . . Such compensatory taxes are no hindrance to anybody's freedom so long as they remain reasonable; but they could of course be converted into a hindrance to the freedom of trade. If the authorities concerned really wanted to hamper anybody's trade, they could easily raise the amount of tax or toll to an amount which would be prohibitive or deterrent or create other impediments which instead of facilitating trade and commerce would hamper them. It is here that the contrast, between 'freedom' (article 301) and 'restriction' (articles 302 and 304) clearly appears: that which in reality facilitates trade and commerce is not a restriction, and that which in reality hampers or burdens trade and commerce is a restriction. It is the reality or substance of the matter that has to be determined. It is not possible a priori to draw a dividing line betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regulation is to be implemented must have a direct nexus to the nature of tax which can be considered to bring in existence the element of tax being compensatory in nature or otherwise. It would be profitable to notice the principle explained in concurring judgment of the honourable Justice K. Subba Rao with the majority view. The court said: . . . If a law directly and immediately imposes a tax for general revenue purposes on the movement of trade, it would be violating the freedom. On the other hand, if the impact is indirect and remote, it would be unobjectionable . . . With the aforesaid premise, the court referred to general principle of taxation that it is presumed to be in public interest which was the reason that had prevailed with minority opinion in Atiabari's case AIR 1961 SC 232, and said: . . . It is said that law of taxation is always in public interest. Ordinarily it may be so but it cannot be posited that there cannot be any exceptions to it. A taxing law may be in public interest in the sense that the income realised may be used for public good, but there may be occasions when the rate or the mode of taxation may be so abhorrent to the principles o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he State or an agency of the State, and imposes it upon those who choose to avail themselves of the service or convenience, the freedom of trade and commerce may well be considered unimpaired. In such a case the imposition assumes the character of remuneration or consideration charged in respect of an advantage sought and received. The basic feature of compensatory tax was to find whether the imposition is for the purpose of providing identifiable facilities, convenience of service to the trade and is imposed upon them for whose benefit such facilities, convenience or services are provided and the money so collected from such imposition is spent in equivalence to providing such facilities to trade, commerce or intercourse, it becomes compensatory irrespective of the fact that collection becomes part of the fund or goes in the coffer of State generally. Benefit to other incidentally will not alter the character also. So also vice versa if the tax is imposed for general revenue of the State, the incidental benefit reaching to trade and commerce on account of general activities of the State or its agencies, such incidental benefits will not make it compensatory tax. So also, even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice provided to the tax-payer by way of compensating State in providing such facilities. Similarly, in the second decision in Common Wealth Freighters Proprietory Limited v. Sneddon [1959] 102 CLR 280 the relevant statute in question was the Road Maintenance (Contribution) Act, 1958, which imposed upon the owners of commercial goods vehicles a road charge at a rate per mile of public street travelled in New South Wales towards compensation for wear and tear to public streets caused by such travel. This again was challenged as impeding freedom of trade, commerce and intercourse by levy of such tax on commercial goods vehicles. The principle enunciated by the High Court in its earlier decision in Armstrong's case [1957] 99 CLR 28 was reiterated. This again was a case of imposition of tax on facilities provided for better movement of trade and commerce and levy for maintenance of such facilities for better movement of trade and commerce. It is in that context the court enunciated the principle that where tax is levied for providing certain benefits to trade and commerce and recovering the amount, in proportion to the money spent, from those who availed such facilities, ameni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in first Jindal's case [2004] 134 STC 303 (SC), was disapproved and overruled by the Constitutional Bench in Jindal's case [2006] 145 STC 544 (SC). The above analysis finds support from the view expressed in Jindal's case [2006] 145 STC 544 (SC), wherein the five-judge Bench on reference had opined after comparing provisions of article 301 of Indian Constitution and article 92 of Australian Constitution (at page 567 of STC): Article 301 is inspired by section 92 of the Australian Constitution when it refers to freedom of trade and commerce. However, article 301 is subject to limitations and conditions in articles 302, 303 and 304 which are borrowed from the commerce clause under article 1 of the US Constitution. Therefore, Part XIII is an amalgam of the United States and Australian Constitutions which brings out the difference between regulatory and taxing powers. This is how the concept of payment for revenue and concept of payment for regulation arose. This is how the regulatory power stood excluded from the taxing power and on that reasoning in Automobile Transport's case AIR 1962 SC 1406, this court took the view that compensatory taxes constitute a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be satisfying the test of proportionality on quid pro quo scale, it was held to be intra vires. As we have noticed, the levy in question in Automobile Transport's case AIR 1962 SC 1406, was also in the nature of levy which was subject-matter of two Australian decisions, referred to above, which have also been referred to in the majority judgment in Automobile Transport's case AIR 1962 SC 1406. Can it be said on a circumspect view of the provisions of the Act of 1999 that levy in question is for providing facilities to trade or commerce and not for the purpose of generating general revenue for the purpose of State or Municipality, as the case may be? Object and Reasons: The Statement of Objects and Reasons to Bill passed as Rajasthan Tax on Entry of Goods into Local Areas Act, 1999 reads as under: In order to augment the revenues of the State and to enable it to meet the increased requirements of development in rural and urban areas, additional resources are required to be generated. (2) The States of Madhya Pradesh and Karnataka have enforced entry tax with the help of the sales tax department during last twenty years or so. (3) Entry 52 in the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not provide a clue to consider its object to be to provide facilities to trade and commerce. Scheme of the Act: We may now consider the general scheme of the Act in totality. Section 3, which is the charging section, says that there shall be levied, collected and paid to the State Government a tax on entry of any goods brought into a local area, for consumption, use or sale therein, with effect from such date and at such rates, not exceeding twenty per cent of the value of the goods, as may be specified by the State Government, by notification in the Official Gazette, and different dates and different rates may be specified in respect of different goods or different class of goods or different local areas. It is to be levied on taxable purchase value of the goods, so however that in cases where it is not possible to determine the taxable purchase value of goods, the entry tax shall be levied on taxable market value of goods. Sub-section (3) of section 3 provides that tax levied under subsection (1) shall be paid by every registered dealer or a dealer liable to get himself registered under this Act who brings or causes to be brought into a local area, the goods wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined to the local area but has been made on the State basis irrespective of the fact that the person may be a petty dealer within the local area, entry into which only makes the event liable to tax. Section 12 requires filing of return by every registered dealer to the assessing authority at such intervals within such period and in such manner containing such particulars as may be prescribed. Under section 16 every registered dealer is required to send to the assessing authority every month a statement containing such particulars as may be prescribed and is required to pay in advance the full amount of tax payable by him on the basis of the goods brought by him during the preceding month into the local area and the amount so payable shall be deemed to be an amount due from him under the Act. While the provision has been made for recovering the shortfall of the amount of tax so paid in advance on final assessment, no provision has been made for refund or advance received in excess of liability. This provision makes monthly return of particulars and advance payment of tax on the basis of previous month's liability obligatory. In this connection, it is relevant to notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods into a local area as an alternative for compensating the municipalities for the loss of revenue. Nor there is any intrinsic or external evidence to suggest that impugned legislation has been made for conferring specific identifiable benefit or for extending facilities to trade and commerce carried on by dealer and the burden is to recompense the State of that amount spent in providing such facilities and benefits. This position will be further clear from the fact that section 42 of the Act envisages that there shall be paid to each local authority every year such sums of money, as may be determined by the State Government, from time to time, out of the tax collected under the Act. Thus, section 42 does not envisage distribution of the whole revenue raised from entry of goods in different local areas on equivalence basis for compensating the local area of the loss of revenue on abolition of octroi, but by only assigning such sums as may be determined by the State Government. It even does not envisage that entire amount collected under the Act through different local areas will be distributed amongst the authorities of self-governance or local administration but the matter has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the State of Rajasthan, an officer empowered by the State Government in this behalf may stop the vehicle or the carrier or the person carrying such goods for inspection at any place within his jurisdiction. He may also direct the driver or person-in-charge of the vehicle or of the goods not to part with the goods in any manner including by re-transporting or rebooking till verification is done or an inquiry is made, which shall not take more than seven days. In other words, incidental provisions have been made thereunder, details of which may not be relevant for the present purposes. But the fact remains that provisions of the Act and Rules read together leave no room of doubt that the provisions of the Act result in direct and immediate impediment of the movement of goods into the local area as defined in the Act for subjecting it to levy of tax and making provision for stoppage of such goods while in movement at every check-post until the goods reach its destination and is subject to use, consumption or sale within the local area after entering the same. Apart from that, the annual returns and monthly statement of the turnover are required to be filed in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit to trade and commerce within the local area as distinct from general benefit, which anyone else otherwise may also derive as a citizen of that area from various governmental activities, the tax cannot fall within the category of compensatory tax, the test of some tenuous or the indirect and incidental benefit flowing to trade and commerce being rejected in Jindal's case [2006] 145 STC 544 (SC). Compensating the municipality on account of loss of its revenue due to abolition of octroi and taking upon itself the levy and collection of tax on entry of goods as authorised under entry 52 of State List of the Seventh Schedule does not alter the character of the levy nor it does make it compensatory in the sense it has been explained in Jindal's case [2006] 145 STC 544 (SC) as it is not for the purpose of conferring specific or special identifiable benefit to trade and commerce. To compensate the municipality or a panchayat or a cantonment board or a notified area committee of its general revenue required for funding its governance expenses is not a special benefit to or an act of regulating the trade or commerce directly so as to fall within the precincts of quid pro qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service. We have otherwise noticed two decisions of the Rajasthan High Court holding that imposition of entry tax under entry 52 of the State List under the Rajasthan Town Municipalities Act to be within the domain of article 301, but the same was saved in one case because relevant law was pre-existing law (Jaipur Municipalities Act, 1943) and its operation was saved under article 305 and the other on the ground that the Rajasthan Town and Municipalities Act as a whole has received the assent of President. Hence, the Act was saved for compliance of article 304(b) read with article 255 of the Constitution. The two decisions were not brought to the notice of the court in Godfrey Philips India's case [2001] 121 STC 54 (Raj); [2000] 7 STT 50. Likewise, decision of the apex court in Mrs. Meennakshi v. State of Karnataka AIR 1983 SC 1283; [1984] Supp. SCC 326 and Burmah-Shell Oil Storage and Distributing Co. of India Ltd. v. Belgaum Borough Municipality, Belgaum AIR 1963 SC 906 were not brought to the notice of the court in the aforesaid Rajasthan case AIR 1958 SC 192 which had directly considered the nature of imposition authorised in terms of entry 52 of List II of the Seventh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugned Act read comprehensively along with its Preamble and Objects and Reasons there is no indication facially that the levy is imposed to extend any quantifiable benefit. It remains to be seen whether in its absence State has discharged its burden as a service/benefit provider to show through material placed before us that payment of tax is a reimbursement/recompense for the quantifiable/measurable benefit provided to or to be provided to its payers. This takes us to consider whether State has discharged its burden to show that money collected from entry tax in question has actually been spent on providing such benefits or services to the trade or commerce within the local areas from which tax is collected or within the State itself. The test for considering whether any imposition is compensatory in nature is firstly whether it can be facially inferred from the statute itself that imposition is to reimburse or recompense the State for providing specified or identifiable benefits/facilities/services to trade or commerce in a quantifiable measure. If facially it is not discernible from the statute, still the State can prove by providing relevant data that money collected thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under article 243H and 243X, respectively, for functioning of the local authorities. This is apart from the fact that there appears to be some apparent dichotomy between the revenue collected from the entry tax in the State under the Act of 1999 and its disbursement between the municipalities and panchayats. For example, according to the figures stated in the additional affidavit for the year 2004-05, in all, 144.01 crores were collected by way of entry tax in the State, whereas, in 2004-05, Rs. 451.63 crores have been disbursed out of the aforesaid fund to the municipal councils and Rs. 2.95 crores have been provided to Panchayats. There does not appear to be any connection between the collection and disbursement to warrant any inference that the tax has been levied for the purpose of compensating the local authorities for loss of their revenue. Likewise, in 2005-06 total revenue collected by way of entry tax was Rs. 236.71 crores and the disbursement to the municipalities itself has been stated to be Rs. 494.07 crores and to the panchayat samities Rs. 2.76 crores. This only shows that assignment of funds to the municipal councils or the panchayat samities, which are defined as l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the special benefit to the payer (individual as such) based on the principle of equivalence. When the tax is imposed as a part of regulation or as a part of regulatory measure, its basis shifts from the concept of 'burden' to the concept of measurable/quantifiable benefit and then it becomes 'a compensatory tax' and its payment is then not for revenue but as reimbursement/recompense to the service/facility provider. It is then a tax on recompense. Compensatory tax is by nature hybrid but it is more close to fees than to tax as both fees and compensatory taxes are based on the principle of equivalence and on the basis of reimbursement/recompense. If the impugned law chooses an activity like trade and commerce as the criterion of its operation and if the effect of the operation of the enactment is to impede trade and commerce then article 301 is violated. Apparently, none of the activities on which amount is shown to have been spent is in the nature of regulation or is part of regulatory measure and is also not a special benefit to the trade, commerce or intercourse, which can be scaled on the principle of equivalence. The collection is a part of general revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (j) constructing, altering and maintaining public streets, culverts, municipal boundary marks, markets, slaughterhouses, drains, sewers, drainage-works, sewerage-works, baths, washing places, drinking fountains, tanks, wells, dams and the like; (k) constructing public latrines, privies and urinals; (l) obtaining supply or an additional supply of water, proper and sufficient for preventing danger to the health of inhabitants from the insufficiency or unwholesomeness of the existing supply; (m) naming streets and numbering houses; (n) registering births and deaths; (o) public vaccination; (p) suitable accommodation for any calves, cows or buffaloes required within the municipality for the supply of animal lymph; (q) arranging for the destruction or the detention and preservations of such dogs within the municipality as may be dealt with under section 208 of this Act; (r) printing such annual reports on the municipal administration of the municipality as the State Government by general or special orders, requires the Board to print; (s) paying the salary and contingent expenditure on account of such police guards as may be required by the Board for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antifiable measure. Like Municipality Act, under section 50 of the Panchayati Raj Act, 1994, the functions of panchayat are those which may be specified by the Government from time to time out of the functions and powers specified in the First Schedule. Nothing has been placed on record that out of various functions enlisted in the First Schedule to the Act of 1994 or for that matter in Schedule XI of the Constitution any of specific functions for providing facilities or benefits to trade or commerce by the Panchayat have been entrusted to or assigned to the Panchayat and the revenue has been spent for providing such benefits. Nothing had been shown to have been spent by the local authorities to whom fund is alleged to have been granted on any specified benefit or facilities that have been extended to trade or commerce in any quantifiable measure. Nor it has even been alleged that any sum was spent in relation to discharge of any of those functions in any quantifiable measure. Therefore, no material is placed to establish the commensuration of the expenses with the benefits provided. Therefore, the basic test for invoking the principle of compensatory tax being out of the provin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e field enabling it to levy and collect the octroi by itself and confer upon itself the discretion to allocate such sums as it may deem fit to the respective local authorities out of the collection made by it under the Act of 1999. But nonetheless the provisions under the Municipalities Act or the Panchayati Raj Act envisaging levy and collection of octroi or tax on entry of goods into local area at the rate prescribed by the State Government continues to be on the statute book which can at any time be revived. Therefore, in true sense it is a misnomer to call that the enactment of the Act of 1999 is to compensate the State Government for its loss of revenue which was collected by municipalities or panchayats or to compensate the municipalities or panchayats out of the funds collected under the Act by the State. Even while continuing with the provisions on the statute book to levy and collect tax by the local authorities itself is a moot point whether the State Government could enact the Act of 1999 to augment its general revenue. Independent of this grey area, whether the levy and collection of tax on entry of goods into local area is a levy by the local authority or the Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y State proves that payment of entry tax is a reimbursement or recompense for quantifiable/measurable benefits provided or to be provided to the payers, i.e., trade and commerce for which the tax is imposed. Therefore, the impugned tax under the Act of 1999 is not compensatory in nature and is not taken out of the purview of article 301 of the Constitution. It being a tax on activity of movement of goods, it results in directly impeding the free movement of trade, commerce and intercourse in terms of article 301 of the Constitution. The Act of 1999 having been enacted by the State Legislature and admittedly not enacted after following the procedure laid down under article 304(b), it does not satisfy the test of legislative competence in terms of restrictions imposed in Chapter XIII and must be held to be hit by article 301 and ultra vires, as it was so held in the case of Atiabari Tea Co.'s case AIR 1961 SC 232. In view of the aforesaid, the irresistible conclusion is that under any law framed under entry 52 of List II of the Seventh Schedule of the Constitution a tax being directly on the movement of goods from outside the local area to within the local area limits has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troduction into State Legislative Assembly has to receive sanction of the President. Admittedly, no such approval has been sought in terms of proviso to article 304 of the Constitution. The legislation made by the State Government having the effect of impeding the free movement of trade, commerce and intercourse by dint of above levy cannot be saved from being ultra vires of article 301 of the Constitution. This principle was well enunciated by the Supreme Court in Atiabari Tea Co.'s case AIR 1961 SC 232, wherein, the court considered the imposition of tax under the Assam Taxation (on Goods Carried by Roads or Inland Waterways) Act, 1954, and finding that the impact of the tax is such which results in directly and immediately restricting the free movement of trade or commerce so as to fall within the purview of article 301 of the Constitution held that law imposing such tax must comply with provisions of article 304(b). Since the tax has been imposed by the Assam Legislative Assembly without receiving the approval of the President, the Act was held to be invalid. The court said: The purpose and object of the Assam Taxation (on Goods carried by Roads or Inland Waterways) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g from that clause has been provided under articles 302 to article 305. When admittedly in the present case requirement of article 304(b) before enacting a law falling within the domain of article 301 has not been followed, the impugned Act must be held to be ultra vires to Chapter XIII of the Constitution in consonance with Atiabari's case AIR 1961 SC 232. Accordingly, this petition is allowed. The Rajasthan Tax on Entry of Goods into Local Areas Act, 1999 is held to be ultra vires article 301. The demand raised against petitioner shall not be enforceable in case not already paid by the petitioner. However, if any amount is collected by the petitioner from its customer as entry tax, the same shall be allowed to be retained by it on proof that the burden thereof has not been passed on to buyers, consumers or users. If the burden has been so passed on to such other persons, the same shall be paid by the petitioner to the State Treasury within a month failing which such amount shall be recoverable from him. Likewise, any amount already paid by the petitioner as entry tax shall be refunded to him on proof of the fact that burden thereof has not been passed on to the users, cons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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